Financial Services Compensation Scheme Plan and Budget 200809 by nyx11518

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									Plan and Budget: 2008/09
Financial Services
Compensation Scheme
Financial Services
Compensation Scheme
Plan and Budget: 2008/09

Contents
Overview                                          4
Chairman's Foreword                               5
Chief Executive’s Overview                        6
Claims forecasts and strategy                     8
Service standards                                10
Business development                             11
Financial issues and funding                     12




Pictures:
Cover shot, p6, p7, p8 and p11: David Tothill.
Others : Philip Wolmuth
                                     Overview
                                     Our vision, our role and
                                     our forecasts
                                    Our vision
Our role                            FSCS aims to achieve and be recognised for sustained professionalism and
                                    fairness in providing financial compensation, in a reasonable time and at a
We are the UK's independent
                                    reasonable cost.
statutory compensation fund for
customers of financial services
                                    You can find more information about our aims and objectives at
firms authorised by the Financial
                                    www.fscs.org.uk/industry/about_us.
Services Authority. We can pay
compensation if a firm is unable,
                                    Details of our service standards and business development projects for
or likely to be unable, to pay
                                    2008/09 are given on pages 10 and 11.
claims against it.

Set up under the Financial
Services and Markets Act 2000       Our forecasts
(FSMA), FSCS became
operational on 1 December 2001      This document provides FSCS's Plan and Budget: 2008/09, which are informed by our
and protects:                       forecasts of likely future business. Where it refers to forecasts, these are estimates of
                                    the claims volumes, costs and recoveries we anticipate that we could experience.
• deposits,                         They are based on our experience of current claims trends as well as other
• insurance policies,               information from the FSA, FOS and the industry. We use these data to assess our
• insurance broking (for business   funding and initial levy requirements.
  on or after 14 January 2005),
• investment business, and          Forecasts are not an exact science. Whilst our forecasts are informed by existing
• mortgage advice and arranging     claims trends, we have to bear in mind that these may not provide an accurate guide
  (for business on or after 31      to the future. We cannot levy in advance where there is not a reasonable expectation
  October 2004).                    that we would have to deal with claims in a particular area. This principle is enshrined
                                    in the Rules set for us by the FSA which state we have to have reasonable grounds for
We are funded by levies on the      believing we will need the money in the 12 months following the levy.
industry. You can find more
information about our funding at    Whilst there is a relationship between the economic environment, complaints in the
www.fscs.org.uk/industry.           live market and what claims might come to FSCS, there is no direct correlation. As a
                                    result the estimates in this Plan and Budget do not provide a risk outlook for possible
                                    new claims areas, nor are they an economic forecast. They can change according to
                                    developments in the markets or where consumers for reasons of their own choose to
                                    claim, or not to claim.

                                    We will review and update these forecasts before we set the levy in March. Our
                                    funding requirements depend on a number of factors including likely claims volumes,
                                    uphold rates and the amount and timing of recoveries we make. The indicative
                                    funding requirements in this document are therefore subject to change.

                                    You can find more information on our forecasts on pages 8 and 9.
                                    Details of FSCS’s powers to raise levies is in the FSA handbook, Fees section 6.1.




4 FSCS Plan and Budget: 2008/09
Chairman’s Foreword
David Hall

Welcome to our Plan and Budget:                  regime, which provides a more robust,
2008/09. This document contains                  sustainable and fair system for funding
information about our preliminary                the FSCS, and potential reforms to the
claims estimates for the next                    compensation framework.
financial year as well as our first
indicative funding requirements.                 Our work takes place against the backdrop
                                                 of increasingly complex and diverse
                                                 markets. This carries a greater risk that
Our approach in context                          problems in one part of the financial
During the last six years, FSCS has met a        services sector will impact on another and
number of major pressures head on,               that problems in other parts of the world
grown and developed as an organisation.          may have an adverse impact on UK
Since we started paying compensation in          markets and firms.
December 2001, we have helped
                                                                                               David Hall
hundreds of thousands of people and              In light of this, at home and
paid more than £1bn in compensation.             internationally we contribute to wider
Compensation has covered a wide range            industry debates and policy-making.
                                                                                               Since we started paying
of claims across the industry, including                                                       compensation in December
those relating to mortgage endowments,           For example, FSCS is in close contact with    2001, we have helped
precipice bonds, splits, credit unions and       the FSA, the Bank of England, the Treasury
insolvent insurers.                              and the Financial Ombudsman Service.          hundreds of thousands of
                                                 We are actively engaged in the retail         people and paid more than
2008/09 promises to be another                   distribution review, and the debate about
challenging year for FSCS and for the
                                                                                               £1bn in compensation.
                                                 banking reform.
financial services industry across all
sectors.                                         These changes are also demanding a
The FSA in its 2008 Financial Risk Outlook       cooperative approach across borders.
has warned firms and consumers of the            FSCS has long-standing, productive
risks “inherent in a significantly less benign   working relationships with other key
economic environment” and identifies             players in Europe.
five priority risks including business
models of some financial institutions            We are founder members of the
being “under strain” due to adverse              European Forum of Deposit Insurers
market conditions, and a potential loss of       (EFDI) and work closely with our              will be working to broaden our
confidence in financial institutions and in      colleagues in Europe on issues relating to    relationships, both domestically and
the authorities’ ability to safeguard the        our role in the UK. For example, as a         internationally, and to continue
financial system.                                member of EFDI we are working with the        contributing our knowledge and
                                                 European Commission on the review of          experience to policy-making at home
Whilst we are seeing significant                 the Deposit Guarantee Schemes Directive.      and abroad.
turbulence in the markets and the
continuing fallout of the credit crunch,         Beyond Europe, we maintain a number of
the volume of endowment claims coming            close working relationships with
                                                                                               Our commitment
in to FSCS (our main source of new               compensation schemes in other countries       Our Plan and Budget 2008/09 reflects
claims in recent years), has been reducing.      to share experiences and best practice.       our continuing commitment to being
This presents us with the challenge of a                                                       an efficient and effective organisation.
marked tailing off in some claims areas          FSCS is here to protect consumers and is      We aim to ensure FSCS is equipped to
against the unpredictability of what could       funded by the industry. It therefore takes    deliver an effective and high quality
come our way next year.                          its relationship with its stakeholders very   service and will work with the industry
                                                 seriously. We maintain close and fruitful     and the FSA to help ensure consumers
At the same time, we are getting ready           working relationships with consumer and       are aware of the protection FSCS can
for the introduction of the new funding          trade organisations. During 2008/09, we       provide.


