PS3/22 | CP1/22 - Financial Services Compensation Scheme – Management Expenses Levy Limit 2022/23

Published on 25 March 2022

 

PRA PS3/22 | FCA Handbook Notice 97 – Financial Services Compensation Scheme – Management Expenses Levy Limit 2022/23

1: Overview

1.1: This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 1/22 ‘Financial Services Compensation Scheme - Management Expenses Levy Limit 2022/23’ (page 2 of 2). It also contains the final rules for the Financial Services Compensation Scheme (FSCS) Management Expenses Levy Limit (MELL) for 2022/23 (Appendix 1).

1.2: This PS is relevant to all PRA-authorised firms, but contains no material of direct relevance to retail financial services consumers or consumer groups upon which they might need to act.

Background

1.3: The FSCS is the compensation fund of last resort for customers of failed authorised financial services firms across the PRA’s and the Financial Conduct Authority’s (FCA’s) regulatory remit. The MELL is the maximum amount that the FSCS may levy for management expenses in a year without further consultation. It provides the FSCS with the resources to process compensation claims resulting from the failure of financial services firms. These functions are conferred on the FSCS by Part XV of the Financial Services and Markets Act 2000 (FSMA).

1.4: In CP1/22, the PRA and FCA consulted on a proposed MELL of £110.5 million for 2022/23. This included:

• FSCS management expenses of £95.5 million to cover the FSCS’ ongoing operating costs including staff, facilities, claims handling, legal, and other professional services; and
• an unlevied reserve of £15 million which allows the FSCS to levy additional funds at short notice in the event of a significant unexpected event, without the need for further consultation by the PRA and the FCA.

1.5: When CP1/22 was published the FSCS was forecasting an underspend of £5.2 million compared to the 2021/22 management expenses budget of £90.5 million. CP1/22 stated that if this forecast were to materialise these funds would be rebated to firms in the form of reduced levies for 2022/23. The FSCS is now forecasting an underspend of c. £9 million. If this forecast materialises and the contingency reserve is not utilised in 2022/23 the total levy paid by firms in 2022/23 will be £86.5 million.

Summary of responses

1.6: The PRA received one response to the CP. The PRA’s feedback to this response is set out in Chapter 2.

1.7: The respondent raised queries on how the proposed levy has been allocated across classes, the proposed cost and use of the FSCS’ revolving credit facility, and the need for the FSCS to have a budget for raising awareness.

1.8: Having considered this response to the CP, the PRA has decided to publish the policy as proposed.

Implementation

1.9: The FSCS MELL will apply for the financial year ending Friday 31 March 2023.

1.10: The FCA Board has also made its respective rule for the 2022/23 MELL.¹

The policy set out in this PS has been designed in the context of the UK having left the European Union and the transition period having come to an end. Unless otherwise stated, any references to EU or EU derived legislation refer to the version of that legislation which forms part of retained EU law.²

2: Feedback to responses

2.1: Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to it, and to publish an account, in general terms, of those representations and its response to them.³

2.2: The PRA received one response to the consultation. The section below provides feedback on each of the areas raised by the respondent.

Allocation of management expenses costs between classes

2.3: The respondent welcomed the reduction of the management expenses costs allocated to the General Insurance Distribution class, before querying the lack of an allocation to the Life and Pensions Provision class, given that the CP considers a forecasted rise in costs related to complex pension related claims.

2.4: The FSCS confirms that it is not expecting a failure in the Life and Pensions Provision class; hence no cost being allocated to it. The forecasted complex pension claims are for pension advice and intermediation, which are correctly allocated to either the Life Distribution and Investment Intermediation, or Investment provision classes.

FSCS credit facility

2.5: The respondent questioned the cost of the FSCS’ credit facility, and the need for it to be available at a day’s notice.

2.6: The FSCS considers the credit facility is needed to ensure it has the liquidity necessary to meet its statutory obligations to pay out compensation rapidly in the event of an unexpected failure, including within 7 days for the failure of a deposit taker. The FSCS considers that the facility offers value-for-money based on the current market, and was subject to a public procurement process.

2.7: The respondent also requested further clarity on the difference between the use the FSCS would make of its credit facility, and the contingency reserve.

2.8: The credit facility is used to provide the necessary liquidity for the FSCS to pay out compensation rapidly in the event of a failure where compensation has to be paid out in advance of a levy being raised and received from firms. The contingency reserve is the amount the FSCS is able to levy firms for additional operating costs without further consultation, which is used to cover the costs of handling unexpected failures.

