BoE and FCA propose management expenses levy limit of £83.2m for FSCS for 2020/21

The FSCS has indicated that it may need to use £2.6 million of its 2019/20 contingency reserve due to an unexpected rise in the number of claims it will need to handle in that year.

The UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have earlier today published a consultation paper setting forth their proposals for the Management Expenses Levy Limit (MELL) for the Financial Services Compensation Scheme (FSCS) for 2020/21. The MELL covers the costs of operating the compensation scheme and is the maximum amount that the FSCS can levy for its operating costs.

The levy has two components: the management expenses budget; and a contingency reserve. It does not include claimants compensation costs.

The proposed MELL is £83.2 million for 2020/21. The sum comprises a management expenses budget of £78.2 million and an unlevied contingency reserve of £5 million.

The proposed management expenses budget for 2020/21 is £78.2 million. The management expenses budget covers the FSCS‘s ongoing operating costs and includes the FSCS’s IT, staff, outsourcing, legal and claims handling costs. This is an increase of 4.8% (£3.6 million) compared with the 2019/20 management expenses budget of £74.6 million. The bulk (75%) of the increase can be attributed to a forecast rise in the volume and complexity of claims expected by the FSCS.

The compensation scheme has indicated that it may also need to use £2.6 million of its 2019/20 contingency reserve due to an unexpected increase in the number of claims it will need to handle in that year. In the event of this use of the contingency reserve, the actual spend for 2019/20 would be £77.2 million; the proposed management expenses budget for 2020/21 of £78.2 million would then be an increase of 1.3% (£1 million) year-on-year.

The proposed contingency reserve for 2020/21 is £5 million, unchanged from 2019/20. The FSCS has reviewed the level required and considers that a £5 million reserve is sufficient.

The FSCSs compensation costs levy, which covers compensation paid to consumers, is determined separately by the FSCS and does not form part of this consultation.

The consultation closes on February 17, 2020. Any comments or enquiries should be addressed at CP1_20@bankofengland.co.uk. The PRA is accepting responses on behalf of both organisations, and responses will be considered by both authorities.