Fair Fees: Brokers may face further levy rise after 50% hike

Brokers could face a further hike in their Financial Services Compensation Scheme levies, on top of the 50% plus increase announced last week, the body’s budget document reveals.

Announcing its budget for 2011/12, the FSCS said its draft levy had been set at £93.5m, compared with £61m for the current financial year. Last year the levy, which is the funding requirement for compensating the victims of mis-selling by insurance intermediaries, was just £8.5m.

The levy has been issued for consultation, with the FSCS due to determine the final figure next month. The draft is based on the FSCS’ assumption that it will handle just over 20,000 compensation claims next year.

However, the budget document says that the volatile nature of the compensation claims coming through means that it is very difficult to predict the final total. Last year’s levy rose from a draft figure of £50.5m.

“These requirements depend on a number of factors including likely claims volumes, uphold rates and the amount and timing of recoveries we make. These factors are largely beyond our control. The indicative funding requirements in this document are therefore likely to be subject to change.”

Under its worst case scenario, the scheme says that it could pay out on up to 27,250 cases in 2011/12.

The increase in compensation payments for insurance intermediaries’ customers has been almost entirely fuelled by the rise in payment protection insurance-related complaints, the volume of which is continuing to spiral, according to Financial Ombudsman Service figures.

The FSCS document says: “Volumes have been increasing month on month and this upward trend is expected to continue.”

Broker Network chairman Grant Ellis said: “This [increase] has not peaked yet – there will be more bad news.”

The rise in the levy will take effect in June when the FSCS will send out its bills for this year’s levy.

In a column in this week’s Insurance Times, Biba chief executive Eric Galbraith writes: “The impact of what will be another 50% increase on last year’s already substantial increase will be critical to the survival of some brokers. In order to survive, brokers may have to pass on the cost of the FSCS levy to their customers.”

Galbraith urges the FSA to speed up its implementation of the fundamental review of the FSCS in order to ward off the threat of further big increases next year.

Insurance Times’ Fair Fees campaign is fighting for the review of the FSCS to introduce a fairer deal for insurance brokers on fees and levies.

The FSCS levy: view from the market

Alex Alway, chief executive, Jelf

“It’s not beyond the wit of man to see who is involved [in PPI complaints] and break it down to the relevant areas.

“It’s not going to stop, it’s going to go up next year. The PPI complaints have not really started to come through yet.

“Imagine what kind of effect these kind of increases are having in a difficult trading environment.”

Mike Williams, owner, Coversure Chelmsford

“It’s high time the regulators stopped sweeping this under the carpet and said: ‘Let’s have a regulation and cost that is proportionate to the risk.’

“For a firm like mine, I’ve got to increase my revenue by at least 10% to pay for the additional bill.

“I’ve got to employ somebody in a few months, but if I have to pay for this, can I grow the business?”

Stuart Randall, chief executive, Ataraxia

“Brokers will be squeezed through no fault of their own. They are already suffering with the rates and commissions and everything else, and this is just another squeeze.

“If the sums don’t add up, you have to do something, and brokers will have to look at their overheads of their business, which will include staff.”

Grant Ellis, chairman, Broker Network

“I would not be surprised if the levy increases while the scheme continues to find in favour of the customer because files are not in order as far as they are concerned.

“Customers are being encouraged to claim, not only by the attitude of the FSA but also by TV adverts. It’s unbelievable that at a time of spending cuts, the FSA seems impervious.”