The Financial Services Compensation Scheme (FSCS) has blamed potential claims from the London Capital & Finance (LCF) mini-bond scandal for an additional £44m cost in its £649m 2020/21 budget.

While many LCF investors’ claims are likely to be rejected as outside the FSCS remit the body says it has had to set aside £44m to deal with potential claims.

A number of cases are set for judicial review and the FSCS says it needs to make provision if it loses the court cases.

The FSCS said of LCF: “This has been one of the most significant cases for FSCS not only in terms of the number of those affected but also in its complexity.”

FSCS has so far paid £3.3m to 169 LCF customers who invested in mini-bonds from LCF following transfers out of stocks and shares ISAs. As this was a regulated activity the FSCS paid these claims immediately. However this is a small proportion of the 11,600 LCF customers, “mainly of retirement age”, who invested £237m with LCF. These claims are still being considered.

The additional LCF costs will fall mainly on the Life Distribution and Investment Intermediation class which includes financial advisers.

The levy on this class brought in £189m in 2019/20. The indicative levy for this class for 2020/21 was £213m but this has now been increased to a final levy for 2020/21 of £229m - a £40m or 21% increase on 2019/20.

The FSCS says the main driver of the increase is the inclusion of £44m to cover estimated compensation costs for (LCF) however the Life Distribution and Investment Intermediation class will benefit from a provider contribution of £51m due to savings and lower claims in other classes.

The FSCS total levy on the industry for 2020/21 will be £649m this year, £14m more than forecast in its Plan and Budget 2020/21 published in mid-January. This includes £74.7m for management expenses, broadly similar to the previous year.

The FSCS also warned today that it is continuing to see an increase in pension mis-selling claims but has cut its forecast made in the January Plan and Budget for SIPP operator claims by £7m due to a revision in the “anticipated timing and cost of some recent and expected future SIPP operator failures.” 

The FSCS added that in 2019/20 it received 4,100 more claims than budgeted for on SIPPs and pensions resulting in increased expenses of £3.9m.

The 2020/21 budget does not include the potential impact of Covid-19 claims if they arise as the figures were put together before the outbreak.

Caroline Rainbird, FSCS chief executive, said: “The overall increase in the FSCS levy since the January forecast partly reflects the ongoing progress we are making in relation to the LCF failure.

“As we announced earlier this month, we have now started the process of reviewing individual LCF claims relating to misleading advice. Whilst it is too early to say how many LCF customers will be eligible for compensation, for the purpose of the levy we have estimated an amount of £44m. “We know that the industry has expressed concerns about the rising trends in compensation costs and increased levy amounts. I would like to reassure our levy payers that we are working with the industry and regulators to do as much as we can to address these concerns and will keep our levy payers updated on our progress.”

Details of the annual levy are in the the latest FSCS Outlook newsletter: latest edition of Outlook.