                                                                                                         FSCS Plan and Budget: 2008/09 5
                                       Chief Executive’s Overview
                                       Loretta Minghella

                                       2008/09 is going to be a year unlike           will come in a debit note for firms in the
                                       any other since FSCS was set up                current A7 and A9 contribution groups.
                                       over six years ago. It will be the             The £6m will cover the costs of splits
                                       first year of the new FSCS funding             claims in 2006/07 and 2007/08 for which
                                       arrangements, bringing with it a               we have not previously levied (because
                                       "clean break" from the current                 we had to quantify the costs and identify
                                       system. Five new Classes (and                  which contribution groups would be liable
                                       related Sub-classes) will replace the          in the light of the claims received).
                                       12 current contribution groups.
                                                                                      The new funding system means that
                                       Overall our estimated gross funding            2008/09 will also be the first year we
                                       requirement for 2008/09 is £130.8m.            produce a levy from a zero base because
                                       Taking into account contribution group         the fund balances in the current
                   Loretta Minghella   balances, a net total of £30.7m will be        contribution groups will go back to firms
                                       paid by levy payers. An initial estimate of    as credit or debit notes as part of the levy
One of the recurring themes            our funding requirements by Sub-classes        process. In previous years, we would
                                       under the new system is on page 13. The        generally carry forward any positive
  for us since our inception           amounts for each Sub-class are within          balances to offset the costs we expected
   has been the difficulty of          the new Sub-class levy limits for              for the contribution groups in the next
 predicting accurately what            compensation costs.                            year but the current contribution groups
                                                                                      will end on 31 March 2008. Direct
        will come our way. If                                                         comparisons with previous years levy
 anything, the environment             Cost drivers                                   forecasts are therefore very difficult, but
                                       The main drivers of compensation costs         more information on the new
      in which we operate is           include continued settlement of insurance      arrangements is on pages 12-20.
       becoming even more              claims, resolution of a declining volume of
complex and harder to read             endowment and pensions claims, and a
                                       less predictable flow of other investment      Banking and
 in the light of factors such          and deposit claims. Splits claims will be      compensation reform
  as increasing globalisation          also be a significant part of our costs next   The next financial year also brings with it
       and integration in the          year.                                          the promise of more change to how we
                                                                                      operate as a result of new legislation
  financial services markets.          We have been saying for some time that         contemplated for banking reform and
                                       splits costs were coming but that we           deposit protection.
                                       would only levy the industry for them
                                       when the costs were clearer. We are now        We welcome the recent publication of a
                                       in a position to do so. Although we            new consultation on financial stability and
                                       expect to levy the industry £13m in total      depositor protection by the Tripartite
                                       for splits in 2008/09, this is considerably    Authorities and the Treasury Select
                                       less than we originally thought it might       Committee report, ‘The run on the Rock’,
                                       be. We have received fewer claims than         which has made an important
                                       anticipated and the uphold rate is lower       contribution to the on-going debate
                                       than the average for investments. These        about reform. FSCS gave evidence to the
                                       factors have helped to keep the levy           Treasury Select Committee and assisted
                                       down.                                          the Tripartite authorities with their work
                                                                                      on the proposals. We will continue to
                                       Of the total projected figure for splits,      engage with the Tripartite authorities and
                                       £7m is for splits costs (including             other interested parties over the coming
                                       management expenses) in 2008/09. £6m




6 FSCS Plan and Budget: 2008/09
months to ensure that any reforms are          Efficiency and quality
robust and reflect our practical
                                               During the current year, we have been
experience.
                                               experiencing a sharp decline in the
                                               volumes of claims coming in,
The Treasury Select Committee
                                               particularly in the area of mortgage
concluded that the FSCS model had
                                               endowment claims as well as the
worked well for the range of failures that
                                               previously predicted slowdown in
had come to FSCS so far. There is no
                                               pensions review cases. That trend
doubt that there are currently hurdles
                                               seems set to continue in 2008/09.
which stand in the way of paying
compensation quickly. Potential changes
                                               Whilst claims volumes are in decline,
in legislation and FSA rules would make
                                               our commitment to increasing
speedier payments possible, and could
                                               efficiencies in claims handling and
change the context of our operations
                                               other areas of our work remains strong.
considerably.
                                               For 2008/09 we have defined a
                                               number of important business
We cannot yet predict what it might
                                               development projects to help us to
mean for us or for the industry, but we
                                               achieve that aim. You can find more
can be certain that banking reform and
                                               information about these projects on
related changes to the compensation
                                               page 11.
framework are likely to make a significant
call on our time during 2008/09.
                                               Our prime concern is that claimants
                                               have the benefit of high quality,
We will also continue to build on our work
                                               efficient claims handling whatever
to increase consumer awareness of the
                                               volumes come our way.
Scheme with the FSA and the industry,
particularly in the banking sector where a
loss of confidence can seriously damage
financial stability.


