The Financial Services Compensation Scheme has warned that rising inflation and more complex cases are pushing up its costs.
In its latest budget update published today, the FSCS is proposing a management expenses budget of £99.8m for 2022/23 – up 5% year on year.
Higher costs due to inflation are responsible for the increase, the FSCS said, although it highlighted it had managed to keep the rise below 6%.
Despite efforts to keep costs down FSCS CEO Caroline Rainbird warned that the greater complexity of some claims, particularly in the pensions and investment areas, means an increases in costs is likely over the coming years.
To help meet the challenge the FSCS plans to invest £3.9m in technology and better processes.
She said: “Handling claims in areas such as pension transfers and SIPP operator failure is growing ever-more complex, and we expect this trend to continue. We must keep our technology up to date, both to handle this increased complexity but also to ensure our customer’s information continues to be safe and secure. Part of this investment covers the completion of our Cloud migration project, which is now in its final stages.”
Ms Rainbird says she expects the volume of cases to remain broadly level over the coming year but the body will strive to reduce the cost of individual case handling.
She said: “This proposed budget includes a year-on-year reduction in volume-related costs, as we expect claims volumes to remain broadly at the level they are now, which is lower than forecast this time last year.
“However, this reduction is offset by an increase in our controllable costs due to inflation and the resulting price rises. Through very careful control of our spending, we have kept the increase in our controllable costs to below inflation – at less than 6%.”
The FSCS is continuing to make efforts to recover costs from failed firms. Between April and December 2022 the FSCS recovered £4.1m. Of this, £2.5m has been paid to customers who had losses greater than the FSCS compensation limits. Any balance at the end of the year will be used to offset levies.
The FSCS is forecasting its own costs for 2022/23 will be £89.2m, a £6.3m reduction against the budget announced in January 2022.
Ms Rainbird said this was the result of the FSCS processing fewer claims than expected, primarily in the Life Distribution and Investment Intermediation and Investment Provision classes. Overall, the FSCS expects 13,600 fewer claims decisions this year compared to its initial forecast.
The FCA and PRA will jointly consult on the proposed budget until 9 February.
In December the FCA announced it would review Financial Services Compensation Scheme limits and funding class thresholds as part of plans to improve the compensation framework. The regulator has been reviewing the framework for protection provided by the FSCS following concerns about spiralling costs and levies.
