Protection and health insurance advisers will see their Financial Services Compensation Scheme (FSCS) levy significantly reduced after the regulator updated its expectations for this financial year.
For those pure protection and health insurance advisers who are part of the general insurance distribution funding class, the total levy has halved from £148.3m to £73.8m.
This has been primarily driven by a £71m reduction in this class’s retail pool contribution to cover losses generated by other sectors, the FSCS said.
However, this remains far more than the £12.9m which firms in this sector need to contribute for their own failings.
More revisions and delayed hikes
Overall, after assessing the state of the market and claims coming through so far, the FSCS has cut its final levy bill for 2021/21 to £833m from the £1.04bn proposed in November.
But there was a warning that the levy may need to be revised again later in the year as some of the expected losses could simply be delayed, potentially seeing bills balloon later.
Mortgage brokers who are part of the home finance intermediation class will also see a halving of their levy from £22.9m to £11.5m, while home finance providers and debt management firms are seeing substantial drops in their fees.
However, there will be no change for firms in the Life Distribution and Investment Intermediation (LDII) class and investment providers, which will contribute £240m and £200m respectively.
Funding for the compensation scheme has been particularly controversial this year as the body originally estimated it would need to raise a levy of more than £1bn for the 2021/21 financial year.
This was largely due to failures within the pensions and investment sectors which were so severe they exceeded the cap these firms could contribute so meant others had to pick up the bill through an additional retail levy of £116m.
This has resulted in many industry spokespeople calling for the FSCS’s funding model to be overhauled and the Financial Conduct Authority (FCA) has agreed it should be fairer.
‘Incredibly uncertain period’
FSCS chief executive Caroline Rainbird noted there were two main reasons for this reduction.
“Firstly, due to the extension of government support schemes, some firms that looked likely to fail this year could now fail in the 2022/23 financial year and beyond,” she said.
“Secondly, in 2020/21, we saw lower claims volumes relating to insurance failures than had been expected. There are also a number of self-invested personal pension (SIPP) operator claims that we now expect to be paid in 2021/22, rather than in 2020/21.
“These factors have led to a £96m surplus for the 2020/21 financial year, which has been used to offset the previously forecasted £1.04bn levy.
“We are going through an incredibly uncertain period and therefore the levy may have to be revised again later in the year,” she added.
However, the regulator is anticipating the high levels of complex pension advice claims to continue, further failures of SIPP operators, and an increase in payouts for the general insurance provision class.
Due to this uncertainty, invoices for the £116m levy payments will not be issued until later in the year with a one month warning before.
Reforms needed
The Personal Investment Management and Financial Advice Association (PIMFA) welcomed the reduction but continued its call for an overhaul of the FSCS funding model.
Tim Fassam, director of government relations and policy at PIMFA, said: “Clearly a reduction in the original levy forecast is good news for firms.
“However, the number outlined by the FSCS today is still too high, while predictions that much of the pain resulting from failed SIPPs will be felt next year is of little comfort to our firms.
“We have set out a roadmap towards lower levies in the long term and are urging government and the regulator to work with us and the rest of industry to create a sustainable solution, which ensures that future levy costs, individual failures and ultimately poor consumer outcomes are consigned to history.”