Financial Services Compensation Scheme- Outlook Update November 2022 and 2023/24 Levy Forecast

This briefing presents the latest update on the FSCS 2022/23 levy charge for financial services firms, as published in FSCS’s November 2022 Outlook publication, and shares an initial forecast for the 2023/24 FSCS levy.

Credit unions fall under the deposit-takers levy class and are required to pay their share of the levy based on a risk-weighted levy charge. Levy contributions cover the cost of compensation the FSCS pays out in the event an FSCS-protected firm fails, as well as management expenses and day-to-day running costs for the FSCS.

The publication highlights that due to current economic turmoil and the cost of living crisis, the assurances provided by FSCS protection for individuals’ finances is more important than ever.

2022/23 Levy Update

The November publication announces that no additional or supplementary levy is expected at this stage, for the 2022/23 fee year. Therefore, the deposits class levy for 2022/23 remains unchanged from the May Outlook figure of £18.4m, that credit unions were invoiced for earlier this year.

The November Outlook confirms that, as previously forecasted by FSCS, a retail pool contribution will not be required from the deposits class in the 2022/23 fee year. A retail pool contribution is raised if another class of firms exceeds their annual levy limit, requiring other classes of firms to cover the cost.

The deposits class paid £18.4m in levies in 2022/23 which included £4.4m in provider contributions to the Life Distribution and Investment Intermediation class. A provider contribution is a sum paid by product provider firms to contribute to the levies of related intermediation classes e.g., general insurance distribution. The November 2022 update revealed that approximately £4m in compensation has been paid out for the deposits class this fee year, due to five credit union failures.

2023/24 Indicative Levy Forecast

The 2023/24 levy charge for the deposits class is predicted to be £18.2m which is a slight reduction of 1.1% from the 2022/23 figure. Approximately £2m of this is expected to be paid to other firm classes as provider contributions. As FSCS anticipated, a £2.8m surplus from the deposits class will be taken forward to offset the 2023/24 levy.

Though the levy charge for the deposits class is only expected to decrease year-on-year by 1.1%, the overall levy for all firms is predicted to decrease by approximately 20%, suggesting that that the rate of firm defaults forecasted for other financial services sectors is falling compared to deposit-taking firms. The FSCS is clear to state that the compensation costs forecasted for the deposits class are based on the expectation that a small number of credit unions will fail during 2023/24. This is in keeping with the trend of credit union failures in recent years.

Further updates for the 2023/24 levy will be provided by FSCS in spring 2023, with firms to be invoiced for the next annual levy in summer 2023.

Overall, the credit unions can anticipate their FSCS levy invoice in Summer 2023 invoice to be in the region of what was invoiced in Summer 2022 However, it must be noted that levy forecasts are volatile and unpredictable by nature and are therefore subject to change.