The regulator noted that it will be focusing on anticipating where these firm failures may be about to occur and as a result, it is increasing the scrutiny of firms’ finances so it can “intervene rapidly where necessary”.
The warning came as part of its CP20/6: Regulated fees and levies: rates proposals 2020/21 consultation paper.
FCA chairman Charles Randell highlighted the situation when discussing the costs for other organisations who raise levies from regulated firms, including the FSCS.
The FSCS levy is a direct consequence of firm failure, and the FCA has no role in setting it.
“The Financial Services Compensation Scheme (FSCS) Compensation Costs Levy is significant,” Randell said.
“We recognise that Covid-19 will have a significant impact on the viability of a number of firms. There may be further firm failures as a result, and further recourse to the FSCS.
“A key focus of our work in the coming weeks and months will be to anticipate where those failures may occur.
“We will continue to work closely with FSCS to ensure that, collectively, we have a clear view of the likely future implications of Covid-19, and work with firms to ensure that any failures are managed in an orderly fashion.
“Therefore, we are putting additional resources into monitoring and analysing firms’ financial positions, so that we can intervene rapidly where necessary. We will continue to discuss how to reduce compensation costs,” he added.
Financial Ombudsman Service levy down
The Financial Ombudsman Service (FOS) has also significantly revised its funding arrangements for the coming year since consulting in December 2019 to accommodate the current situation.
“The changes represent a combination of targeted interventions to help smaller firms through the Covid-19 crisis, and broader steps to benefit all firms that contribute to its funding” Randell continued.
“The service has decided to ask the FCA to raise a lower levy from firms than envisaged in its budget consultation. As a result, around 30 per cent of the service’s income will now come from the levy in 2020/21, rather than the 40 per cent previously sought.
“This means that, while the levy is still going up this year, for many firms the increase will be significantly smaller than it would have been without this change.
“The service will absorb the cost of these changes – which amount to £25.4m in total – by reducing its reserves.”
Case fees are increasing but the number of free cases has increased from 10 to 25, meaning that the vast majority of firms will not pay case fees.