The Financial Services Compensation Scheme (FSCS) has today published its Plan and Budget for 2021/22.
The Plan and Budget confirms the 2020/21 supplementary levy and outlines FSCS’s forecast 2021/22 levy. The levy pays for compensation to customers of failed firms and for FSCS’s running costs (its ‘management expenses’). A supplementary levy is raised when funds are needed to cover any additional compensation costs since the original forecast levy.
In the Plan and Budget, FSCS has revised the 2020/21 supplementary levy from £92m to £78m. This is due to fewer LCF claims being upheld than forecast in November 2020. Taking account of class surpluses that will be used to offset the levy, £44.5m will be invoiced for the supplementary levy by the Financial Conduct Authority (FCA) in early February.
FSCS’s current forecast indicates that the 2021/22 levy will be £1.04bn, a 48% increase on last year. The LDII and Investment Provision classes are expected to breach their class funding limits for the second year in a row, and therefore the retail pool will be triggered for a total of £252m. The current forecast ensures FSCS can pay out an expected higher volume in claims (72% rise compared to the 2020/21 original forecast, and a 6% increase on the latest forecast for 2020/21) over the next financial year (2021/22). FSCS is anticipating an increase in firm failures due to the ongoing economic impacts related to COVID-19. It is also forecasting an ongoing rise in complex pension advice claims and further failures of self-invested personal pension (SIPP) operators. Additionally, it expects pay-outs related to recent failures in the General Insurance Provision class.
Given the current high levels of economic uncertainty, the indicative levy for 2021/22 of £1.04bn is a best estimate based on the data currently available and is subject to change. FSCS will confirm the final levy figure in the next Outlook publication, which is due to be published in April/May 2021.
As well as a rise in compensation costs, FSCS’s management expenses budget being consulted on is £90.5m. This is a £7.3m (9%) increase on the forecast outlined in the November 2020 Outlook, and a £12.4m (16%) increase on our 2020/21 budget. The increase is due to a rise in the anticipated number of claims as well as the growing complexity, and therefore processing costs, of claims.
Due to the uncertainty of the year ahead, and because it is not always clear when claims may arise, FSCS is looking to increase the unlevied contingency reserve from £5m to £15m. This is a separate reserve which allows FSCS to invoice for additional funds from the industry to support the processing costs of any unforeseen failures, or to handle the expected rise in claims should they materialise.
FSCS will invoice the largest 1,000 regulatory fee payers a 50% advance payment towards the levy in March 2021. This will ensure FSCS has sufficient funds to operate and pay compensation until the annual levy is invoiced in the summer.
Caroline Rainbird, Chief Executive of 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.
Caroline Rainbird continued: “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.”
The Plan and Budget 2021/22 is available on the FSCS website.