FSCS levy increase to £1bn partially driven by expected rise in pension advice compensation

The Financial Services Compensation Scheme (FSCS) has forecast that its levy, which pays for customer compensation and its running costs, will increase by 48 per cent to £1.04bn in 2021/22.

The forecast ensures the FSCS can pay out an expected higher volume in claims, as it is anticipating an “ongoing rise” in complex pension advice claims.

Further failures of self-invested personal pension (Sipp) operators are also predicted in 2021/22, alongside an anticipated increase in firm failures due to the economic impact of Covid-19.

These factors combined have led to the forecast 48 per cent rise to over £1bn. The estimate is based on “the data currently available” and is subject to change before it is confirmed in April/May 2021.

The FSCS noted that compensation costs for 2020/21 were higher than originally forecast, largely due to compensation pay-outs for London Capital & Finance, an increase in the costs of 'return of funds' cases and an increase in pension advice compensation.

As a result, FSCS confirmed that £92m of additional funding was required in the form of a supplementary levy in 2020/21. 

The FSCS noted that it is looking to increase the unlevied contingency reserve from £5m to £15m due to the “uncertainty of the year ahead”.

"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,” said FSCS chief executive, Caroline Rainbird.

“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."

Commenting on the 2021/22 forecast, Pimfa director of government relations and policy, Tim Fassam, added: "In any other sector, a forecast for compensation of over £1bn would be the focus of national scandal - £1bn of compensation represents £1bn worth of financial loss, emotional stress and economic hardship for thousands of UK consumers.

"We cannot continue to normalize this level of loss, accepting that the compensation scheme will hopefully pick things up on the other side, every single person who has had to claim on the FSCS has received a poor outcome that it would be better to avoid. This is a further sign that the cost of compensation is truly out of control.

"This cost is a symptom of a system that fails both customers and the industry. Reform is now urgent but will take time. 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.”

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