the levy delivering our strategy in 2014/15...we think we do what we do well. we now regularly...

Plan and Budget: 2014/15 Financial Services Compensation Scheme

Chairman’s foreword >

Chief Executive’s overview >

The levy

>Delivering our strategy in 2014/15 >

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Contents

Chairman’s foreword 4

Chief Executive’s overview 6

The levy 8

Delivering our strategy in 2014/15 22

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Chairman’s foreword

Lawrence Churchill

Chairman

This year, alongside the launch of our Plan and Budget: 2014/15, FSCS is publishing its Five Year Vision. This Vision for a Confident Future marks a first for the Scheme and demonstrates our commitment to continuous improvement and to accountability.

Our mission is to provide a responsive, well-understood and efficient compensation service for customers of financial services, which raises public confidence in the industry. This mission is central to our Five Year Vision.

People must be confident the money they commit to financial products or services is protected. And we know that confidence underpins financial stability.

FSCS plays an integral role in this. Our Five Year Vision describes both our progress so far in carrying out that role and our long-term strategy. And importantly, each year FSCS’s Plan and Budget will allow our stakeholders to keep a check on how we’re doing.

Our Vision sets out seven imperatives for the next five years if FSCS is to meet the expectations of its stakeholders, and above all, consumers:

• Modernising our service to consumers

• Diversifying how we deliver compensation to provide maximum convenience and continuity for consumers

• Raising awareness of FSCS protection to boost confidence

• Improving value for money, accountability and transparency

• Achieving excellence as a creditor to maximise the value we recover from failed businesses

• Deepening contingency planning to be ready to respond to failures alongside our key partners

• Engaging our people and our organisation to be even more agile and professional

Each of these will play a vital role in FSCS’s ability to deliver its mission and aims. For now, I’d like to focus on two of our stakeholder groups in particular: the people we are here to help and the people that make it happen.


Nineout of ten PPI Claims turned round within three months

Delivering compensation to consumersWe think we do what we do well. We now regularly return people’s deposits within seven days when banks, building societies or credit unions fail without the need for an application form. We turn round nine out of ten PPI claims within three months and nine out of ten other claims within six. We are now able to make compensation payments direct to consumers’ bank accounts where they request it.

But we are also conscious that we must modernise our service if it is to keep pace with people’s expectations. Other than for deposits, we still require people to submit written applications in support of most claims. This is time-consuming for the consumer and inefficient for us. We currently return around 30% of applications because they do not provide the evidence we need. Moving to an online application service will be more convenient for consumers and enable us to provide the support consumers need to get their claims right and completed on time. Online claims will also enable FSCS to engage more efficiently with our outsource partners who handle the bulk of claims.

We also need to recognise that a pay-out is not always the ideal way of compensating consumers. In some cases consumers attach equal importance to maintaining their service when a provider fails. This is especially true, for example, of insurance policies, but can also apply to bank, building society and credit union accounts on which people rely to manage their day-to-day finances. We already have some experience of this: in 2008 FSCS funded the transfer of accounts in Bradford & Bingley to Santander with no interruption in consumers’ service. Working with our partners in the PRA and FCA, we shall want to explore how in future we can both compensate and maintain services where that offers the best outcome for consumers.

Engaging our people and organisationNone of the above will be possible without FSCS investing in its people and in their capability. That’s why I believe our people are a vital component to our strategy over the next five years.

Our people are central to what we’ve achieved so far. Their commitment to excellent service is exemplary. FSCS’s people are essential to improving our ability to provide a responsive, well-understood and efficient compensation service. So, it’s vital that we work harder to engage our people to make FSCS even more agile and even more professional. Working to improve their skills and knowledge will be a top priority for the next five years.

As you can see, our vision for a stronger, better compensation scheme really puts stakeholders at the heart of what we do. In particular, it mirrors our commitment to protecting consumers and developing our people who are central to FSCS.


Chief Executive’s overview

Mark Neale

Chief Executive

£1.7mfall in operational expense

As the Chairman explains, for the first time in FSCS’s history, we are publishing our long term vision. At the same time, we’re providing our stakeholders with the opportunity to track our progress along the way in our annual Plan and Budget. It provides another opportunity for us to be open and accountable to those that fund us – our levy payers. We welcome feedback from our stakeholders.

You’ll see that later in this document we provide details of our expected annual levies. Importantly, the 2014/15 annual levy is the first to be calculated under the new 36 month funding approach for all classes except deposits. You will remember FSCS published its approach to this in a paper last September. We have provided a comparison between the indicative funding requirements as calculated under the 12 month and the 36 month funding models. We calculate FSCS’s annual levy for 2014/15 at £313m.

The costs of running FSCS are set out in the Management Expenses Budget on page 16. You will see that our total operational and investment expense of £59.6m has fallen by £1.7m compared with the 2013/14 budget. This reflects the efficiencies we have made in continuing operations, outsourcing and a reduction in FSCS’s pension scheme deficit funding liability.

The budget we are proposing will enable us to continue to deliver a responsive service to consumers while also strengthening our capabilities in line with our five year strategy.

Our top priority in 2014/15 is to carry through the modernisation of claims handling through our Connect programme. This will also enable claimants to engage with us through the channels they find convenient, including online. Our aim is to achieve better customer service at the same time as improving operational efficiency and effectiveness. This work forms the basis of the first of our seven main strategic imperatives outlined in our new Vision. It will deliver benefits for both consumers and levy payers.

The need for us to continue to raise awareness of the protection we provide remains high on our agenda. Our market research shows a strong positive link between that awareness and confidence in financial products.


