Caroline Rainbird

Our May 2022 Outlook

FSCS Chief Executive Caroline Rainbird introduces our May 2022 Outlook, focusing on the 2022/23 levy forecast.  

Today we are sharing the latest compensation and overall levy forecast for 2022/23. Whilst the headline levy number has decreased since our first forecast in November, the amount of compensation we expect to pay customers during 2022/23 is still greater than the total we paid last year.  The longer-term data also suggests that the year-on-year increase in the amount of compensation we pay to customers will continue. In part, this is because around 80% of people come to us at least five years after dealing with the firm they are making a claim against. Hence the harm has often occurred many years before a claim is made and the compensation paid to the customer.

We submitted an extensive response to the FCA’s Compensation Framework Review (CFR) discussion paper in March, where we set out our views on creating a fair and balanced compensation regime for the future. It is important to note that the review is not looking at how FSCS operates. The team continues to provide the customers of failed financial services firms with excellent service, paying compensation where we can do so in an efficient and fair manner.

We have faced criticism from some levy payers over the size of their FSCS bill in recent years, but these costs are only a symptom – driven by poor consumer outcomes and the compensation we need to pay out as a result. FSCS is keen to play a positive and proactive role in shaping the long-term future of the UK’s compensation regime, and we believe our submission demonstrates our commitment to being a leading and thoughtful voice in this important debate.

I am very conscious of the impact paying out increasing levels of compensation has on the industry, as well as consumers, and we continue to call for changes that will help address the root causes – such as scams, poor practice, and gaps in financial education – so that the costs of the levy can be sustainably reduced over time.

We also support further exploration and analysis of alternative compensation funding models, including the retail pool concept which we know causes particular frustration in some parts of the industry. Although changing the current model will not eliminate the underlying issues, we appreciate that it may alleviate some of the pressure on levy payers.

In relation to compensation funding, there is one area in particular that needs highlighting, and that is pensions. The scale of the financial loss experienced by many consumers in this area highlights the impact the current compensation limit has on our ability to put people back on track, leaving many with pension shortfalls. These losses are compounded by the fact that in the UK we have low pension engagement, with many people not checking their pensions regularly or taking the time to understand how their money is invested. People often do not realise the consequence of poorly advised decisions on their retirement plans until it is too late for them to recover their losses. This can have a devastating financial and emotional impact.

We have also published some of the data and insights (pdf 4MB) that we put forward in our submission to the CFR, and we look forward to seeing the full detail of responses to the discussion paper.

The latest 2022/23 levy forecast

In our latest Outlook update, we share our latest total levy forecast for 2022/23 of £625m. Although this is a decrease from the final 2021/22 levy of £717m, we expect compensation costs for the year to be greater. Surpluses from 2021/22 have allowed us to reduce the amount billed to firms, but past instances of consumer harm continues to drive high levels of compensation.

Following consultation earlier this year, the PRA and FCA confirmed our Management Expenses Levy Limit (MELL) at £110.5m. This covers our expected running costs for the year plus a contingency for unexpected costs which we do not bill to firms unless required. The total levy forecast of £625m includes a revised management expenses levy of £85m, as we have now factored in a surplus from last year of £11m.

As Fiona Kidy, our Chief Finance Officer and Lila Pleban, our Chief Communications Officer, explain in their video, the uncertain economic situation continues to pose a challenge when it comes to forecasting potential firm failures. Even a small number of firms failing earlier or later than expected can make a big difference to the amount of compensation we need to pay to customers. In our revised forecast we still expect the majority of the compensation this year to come from firms that have already failed, so even if we see fewer new failures than expected, the compensation costs will remain high.

Claim complexity also has an impact on our costs. We continue to see many claims in areas such as pension advice and general insurance that take significant amounts of time to investigate and resolve. They also require expertise and often rely on third parties to provide information and evidence which can take many months. These claims tend to be higher value, but we are seeing their costs spread over more years than we initially expected due to their complexity.

FSCS’s priorities for 2022/23

Providing a trusted compensation service that helps build confidence in the industry is at the core of our mission. The ‘Prepare’ and ‘Protect’ parts of our strategy are about ensuring we deliver this and put our customers back on track as soon as possible. This year, alongside handling the firm failures and claims that come to us, we are working on our customer experience of the future – how we can continue delivering great service whilst leveraging new technology, innovation and managing our costs. There is also a new part of the market coming under FSCS protection, Funeral Plans, which will have its own funding class. We are embedding this new area into our business so that we are prepared for any failures that happen after the firms come under FCA regulation at the end of July.

This year, £698m is forecast to go to our customers as compensation. The ‘Promote’ and ‘Prevent’ areas of our strategy look to address the harm that underpins this cost, both through initiatives that we lead and through collaboration with the regulatory bodies and industry. We continue to support existing work in these areas, such as the FCA’s Consumer Investments Strategy. We are also working on clearly defining FSCS’s ambition for consumers. We believe there is value in going beyond raising general awareness of the compensation scheme and are looking at specific groups of consumers and ‘moments’ in their lives where we can have the greatest impact.

One of these moments is when a customer realises they can make a claim with FSCS, and must choose whether to claim directly for free, or use the services of a representative. We have recently spoken to a number of our customers who chose to use representatives to find out more about why they made that decision and how much they knew about their options. 41% of the customers we spoke to were not aware there was a free option, and around three in five told us they would definitely make a claim directly for free if they ever had cause to do so again. The insights from this research are helping us shape the next phase of our consumer strategy.

To support our work, data is key. We are creating a new insight and data hub for our teams to use and we are continuing to invest in our data capabilities so that our unique view on the industry can be captured and shared. This will help us continue to highlight issues and opportunities to the industry, regulators and others. It also helps to expose poor behaviour and pinpoint the root causes of harm so that effective solutions can be proposed.

Data also helps us with our recoveries work. Once we have paid compensation, the customers’ legal rights are transferred to FSCS. This allows us to try and recoup the compensation we have paid which essentially offsets future levies. Sometimes we recover uncompensated losses too, which we are able to pass onto customers. We can pursue recoveries against the firm that has failed, usually by making a claim in the firm’s insolvency, and against any relevant third parties who may also carry legal responsibility for our customers’ losses. These might include, for example, the professional indemnity insurers of the firm in default. Since the 2015/16 financial year, we have successfully recovered more than £290m.

We will continue to update our levy forecasting throughout the year and will share our next major update with you in the autumn edition of Outlook.