Three challenges for our planning and budgeting

On 19 January we published our Plan & Budget 2018/19This is now a well-established annual event which sets the scene for the year ahead.

This year’s document foreshadows that FSCS will spend just under £73 million on its own running costs and raise levies of £336 million[1] to fund our compensation and management costs. 

The document itself provides plenty of commentary on our proposed budget, so I shall leave those interested to go to that direct.

Instead, I’d like to put the Plan & Budget in a broader context by recalling three important challenges which frame our work: the range of FSCS’s responsibilities; the unpredictability of our workload; and our outsourced business model.

The first challenge is that FSCS does not exist only to handle claims here and now.

I was asked by FCA’s small business panel at the beginning of January to justify the ratio of management to compensation costs.  Don’t we spend a lot at FSCS for every pound of compensation paid?

But this perfectly reasonable challenge does not take into account the full range of FSCS’s responsibilities. In fact the direct costs of claims handling account for only just under £24 million of our budget - or about one third.

We also incur significant costs – just under £10 million – on our financial and operational resilience so that we are ready to handle a major failure of a bank or another crisis.  That is when FSCS’s ability to protect consumers and financial stability will really be put to the test. 

So we maintain a contingent borrowing facility with a consortium of banks to fund a seven day pay-out.  And we provide an important service to the Bank of England validating the Single Customer View (SCV) files which all banks, building societies and credit unions must maintain to support a pay-out.

Then there are costs of making recoveries from the estates of failed businesses or from third parties responsible for investors’ losses.  These weigh in at around £4 million.  The substantial recoveries we achieve –over £120 million in 2017/18 – offset our levies.

And we also spend on FSCS’s underlying infrastructure, which supports all our activities.  We invest in our claims handling process to improve customer service and reduce future costs.  We fund our pension scheme[2].

So, yes, claims handling is certainly important.  But FSCS also has to be ready to meet future eventualities and to act effectively as a creditor of failed businesses.

Our second challenge is the sheer unpredictability of our workload over just about any timescale you care to mention.  We can be called on to protect consumers overnight from failures no one saw coming.  MF Global and Alpari are good examples from the recent past.  We also had little forewarning of the failure of the Enterprise Insurance Company in 2016.

Equally, we see significant changes in the mix and volume of claims over more extended periods.  So, over the last two or three years, the most striking feature of our workload has been the steady growth of pension claims.

These claims have mostly been against failed life and pension advisers as a result of bad advice to transfer money out of occupational pension schemes into SIPPs in order to hold risky and illiquid assets.

This January we announced that we are also accepting claims against three SIPP platform providers which, after careful consideration, we are satisfied owed liabilities to investors.

Together, we expect these pension claims will number over 8,500 in 2018/19 and entail compensation costs in the 12 months to 31 March 2019[3] of around £110 million.

This growth in pension claims underlines the importance of raising awareness of the scope of FSCS protection of insurance, investments and investment advice as consumers make increasingly important choices about financing their retirements.

And that brings me to the last important challenge.

Because of the unpredictability and volatility of our workload, FSCS’s business model is to out-source the handling of most claims to partners who are better placed to handle the volume risk.  It would make no sense for FSCS to hire and fire people and take on and let go accommodation as claims rise and fall.

Much of our investment in recent years has, accordingly, gone into establishing a common claims handling platform – which we control – to enable us to move claims swiftly and securely between FSCS and our partners.  Since December 2016 customers have also been able to claim on-line.  90% now do so.

From July 2018 we shall refine this business model by entering into a longer-term relationship with a single partner.  We are confident this will enable us to achieve further gains in customer service and efficiency in the years to come because our partner will have much greater incentive to invest in claims handling process and will work with us to build a strong customer service ethos.

So, as our Plan & Budget 2018/19 explains, FSCS enters the last year of our current five year strategy in good shape.  Thanks to past investments, we are providing better customer service more efficiently and with better control. 

But FSCS cannot stand still.  We must be prepared to respond to future failures.  We must be able to deal with the unexpected and changes in the mix of our claims.  And we must maximise recoveries to offset our compensation costs. 

There is, in short, more to FSCS than meets the eye.

[1] This is an indicative figure.  We shall publish final levies in March or April.

[2] A DB scheme which closed in 2011.

[3] i.e. includes amounts that are part of the 2017/18 levy year.