Our January 2022 Budget Update

As we welcome in a new year, I am pleased to introduce our latest Budget Update. You will notice this is streamlined and only includes the latest information regarding our management expenses which are consulted on each year by the PRA and FCA via the Management Expenses Levy Limit (MELL).

Our 2022/23 total levy forecast (including both management expenses and compensation costs) were presented in our November 2021 Outlook  I trust this early view of the following year’s levy proved helpful for the industry.  

2021/22 management expenses update

Our forecasted running costs (management expenses) for 2021/22 now stand at £85.3m which represents a £5.2m reduction against our budget announced in January 2021. The expected surplus (currently £5.2m) will be used to reduce the 2022/23 levy and will be factored into our next Outlook update in the spring.   

For the same reason that we did not need to invoice the retail pool last year, the reduction is largely due to fewer firms failing and therefore not as many claims coming through as anticipated. However, as noted in our November 2021 Outlook, many of these firm failures may in fact occur in 2022/23 or beyond.    

2022/23 management expenses budget

To meet our running costs, and ensure we are helping our customers get back on track as quickly as possible, we anticipate needing an annual budget of £95.5m - a 5% increase against our budget announced this time last year.

One of the key drivers behind this increase is an ongoing trend we are seeing of more complex claims with higher processing costs. For the next financial year, we expect complex claims to account for approximately 43% of all our claims decisions, an increase of 26% on 2021/22.

Of particular note is the rising number of claims coming through from customers who were given poor advice to move their pensions into unsuitable investments. These claims cost us more to process as they have longer handling times and require specialist staff to assess them and calculate the necessary compensation. To help illustrate this complexity, in the year to date, we have made over 9,000 requests to firms as part of gathering the supporting evidence needed for these claims. This is an 80% increase on the same time last year and a four-fold increase on 2018/19.   

As well as more pension-related claims, we are seeing more individual firm failures that are associated with multiple financial products. These types of claims are also time-consuming to investigate. A good example is the failure of SVS Securities plc. This wealth management firm had offered a range of services to its clients, including advisory stockbroking, foreign exchange trading and discretionary fund management services. Consequently, a number of their former clients are making claims against a range of their products. Preparing these claims means tracking down multiple sources of information and carrying out a number of associated processes. 

Keeping our costs low

As well as making strategic decisions to reduce spend across the business and keeping our controllable spend increase to no more than 3% this year, we are always looking for new opportunities to use technology to save time and money whilst delivering the right level of quality. As part of embracing Artificial Intelligence (AI), we have introduced a new data lake and search tool to find specific information in large data pools more quickly. During 2021, AI, although not used to determine whether claims are valid or not, enabled us to handle more than two years’ worth of claims in six months, as well as avoid additional claims handling costs of around £9m.

AI is an essential part of our commitment to reducing our costs and our ambition is to transform into a data-driven organisation that is continually investing in its technology and people to manage our controllable spend.

In addition, our recoveries work plays an important role in reducing the burden upon levy payers. In the first eight months of 2021/22, we recovered a little under £10m. Of this, around £900k was paid to customers who had losses in excess of our limits and the balance was used to offset levies in the relevant funding classes.

Looking to the future

Our management expenses, though dwarfed by the costs of the compensation we pay, are inextricably linked to the annual FSCS levy.

Although we have the right team and systems in place to efficiently process claims and make recoveries, it is important to be aware that the sheer complexity of claims means that we are likely to continue seeing increases in claims processing costs over the coming years as well as potential increases in the amount of compensation needed.

Our data shows a significant proportion of compensation is paid out in relation to poor advice and c. 70% relates to advice which occurred five years or more before a customer makes their claim. This lag in the system, as well as the growing complexity of claims, highlights the challenges ahead of us all and demonstrates the need for change.

At the end of last year, the FCA published its Compensation Framework Review discussion paper. This outlines several questions about the current compensation framework and we welcome the debate it opens up around developing a fair and balanced compensation model. We understand the difficulties within this and getting the balance between consumer and industry responsibility will be an important and critical challenge to face into collectively.

We want to see a compensation framework in place that is fair for the industry but allows us to put as many people back on track as possible when this is needed. We are thinking hard about how to tackle these matters and will continue to focus our intelligence and analysis capabilities to that end. I encourage all of our stakeholders to join the debate to find solutions that support the health of the whole of the financial services sector and customers, and the wider economy they serve.