PS6/24 – Financial Services Compensation Scheme – Management Expenses Levy Limit (MELL) 2024/25

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to consultation paper (CP)1/24 – Financial Services Compensation Scheme – Management Expenses Levy Limit 2024/25. It also contains the PRA’s final PRA rules for the Financial Services Compensation Scheme (FSCS) Management Expenses Levy Limit (MELL) for 2024/25 (Appendix 2).

1.2 This PS is relevant to all FSCS levy-paying Financial Conduct Authority (FCA) and PRA-authorised firms. It 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 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 CP1/24 the PRA and FCA consulted on the FSCS’ proposed MELL of £108.1 million for 2024/25. This included:

• the FSCS management expenses budget of £103.1 million to cover ongoing operating costs, including staff, facilities, claims handling, legal and other professional services, and provision for FSCS to transition to a new claims handling model; and
• an unlevied reserve of £5 million which allows the FSCS to raise additional funds at short notice to meet costs that were not foreseen, without the need for further consultation and rulemaking by the PRA and FCA.

1.5 When CP1/24 was published, the FSCS forecasted an underspend of £0.2 million compared to the 2023/24 management expenses budget of £99.8 million. Since publication of CP1/24, the FSCS has confirmed that the forecasted underspend is now £0.7 million. If this forecast materialises, then these funds will be used to offset the levy for the relevant classes in 2024/25.

1.6 In determining its policy, the PRA considers representations received in response to the consultation, publishing an account of them and the PRA’s response (‘feedback’). Details of any significant changes are also published. In this PS, the ‘Summary of responses’ section contains a general account of the representations made in response to the CP and the ‘Feedback to responses’ chapter contains the PRA’s feedback.

1.7 In carrying out its policy making functions, the PRA is required to have regard to various matters. In CP1/24 the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy. The ‘Changes to draft policy’ section of this chapter refers to that explanation, taking into account consultation responses where relevant.

Summary of responses

1.8 The PRA received one response from the Building Societies Association (BSA) which provided broad support for the proposals in the CP. The PRA’s feedback to this response is set out in Chapter 2.

1.9 Given the response, the PRA does not consider that there are reasons to change the proposal as consulted.

Changes to draft policy

1.10 This PS takes account of how the policy advances the PRA’s objectives and of significant matters that the decision maker had regard to. These are as set out in CP1/24 and there are no changes to the draft policy.

Implementation

1.11 The MELL will apply from Monday 1 April 2024, the start of the FSCS’s financial year, to Monday 31 March 2025.

1.12 The FCA Board has also made its respective rule for the 2024/25 MELL.

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 feedback to them.^{footnote [1]}

2.2 The PRA has considered the response received to the CP. This chapter sets out the PRA’s feedback to that response, and its final decisions.

Management Expenses Levy Limit

2.3 The respondent understood the need for an increase in the budget and welcomed action by the FSCS to cut controllable costs where possible.

Unlevied Reserve

2.4 The respondent welcomed the move for the unlevied reserve to be halved from £10 million to £5 million. This brings the unlevied reserve back to its 2020/21 level after the reserve was initially increased to £15 million in 2021/22 amid increased uncertainty during the Covid-19 pandemic.

Other

2.5 The respondent provided other comments which were not relevant to this consultation. The PRA will discuss these separately with the respondent.