Compensation scheme for savers sets aside extra £339m to cover failures

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12:18pm, Fri 22 Jan 2021
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A Government-backed insurance body designed to step in when banks or investment schemes fail has said it will need an extra £339 million to protect UK savers from the effects of Covid-19 in the coming financial year.

The Financial Services Compensation Scheme (FSCS) said it planned to hike its levy by 48% in the year starting April compared with the previous period.

If a Financial Conduct Authority (FCA) authorised firm goes bust – which includes pension advice companies, banks, and others – the FSCS can pay out up to £85,000 to customers who have lost their savings.

It raises money from the companies that offer certain regulated services, and expects to bill them £1.04 billion in the year starting April.

Ongoing trends in a number of classes, and the widespread economic impacts of Covid-19, mean we are anticipating an increase in firm failures over the next financial year

From this, the scheme expects to pay out £968.3 million in compensation claims over the period.

“Ongoing trends in a number of classes, and the widespread economic impacts of Covid-19, mean we are anticipating an increase in firm failures over the next financial year,” said FSCS chief executive Caroline Rainbird.

“This will likely lead to a rise in the volume of claims, many of which are complex, and therefore an increase in the levy.”

Precisely forecasting how many claims are likely in the next 12 months is difficult, but the FSCS believes that there will be a rise in more complex pension advice claims, adding further complications.

As a result, not only the size of the payouts but the cost of handling the claims is set to rise, the body forecast, upping the size of its own operating budget by 9% to £90.5 million.

The FSCS said it is also expecting more failures in the self-invested personal pension (SIPP) sector, with claims thought to reach around £336 million, an 89% rise on the prior period.

The body also said it was reducing an additional levy for the current financial year that it first revealed in November.

At the time, it had said that the authorised firms would be charged an extra £92 million.

We need to tackle the root causes, not just the symptoms, of the costs and distress caused by failures

However on Friday this was reduced to £78 million in part because the scheme had upheld fewer claims from investors in London Capital and Finance (LCF), which collapsed in 2019, dropping more than £200 million worth of savers’ money.

Ms Rainbird criticised the size of her own budget forecasts for the coming year, saying the £1.04 billion levy was “far too high” and would put pressure on the finances of regulated firms.

She added: “We need to tackle the root causes, not just the symptoms, of the costs and distress caused by failures. We are doing everything in our power to try to reduce the levy.

“Alongside our recommendations, we are continuing to raise awareness of FSCS protection and we are working with the regulators to tackle scams.”

Banks and investment schemes are required to pay into the FSCS levy if they want to offer certain services in the UK.

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