Our November 2022 Outlook

Message from Caroline Rainbird, Chief Executive  

Today we published FSCS’s latest Outlook, sharing updated compensation figures for this financial year, and a first look at the overall levy forecast for 2023/24.

I will cover some of the financial highlights in this message, but you can find the full details on our dedicated webpage at www.fscs.org.uk/outlook.

Today’s horizon

The economic backdrop is shifting rapidly. Today, ‘cost of living’ is a phrase we utter almost daily, and as interest rates rise in response to inflation, new challenges are at the forefront of consumers’ minds – from mortgage rates to pension values. Small businesses are feeling the pressure just as much as households, including many of the levy payers who fund the compensation we pay to our customers.

It is during times of economic volatility that FSCS plays a particularly important role in providing stability for consumers, helping increase their confidence and building trust. Research conducted in September this year tells us, that of those aware of FSCS, 82% feel more confident taking out a product that is FSCS protected, and 68% are likely to invest more money if the provider is FSCS protected.

This demonstrates how FSCS’s existence helps to underpin a strong retail finance sector in the UK. Combined with access to sound financial advice, FSCS protection helps create the right environment to invest, so consumers are better able to make informed decisions about their money, understanding the risks involved.

Latest forecasts

At this stage in the 2022/23 financial year, no additional levy is expected and we anticipate a reduction of around 20% in the levy required for next year.

Whilst I am sure a lower levy for 2023/24 is welcome news, I must emphasise that this reduction is due to surplus balances being carried over from 2022/23, and we expect compensation costs in 2023/24 to remain relatively high at £592m.

One reason for this, as we explained in our Balancing Act of Compensation (pdf 1MB) report earlier this year, is that there is an inherent lag in the system. Around 80% of people who need to bring claims to us did not realise they had been given unsuitable advice until at least five years after the event.

It is also important to note that there are some variables which we have not yet been able to include in our forecasts due to uncertainties around timings. As FSCS operates on a ‘pay as you go’ basis, we will only include costs where we have a high degree of certainty.

For 2023/24, we have not included compensation estimates for firms that may fail if the FCA implement the proposed consumer redress scheme for members who transferred out of the British Steel Pension Scheme (BSPS). Firms involved in BSPS transfers which have already failed are included in our forecasts, as these are more certain. Once the FCA confirms whether the consumer redress scheme will proceed, we will consider what that means for our assumptions.

We are of course committed to keeping the industry informed of any changes and we will provide a full forecast update for 2023/24 next spring.

What will compensation look like in the longer term?

This is an interesting question for FSCS and the wider industry to consider. In recent years, FSCS has seen its work shift from relatively simple claims such as Payment Protection Insurance (PPI) to complex pensions claims. In time, something else will likely become the new focus as the variety of claims we receive increases, and the nature of claims evolves. Whilst it is difficult to predict the future, we do know that it is the actions of firms, that are taking place right now, that will result in the claims we receive in years to come.

As part of our long-term aim to help reduce consumer harm, FSCS continues to play an active role in working with our regulatory colleagues to generate an ever-healthier financial ecosystem that supports both growth and stability, whilst driving up consumer confidence.

Addressing the root causes of harm remains the goal we should pursue collectively. This includes using FSCS data to support the identification of problems within the sector, empowering consumers with better financial education, and driving improved standards and conduct in particular pockets of the industry.