Our May 2023 Outlook

Today we published FSCS’s latest compensation and levy forecasts for 2023/24. The headline levy figure is that we now expect to need £270m from industry levy payers this year to pay compensation to consumers who need our help.

This is a significant reduction from the initial estimates that we shared in November, however, in total, we still expect to pay £471m in compensation this year - the sixth year in a row that we are close to or above £500m. The gap between the compensation we expect to pay (£471m), and the levy we need to charge (£270m), is covered by the surpluses that we are carrying over from last year.

The full Outlook report goes into more detail for each individual levy class.

What sits behind our forecasts for 2023/24

This time last year, the longer-term data suggested that the amount of compensation we pay to customers was likely to continue increasing. Whilst the level of compensation expected this year is lower than it has been in some recent years, we have no evidence that there is a sustained downward trend and compensation costs for 2023/24 are expected to be higher than in 2022/23.

The advice market continues to drive most of the claims we see. Now sitting at £213m, Life Distribution & Investment Intermediation is the only class that has seen its compensation forecast increase slightly since November’s Outlook. We expect some of the compensation in this class will be paid to former members of the British Steel Pension Scheme, where their advice firm has already failed. The FCA’s redress scheme for these former members is now up and running and, by the end of this year, those firms that are still in business should pay any redress they owe.

The FCA’s latest business plan includes prevention of harm and higher standards as their first two areas of focus. The plan also includes a commitment to review compensation limits and funding class thresholds, which were originally made in the Compensation Framework Review feedback statement last year. This work, together with the continuation of the FCA’s Consumer Investments strategy, is something that FSCS welcomes and continues to support. We recently responded to the consultation on core investment advice and are interested in the ongoing discussions around the advice and guidance boundary.

In January, the FCA and PRA jointly consulted on and approved our Management Expenses Levy Limit (MELL) of £109.8m, which was slightly below last year’s £110.5m. £10m of the MELL is what we call the ‘unlevied reserve’, essentially a contingency fund we can charge to firms to meet unforeseen costs. Our management expenses budget is £99.8m.

FSCS’s expenses are split into controllable and non-controllable costs. The latter are directly linked to handling the claims we receive from customers. What can get lost in the detail, however, is the 'invisible effort' that goes on before a single claim is paid against a failed firm. Each year we carry out several intensive investigations into a firm, usually those involved in investments or advice, triggered by customers coming to us and making a claim. We must ascertain whether any claims against the firm are valid under our rules, and whether the firm is able to meet these claims. It sounds simple on paper, but there are often legal or regulatory complexities that mean these investigations can take many months to complete. Ultimately, this investigative work or ‘invisible effort’ may not result in any eligible claims. The effort goes unnoticed to most, and is silent in our compensation figures, but it does incur management expenses.

FSCS’s role in building trust and confidence

Our mission as an organisation is to provide a trusted service that helps raise public confidence in the financial services industry. If firms are trusted, and this includes FSCS and other members of the regulatory family, this builds confidence. Confident consumers are far less likely to make impulsive decisions when it comes to their money. This in turn leads to greater stability, which is the best foundation for growth.

You will find much debate about the extent to which consumers can be well-protected in a market that seeks to drive growth and competitiveness, but I believe that sustainable growth simply cannot happen if consumers do not feel safe. Continuing to seek out and eradicate the root causes of harm is key to that trust in the financial system, which is something FSCS continues to play an active role in.

We will continue to closely monitor the volume and complexity of claims throughout the year and will share our next update on the levy in the autumn edition of Outlook.