Awareness budget

2.9: The respondent queried the need for the FSCS to allocate a budget to raise awareness amongst eligible claimants, given the existing requirements for PRA and FCA regulated firms to make consumers aware of the FSCS.

2.10: The efforts of the FSCS serve to improve awareness of the scheme, working to ensure consumers across all sectors are aware of the protection they are entitled to both at the point of purchase, and when they need to make a claim. The FSCS also informs consumers that they are able to come to it directly when seeking compensation, rather than using claims management companies to do so. This goes beyond the requirements on regulated firms. The FSCS considers its awareness-raising activities provide helpful additional support, enabling it to fulfil its duties on publishing information for claimants and potential claimants.

3: Appendix

• Appendix 1: PRA RULEBOOK: NON AUTHORISED PERSONS: FSCS MANAGEMENT EXPENSES LEVY LIMIT AND BASE COSTS INSTRUMENT 2022 (pdf)

 

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Published on 12 January 2022

 

PRA CP1/22 | FCA CP22/1 - Financial Services Compensation Scheme – Management Expenses Levy Limit 2022/23

By responding to this consultation, you provide personal data to the Bank of England (the Bank) and the Financial Conduct Authority (FCA). This may include your name, contact details (including, if provided, details of the organisation you work for), and opinions or details offered in the response itself.

The response will be assessed to inform our work as regulators, and (in the case of the Bank), a central bank. We (the Bank and the FCA) may use your details to contact you to request clarification on of any aspects of your response.

Responses to this consultation will be shared with the FCA and the FSCS. They will review the responses and may also contact you to clarify aspects of your response. We will retain all responses for the period that is relevant to supporting ongoing regulatory policy developments and reviews. However, all personal data will be redacted from the responses within five years of receipt. To find out more about how we deal with your personal data, your rights, or to get in touch please visit Privacy and the Bank of England.

Information provided in response to this consultation, including personal information, may be subject to publication or disclosure to other parties in accordance with access to information regimes including under the Freedom of Information Act 2000 or data protection legislation, or as otherwise required by law or in discharge of the Bank’s and the FCA’s functions.

Please indicate if you regard all, or some of, the information you provide as confidential. If the Bank of England or the FCA receives a request for disclosure of this information, we will take your indication(s) into account, but cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system on emails will not, of itself, be regarded as binding on the Bank of England or the FCA.

Responses are requested by Monday 14 February 2022.

Please address any comments or enquiries to:

Tom Lappage
Bank of England
Threadneedle Street
London EC2R 8AH

CP1_22@bankofengland.co.uk

1: Overview

1.1: In this Consultation Paper (CP), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) set out proposals for the Management Expenses Levy Limit (MELL) for the Financial Services Compensation Scheme (FSCS) for 2022/23. This CP is supported by the FSCS’ publication of its Budget Update for 2022/23.¹

1.2: This CP is relevant to all PRA and FCA authorised firms, but contains no material of direct relevance to retail financial services consumers or consumer groups upon which they might need to act. As costs may be passed on to consumers in the form of higher prices, consumers may indirectly contribute to part of the FSCS levies. However, an efficient and adequately funded compensation scheme is beneficial to all consumers.

1.3: Separate to this consultation, the FCA published a discussion paper on Monday 6 December 2021 as part of its review of the compensation framework within which the FSCS operates.² Through its discussion paper, the FCA is interested in identifying opportunities to improve the aspects of the framework which the FCA is responsible for, to ensure the framework continues to provide an appropriate level of protection for consumers whilst ensuring the funding arrangements for compensation costs are sustainable with costs to firms fairly distributed. Responses to the FCA’s discussion paper are due by Friday 4 March 2022 and should be sent to the FCA using the online form or via email.³

Background

1.4: The FSCS has a statutory responsibility to process compensation claims resulting from the failure of financial services firms. It also carries out a number of other functions, including:

• making recoveries from failed financial institutions;
• promoting consumer awareness of FSCS protection; and
• the verification of account information provided by firms that enables faster pay-out to depositors.

1.5: Under the Financial Services and Markets Act 2000 (FSMA), the PRA and the FCA must set a limit for the total management expenses that the FSCS can levy on financial services firms.⁴ The MELL is the maximum amount that the FSCS may levy in a year for its operating costs without further consultation. It ensures that the FSCS has adequate funding to exercise certain functions conferred on it by Part XV of FSMA and by rules made by the PRA and the FCA.

