CP1/24 – Financial Services Compensation Scheme – Management Expenses Levy Limit (MELL) 2024/25

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Responses are requested by Monday 12 February 2024.

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Responses can be sent by email to: CP1_24@bankofengland.co.uk

Alternatively, please address any comments or enquiries to:
Ben Mirchandani
Bank of England
Threadneedle Street
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EC2R 8AH

1: Overview

1.1 In this consultation paper (CP), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) set out the proposals for the Management Expenses Levy Limit (MELL) for the Financial Services Compensation Scheme (FSCS) for 2024/25. The MELL covers the FSCS’s costs of operating the UK’s statutory compensation scheme. This CP is supported by the FSCS’s publication of its Budget Update for 2024/25.^{footnote [2]}

1.2 This CP is relevant to all PRA and FCA authorised firms, who fund the FSCS through levies, but contains no material of direct relevance to retail financial services consumers or consumer groups upon which they might need to act. As costs to authorised firms 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 as it helps secure an appropriate degree of protection for consumers of financial services firms and promotes the stability of, and confidence in, the UK financial system.

1.3 The proposed MELL is £108.1 million for 2024/25, consisting of a management expenses budget of £103.1 million and an unlevied reserve of £5 million. The proposed MELL would apply from Monday 1 April 2024, the start of the FSCS’s financial year, to Monday 31 March 2025. This is a reduction of £1.7 million from the 2023/24 MELL of £109.8 million.

1.4 The PRA has a statutory duty to consult when changing rules (FSMA s138J). The FCA has a requirement to consult under FSMA s138I.

1.5 None of the statutory panels were consulted about the proposals in this CP as this is a matter for the PRA and the FCA’s statutory oversight of the FSCS as explained in paragraph 1.8.

1.6 In carrying out their policy making functions, both the PRA and FCA are required to comply with several legal obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Background

1.7 The FSCS is a fund of last resort which provides compensation to consumers when financial services firms fail. It also carries out a number of other functions, including:

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

1.8 Under the Financial Services and Markets Act 2000 (FSMA), the PRA and FCA must set a limit for the total management expenses that the FSCS can levy on financial services firms.^{footnote [3]} 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.

Structure of this CP

1.9 Chapter 2 of this CP contains the proposals for the FSCS’s MELL in 2024/25. The key points to note in the budget are set out, alongside further detail on the proposals, and an explanation of the FSCS’s unlevied reserve. Detail on how the budget is allocated between the PRA and FCA funding classes is also provided and explained in Appendix 4.

1.10 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.^{footnote [4]} It also contains the PRA’s and FCA’s assessment of the compatibility of the proposed rules with their respective statutory objectives (including the PRA’s secondary objectives) and regulatory principles.^{footnote [5]} 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.^{footnote [6]}

Responses and next steps

1.11 This consultation closes on Monday 12 February 2024. The PRA and FCA invite responses on the proposals set out in this consultation. Please address any comments or enquiries to CP1_24@bankofengland.co.uk. The PRA is accepting responses on behalf of both authorities. Any responses will be considered by both authorities and shared anonymously with the FSCS.

1.12 When providing your response, please tell us whether or not you consent to the PRA or the FCA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.13 Please also 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.

1.14 Following consideration of the responses, the PRA proposes to issue a policy statement (PS) and the FCA proposes to issue a Handbook Notice so that the final rules can be in place for the start of the FSCS’s financial year on Monday 1 April 2024.

2: Proposals for the MELL 2024/25

2.1 In this chapter, the PRA and FCA set out the FSCS’s proposals for its MELL 2024/25. 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.^{footnote [7]}

2.2 The MELL has two components: the management expenses budget, which is the forecast cost of running the compensation scheme over the year; and an unlevied reserve, which allows the FSCS to raise additional funds at short notice to meet costs that were not foreseen. It does not include claimants’ compensation costs as these depend on the number of claims received and are determined separately by the FSCS. Further information about compensation costs can be found on the FSCS’s website.

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. The FSCS is currently forecasting that the management expenses for the current year, 2023/24, will be £99.7 million which is a slight underspend relative to their budget of £99.8 million. Any difference in actual expenses from the budget will be returned to firms by providing rebates or will be used to reduce firms’ future levies.

