The Financial Services Compensation Scheme (FSCS) has revised its levy forecast for 2023/24 to £270m ($334m, €311m).
This comes several months after the UK lifeboat scheme predicted the levy for this financial year would be £478m.
The 2022/23 levy came in at £625m, which means the £270m prediction for 2023/24 will be a 57% fall.
The lifeboat scheme said that 2023/24 forecast levy has reduced due to:
- An increased surplus from the 2022/23 levy being carried over into 2023/24, which has reduced the amount of money FSCS needs to raise to cover compensation costs. These surpluses materialised because of lower volumes of pensions decisions, revised self-invested personal pension (Sipp) operator claim timings and large insurance pay-outs being delayed or settled at lower amounts; and
- An overall decrease to the compensation forecast for 2023/24 of £121m, but it still expects to pay £471m. The decrease includes a £67m reduction in the investment provision class, mainly due to fewer Sipp operator claims now expected this year. It also includes a £56m reduction in the general insurance provision class, partly due to delays on large loss claims.
Complex firm failures
The FSCS said it continues to see increasingly complex firm failures within the Sipp operator, ongoing claims management of insurance estates and defined benefit (DB) pension advice areas.
“These can take significant time and expertise to investigate, and often rely on third parties providing information,” the FSCS said in its outlook published on 25 May. “The overall process can take many months to resolve. These claims can also be high value and compensation relating to these claims can be spread over multiple financial years.”
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 financial services industry, particularly during economic and market volatility.
“Whilst the level of compensation expected this year is lower than it has been in some recent years, this is the sixth year in a row that compensation costs are close to or above £500m.
“We will continue to closely monitor the volume and complexity of claims throughout the year and will share our next update on the levy in the autumn edition of outlook.“
LDII
Advice firms, which fall under the life distribution and investment intermediation (LDII) class, will contribute £101.1m to the levy in 2023/24.
This is a £4m drop from £105.5m predicted in November 2022. In 2022/23, the levy for LDII class was £213.1m in 2022/23.
The compensation costs forecast for this class have increased by £3m (£212.8m) since November’s prediction of £209.5m.
The main changes in the levy forecast include:
- A £21m reduction relating to the compensation costs for complex pension claims as: –the number of claims decisions expected in 2023/24 have decreased for potential new failures; and –this is offset partly by higher average compensation.
- Macroeconomic factors impacting the pension redress calculation model, including increased interest rates and inflation, had resulted in lower average compensation payments during 2022/23. This has now stabilised and so decreases in average compensation are no longer expected; and
- A £20m increase across other products, mainly driven by Sipp advice claims, due to an increase in new claims received in 2022/23. This resulted in an increased volume of claims in progress expected to be completed in 2023/24.
The LDII class will be receiving provider contributions from the life and pensions provision (£15m), investment provision (£21m) and deposit acceptors (£2m) classes.
