The Financial Services Compensation Scheme (FSCS), the UK's so-called lifeboat scheme, has said it is likely to need more than £1bn from the sector if it is to cover the cost of compensation during 2021.
The FSCS published its plan for 2021-22 today, which reveals it will need at least £1.04bn from the industry, including £240m from advisory firms. This is a rise of 48% on 2020.
Caroline Rainbird, chief executive of FSCS, said: "This annual levy ensures we can protect consumers, which helps to improve market stability and increases confidence in the finance sector."
We cannot continue to normalize this level of loss, accepting that the compensation scheme will hopefully pick things up on the other side."
"But we appreciate that the levy is far too high and that increasing costs could put pressure on firms' finances."
She added: "We need to tackle the root causes, not just the symptoms, of the costs and distress caused by failures."
"By taking integrated and coordinated action with the regulators and industry, we can help improve outcomes for consumers and, in turn, reduce the burden of the levy."
However many in the industry expressed outrage at the news.
PIMFA, the trade association for the weatlh management and financial advice industry, today has reacted with "disbelief" at the FSCS compensation forecast, that in any other industry would be considered a natioanl scandal. Reform is urgently needed.
Tim Fassam, director of Government Relations and Policy at PIMFA, said: "In any other sector, a forecast for compensation of over £1bn would be the focus of national scandal - £1bn of compensation represents £1bn worth of financial loss, emotional stress and economic hardship for thousands of UK consumers."
"We cannot continue to normalize this level of loss, accepting that the compensation scheme will hopefully pick things up on the other side, every single person who has had to claim on the FSCS has received a poor outcome that it would be better to avoid. This is a further sign that the cost of compensation is truly out of control."
"This cost is a symptom of a system that fails both customers and the industry. Reform is now urgent but will take time. HM Treasury must find other sources of revenue to cover these extreme costs. The fairest source are FCA levies, which ensures polluters pay and it remains an industry funded regime."
"We have put forward a number of recommendations to the government and the regulator, which we think will reduce the bill over time but crucially ensure that firms do not fail in the first place. We want to work collaboratively to ensure that these continued rises in compensation claims are brought to an end."