Business planning                                                                               FSCS aims to provide an
One of the recurring themes for us since
our inception has been the difficulty of
                                                                                                   effective and efficient
predicting accurately what will come our                                                    compensation service and to
way. If anything, the environment in                                                     help maintain confidence in the
which we operate is becoming even more
complex and harder to read in the light of                                                      financial services sector.
factors such as increasing globalisation
and integration in the financial services
markets.

These difficulties will continue in the next
financial year so we are continuing to
develop our business contingency
planning and stress-testing our approach.
We see this as an investment in making
our systems as robust and flexible as they
can be.




                                                                                               FSCS Plan and Budget: 2008/09 7
                                        Claims forecasts and strategy
                                        Jonathan Clark, Director of Claims

                                        How we forecast                                outsourcers, helping to make sure that we
                                                                                       deal with them efficiently. We expect the
                                        FSCS is a demand-led organisation. The
                                                                                       claims to continue into 2008/09 but the
                                        volume of claims we handle is the key
                                                                                       volumes are running at less than we
                                        driver of our activities and a key driver of
                                                                                       forecast when we were putting together
                                        our expenses, influencing the number and
                                                                                       our Plan and Budget for 2007/08.
                       Jonathan Clark   skills of people needed to process claims
                                        and to maintain our target service levels.
                                                                                       Our splits work has brought a very diverse
Our continuing commitment                                                              portfolio of claims in a complex area and
                                        Whilst forecasting claims volumes is
        to providing the best                                                          it is difficult to judge the average uphold
                                        extremely difficult, and assumptions are       rate or value of the claims for next year at
           possible service to          not always borne out by events, our            this stage. We expect the majority of
consumers stands. Our drive             claims strategy will again put us on a         costs relating to Exeter claims in 2007/08
                                        sound footing for dealing with new
    to deliver our key service          challenges that come our way in 2008/09.
                                                                                       will largely be allocated to the existing A9
                                                                                       contribution group, and for BFS to A7.
 standards in the most cost-                                                           These will be charged to firms as debit
 effective way will continue.           FSCS has considered forecasts for new          notes, alongside the levy for the D1 Sub-
                                        claims within a range to help us manage        class under the new funding regime for
2008/09 will be another year            the uncertainties around actual claim          splits claims decided after 1 April 2008.
    in which we build on our            receipt. For example, our range for
                  work so far.          mortgage endowment claims is currently         We are also succeeding in reducing
                                        between 5,000 and 10,000 claims. We            significantly the older, complex cases in
                                        base our operational planning, expenses        our work-in-progress, particularly in
                                        budgets and funding needs on estimates         relation to mortgage endowments.
                                        of the most likely outcome reflecting
                                        current claims trends.
                                                                                       New challenges
                                                                                       There has been media coverage of a
                                        Our claims strategy                            company called Pacific Continental
                                        We use a mix of FSCS staff and                 Securities with suggestions that it could
                                        outsourcers as a central feature of our        lead to a significant bill for FSCS. We have
                                        claims handling strategy. This allows us to    started to receive claims relating to the
                                        respond flexibly to claims volumes,            company and are examining them to see
                                        whether they go up or down. One of the         if we can help. We are working through
                                        other advantages of using outsourcers is       our default process, but the volume and
                                        that it means our costs more closely           value of any claims is currently hard to
                                        reflect the claims volumes we are dealing      predict. We will keep levy payers informed
                                        with. The volume of claims we receive is       once we know more about the likely
                                        an important factor in determining the         impact of the claims on our funding
                                        level of outsourcing costs we incur.           requirements.

                                        In our 2007/08 Plan and Budget, we said        We are also aware of the growing
                                        that our claims strategy was paying off        complaints about the mis-selling of
                                        and helping us to manage claims volatility.    payment protection insurance (PPI) by
                                        This year our strategy is allowing us to       intermediaries and the possibility that
                                        respond effectively to lower than forecast     these could lead to claims for FSCS. We
                                        claims volumes.                                cannot predict yet what they might mean
                                                                                       for us and so have not made any specific
                                        This flexible approach was a feature of        provision for PPI in our forecasts at this
                                        our response to handling splits claims         stage. Mortgage advice claims could be
                                        against Exeter Fund Managers Ltd (Exeter)      on the horizon although it is also too early
                                        and BFS Investments plc (BFS) with our         to predict what they might mean for FSCS

8 FSCS Plan and Budget: 2008/09
in the absence of any significant             Effective claims handling
experience of claims in this area to date.
                                              In handling claims, we will continue to
                                              concentrate on efficiency and quality. This
Throughout the coming year, we will           year we completed a project to improve
continue to take a flexible approach that     our internal quality controls and we will
allows us to respond to the volatility        build on this during 2008/09. We will
confronting us. We will develop our           maintain our quality checks on the
internal capacity to respond quickly to       companies to which we outsource work to
developments and volumes by sharing           make sure they meet the highest possible
staff between claims groups and               standards too.
continuing to develop their capacity to
multi-skill, and we will work with            Our continuing commitment to providing
                                              the best possible service to consumers
outsourcers to increase their capacity to
                                              stands. Our drive to deliver our key service
meet our requirements in the event of an
                                              standards in the most cost-effective way
unexpected upturn in volumes.                 will continue. 2008/09 will be another year
                                              in which we build on our work so far.




Claims forecasts 2008/09*
As last year, FSCS has considered forecasts for new claims within a range to help us manage the uncertainties
around actual claim receipts. We base our budget and levies on estimates of the more likely outcome.

