FSCS warns of high number of claims due to London Capital & Finance pay-outs
The UK Financial Services Compensation Scheme (FSCS) today published its half year edition of Outlook, which gives an overview of the levy position at the mid-point of the 2020/21 financial year.
There have been a number of factors driving up the levy this year. As a result of this, FSCS estimates the Life Distribution and Investment Intermediation (LDII) class requires £92 million of additional funding in the form of a supplementary levy.
This amount is more than the annual maximum that FSCS can raise from this class. Therefore, FSCS will source £8 million from the LDII class and £33 million from surpluses across other classes. It will also call for an additional £51 million from the other classes, including those in the retail pool.
Over a number of years, FSCS has seen more firms failing, which has contributed towards the rising levy. This year, alongside many smaller failures – such as Greyfriars Asset Management LLP and Pointon York Ltd – FSCS has seen more compensation pay-outs to customers resulting from the complex failure of London Capital & Finance (LCF). There has also been an increase in pension advice claims and additional costs in relation to the transfer of cash and assets from investment firms, including Reyker Securities.
The total management expenses budget (i.e. the cost of running FSCS and of paying claims) is forecast to be £83.2 million, which is an increase on the current budget. The increase in the forecast stems primarily from overall anticipated claims volumes being 38% higher than budgeted, with around 10,200 more claims than had been expected due to LCF pay-outs. In addition, FSCS has seen more complex claims which are costlier to process.
Caroline Rainbird, FSCS Chief Executive, said:
“I appreciate that the supplementary levy will be unwelcome news for firms against a challenging economic backdrop, and I genuinely understand the difficulty this will cause. We only raise a supplementary levy when we absolutely have to, when we estimate that we will not have sufficient funds to meet rising compensation costs or management expenses for the period until the next levy is due”.
Let’s note that, according to the update for customers of failed London Capital & Finance provided in late October 2020, FSCS has paid out more than £38.1 million in compensation to LCF customers and is continuing its work to assess the outstanding claims. The amount compares with just over £20 million in compensation paid out as of August 27, 2020.
In January 2020, following an initial review of call recordings and emails to customers, FSCS concluded that some customers were given misleading advice by LCF and that these customers would have valid claims for compensation.