Firms will have to stump up £69m thanks to a new levy to combat the Financial Services Compensation Scheme’s deficit for 2018 caused by poor advice, says its chief executive Mark Neale.
In its November outlook, the FSCS says Sipp and other pension transfer failures accounted for 45 per cent of all defaults declared this year and 83 per cent of resulting claims received.
This is due to “larger claims volumes that relate to pension adviser defaults,” the FSCS says.
The lifeboat fund’s expected deficit for the year is almost the same size as the additional £75m levy on life and pensions advisers raised in April.
Neale says: “We expect a deficit by year end of just under £70m. This will, I am afraid, necessitate a supplementary levy falling on the retail pool and we shall announce the size of that supplementary levy in January.”
The FSCS says “common factors” are underlying all claims, led by vulnerable customers being persuaded into unsuitable investment choices.
The failure of Beaufort Securities specifically noted, along with the failure of nine credit unions which will add to a projected £10m deficit for general insurance this year.
Neale says: “Unwise investment choices are usually held within a Sipp or to trade in valuable rights in defined benefit schemes [and] we see many examples of mis-selling as both regulated, but also increasingly unregulated advisers, promote risky, illiquid investments.”
Claims relating to other types of pension transfer have been increasing significantly in the past two years, driven predominantly by the failure of the British Steel Pension Scheme.
Under-capitalised businesses and phoenxing advisers also added to the strain on the lifeboat fund this year, Neale adds.
He says: “We see providers who fail to perform rudimentary due diligence on these investments and we see directors and advisers involved in failure who re-invent themselves and come back for more.”
Six of the FSCS’s eight funding classes have been provisionally earmarked supplementary levies for next year.
In addition to life and pensions and general insurance provisions, this includes deposits, general insurance intermediation, investment intermediation and debt management.
Final levies for the 2019-20 financial year will be put in place by April, with on account levies also starting from next year.
Neale says the FSCS expects to collect 50 per cent of monies from firms that pay on account levies to the FCA and the Prudential Regulation Authority next year.
This is the maximum allowed and is expected to be in progress when Neale completes his current three-year tenure as chief executive in May and leaves the FSCS.
The overall compensation payment forecast has been reduced by £4m however, ahead of expected increases in personal indemnity insurance claims before next year’s August deadline.
Despite the new levy, the FSCS says it is continuing to deliver ahead of schedule by decreasing wait times on pay outs.
The lifeboat fund’s partnership with Capita has seen 100 new staff inducted into its claims handling division this year including specialist staff.
A £37m contract with the outsourcing firm for claims management handling was negotiated in July.