UK Financial Services Compensation Scheme to levy firms £532m in 2019/20

The UK Financial Services Compensation Scheme (FSCS) has earlier today announced its levy for 2019/20.

The body will levy firms £532 million this year, a number which represents a rise of £16 million from the size of the levy forecast in FSCS’s Plan and Budget 2019/20 in January. This includes management expenses of £74.6 million.

In 2018/19 the FSCS levy was £468 million for the nine-month levy year in 2018/19 (from July 2018 to March 2019). Had the 2018/19 levy been for a 12-months period, it would have been £574m – £42m higher that the £532 million levy announced today.

The main reasons for the £16 million difference between the forecast levy and the final levy are an uplift in the number of claims expected against SIPP operators and an upwards revision to the expected continuing costs in some historic insurances failures.

FSCS expects that the main driver of the compensation costs this year will continue to be pension claims. The majority of these claims are set to continue to arise from bad advice to transfer retirement savings out of occupational schemes and into SIPPs – usually with a view to investment in risky and illiquid assets.

The body explains that the rise in many of the FSCS’s compensation limits from £50,000 to £85,000 will add roughly £20 million to compensation costs in 2019/20. The other changes arising from the FCA’s review of FSCS’s funding (25% provider contributions and the reorganisation of the funding classes) affect the distribution of compensation costs, but not their size.

As well as protecting deposits up to £85,000 in banks, building societies and credit unions, the higher FSCS limits cover investments, mortgage advice, life and pensions advice, debt management and long-term care insurance.

The new limits apply in the following areas:

• Investment provision is now £85,000 per person per firm, up from £50,000.

• Investment intermediation is now £85,000 per person per firm, up from £50,000.

• Home finance intermediation is now £85,000 per person per firm, up from £50,000.

• Life and pensions intermediation is now £85,000 per person per firm, up from £50,000.

• Debt management is now £85,000 per person per firm, up from £50,000.

• Long-term care insurance is now 100% of the claim per person per firm, up from £50,000.

Customers of firms that are declared to have failed (in default) before April 1, 2019 will be covered up to the previous £50,000 limits. The new limits apply to claims against firms that fail on or after April 1, 2019.

In March 2019, FSCS published data revealing FSCS recovered just under £300 million over the past five years (that is, from FY 2014/15 to FY 2018/19 year to date) from failed financial services firms. FSCS also noted that it had recovered billions of pounds following the resolutions of the 2008 banking failures, where FSCS needed to take out loans totalling approximately £20 billion from the Government at the time of the financial crisis. Those loans have now been repaid in full, largely through FSCS’s recoveries work.