Q&As on the Interim 2011/12 FSCS 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 financial year, although further compulsory 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 2011/12 financial year. 

1. What is the 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 financial year, although further compulsory 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 2011/12 financial year. 

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2. How much is the interim levy?

The interim levy is £60m. These costs fall to the investment intermediation sub-class.

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3. Which firms are liable for the levy?

Firms who were authorised in the FSCS Investment Intermediary sub-class in the 2011/12 levy year. This includes firms that were authorised on 30 March 2011 or firms that have an annual eligible income apportioned to the sub-class.

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4. What is this interim levy being raised for?

The interim levy includes an amount for some Keydata claims, which were higher in volume and value than expected. It also includes costs for MF Global, Arch Cru, Wills & Co and claims against smaller stock broking firms.

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5. Does the £60m cover all the expected compensation costs against Keydata or does the FSCS expect to need further funds for Keydata claims in 2012/13?

The amount being levied in March is expected to be the amount needed up until the next annual levy cycle. FSCS will be announcing the 2012/13 levy shortly. FSCS assumptions are informed by existing claims trends, we have to bear in mind that these may not provide an accurate guide to the future. Unforeseen events in the markets can impact upon our assumptions and our funding, subsequent levy requirements can change substantially as a result. We do not levy unless there is a reasonable expectation that we would have to meet the costs of claims and management expenses in a particular area. 

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6. How did FSCS get its predictions on what was needed for Keydata so wrong?

Keydata was a time-consuming and complex default. The FSCS carried out a number of in-depth investigations into Keydata before determining whether there were any eligible claimants. The number of recent eligible Keydata claims was higher in both volume and value than FSCS earlier claims and assumptions.

FSCS’s assumptions are informed by existing claims trends, however, these are not always an accurate guide to the future. Unforeseen events in the markets can impact upon FSCS’s assumptions and its funding, subsequent levy requirements can change substantially as a result. FSCS does not levy unless there is a reasonable expectation that it would have to meet the costs of claims and management expenses in a particular area.

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7. Is the FSCS predicting the end of claims against Keydata and other large investment failures?

The FSCS is expecting claims against Keydata to start tailing off and it is not expecting any large investment failures in 2012/13. However, FSCS does expect to continue to receive stock broking and investment advice claims.

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8. What period does the FSCS expect the money from the interim levy will cover?

FSCS raises levies annually on each class of levy payers to cover the relevant compensation payments for the following 12 months and management expenses expected to arise in the financial year which ends on 31 March. This timescale reflects the fact that the proceeds of the levy announced at the beginning of each financial year do not in practice become available until the beginning of July. FSCS has operated on this basis since it was established in 2001.

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9. 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 in such tough times. FSCS has a statutory duty to compensate people with eligible claims as they fall due. It issues levies according to the rules set by FSA and it has to pay claims as they fall due. This helps to build consumer confidence and contributes to financial stability.

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10. When are the interim levy invoices being issued to firms?

The invoices for the interim levy will be sent out before the end of the financial year.

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

The FSCS levies are due for payment 30 days after the date of the invoice. The FSA has established arrangements for firms who wish to spread the costs of fees and levies. Details of these arrangements are available from the FSA.

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12. What if a firm can’t pay the bill within 30 days?

Firms are able to pay the interim levy invoice in instalments through Premium Credit Limited. This arrangement needs to be confirmed with the FSA.

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13. Why doesn’t the FSCS just borrow the money from HM Treasury and work out a repayment plan later?

The circumstances under which the FSCS borrowed money from HM Treasury previously, were exceptional. The necessary amounts far exceeded the levy limits. These costs are within the annual levy limits.

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