2.4 Both the Prudential Regulation Committee (PRC) and the FCA Board considered the proposals for the MELL and gave approval for the consultation in December 2023. The proposed rules through which the PRA and FCA set the MELL are in Appendices 1 and 2 respectively.

Management expenses budget

2.5 The proposed management expenses budget for 2024/25 is £103.1 million. The management expenses budget covers the FSCS’s ongoing operating costs and consists of controllable costs (costs which are not sensitive to changes in volume), volume and complexity driven costs (costs sensitive to changes in claim volume and type), and an investment budget, which the FSCS defines as costs required to deliver on its statutory objectives, priorities, and strategic ambition.

2.6 The proposed management expenses budget is 3.3% (£3.3 million) higher than the 2023/24 management expenses budget of £99.8 million.^{footnote [8]} This increase can be attributed to the investment required to implement a strategic decision by the FSCS to transition to a new operating model, in order to tackle the continuing trend of increased complexity of claims being received by the FSCS over recent years. Under the new model, the FSCS will handle more claims internally, with some claims continuing to be outsourced in future. It is likely that a fewer number of claims will be outsourced, and these will be claims that tend to be less complex. The aims of this change are to reduce risk and deliver efficiencies over the longer term. The new model has led to an increased budget in the near term as there are costs related to the transition. To partially offset the rise in the budget related to this change, the FSCS has cut discretionary spend and has undertaken various cost-saving initiatives, including a £2.5 million fall in controllable costs.

Unlevied reserve

2.7 The unlevied reserve is an important part of the FSCS’s contingency planning. It allows the FSCS to raise additional funds at short notice, without further consultation, to meet costs that were not foreseen when the management expenses levy was set.^{footnote [9]}

2.8 The proposed unlevied reserve for 2024/25 is £5 million, which is £5 million less than the 2023/24 reserve of £10 million. In 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 during the Covid-19 pandemic. The reserve was then lowered to £10 million in 2023/24 as a result of failures anticipated during the pandemic not materialising as expected. Throughout this period, the reserve remains unused so far. For the 2024/25 MELL, it is proposed that the unlevied reserve returns to its pre-pandemic level.

Management expenses budget- further detail

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

2.10 In line with previous years, the FSCS has distinguished between controllable costs, volume and complexity driven costs and investment costs. Splitting costs in this way helps to identify and communicate the key drivers for the FSCS’s expenses.

2.11 Within the proposed management expenses budget increase of £3.3 million (3.3%) compared to the 2023/24 budget, controllable costs are forecast to fall by £2.5 million (-4%), and investment spending by £2.9 million (-37%). However, proposed volume and complexity driven costs have increased by £8.7 million (26%). This increase is a direct result of the higher staff and contractor costs required to support the transition to the FSCS’s new operating model.

2.12 The FSCS’s strategic decision to change its operating model to increase its in-house claims processing capability coincides with its current outsourcer contracts coming to an end. Moving to the new operating model (which the FSCS describes as ‘hybrid by design’) will, in the future, allow the FSCS to increase its control over the claims handling process and improve the quality of the claims it processes. This will better position the FSCS to effectively deal with the current and expected future claims mix, which is continuing to shift from simpler claims to more complex claims, such as those related to pension advice which are more effort intensive and harder to outsource efficiently.

2.13 The 2024/25 financial year will be a transitional year, and as mentioned in paragraph 2.12, there will be related higher costs, including for additional headcount and the recruitment costs associated with those. In addition, current outsourcing partners will be paid for some services during the same period while the new partner and internal claims handlers are also being trained. The FSCS expects these costs to reduce over time as outsourcing of claims handling reduces. The FSCS also expects the changes to its operating model to deliver greater efficiencies, which, if realised, should help ensure that its future operating costs are lower than they otherwise would have been. The FSCS has looked to fund these increases as much as possible by achieving savings in other areas of the budget.

Table 1: Management expenses, activity-based costing (£ million)^{footnote [10]}

Key points to highlight^{footnote [11]}

2.14 Claims handling infrastructure and support: this enables the FSCS to carry out its core function of handling claims following firm failures. It constitutes the largest part of the management expenses budget, amounting to £85.4 million in the 2024/25 budget, higher than £75.9 million in the 2023/24 budget.