Claims forecasts 2008/09*

Table 1
Type of claim                Estimate of     New claims       NEW claims        New claims     Estimate of         *         Figures
                             completed       forecast         forecast          forecast       completed               are rounded.
                             claims in       LOWER            MORE LIKELY       UPPER          claims in
                             2007/08         forecast for     forecast for      forecast for   2008/09             **      Figures
                                             2008/09          2008/09           2008/09                                   relate to
                                                                                                                        payments
Mortgage endowments           13,500            5,000            8,000              10,000       9,000                        only.
Investments excl. splits       1,600            1,000            1,200               2,400       1,200                  Insurance
                                                                                                                       claims are
Splits                         3,400              200              400                 600       2,750                      usually
Deposits (credit unions)       4,200            3,000            4,250               5,500       4,250                handled by
Pensions Review & FSAVCs         535              120              240                 360         300                          the
Insurance intermediaries         120               50              200                 450         200                 appointed
Mortgage advisers                 10               25               50                  75          50              run-off agent
                                                                                                                   and presented
                                                                                                                      to FSCS for
Total claims                  23,365            9,395          14,340               19,385     17,750               checking and
                                                                                                                         payment.
Insurance payments**                            7,000            8,000              10,000



                                                                                                  FSCS Plan and Budget: 2008/09 9
                                   Service standards


                                   FSCS receives a wide variety of claims for many different product types and with
                                   varying complexity and urgency. Our turnaround times for claims are affected by many
                                   factors, including the type of claim, how complex it is, and whether we have to wait for
                                   information from third parties such as liquidators.

                                   Our general standard is to process all claims within six months. However, we set
                                   different target service levels for different types of claims. For instance, we currently
                                   complete the vast majority of credit union claims within a month. We always give
                                   priority to people who may be facing hardship when making a claim.

                                   Our target service levels for                   (v)   Where the firm is already in default,
                                   2008/09 are:                                          we will issue a decision on 90% of
                                                                                         all claims within six months of
                                   (i)    Telephone calls are dealt with as              receiving a completed application
                                          they are received. However, if we              form. Of the remaining 10%, no
                                          have to call someone back we aim               claims should be older than 12
                                          to do so within 48 hours of the                months unless exceptional
                                          enquiry being received, in 90% of              circumstances apply.
                                          cases.
                                                                                   (vi) In respect of credit union claims, we
                                   (ii)   We aim to answer all                          have updated our service standard
                                          correspondence (including                     to reflect the faster turnaround
                                          complaints) within 15 working days            times we achieve in this area. We
                                          in 90% of cases.                              now aim to achieve a turnaround
                                                                                        time of at least 90% of claims being
                                   (iii) We will send out an application                completed in eight weeks. In
                                         form within five working days in at            practice, the vast majority of credit
                                         least 90% of cases, where                      union claims are completed within a
                                         consumers have a claim that is                 month.
                                         potentially within our remit.
                                                                                   (vii) We will issue compensation
                                   (iv) Where a firm is unable to meet                   payments within 10 working days
                                        claims made against it, we aim to                of written acceptance of a
                                        make 50% of default declarations                 compensation offer, in 90% of
                                        within six months of the start of our            cases. For pension reinstatements,
                                        investigations, and 100% within 12               or pension loss claims where
                                        months.                                          compensation takes the form of an
                                                                                         annuity, we will arrange
                                                                                         compensation within 10 working
                                                                                         days of receipt of all necessary
                                                                                         information from third parties, for
                                                                                         example, an annuity quotation or
                                                                                         the notification of reinstatement
                                                                                         costs.




10 FSCS Plan and Budget: 2008/09
Business
development

We will undertake a number of
projects during the year to help us
to continue making efficiency gains
and process improvements. These
aim to enhance the quality of our
service to those entitled to FSCS
protection, as well as our overall
cost effectiveness.


These projects include:

(i)    Work on reforming the
       compensation framework following
       the Tripartite consultation and
       proposed legislation on financial
       stability and compensation reform;

(ii)   Building on our business
       contingency planning to increase the
       Scheme’s preparedness to respond
       rapidly to higher volume business
       failures if called upon; and

(iii) Completing a strategic review of our
      operating model to develop further
      our claims handling process and
      refine our strategy.


Due to the very significant pressures on
FSCS in this financial year, we are carrying
forward a small number of projects,
commenced in 2007/08, into 2008/09
and remain committed to delivering them.

They include:

(i)    An online claims application and
                                               Projects include building on our
       tracking system for claimants;          business contingency planning to
                                               increase the Scheme’s
(ii)   Adapting our technological
       platforms to reflect changing           preparedness to respond rapidly
       business requirements; and              to higher volume business failures
                                               if called upon
(iii) Building better tools to track and
      measure our performance and use
      of resources.




                                                                                    FSCS Plan and Budget: 2008/09 11
                                   Financial Issues and Funding
                                   Transition to the new funding regime

                                   “Clean break” transitional arrangements

                                   The new funding model is divided into five broad classes (life and pensions;
                                   investments; general insurance; deposits; and home finance). Each class, except
                                   deposits, will have two Sub-classes, and the broad classes together will form a general
                                   retail pool if necessary.

                                   There is a limit to the amount that can be levied from each Sub-class, each year. More
                                   information on the new funding regime is available from the FSA’s website
                                   (www.fsa.gov.uk).

                                   The 2008/09 levy period covers 12 months from 1 April 2008 and the first quarter of
                                   2009/10. This takes into account the timing of levy receipts, assumed to be 1 July each
                                   year. Our current initial estimate for gross 2008/09 funding requirements is £130.8m to
                                   cover compensation costs (net of recoveries) and management expenses (net of
                                   interest).

                                   The “clean break” transitional arrangements of the new funding model require FSCS to
                                   fix fund balances at 31 March 2008 in each contribution group. Firms must then be
                                   credited with their share of the balance of funds accumulated at 31 March 2008 in
                                   those existing contribution groups of which they are members, or issued with a debit
                                   note if the contribution group’s costs exceed income.

                                   We currently estimate that contribution group fund balances will amount to a net
                                   amount of some £100.1m at 31 March 2008. This leaves an estimated net amount of
                                   some £30.7m to be collected from firms.

