The Financial Services Compensation Scheme (FSCS) has confirmed its total annual levy forecast for 2022/23 will remain at £625m ($755m, €724m)
The lifeboat scheme said there is no additional levy expected for the remainder of the current financial year. The 2022/23 levy was originally predicted to be £900m.
It has also announced that early indications show the 2023/24 levy will come in at £478m, a 23.5% drop from the previous year.
This is primarily due to surpluses that are expected to be carried over, including:
- £91m in the investment provision class, mainly due to self-invested personal pension (Sipp) operator claims now expected in 2023/24; and
- £86m in the life distribution and investment intermediation class, mainly due to processing fewer complex pension claims than expected.
At the end of this financial year, across all classes, any surpluses will be carried forward and used to offset the 2023/24 levy. An update on the 2023/24 levy forecasts will be provided in spring 2023.
The total compensation for 2022/23 is now predicted to be around £517m.
The UK lifeboat scheme expects to pay £592m in compensation in 2023/24. This includes £497m for firms that have already failed and £95m for firms forecast to fail during 2023/24.
Compensation is expected to remain relatively high for several reasons, including:
- A continued trend of complex claims in areas such as pension advice and general insurance; and
- A lag between harm occurring and FSCS receiving claims. Approximately 80% of people who need to bring claims to FSCS did not realise they had been given unsuitable advice until at least five years after the event.
The lifeboat scheme said it will continue to work closely with its regulatory partners including the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and Financial Ombudsman Service (FOS) to “monitor firm failures and the associated compensation cost within its forecasts”.
Advice firms, which fall under the life distribution and investment intermediation (LDII) class, will contribute £105.5m to the levy in 2023/24.
This is a drop of £107.6m from £213.1m in 2022/23.
The FSCS said this is primarily due to an anticipated surplus of £86m being carried forward from 2022/23 and offsetting the 2023/24 levy. It is also currently forecasting a lower levy in 2023/24 due to:
- An estimated 40% reduction in Sipp advice claims decisions with no large advice firm failures expected in 2023/24; and
- The average compensation per claim decreasing due to macroeconomic inputs, resulting in a £37m decrease in compensation payments.
The lifeboat scheme added: “Although there is a lower levy forecast for 2023/24, the overall compensation costs are expected to stay broadly similar to the previous financial year.
“This includes an expected increase in compensation for complex pension claims decisions, however this will be offset by the surplus, approximately £86m, being carried over from 2022/23. This early levy estimate includes compensation where we have a high degree of certainty about when claims will come through to us.
“It does not currently include, for example, claims against firms that may fail following the proposed British Steel Pension consumer redress scheme. This class is also expected to receive £39.6m in provider contributions from other classes in 2023/24.”
Also, in relation to Sipp operator claims, the lifeboat scheme anticipates that there will be around £12m increase in compensation costs related to claims surrounding section 27 of the Financial Services and Markets Act 2000.
Life and investments
Elsewhere, the forecast for the life and pensions class levy in 2023/24 is set for £15.4m. This is a fall of £15.7m from the levy expected in 2022/23 (£31.1m).
Also, the early estimated levy in the investment class for 2023/24 is currently £70m – £45.4m less than in the previous financial year.
The FSCS said that this takes into account an anticipated surplus of around £91m from 2022/23.
Of the £70m levy currently forecast, £48m is for costs in its own class and £22m is provider contributions paid to the LDII class.
Provide stability for consumers
Caroline Rainbird, chief executive of FSCS, said: “With the increasing cost of living at the forefront of many people’s minds, we appreciate levy payers are looking for as much certainty as possible. With our latest forecasts, we aim to support our levy payers in their planning by providing as much notice as we can regarding anticipated costs.
“It is during times of economic volatility that FSCS plays a particularly important role in providing stability for consumers, helping increase their confidence and trust in the financial services industry.
“Research conducted in September this year tells us, that of those aware of FSCS, 82% feel more confident taking out a product that is FSCS protected, and 68% are likely to invest more money if the provider is FSCS protected.
“This demonstrates how FSCS’s existence helps to underpin a strong retail finance sector in the UK, and combined with access to sound financial advice, FSCS protection is providing valuable support to consumers.”