FSCS – Outlook November 2020

The Financial Services Compensation Scheme (FSCS) has released their interim industry newsletter Outlook, which provides a forecast of any additional contributions that will be needed from scheme participants for the 2020/21 financial year.  The report notifies firms that management expenses are on track to be kept within the limit of requiring an additional levy and that the class including credit unions – the deposits class – is forecasted to maintain a surplus balance for the year.

Despite this surplus balance, the deposits class is predicted to be charged an additional £5 million levy, to help cover excess claims costs in other classes. Nonetheless, FSCS forecasts are subject to change, due to the uncertain nature of predicting financial services firms’ performance and failures for the year.

Deposit Class Levy Forecast

The deposits class have currently achieved a surplus balance for the levy year, as there have been less credit union failures than the FSCS predicted. The table below breaks down the surplus balance forecasted for the deposits class for 2020/21.

However, there will need to be additional contributions made by deposit-acceptors, as it is expected that the retail pool will need to be triggered. The retail pool is a measure taken when another class of firms has a total claims cost for the year that exceeds that class’s levy contribution limit. The retail pool requires other appropriate classes to make an additional contribution, in order to cover the excess claims costs made to the FSCS.  An unexpected amount of failures in the Life Distribution & Investment Intermediation (LDII Class) is the main driver of the additional levy this year, as the class is estimated to need a £92m supplementary contribution on top of its own levy fund.

Deposit-accepting firms are predicted to need to contribute £10 million to the supplementary levy. Only £5m of this contribution will be charged as an additional levy to deposit taking firms through the retail pool, as the remaining £5m is to be taken from deposits class’s surplus levy balance.  In addition, the deposits class are also due to be refunded £0.9m from the surplus balance.

Management Expenses Forecast

FSCS state that it is on track for management expenses to remain within the Management Expense Levy Limit (MELL) for the year. This means that there is no additional contribution expected to be charged for FSCS’s running costs. FSCS is set to exceed budgeted management expenses for the year, so plan to utilise its full £5m unlevied reserve on top of the allocated budget. However, FSCS has kept overall expenses within the levy limit, by working to make savings where possible – notably by adopting Artificial Intelligence (AI) to analyse claims recordings and forming strategic outsourcing partnerships with claims-handling firms.

Impact of COVID-19

The usual uncertainty of the levy forecast has been exacerbated by COVID-19. It has been particularly difficult for FSCS to predict the number and impact of failing firms for this financial year, so contributors should be prepared for potential changes to the predicted levy. Furthermore, FSCS has expressed an understanding that the extra costs incurred by the supplementary levy will come at a particularly difficult period for financial firms, but that additional contributions are unfortunately unavoidable this year, given the economic circumstances.

Conclusion

Though the FSCS forecast is highly uncertain, credit unions should prepare for the potential cost of a supplementary levy for the 2020/21 financial year. The FSCS intend to provide confirmation of additional levies in their Plan & Budget report in January 2021, with invoices to be sent soon after. ABCUL will provide another briefing in early 2021, to notify members that the levies have been confirmed. Though credit unions face the cost of an additional levy, the sector should feel comforted that lower than expected credit unions failures has contributed to a class-wide surplus, amid a global pandemic.