YOUR COMPLIANCE MATTERS:    FSCS Supplementary Levy

YOUR COMPLIANCE MATTERS:   FSCS Supplementary Levy

Relevance:                 All firms.

Action required:       Awareness and Understanding; Budget re-organisation

Firm’s inboxes will be receiving some unwelcome messages from the FCA in the shape of an invoice for monies to go to the Financial Services Compensation Scheme (FSCS).

The following is a brief explanation only and more details of the complex arrangements of the compensation funding can be found on the FCA and/or the FSCS website.

Back in November last year, the FSCS warned that there was a greater than expected level of payouts in the “life distribution and investment intermediation class”, following the collapse of firms advising on certain pension products and SIPPS (Self Invested Pension Plans) in particular. An additional levy of £92 million was indicated, which would be split across all categories of regulated businesses because there was insufficient funding in the “life distribution and investment intermediation class” pool.

(The FSCS uses a cross-subsidy approach to fund the claims for a class that has exceeded its annual funding limit. The cross-subsidy is funded by the classes belonging to the FCA retail pool.)

Late in January this year, the FSCS announced that the levy had been reduced to £78 million and £36million would be funded from the “Retail Pool”.

The “General Insurance Distribution” section of the Retail Pool is being asked for £22.86 million and will be raised by a levy on the income declared by firms for the 2020/21financial year, at a cost of £2.09 per £1,000 of declared income from regulated business.

Hence the reason general insurance brokers and insurance intermediary firms are being sent an invoice.

In a letter to firms, the Chief Executive of the FSCS, Caroline Rainbird, states:

“A supplementary levy is only raised where we believe that the funds available to us are, or will be, insufficient to pay compensation to our customers.

We appreciate that this will not be welcome news and could put pressure on firms’ finances. The levy is important as it not only funds the compensation and services we provide, it also helps to improve market stability, increases confidence in the finance sector and gets consumers back on track.”

And then the warning:

“In order to help smaller firm’s manage their cashflow, if your supplementary levy bill is less than £10k, you will have 90 days to pay. All other firms will have 30 days to pay. If you wish to pay by instalments, there are a number of instalment finance providers which you may wish to use. You can search online or speak to your trade association, if you are a member, who may be able to assist.

If the supplementary levy invoice is not paid by the due date, the “late payment” provisions contained in the FEES rules (FEES 2.2.1R) will apply. This means that an administrative fee of £250 will be charged, plus interest at a rate of 5% above the Official Bank Rate.”

So, most client firms will be able to defer payment until early May, but it is still a shock to the financial position, especially in such difficult trading times.

We are happy to discuss this matter, but it is not one that will go away or get reduced. We all need to support the call for changes to a compensation system that has often been referred to as “the fairest of an unfair arrangement”.