We have now moved the costs for this work of £3.6m into our main expenditure budget. This reflects our judgement that we have now developed an effective strategy in which modest marketing spend by FSCS catalyses and complements actions by our partners in the industry who do most of the heavy lifting. As with this year, our focus in 2014/15 will remain on raising awareness of our protection of deposits which has risen above 50% of the population for the first time. We shall also work with the industry next year to consider how best to raise awareness of FSCS protection of insurance products so as to support consumer confidence.

We shall also continue to develop our capability as creditor in order to make recoveries which reduce the costs of compensation to our levy payers. As in previous years, we shall be actively engaged with HM Treasury and our other partners in maximising returns from the estates of the banks which failed in 2008 and 2009. This includes continuing close involvement in the winding up of the estates of the failed Icelandic Banks. We shall also, as in

the Keydata case, pursue recoveries from third parties where we believe they share a liability for investors’ losses. In all cases, our approach will be governed by our statutory responsibility to recover costs only where it is reasonably possible and cost-effective to do so. We shall neither spend more than we need to maximise recoveries, nor fail to take cost-effective action where it is open to us to do so.

Although I’ve touched here on our plans in relation to just three of the seven imperatives we outline in our Vision document, they are of equal importance. We provide details of how we shall take forward each of them in the year ahead in this document. I encourage you to read both this Plan and Budget and our Vision. I hope by the time you’ve finished reading you will share our enthusiasm for our Vision for a Confident Future.


The levy

£313mFSCS annual levy for 2014/15

For the first time, FSCS will be able to levy on an alternative basis to the usual 12 month forecast.

From 1 April 2014, except in the case of the deposit taking class, FSCS will levy the greater of one-third of the next 36 months’ expected compensation costs or the costs expected over the next 12 months from the date of the levy. These costs are subject to the annual class thresholds. In September 2013, FSCS published a paper setting out its approach to calculating the 36 month levy, which was broadly welcomed by the industry.

The 36 month model proposed by FSCS may help to reduce the volatility of annual levies and the likelihood of interim levies while also giving the industry greater certainty. This approach is based largely on past claims experience, which we adjust to reflect current claims trends and market intelligence when the levy is set. FSCS will review the claims and costs of the previous years and compare those against the information that may be available to assist the assessment of costs expected over the next 36 months.

The 36 month compensation cost levy has a five step process as follows:

1. calculate the average figure for compensation paid by the class over the last three years;

2. identify, and adjust for, any inflating or exceptional factors

in the last three years (where the level of costs is not expected to be repeated);

3. add costs of known or expected defaults for which claims have not yet been paid, but have been identified as payable over the next 36 months;

4. factor in any new or current upwards claims trends expected over the next 36 months; and

5. account for the opening balances for each class.

Where the amount reached exceeds a class threshold, the annual limit cap applies. The FCA retail pool would not be triggered by the three year forecasting approach (but only by actual costs incurred in a financial year).

The specific costs element of management expenses for the year will be added to the final amount required at the end of the five stage process. The class threshold applies to both the specific costs element of management expenses and compensation costs. The forecast costs for management expenses, including the outsourcing costs, will be calculated for the following 12 months (not 36 months). Each year the PRA and FCA consult on FSCS’s annual management expenses levy limit.


Section A: Proposed 2013/14 interim levy and 2014/15 indicative levyInterim Levy 2013/14As indicated in the November 2013 edition of Outlook, our most recent compensation claims assumptions show a potential deficit on the Investment Intermediation class of £30m which we expect to levy before April. This is due to an expected increase in compensation

costs as a result of claims against Catalyst Investment Group Limited and Fyshe Horton Finney Limited.

FSCS is also working to establish the extent to which it may be able to compensate customers of TailorMade Independent Limited. As such, we cannot yet confirm if compensatable claims exist, but we expect any such costs to fall to the Life and Pensions Intermediation class.

We will continue to monitor the situation, and will advise the industry if the position changes

Annual Levy 2014/15The Indicative 2014/15 Annual Levy amounts to £313m. This compares to the £315m expected levies raised in 2013/14, including the proposed interim levy, and results in a flat position year on year. We will review and confirm the annual levies in April 2014.

Figure 1 sets out the 2013/14 annual and indicative interim levy amounts, and 2014/15 indicative levies by funding class

Figure 1: 2013/14 annual and indicative interim levy amounts, and 2014/15 indicative levies by funding class

Sub-classes 2013/14 Annual Levy

(£ million)

2013/14 Interim Levy

(£ million)

2014/15 Indicative Levy

(£ million)

Variance

(£ million)

Deposits (SA01) 7.0 - 24.0 17.0

General Insurance Provision (SB01) 115.0 - 72.0 (43.0)

General Insurance Intermediation (SB02) 54.0 - 62.0 8.0

Life and Pensions Provision (SC01) - - - -

Life and Pensions Intermediation (SC02) 13.0 - 40.0 27.0

Investment Provision (SD01) - - - -

Investment Intermediation (SD02) 78.0 30.0 105.0 (3.0)

Home Finance Intermediation (SE02) - - 1.0 1.0

Base costs 18.0 - 9.0 (9.0)

Total 285.0 30.0 313.0 (2.0)


Our calculationsAs previously mentioned, we use a five step process to calculate the 36 month compensation costs. In each relevent class we have applied the historical three year average compensation costs, except for life and pensions intermediation, where the level of claims we are receiving indicate a rising trend. We have therefore uplifted the levy amount for that class.

We did not deduct any costs for past exceptional items. When discussing our approach last autumn, some respondents suggested FSCS should disregard the costs from Keydata. We did not agree, but such costs were not in fact incurred (to any material extent) within the last three years in any event, so do not contribute to next year’s proposed levy amount.

