"We firmly believe there is no silver bullet and regulation alone will not solve this complex problem."
The Financial Services Compensation Scheme (FSCS) has announced a £92m supplementary levy.
In a statement, the FSCS said it "acknowledges that 2020 has been a challenging year for the financial services sector" but estimates the Life Distribution and Investment Intermediation (LDII) class requires £92m of additional funding in the form of a supplementary levy.
This amount is more than the annual maximum that FSCS can raise from this class. Therefore FSCS will source £8m from the LDII class and £33m from surpluses across other classes. It will also call for an additional £51m from the other classes, including those in the retail pool. This is a separate pot that all classes are required to contribute to, where they have not reached their annual maximum, and it is only used when one class exceeds its annual levy limit.
The FSCS said it has "seen more firms failing" in recent years, which has contributed towards the rising levy.
This year, alongside many smaller failures – such as Greyfriars Asset Management and Pointon York – the FSCS has seen more compensation pay-outs to customers resulting from the complex failure of London Capital & Finance (LCF). There has also been an increase in pension advice claims and additional costs in relation to the transfer of cash and assets from investment firms, including Reyker Securities.
The total management expenses budget (i.e. the cost of running FSCS and of paying claims) is forecast to be £83.2m, which is an increase on the current budget. The increase in the forecast stems primarily from overall anticipated claims volumes being 38% higher than budgeted, with around 10,200 more claims than had been expected due to LCF pay-outs. In addition, the FSCS has seen more complex claims which are costlier to process.
Despite rising volume-related costs, the FSCS has reduced spend in its controllable costs, which has resulted in like-for-like claims handling costs reducing by 8% in 2019/20.
Given the current high levels of uncertainty, the FSCS said the figures it is announcing today are "its best estimates and are subject to change". It expects to confirm any additional levies along with its forecast 2021/22 annual levy figures in its January budget, with invoices being issued shortly afterwards.
Caroline Rainbird, chief executive of the FSCS, said: “I appreciate that the supplementary levy will be unwelcome news for firms against a challenging economic backdrop, and I genuinely understand the difficulty this will cause. We only raise a supplementary levy when we absolutely have to, when we estimate that we will not have sufficient funds to meet rising compensation costs or management expenses for the period until the next levy is due.
"Whilst we share the industry's concerns about rising compensation costs and increasing levies, we firmly believe there is no silver bullet and regulation alone will not solve this complex problem.
"Education of consumers plays a key role so that they are empowered to make informed financial decisions that are right for them. Our commitment to continuously innovate in our ways of working to keep our management costs as low as possible, making recoveries wherever we can and if cost-effective is also vitally important. And last but not least, collaboration and data sharing with our regulatory and industry stakeholders is crucial to help prevent future failures. Only by the regulators, industry and FSCS all working together effectively will we be able to address these problems, deliver better outcomes for consumers and reduce future levy bills. That is why we also call for the industry to help support us by calling out bad actors and scams.
“It is still too soon to know the full effects of Covid-19 on the industry, but we must all be prepared for a challenging period in 2021. I want to reassure everyone that FSCS is ready to handle whatever difficulties next year will bring.”
Liz Field, chief executive of PIMFA, commented: "PIMFA are particularly disappointed to learn that further supplementary costs will be levied onto our membership to fund the failure of other firms.
"This means more customers have been let down and had no choice but to use the compensation scheme. These costs are a particularly bitter pill to swallow given the ongoing Covid-19 crisis and the impact that it continues to have on the viability of a number of businesses that make up our membership.
"Whilst we strongly support the role of the FSCS in protecting customers, this latest increase further underlines the need to urgently get these costs under control."