21st July 2017
Last week FSCS published its Annual Report and Accounts, but not just the Annual Report. We also published alongside it for the first time a report on the flows of money over the year – levies, compensation payments, and recoveries – for each industry sector we protect.
This is part of our ongoing commitment to improve the transparency of what we do and of how we finance our work.
If you look behind these bare numbers, you will discern some important enduring insights into FSCS’ challenges and capabilities.
One obvious insight is that the demands on FSCS are volatile and unpredictable.
Because we operate on a pay-as-you-go basis and seek to avoid taking capital out of the industry before we need it, we have to forecast each year both what compensation we shall pay and what recoveries we shall make to offset these costs. We then levy the industry for the difference.
But things don’t always turn out as we forecast: far from it.
In 2016/17 we faced two big insurance failures – of the Enterprise and Gable Insurance companies – of which we had little forewarning. These costs - £41 million for Enterprise and nearly £9 million for Gable - were simply not in our numbers when the year began.
Other trends accelerate more quickly than we expect. That was true of SIPP-related claims. The number of claims against advisers for mis-selling unsuitable pension investments picked up during 2016/17. We expected to pay £95 million in compensation, but in fact had to meet claims with value of £105 million.
In some cases, claims can jump because of the actions of a single firm. That happened last year when mortgage advice claims suddenly leapt because of mis-selling by Fuel Investments Ltd.
As a result of these unforeseen developments, we had to raise supplementary levies of £114 million to meet these higher costs. We were, however, also able to return £50 million to investment advisers where claims undershot our forecast.
Another insight – reassuring, I hope – is that FSCS is well able to respond to these fluctuations in demand in order to protect consumers and maintain confidence.
Our response to the failures of Enterprise and Gable provides a good illustration of this.
We had a few days’ notice of both failures, no more. Both were companies based overseas which operated in the UK under passport arrangements. Both insured a mix of risks in the UK, including motor risks.
Despite this, FSCS was able to ensure that claims from UK policy holders continued to be met. Working with brokers in the UK, we were able to fund replacement cover for many policy holders, including motor policy holders. We returned the unexpired value of premia to many other policyholders.
In the case of Enterprise, this owed much the good relationship we established with the Insolvency Practitioner involved.
All told, we have protected nearly 740,000 policy holders.
Not everything has been plain sailing. We have been challenged by the poor quality – or even non-existence – of data about policyholders. We have learned valuable lessons in the process about own our capabilities and processes.
But FSCS has fulfilled its remit, as we shall continue to do in all eventualities. We are well-prepared.
Finally, a third insight is that our work on recoveries matters. What we recover materially offsets the compensation costs we incur and reduces the levies we raise on the industry.
That is most obviously the case when it comes to the legacy of the 2008 banking failures. The sale of a portion of the Bradford and Bingley mortgage book on 31 March 2017 enabled FSCS re-pay £11 billion of its outstanding debt to HM Treasury.
That re-payment will in turn mean that our levy on banks, building societies and credit unions in respect of interest charges in 2017/18 will fall by around £200 million when the levy falls due in summer 2018.
But we also made substantial recoveries last year as a result of settlements with lenders involved in PPI mis-selling claims. In all we recovered just under £87 million, Bradford & Bingley excepted.
So the numbers in our Annual Report and Accounts are important. But so are the stories behind the numbers.