In its outlook, it said the opening balance for this class was £3.5m, which was used to offset the 2022/2023 levy, leaving it with a forecasted bill of £0.
Additionally, payment of the £8m retail pool contribution which was pencilled in to cover claims against the life distribution and investment intermediation (LDII) sector is no longer required.
Compensation payouts expected for this year within the home finance intermediation class have dropped from £5m to £1m and the FSCS predicts there will be no new failures. The £1m compensation is related to firm failures in previous years.
Mortgage advice firms which complete protection business will have to pay a levy towards that class. The forecast for this year’s general insurance distribution levy has dropped from the £67.7m suggested in November to £5m.
This was also attributed to the scrapping of the retail pool for the LDII sector, which was originally £59m. However, the FSCS said there were close to £2m in payouts related to failures from previous years.
Overall levy drops
The levy forecast for the financial year 2022/2023 is £625m.
This is a reduction on the £900m the FSCS predicted in November, when it said some of the compensation claims from 2021/2022 would be rolled over into this year as they were yet to be processed by the Financial Ombudsman Service. This helped to lower the overall levy.
The reduction includes a £65m decrease in the levy against the LDII class and a £99m reduction in the investment provision class.
The FSCS said that although the headline levy had been reduced, the amount of compensation expected to be paid to customers will be greater than what was paid last year.
As suggested in its November outlook, much of this will be related to pension advice and general insurance provision claims.
It said its longer-term data also suggests that the annual increase in compensation paid will continue. This was in part due to 80 per cent of people making a claim at least five years after dealing with the firm being claimed against.
It added: “The harm has often occurred many years before a claim is made and the compensation paid to the customer.”
Caroline Rainbird, chief executive of the FSCS, said the body had received criticism from some firms over the size of their bills, but added: “These costs are only a symptom – driven by poor consumer outcomes and the compensation we need to pay out as a result.”
Relating to compensation funding, she said pensions needed highlighting. The financial losses experienced by customers put a focus on the limits compensation had on putting them back on track, which left many with pension shortfalls.
She added that this was compounded by many not checking their pension balances regularly or understanding how their money has been invested.
Overall, the FSCS has made a commitment to stabilise the levy by 2025, then reduce it annually between 2025 and 2030.
Rainbird added: “I am very conscious of the impact paying out increasing levels of compensation has on the industry, as well as consumers, and we continue to call for changes that will help address the root causes – such as scams, poor practice, and gaps in financial education – so that the costs of the levy can be sustainably reduced over time.
“We also support further exploration and analysis of alternative compensation funding models, including the retail pool concept which we know causes particular frustration in some parts of the industry. Although changing the current model will not eliminate the underlying issues, we appreciate that it may alleviate some of the pressure on levy payers.”