Introduction to Budget Update January 2023

As we welcome in a new year, I am pleased to introduce our latest Budget Update. This provides information regarding our proposed management expenses which are consulted on each year by the FCA and PRA via the Management Expenses Levy Limit (MELL).

Our 2023/24 total levy forecast (including both proposed management expenses and compensation costs) was presented in our November 2022 Outlook. I trust this early view of the following year’s levy proved helpful for the industry.  

The proposed 2023/24 management expenses budget

To meet our running costs, and ensure we are helping our customers get back on track as quickly as possible, we are proposing a management expenses budget of £99.8m - a 5% increase against our budget announced this time last year.

This proposed budget includes a year-on-year reduction in volume-related costs, as we expect claims volumes to remain broadly at the level they are now, which is lower than forecast this time last year. However, this reduction is offset by an increase in our controllable costs due to inflation and the resulting price rises. Through very careful control of our spending, we have kept the increase in our controllable costs to below inflation – at less than 6%.

In addition, our recoveries work plays an important role in reducing the levy we need to raise from the industry. Between April and December 2022, we recovered £4.1m. Of this, £2.5m has been paid to customers who had losses greater than our compensation limits, and the balance at the end of the year will be used to offset levies in the relevant funding classes.

2022/23 management expenses latest forecast

Our forecasted running costs for 2022/23 now stand at £89.2m which represents a £6.3m reduction against our budget announced in January 2022.

This is the result of FSCS processing fewer claims than expected, primarily in the Life Distribution and Investment Intermediation and Investment Provision classes. Overall, we expect to make 13,600 fewer claims decisions this year compared to our initial forecast.

Any surpluses remaining at the end of the financial year in March will be used to offset the 2023/24 levy and will be factored into our next Outlook update in the spring.   

Investing for the future

Last year, I explained that although we have the right teams and systems in place to efficiently process claims and make recoveries today, the sheer complexity of claims now coming to FSCS means that we are likely to see increases in costs over the coming years. To that end, this year’s proposed budget includes a £3.9m increase in our investment costs which covers essential enhancements to our technology and processes.

2023/24 will be the first year of a three-year plan to invest in our people and systems. We must enhance our claims handling capabilities and ensure we are able to continue to provide an efficient service in the future – one that is both accessible and swift for consumers who are left out of pocket when a firm fails, and cost-effective for the industry that funds us. This includes critical work to keep pace with customer expectations and learn from other schemes globally, as well as engaging with the Bank of England’s review of alternative processes for supporting depositors in the event of bank insolvency.  

Handling claims in areas such as pension transfers and SIPP operator failure is growing ever-more complex, and we expect this trend to continue. We must keep our technology up to date, both to handle this increased complexity but also to ensure our customer’s information continues to be safe and secure. Part of this investment covers the completion of our Cloud migration project, which is now in its final stages.

There is also a significant amount of regulatory change expected in the coming years, with landmark legislation coming through post-Brexit, to help the UK identify opportunities to improve its rules and benefit from its position as a non-EU member. We will also be working closely with the FCA and others on the next stages of the Compensation Framework Review, which the FCA recently published an update on.

To ensure we can respond to changes as they arise, as well as look ahead and plan for the future, we are also investing in both recruiting new expertise and developing our own people. Our aim is to develop our own in-house capabilities in vital areas such as data, insight and policy. In doing so, we can build on the work we have started this year, sharing research and views on important topics such as the compensation framework and consumer trust and confidence. This will not only help FSCS make change efficiently, but also allow us to continue to make valuable contributions to work in the wider financial services ecosystem – including through the Wider Implications Framework.

As I have said many times before, it is only through collaboration and collective effort that we will solve the problems facing consumers and our industry, bringing greater stability whilst also creating the right environment to innovate and stimulate growth.

Our proposed budget is now being jointly consulted on by the FCA and PRA until 9 February 2023.