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 a levy. This annual levy funds the cost of running our service.
Each firm pays an amount relative 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
We're also always exploring ways of working more efficiently to reduce our management costs. This includes reducing our like-for-like claims-handling costs. Acting in the interests of our levy payers and customers is our priority, which is reflected in our consistently high claims quality scores.
Our costs fall into two categories: compensation costs and management expenses. Read more detail on each below.
1) Compensation costs
For funding compensation costs, the FSCS levy is split into nine funding classes:
- Life and Pensions Provision.
- General Insurance Provision.
- General Insurance Distribution.
- Life Distribution and Investment Intermediation*.
- Home Finance Intermediation.
- Investment Provision.
- Debt Management.
- Deposit acceptors (only if the retail pool is triggered).
*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. Each class includes firms that carry out a similar business.
Separate limits apply to the amount each class pays, with pooling arrangements (via a retail pool) in place if some class limits are breached.
2) Management expenses
These are our overheads, which are split between 'base costs' and 'specific costs'.
Base costs are our running costs, which don't directly relate to the compensation we pay.
Firms generally contribute to base costs in proportion to the regulatory costs they pay to the Prudential Regulation Authority (PRA) and/or Financial Conduct Authority (FCA).
Specific costs are the costs of assessing claims and making payments, which are dependent on levels of defaults. As with compensation costs, specific costs are allocated to the relevant classes, then allocated to individual firms in accordance with the applicable tariff base.
FSCS-exempt firms and newly authorised firms don't have to pay specific costs in their first year.
The management expenses levy is based on our budget requirements for each financial year, which we publish annually in our Plan and Budget.
Our 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).