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Fee blocks: Who pays what, and why?

This article is part of
Guide to Financial Services Compensation Scheme

Levies to fund the FSCS are assigned across eight funding classes, with three covering firms regulated by the Prudential Regulation Authority and five those regulated under the Financial Conduct Authority, based on each regulator’s own categorisation.

They are:

PRA

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1) Deposits

2) Life and pensions

3) General insurance

FCA

4) General insurance intermediation

5) Life and pensions intermediation

6) Investment intermediation

7) Investments

8) Home finance

Each firm’s contribution is calculated on the tariff base applicable to the relevant class as set by the regulator, and is collected in all cases by the FCA based on the budget the scheme estimates it will need each year.

Where necessary, the FSCS can raise interim levies in addition to this annual amount, to cover major losses that exceed its forecasts.

A higher maximum threshold for each class is set by reference to what a particular class taken as a whole is deemed to be able to afford in a year. The threshold sets the maximum that the FSCS can ask for through both annual and interim levies in any one year from any single class.

The model operates on the basis that a class will meet the compensation claims from defaults of their peers - so in theory investment advisers will compensate for the failings of other investent advisers only - up to the threshold.

Should this be exceeded, under new funding arrangements which took effect from April 2013 firms in FCA sub-classes are now part of a retail ‘pool’ that meets excess claims arising from other FCA sub-class failures up to £790m, which can be drawn down as required.

How much?

Under a new three-year funding model, firms were for the first time this year asked for a higher levy up front on the basis that this should reduce the requirement for interim levies and this improve predictability of FSCS costs.

The 2014 to 2015 levy will be £276m, excluding major bank compensation costs, with advisers in the investment intermediation sub-class paying £112m. The total the sub-class will be required to pay in a single year wa raised last year to £150m.

Each firm contributes proportionally to this annual levy, the scheme insists. However, advisers have continually bemoaned the high proportion of total levies that fall on their sub-class, often for failures such as Keydata or Catalyst that they feel are more correctly categorised as provider defaults.