To be able to levy for the higher of the expected costs under the 36 month approach or the “traditional” 12 month basis, we calculated the expected compensation costs on both bases. The table below sets out the alternative requirements, and we take the higher of the two. Apart from insurance provision, where we anticipate a claims “spike” next year (because of a backlog in the insolvent estates of older employers’ liability claims), the 36 month numbers are higher. This reflects the fact that interim levies have been and might be raised in the year – which the narrower 12 month approach has not allowed for.

The amounts in figure 2 are then adjusted for opening balances, management expenses and recoveries by funding class, as shown in figure 3. The result of this is the funding requirement that forms the levy amount raised. The highlighted numbers are the indicative amounts to be levied for in 2014/15.

The effect on the forecast fund balances for 2014/15 of raising these amounts is shown in figure 3. Any surplus/deficit created by this levy will then form the opening balance of the calculation for 2015/16.

7 daysfor the majority of savers to get their money back


Figure 2: Forecast compensation costs by funding class

Forecasting compensation costs by funding class

12 month forecast

(£ million)

3 year funding model

(£ million)

Variance

(£ million)

Deposits (SA01) 6.13 n/a

General Insurance Provision (SB01) 107.00 81.56 (25.44)

General Insurance Intermediation (SB02) 38.30 48.65 10.35

Life and Pensions Intermediation (SC02) 25.00 36.19 11.19

Investment Intermediation (SD02) 73.52 101.85 28.34

Home Finance Intermediation (SE02) 0.25 0.18 (0.07)

Total 250.20 268.43 24.36

Figure 3: Forecast funding requirements by funding class

Funding class Funding requirement

based on 12 month

forecast (£ million)

Funding requirement

based on 3 year funding model

(£ million)

Indicative levy

(£ million)

Deposits (SA01) 23.48 n/a 24.00

General Insurance Provision (SB01) 71.54 70.39 72.00

General Insurance Intermediation (SB02) 50.23 61.66 62.00

Life and Pensions Provision (SC01) (0.34) 0.04 0.0

Life and Pensions Intermediation (SC02) 26.31 39.17 40.00

Investment Provision (SD01) (4.21) (1.20) 0.00

Investment Intermediation (SD02) 75.90 104.28 105.00

Home Finance Intermediation (SE02) 0.56 1.03 1.00

Base costs 8.02 n/a 9.00

Total 251.49 275.37 313.00

Note: Any surplus/deficit created by this levy will then form the opening balance of the calculation for 2015/16.


Claims assumptionsIn creating the 12 month forecast we make certain assumptions about claims/default volumes and trends where we have sufficient information to quantify the expected numbers. The outsourcing expenses within the Management Expenses are also based on these assumptions about our likely future business.

Our assumptions reflect our experience of current claims trends as well as other information from the FCA, PRA, the Financial Ombudsman Service and the industry. Clearly, these assumptions may change over time. Recent years have shown that some unexpected larger failures have significantly impacted our estimates. Accordingly, we continually monitor claims trends and default prospects, and review and update assumptions, to help us determine the resources and expenses required to pay the claims we expect within target service levels. The assumptions should not be viewed as forecasts. In particular, they do not provide a risk outlook for possible new claims areas.

We broadly assume that the overall volume of new claims received during 2014/15 will be similar with a slight increase in claim numbers. The 2013/14 financial year is featuring continuing high claim volumes in the insurance intermediation sector resulting from Payment Protection Insurance (PPI) claims. Where there continues to be volatility in claims levels, we will factor these into our assumptions as numbers are known. We are not currently aware of any new significant failures or other product-based trends to emerge, although we cannot rule these out.

Our assumptions about our likely future business are shown in figure 4.16,128

insurance intermediation claims expected in 2014/15


Figure 4: Claims assumptions 2013/14 and 2014/15

Funding class

Default/Type of claim 2013/14 2014/15

New claims assumptions for

2013/14

Estimate of completed claims

for 2013/14

New claims assumptions for

2014/15

Estimate of completed claims

for 2014/15

SA01 Deposits* 6,000 6,000 10,000 10,000

SB02 Insurance Intermediaries (inc PPI, but excluding Welcome Financial Services Limited)

13,545 13,575 16,128 16,528

SC02 Mortgage Endowments and Pensions & FSAVCs

2,280 2,370 1,782 1,752

SC02/ SD02** Investments exc CF Arch Cru Funds, MF Global UK Limited and structured products

2,680 2,682 2,520 2,920

SC02/ SD02*** CF Arch Cru Funds 1,200 1,200 1,260 1,260

SD02 MF Global UK Limited, Worldspreads Ltd, Pritchard Stockbrokers Limited, other stockbrokers and structured products

1,797 1,837 2,206 3,431

SE02 Mortgage Advisors 550 900 828 828

Total claims* exc insurance payments 28,052 28,564 34,724 36,719

Notes: * Excluding major bank failures

** Depending on the nature of the claim, some will fall to Life & Pensions intermediation, and some to Investment intermediation.

Based on historic data, the estimated compensation costs of these claims have been split 25:75 between SC02 and SD02.

*** CF Arch Cru claims are split between Life & Pensions intermediation and Investment Intermediation. Based on historic data,

the estimated compensation costs of these claims have been split 15:85 between SC02 and SD02.


Deposits (SA01)Based on our recent experience of credit union failures we assume a small number of credit union failures in the year ahead. Our assumptions do not provide for the failure of any other deposit taker(s).

General Insurance Provision and Intermediation (SB01 & SB02)We expect that the most significant claim area for the Scheme in 2014/15 will continue to be PPI claims. These costs fall to the General Insurance Intermediation sector. Within our latest assumptions, we expect that volumes will continue at the same high level as currently. This mirrors the experience of the Financial Ombudsman Service and wider industry. We now expect this category to generate around 16,000 new claims during 2014/15.

