The FSCS said that total compensation costs for the year are forecast at £435m, which is £36m less than forecast in May.
The fall was attributed to fewer claims decisions being made than anticipated, mainly in the life distribution and investment intermediation class.
This was mainly due to changes in how pension redress is calculated and third-party response times to enquiries.
There has also been a £23m recovery from Green Realisations 123, leading to a larger surplus in general insurance provision class.
The initial levy forecast for 2024/2025 is £415m, which the FSCS said was an “early indication and subject to change”. It added that it was based on compensation costs of £457m for the financial year in the 2024/25.
The FSCS said that the compensation figure was lower than the levy figure due to higher expected surpluses and recoveries anticipated from failed firms.
It noted that over 80 per cent of the total compensation it expects to pay out in 2024/25 relates to claims against firms that have already been declared in default.
The FSCS said that the key drivers for compensation cost forecast were defined pension payments, payments against insurance firms and payments for SIPP operator failures.
Home finance intermediation levy maintained at £5m
Within home finance intermediation, which covers the mortgage market, the total levy will be £5m and its total closing surplus is £1.8m.
The FSCS said that compensation costs have fallen slightly as there have been fewer new claims and decisions made on existing claims than originally forecast.
The home finance intermediation received a refund of £4m as the funds are not expected to be needed for compensation pay-outs in the current financial year and the home finance providers class was also refunded £1m.
The FSCS said that there were no new firm failures or associated compensation payments expected for 2024/25.
It added that it expected £0.2m in compensation payments for firm failures from previous financial years.
The FSCS said that given the £2m surplus being carrier over from 2023/2023 the home finance intermediation class was not expected to pay an annual levy in 2024/2025.
‘Most compensation paid for poor financial advice’
Martyn Beauchamp, interim chief executive of FSCS, said: “I am delighted to have recently joined FSCS and to be providing this important update regarding the current compensation and levy figures. It is an honour to lead such an important and purposeful organisation.
“FSCS directly contributes to trust and stability in our financial services system and makes a genuine difference to consumers’ lives. As the current 2023/24 compensation forecast (£435m) remains broadly similar to May’s Outlook, we do not expect to raise any additional levies in 2023/24.”
He continued: “Although the levy is expected to increase in 2024/25, due to the lower surpluses carried over from the previous financial year, compensation remains relatively stable. For the most recent three years, including the forecast for 2024/25, compensation is between £400m-£460m.
“From a claims perspective, we are seeing recent trends continuing. Most of our compensation continues to be paid out for poor financial advice and for legacy insurance provider failures – both of which include some of the most complex defaults and claims we handle.
“As always, we will keep the industry informed of any changes to our forecasts in a timely fashion. The next Outlook will be published in spring 2024.”