Summary of proposals

1.6: The proposed MELL is £110.5 million for 2022/23, consisting of a management expenses budget of £95.5 million and an unlevied contingency reserve of £15 million. The proposed MELL would apply from Friday 1 April 2022, the start of the FSCS’s financial year, to Friday 31 March 2023.

Structure of the CP

1.7: Chapter 2 of this CP contains the proposals for the MELL for 2022/23. The key points to note in the budget are set out, alongside further detail on the proposals and an explanation of the FSCS’s contingency reserve. How the budget is allocated between PRA and FCA funding classes is also provided and explained in Appendix 4.

1.8: Chapter 3 of this CP contains an analysis of the costs and benefits of the proposed rules (including the impact on mutual societies) as required under FSMA.⁵ It also contains the PRA’s and the FCA’s assessment of the compatibility of the proposed rules with their respective statutory objectives (including the secondary competition objective) and regulatory principles.⁶ Both authorities also assess whether they have carried out their duty to have due regard to the need to eliminate discrimination and to promote equality of opportunity in carrying out their policies, services and functions.⁷

Responses and next steps

1.9: This consultation closes on Monday 14 February 2022. The PRA and the FCA invite responses on the proposed MELL set out in this consultation. Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be. Please address any comments or enquiries to CP1_22@bankofengland.co.uk. The PRA is accepting responses on behalf of both organisations, and responses will be considered by both authorities.

1.10: Following consideration of the responses, the PRA will issue a Policy Statement (PS) and the FCA will issue a Handbook Notice so that the final rules can be in place for the start of the FSCS’s financial year on Friday 1 April 2022.

2: Proposals

2.1: In this chapter, the PRA and FCA set out the FSCS’s proposals for the MELL for 2022/23. The MELL covers the costs of operating the compensation scheme and is the maximum amount that the FSCS can levy for its operating costs in order to fulfil the obligations imposed on it by FSMA, and set out in the rules made by the PRA and FCA.⁸

2.2: The MELL has two components: the management expenses budget; and a contingency reserve. It does not include claimants' compensation costs. See paragraph 2.10 for further detail.

2.3: The FSCS’s actual expenses for the year may differ from its budget according to the total number and type of claims received. At the end of the financial year, the FSCS will perform a reconciliation of the actual expenses for the year against the total amount levied and the allocation across classes.

2.4: Any difference in actual expenses against the budget will be reflected by providing rebates or using any unspent levies to reduce firms’ future levies. This may happen in 2021/22 (see paragraph 2.15). The proposed rules through which the PRA and the FCA would set the MELL are in Appendices 1 and 2 respectively.

2.5: Both the Prudential Regulation Committee and the FCA Board considered the proposals for the MELL and gave approval for the consultation.

Management expenses budget

2.6: The proposed management expenses budget for 2022/23 is £95.5 million. The management expenses budget covers the FSCS’s ongoing operating costs, and includes IT, staff, outsourcing, legal, and claims handling costs.

2.7: This is an increase of 5.5% (£5 million) over the 2021/22 management expenses budget of £90.5 million.⁹ Most of the increase can be attributed to a forecasted rise in the complexity of claims expected to be received by the FSCS, driven by an increase in the expected number of pension claims from FCA-regulated firms. The remainder of the increase is due to a £1.5 million rise in controllable costs which have been held flat in real terms after adjusting for inflation at 3%.

Contingency reserve

2.8: The contingency reserve is an important part of the FSCS’s contingency planning. It allows the FSCS to raise additional funds at short notice to meet costs that were not foreseen when the management expenses levy was set. The contingency reserve can be levied by the FSCS without further formal consultation by the PRA and the FCA.

2.9: The proposed contingency reserve for 2022/23 is £15 million, which is the same as 2021/22. Last year (2021/22) the FSCS’s unlevied reserve was increased from £5 million to £15 million, due to the challenges of accurately forecasting claims volumes amid increased uncertainty resulting from the Covid-19 pandemic. In 2021/22, the FSCS is unlikely to levy any of its contingency reserve, as claims volumes remain below its forecast.

