On 3 January 2023, the Financial Services Compensation Scheme (FSCS) published an article about the work it does to recover compensation costs and tackle the root causes of consumer harm.
The article addresses the following:
FSCS levy and the year ahead
- The FSCS’s regular outlook forecast helps levy payers prepare for the year ahead. Last month’s outlook confirmed the levy remains unchanged for the current year at £625m, with early indications for 2023/4 revealing that a lower levy of £478m is expected.
- The levy is forecast against expected management expenses, recoveries, class surpluses or deficits, and crucially how much compensation the FSCS expect to pay in the year. Compensation costs have increased year on year and are likely to remain relatively high due to complex pensions advice and general insurance claims, as well as long lag times between customer harm occurring and the FSCS receiving claims relating to that harm.
- In 2023/4 compensation costs are expected to rise from £517m to £592m.
Pursuing recoveries to reduce the levy
- Since 2015 the FSCS has recovered more than £290m from failed firms and other third parties who have legal responsibility. This sum helps reduce the levy on industry, placing responsibility for compensation costs back onto actors that cause harm to customers in the first place.
Looking to the future
- Tackling the root cause of consumer harm and supporting positive firm and consumer behaviour is essential to bring compensation costs down in the longer term and reduce the levy in a sustainable way.
- Earlier in 2022, the FSCS published its report, The Balancing Act of Compensation, which shares its insights into the drivers of compensation costs. It is working to strengthen its data and insight capability, with the aim of working with the FCA and other agencies to identify poor firm behaviour, pinpoint where consumer harm is taking place and support supervisory and enforcement action. An example is the FSCS’s work with the FCA to uncover and act against suspected cases of ‘phoenixing’ where someone escapes the liabilities of one company by setting up another in the financial sector.
- Tackling phoenixing helps ensure bad actors are unable to cause more harm to consumers. Since 2019, the FSCS has identified 390 persons of interest approximately 16 firms have since been banned or taken off the market by the FCA due to phoenixing. FSCS monitoring of phoenixing activity had led to better identification of other behaviours that could signal the cause of consumer harm. The FSCS continues to collaborate closely with its regulatory partners to monitor trends and share insights as its work around phoenixing evolves.