                                   The net amount to be paid by individual firms will depend on what credit (or debit)
                                   they receive, based on 2007/08 tariff data in their previous contribution group(s),
                                   combined with their share of the funding requirement in the new Sub-class(es), based
                                   on 2008/09 tariff data.

                                   Firms will only receive credit or debit notes from a previous contribution group if they
                                   were a member of that previous contribution group from 1 April 2007. Details of the
                                   transition rules are available from the FSA (PS07/19, FSCS Funding Review - Feedback
                                   on CP07/5 and made text
                                   http://www.fsa.gov.uk/pages/Library/Policy/Policy/2007/07_19.shtml ).

                                   Firms not members of previous contribution groups but now allocated to relevant Sub-
                                   classes will pay their share of the full funding requirement in that Sub-class(es), without
                                   adjustment for credits or debits.



                                   How it works in practice
                                   The diagram on page 13 illustrates the three main steps to be taken in the transition
                                   process.

                                   Breakdowns for Sub-classes are on pages 14 to 20.




12 FSCS Plan and Budget: 2008/09
Financial Issues and Funding
Transition to the new funding regime


                                                            Estimated forecast contribution group fund balances at
  STEP 1: FSCS closes contribution
                                                            31 March 2008:
  groups and notifies final balances to
                                                                                                                      £m
  the FSA
                                                            [Deposit takers A1                                         0.9]*
                                                            General Insurance A3                                      73.8
                                                            Life Insurance A4                                          0.1
These are estimated figures. At 31 March 2008               Insurance intermediaries A19                               1.3
contribution group fund balances will be fixed
                                                            Fund managers A7                                          (0.9)
and FSCS will notify the FSA of final balances
once they are finalised.                                    Managers of AUT's A9                                      (5.1)
                                                            Dealers as principal A10                                   0.1
Contribution group fund balances as at 31                   Brokers holding client monies A12                          5.1
March 2008 will be allocated to firms by way of
                                                            Brokers not holding client monies A13                     16.3
the credit/debit note process described on page
12.                                                         Corporate advisors A14                                     0.0
                                                            Mortgage brokers A18                                       0.2
                                                            Pensions review (A16)                                      9.2
* See page 14 for information on the special rules          Total                                                   100.1
that apply to the A1 contribution group fund balance.



                                                            Sub-class initial funding requirement estimates 2008/09:
  STEP 2: FSCS confirms Sub-class
                                                                                                                      £m
  funding requirement estimates and
                                                        A      Deposit                                                5.0
  notifies the FSA
                                                        B1 General Insurance - provision                            73.8
                                                        B2 General Insurance - intermediation                         2.0
These are estimated figures. Sub-class funding
requirements will be reviewed in March. FSCS
                                                        C1 Life & pensions - provision                                1.0
will notify the FSA of likely 2008/09 funding
requirements, based on that updated                     C2 Life & pensions - intermediation                          32.0
information.
                                                        D1 Investments - fund management                              7.0
                                                        D2 Investments - intermediation                               9.0


                                                        E1 Home finance - provision                                   0.0
                                                        E2 Home finance - intermediation                              1.0
                                                        Total                                                      130.8


                                                        Aggregated credit & debit notes                            (100.1)
                                                        Net new money                                                30.7




  STEP 3: FSA issues invoices (during
                                                        The 2008/09 levy impact for individual firms will depend
  Summer 2008) for funding requirements,                on what credit (or debit) they receive, based on 2007/08
  along with credit and debit notes as                  tariff data in their previous contribution group(s),
  appropriate, taking into account final                combined with their share of the funding requirement in
                                                        the new Sub-class(es), based on 2008/09 tariff data.
  contribution group fund balances.

                                                                                                    FSCS Plan and Budget 2008/09 13
                                  Financial Issues and Funding
                                  How it works in practice by Sub-class


                                                                                    2008/09 estimated gross
                                   Class A Deposit                      £5m         initial funding requirement




                                                                      Claims relating to credit union failures
                                   Cost drivers                       and a share of FSCS’s management
                                                                      expenses.



                                   Any credit or debit from           NO - special rules mean the estimated
                                   previous contribution              £0.9m credit has been used to reduce the
                                   groups?                            2008/09 funding requirement.


                                                                      The net amount to be paid by individual
                                   What will firms in this            firms is their share of the £5m funding
                                   Sub-class pay?                     requirement, according to their 2008/09
                                                                      tariff data.


                                  Class A Deposit                             Of the funds transferred at N2, £0.9m is
                                                                              forecast to remain at 31 March 2008. The
                                  Firms in the previous contribution group    transitional requirements for money
                                  (A1) benefited from funds transferred       transferred from the DPB restricts the use
                                  from the previous deposit protection        of this money to deposit claims and
                                  body, the Deposit Protection Board (DPB),   related funding needs. The funds will
                                  at N2, which amounted to some £9m.          continue to be used to pay claims against
                                  These funds have been used to pay           deposit-takers, such as credit unions, and
                                  deposit claims, such as the few remaining   have been used to reduce the 2008/09
                                  BCCI claims, those against London Trust     funding requirement in Class A.
                                  Bank and credit union claims.