2.10: The FSCS has indicated that it does not wish to levy more than is required initially while ensuring it can remain flexible to address the increased uncertainty brought about by the Covid-19 pandemic. The FSCS considers that a £15 million reserve continues to be necessary, given significant uncertainty is likely to remain in 2022/23. The PRA and FCA also consider heightened uncertainty is likely to continue in this time period. The FSCS considers this approach remains preferable to other options, such as levying a greater amount upfront to cater for the uncertainty around claims volumes.

Compensation costs

2.11: The FSCS’s compensation costs levy, which covers compensation paid to consumers, is determined separately by the FSCS and does not form part of this consultation. In its November 2021 Outlook publication, the FSCS gave an indicative levy forecast for 2022/23.¹⁰ The FSCS will confirm the final levies in early April 2022, and provide further information in a subsequent Outlook publication.

Management expenses budget – further detail

2.12: In this section the FSCS’s proposed management expenses budget is broken down by activity, with information on the main changes from last year’s budget.

2.13: In line with previous years, the FSCS has distinguished between volume-driven and complexity-driven costs (costs sensitive to changes in claim volumes and type), and controllable costs (costs which are not sensitive to changes in claims volumes). Splitting costs in this way helps to communicate the key drivers for the FSCS’s expenses.

2.14: The proposed budget includes a £5 million (5.5%) increase compared to 2021/22. Controllable costs have been kept flat in real terms (after adjusting for inflation at 3%), while proposed volume-driven and complexity-driven costs have increased by 10% (£3.4 million). The key driver of this increase is a greater number of expected complex claims coming to the FSCS as a result of the types of firms that are failing. As in previous years, these complex claims are largely comprised of pension claims. However, it is expected that in 2022/23, a greater number of significantly more complex types of pension claims will be received by the FSCS, mainly defined benefit pension scheme transfers (‘DB claims’), which are yet more expensive to process.

2.15: The FSCS are currently forecasting an underspend of £5.2 million compared to the 2021/22 management expenses budget of £95.5 million. If this forecast materialises these funds will be rebated to firms in the form of reduced levies for 2022/23. Consequently, as the MELL is proposed to rise by £5 million the total levy paid by firms in 2022/23 may remain almost constant at £95.3 million.

ABC Category £m	2022/23 Budget			2021/22 Budget			Variance
	Budget	Controllable Costs	Volume and complexity driven	Budget	Controllable Costs	Volume and complexity driven	Total	Total %
Claims handling infrastructure and support	74.2	37.4	36.8	69.5	36.7	32.8	4.7	7%
Outsourced claims handling	21.7		21.7	21.8		21.8	-0.1	-0.5%
Internal claims processing	18.9	6.3	12.6	15.8	5.6	10.3	3.0	19%
Core support: IT facilities, central services	33.7	31.1	2.6	31.9	31.1	0.8	1.8	5%
Funding readiness	8	8		8.2	8.2		-0.2	-2%
Protection, recoveries, investment & pension deficit	13.3	13.3	0	12.8	12.3	0.6	0.5	4%
Consumer protection	0.9	0.9	0	0.9	0.9	0.1	0.0	0%
Depositor protection	3.5	3.5	0	3.4	3.2	0.2	0.1	3%
Recoveries	3	3	0	2.6	2.3	0.3	0.4	15%
Investment / change	4	4	0	4	4	0	0.0	0%
Pension funding	1.9	1.9	0	1.9	1.9	0	0.0	0%
Total management expenses	95.5	58.7	36.8	90.5	57.2	33.4	5	5%

Key points to highlight

2.16: Claims handling infrastructure and support: This constitutes the largest part of the management expenses budget, amounting to £74.2 million; this enables the FSCS to carry out its core function of handling claims following firm failures.

• Outsourced claims handling costs amount to £21.7 million, a £0.1 million reduction compared to 2021/22.
• Internal claims processing costs have increased by £3 million to £18.9 million.
• This increase is largely due to a growing number of complex pensions claims expected in the next year, which typically require higher-skilled internal resources.
• Core support (IT, facilities and central services) costs amount to £33.7 million, an increase of £1.8 million.
• This increase is largely due to the greater internal resource that will be required to support investment in technology, data and insights and costs of upgrading the claims processing platform which is due to fall out of service.

2.17: Funding readiness: The FSCS maintains a borrowing facility, available within one business day, to fund pay-outs following significant firm failures. The cost of the facility, including bank charges and payment processing fees, is expected to be £8 million. This is a reduction of £0.2 million from 2021/22.