• Internal claims processing costs are estimated to increase by £9.9 million, to £32.8 million.
  • This increase is due to the transition to the new operating model with increased in-house capabilities for claims handling.
• In the transition year, outsourced claims handling costs are broadly flat relative to the 2023/24 budget, at £13.5 million, a £0.2 million reduction compared to the 2023/24 budget.
• Core support (IT, facilities, and central services) costs amount to £39.2 million, a reduction of £0.1 million relative to the 2023/24 budget.
  • There is forecast to be an increase in IT and central services costs due to the increased number of users and equipment required to support the new operating model, as well as an increase in investment in the FSCS’s security services and support required as a result of the growth planned throughout the transition.
  • Overall, however, core support costs have remained fairly constant with savings identified to reduce other costs, as FSCS aims to fund as much of the implementation of the new operating model cost as possible through cost savings elsewhere.

2.15 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 £7 million. This is a reduction of £1 million from the 2023/24 budget.

2.16 Depositor protection, consumer protection, investment, recoveries, and pension deficit: The FSCS proposes to spend £10.7 million in these areas:

• Spending on depositor protection is forecast to fall by £0.9 million to £2.9 million, as FSCS focuses its budget on the highest priority areas. The identified priorities in this area include allocating funds to further develop the deposits ‘protected’ badge; this is important in the context of the upcoming review to the FSCS deposit protection limit which has to be completed by January 2025. In other areas, cost savings have been identified. Spending on consumer protection is forecast to fall from £0.8 million to £0.4 million, also reflecting the impact of identifying cost savings. £2.4 million has also been budgeted for recoveries and will include a focus on cases relating to illiquid funds, Professional Indemnity Insurance and general insurance providers.
• Investment spending is projected to fall by £2.9 million relative to the 2023/24 budget, to £5 million. It will be focused on three initiatives:
  • Service operating environment (£2.7 million): This is an expected one-off cost of overseeing the transition to the new operating model and includes costs associated with project management, legal costs for the procurement, and costs related to the recruitment and training of internal resources and new partners.
  • Depositor protection and resolution strategy (£0.95 million): This investment is focused on the FSCS’s core statutory functions in relation to depositor protection. It includes long-term strategic solutions regarding faster pay-out, solutions to better deal with failures of credit institutions with safeguarded funds and depositor aggregator accounts and supports both electronic payments in the event of insolvency and the government’s proposed enhancements to the special resolution regime.^{footnote [12]}
  • Insurance platform (£1.35 million): This investment is to replace the legacy system used to process all insurance compensation payments to streamline the process and result in a more efficient handling of insurance claims. This investment will ensure the right system is procured, tested, and migrated, mitigating any risks regarding data loss or integrity.
• There will be no pension deficit funding due to recent market movements, which have resulted in the FSCS’s defined benefit scheme being fully funded.

Staff costs

2.17 Staff costs are included within each of the relevant activity-based spending categories set out in the previous section. Aggregating across all of those, the FSCS’s proposed staff costs budget is £38.9 million, a £6.7 million increase from the 2023/24 budget. The increased budget reflects an increase in staff headcount – almost entirely related to the new operating model – and a 5% salary inflation provision for existing staff.

2.18 The FSCS is planning to increase its headcount by 67 overall. Of the increased headcount, 65 are related to the new operating model. As the FSCS moves to outsourcing fewer complex claims, the new operating model is intended to transfer the headcount from outsourced to insourced resulting in the observed increase.

2.19 Of the 5% salary inflation proposed, 4% will be allocated for general salary inflation to attract and retain talent and 1% will be utilised for areas of greater retention risk and the lower paid. This pay inflation of 5% has been self-funded by the FSCS through identifying cost efficiencies across its operations.

