The FSCS is funded by levies on firms authorised by the PRA and the FCA. The FSCS's costs are made up of management expenses and compensation payments
Under our funding system, for the purposes of funding the FSCS compensation costs, the FSCS levy is split into eight broad classes:
- life and pensions,
- general insurance,
- general insurance intermediation,
- life and pensions intermediation,
- investment intermediation,
- home finance, and
- debt management.
The first three classes are referred to as the PRA classes, while the last six are referred to as the FCA classes.
Each firm's contribution is calculated on the tariff base applicable to the relevant class. Each firm contributes proportionally. A threshold for each class is set by the PRA and FCA by reference to what a particular class (taken as a whole) can be expected to afford in a year. The threshold sets the maximum that the FSCS can levy for compensation in any one year. The model operates on the basis that a class will meet the compensation claims from defaults in that class up to the threshold.
Under the previous system (which ended on 31 March 2013) FSCS was able to raise up to £4.03 billion for failures in any class as all classes were part of the same retail pool.
Under the new funding arrangements which took effect on 1 April 2013, the amount that can be raised by levy in the year will vary, depending on the funding class. Only FCA classes will receive support from other classes and so for PRA classes the amount that FSCS can levy in any year is the individual class limit. For FCA classes it is the amount of the relevant FCA retail pool.
For intermediary failures the FCA retail pool will be contributed to by all FCA classes as well as the FCA provider contributor classes (which mirror the PRA classes). This gives FSCS access to £1.05bn in the event of a failure.
For an investment provider failure, FSCS has access to £790m (the FCA provider contribution classes will not be required to contribute to an investment provider failure).
The FCA collects fees on behalf of FSCS from both the PRA classes and the FCA classes.
- Cost structure
- Levy information
- FSCS funding model diagram (including classes, sub-classes and thresholds)
- FSA definitions of the new classes and sub-classes
Full details of the funding rules for the FSCS are in the FCA's Handbook and the PRA Handbook under Redress, Compensation. The main rules relating to funding are set out in FEES 6.