For general insurance provision we expect that 2014/15 will see an increase in compensation costs. On the estates of Chester Street, Builders Accident Insurance and Independent Insurance Company

Limited we continue to see claims costs arising from significantly increased numbers of Noise Induced Hearing Loss claims and expect compensation for mesothelioma claims will continue at a rate similar to last year. We will also receive claims arising from the 2012/13 defaults of Municipal Mutual Insurance and Lemma Insurance Europe Ltd as well as the default of Millburn Insurance Company Ltd that occurred in December 2013. For general insurance provision, FSCS is primarily responsible for making payments to claimants, with claims being processed by run-off agents. Hence volume expectations are not included in figure 4.

Life and Pensions Provision and Intermediation (SC01 & SC02)We have started to see a slight increase in pension claims, including claims in relation to Self-Invested Personal Pensions (SIPPs), and expect more claims in this area in the future. We expect in 2014/15 to see lower volumes of mortgage endowment claims.

16,000PPI claims expected in 2014/15


Investment Fund Management and Investment Intermediation (SD01 & SD02)Volumes of claims resulting from smaller stockbrokers and general investment claims look to remain about the same next year. This is an area where we have seen the most volatility of claims volumes and impact of larger failures in recent years, so our assumptions are subject to change.

As reported in our November 2013 issue of Outlook, we are preparing to deal with claims against Catalyst for its role in promoting bonds backed by ARM Asset Backed Securities SA. This may lead to significant compensation costs in 2014/15.

Home Finance Intermediation (SE02)We do not expect any significant increase in claims volumes for the rest of this year and into the next. We have maintained similar assumptions for 2014/15.

Welcome Financial Services Limited (WFSL)Claims against WFSL are handled by FSCS but are not funded by the levy payer, hence are not included in figure 4. Welcome’s restructuring arrangements provide for it to make payments to FSCS to fund compensation costs and the costs associated with handling PPI and Non PPI claims. We expect to process approximately 12,000 claims during 2014/15, without any need for levy payer funding.


Section B: Management expensesFigure 5 breaks down FSCS’s management expenses budget for 2014/15 alongside the budget for 2013/14, and the latest expected outturn for this year.

This year, with the introduction of two new regulators under the Financial Services Act 2012, we have further split the 2014/15 management expenses budget between those funding classes in figure 6.

Total operational and investment expense falls by £1.7m against the budget year on year, as management has offset cost pressures in certain areas with savings in others.

The change programme is expected to be on par with the current year’s budget, and will continue to realise further efficiency gains in subsequent years.

Strategic change portfolio – improving FSCS’s effectiveness and efficiencyFSCS is investing in its business to enable it to carry out its functions more effectively.

Of a total of £16m, the key investment of £6m in 2014/15 continues to be the ‘Connect’ programme, which will streamline our claims management processes. This will complete our claims re-engineering to bring our claims processes onto a single, consistent and well-controlled platform, which our outsource partners will also use. This will also allow claimants to engage with us through channels they find convenient, including an online claim facility, available through our web site.

The budget also allows £3m for work on the system supporting the Single Customer View (SCV) verification as part of the costs to the deposit taking class, and some smaller pipeline projects. The SCV is a single, consistent view of an eligible claimant’s aggregate protected deposits with the relevant firm which contains the information required by the Compensation rules in the PRA Handbook (COMP). FSCS verifies deposit takers’ SCV files to ensure they are fit for compensation purposes and compatible with its internal systems and processes in the event of a failure.

£6minvestment in the ‘Connect’ programme in 2014/15


Figure 5: Management expenses budget

2013/14 Budget (£ million)

2013/14 Forecast (£ million)

2014/15 Proposed Budget (£ million)

Continuing Operations

- Staff Costs 16.4 16.6 17.0

- External Providers 2.5 2.2 2.5

- Facilities 2.3 2.1 2.2

- IT 2.2 2.0 2.4

- Legal Costs 1.4 1.5 1.3

- Communications 4.0 0.5 4.1

- Pension Deficit Funding 3.1 2.1 1.6

- CEO Contingency 0.2 0.0 0.3

- Other 1.3 0.8 0.9

Subtotal 33.4 27.7 32.3

Outsourcing 12.0 12.8 11.0

Operational total 45.4 40.5 43.3

Strategic Change Portfolio 15.9 13.4 16.3

Operational & Investment Expense total 61.3 53.9 59.6

Bank facility fees 4.9 4.5 4.9

Keydata Investment Services Limited Recovery Expense

7.2 4.2 7.2

Major banking failure related Management expenses

1.0 1.0 3.0

Total Management expenses 74.4 63.5 74.7

Non-levied Reserve for Major Failure 20.0 0.0 5.3

Total Management Expense Levy Limit 94.4 63.5 80.0


Figure 6: Split of Management Expenses Levy Limit (MELL) for 2014/15 (excluding Non-Levied Reserve)

FSCS PRA FCA

Base costs total (£ million) 16.5 8.3 8.3

Specific costs

- Deposits (SA01) 19.5 19.5 -

- General Insurance Provision (SB01) 5.0 5.0 -

- General Insurance Intermediation (SB02) 13.6 - 13.6

- Life and Pensions Provision (SC01) 0.2 0.2 -

- Life and Pensions Intermediation (SC02) 3.8 - 3.8

- Investment Provision (SD01) 0.2 - 0.2

- Investment Intermediation (SD02) 14.8 - 14.8

- Home Finance Intermediation (SE02) 1.1 - 1.1

Specific costs total 58.2 24.7 33.5

Total 74.7 33.0 41.8


Major Recoveries Expenses – reducing the costs of the levy The Scheme actively pursues opportunities to recover the costs of compensation wherever it is possible and cost-effective to do so. Keydata Investment Services Limited recovery costs for 2014/15 are estimated to be flat to the current year at £7.2m. FSCS continues to pursue recoveries from intermediaries involved in the sale of Keydata products to mitigate the costs of compensation to levy payers. Significant recoveries have already been delivered. FSCS considers that continuing action will benefit levy payers.

