FAQs on the interim levy 2012/13

The FSCS operates on a ‘pay-as-you-go’ basis, and raises levies to cover the projected annual costs of the Scheme (both operational costs and the costs of compensation payments). It normally undertakes a levy process once every year, although further interim levies against the relevant sub-class (up to the threshold limit) can be raised if costs are forecast to exceed those initially anticipated.

This interim levy arises from revisions to our earlier estimates of the compensation we are expecting to pay out before the next annual levy cycle and the management expenses for the 2012/13 financial year.

1. What is an interim levy?

The FSCS operates on a ‘pay-as-you-go’ basis, and raises levies to cover the projected annual costs of the Scheme (both operational costs and the costs of compensation payments). It normally undertakes a levy process once every year, although further interim levies against the relevant sub-class (up to the threshold limit) can be raised if costs are forecast to exceed those initially anticipated.

This interim levy arises from revisions to our earlier estimates of the compensation we are expecting to pay out before the next annual levy cycle and the management expenses for the 2012/13 financial year.

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2. When does FSCS raise an interim levy?

The decision to raise an interim levy has to be made taking into account the particular circumstances that are relevant at the time. Whilst it is not therefore possible to state categorically the circumstances that would give rise to an interim levy, we feel it is important to reiterate the following guidance:

  • FSCS will only raise an interim levy where it has reasonable grounds for believing that the funds available to it to meet relevant compensation costs or management expenses for the period until the next levy is due are, or will be, insufficient. We cannot levy in advance where there is not a reasonable expectation that we would have to deal with claims in a particular sector.
  • Borrowing between sub-classes or using our commercial facilities is generally only utilised as a way of managing short term cash flow, or where the amount of the funding shortfall is considered to be too small to warrant an interim levy.
  • We would not normally expect to raise an interim levy on any sub-class for an amount of less than £10m, and would give careful thought to amounts upwards to say £20m, especially if the compensation became due close to the end of the financial year.
  • FSCS does not take levy decisions, either to trigger or otherwise affect the cross-subsidy. The key purpose of the levy is to safeguard sufficient funding for known or reasonably expected costs, applied as within the rules.
     

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3. Why has the investment intermediation sub-class been hit with an interim levy?

The funding is necessary to pay claims relating to a number of on-going investment failures such as Pritchard Stockbrokers Limited and Worldspreads Ltd for which the costs were not previously levied.

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4. What amount has the investment intermediation sector been levied so far this year?

£78.0m (of which £66.15m related to compensation costs).

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5. Why has the general insurance sub-class been hit with an interim levy, when this hasn’t been the case in previous years?

This interim levy arises from revisions to our earlier estimates of the compensation we are expecting to pay out before the next annual levy cycle and the management expenses for the 2012/13 financial year. The revisions result from the continuing high costs and volumes of PPI claims which mirrors the experience of the Financial Ombudsman Service and experience in the wider industry.

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6. What amount has the General Insurance Intermediation sector been levied so far this year?

£36.0m (of which £28.72m related to compensation costs).

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7. When is this interim levy going to be due?

The FSA will start sending out the invoices during the week of 18 March 2013. The levies are due for payment 30 days after the date of the invoice.

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8. Why do advisors only have 30 days to pay the levy?

Firms have 30 days to pay in accordance with FEES rules. The FSA has established market arrangements for firms who wish to spread the costs of fees and levies.  An instalment facility is provided by Premium Credit Limited:  http://www.premium-credit.co.uk/fsa.html

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9. Why has this latest interim levy been raised so close to the end of the financial year, as has been the case in previous years?

FSCS will only raise an interim levy where it has reasonable grounds for believing that the funds that are available to it to meet relevant compensation costs for the period until the next annual levy cycle, normally in July, or the management expenses will be insufficient. We cannot levy in advance where there is not a reasonable expectation that we would have to deal with claims in a particular sector.

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10. Why can’t FSCS just roll the interim levy into next year’s levy to help firms?

The decision to raise an interim levy has to be made taking into account the particular circumstances that are relevant at the time. We will only raise an interim levy where we have reasonable grounds for believing that the funds available to us to meet relevant compensation costs or management expenses for the period until the next levy is due are, or will be, insufficient. This means we cannot roll the interim levy into the next year. Neither can we levy in advance where there is not a reasonable expectation that we would have to deal with claims in a particular sector.

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11. What is the likelihood that an interim levy will be raised for the 2013/14 financial year?

The nature of our business is unpredictable and we forecast as much as possible on the amount of claims we are likely to receive in each year. For the 2013/14 annual levy we have allocated for higher compensation costs but the situation is ever changing. We will continue to monitor the situation and will try to provide the industry with more certainty as soon as we can.

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12. The FSCS has already hit advisors hard with interim levies. Will this levy drive some out of business?

FSCS cannot speculate on this issue although the Scheme recognises the levy will not be welcome news for firms. FSCS has a statutory duty to compensate people with eligible claims as they fall due. It issues levies according to the rules set by the FSA, and this helps to build consumer confidence and contributes to financial stability.

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