‘Scandal’ as watchdog forecasts £1bn in compensation claims in year ahead
As part of its Plan and Budget for 2021/22, the Financial Services Compensation Scheme (FSCS) has set out levy requirements for the industry (firms pay to fund the body which provides compensation to customers when financial firms fail).
For the year ahead, the levy is to double from £700m to £1.04bn, as the FSCS suggests it will see a spike in compensation claims.
It noted that poor pension and investment advice, failing Self-Invested Personal Pension providers, general insurance claims and firm failures as a result of the Covid-19 pandemic will account for the majority – £930m – of expected claims and costs.
Caroline Rainbird, chief executive of the FSCS, stated: “Over the coming year, we anticipate an ongoing rise in complex pension advice claims and further failures of SIPP operators. We also forecast an increase in pay-outs for the insurance provision class due to recent failures. Furthermore, due to the widespread economic impacts of Covid-19, we are also, unfortunately, anticipating an increase in failures across the industry.
“To ensure we can pay for the anticipated increase in the volume of claims, we are currently forecasting a 2021/22 levy of £1.04bn. Given the current high levels of uncertainty, this figure is our best estimate and is subject to change.”
‘Scandal that shows regulation failing consumers and firms’
Tim Fassam, director of government relations and policy at trade association for the wealth management and financial advice industry, PIMFA, said that the forecast in any other industry would be considered a “national scandal”.
Fassam 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 normalise 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.
“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.”