FSCS: Interim levies may still rise
In the FSCS’s latest annual report for 2014/15, the body said it could not rule out the need to pass the bill for rising compensation claims onto advisers.
In 2013 the FSCS brought in a 36-month funding model in an attempt to smooth the volatility of FSCS fees levied on advisers and providers.
But the latest annual report states: “However, we nonetheless continue to face a high degree of uncertainty about the likelihood and timing of possible failures, and the volume, types and timing of the claims that could arise.
“As a result, there will continue to be occasions when we have to raise an interim levy as we did in March 2015 on the Life and Pensions Intermediation class.”
Under the existing FSCS fee structure life and critical illness cover falls into the life and pensions business category thereby forcing any broker advising on life assurance or CIC to pay a proportion of FSCS levies incurred by every pensions adviser.
In its 2015/16 budget published at the start of this year, the FSCS said it expected a reduction in the overall volume of new claims as the number of claims for PPI and mortgage endowments were expected to fall in line with those experienced by the Financial Ombudsman Service and the wider industry.
However, it anticipated the scheme would see a significant rise in compensation costs arising from advice to transfer pension savings into self-invested personal pensions.
The annual report confirmed levies received this year totalled £1.076bn, compared with £1.11bn in 2013/14. This figure includes the interest cost and capital repayment levy for the banking failures of 2008/09.
The calculation of the annual levy is made up of different components, primarily driven by the scheme’s forecast of compensation costs.
The levy has to be adjusted to reflect both unspent balances or deficits (carried over from the previous year) and recoveries and also reflects FSCS’s management expenses.
Compensation payments relating to the Life and Pensions Intermediation sector rose by £16.5m in 2014/15 to £35.2m compared with £18.7m in the previous year.
Life and pensions intermediation claims also rose from 4,248 to 4,442 in 2014/15 with 43% of claims in this category upheld.
Claims to the FSCS against mortgage brokers meanwhile fell from the previous year’s 710 to 531 in 2014/15.
The average claim in the home finance intermediation category for 2014/15 was £53,199, up from £39,994 in 2013/14. Just 7% of claims made to the FSCS were upheld.
Writing in the annual report Mark Neale, chief executive of the FSCS, said: “FSCS needs to maintain the confidence of the industry which pays for the protection we provide.
“Doing so depends on being able to demonstrate that FSCS has a business model that delivers value for money in both benign conditions and in times of crisis.
“It also depends on FSCS’s willingness to be open about costs and as candid about those aspects of our work which have gone wrong as those which have gone right.”
Earlier this week mortgage advice heavyweights Nigel Stockton and Patrick Bunton called for reform of the FSCS levy categories to put a stop to GI brokers footing the rising bill from poor advice given on pensions.
Stockton, financial services director at Countrywide, said: “MMR has been a success and that is a positive reflection on all parties. Maybe as a result of these changes our fees will be reduced and the Financial Services Compensation Scheme reorganised to properly reflect the risks that each area incurs?”
Bunton, director of London & Country, said: “It is utterly unfair that good firms serving customers’ needs are facing ever-increasing bills to pay for miscreants who have left the market and left their past miss-selling liabilities with FSCS.
“The good cannot be continually expected to pick up the tab for the bad, especially not in areas where they don’t even conduct business themselves.”
FSCS confirmed it has seen a steady rise in self-invested personal pensions-related claims arising from poor advice to transfer pension savings from sound occupational schemes into SIPPs and then to invest in illiquid and risky assets within the SIPP.
FSCS paid out £19.4m in compensation relating to 1,142 SIPPs-related claims which gave rise to an interim levy in March 2015 of £20m on Life and Pensions intermediaries.
The FSCS added: “As we have made clear in our communications with the industry, we believe that the numbers and costs of complex SIPPs-related decisions are likely to rise steeply again during 2015/16.”
Neale said: “I understand the frustration expressed by some industry members about these higher costs. That is why I have commissioned an independent review into the project Connect [the FSCS online claims submission system undergoing development].
“We shall report the findings to the board later in the year and cover them in future publications.”