How we are funded
We're able to pay our customers compensation because we are fully funded by the financial services industry. Firms authorised by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) pay us an annual levy which funds the cost of running our service.
Each firm pays an amount that relates to its size. For example, a deposit taker like a bank pays a levy according to the number of protected deposits (such as current and savings accounts) it holds, compared to the total of the industry.
Reducing the levy
Reducing the levy is always a top priority for us. We aim to make recoveries (when we claim back compensation costs) wherever possible. In 2019/20 we made recoveries of £50 million, which helped to reduce the cost of the levy.
We're also always exploring ways of working more efficiently to reduce our management costs - we reduced our like-for-like claims-handling costs by 8 per cent in 2019/20. Acting in the interests of our levy payers and customers is our priority, which is reflected in our 97% claims quality.
Our costs fall into two categories: compensation costs and management expenses. Read more detail on each below.
For funding compensation costs, the FSCS levy is split into eight funding classes:
- Life and pensions provision.
- General insurance provision.
- General insurance distribution.
- Investment intermediation*.
- Home finance intermediation.
- Investment provision.
- Debt management.
*The old 'life and pension' and 'investment intermediation' classes were merged from 1 April 2019.
Because levies are split by funding class, how much a firm pays is based on the total cost of failures of other firms in its class - firms that carry out a similar business. Separate limits apply to the amount each class pays, with pooling arrangements in place if some class limits are breached.
These are our overheads, which are split between 'base costs' and 'specific costs'.
Base costs are the costs of running FSCS, which don't directly relate to the compensation we pay. Specific costs are the costs of assessing customers' claims and making compensation payments and are linked to the relevant funding class.
All participating firms have to contribute to base costs. FSCS-exempt firms and newly authorised firms in their first authorised year don't have to pay specific costs.
The management expenses levy is based on our budget requirements for each financial year, which we publish annually in our Plan and Budget. The FSCS management expenses levy is a matter of public consultation and the FCA and PRA publish a joint consultation paper each year.
The management expenses levy limit for 2019/20 was consulted on in the joint FCA/PRA consultation paper CP19/9_PRA CP2/19 (PDF 691 KB).