In 2008/09 the Scheme paid out some £20.4bn to compensate customers in respect of the five major bank failures: Bradford and Bingley; Icesave; Kaupthing Singer & Friedlander; Heritable; and London Scottish Bank. This was funded by borrowing from HM Treasury, which FSCS is repaying with interest. Following recoveries and the first capital repayment, the balance of these FSCS loans is approximately £16.6bn. In chapter 4, section e, we provide an update on the recoveries from these failures. The budget for related management expenses is increasing by £2m to £3m to cover continuing work to be undertaken on these estates.

Non Levied Reserve for Major FailureThe Management Expenses Levy Limit (MELL) includes an additional non-levied reserve, within which we can increase our management costs without consultation in response to unforeseen failures. This reserve is not levied on the industry unless in response to a major crisis or urgent need. In 2013/14, the reserve was set at £20 million. The budget for 2014/15 has a reduced reserve of £5.3m.

The reserve level does not reflect the specific or known costs of any particular future failures. It is indicative of the short term costs of, for example, dealing with large defaults, within tight timeframes in an uncertain financial climate.

In practice, we are unlikely to raise more than our budgeted expenses, unless there is a specific event or events that require us to do so. In line with our usual practice, we will inform the relevant parties, such as the PRA and FCA, before raising a levy against this reserve.

£5.3mnon-levied reserve in case of a major crisis


Figure 7: Comparison of 2013/14 levies with forecast levies for 2014/15

Actual Levies for 2013/14 Forecast Levies for 2014/15

Defaults Loan interest cost

(£ million)

Capital Levy

(£ million)

Total Levy

(£ million)

Loan interest cost

(£ million)

Capital Levy

(£ million)

Total Levy

(£ million)

Icesave 19 183 202 12 125 137

KSF 16 133 149 11 127 138

Heritable 3 7 10 1 8 9

LSB 4 40 44 3 39 42

Dunfermline - - - - 100 100

B&B 386 0 386 412 0 412

Total 428 363 791 439 399 838

Figure 8: Major banking failure loans

Balances as at 31 December 2013

Defaults Drawdown to 31/12/13

(£ million)

Recoveries to 31/12/13

(£ million)

Recoveries received to

31/12/13 %

Capital Levy in 2013/14

(£ million)

Loan balance at

31/12/13 (£ million)

Icesave 1,441 787 55% 183 471

KSF 2,581 2,116 82% 133 332

Heritable 465 438 94% 7 20

LSB 237 84 35% 40 113

B&B 15,654 - 0% - 15,654

Total 20,378 3,425 363 16,590


Major Banking Defaults LevyThe major banking default levy is forecast to be £838m for 2014/15 (£791m in 2013/14). This is based on a number of assumptions detailed below.

In 2013/14 the loan interest cost is forecast to be £439m, which will be levied in 2014/15. Under the loan arrangements which came into effect from 1 April 2012, the rates used to calculate the loan interest are subject to a floor. The floor is set at the Debt Management Office (DMO) Gilt reference rate for a gilt of a similar maturity (and is selected consistent with the methodology previously published on our website). The forecast is that the relevant gilt rate will be greater than LIBOR at least until 31 March 2016 for the B&B loan.

2014/15 will be the second year that FSCS will raise a levy to repay the capital of the non B&B loans from HM Treasury so that they are fully repaid by 31 March 2016. In the case of the Icelandic banks and London Scottish for repayment of the loans, we apply a total final recovery shortfall of £961m (£1161m–£200m for Dunfermline) to be raised by levy of which £363m was collected in 2013 (see figure 9).The B&B loan principal is due to be repaid from recoveries from the company.

The main uncertainty around the recovery projections is for Icesave. As at 31 December 2013, about 55% had been received. The assumption used for this levy is that a further 15% of recoveries are received by 31 March 2016, but this may change. If no further recoveries

are received from Icesave before 2016, an additional £222m would need to be recovered by levy in the next two years. The other main uncertainty is the amount and timing of Dunfermline levies. However, for 2014/15 we have alowed for a £100m interim payment to HM Treasury on account of FSCS’ contribution to the costs of resolution.

The total amount of the forecast major banking failure levy of £838m to be levied in 2014/15 (£439m interest, £100m Dunfermline contribution and £299m capital shortfall) is therefore based on a number of uncertain factors. The final amounts will not be confirmed until the summer. As before, the levy will be raised in July/August 2014 for payment to HM Treasury by 1 October 2014.

Figure 9: Forecast recovery ranges (latest assumptions)

Final recoveries expected 2014/15 Forecast 2013/14 Forecast

Defaults Final Recovery

Range

%

Recovery Rate Used In Model

%

Capital Shortfall To

Be Levied (£ million)


%

Shortfall To Be Levied

By 31/3/16 (£ million)


%

Capital Shortfall To

Be Levied (£ million)

Icesave 90–100% 95% 72 70% 432 70% 432

KSF 85–86.5% 85% 387 85% 387 83% 439

Heritable 94–100% 88% 56 95% 23 88% 56

LSB 50% 32% 161 50% 119 32% 161

Dunfermline n/a n/a 570 n/a 200 n/a n/a

B&B 100% 100% 0 0 0

Total 1,246 1,161 1,088

http://www.fscs.org.uk/industry/news/2013/may/estimates-of-levy-for-interest-62tgym61d/index.html

http://www.fscs.org.uk/industry/news/2013/may/estimates-of-levy-for-interest-62tgym61d/index.html


Delivering our strategy in 2014/15

a. Modernising our service to consumersMeeting our service standardsOur top priority in 2014/15 is to provide a responsive and efficient service to people who have lost money as a result of the failure of a regulated financial services business.