14 FSCS Plan and Budget 2008/09
Financial Issues and Funding
Transition to the new funding regime

                                                                                                                          Sub-class B1 General Insurance - provision
                                                                                                                          Based on current claims estimates, the
  Sub-class B1 General                              £73.8m                2008/09 estimated gross
                                                                          initial funding requirement
                                                                                                                          overall position of firms in the previous
  Insurance - provision                                                                                                   contribution group A3 will be neutral, due
                                                                                                                          to an estimated fund balance credit of
                                                                                                                          some £73.8m in contribution group A3 at
                                                   Claims relating to existing estates, such                              31 March 2008.
                                                   as Independent Insurance and Chester
  Cost drivers                                                                                                            This is good news for these firms, who
                                                   Street, and a share of FSCS management
                                                   expenses.                                                              also benefited from a £40m refund in
                                                                                                                          January 2008 as a result of higher than
                                                                                                                          forecast recoveries and lower than
  Any credit or debit from                         YES – estimated £73.8m CREDIT, shared                                  forecast compensation costs in
  previous contribution                            between firms in A3 according to their                                 contribution group A3 during 2007/08.
  groups?                                          tariff data for 2007/08.*
                                                                                                                          However, the net amount to be paid by
                                                                                                                          (or credited to) individual firms will
                                                   The net amount to be paid by individual                                depend on tariff data in 2007/08 and
                                                   firms is the difference between their                                  2008/09 as indicated in the table (left).
  What will firms in this
                                                   share of the £73.8m funding requirement,
  Sub-class pay?
                                                   according to 2008/09 tariff data, less their
                                                   share (if any) of the £73.8m credit.

Forecast assumptions for the B1 Sub-class are based on recent trends for compensation costs against the insolvent insurance estates
with which FSCS currently deals and input from the insolvency practitioners concerned. A number of factors may affect the reliability
of these assumptions. Outstanding claims against Independent Insurance Company Limited are likely to be small in number but
sizeable in value. Therefore a small swing in the number of claims decided in the year could have a significant impact on funding
requirements in this group. Similarly, there is some outstanding litigation concerning the meaning of certain insurance policies.



                                                                                                                             Sub-class B2 General Insurance -
  Sub-class B2 General                                                    2008/09 estimated gross                            intermediation:
  Insurance -                                         £2m                 initial funding requirement                        Although actual compensation costs in
                                                                                                                             this Sub-class are anticipated to continue
  intermediation                                                                                                             to be relatively low, FSCS does undertake
                                                                                                                             significant work relating to potential
                                                                                                                             defaults and actual defaults in this area.
                                                   Claims relating to insurance intermediary
                                                                                                                             The funding requirement reflects the
                                                   failures and a share of FSCS management
  Cost drivers                                                                                                               management costs associated with
                                                   expenses.
                                                                                                                             activities such as facilitating risk transfer,
                                                                                                                             which reduces compensation costs and
                                                                                                                             benefits consumers.

  Any credit or debit from                         YES – estimated £1.3m CREDIT, shared                                      The Financial Ombudsman Service (FOS)
  previous contribution                            between firms in A19 according to their                                   in its corporate plan & 2008/2009 budget
  groups?                                          tariff data for 2007/08.*                                                 is predicting a 10% increase in insurance
                                                                                                                             complaints, largely relating to payment-
                                                                                                                             protection insurance (PPI). It is not
                                                   The net amount to be paid by individual
                                                                                                                             currently clear what claims might be made
                                                   firms is the difference between their
  What will firms in this                                                                                                    against broking firms that are no longer
                                                   share of the £2m funding requirement,
  Sub-class pay?                                                                                                             trading, or that go into default during
                                                   according to 2008/09 tariff data, less their
                                                                                                                             2008/09, in relation to this product. No
                                                   share (if any) of the £1.3m credit.
                                                                                                                             provision has therefore been made in this
                                                                                                                             forecast funding requirement for potential
                                                                                                                             PPI claims.

* Firms will only receive credit or debit notes from previous contribution groups if they were a member of a previous
contribution group from 1 April 2007. Details of the transition rules are available from the FSA (PS07/19, FSCS Funding
Review - Feedback on CP07/5 and made text).                                                                                            FSCS Plan and Budget 2008/09 15
                                                                                                                                        FSCS Plan and Budget 2007/08
Financial Issues and Funding
How it works in practice by Sub-class

                                                                                                           Sub-class C1 Life & pensions - provision:
                                                                                                           Based on current claims estimates, life
 Sub-class C1 Life &                     £1m              2008/09 estimated gross
                                                                                                           and pensions providers in the previous
                                                          initial funding requirement
 pensions - provision                                                                                      contribution groups A4 and A16 will
                                                                                                           benefit from a fund balance credit of
                                                                                                           some £7.9m from those contribution
                                     Their share of FSCS management                                        groups at 31 March 2008.
 Cost drivers
                                     expenses.
                                                                                                           This credit largely relates to pensions
                                     YES – estimated CREDIT for firms in A4                                review claims, and marks the end of the
                                     (£0.1m) and A16 (£7.8m). The A16 credit                               ring-fenced group A16 (IFA pensions
 Any credit or debit from                                                                                  review claims). The refund is also due to a
                                     reflects our estimate of life and pension
 previous contribution                                                                                     small positive fund balance for claims
                                     providers’ share of the likely favourable
 groups?                                                                                                   relating to the previous contribution
                                     fund balance for A16 IFA pensions review
                                     claims at 31 March 2008.                                              group A4 (estimated at £0.1m).


                                     The net amount to be paid by individual
                                     firms is the difference between their
                                     share of the £1m funding requirement,
 What will firms in this
                                     according to their 2008/09 tariff data, less
 Sub-class pay?
                                     any credit in respect of their membership
                                     of A4 and A16. This is expected to result
                                     in a refund to most firms.*



                                                                                                           Sub-class D1 Investments - fund
 Sub-class D1                                                                                              management:
 Investments - fund                    £7m            2008/09 estimated gross
                                                                                                           The estimated funding requirement in this
                                                      initial funding requirement
 management                                                                                                Sub-class is £7.0m. Based on current claims
                                                                                                           estimates, there will be a projected funding
                                     Claims relating to splits (BFS & Exeter)                              deficit of £6.0m for splits claims relating to
 Cost drivers                        plus a share of FSCS management                                       the previous contribution groups A7 & A9 at
                                     expenses.                                                             31 March 2008.

