The Financial Services Compensation Service will spend almost £9mn increasing its in-house expertise to deal with the increase in complex claims.
Interim chief executive of the lifeboat scheme, Martyn Beauchamp, said this means the organisation could reduce the amount it spends on outsourcing in 2024/25.
Beauchamp said: “We anticipate a nominal increase in our costs next year due to the strategic decision to reduce our outsourcing.
“We believe that increasing our in-house expertise is the best way to manage the complex claims and enquiries that currently make up the majority of FSCS’s work.
“We’re forecasting an £8.7mn increase in our operational budget as part of this necessary transition.”
This figure will include costs for recruitment, training and overlap of new staff to ensure continuity.
In the statement, Beauchamp set out a proposed management expenses budget of £103.1mn for 2024/25, a 3 per cent increase on the previous year.
As well as covering the cost of handling claims, this also funds work pursuing recoveries and raising awareness of the protection provided by the FSCS.
The proposed management expenses levy limit is £108.1mn, which covers the FSCS's operating costs, including staff, IT legal and both outsourced and internal claims handling costs.
The limit includes a £5mn reserve on top of the core budget which is £5mn lower than in January 2023 after returning to pre-pandemic levels.
For three years this reserve was higher as there was more uncertainty around firm failure, because of the Covid-19 pandemic.
The FSCS's forecast for management expenses in 2023/24 now stands at £99.7mn, around £200,000 less than expected due to lower than anticipated claims processing costs.
Firm failures and levy
In an interview, published last week (January 4), Beauchamp told FT Adviser that while firm failures were expected the current level remains "too high and needs to be addressed".
Late last year, the FCA ran a consultation on capital requirements for personal investment firms as it looks to reduce the amount of compensation FSCS needs to pay to consumers.
The regulator proposed a “polluter pays” framework which will require personal investment firms to set aside capital so that they can cover compensation costs.
Any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.
Beauchamp told FT Adviser: "This goal is something FSCS strongly supports, as poor investment advice is still driving large numbers of complex claims which are often costly for us to resolve.
“These costs are passed onto the wider industry through FSCS’s levy, which we know creates a burden on many firms."
A possible increase to the Financial Services Compensation Scheme levy this was labelled a "disappointment" for competent financial advisers back when it was announced in November.
In its Outlook document, published November 9, the lifeboat scheme forecast that its levy would rise to £415mn in 2024-25, with advisers set to contribute £140mn - an increase from £101.1mn in 2023-24.
tara.o'connor@ft.com
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