2.18: Depositor protection, consumer protection, investment, recoveries, and pension deficit: The FSCS proposes to spend £13.3 million in these areas:

• Spending on depositor protection will increase by £0.1 million to £3.5m, while spending on consumer protection will remain constant at £0.9 million.
• These funds will be used to develop overall consumer awareness of the FSCS and its services and to maintain preparedness to manage new failures, for example through the continued support of the FSCS’s Single Customer View (SCV) systems.
• Spending on transformation will remain flat at £4 million, as it has been since 2019/20. The focus of this spending will be on three categories.
• Customer: improving the FSCS’s claims handling capability (including efficiency of claim processing), thereby reducing handling times and improving customer experience;
• Technology: improving forecasting capabilities, and transition to cloud data storage; and
• Insight and Data: improving data capabilities and platforms to drive more effective decision making to improve outcomes for consumers, while reducing future costs.
• Pension deficit funding will remain flat at £1.9 million, a sum which has been deemed sufficient by the FSCS to meet its obligations following the results of its latest pension valuation.

Staff costs

2.19: Staff costs are included within the activity-based spending categories. The FSCS proposes a staff costs budget of £27.2 million (£3.8 million increase) to facilitate an increase in staff headcount and a 1.5% salary inflation budget, as approved by the FSCS Board.

2.20: The FSCS is planning an increase of 25 full-time equivalent (FTE).The increased headcount is predominantly to process and support the increased number of complex claims the FSCS expects to receive. Other areas with a proposed increase in FTE staff include policy, strategy, data, and technology to support the FSCS’ strategic initiatives.¹²

Budget allocation

2.21: The management expenses budget component of the MELL is made up of:

1. a base costs element, which is related to the general running costs of the FSCS and is not directly dependent on the volume or type of claims received. Base costs are split equally between the PRA and FCA regulatory fee blocks, and allocated to individual firms in proportion to their regulatory fees; and
2. a specific costs element, which includes the costs of assessing claims, achieving recoveries, and making payments. Specific costs are allocated to PRA and FCA regulatory fee blocks based on the cost and volume of claims relating to PRA and FCA funding classes.¹³

2.22: The FSCS’s proposed specific costs are £65.6 million and the proposed base costs are £29.9 million.

2.23: Appendix 4 contains a breakdown of the FSCS’s proposed budget by funding class. The FCA funding class allocation would increase by £4 million and the PRA funding class allocation would increase by £1 million.

2.24: Further information on the FSCS’s proposed management expenses budget will be included in its 2022/23 Budget Update, due to be published on Wednesday 12 January 2022 on the FSCS website.

3: Statutory obligations

3.1: Under FSMA, the PRA and the FCA are required to carry out and publish a cost benefit analysis (CBA) when proposing draft rules, as well as:¹⁴

• an explanation of the reasons for believing that making the proposed rule is compatible with the PRA’s and the FCA’s objectives;
• to consider if making the proposed rule is compatible with their duty to have regard to the regulatory principles;
• a statement as to whether the impact of the proposals upon mutuals will be significantly different than upon other persons.

3.2: The Prudential Regulation Committee (PRC) and the FCA should also have regard to aspects of the Government’s economic policy as recommended by HM Treasury.¹⁵

3.3: The PRA and the FCA are also required by the Equality Act 2010 to have due regard to the need to eliminate discrimination and to promote equality of opportunity in carrying out their policies, services and functions.¹⁶ 

Cost benefit analysis (CBA)

3.4: FSMA requires the PRA and the FCA to publish a CBA of proposed rules, defined as an analysis of the costs, together with an analysis of the benefits that will arise if the proposed rules are made.

3.5: Monetary values for the impacts are provided where it is reasonably practicable to do so. The proposals are based on carefully weighing up the costs and benefits and reaching a judgement, taking into account all foreseeable impacts.

Benefits

3.6: Setting the MELL at £110.5 million would ensure that the FSCS could continue to operate and to meet its objective of providing a compensation scheme that is efficient, fair, approachable, and responsive. The £5m increase compared to 2020/21 is due to the impact of rising prices across the economy combined with the additional cost of handling rising numbers of increasingly complex claims. This increase is necessary to ensure the FSCS can handle such claims and meet its objectives.

