Contrary to earlier expectations, the UK’s financial institutions will collectively be paying less to fund the Financial Services Compensation Scheme (FSCS) in the 2014-2015 financial year than was the case in 2013-2014.

Lower than Expected Levy

The FSCS provides compensation to customers who would otherwise lose money should their financial firm become insolvent. Its only source of funding is a levy on regulated firms, so effectively the well-behaved, solvent firms are subsidising the rest.

The FSCS levy for 2013-2014 was £285 million, and for 2014-2015, this will reduce to £276 million. This differs from the £313 million figure predicted in the FSCS Annual Budget. Back in November 2013, the FSCS even indicated it was likely to need to charge an interim levy to allow for unexpected costs, but this charge was never imposed.

Primary Reasons for the Reduction

The main reasons for the reduction are said to be the increase in successful recoveries by the FSCS, particularly relating to Keydata Investment Services, and the significant indications that claims for mis-sold payment protection insurance (PPI) have peaked. PPI is the most mis-sold financial product ever in the UK, yet the Financial Conduct Authority’s complaints data shows that PPI complaints in the second half of 2013 were 1,390,756, a reduction of 22% from the first half of the year.

However, for investment intermediaries, the 2014-2015 levy has risen to £112 million from the predicted £105 million. This is said largely to be due to the cost of claims against Catalyst Investment Group Limited, which was declared insolvent in October 2013 after it incurred significant losses through sales of investment bonds from unauthorised Luxembourg-based firm ARM Asset Backed Securities SA.

Predicted Expenses on Compensation in 2014-2015

The total of £276 million is made up of a £112 million levy on investment intermediaries, £71 million on general insurance providers, £38 million on general insurance intermediaries, £33 million on life and pension intermediaries, £16 million on deposit takers and £2 million on home finance intermediaries, plus £4 million of base costs.

The FSCS has predicted that it will need to spend £324 million on compensation in 2014-2015.
Firms can expect to receive their FSCS levy bill from July 2014, and the sum due will be payable within 30 days.

FSCS Chief Executive, Mark Neale, said of the figures: “There is good news today for many firms. Our overall levy for the coming year is down from earlier indications. That partly reflects an expectation of lower claims volumes. But fund managers and investment intermediaries are also benefiting from our success in making recoveries. We have secured many millions of pounds for them and will continue to pursue recoveries wherever it is cost-effective to do so.”

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