Certain uncertainty

The publication of our levies every year is always the point when the support of our levy payers is put to the test.  It’s the moment when the cost of maintaining a protection scheme is brought home to the industry as a whole and to individual firms paying the levy.

This year is no exception.  On the contrary, the test is, if anything, more pronounced because we are asking our levy payers substantially to increase the contributions which we forecast in January.  Our levies for 2018/19[1] will be £407 million, compared to a forecast of £336 million.

What is more, we expect that we shall have to raise a supplementary levy later in the year to meet the rising costs of pension claims. 

You will find more information about the levies in our latest edition of Outlook.

I think FSCS does retain the support of the industry.  Most firms recognise that the protection FSCS provides supports wider confidence in financial services and reduces the risk of a Northern Rock-style panic in the event that something goes wrong.

We have evidence from our own research that consumers who understand and trust FSCS protection are more likely to seek independent financial advice and are more likely to invest in regulated products which have FSCS protection.

So FSCS protection is worth paying for.

But, equally, firms will naturally ask whether the costs need to be as high and as volatile as they are and whether those costs are fairly shared.

These are the questions which the FCA’s Review of FSCS’s funding has been asking and asking very comprehensively.  (We now know how the Review has answered many of those questions.  We very much support those answers.)

I don’t want to re-play that Review, but I do want to make some observations, particularly about the role which FSCS can, and should, play in managing the costs we impose.

First, we have a duty of transparency: to ensure that firms have as good visibility as we can give of future levies.

Volatility is, I’m afraid, an unavoidable consequence of a pay-as-you-go funding regime.  The advantage is that FSCS does not take money from the industry ahead of need by building up a fund.  We only levy for the compensation costs about which we can be reasonably certain.

The downside is that uncertainty is the only certainty.

Take our levies for 2018/19.  We know that we are likely to pay compensation as a result of the failure of Beaufort Securities and we are working closely with the administrators to pin those down.  But until the administrators have completed their work and have identified any shortfalls in client funds and in client assets, we can only make educated forecasts of the extent of our liability.

Equally, we know that the trend of rising pension claims is likely to continue, but not to what extent.

Then, there will be the failures of which we have, as yet, no forewarning.

What I can promise is that we shall keep the industry well-informed throughout the year.

Second, FSCS will act to mitigate the costs of failure to the extent we can.

We do this, most obviously, through the recoveries we achieve and then return to the industry. 

On this we have an outstanding track record thanks to the professionalism of our Legal Team. 

Following the sale of a further tranche of the Bradford & Bingley mortgage book we should pay off in the next week or two the final instalment of the £15.6 billion we borrowed from HM Treasury in 2008 to fund the transfer of Bradford & Bingley’s deposits to Santander.  That means FSCS will have cleared up the legacy of the 2008 failures.

In the last year, we have also made substantial recoveries from PPI lenders and insolvent estates.

Thanks to our recoveries, our levies are much lower than they would otherwise be.

And we also work closely with our regulatory partners to share intelligence which may help prevent future failure.  We learn much about the causes of failure from our recoveries work.  We recognise an obligation to share what we learn.

Finally, FSCS will continue to play its part in the continuing search for fairer ways of sharing our costs. 

I am personally very pleased that FCA has committed to further work on risk-based levies.  A significant proportion of this year’s levies flow from bad advice to consumer to invest in illiquid and risky unregulated assets.

It should not be beyond us to find a way of adjusting the levy to reflect the risks to which individual firms are exposing their customers and, hence, the potential compensation costs to which they are exposing the industry.

In short, the announcement of our levies is always a reminder of the costs of FSCS protection. But we should not lose sight of the benefits we bring or of the steps we take to manage and minimise those costs.

[1] Because we are aligning our levy year with the financial year, the 2018/19 levy in fact covers only nine months from 1 July 2018 to 31 March 2019.