Fewer London Capital & Finance claims upheld than initially forecast, FSCS confirms
The UK Financial Services Compensation Scheme (FSCS) today publishes its Plan and Budget for 2021/22, with the announcement bearing no positive news to clients of failed London Capital & Finance.
The Plan and Budget confirms the 2020/21 supplementary levy and outlines FSCS’s forecast 2021/22 levy. The levy pays for compensation to customers of failed firms and for FSCS’s running costs (its ‘management expenses’). A supplementary levy is raised when funds are needed to cover any additional compensation costs since the original forecast levy.
In November 2020, FSCS published its Outlook update, which gave an overview of the levy position at the mid-point of the 2020/21 financial year. In the update, FSCS noted that compensation costs for 2020/21 were higher than originally forecast. This was largely due to compensation pay-outs for London Capital & Finance (LCF), an increase in the costs of ‘return of funds’ cases (where FSCS funds the cost of transferring the cash and assets of failed investment firms to a new provider) and an increase in pension advice compensation.
As a result, FSCS confirmed that £92m of additional funding was required in the form of a supplementary levy. Each type of regulated financial services firm fits into a funding class, which has a limit for what levy fees the class can pay in a year. As the Life Distribution and Investment Intermediation (LDII) class had almost reached its limit, additional levy contributions would be required from other classes through the retail pool.
In the Plan and Budget published today, FSCS has revised the 2020/21 supplementary levy from £92m to £78m. This is due to fewer LCF claims being upheld than forecast in November 2020. Taking account of class surpluses that will be used to offset the levy, £44.5m will be invoiced for the supplementary levy by the Financial Conduct Authority (FCA) in early February.
FSCS’s current forecast indicates that the 2021/22 levy will be £1.04bn, a 48% increase on last year. The LDII and Investment Provision classes are expected to breach their class funding limits for the second year in a row, and therefore the retail pool will be triggered for a total of £252m.
The current forecast ensures FSCS can pay out an expected higher volume in claims (72% rise compared to the 2020/21 original forecast, and a 6% increase on the latest forecast for 2020/21) over the next financial year (2021/22). FSCS is anticipating an increase in firm failures due to the ongoing economic impacts related to COVID-19. It is also forecasting an ongoing rise in complex pension advice claims and further failures of self-invested personal pension (SIPP) operators.
Additionally, it expects pay-outs related to recent failures in the General Insurance Provision class.
Given the current high levels of economic uncertainty, the indicative levy for 2021/22 of £1.04bn is a best estimate based on the data currently available and is subject to change.
Due to the uncertainty of the year ahead, and because it is not always clear when claims may arise, FSCS is looking to increase the unlevied contingency reserve from £5m to £15m. This is a separate reserve which allows FSCS to invoice for additional funds from the industry to support the processing costs of any unforeseen failures, or to handle the expected rise in claims should they materialise.
FSCS will invoice the largest 1,000 regulatory fee payers a 50% advance payment towards the levy in March 2021. This will ensure FSCS has sufficient funds to operate and pay compensation until the annual levy is invoiced in the summer.
According to the update about LCF published in December 2020, FSCS paid out just over £50.9 million in compensation to 2,584 LCF bondholders who held 3,440 LCF bonds.