UK financial advisers are facing a £270m compensation bill, with even higher costs predicted for the future, following the Financial Services Compensation Scheme’s publication of its Plan and Budget for 2017/18.
The FSCS provides advance notice of the Scheme’s expected management costs and initial forecasts of the levies financial services firms will need to pay, to be able to compensate clients, next year have been set at £378m.
The FSCS has predicted the total number of claims will fall slightly in 2017/18, following a recent spike of £401m in 2016/17, but it warned that the trend of rising numbers of complex life and pensions cases will probably continue, resulting in “materially higher” costs.
The figure that is to be faced solely by IFA and intermediary firms is £270m. This figure is combined for this year and next. The levy for 2017/18 for life and pensions advisers alone will be £171m – a £45m increase on the current year’s figures.
In a statement announcing the compensation, the FSCS said that the levy for general insurers is expected to be significantly lower, but for the life and pension intermediation sector it forecasts “materially higher costs and a second call on all firms to contribute to these claims.”
There is an increased levy on the investment intermediation class, but only after allowing for the £50m refund this year. Claims from the life and pensions class are expected to be so high that they will exceed the class’s annual threshold, meaning the FSCS will have to call on spare funds from the retail pool which all levypayers contribute to, the FSCS said.
“Our Plan and Budget spells out our estimates for the coming financial year,” said FSCS chief executive, Mark Neale. “It provides our first indication of the costs and claims we expect. It highlights how FSCS will protect consumers in 2017/18 and the costs of doing so.
“The Financial Services Compensation Scheme is there for people with nowhere else to turn when firms fail. So the £378m indicative levy represents the costs of protecting people. That protection generates consumer confidence and contributes to financial stability.”
The FSCS added it has received a number of claims against Sipp providers for due diligence failings and it said that if it is satisfied that a legal liability arises and these claims are eligible, the cost of these claims would be levied against investment providers.
Mortgage brokers will be told to pay £14m for 2017/18 which will be a reduction of £7m on the current year because the FSCS will levy a supplementary £15m more than the £6m it had already announced. The FSCS said that it will confirm the final levy in April.
‘Impact on firms’
Neale admitted that the FSCS was concerned at the amounts having to be pent by advisory firms saying that the FSCS “recognise[s] the costs impact on firms, particularly in the light of the supplementary levies announced today, of which we seek to give as much advance warning as possible”. He added that the organisation is also concentrating on reducing its overheads and is set to realise benefits from its online claims system in the coming years.
The FSCS has come to the aid of more than 4.5m people, paying out a total of £26bn since 2001.
The Plan and Budget 2017/18 is available on the FSCS website.