The Financial Services Compensation Scheme has increased its running costs budget forecast for 2022/23 to £95.5m.

This is a 5% increase against its budget announced this time last year.

The compensation body said that one of the key drivers behind the increase was increasingly complex claims with higher processing costs.

It said that for 2022/23 it expects complex claims to account for approximately 43% of claims decisions, an increase of 26% from 2021/22.

In its budget update, released this morning, the FSCS said it was seeing a rising number of claims coming from customers who were given advice to move their pensions into unsuitable investments.

It said these claims cost it more to process as they have longer handling times and require specialist staff to assess them and calculate any necessary compensation.

In 2021/22 so far, the FSCS has made over 9,000 requests to firms as part of gathering the supporting evidence needed for these complex claims. This is an 80% increase on the same time last year and a four-fold increase on 2018/19.  

In its budget update, the FSCS said it has reduced its forecasted running costs for 2021/22 by £5.2m to £85.3m. The expected surplus will be used to reduce the 2022/23 levy.

The compensation body said the reduction was mainly due to fewer firms failing and, therefore, not as many claims coming through as anticipated. However, the FSCS said it expects that many of these firm failures may occur in 2022/23 instead.

The FSCS said it has been concentrating on its recoveries work to reduce the burden on levy payers.

In the first eight months of 2021/22, the FSCS recovered close to £10m. Of this, £900,000 was paid to customers who had losses in excess of FSCS limits and the balance was used to offset levies in the relevant funding classes.

Caroline Rainbird, chief executive of the FSCS, said the compensation body was investing in technology in order to reduce costs and the burden on levy payers.

She said: “As well as making strategic decisions to reduce spend across the business and keeping our controllable spend increase to no more than 3% this year, we are always looking for new opportunities to use technology to save time and money while delivering the right level of quality.

“As part of embracing Artificial Intelligence (AI), we have introduced a new data lake and search tool to find specific information in large data pools more quickly. During 2021, AI, although not used to determine whether claims are valid or not, enabled us to handle more than two years’ worth of claims in six months, as well as avoid additional claims handling costs of around £9m.

“AI is an essential part of our commitment to reducing our costs and our ambition is to transform into a data-driven organisation that is continually investing in its technology and people to manage our controllable spend.”

Ms Rainbird added that a significant proportion of compensation is paid out in relation to poor advice and around 70% relates to advice which occurred five years or more before a customer makes their claim.

She said the FSCS is likely to continue seeing increases in claims processing costs over the coming years, as well as potential increases in the amount of compensation needed. This means that the levy is also likely to rise as management expenses are, “inextricably linked to the annual FSCS levy”.

In December the FSCS blamed poor financial advice for driving up its soaring annual levy. https://www.financialplanningtoday.co.uk/news/item/13922-fscs-blames-poor-financial-advice-for-soaring-levy

With the cost of the levy heading towards £1bn a year, the FSCS said bad advice, often given several years ago, was responsible for a large part of the growing compensation bill.

The body has also said that it accepts the cost of the compensation levy is too high and needs change. But it also warned that the long timescale in resolving bad advice claims meant the FCA may struggle to reduce the compensation bill by 2025 as it hopes.