Budget allocation

2.20 The management expenses budget component of the MELL is allocated across PRA and FCA firms to broadly reflect how the operating costs of the FSCS are spent. This determines the levy each firm pays in relation to the MELL. The split between PRA and FCA regulatory fee blocks is made up of:

(i) 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 50/50 between the PRA and FCA regulatory fee blocks as set out in the PRA and FCA rules, and allocated to individual firms in proportion to their regulatory fees; and

(ii) a specific costs element, which includes the costs of assessing claims, achieving recoveries, and making payments. Specific costs are allocated to the PRA and FCA regulatory fee blocks based on the cost and volume of claims relating to the PRA and FCA funding classes.^{footnote [13]}

2.21 The FSCS’s proposed base costs are £37.1 million and the proposed specific costs are £66.1 million. Appendix 4 contains a breakdown of the FSCS’s proposed budget by funding class. The FCA funding class allocation is forecast to increase by £3.5 million in the 2024/25 budget to £62.5 million, and the PRA funding class allocation is forecast to fall by £0.2 million to £40.6 million.

2.22 Further information on the FSCS’s proposed management expenses budget will be included in its 2024/25 Budget Update, due to be published on Thursday 11 January 2024 on the FSCS website.^{footnote [14]}

3: Statutory obligations

3.1 Under FSMA, the PRA and FCA are required to carry out and publish a cost benefit analysis (CBA) when proposing draft rules, as well as:^{footnote [15]}

• 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 authorised persons.

3.2 The PRC and the FCA should also have regard to aspects of the Government’s economic policy as recommended by HM Treasury.^{footnote [16]}

3.3 The PRA and 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.^{footnote [17]}

PRA objectives analysis

3.4 The PRA must, when discharging its general functions, so far as is reasonably possible, act in a way that advances its general objective – ie, promoting the safety and soundness of PRA-authorised firms.^{footnote [18]}

3.5 The PRA must carry out that objective 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.

3.6 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 allows the FSCS to provide its core functions without imposing too much of a burden on firms. This helps promote the stability of the UK financial system, as well as confidence in the UK financial system.

3.7 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 objective to contribute to securing an appropriate degree of protection for those who are, or may become, policyholders.^{footnote [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.

3.8 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, competitiveness and growth in the markets for services provided by PRA-authorised firms in carrying on regulated activities.^{footnote [20]}

3.9 The MELL is not expected to have any adverse effect on competition, competitiveness, and growth, 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).

3.10 The PRA considers the MELL is beneficial for competition as the good functioning of the FSCS helps to facilitate orderly failure and because the FSCS imposes burdens on firms in a proportionate manner. Further, the MELL enables the FSCS to operate efficiently and effectively, meaning it can fulfil its role of providing increased confidence in the financial system. This makes the UK more attractive to business and investment, supporting its international competitiveness and growth.

3.11 Subject to this consultation, the PRA considers that the proposed FSCS MELL is appropriate. The limit proposed ensures the FSCS has adequate resources to perform its statutory functions for the coming year. In addition, in setting the MELL for 2024/25, the PRA and FCA 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. The PRA believes that an appropriate balance has been struck between the need to ensure their regulatory objectives are fulfilled and the need to keep regulatory burdens proportionate.

PRA’s ‘Have regards’ analysis

3.12 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. The PRA believe that the proposed MELL is compatible with these regulatory principles. The following factors, to which both authorities are required to have regard, were significant in their analysis of the proposal:

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

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

• The PRA’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 consultation paper (paragraphs 3.25 to 3.33).
• The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA consider that ‘have regard’ to not be a significant factor for this proposal.

FCA objectives analysis

3.13 When consulting on new rules, the FCA is required by section 138I(2)(d) FSMA to include an explanation of why it believes making the proposed rules is compatible with (a) its general duty, under section 1B(1) FSMA, to, so far as is reasonably possible, act in a way which is compatible with its strategic objective and which advances one or more of its operational objectives; (b) the requirement under section 1B(4A) FSMA to, so far as is reasonably possible, act in a way which, as a secondary objective, advances the competitiveness and growth objective; and (c) its general duty under section 1B(5)(a) FSMA to have regard to the regulatory principles in section 3B FSMA.

3.14 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 (section 1C FSMA). The proposal is also considered to be compatible with the FCA’s competition objective to promote effective competition in the interests of consumers (section 1E FSMA). 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, in particular smaller firms.