3.7: If a MELL was not set, the FSCS would not be able to operate and provide direct benefits to eligible claimants through the payment of compensation in the event of firm failure. While the wider benefits of the FSCS to the financial system are hard to quantify, the direct benefit to consumers from FSCS compensation is forecast to be £717 million in 2021/22.¹⁷ This reduces consumers’ financial loss and increases consumer confidence in authorised financial services firms. Timely compensation in the event of the failure of a deposit taker helps ensure consumer confidence in the financial system.

3.8: Compensation pay-outs are partially offset by the recoveries made by the FSCS from the estates of failed firms or from third parties responsible for the losses.

Costs

3.9: The one-off direct cost to firms would be equal to the budget of £95.5 million minus any underspend from 2021/22. The MELL would be split between the PRA and the FCA funding classes, and levied on all authorised firms according to the volume of regulated financial services business they conduct. Appendix 4 provides a summary of how the MELL costs are allocated between the PRA and the FCA classes.

3.10: Management expenses are charged to firms and may be passed on to consumers in the form of higher prices.

3.11: The contingency reserve of £15 million would give the FSCS some margin to meet costs that exceed its budgeted expenses and that need to be funded at short notice. The PRA and the FCA recognise that the FSCS needs to be able to respond quickly and efficiently to firm failures. Should the FSCS require funding beyond the limit imposed by the MELL due to exceptional circumstances, the PRA and the FCA would urgently consider the request.

Summary

3.12: The PRA and the FCA consider that the benefits of raising the MELL outweigh the costs placed on industry, primarily because the provision of compensation in the event of the failure of a financial services firm protects consumers, helping to ensure consumer confidence in the financial system.

Compatibility with the PRA’s objectives

3.13: The PRA must, when discharging its general functions, so far as is reasonably possible, act in a way that advances its general objective – i.e. promoting the safety and soundness of PRA-authorised firms.¹⁸

3.14: The PRA must carry out that objective primarily by:

• seeking to ensure that the business of PRA-authorised persons is carried out in a way which avoids any adverse effect on the stability of the UK financial system; and
• seeking to minimise the adverse effect that the failure of a PRA-authorised person could be expected to have on the stability of the UK financial system.

3.15: The PRA considers that the proposed rule on setting the MELL is compatible with these statutory obligations. The continued operation of the FSCS with a MELL set at an appropriate level assists in minimising the adverse effect of the failure of a PRA-authorised firm on consumers, and so helps promote the stability of the UK financial system as well as confidence in the UK financial system.

3.16: The PRA has an additional primary objective for insurance. In addition to promoting insurers’ safety and soundness, thereby supporting the stability of the UK financial system, it has an insurance objective to contribute to securing an appropriate degree of protection for those who are or may become policyholders.¹⁹ The PRA considers that the proposed rule to set the MELL is compatible with this duty because the continued operation of the FSCS with a MELL set at an appropriate rate assists in securing an appropriate degree of protection for policyholders of a PRA-authorised firm that has failed.

3.17: When discharging its general functions in a way that advances its objectives the PRA must, so far as is reasonably possible, act in a way which, as a secondary objective, facilitates effective competition in the markets for services provided by PRA-authorised firms in carrying on regulated activities.²⁰

3.18: The MELL is not expected to have any adverse effect on competition as it applies to firms in proportion to their share of FSCS protected business within their funding class. Any levy on a firm as a result of this proposal will take into account the business volume of the firm levied, as well as the claims received in the relevant classes; as such the MELL is not likely to disadvantage specific groups of firms (in particular smaller firms). The PRA considers the MELL is beneficial for competition, as the continued functioning of the FSCS helps to facilitate the orderly exit of firms from the market.

Compatibility with the FCA’s objectives

3.19: When consulting on new rules, the FCA is required by s. 138(2)(d) FSMA to include an explanation of why it believes making the proposed rules is:

1. compatible with its general duty under s.1B(1)FSMA, so far as reasonably possible, to act in a way which is compatible with its strategic objective and advances one or more of its operational objectives; and
2. compatible with its general duty under s.1B(5)(a)FSMA to have regard to the regulatory principles set out in s.3B of FSMA.

3.20: The FCA considers that the proposals set out in this consultation are compatible with the statutory objectives. They are primarily intended to advance the FCA’s operational objective of consumer protection.

