Last month, the regulator revealed it was planning to reduce the Financial Services Compensation Scheme (FSCS) levy by 2025 before working with the industry between 2025 and 2030 to stabilise it.
The FSCS gives consumers compensation when authorised firms are unable to cover the claims against them.
An overall bill is announced at the start of the financial year with each sector contributing to a pot. The bill each sector has to pay is capped, meaning other financial services companies must pay an excess for the failures of firms that are outside of their remit.
This year, the FSCS revised the levy down from £833m to £717m for the financial year 2021/2022 after it said the claims made against the investment provision sector were lower than expected because they would be pushed to next year.
This final levy for 2021/2022 was a further reduction from the £1.04bn proposed in January.
Fairer funding system
Earlier this year, the FCA said it wanted to work towards a fairer system which saw firms liable for the majority of claims against the financial services sector pay the most.
When the first levy of £1.04bn was announced in January, mortgage advisers were set to contribute a fee of £22.9m, with £5.8m covering its own sector and £17.1m going towards wider industry failings.
The final £717m levy confirmed in November saw mortgage advisers contribute £3.6m for the financial year 2021/2022 instead. This was after the FSCS removed the excess £9m payment each sector had to contribute to cover the failures of the life distribution and investment adviser and investment provision sectors.
The mortgage intermediary sector also made fewer compensatory payouts than the £5.1m the FSCS proposed in May, with a final bill of £3m in November.
However, for the financial year 2022/2023, mortgage intermediaries could end up paying an additional £8m to cover expected claims against the life distribution and investment adviser and investment provision sectors on top of a £1.5m bill for its own failings.
Seeking views
As part of its discussion paper, the regulator is seeking views on the purpose, scope and funding of its compensation framework to make sure it meets the needs of consumers and firms.
The FSCS’ operating costs and compensation payouts are funded by these levies. Excluding costs relating to the 2008 banking crisis, this bill has increased over the last decade from £277m in 2011/2012 to an expected £717m for 2021/2022.
The FCA said many of these claims were historic and related to misconduct by firms in the investment sector. Further payouts due to these historic claims are expected to arise in coming years.
Additionally, the regulator said it would be addressing the root causes of the increases in compensation liabilities by improving conduct to prevent misconduct occurring in the first place. The FCA said it would also set out to improve the financial resilience of firms so they are able to meet liabilities and put things right for consumers themselves.
Sheldon Mills, the FCA’s executive director for consumers and competition, said: “We want consumers to have trust in a thriving UK financial services sector, and businesses to be confident that they can bring new and innovative products to market. To achieve this, it is vital that consumers have an appropriate level of protection if things go wrong – and that we find a fair and sustainable way of funding the cost of this protection. Now is the time to ask how we can ensure our compensation framework is fit for the future.
“We are already taking action against the drivers of compensation claims. These include our measures to reduce the impact when firms fail and to tackle misconduct in the investment market.”
An Investment Firms Prudential Regime will come in this January, which will refocus its prudential requirements not only on the risks firms face, but also on reducing consumer harm.
