FSCS forecasts latest levy position
The Financial Services Compensation Scheme (FSCS) has today published its half-year edition of Outlook, which gives an overview of the levy position at the mid-point of the 2020/21 financial year.
FSCS acknowledges that 2020 has been a challenging year for the financial services sector. FSCS has adapted well to the challenges, and continues to deliver its claims service as usual, with no resulting impact on compensation pay-out timeframes.
There have been a number of factors driving up the levy this year. As a result of this, FSCS estimates the Life Distribution and Investment Intermediation (LDII) class requires £92m of additional funding in the form of a supplementary levy.
This amount is more than the annual maximum that FSCS can raise from this class. Therefore FSCS will source £8m from the LDII class and £33m from surpluses across other classes. It will also call for an additional £51m from the other classes, including those in the retail pool. This is a separate pot that all classes are required to contribute to, where they have not reached their annual maximum, and it is only used when one class exceeds its annual levy limit. A full breakdown of the supplementary levy is provided in the table in the Notes for Editors below.
Over a number of years, FSCS has seen more firms failing, which has contributed towards the rising levy. This year, alongside many smaller failures – such as Greyfriars Asset Management LLP and Pointon York Ltd – FSCS has seen more compensation pay-outs to customers resulting from the complex failure of London Capital & Finance (LCF). There has also been an increase in pension advice claims and additional costs in relation to the transfer of cash and assets from investment firms, including Reyker Securities.
Given the current high levels of uncertainty, the figures FSCS is announcing today are its best estimates and are subject to change. FSCS expects to confirm any additional levies along with its forecast 2021/22 annual levy figures in its Plan & Budget, which will be published in January 2021, with invoices being issued shortly afterwards.
The total management expenses budget (i.e. the cost of running FSCS and of paying claims) is forecast to be £83.2m, which is an increase on the current budget. The increase in the forecast stems primarily from overall anticipated claims volumes being 38% higher than budgeted, with around 10,200 more claims than had been expected due to LCF pay-outs. In addition, FSCS has seen more complex claims which are costlier to process.
Despite these rising volume-related costs, FSCS has been able to reduce spend in its controllable costs, which has resulted in like-for-like claims handling costs reducing by 8% in 2019/20.
Caroline Rainbird, FSCS Chief Executive, said: “I appreciate that the supplementary levy will be unwelcome news for firms against a challenging economic backdrop, and I genuinely understand the difficulty this will cause. We only raise a supplementary levy when we absolutely have to, when we estimate that we will not have sufficient funds to meet rising compensation costs or management expenses for the period until the next levy is due.
"Whilst we share the industry's concerns about rising compensation costs and increasing levies, we firmly believe there is no silver bullet and regulation alone will not solve this complex problem.
"Education of consumers plays a key role so that they are empowered to make informed financial decisions that are right for them. Our commitment to continuously innovate in our ways of working to keep our management costs as low as possible, making recoveries wherever we can and if cost-effective is also vitally important. And last but not least, collaboration and data sharing with our regulatory and industry stakeholders is crucial to help prevent future failures. Only by the regulators, industry and FSCS all working together effectively will we be able to address these problems, deliver better outcomes for consumers and reduce future levy bills. That is why we also call for the industry to help support us by calling out bad actors and scams.
“It is still too soon to know the full effects of COVID-19 on the industry, but we must all be prepared for a challenging period in 2021. I want to reassure everyone that FSCS is ready to handle whatever difficulties next year will bring.”
The Interim Outlook Report is available on the FSCS website.
Suzette Browne t: 020 7375 8633 / m: 07500 842747
Anthony Ozimic t: 020 7375 8638 / m: 07939 177683
James Tweed t: 020 7375 8646
Notes for editors