The Financial Services Compensation Scheme (FSCS) today publishes its latest Outlook update, with revised compensation and levy forecasts for 2022/23, and a new report which highlights some of the data and insights put forward by FSCS in response to the FCA’s Compensation Framework Review discussion paper.
In November 2021’s Outlook, FSCS published an early levy forecast for 2022/23. This forecast considered the trends of the past few years, including a rise in complex claims, the anticipated impact of firms that have already failed, and projections based on when future failures were expected to occur.
FSCS has now revised its levy forecast for 2022/23 to £625m. Although the levy itself has reduced, FSCS expects to pay its customers more compensation in 2022/23 than it did in the previous year, totalling £698m.
In line with November 2021’s Outlook, the main driver behind the increase in compensation costs is the ongoing trend of more complex claims in areas such as pension advice and general insurance. These complex claims take significant amounts of time and expertise to investigate and often rely on third parties to provide information which can take many months to resolve. These claims tend to be high value and compensation relating to these claims can be spread over multiple financial years.
The forecast levy amount has reduced due to:
- A surplus from the 2021/22 levy has been carried over into 2022/23 which has reduced the amount of money FSCS needs to raise from firms to cover the costs of compensation.
- The uncertain and rapidly changing economic situation continues to pose a challenge when it comes to forecasting when failures will occur, and when compensation costs will materialise as a result.
- An overall decrease to the compensation forecast for 2022/23 of £162m. This includes a £65m reduction in the Life Distribution & Investment Intermediation (LDII) class and a £99m reduction in the Investment Provision class.
- A retail pool contribution will not be required in 2022/23 as we no longer expect the LDII class to breach its annual levy limit and need additional funding.
This is also the first year of the Funeral Plans funding class. From 29 July 2022, the FCA will regulate firms and intermediaries that provide and arrange pre-paid funeral plans. However, FSCS is not expecting any compensation costs in this class in 2022/23 and newly authorised firms do not pay any levies in their first year of regulation.
New report – The balancing act of compensation
Alongside Outlook, FSCS has published a new report, The balancing act of compensation, which sets out some of the key themes from its submission to the FCA’s Compensation Framework Review discussion paper. This report includes trends in FSCS’s compensation costs, views on compensation limits, and stories of customers who have made a claim with FSCS.
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 industry, particularly during heightened economic volatility.
“While the headline levy number has decreased since our initial forecast in November, the total amount of compensation we expect to pay is greater than last year. Longer-term data suggests that the amount of compensation we pay to customers will continue to increase.
“We have faced criticism from some levy payers over the size of their FSCS levy bill in recent years, but these costs are only a symptom – driven by poor consumer outcomes and the compensation we need to pay out as a result.
“FSCS is keen to play a positive and proactive role in shaping the long-term future of the UK’s compensation regime, and we believe our submission to the FCA’s Compensation Framework Review demonstrates our commitment to being a leading and thoughtful voice in this important debate.”