The UK’s lifeboat scheme has forecast it will need more than £1bn from the industry to cover the cost of compensation for the coming year, maxing out the advice sector’s limit for the second year running.
The Financial Services Compensation Scheme’s 2021/22 plan and budget, published today (January 22), said its current forecast indicates the levy will be £1.04bn for the year — 48 per cent up on last year’s total.
Advice firms are expected to contribute £240m. This is the same as last year, due to the fact the class is forecast to breach its funding limits for the second year in a row.
Due to the advice class breaching its limit, alongside the investment provision class, the scheme said the retail pool would be triggered to cover £252m of the total costs.
Meanwhile mortgage brokers will be charged £23m towards the levy — more than seven times the £3m they were charged last year.
The FSCS put the overall expected jump in claims down to an expected increase in firm failures due to the economic impacts of Covid-19, alongside an ongoing rise in complex pension advice claims and further self-invested personal pension provider failures.
Caroline Rainbird, chief executive of FSCS, said: "This annual levy ensures we can protect consumers, which helps to improve market stability and increases confidence in the finance sector.
“But we appreciate that the levy is far too high and that increasing costs could put pressure on firms' finances.”
The FSCS is assuming the LDII class, which includes advice firms, will attract 19,269 claims during the 2021/22 year, a jump of 90 per cent on last year’s original forecast.
It has also revised upwards by 120 per cent its expected number of claims for the 2020/21 year, from 10,134 to 22,251.
The home finance intermediation class — covering mortgage advice — is expected to receive 68 per cent more claims in 2021/22 than the original forecast for last year, around 1,250.
Smaller supplementary costs
It was not all bad news, however. The FSCS has revised the supplementary levy for 2020/21 down £14m to £78m.
In November, the scheme said it was forced to raise a £92m supplementary levy following an increase in pension advice claims and other high profile firm failures, such as London Capital and Finance.
But today the FSCS said there had been fewer LCF claims upheld than originally forecast in November 2020, and it could therefore knock down the cost.
In its plan, the FSCS said encouraging better consumer decisions and taking action on bad practice would ultimately drive down the levy.
It outlined recommendations for reforms to improve outcomes, such a excluding firms and individuals involved in multiple failures from the industry and exploring how to prevent unsuitable high-risk products from being sold to mass-market consumers.
The FSCS also suggested introducing a traffic light warning system, that highlighted the risks of different products in a simple, clear way, and ensuring all financial services providers were required to communicate the scheme’s protection to consumers.