Mortgage brokers spared from FSCS levy as forecast drops to £625m

Mortgage brokers spared from FSCS levy as forecast drops to £625m

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.” 

 

Levy criticisms 

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.” 

FCA gains ability to strike off firms within a month that don’t use regulatory permissions

FCA gains ability to strike off firms within a month that don’t use regulatory permissions

 

The new powers set out in Schedule 6A to Financial Services and Markets Act 2000 (FSMA), have been in the works since 2016. They now allow the FCA to cancel or change a firm’s regulatory permission 28 days after the first of two warnings, and also to reverse or annul previous decisions.

Previously, the FCA had to wait 12 months or more to start the process. This created a loophole for potential fraudsters that get on the register and use it to trick consumers into a false sense of security around unregulated activities, that aren’t covered by the Financial Services Compensation Scheme.

 

‘Use it or lose it’

The new power supports the FCA’s existing “use it or lose it” initiative, which has seen the regulator carry out 1,090 assessments since May 2021, resulting in 264 firms applying to voluntarily cancel, and a further 47 to modify their permissions.

Authorised under the Financial Services Act 2021, the “use it or lose it” initiative allows the FCA to “vary or cancel the statutory permissions to conduct FCA-regulated activities of many FCA-authorised firms”. This includes firms who appear to be carrying on no FCA-regulated activities which they have permissions for or have not responded as directed to the regulator’s warning notices.

The changes and or cancellations are recorded on the Financial Services Register.

 

Where the powers apply

The powers only apply to firms authorised or deemed, under the temporary permissions or supervised run-off regimes, to be authorised by the FCA under Part 4A of the FSMA. These firms were asked to review their permissions in January 2021.

Firms can get in trouble for inappropriate uses of permissions and a failure to pay regulatory fees.

Inappropriate uses of permissions include when a permission is being wrongfully used to market high risk products that are not regulated by the FCA.

Where a firm fails to pay its regulatory fees, submit returns or complete annual declarations, the FCA may view these as indicators of a lack of regulated activity, which may lead to permission being removed through use of this new power.

Mark Steward, executive director of enforcement and market oversight at the FCA, said: “Businesses with permissions they don’t need or use, risk misleading consumers.

“Firms should regularly review their permissions, ensure they are correct, and they are acting in accordance with them. If they are not needed or used, they should seek to cancel them.”

 

FCA fines Barclays £783,800 in Premier FX case

FCA fines Barclays £783,800 in Premier FX case

Barclays agreed to cover more than £10m in losses by Premier FX customers.

The financial regulator said that Barclays, Premier FX’s sole banker in the UK, had neglected to identify that internal controls at the payments firm were deficient and that Barclays had failed in this case to conduct its business with due skill, care and diligence.

While the liquidator was to distribute 9p for every £1 customers had lost, Barclays has agreed to make up the difference with what the FCA said was a voluntary payment of £10,076,943.75, meaning that the 167 Premier FX clients whose claims had been accepted by liquidators would have 100 per cent of their money returned. 

Mortgage Solutions approached Barclays for comment. A spokesperson for the bank responded: “Barclays has reached a resolution with the FCA following an investigation into its oversight and monitoring of a former customer, Premier FX Limited. As part of this resolution, Barclays has agreed to pay a penalty of £783,800 and make an ex gratia payment to be distributed amongst Premier FX’s customers.

“Barclays fully cooperated with the FCA’s investigation.”

The FCA said the Barclays payment would be sent by the liquidators by the end of next month and that the fine ended the watchdog’s investigation into Premier FX and associated parties. 

The FCA publicly censured Premier FX in February 2021 for failing to safeguard its customers’ money and seriously misleading them about the services it was authorised to provide. 

The regulator said that Premier FX had seriously misled customers on three levels, falsely telling them that it could hold their funds indefinitely without the need for a payment order for onward transfer; that their funds would be held in secure, segregated client accounts; and that their funds would be protected by the Financial Services Compensation Scheme (FSCS).

