The Financial Services Compensation Scheme (FSCS) has forecast that its levy for 2021/22 will be £1.04bn, a 48% increase on last year.

In its 2021/22 Plan and Budget, the compensation scheme indicated it is anticipating an increase in firm failures due to the ongoing economic impacts related to COVID-19, leading to a “likely rise” in the volume of claims over the next financial year.

The FSCS is forecasting an ongoing rise in complex pension advice claims and further failures of self-invested personal pension (SIPP) operators. The compensation scheme said it also expects pay-outs related to recent failures in the General Insurance Provision class.

As well as a rise in compensation costs, the FSCS’s management expenses budget being consulted on is £90.5m. This is a £7.3m (9%) increase on the forecast outlined in the November 2020 Outlook, and a £12.4m (16%) increase on the scheme’s 2020/21 budget. The FSCS revealed this increase is due to a rise in the anticipated number of claims as well as the growing complexity, and therefore processing costs, of claims.

The FSCS also indicated it will invoice the largest 1,000 regulatory fee payers a 50% advance payment towards the levy in March 2021. The scheme suggested this is to ensure it has sufficient funds to operate and pay compensation until the annual levy is invoiced in the summer.

FSCS chief executive, Caroline Rainbird, said: “Ongoing trends in a number of classes, and the widespread economic impacts of COVID-19, mean we are anticipating an increase in firm failures over the next financial year. This will likely lead to a rise in the volume of claims, many of which are complex, and therefore an increase in the levy.

“This annual levy ensures we can protect consumers, which helps to improve market stability and increases confidence in the finance sector. But we appreciate that the levy is far too high and that increasing costs could put pressure on firms’ finances.”

The £1.04bn is subject to change, the FSCS added, with the final levy figure expected to be confirmed in April or May.

However, Association of Mortgage Intermediaries (AMI) chief executive, Robert Sinclair, has condemned the FSCS levy for 2021.

“In announcing that the FSCS needs to raise in excess of £1bn to make compensation claims we have reached a new low in the story of financial regulation in the UK,” Sinclair commented.

“The dire discovery that the investment and pensions sector has been blind to widespread fraud and poor advice needs direct action by the industry.

“Asking mortgage brokers to pay more for bad pensions and investment advice than they are levied by the FCA for their own regulation is nothing short of a disgrace. The announcement of a Treasury Taskforce is too little and too late.

“On behalf of ordinary advisers who will have to find this money at a time when doing their job could not be harder, AMI requests that the review of future regulatory framework is expanded to look at how we develop a new approach that gives proper scrutiny of how firms are able to operate within the UK regulatory framework.”

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