Everyone is in favour of value for money. FSCS certainly is. It’s one of our strategic imperatives for the next five years.
But what do we mean by value for money?
A good place to start is by asking what FSCS produces. That then opens up a useful insight into improving value for money.
Well, first and foremost, FSCS deals with claims by consumers against businesses which have failed. But those claims are both very volatile and unpredictable. We received fewer than 4,000 claims (excluding insurance) in 2002/03. This contrasts starkly with 2012/13 when FSCS received more than 62,000 news claims while paying out more than £326m in compensation.
Claims are also are also very varied. Handling the return of savers’ money when a bank, building society or credit union fails is a completely different proposition from sorting out the complex legal and quantification issues involved in an investment failure like Keydata.
So, the first pre-requisite for value to money is to have a business model in place capable of dealing efficiently with volatility and complexity as far as possible.
FSCS achieves this by outsourcing the great majority of claims. This is far more efficient than hiring and firing people as claims volumes fluctuate. It enables us to draw on the spare capacity of much larger and more diverse businesses.
We also, though, retain small in-house specialist teams to specify how claims should be assessed by our out-source partners and to deal with low volume, complex claims that are uneconomic to out-source.
So far so good, but FSCS also needs a strategy for out-sourcing. Ours exploits competition to achieve both efficiency and effectiveness.
We do that by having a panel of three out-source partners. We open entry to the framework to competition every five years. And we expect the firms on the panel to compete against each other on price and quality to win new business. This helps us manage the peaks and troughs in our claims costs for the industry.
We think this is the right way of making competition work in our favour on out-sourcing. We use different approaches for other services we buy in.
We are also investing in our systems to ensure that our out-source partners can work with us efficiently.
Our current work to put in place an on-line claims facility – Project Connect – will achieve exactly that. It will enable us to exchange information with out-sourcers electronically to a standard process, with much more reliable management information to keep track of progress.
So much for claims, but that is not FSCS’s only output. We also work with our partners in government and the regulators to prepare for the resolution of firms in difficulty. Not all of these firms do in fact fail, but the preparatory work has to be done just the same.
And we also work on contingency plans for a range of future eventualities so that FSCS is ready to protect consumers in the next crisis. We can’t tell when that will be, just that it will happen. People expect us to be ready to deal with failures as they happen.
We work to maximise recoveries from the estates of failed businesses and, where relevant, from third parties with a liability for consumers’ losses.
How do you judge the value for money of this preparatory and recoveries work and contingency planning?
I think there are two main safeguards here.
One is that our contingency planning is guided by a clear risk analysis which takes into account both the likelihood and impact of different eventualities.
We ensure that the effort and resources we put into planning for each eventuality are proportionate in the light of this analysis. We do not lavish resources on contingencies that are very remote or which, though more likely to arise, will have limited impact on consumers and financial stability.
Equally, we only pursue recoveries where it is practical and cost-effective to do so. We will say more about this when we publish the annual levy or in our annual report in the summer.
The other safeguard is that we keep a firm grip on FSCS’s core costs – the costs of maintaining a capability regardless of claims volumes.
These costs have been held broadly steady in nominal terms over a few years. But our capability has not stayed the same. We have become more professional and more flexible, so that we are better equipped to deal with a wider range of eventualities.
For example, we have recovered £3.7bn since the financial crisis.
So, in short, value for money matters to us. And our commitment to it is more than a pious expression of good intent.
Not everything we do is readily measurable. But everything we do is subject to a value for money challenge. And that is why value for money is an important component of our Vision for a Confident Future and our accountability.
a financial co-operative which is owned and controlled by its members.
a financial product in which money can be invested to earn interest or profit (although the value of investments can go down as well as up).