Mark Steward, executive director of enforcement and market oversight for the FCA, said: “Premier FX, which handled money on behalf of other people, presented particularly high risks of financial crime and fraud. Barclays was aware of these high risks in providing banking services to Premier FX but failed to take reasonably appropriate steps to mitigate those risks.”

He added however, that Barclays’ agreement to “meet the deficiency in Premier FX’s funds mitigates the actual losses to Premier FX’s customers” and was “a significant step to the credit of the bank” and one which “has reduced substantially the sanction that otherwise would have been imposed.”

Mortgage broker among firms declared in default

Mortgage broker among firms declared in default

Midland Independent Financial Services, which was based in Cannock and formerly traded as The Mortgage Shop, has now gone out of business according to the financial industry’s lifeboat scheme.

As a result, former customers who believe they were owed money by the business may now be able to claim compensation from the FSCS.

The news follows two mortgage brokers being declared in default in December.

The other businesses named by the FSCS as having gone into default are:

Sarah Marin, chief customer officer at the FSCS, commented: “FSCS’s protection increases consumer confidence when buying financial products and services, and our compensation helps put customers back on track if firms should fail.

“We encourage customers to claim directly with FSCS via our website, which provides the easy-to-use service they expect. Help is on hand throughout the process, with claims experts available through web chat or over the phone.”

FSCS budget set at £95.5m

FSCS budget set at £95.5m

 

This is a five per cent increase on last year’s budget which the FSCS attributed to a rise in complex claims with higher processing costs. 

It said it expected complex claims to account for 43 per cent of cases this year, a 26 per cent uptick on 2021/2022. 

This has been caused by claims made by customers who were given poor advice to move their pensions into unsuitable investments. The FSCS said these claims cost them more to process due to longer handling times, as well as the need for specialist staff to assess and calculate the compensation. 

The FSCS said its forecasted management expenses for 2021/2022 now stood at £85.3m, a £5.2m reduction against the budget announced in January last year. It said the £5.2m surplus would be used to reduce the 2022/2023 levy and factored into its next outlook update in spring. 

It said the reduction was larger due to fewer firms failing and therefore fewer claims coming through. However, it said these failures may occur in 2022/2023 and beyond instead. 

Caroline Rainbird, chief executive of FSCS, said: “Our management expenses, though dwarfed by the costs of the compensation we pay, are inextricably linked to the annual FSCS levy. 

“Although we have the right team and systems in place to efficiently process claims and make recoveries, it is important to be aware that the sheer complexity of claims means that we are likely to continue seeing increases in claims processing costs over the coming years as well as potential increases in the amount of compensation needed.” 

Rainbird welcomed the Financial Conduct Authority’s (FCA) review of the compensation framework as part of its plans to reduce the levy imposed on firms by 2030. She also urged industry members to put forward their views.

Last year, the regulator published a discussion paper to consult on how to make the levy fairer, so firms paid for their own failures. 

She added: “We understand the difficulties within this and getting the balance between consumer and industry responsibility will be an important and critical challenge to face into collectively. 

“We want to see a compensation framework in place that is fair for the industry but allows us to put as many people back on track as possible when this is needed. We are thinking hard about how to tackle these matters and will continue to focus our intelligence and analysis capabilities to that end.” 

FCA seeks views on making FSCS levy fairer

FCA seeks views on making FSCS levy fairer

 

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.

FCA commits to reduce FSCS levy by 2030

FCA commits to reduce FSCS levy by 2030

 

Sarah Pritchard, executive director, markets at the Financial Conduct Authority (FCA) announced the objective in a closing keynote speech at the Personal Investment Management & Financial Advice Association (PIMFA) virtual Senior Leadership Summit yesterday. 

This followed the news that the FSCS had lowered the levy for the financial year 2021/2022 from £833m to £717m.  