                                                                                                           This deficit arises because no levy was
                                     YES – £6m DEBIT. Firms in A7 and A9 are                               raised for these splits costs during 2006/07
 Any credit or debit from
                                     expected to share an estimated £6m                                    and 2007/08.
 previous contribution
                                     debit carried forward (£0.9m – A7 and
 groups?
                                     £5.1m A9).                                                            We expect to deal with the bulk of new
                                                                                                           splits claims within 2008/09, although these
                                                                                                           claims may continue into 2009/10.
                                     The amount to be paid by individual firms
                                     is their share of the £7m funding                                     As we indicated in Outlook in December,
 What will firms in this                                                                                   the majority of Exeter claims have been
                                     requirement, according to their 2008/09
 Sub-class pay?                                                                                            allocated to the A9 contribution group and
                                     tariff data, plus any debit in respect of
                                     their membership of A7 and/or A9.*                                    the majority of BFS claims have been
                                                                                                           allocated to the A7 contribution group. Each
                                                                                                           claim is allocated according to its facts.

These claims are very complex, and the current uphold rates and average values may not be representative of splits claims overall.
Our estimated funding requirement for these claims is therefore only indicative. Based on current trends, the majority of claims are
allocated to this Sub-class with only a handful currently being allocated to intermediaries.



                                               * Firms will only receive credit or debit notes from previous contribution groups if they were a member of a previous
                                              contribution group from 1 April 2007. Details of the transition rules are available from the FSA (PS07/19, FSCS Funding
16 FSCS Plan and Budget 2008/09                                                                                          Review - Feedback on CP07/5 and made text).
Financial Issues and Funding
Transition to the new funding regime

                                                                                       Sub-class C2 Life & pensions -
Sub-class C2 Life &                                                                    intermediation:
pensions -                          £32m           2008/09 estimated gross
                                                                                       Based on current claims estimates,
                                                   initial funding requirement         intermediary firms in the previous
intermediation                                                                         contribution groups A12, A13 and A16
                                   Claims relating to mortgage endowments,             will benefit from a fund balance credit at
                                   pensions and other life and pensions                31 March 2008. This credit relates, in
Cost drivers                                                                           part, to reduced volumes and costs of
                                   claims, plus a share of FSCS management
                                   expenses.                                           mortgage endowment and pensions
                                                                                       review claims, and marks the end of the
                                                                                       ring-fenced contribution group A16 (IFA
Any credit or debit from           YES – firms in A12, A13 and A16 are                 pensions review claims).
previous contribution              expected to share a CREDIT according to
groups?                            their tariff data for 2007/08.*                     The A16 balance will be distributed
                                                                                       between providers and intermediaries in
                                                                                       proportion to their contributions in
                                   The net amount to be paid by individual
                                                                                       2007/08. Pensions review claims will now
                                   firms is the difference between their
                                                                                       be allocated to Sub-class C2.
What will firms in this            share of the £32m funding requirement,
Sub-class pay?                     according to their 2008/09 tariff data, less
                                                                                       The net amount to be paid by individual
                                   any credit (if any) in respect of their
                                                                                       firms will depend on tariff data in 2007/08
                                   membership of A12, A13 and A16.
                                                                                       and 2008/09 as indicated in the table
                                                                                       (left).
A12 and A13 contribution group fund balances as at 31 March 2008
These balances will be distributed to firms in the respective contribution groups by   Any firms now allocated to Sub-class C2
reference to their 2007/08 tariff data. We estimate the balances to be some £5.1m      but not previously in contribution groups
in A12 and £16.3m in A13, due mainly to lower than expected mortgage                   A12, A13 and A16, will be levied for their
endowments volumes and costs. Most firms should therefore expect credit notes to       share of the full funding requirement
offset 2008/09 funding requirements.                                                   (£32.0m) without any adjustments for
It would be misleading to try to map these balances against the new Sub-classes        credits or debits.
here, as there is no exact correlation between old groups and new Sub-classes.
However, firms now in A12 or A13 will receive their full entitlement to any refund
which will defray any liabilities in C2 or D2.

Sub-class D2                                                                           Sub-class D2 Investments -
Investments -                       £9m           2008/09 estimated gross
                                                  initial funding requirement
                                                                                       intermediation:
                                                                                       The estimated funding requirement in this
intermediation                                                                         Sub-class is £9.0m. Based on current
                                   Claims relating to investment mis-selling           claims estimates, firms in the previous
                                   and a share of FSCS management                      contribution groups A10, A12 and A13
                                   expenses. (NOTE: it is too early to say             will benefit from a fund balance credit at
Cost drivers                       what impact Pacific Continental                     31 March 2008.
                                   Securities might have. Potential claims
                                   relating to this firm, or new defaults, are         The majority of the refund will apply to
                                   therefore not included).                            firms previously in contribution groups
                                                                                       A12 and A13 as these are the two
Any credit or debit from           YES – firms in A10, A12 and A13 are                 contribution groups with the largest
previous contribution              expected to share a CREDIT according to             estimated fund balances at 31 March
groups?                            their tariff data for 2007/08.*                     2008.


                                   The net amount to be paid by individual
                                   firms is their share of the £9m funding                  * Firms will only receive credit or debit notes from
What will firms in this            requirement, according to their 2008/09                          previous contribution groups if they were a
                                                                                             member of a previous contribution group from 1
Sub-class pay?                     tariff data, less any credit (if any) in                        April 2007. Details of the transition rules are
                                   respect of their membership of A10, A12                      available from the FSA (PS07/19, FSCS Funding
                                                                                                 Review - Feedback on CP07/5 and made text).
                                   and A13.
                                                                                                     FSCS Plan and Budget 2008/09 17
Financial Issues and Funding
How it works in practice by Sub-class

                                                                                                                          Sub-class E1: The estimated funding
  Sub-class E1 Home                                                                                                       requirement in this Sub-class is £0.0m.
                                                     £0m               2008/09 estimated gross
                                                                                                                          There is no related previous contribution
  finance - provision                                                  initial funding requirement
                                                                                                                          group.

