The Financial Services Compensation Scheme’s 2021/22 plan and budget forecasts the levy will be £1.04bn for the year, up 48% on last year’s total.
Mortgage brokers will be charged £23m towards the levy, up from £3m that they were charged the year prior.
Advice firms are expected to contribute £240m, which is in line with what they were charged last year.
Furthermore, the scheme said the retail pool would be triggered to cover £252m of the total costs, this is due to the advice class breaching its limit, alongside the investment provision class.
The overall increase in claims was accountable to the rise in firm failures due to the impact of COVID-19, according to the FSCS.
However, the FSCS has reduced the supplementary levy for 2020/21 down from £92m to £78m.
The initial increase was due to a rise in pension advice claims and several high profile firm failures.
In order to improve future outcomes, the FSCS has recommended excluding firms and individuals involved in multiple failures from the industry.
It is also encouraging exploration into how to prevent unsuitable high-risk products from being sold to mass-market consumers.
In addition, the FSCS suggested introducing a traffic light warning system that highlighted the risks of different products in a simple, clear way.
The Association of Mortgage Intermediaries has condemned this 2021 levy, and its chief executive Rob Sinclair believes it has reached a “new low” for financial regulation in the UK.
Robert Sinclair, chief executive of AMI, said: “In announcing that the Financial Services Compensation Scheme needs to raise in excess of £1bn to make compensation claims we have reached a new low in the story of financial regulation in the UK.
“The dire discovery that the investment and pensions sector has been blind to widespread fraud and poor advice needs direct action by the industry.
“Asking mortgage brokers to pay more for bad pensions and investment advice than they are levied by the FCA for their own regulation is nothing short of a disgrace.
“The announcement of a Treasury Taskforce is too little and too late.
“On behalf of ordinary advisers who will have to find this money at a time when doing their job could not be harder, AMI requests that the review of future regulatory framework is expanded to look at how we develop a new approach that gives proper scrutiny of how firms are able to operate within the UK regulatory framework.”
Caroline Rainbird, chief executive of the FSCS, added: “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.
“Whilst we share the industry’s concerns about rising compensation costs and increasing levies, we firmly believe there is no silver bullet and regulation alone will not solve this complex problem.
“Education of consumers plays a key role so that they are empowered to make informed financial decisions that are right for them.
“Our commitment to continuously innovate in our ways of working to keep our management costs as low as possible, making recoveries wherever we can and if cost-effective is also vitally important.
“And last but not least, collaboration and data sharing with our regulatory and industry stakeholders is crucial to help prevent future failures.
“Only by the regulators, industry and FSCS all working together effectively will we be able to address these problems, deliver better outcomes for consumers and reduce future levy bills.
“That is why we also call for the industry to help support us by calling out bad actors and scams.
“It is still too soon to know the full effects of COVID-19 on the industry, but we must all be prepared for a challenging period in 2021.
“I want to reassure everyone that FSCS is ready to handle whatever difficulties next year will bring.”
Tim Fassam, director of government relations and policy at PIMFA, added:”In any other sector, a forecast for compensation of over £1bn would be the focus of national scandal – £1bn of compensation represents £1bn worth of financial loss, emotional stress and economic hardship for thousands of UK consumers.
“We cannot continue to normalise this level of loss, accepting that the compensation scheme will hopefully pick things up on the other side, every single person who has had to claim on the FSCS has received a poor outcome that it would be better to avoid.
“This is a further sign that the cost of compensation is truly out of control.
“This cost is a symptom of a system that fails both customers and the industry. Reform is now urgent but will take time.
“HM Treasury must find other sources of revenue to cover these extreme costs.
“The fairest sources are FCA levies, which ensures polluters pay and it remains an industry funded regime.
“We have put forward a number of recommendations to the government and the regulator, which we think will reduce the bill over time but crucially ensure that firms do not fail in the first place.
“We want to work collaboratively to ensure that these continued rises in compensation claims are brought to an end.”