Our current service levels reflect our understanding of what consumers want of FSCS, as well as the practical constraints we face in dealing with claims.

We set different target service levels for different activities and types of claims. Where possible, we give priority to people who may be facing hardship when making a claim. Many factors affect our turnaround times for claims. They include the type of claim, its complexity, the rules we have to apply and whether we have to wait for information from third parties (such as liquidators or other providers).

Connect programmeOur Connect programme will achieve better customer service at the same time as improving operational efficiency and effectiveness. This will benefit both consumers and levy payers. We are redesigning and standardising our claims handling processes and developing online services. This will allow people to complete applications online and give them more choices about interacting with FSCS.

Specifically, the Connect programme will allow us to:

1. respond quickly, efficiently and accurately to consumer claims for compensation;

2. ensure that the Scheme operates as cost efficiently as possible; and

3. be ready to respond to defaults in the financial services industry to protect consumers and financial stability.

During 2013, the programme moved from defining the detailed processes and specific requirements we need to meeting these three pillars into delivering the changes we require.


We have procured the support we need to develop our new online service and to deliver a new claims handling platform. Our two delivery partners are now working with us on designing the solution and preparing to start building the systems during the first quarter of 2014.

Our people are at the heart of the changes we will make to deliver the benefits of Connect. During the last half of 2013, we developed our initial view of our new operational team structure. We also defined the roles and capabilities needed by the people who work for us to deliver

an efficient and first-rate claimant experience. From the start of 2014, increasing numbers of staff in our Operations Division are working on the programme and helping to transform the way FSCS works.

The Connect programme is on target to be implemented in late 2014.

17mestimated audience ‘in need of help’

Figure 10: Our current target service levels for 2014/15

Activity Claim Type Service Standard

Answering Telephone Calls All 80% within 20 seconds 95% within 90 second

Responding to Complaints All 90% within 20 working days

Responding to other Correspondence All 90% within 10 working days

Sending Application Forms Deposits Not applicable as application forms are not used for deposit claims

Non-deposits 90% within 5 working days

Confirming Claim Decisions Deposits Majority of compensation within 20 working days (target 7 days)

Welcome Financial Services Limited

90% of claims within 8 weeks of receiving a completed application form

PPI 90% of claims within three months of receiving a completed application form

Other 90% of claims within six months of receiving a completed application form

Making Compensation Payments 90% within 10 working days of acceptance of a compensation offer (where applicable)


b. Diversifying how we handle claims by finding additional ways of resolving failuresFSCS continues to work closely with the UK Authorities on ways in which we can deal with claims promptly and to consider how we can find additional ways of delivering compensation which, where appropriate, also provide consumers with continuity of important services.

The EU Deposit Guarantee Scheme Directive (DGSD) proposes a number of changes which will impact on FSCS. One of the suggested changes is to reduce payout timescales from the current 20 working days for customers of failed deposit taking firms to a mandatory seven working day payout across the EEA

by 2023, although FSCS aims to pay the majority of consumers of failed deposit takers in seven days already. Other changes relate to eligibility of deposits and depositors, funding and consumer disclosure. The implementation date for member states to comply with the DGSD is within 12 months after entry into force of this Directive. FSCS expects the DGSD to come into force in the first part of 2014.

In addition, the Bank Recovery and Resolution Directive is establishing a framework for the recovery and resolution of failing banks. This aims to increase the resolution tools available to authorities so they can intervene decisively both before problems occur and early on in the process if problems are identified. As a contributor to the UK resolution regime, FSCS is part of the response for resolving failed deposit taking firms.


c. Raising awareness of FSCS protection to boost confidenceOne of our key objectives is to raise awareness of FSCS protection so that the public is reassured their deposits in banks, building societies and credit unions are safe, up to the £85,000 limit.

The need to build awareness remains high. Research shows that about half of the public are aware of a protection scheme, an increase of more than 30 percentage points since 2008. This is still too low and compares poorly with some of our overseas counterparts. For example, awareness of deposit protection in the US is between 70 and 80% of the population. We aim to achieve this level of awareness in the UK over a number of years, in partnership with the industry, with banks, building societies and credit unions doing most of the heavy lifting supported by targeted marketing by FSCS.

In the last quarter of 2012/13, we launched Phase 2 of our consumer awareness programme, focusing on deposits. The programme was developed with input from industry and consumer organisations on our Consumer Awareness Advisory Panel and we continue to seek their feedback throughout the programme.

Our key audience is those ‘in need of help’ – who own financial products but are unaware of FSCS protection. Research estimates that over 17m people in the UK fall into this definition, and our programme reached approximately 82% of this audience through the year.

The consumer awareness programme included radio, press and digital advertising, as well as stakeholder and PR activity. We also developed a themed partnership element with Absolute radio, the Daily Mail, the Mail on Sunday and Metro newspapers. The aim of this is to promote FSCS protection within salient topic areas where people are thinking

about deposit savings for significant events such as weddings, holidays, retirement planning, university fees and property purchases.

We also launched a new consumer microsite and our new Protection Checker (in collaboration with the FCA and PRA). This allows consumers to check whether their savings are with authorised firms, have tripped the £85,000 limit and any shared authorisations. Over 14,000 visits were made to the Protection Checker online in October and November.

We are making good progress with the programme and hitting some key performance indicators while being very close to or on track for others. We have a robust research and evaluation framework, which has allowed us to analyse and refine our activity. Our targets for 2013/14 and 14/15 are set out in Figure 11.

