The Financial Services Compensation Scheme is forecasting a 20% cut to its levy requirement for 2023/24 thanks to high levels of surplus built up in the current financial year.
The move could see the levy cut from £625m in the current financial year to £478m in 2023/24 and is likely to mean a lower levy for many of the firms which fund the FSCS.
This year the FSCS has been able to recoup more than £6m from failed firms and costs have been lower than expected.
Surpluses have been built up this year in several sectors including £91m in the Investment Provision class, mainly due to self-invested personal pension (SIPP) operator claims now expected in 2023/24 and £86m in the Life Distribution and Investment Intermediation class, mainly due to fewer claims processed than anticipated for complex pension claims.
The initial forecast for the 2023/24 levy is £478m which is based on an early indication and is subject to change, the FSCS said. The FSCS expects compensation payments to total £592m in 2023/24 including £497m for firms that have already failed and £95m for firms forecast to fail during 2023/24.
While compensation in 2023/24 are expected to rise overall, the indicative levy is lower than in the current financial year due to surpluses being carried over, the FSCS said. One reason for this is that complex cases are taking longer to resolve.
FSCS chief executive Caroline Rainbird revealed the figures, the first forecast for 2022/23’s levy, in the body’s November Outlook publication published today.
She said: “We anticipate a reduction of around 20% in the levy required for next year.”
But in a note of caution she added: “Whilst I am sure a lower levy for 2023/24 is welcome news, I must emphasise that this reduction is due to surplus balances being carried over from 2022/23, and we expect compensation costs in 2023/24 to remain relatively high at £592m.
She warned that there were a number of factors that could blow this forecast off course.
She said as the FSCS levy and costs were based on a ‘pay as you go’ model there was an “inherent lag” between an influx of new cases and higher costs.
She said: “Around 80% of people who need to bring claims to us did not realise they had been given unsuitable advice until at least five years after the event.”
For 2023/24, she also warned that the FSCS had not included compensation estimates for firms that may fail if the FCA implements a proposed consumer redress scheme for members who transferred out of the British Steel Pension Scheme (BSPS).
Many adviser involved in BSPS transfers have already failed and these are included in the forecasts but the FCA redress scheme could mean many more firms defaulting as compensation claims and complaints come in.
A full forecast update for the levy for 2023/24 will be published next spring.
Ms Rainbird said “at this stage” for the current 2022/23 financial year no additional levy is expected.
Looking further ahead Ms Rainbird said that the nature of cases was becoming more complex as the workload shifted from “relatively simple claims” such as PPI towards far more challenging and technically complex pension cases.
Ms Rainbird said, however, that in the current times of uncertainty the FSCS playe a “particularly important role” in providing stability for consumers. Research conducted in September found that 82% of consumers feel “more confident” taking out a product that is FSCS protected and 68% were likely to invest more money if the provider was FSCS protected.