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City regulators propose 2.5% reduction in FSCS levy

  • 18/01/2016
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City regulators propose 2.5% reduction in FSCS levy
The City regulators are proposing to cut the Financial Services Compensation Scheme (FSCS) management expenses levy by 2.5% to £72.7m in 2016/17, a joint consultation paper has revealed.

The levy limit, which is relevant to all authorised financial services firm, currently stands at £74.4m and is made up of two components, the management expenses budget and a contingency reserve.

In its consultation, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) proposed that the scheme’s management expenses budget should be lowered by 2.5% to total £67.4m, while keeping its contingency reserve unchanged at £5.3m.

Management expenses relate to the running of the FSCS and differ depending on which sector of financial services individual firms fall within. These costs exclude compensation payouts made to or on behalf of claimants. Its contingency reserve acts as a financial buffer in circumstances that were unforeseen when the annual levy was set.

In October, acting chief executive of the FCA Tracey McDermott pledged to review the FSCS levy, which she described as ‘lumpy and unpredictable’. The service came under fire last year when its levy for 2015/16 ended up being £32m higher than budgeted in part due to a rise in claims relating to self-invested personal pensions.

The proposed management expenses budget will be made up of £23.4m in base costs and £44m in specific costs, according to the consultation. Specific costs are allocated according to the amount of risk and work posed by providers and intermediaries.

A total of £14.2m has been set aside for costs concerning deposits held by banks and building societies, with general insurance intermediation, the second most expensive sector for the FSCS, set at £9.5m. Home finance intermediation which includes mortgage intermediaries has been assigned a cost of £724,000.

If agreed, the proposed levy limit will apply from 1 April 2016, the start of the FSCS’s financial year, to 31 March 2017.

The consultation closes on Monday 15 February.

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