Figure 11: Awareness targets for 2014 and 2015

Message Level to achieve by March 2014 Level to achieve by March 2015

Awareness of market protection 54% 58%

Reassurance that FSCS exists 43% 47%

Confidence in money being safe 69% 72%


14,000visits to the Protection Checker in October and November 2013

How will we keep improving awareness levels through 2014/15?Our core objectives, audience and strategy remain broadly the same as in 2013/14, while tweaking our approach to gain improvements. Although this is under review, we will continue with our existing advertising and develop new visuals to keep things fresh, so that we don’t ‘switch people off’. We will also look at the marketing channel ‘mix’ to ensure that it offers the best value for money, as well as the most relevant ways of talking to our target audience.

The support we get from industry is vitalWe already know that our work with industry to build consumer awareness levels is critical to reaching our target awareness levels by the end of March 2015.

To this end we are encouraged by the leadership from the industry:

• Barclays is featuring FSCS in its ISA advertising;

• HSBC has committed to a plan over the next year to ensure all their customers know about FSCS protection, and is already featuring FSCS on its in-branch radio;

• Lloyds Bank is featuring FSCS on its mobile app;

• Nationwide included FSCS in its press advertising;

• RBS is featuring FSCS in its direct mail; and

• Santander includes FSCS prominently on its website.

These are just a few examples of the support we are receiving to help deliver our mission.

Research in 2013 showed that the presence of FSCS in-branch materials added significantly to overall awareness. During 2014/15, we will align the in-branch and consumer awareness programme materials, so consumers recognise FSCS protection whether they see it in-branch or in a newspaper, magazine or on the radio. And we will continue to work hand-in-hand with financial services firms to bridge the information gaps and help bring reassurance to customers and play our part in restoring trust in financial services.

d. Improving value for money to drive value and strengthen accountabilityFSCS is funded by the industry, and will be required by the Financial Services (Banking Reform) Act 2013 to “ensure efficiency and effectiveness in the discharge” of its functions, as well as a need to “minimise public expenditure…for the purposes of the scheme”.

FSCS has defined value for money (VFM) as “the optimum use of the resources available to FSCS, particularly levy payers money, to achieve the right balance of efficiency, economy and effectiveness for our stakeholders.”

FSCS has the following VFM objectives:• enhancing the culture of the

organisation, for example, continually striving to do more at the appropriate quality for less money;

• ensuring that the principles of VFM are understood and that it is the responsibility of all staff to pursue VFM in the Schemes activities;


• integrating VFM into planning, decision making and reporting;

• monitoring the achievement of VFM through reporting and benchmarking; and

• ensuring we have the ability to demonstrate that VFM is being delivered.

FSCS will achieve the VFM objectives by:• introducing and documenting

VFM objectives into the Procurement Policy, Delegation of Authority Policy and associated processes;

• defining clear roles and responsibilities (i.e. Category Owner, Supplier Relationship Owner, Contract Owner, etc.) and introducing them formally through a Procurement Forum and adapting job descriptions to reflect agreed commitment;

• adhering to procurement policies and embedding VFM considerations into every step of the procurement processes, including the introduction of Category Strategies;

• defining and monitoring VFM through Procurement function KPIs and Category’s ‘Vital Signs’, and establishing formal reporting through the Finance Scorecard; and

• establishing robust and auditable tools and processes to demonstrate that VFM is being delivered.

The Connect programme will also enable FSCS to take advantage of a number of VFM benefits.

FSCS claims handling processes have been redesigned for efficiency as well as to reduce operational risk. To capitalise on these the programme will also increase the capability of the FSCS team through training and personal development. These factors will enable a greater focus on the number of claims that can be handled through a more streamlined, technology and capability led process. Put simply, the process has been designed to enable claims to be assessed more quickly with less overall effort.

FSCS will be able to share its systems and have the facility to track the ‘real-time’ progress of claims. This will reduce or eliminate the costs and risks associated with exchanging data sets between FSCS and its outsourcers that do not use the shared systems, and provide FSCS with greater richness of data with which to manage the outsourcers’ performance.


A standard set of processes and common systems will enable FSCS to place greater emphasis on cost as one of the selection criteria in any future outsourcer procurement activity.

The overall effect of these changes is to support FSCS’s continued utilisation of outsourcers to help it deliver on some of its key commitments, including the handling of claims for compensation. FSCS will use the reprocurement of its existing Outsourcing Framework contract as an opportunity to drive value from current or future potential outsourcing suppliers.

Finally, by putting continuous improvement at the heart of FSCS’s operation, FSCS is committing to look on an ongoing basis at enhancing its processes and systems to further improve their efficiency.

e. Achieving excellence as a creditor to maximise the value we recover from failed businessesEfficient operation and the maximisation of recoveriesWe are very conscious FSCS must meet all eligible claims for compensation. We know too that firms want us to ensure that the costs are spread correctly across the industry. We also pursue all reasonable recoveries to offset the bill to the industry.

2008/09 major bank failures – recoveries and loan costsThe Scheme continues to be an active member of creditors’ committees of all the estates mentioned on page 29 (apart from Bradford & Bingley) and we continue to receive dividends in respect of our claims which are used to reduce the borrowing that the Scheme has with HM Treasury resulting from compensating consumers at the time these banks failed. Recoveries totaling £240.8m have been made from these estates in the current financial year.


Bradford & Bingley (“B&B”)The run-off of the B&B business continues, with UK Asset Resolution overseeing the business on behalf of HM Treasury. As B&B did not enter an insolvency process, there is no creditors’ committee. While B&B forecast repayment of the FSCS claim in full, the timing of repayment remains unclear. We are taking further advice considering options that may accelerate repayment of our loan.