Pritchard said the regulator was looking to stabilise the FSCS levy by 2025 as part of its transformation policy. She said the FCA was targeting “a year-on-year reduction in the levy between 2025 and 2030”. 

She added that the FCA would publish a consultation paper before the end of the year, which would set out some proposals on how the levy might be stabilised.  

Pritchard also said the regulator needed to work with the industry to make this happen. 

“This needs a whole system response,” she added. 

Liz Field, chief executive of PIMFA, said: “We welcome the announcement from the FCA that the regulator wants to work with us to stabilise the FSCS levy and work towards real world year-on-year reductions in the levy between 2025 and 2030. 

“PIMFA remains absolutely clear that the current levels of FSCS funding are unsustainable for the industry and can only be addressed once the drivers of FSCS claims are suitably addressed.” 

In its outlook for the year, the FSCS said it revised down the levy as it no longer required each financial services sector to contribute to a £116m pool to cover claims made against the investment provision sector. It said the claims still sat with the Financial Services Ombudsman and were expected to be processed in 2022/2023.

In response, the Association of Mortgage Intermediaries said it was ready to work with the FCA and FSCS to establish a fairer funding mechanism for the compensations scheme.

FSCS levy cut to £717m for 2021/22

FSCS levy cut to £717m for 2021/22

 

This was because it no longer needed to invoice the retail pool for the £116m it expected to cover claims made against the investment provision sector. 

Each financial services category was expected to contribute £9m to make up for the self-invested personal pension (SIPP) operators breaching its annual levy limit of £200m. However, claims against the sector were £106m lower than forecast and many are yet to be processed with the Financial Ombudsman Service. 

The FSCS now expects these claims to come through during the 2022/2023 financial year and does not expect to raise any more levies this year. 

The Association of Mortgage Intermediaries (AMI) said it was surprised that the retail pool had been deferred to next year. It was also shocked that the Financial Conduct Authority (FCA) had not been asked to invoice an interim levy as part of this year’s costs. 

Robert Sinclair, chief executive of AMI, said: “AMI is pleased to see that the FSCS does not need to invoke the retail pool for financial year 21/22, so avoiding an interim levy on mortgage and protection firms in the new year.” 

The indicative levy forecast for 2022/2023 is £900m. This includes £400m relating to compensation for failures that have not yet occurred. 

 

Mortgage broker levy 

Mortgage advisers paid £3.6m for the financial year 2021/22 and this is forecast to fall to £1.5m for the next financial year. 

However, the sector may need to contribute £7.7m towards a retail pool to cover the life distribution and investment intermediation (LDII) sector.

The LDII sector is predicted to breach its £200m annual levy limit next year and require funds from other sectors. 

AMI said the prospect of the retail pool being added to next year’s bill was still “uncertain”. 

Sinclair added: “For 22/23 we remain concerned about the costs being transferred from bad behaviour in the pensions and investment markets on our innocent member firms. The continuing retail pool liabilities being added will not be charged until later in 2022, but this guillotine hanging over the heads of mortgage firms is stressful and unwelcome.  

“We are concerned that 73 per cent of the FSCS costs come from advice more than five years ago. This means that any actions taken by FCA today will have limited short-term impact. The industry needs a better solution to this compensation mess.”  

“AMI stands ready to work with the FCA and FSCS to establish a better and fairer funding mechanism for the FSCS. Previous work on the scheme has seen the FCA at its best in promoting constructive debate. We hope the doors to a new debate will be opened soon,” Sinclair added. 

FCA pledges to be more assertive and make faster regulatory decisions

FCA pledges to be more assertive and make faster regulatory decisions

 

This is the first annual plan for the regulator since Nikhil Rathi joined as chief executive in October. 

Rathi (pictured) said: “The FCA must continue to become a forward-looking, proactive regulator. One that is tough, assertive, confident, decisive and agile. 

“One that acts, acts fast—and where we can’t act, engages enthusiastically with those who can. Continuing to be more innovative, assertive and adaptive.” 

