The Financial Services Compensation Scheme (FSCS) is turning to industry to raise an extra £92m ($122m, €103m) on top of the annual levy already collected.
Caroline Rainbird, chief executive of the FSCS, said that the funding is needed as the scheme is unlikely to have enough to meet the rise in compensation costs or management expenses until the next round of levies is due next year.
The £92m is largely attributed to a surge is claims related to life distribution and investment intermediation (LDII).
The FSCS acknowledged that the sum is more than the annual maximum it is allowed to raise for the LDII class and, as a result, it will source £8m from LDII as well as £33m from surpluses across all other classes.
Reaching out
The scheme added that it will call for an extra £51m from the other sectors, including those in the “retail pool”, to reach the sum needed.
This is a separate pot that all classes are required to contribute to, especially if they have not reached the annual maximum, and it is only used if one class exceeds its annual levy limit, the FSCS said.
The total management expenses budget for 2021 is forecast to be £83.2m, compared to the £74.7m it raised for the current year.
On a positive note, however, the FSCS said it managed to reduce spend in its controllable costs by 8% in 2019-20, despite the rising volume of claims.
Cost review
Industry players deemed the lifeboat scheme’s move as “disappointing”
Liz Field, chief executive of the Personal Investment Management and Financial Advice Association (Pimfa), said: “Pimfa are particularly disappointed to learn that further supplementary costs will be levied onto our membership to fund the failure of other firms.
“This means more customers have been let down and had no choice but to use the compensation scheme. These costs are a particularly bitter pill to swallow given the ongoing covid-19 crisis and the impact that it continues to have on the viability of a number of businesses that make up our membership.
“Whilst we strongly support the role of the FSCS in protecting customers, this latest increase further underlines the need to urgently get these costs under control.”
Surprisingly, there was virtually no reaction from financial advisers and wealth professionals on social media, as International Adviser was not able to find a single post mentioning the latest move by the lifeboat scheme.
One of the London Capital & Finance (LCF) bondholders told IA they are very sympathetic with IFAs on the issues of rising levies. They feel the FSCS did not get it right at the beginning, considering that a big percentage of the overall sum was needed and will still be needed to pay for LCF claims.
They, however, suggested the FSCS should be more proactive and send warnings alongside compensation about investing in and/or through regulated entities by providing a link or document outlining which companies are actually authorised in the sector.
‘Challenging economic backdrop’
FSCS’ Rainbird added: “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.
“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. 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.”
