The Financial Services Compensation Scheme (FSCS) has reported that the life distribution and investment intermediation (LDII) class will face the maximum £240m ($321m, €280m) levy for the 2022/23 financial year.
The 2022/23 levy payable by firms in the LDII class, which includes financial advisers, is the same figure as the one for 2021/22.
The expected sum of funding required for the class in the next financial year is £406m, which exceeds its annual class levy limit of £240m.
This means £53m will need to come from provider contributions and the remainder (£113m) will need to be funded by the retail pool, which is a separate pot that Financial Conduct Authority (FCA) funding classes contribute to if they have not reached their maximum limit, and another class has exceeded its own.
The compensation payouts for the LDII segment are forecast to be £373m, which is £42m higher than the latest 2021/22 forecast (£331m).
The FSCS said that this is “largely due to the shift we are seeing in the types of claims being made” and it is “expecting to see more complex claims related to pension advice in 2022/23”.
Deficit
The UK lifeboat scheme said that the LDII class received £90m in provider contributions from other classes in the 2021/22 financial year; including:
- £50m from the investment provision class;
- £35m from the life and pensions provision class; and,
- £5m from deposit acceptors.
It added: “While this has helped reduce the shortfall in this class, the projected year-end deficit is currently £17m.
“As this is below £20m, the retail pool will not be triggered this year and the deficit will be carried over to the next financial year.”
Overall
The FSCS also reported that the total levy for the 2021/22 financial year is now £717m, which is lower than the £833m levy announced at the last forecast in May. The previous £833m figure included £116m for the retail pool.
The UK lifeboat scheme said it no longer needs to invoice the retail pool because “failures that were expected in 2021/22 have not yet happened and are now more likely to occur in 2022/23 and beyond”.
The FSCS added that “it will not be calling for a supplementary levy this financial year”.
To help prepare the industry for the year ahead, FSCS said its first overall levy forecast for the 2022/23 financial year will be of £900m. This figure includes an estimate for its running costs, which will be consulted on in January 2022.
The FSCS added: “It is important to note that, of the £900m funding that is currently forecast for 2022/23, approximately £400m relates to compensation costs for failures that have not yet occurred.
“This element of the forecast is based on a number of sources of information and has been calculated on an estimation of when businesses will fail.”
‘Action from all parties’
Caroline Rainbird, chief executive of the FSCS, said: “While the lower levy forecast for this year (2021/22) may be seen as good news, it is important to note that the reduction is mainly due to failures that were expected this year now looking likely to happen next year or beyond.
“We hope that the industry finds our early 2022/23 levy forecast helpful to plan for the year ahead. We will continue to keep the industry updated on our assumptions and latest forecasts as events play out.
“We appreciate that the levy remains high, but it will take action from all parties to drive fundamental change. We are already seeing progress, for example with the launch of the FCA’s consumer investment strategy.
“We will continue to play our role, but again we want to highlight the importance of the wider industry in playing its part. It must proactively call out, and take action against, poor behaviour and do more to identify sources of consumer detriment and practical solutions.
“It is only through serious action and collaboration that we can combat the issue of the rising levy.”
