Everyone is in favour of value for money. The FSCS certainly is. It’s one of our strategic imperatives for the next five years.
But what do we mean by value for money?
A good place to start is by asking what the FSCS produces. That then opens up a useful insight into improving value for money.
First and foremost, the FSCS deals with claims by consumers against businesses which have failed. But those claims are both very volatile and unpredictable. We received fewer than 4,000 claims - excluding insurance - in 2002-03. This contrasts starkly with 2012-13 when the FSCS received more than 62,000 new claims while paying out more than £326m in compensation.
Claims are also very varied. Handling the return of savers’ money when a bank, building society or credit union fails is a completely different proposition from sorting out the complex legal and quantification issues involved in an investment failure like Keydata.
So the first pre-requisite for value to money is to have a business model in place capable of dealing efficiently with volatility and complexity as far as possible.
The FSCS achieves this by outsourcing the great majority of claims. This is far more efficient than hiring and firing people as claims volumes fluctuate. It enables us to draw on the spare capacity of much larger and more diverse businesses.
We also, though, retain small in-house specialist teams to specify how claims should be assessed by our outsource partners and to deal with low volume, complex claims that are uneconomic to out-source.
The FSCS also needs a strategy for outsourcing. Ours exploits competition to achieve both efficiency and effectiveness. We do that by having a panel of three outsource partners. We open entry to the framework to competition every five years. And we expect the firms on the panel to compete against each other on price and quality to win new business. This helps us manage the peaks and troughs in our claims costs for the industry.
We think this is the right way of making competition work in our favour on outsourcing. We use different approaches for other services we buy in. We are also investing in our systems to ensure that our outsource partners can work with us efficiently.
Our current work to put in place an online claims facility – Project Connect – will achieve exactly that. It will enable us to exchange information with outsourcers electronically to a standard process, with much more reliable management information to keep track of progress.
But claims are not the FSCS’s only output. We also work with our partners in government and the regulators to prepare for the resolution of firms in difficulty. Not all of these firms do in fact fail, but the preparatory work has to be done just the same.
And we also work on contingency plans for a range of future eventualities so that the FSCS is ready to protect consumers in the next crisis. We can’t tell when that will be, just that it will happen. People expect us to be ready to deal with failures as they happen.