3.21: The role of the FSCS is in general to provide compensation to consumers of financial products when authorised firms are unable, or likely to be unable, to meet their obligations. A compensation scheme provides a safety net, offering protection to consumers, which in turn leads to greater confidence in their dealings with financial services firms, benefiting all firms and leading to a stronger financial system. If the FSCS was unable to process claims because of financial constraints due to an insufficient MELL this would undermine the protection offered to consumers.

3.22: The FCA considers that the proposed FSCS MELL is appropriate. The limit proposed ensures the FSCS has adequate resources to perform its functions for the coming year. In addition, in setting the MELL for 2022/23, the FCA and the PRA have allowed for sufficient unlevied reserve to prevent disruption to the FSCS’s work if it needs to exceed its operating budget for unexpected reasons.

3.23: When consulting on new rules, the FCA is also under a duty to discharge its general functions in a way which promotes effective competition in the interests of consumers (s. 1B(4) FSMA). This duty applies in so far as promoting competition is compatible with advancing the FCA’s consumer protection and/or integrity objectives. The proposals are also compatible with the FCA’s competition duty to promote effective competition in the interests of consumers. Any levy placed on a firm because of this proposal will take into account the firm’s size, and as such is not likely to disadvantage specific groups of firms, in particular small firms.

3.24: Setting an FSCS MELL has no material significance for the reduction of financial crime objectives.

Compatibility with the regulatory principles – PRA and FCA

3.25: This section comments on how this proposal to set the MELL meets the requirement that the PRA and the FCA must have regard to the regulatory principles outlined in section 3B of FSMA in discharging their respective general functions.

3.26: The regulatory principles most relevant to this proposal are:

(a) The need to use the resources of each regulator in the most efficient and economical way.

3.27: The FSCS is operationally independent of, but accountable to, the PRA and the FCA. This means that the PRA’s and the FCA’s resources are not directly involved in carrying out the proposed activities.

3.28: The PRA and the FCA rules require the FSCS to use its resources in the most efficient and economical way when carrying out its functions. Setting the MELL, after public consultation, encourages good internal management and effective operating procedures.

(b) The principle that a burden or restriction should be proportionate to the benefits.

3.29: The PRA’s and the FCA’s assessment of the fairness and proportionality of the burden and benefits relating to this proposal can be found in the cost benefit analysis section of this CP (paragraphs 3.4 to 3.12).

Impact on mutuals

3.30: Management expenses are levied on all authorised firms, including mutual societies, according to the volume of regulated financial services business they conduct. The impact on mutual societies is therefore not considered significantly different to that on other types of firms.

HM Treasury recommendation letter

3.31: HM Treasury has made recommendations to the PRC and the FCA about aspects of the Government’s economic policy to which the PRC and the FCA should have regard when considering how to advance their objectives and apply the regulatory principles set out in FSMA.²¹ The PRA and the FCA consider that the recommendations most relevant to the proposals in this CP are:

1. competition;
2. a better outcome for consumers; and
3. competitiveness.

3.32: Recommendation (i) has been considered in paragraphs 3.17, 3.18, 3.20, and 3.21, and recommendation (ii) in paragraph 3.7. With regard to recommendation (iii), the PRA and the FCA consider that an appropriately funded compensation scheme will enhance consumers’ trust in UK regulated firms. This will help to ensure that the UK remains an attractive domicile for internationally active financial institutions, and that London retains its position as a leading financial centre.

Equality and diversity

3.33: In making their respective rules and establishing their practices and procedures, the PRA and the FCA may not act in an unlawfully discriminatory manner. The PRA and FCA are required, under the Equality Act 2010, to ‘have due regard’ to the need to eliminate discrimination, harassment, victimisation, and any other conduct prohibited by or under the Act, advance equality of opportunity between persons who share a protected characteristic and those who do not, and to foster good relations between people who share a protected characteristic and those who do not.²²

3.34: To meet this requirement, the PRA and the FCA have performed an assessment of the policy proposals, and consider that they do not give rise to equality and diversity implications under the Equality Act 2010. However, the PRA and FCA would welcome any comments respondents may have on any equality issues they believe arise as a result of these proposals.

Responses are requested by Monday 14 February 2022.

Appendices

Appendix 1: Prudential Regulation Authority Rulebook: Management Expenses Levy Limit and Base Costs proposed rule instrument
Appendix 2: Financial Conduct Authority Handbook: FEES manual
Appendix 3: FSCS management expenses by line item
Appendix 4: FSCS management expenses by funding class