UK financial services companies face an annual bill of more than £1bn to fund compensation for the collapse of London Capital & Finance, coronavirus-related business failures, and pension scams.
On Friday, the Financial Services Compensation Scheme — the lifeboat funded by banks, insurers, asset managers and financial advisers — said its levy on financial services providers would rise to £1.04bn in 2021/22, a 48 per cent increase on the previous financial year.
An additional £44.5m will also have to be paid by early February, taking the levy for the current 2020/21 financial year to £700m. The levy is compulsory for all companies regulated by the Financial Conduct Authority.
“We are anticipating an increase in firm failures over the next financial year,” said Caroline Rainbird, FSCS chief executive. “This will probably lead to a rise in the volume of claims, many of which are complex, and therefore an increase in the levy.”
The £1bn cost could increase further as a judicial review is under way to examine the decision by the FSCS to only compensate a fifth of the 11,600 customers who lost £236m in the collapse of London Capital & Finance, the mini-bond provider. The FSCS could have to pay compensation to more than 10,000 investors if the High Court rules in favour of the claimants.
The FSCS said it expected to deal with 54,311 compensation claims in 2021/22, an increase of 72 per cent over the caseload anticipated a year ago.
As well as potential payouts to LCF customers, it expects more claims related to unsuitable advice about pension transfers and the sale of unregulated products in self-invested personal pensions (SIPPs). The coronavirus pandemic has led to an increase in the number of financial services companies that have failed or stopped trading, owing money to customers. The FSCS said in November that it would compensate the customers of 45 financial companies that had defaulted between May and October 2020.
The Personal Investment Management & Financial Advice Association, a trade body, said “the cost of compensation is truly out of control” and the £1bn levy bill should be considered a “national scandal”.
“This is a symptom of a system that fails both customers and the industry. Reform is urgently needed,” said Tim Fassam, Pimfa director of government relations and policy.
Pimfa has proposed that fines imposed by the FCA, which are currently paid to the Treasury, should instead be used to cover some of the costs of the FSCS levy.
It has also called for the government to tackle problems such as “phoenixing”, where a financial company transfers liabilities to the FSCS but then restarts its business under another name.
The government agreed to set up a working group to examine the escalating cost of the FSCS at a meeting this week of the Treasury’s asset management task force which was hosted by the City minister John Glen.
Ms Rainbird said that the FSCS was “doing everything in our power” to try to reduce the levy.
“We are working with the regulators to tackle scams. By taking action with the regulators and industry, we can help improve outcomes for consumers and reduce the burden of the levy,” she said.