The Financial Services Compensation Scheme (FSCS) has warned its levy may have to rise again in the next financial year to meet the cost of compensation claims.
According to the FSCS, the number of endowment claims filed in six months has already risen above the total number expected for the whole year and may be more than double again in 2006.
Over 10,000 new endowment claims fell into the compensation scheme between April and September 2005 – far above the earlier forecast of 7,000 for the entire year – and this number may double again as the total figure could be more than three times higher than the January forecast at 22,000 between 2005 and 2006.
Officials say the body now expects to complete around 15,000 claims during this financial year - as opposed to an original forecast of 7,000 - but will need to use significantly more funds to enable it to process and pay higher claims volumes.
At this stage, IFAs and advisers in the A13 FSA authorisation category – investment advisers not holding client money - will not see any additional charge on levies despite the funding shortfall as the impact of claims this year will be offset against the 2006/07 levy.
However, Loretta Minghella, chief executive of the FSCS, warns it expects to be handling similar levels of endowment claims in the 2006/07 financial year, suggesting there is still the prospect of a rise in the levy at a later date to meet the funding shortfall.
"New endowment claims have been received at unprecedented levels, way beyond our expectations,” says Minghella.
“As ever, the challenge for the FSCS is to strike the right balance between providing an efficient and timely service to consumers with our responsibility to the industry to keep costs under control."
When the FSCS first announced in Juy 2004 there would be a levy shortfall, advisers were left with an average 375% increase in the levy to be paid.
This figure could be higher again if the FSCS levy has to rise again, as Pass - the panel of providers which contributed £1.5m towards the FSCS levies for the benefit of intermediaries in November 2004 - is not expected to make this gesture again.
At present, fewer than four in ten (39%) of the claims made for endowment compensation are upheld, points out the FSSCS, and most of those filed relate to smaller intermediary practices which closed many years ago rather than as a result of recent firm collapses.
The FSCS is increasing its in-house resources as well as outsourcing some claims to enable it to process higher volumes and to bring claims processing times down, so consumers’ claims can be largely dealt with by July 2006 and in the six months target allotted.
Officials say the current shortfall to the FSCS fund is not serious enough to create a major gap in £37.4m of funding raised at this stage, and no further funds will be needed from IFAs as long as the shortfall is less than 10% of the initial levy and the average compensation claim remains at around £2,300.
But if the shortage of funds needed to meet the compensation claims rises to more than 25%, the FSCS will have to consider a further levy, says Minghella.
She adds: "We do not currently think it is necessary to raise a further levy for endowment claims in this financial year. However, we are keeping a close eye on the level of funds available. There may come a point where a levy has to be raised."
The FSCS says it will publish its plan and budget for the 2006/07 financial year in February 2006, as well as the forecast for possible levy amounts and claims numbers.
This information will be revealed at roughly the same time as the FSA publishes its consultation into the funding for the FSCS – a process which first began in May 2005 with the appointment of Oxera Consulting to research the impact of funding on firms in the financial services sector.
A further consultation document is also expected to be issued by the FSA next month concerning compensation and eligibility limits for both the Financial Ombudsman Service and the FSCS.
Officials at the FSA say while it is reviewing the limits, it does not expect the current status of the FSCS compensation pot to affect the direction of its FSCS funding review.
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 Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
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