3.15 The FCA considers that the MELL is compatible with the secondary competitiveness and growth objective. Setting the MELL will assist the FSCS in the timely payment of compensation in the event of firm failures and meeting its objective of providing a compensation scheme that is efficient, fair, approachable and responsive. This is likely to help increase consumer confidence in authorised financial services where the FSCS applies, supporting international competitiveness and growth.

3.16 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, benefitting all firms and leading to a stronger financial system. If the FSCS was unable to process claims because of financial constraints due to an inappropriate MELL, this would undermine the protection offered to consumers.

3.17 Subject to this consultation, 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 2024/25, the PRA and FCA 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.

3.18 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 (section 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.

3.19 Setting a FSCS MELL has no material significance in relation to minimising the extent to which it is possible for a business carried on by an authorised person or a recognised investment exchange, or in contravention of the general prohibition, to be used for a purpose connected with financial crime.

FCA’s ‘Have regards’ analysis

3.20 As part of this consultation process, the FCA also has to have regard to the regulatory principles set out in section 3B FSMA. The FCA believes that the proposed MELL is compatible with these regulatory principles. The regulatory principles most relevant to this proposal are:

• the need to use the resources of each regulator in the most efficient and economic way; and
• the principle that a burden or restriction should be proportionate to the benefits.

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

3.22 The FCA rules require the FSCS to have regard to the need to use its resources in the most efficient and economic way when carrying out its functions. Setting the MELL, after public consultation, encourages good internal management and effective operating procedures.

3.23 The FCA believes that an appropriate balance has been struck between the need to ensure their regulatory objectives are fulfilled and the need to keep regulatory burdens proportionate.

3.24 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 below.

Cost benefit analysis (CBA)

3.25 FSMA requires the PRA and 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.

3.26 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

3.27 Setting the MELL at £108.1 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. 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. The direct benefit to consumers from the FSCS compensation is forecast to be £457 million in 2024/25.^{footnote [21]} 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. These wider benefits of the FSCS to the financial system are hard to quantify but are judged likely to be material.

3.28 The proposed management expenses budget of £103.1 million is £3.3 million higher compared to the 2023/24 budget but will have the benefit of increasing the FSCS’s control over the claims handling process. This will better position the FSCS to effectively deal with the current and expected future claims mix, which is continuing to shift from simpler claims to more complex claims, such as pension advice claims which are more effort intensive and inefficient to outsource. The model will ensure the FSCS can handle such claims more efficiently and to a high standard, therefore allowing the FSCS to deliver its statutory functions. Further, the new model will bring an improved customer experience as the FSCS is better equipped to handle complex claims. The costs associated with this new model have been kept down by finding other savings throughout the organisation.

3.29 The FSCS has explained that the internalising of claims handling will also lead to future increases in productivity and efficiency, providing opportunities for cost-saving in future budgets. The FSCS forecasts operational costs could fall by at least £5 million in 2025/26 as there will be no fixed costs payable to the new outsource partner. Further, in future years the £2.7 million investment spend associated with the transition to the new model in 2024/25 will not be incurred.

Costs

3.30 The one-off immediate direct cost to firms would be equal to the budget of £103.1 million minus any underspend from 2023/24. The MELL would be split between the PRA and 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 FCA classes.

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

3.32 The unlevied reserve of £5 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 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 FCA would urgently consider the request.

Summary

3.33 The PRA and FCA consider that the benefits of raising the management expenses budget 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, and the higher proposed budget should help support this aim for this and future years.

Impact on mutuals

3.34 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

3.35 HM Treasury has made recommendations to the PRC and FCA about aspects of the Government’s economic policy to which the PRC and FCA should have regard when considering how to advance their objectives and apply the regulatory principles set out in FSMA.^{footnote [22]} The PRA and FCA consider that the recommendations most relevant to the proposals in this CP are:

(i) competition;

(ii) a better outcome for consumers; and

(iii) competitiveness.

3.36 Recommendation (i) has been considered in paragraphs 3.8, 3.9, and 3.10, and recommendation (ii) in paragraph 3.27. With regard to recommendation (iii), the PRA and 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. This is seen in paragraphs 3.9 and 3.10.

Equality and diversity

3.37 In making their respective rules and establishing their practices and procedures, the PRA and 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.^{footnote [23]}

3.38 In developing its proposals, the PRA and the FCA have had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposals 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.