Mortgage brokers, who fall under the home finance intermediation class, are still set to pay no levy this year due to a £7m surplus carried over from the previous year.
The FSCS said it did not expect any new firm failures or compensation payouts associated with the home finance intermediation class, but it did expect £700m in legacy claims.
The general insurance distribution class is still expected to pay a levy of £5.3m for 2023/2024, which will impact mortgage firms and advisers that fall into this category. This class closed 2022/2023 with a £1m surplus which will be used toward next year’s levy.
The £5.3m levy will cover firm failures in previous years and any compensation this year.
FSCS to pay £471 in compensation this year
The overall levy has been reduced because of an increased surplus from 2022/2023 which lessened the amount of money the FSCS needed to raise to cover compensation costs.
It said the surpluses were a result of lower volumes of pensions decisions, revised self-invested personal pension (SIPP) operator claim timings and large insurance payouts being delayed or settled at lower amounts.
The FSCS said it still expected to pay £471m in compensation this year.
The reduction to the overall levy includes a £67m fall in the investment provision class, due to an expected lower number of SIPP operator claims. There was also a £56m reduction in the general insurance provision class, which the FSCS said was down to delays on large loss claims.
The body said it was seeing “increasingly complex firm failures” which could take time and expertise to investigate. It said the process could take months to resolve while the claims could be high value and compensation relating to claims “can be spread over multiple financial years”.
Caroline Rainbird, chief executive of FSCS, said: “The levy enables FSCS to continue to provide a trusted compensation service that helps build confidence in the financial services industry, particularly during economic and market volatility.
“Whilst the level of compensation expected this year is lower than it has been in some recent years, this is the sixth year in a row that compensation costs are close to or above £500m.
“We will continue to closely monitor the volume and complexity of claims throughout the year and will share our next update on the levy in the autumn edition of outlook.”
Any reduction is welcome
Financial services trade association PIMFA welcomed the reduction but said in the longer term, a solution to the compensation framework still needed to be found.
Simon Harrington, head of public affairs at PIMFA, said: “Every consumer who finds themselves having to use the FSCS to receive redress is a consumer who has received a bad outcome that it would have been better to avoid in the first place.
“It is therefore extremely pleasing to see that fewer consumers have found themselves in need of help from the FSCS in the past year, leaving the FSCS with a forecasted surplus from 2022/23.”
Harrington added: “Moreover, given the FSCS levy represents one of the few uncontrolled costs faced by well-run firms each year – and therefore it has a significant financial impact on them – any reduction in the levy, and let us be clear the forecast for next year represents a significant reduction, is clearly welcome news.”
He said while it was good news in the short term, “we still have medium to long-term concerns about the future compensation framework and the costs that are likely to inevitably arise from pension freedoms and the Covid pandemic. It is therefore likely that today’s forecast represents short-term respite for firms.”
Harrington added: “As costs rise, it is vital that the Treasury recognises the burden placed on well-run firms. We would still urge the regulator and more importantly, the Treasury to consider a longer-term solution that uses alternative sources of funding.
“Financial Conduct Authority (FCA) fines, which are currently diverted to the Exchequer remain a sizeable source of income which would be consistent with our, the FCA’s and wider industry’s view that the polluter should pay.”