As the regulator expected firms to keep pace with the changing world, its daily regulation also needed to adapt, it said. 

The plan stated: “As the regulatory context becomes more complex, and the numbers we regulate increase, we need to invest, to grow and develop our capabilities. This will enable us to move swiftly, and make confident, well-informed decisions from complex information.  

“We also need to broaden our approach to the way we choose and use our wide range of regulatory tools, to improve our reach and impact across all regulated firms.” 

The plan said FCA would ensure it had the necessary skills to supervise firms amid a digitisation of the market, sped up by the coronavirus pandemic. 

It also proposed that in order to meet the needs of borrowers, it would put measures in place to allow firms to exercise flexibility in the interests of customers. 

It said it wanted customers to find products that fit their needs, not become over-indebted through borrowing and to have access to affordable credit in a smooth way. 

The FCA said it wanted all regulated firms to focus on customer and market outcomes when designing and delivering services. 

Nikhil Rathi added: “Over the next 18 months you will continue to see an FCA that looks and feels even more different. One that operates, partners and communicates differently. 

“One that delivers market integrity and delivers for the consumers that we serve. One that is not only purposeful but that is fit for purpose. 

“There is a lot of work to do. I am confident that we have the right strategy, people and ambition to do it.” 

The Financial Services Compensation Scheme (FSCS) welcomed the plan, saying the initiatives would help reduce its levy. 

Caroline Rainbird, chief executive at FSCS, said: “We have been clear that tackling the root causes of these harms is the only way to sustainably reduce the levy over the coming years, and it is very encouraging to see the detail in the FCA’s business plan around this.  

“We all recognise that the complex problem of consumer harm will be solved only by the entire industry working together, supported by those with the powers to make changes and enforce them.” 

MAOE: Sinclair says PII pricing will fall after interest-only mis-sale cases fail

MAOE: Sinclair says PII pricing will fall after interest-only mis-sale cases fail

Sinclair said: “I am happy to be able to tell people the last four cases that went through to ruling were either struck out due to time bar or found in favour of the advice firm, so had no case to answer.”

He said “We are now suing for costs for those adviser firms. This is a significant shift.”

At the Mortgage Administrators Online Event today, hosted by Mortgage Solutions, attendees heard mortgage brokers have lived with the threat of claims for years or been forced to battle threats of legal action over pre-credit crunch ‘mis-sold’ interest-only mortgages across the market.

It’s not over as the legal firms involved continue to probe Financial Ombudsman cases to try to get a foothold, said Sinclair. But he added: “I’m hopeful lawyers involved will lose their funding from venture capital firms and therefore this will begin to fall away over the next 6-12 months.”

He said in turn, this will impact the PII market, which has seen price increases that should ‘settle down’ as the pressure begins to evaporate.

One of the judgments involves a case brought against SPF Private Clients involving a 20-year interest only mortgage from Birmingham Midshires. In May this year, the judge ruled the limitation period had expired and the claimants had sufficient understanding of the advice given.

 

FSCS fees

Meanwhile, Sinclair also outlined the industry’s success to date in getting FSCS fees reduced from a proposed £1bn down to £120m for the mortgage advice sector – but added that the ‘sword of Damocles continues to hang over our shoulder’ with the final decision yet to come in October.

He also saluted the government’s efforts to stave off the worst financial effects of Covid-19.

“What we’ve seen from government is a willingness to put the housing and mortgage market at the heart of the economy.”

However, Sinclair’s report card for the government was not all positive, calling the cladding issue four years post-Grenfell and the government’s treatment of its victims a ‘governmental and a national disgrace’.

“The money is not yet available to make the changes to these properties – and making the changes, the money only covers the cladding and not the other defects that might emerge once that cladding has been removed,” added Sinclair.

 

All the MAOE presentations will be available on demand on Mortgage Solutions’ YouTube channel.