DunfermlineThe Independent Valuer reported on recovery amounts in an insolvency scenario on 31 July 2012. At FSCS’s request, the valuer issued a Reconsideration. The report has been accepted by FSCS and HM Treasury. FSCS’s liability to HM Treasury will not be finalised until the end of the resolution process. The Scheme’s last financial statements contained a provision of £540m based on the latest information available at that time.

HM Treasury have subsequently indicated that they are likely to request an interim payment payable on 1 October 2014. We currently expect this to amount to £100m and expect to levy for it at the same time as the annual interest charge.

KeydataFSCS’s court proceedings against a large number of IFA firms in connection with the sale of Keydata Investment Services products are on-going. To date, FSCS has settled claims with a number of defendants for a variety of reasons, the terms of which are confidential. The remaining parties are still subject to the legal proceedings and, as the FSCS remains confident of its position, we will continue to pursue the claims through the court process.

Since the case management conference in the Lifemark and SLS proceedings in March, FSCS has selected six lead case defendants. This is to advance defences in relation to a number of lead cases, which will give a representative set of investor claims to be heard by the court. Based on the current timetable, lead case defendants’ defences are expected shortly. Proceedings are stayed against all defendants not selected to be lead case defendants and a further case management conference is scheduled for February 2014.

Lifemark Our involvement in the issues arising from the failure of Lifemark S.A. is nearing a conclusion following the enforcement of the security held over Lifemark S.A’s assets by the Trustee on behalf of its creditors. The Trustee has publicly confirmed that total bondholder returns, before the costs of distribution through Keydata, will range from 12% to 15% of the capital invested. The Trustee has made payments (before Keydata costs) on account to bondholders, including FSCS, of 8.5% of the capital invested. Following receipt, FSCS has completed a distribution of these recoveries to the majority of Lifemark claimants with compensatable losses over £30,000 and whose claims were assigned to FSCS. Following the completion of that exercise, FSCS expects to be in a position to allocate the recoveries remaining from the estate between the affected levypayer classes (Investment Provision and Investment Intermediation) early in the 2014. The recoveries received from Lifemark will ultimately be less than the original investment value, but will be substantially higher than would otherwise have been the case without FSCS’s intervention.


20%increase in employee engagement

f. Deepening contingency planning to be ready to respond effectively to crisesWe are working closely with the Authorities to identify and respond to emerging risks. This work is more developed in the deposit sector allowing FSCS involvement at the appropriate stages of resolution and contingency planning. For example, FSCS has worked with the Authorities to produce a contingency planning time plan identifying the roles and responsibilities of the different authorities during the resolution process. FSCS is closely involved with its partners in the on-going development of this resolution planning options to ensure the most appropriate outcomes for consumers.

A lot of work is underway with our partners to make sure that processes and contingency planning are developed and tested across the full range of FSCS protection. This work is currently focusing on the life insurance area. This will increase our ability to respond to failures. It will also ensure that in times of stress, there is no doubt about roles and responsibilities and dependencies of the safety net.

g. Engaging our people and our organisation to be even more agile and professionalIn June 2013, our Board approved our new People and Organisational Development Strategy for 2013 to 2016, to help support this imperative and we identified six key objectives for the life of the strategy:

1. Organisational development – improving organisational performance.

2. Management development – empowering management capability and managing performance.

3. Learning and development – enlightening our leaders.

4. Recognition and reward – inspiring individuals.

5. Talent Management – making it all happen.

6. Human Resources Services – supporting our business.


Our continued investment in personal development has included:

• increased range of e-learning modules including those written by us through the FSCS Learning Zone;

• professional qualifications support including CIMA, ACCA and the Chartered insurance Institute;

• the launch of our own management development programme – Growing management Talent;

• the launch of the Race for Opportunity Mentoring Circles in collaboration with Business in the Community;

• a pilot programme of Coaching Circles to develop coaching skills across the Scheme; and

• our first group to participate in the Work Foundation Towards Outstanding Leadership programme.

Since April 2013, we have delivered more learning opportunities than in any previous year and set ourselves the challenging target of four days learning per employee per annum. We’ve also continued to build on our corporate social responsibility (CSR) programme. This centres on volunteering activities with our local community and during 2013 more than 60% of our workforce participated.

For a third year, FSCS commissioned Best Companies to survey our people during 2013 in order to establish how they perceived the organisation. The aim of this, as always, is to improve staff engagement and ensure we are as effective as possible. We are delighted that the initial results show an increase in employee engagement of over 20% and that after last year’s fall, the Scheme has been recognised again as ‘One to Watch’.

The reality is that the Scheme in 2013 is already very different to three years ago and we have learned – as all good organisations do – where the ‘pinch points’ are in our operating model and areas which we might want to revisit. Implementing Connect has implications for our staffing structure. It presents an ideal opportunity to ‘tune up’ our operating model to delivering optimum performance, now and in the future.

In our Vision for a Confident Future, we set out our ambitions for our people:

• we will have achieved Best Companies accreditation and increased employee engagement by 20% year on year overall based on the People Survey;

• we will maintain a sickness absence target of 2%;

• we will provide a minimum of four days learning per employee per annum; and

• we will be recognised as an Investor in People.

This Plan and Budget: 2014/15 is for consultation. We welcome your feedback, which should be sent to [email protected] by 21 February 2014.

mailto:[email protected]

Financial Services Compensation Scheme

10th Floor

Beaufort House,

15 St Botolph Street,

London, EC3A 7QU

0800 678 1100

www.fscs.org.uk

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FSCS on Twitter @FSCSnews

FSCS YouTube channel FSCSProtected

January 2014

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