The Financial Services Compensation Scheme has cut the amount advisers are expected to pay towards the levy by more than half.
The lifeboat scheme’s latest Outlook document, published today (May 23), revealed the total levy for 2024-25 now stands at £265mn,which is significantly lower than the £415mn estimated in November and a small decrease from the final 2023-24 levy of £270mn.
Advice firms, which fall under the life distribution and investment intermediation class, will now contribute £66mn, a £75mn decrease from November’s indicative forecast which stood at £140.4mn.
The FSCS said the main reason for the reduction was that compensation for the LDII class in 2023-24 was £130mn, £51mn lower than forecast in November 2023.
This was mainly due to reduced average compensation values on pension transfer claims, lower payment volumes for BSPS pension claims and fewer firms failing than expected during the redress scheme.
These lower compensation costs resulted in an additional £57mn surplus, which was carried forward and used to offset the 2024-25 levy.
Simon Harrington, head of public affairs at adviser trade body Pimfa, said the reduction would “come as welcome relief" for advisers and it would help reduce their outgoings for the coming year “allowing them to focus investment internally rather than on servicing the cost of regulation”.
He added: “We are particularly pleased to see that the FSCS has managed to recover a significant amount from failed firms over the reporting period and this is something which we would like to congratulate the FSCS on.
“We have always been clear that more focus should be placed on recovery in pursuit of reducing the levy and while we accept that recoveries are difficult and even harder to plan for, this represents significant progress on behalf of the FSCS and the levy more generally.”
The expected compensation costs for the LDII class for next year have also dropped from £224mn to £156mn.
This is due to reduced pensions uphold rates and average compensation values, the FSCS expecting to receive fewer new claims and lower compensation costs for special administration firm failures.
Martyn Beauchamp, interim chief executive of the FSCS, said: “Predicting failures and claims volumes in advance is difficult, not least due to external conditions that are beyond our control such as the timings of firm failures or prevailing economic conditions.
“Customers often contact us many years after the firm they had been doing business with failed. Indeed, around 85 per cent of claims are made five or more years after the original advice was given, which means it can be challenging to predict when a claim will be made.”
Earlier this month, Beauchamp told FT Adviser the use of artificial intelligence, teamed with a new operating model, will help the lifeboat scheme pay out claims more efficiently.