                                                                                                                          This means that, based on current claims
  Cost drivers                                     Not applicable.                                                        forecasts, no levy is currently expected on
                                                                                                                          firms in this Sub-class for the 2008/09
  Any credit or debit from                                                                                                levy period.
  previous contribution                            Not applicable.
  groups?

                                                   This Sub-class will only be levied for
  What will firms in this                          funding requirements that exceed the
  Sub-class pay?                                   levy limit in Sub-class E2 Home finance -
                                                   intermediation.




  Sub-class E2                                                                                                            Sub-class E2: The estimated funding
  Home finance -                                    £1m                 2008/09 estimated gross
                                                                        initial funding requirement
                                                                                                                          requirement in this Sub-class is £1.0m.
  intermediation
                                                                                                                          Based on current claims estimates, firms
                                                                                                                          in the previous contribution group A18
  Cost drivers                                     A share of FSCS management expenses.                                   will benefit from a fund balance credit of
                                                                                                                          some £0.2m from that contribution group
                                                                                                                          at 31 March 2008.
  Any credit or debit from                         YES – estimated CREDIT (£0.2m), for firms
  previous contribution                            in A18 according to their 2007/08 tariff
  groups?                                          data.*


                                                   The net amount to be paid by individual
                                                   firms is their share of the £1m funding
  What will firms in this
                                                   requirement, according to their 2008/09
  Sub-class pay?
                                                   tariff data, less any credit (if any) in
                                                   respect of their membership of A18.




* Firms will only receive credit or debit notes from previous contribution groups if they were a member of a previous
contribution group from 1 April 2007. Details of the transition rules are available from the FSA (PS07/19, FSCS Funding
Review - Feedback on CP07/5 and made text).




18 FSCS Plan and Budget 2008/09
Table 2
Management expenses by type


                                                                                         Budget            Forecast            Budget
                                                                                        2008/09            2007/08            2007/08
                                                                                            £m                  £m                £m

Staff employment and Outsourcer costs                                                       14.97              18.00              23.53


Accommodation and office services                                                            2.98               3.19               3.09
Other costs, including professional fees in pursuit of recoveries, IT, depreciation          5.46               5.10               4.46
Project related costs*                                                                       1.33*              0.79               0.96


Total                                                                                      24.74              27.08              32.04

Reserve contingency                                                                          5.50               0.00               5.48

* Including FSCS salary costs




Table 3
Management expenses, base and specific split

                                                                                         Budget            Forecast            Budget
                                                                                        2008/09            2007/08            2007/08
                                                                                            £m                  £m                £m

Base Costs                                                                                   5.17               4.38               5.13
Specific Costs                                                                              19.57              22.70              26.91


Total                                                                                      24.74              27.08              32.04




    Management Expenses Levy Limit

    The FSA will consult on a total management expenses levy limit (MELL) for 2008/09 of £30.24m in its Consultation Paper on
    fees and funding, which is due out this month. This compares to a MELL of £37.52m for 2007/08.

    The basis of the MELL for FSCS is a management expenses budget of £24.74m, plus a reserve contingency of £5.5m.

    Whilst we will not levy to collect the reserve contingency unless necessary, it will enable us to cover the potential costs of
    handling an increase in new claims volumes at the upper range levels of our estimates and any additional costs that may arise
    from our business development projects to the extent that we have not been able to cost them in our central budget. For
    further details of the projects, see page 14. We will keep levy payers informed if it is necessary to use the reserve contingency.




                                                                                                          FSCS Plan and Budget: 2008/09 19
                                                                                Table 4
                                                                                2008/09 Summary of forecast Sub-class accounts


                                   2008/09 summary                                  Total                      GI                GI    Life & pensions    Life & pensions    Investments      Investments     Home finance    Home finance
                                                                                 2008/09     Deposit    Provision    Intermediation           Provision   Intermediation       Fund man.    Intermediation       Provision   Intermediation




20 FSCS Plan and Budget: 2008/09
                                                                                      £m         £m           £m                £m                  £m                £m             £m                £m              £m               £m


                                   Compensation costs (net of recoveries)            78.2        2.0         52.0               0.3                 0.1              17.1            3.5               3.1             0.0              0.1



                                   Management expenses base costs                      5.2       1.1          0.3               0.6                 0.8               0.5            0.7               1.0             0.0              0.2

                                   Management expenses specific costs                19.5        1.2          2.3               0.9                 0.0               9.5            2.3               2.7             0.0              0.6

                                   Total management expenses                         24.7        2.3          2.6               1.5                 0.8              10.0            3.0               3.7             0.0              0.8


                                   Interest net of tax                               (2.5)      (0.1)        (1.8)             (0.0)              (0.1)              (0.4)           0.1              (0.2)            0.0              0.0



                                   Ringfenced funds at 1 April                       (0.9)      (0.9)

                                   Levy                                            (130.8)      (5.0)       (73.8)             (2.0)              (1.0)             (32.0)          (7.0)             (9.0)            0.0             (1.0)



                                   Funds (in credit) / debit at 31 March 2009       (31.3)      (1.7)       (21.0)             (0.2)              (0.2)              (5.3)          (0.4)             (2.4)            0.0             (0.1)




                                   Funds in credit at 31 March 2009 will be applied against costs for each Sub-class in Q1 2009/10, at which point a further levy will be collected as necessary.
Financial Services
Compensation Scheme
7th Floor
Lloyds Chambers
1 Portsoken St
London E1 8BN

								
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