Advisers operating in the health and protection insurance and mortgage sectors have escaped the prospect of picking up the massive costs of failures in other parts of the financial services industry.
In its latest update the Financial Services Compensation Scheme (FSCS) has cut its expected compensation costs and overall levy for 2022/23 and removed the retail pool funding as a result.
Furthermore, health and protection insurance advisers, who fall into the general insurance distribution (GID) class, have also seen a cut to their expected levels of compensation claims for the current financial year.
The GID class had been expected to be the biggest bailout funder for the pensions and investment sectors when the previous levy estimate was published in November.
The general insurance distribution class will now only have to pay £5.3m in FSCS levy this year compared to the previously predicted figure of £67.7m.
The main reason for this is that the class will no longer be required to make a £59m retail pool contribution to the Life Distribution and Investment Intermediation (LDII) class.
The FSCS added that it is not expecting any new failures in 2022/23. However, there are close to £2m in compensation pay-outs expected which relate to firm failures in previous financial years.
Mortgage advisers pay no levy
The latest update is even better news for mortgage advisers who are part of the home finance intermediation class as they will now not have to pay any levy towards the FSCS this year.
This is down from the previously expected figure of £9.1m.
Again the primary reason is that an £8m retail pool contribution will no longer be required, and the lower than expected compensation costs in 2021/22 added a further £3.5m to the class fund.
However, performance in the sector itself has also improved as the compensation pay-outs expected for 2022/23 have decreased from £5m to £1m.
The FSCS said it was not expecting any new failures in 2022/23 and the close to £1m compensation pay-outs expected relate to firm failures in previous financial years.
Levy forecast down £275m
Overall, the FSCS cut its annual levy for 2022/23 to £625m, down from £900m in the November estimate. This figure is also down from the final 2021/22 levy figure of £717m.
“A retail pool levy will not be required in 2022/23 as we no longer expects the Life Distribution and Investment Intermediation (LDII) class to breach its annual levy limit and require additional funding,” the FSCS said.
However, despite this decrease the FSCS still expects customer compensation costs in 2022/23 to be higher than for last year, with customers experiencing losses from more than 1,000 different firms which failed in previous years.
The majority of the £128m fall in compensation paid to customers in 2021/22 was due to:
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- a £54m reduction in compensation paid in the LDII class due to fewer complex pension claims being received than previously forecast;
- a £14m reduction in compensation paid in the investment provision class due to fewer SIPP operator failures than previously forecast; and
- a £56m reduction in compensation paid in the general insurance provision class. Some of these claims decisions are now expected in 2022/23, primarily in relation to East West Insurance Company Ltd.
From the forecast fall of £162m in compensation for 2022/23, the two classes with the biggest decrease are:
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- the LDII class with a £65m reduction due to fewer claims decisions expected for complex pension claims; and
- the investment provision class with a £99m reduction due to fewer SIPP operator failures than expected.
‘Compensation costs will remain high’
Despite the somewhat positive news for the industry, the regulator warned the uncertain economic situation continues to pose a challenge when it comes to forecasting potential firm failures.
“Even a small number of firms failing earlier or later than expected can make a big difference to the amount of compensation we need to pay to customers,” said FSCS chief executive Caroline Rainbird.
“In our revised forecast we still expect the majority of the compensation this year to come from firms that have already failed, so even if we see fewer new failures than expected, the compensation costs will remain high.”