It’s the new year kick in the teeth that advisers were probably expecting, but that doesn’t make it any easier to accept that the Financial Services Compensation Scheme’s (FSCS) industry levy is set to rise yet again.
In its Plan and Budget for 2021-22, the lifeboat scheme said it is looking to raise £1.04bn ($1.4bn, €1.1bn), a 48% increase from 2020-21.
“In any other sector, a forecast for compensation of over £1bn would be the focus of a national scandal,” said Tim Fassam, director of government relations and policy at the Personal Investment Management & Financial Advice Association (Pimfa).
“£1bn of compensation represents £1bn worth of financial loss, emotional stress and economic hardship for thousands of UK consumers.”
He added: “We cannot continue to normalise this level of loss.”
Fassam said that the cost is a “symptom of a system that fails both customers and industry” and called for urgent reform.
“HM Treasury must find other sources of revenue to cover these extreme costs. The fairest source are FCA levies, which ensures polluters pay and it remains an industry funded regime.”
Anticipated firm failures
As per the Plan and Budget, the retail pool will need to contribute a total of £252m, as the life distribution and investment intermediation (LDII) and investment provision classes “are expected to breach their class funding limits for the second year in a row”, the FSCS said.
The stark increase stems from an expectation of a higher volume in claims – roughly 72% more compared with the 2020-21 original forecast, and 6% more than the latest calculations for the current financial year.
“FSCS is anticipating an increase in firm failures due to the ongoing economic impact related to covid-19,” the lifeboat scheme said.
“It is also forecasting an ongoing rise in complex pension advice claims and further failures of self-invested personal pension (Sipp) operators.”
In November 2020, the FSCS sought an additional £92m from the sector to pay for claims related to the collapse of London Capital & Finance (LCF).
The figure has now been adjusted to £78m, however.
Consultation
At the same time, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) unveiled a consultation paper looking to increase the lifeboat scheme’s management expenses levy limit by 16% (£12.4m), to reach £90.5m.
The limit for 2020-21 was set at £78.2m.
These costs are separate from the compensation fund and cover day-to-day running costs.
The regulators said that “88% of the increase is due to a forecast rise in the volume and complexity of claims expected by the FSCS”.
The proposed increase to management expenses “is based on a greater level of uncertainty than is normal due to the covid-19 pandemic and the difficulties this presents in forecasting possible firm failures and the number of potential FSCS claims”.
But it’s not just the management expenses that are set to rise, with the FSCS also looking to increase the unlevied reserve by 200% to £15m, up from £5m last year.
“The £15m unlevied reserve proposed for 2021/22 is made up of two components. First, the FSCS has set £7.1m to cover the cost of processing an additional 33% of forecasted claims should they materialise next year,” the watchdog stated.
“This is to reflect the current uncertainty. A further £7.9m is to account for any additional unexpected claims beyond its forecasting.”
This takes the total sum across both elements to £105.5m.
The consultation will close on 19 February 2021.
‘Far too high’
Caroline Rainbird, chief executive of the FSCS, said: “Ongoing trends in a number of classes, and the widespread economic impacts of covid-19, mean we are anticipating an increase in firm failures over the next financial year.
“This will likely lead to a rise in the volume of claims, many of which are complex, and therefore an increase in the levy.
“This annual levy ensures we can protect consumers, which helps to improve market stability and increases confidence in the finance sector. But we appreciate that the levy is far too high and that increasing costs could put pressure on firms’ finances.
“FSCS believes encouraging better consumer decisions and taking more action on bad practice will ultimately help drive down the levy. In the Plan and Budget, FSCS outlines some of its recommended reforms to improve outcomes for consumers, for example, excluding firms and individuals involved in multiple failures from the financial services industry.
“We need to tackle the root causes, not just the symptoms, of the costs and distress caused by failures. We are doing everything in our power to try to reduce the levy. Alongside our recommendations, we are continuing to raise awareness of FSCS protection, and we are working with the regulators to tackle scams.
“By taking integrated and coordinated action with the regulators and industry, we can help improve outcomes for consumers and, in turn, reduce the burden of the levy.”
