Mortgage brokers will not be charged a levy by the Financial Services Compensation Scheme in 2007/08, although IFAs not holding client money are still liable for a charge of £42m.
The FSCS has announced it is cutting the 2007/08 initial levy - outlined in its ‘Plan and Budget’ in January - by £10m to £94.5m, with those making contributions in the A12, A16 and A18 categories all benefiting from the reduction.
As part of this, mortgage intermediaries (A18) have escaped any initial levy for the coming year, as “following the review of trends and data” FSCS has decided it has “enough funds to cover these firms’ share of management expenses and forecast compensation costs”.
In addition, it says levies have been reduced for those in category A12 – advisers holding client money – by £700,000 to £10.5m, mainly because of a reduction in the number of mortgage endowment claims expected to be received.
In its ‘Plan and Budget’, the FSCS forecast 26,500 new endowment claims for the year ahead, however it has now scaled back this forecast to 21,000, which was the lowest point on the range published in January.
That said, while group A12 benefits from this reduction, the A13 levy - which tends to affect IFAs and stockbrokers not holding client money - remains at the January level of £42m, as the FSCS says despite the number of mortgage endowment claims forecast being reduced, “there are offsetting factors in this group, which mean that FSCS has decided to levy £42m as originally proposed”.
Those contributing to the A16 – pensions review – category are also receiving a reprieve as the levy has fallen by £9m to £38.5m, partly because the FSCS recovered £2.1m in additional recoveries, while a reduction in the forecast number of compensation payments has cut an extra £1.8m.
The FSCS also points out an additional £4.9m has been cut from the levy as the timing of a number of payments has shifted them into 2008/09, although the organisation points out the Financial Services Authority (FSA) is currently consulting on the future funding arrangements of the FSCS, including the A16 contribution group.
The organisation has also confirmed while it is forecasting it will be deal with splits claims during 2007/08, it is “not yet possible to predict accurately the timing, volume of claims or the amount of compensation that FSCS will need to pay”.
As a result, it states the costs for handling these claims, and potential compensation payments, have not been included in the FSCS’s current levy forecasts, although the total levy for the coming year is still £19m higher than 2006/07.
Loretta Minghella, chief executive of the FSCS, says: “Since we published our indicative levy earlier this year we’ve reviewed and refined our forecasts for claims volumes and compensation costs.”
“While this is good news for some sectors, we recognise the levy will confirm some tough news for other levy groups. However, having an efficient and cost-effective compensation service is good for consumer confidence and good for the industry as a result."
Fay Goddard, deputy director general of the Association of IFAs (AIFA), says the reduction in fees for those in category A12 is good news, as is the decision to remove the levy for mortgage brokers.
And because the levy remains unchanged from January’s forecast for category A13 – the majority of IFAs – Goddard says it is no better or worse than before, although she says it can be argued it is a positive move as it is lower than last year’s £47.1m.
But while she welcomes the news for those firms falling in category A16, which has seen a dramatic reduction, she warns the industry has to be a little bit careful in this area, as although part of the cut is a genuine reduction, £4.9m has merely been rolled over into next year.
She says: “Pensions cases can be very complex and time consuming, so the FSCS has re-evaluated some of these cases and decided the outcome will not fall within the coming financial year, which is still positive news.”
However Goddard points out the reason for the reduction for the A12 category – a reduced forecast for mortgage endowment claims – is partly because of the recoveries in the value of these policies.
“The actual amount of compensation in these cases is reducing significantly. And for lots of people who were paid out compensation at the bottom end of the market, if policies were held to maturity maybe there wouldn’t be any loss at all,” suggests Goddard.
Although she points out the reason why the majority of IFAs are not benefiting from this change is because the A13 category’s opening balance effectively started “in the red”, so the reduced compensation amounts are bridging this gap, although Goddard points out this is still good news as the total levy has still reduced.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
Head of UK intermediary distribution
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