FCA Handbook - FEES 6.5 Compensation costs

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FEES 6.5 Compensation costs

Allocation

The FSCS must allocate any compensation costs levy:

(1)
first, to the relevant classes (other than the deposit acceptors’ contribution class) in proportion to the amount of compensation costs arising from, or expected to arise from, claims in respect of the different activities for which firms in those classes have permission up to the levy limit of each relevant class; and
(1A)
next, amongst the categories (if any) within each class:
1. (a)
  in proportion to the categories’ unused levy limits as at the date of the levy;
2. (b)
  up to those levy limits, subject to the conditions in FEES 6.5.2-AAR; and
(2)
thereafter, where the levy limit for a class has been reached (whether as a result of compensation costs or specific costs or both), to the retail pool, in accordance with, and subject to, FEES 6.5A and subject to the conditions in FEES 6.5.2-AA.

Cap and clawback caused by other levies on insurers, investment providers and deposit takers

(1)

This rule applies in relation to a relevant category or class in the table below.

Relevant category or class	Relevant unused levy limit	Corresponding funding class
Category 1.2 (General insurance provision)	Levy limit of the corresponding funding class in the PRA Rulebook, minus any levy imposed: (a) on that class by the FSCS under the PRA’s rules; and (b) on the relevant category or class by the FSCS under the FCA’s rules; in the same financial year	Corresponding funding class in the PRA Rulebook
Category 2.2 (Life insurance provision)
Category 2.4 (Structured deposits provision)
Deposit acceptors’ contribution class
Category 2.3 (Investment provision)	Levy limit for class 3 (Investment Provision Claims) minus any compensation costs levies or specific costs levies imposed by the FSCS in the same financial year	Class 3 (Investment Provision Claims

(2)
An allocation under step (1A) or (2) of FEES 6.5.2-AR to a relevant category or class must be capped as necessary so as not at that time to exceed the relevant unused levy limit in the table in (1), with any outstanding amount reallocated starting with that step.
(3)
If a relevant unused levy limit in the table in (1) is exceeded by a subsequent levy imposed on the corresponding funding class by the FSCS (under the PRA’s or FCA’s rules) in the same financial year, the FSCS must recover any previous contributions by the relevant category or class in the way set out in (4), but only to the extent necessary to correct that relevant unused levy limit excess.
(4)
If (3) applies, then the FSCS must, as far as reasonably possible:
1. (a)
  in the case of a previous contribution by a relevant category under FEES 6.5.2-AR(1A):
  1. (i)
    impose a levy on the other categories in the class to which the relevant category belongs and thereafter to the other firms in the retail pool, applying FEES 6.5.2-AR(1A) and (2); and
  2. (ii)
    credit the recovered amount to the relevant category.
2. (b)
  in the case of a previous contribution by a relevant category or class to the retail pool under FEES 6.5.2-AR(2):
  1. (i)
    impose a levy on the other firms in the retail pool in accordance with, and subject to, FEES 6.5A; and
  2. (ii)
    credit the recovered amount to the relevant category or class.
(5)
The FSCS may, before imposing a levy under (4), raise funds to correct the unused levy limit excess by commercial or other borrowing, or by utilising funds as set out in, and subject to, FEES 6.3.17R.

(1)
This is an example of the effect of levies under the PRA’s rules on levies on category 1.2 (General insurance provision), as a result of FEES 6.5.2-AAR.
(2)
The FSCS allocates a compensation costs levy and specific costs levy totalling £205 million to class 1 (General Insurance Distribution Claims) under FEES 6.5.2-AR (see FEES 6.4.6AR). For the purposes of this example, this is the first levy imposed by the FSCS in that financial year. As a result of FEES 6.5.2-AR(1A), £155 million is allocated to category 1.1 and £50 million to category 1.2.
(3)
The FSCS next imposes a levy under the PRA’s rules on the funding class (general insurers) that corresponds to category 1.2. That levy is equal to the levy limit for that funding class (general insurers) in the PRA Rulebook.
(4)
As a result of FEES 6.5.2-AAR(3) and (4), the FSCS must raise £50 million by imposing a levy on category 1.1 and credit those funds by way of repayment to category 1.2.
(5)
The FSCS then allocates a further compensation costs levy and specific costs levy totalling £50 million to class 1 under FEES 6.5.2-AR. As a result of FEES 6.5.2-AAR(2), the FSCS must allocate the whole amount of that further levy to category 1.1.
(6)
Subsequently but in the same financial year, the FSCS incurs further compensation costs and specific costs attributable to class 1 and totalling £75 million. However, if £75 million were allocated to class 1, it would cause category 1.1 to exceed its levy limit of £310 million when combined with the £255 million that category 1.1 has already paid in that financial year. Accordingly, the FSCS imposes a further compensation costs levy and specific costs levy totalling £75 million and allocates it as follows:
1. (a)
  £55 million to category 1.1, bringing the total levies paid by that category in the financial year to its levy limit;
2. (b)
  £0 to category 1.2; and
3. (c)
  £20 million to the retail pool in accordance with FEES 6.5.2-AR(2).

The use made by FSCS of borrowing facilities to provide liquidity until the next levy does not affect the attribution of compensation costs, nor the allocation of compensation cost levies; the allocation of a compensation costs levy occurs at the time that the FSCS imposes a levy.

If a participant firm which is in default has carried on a regulated activity other than in accordance with a permission, the FSCS must treat any compensation costs or specific costs arising out of that activity as if the relevant permission were held by the participant firm.

If the relevant person in default is an appointed representative, the FSCS must treat any compensation costs or specific costs arising out of a regulated activity for which his principal has not accepted responsibility to as if the principal had accepted responsibility.

Participant firm’s share of a levy

(1)
A participant firm must pay to the FSCS a share of each compensation costs levy allocated to the classes and categories of which it is a member unless either the firm is exempt under FEES 6.2 (Exemption) or the FSCS has chosen to exercise its discretion under FEES 6.3.23 R in respect of that firm.
(2)
[deleted]

The FSCS must calculate each participant firm's share of a compensation costs levy (subject to FEES 6.3.22 R (Adjustments to calculation of levy shares)) by:

(1)
identifying each of the relevant classes and categories to which each participant firm belongs, using the statement of business most recently supplied under FEES 6.5.13 R (1);
(2)
identifying the compensation costs falling within FEES 6.3.1R allocated, in accordance with FEES 6.5.2-AR, to the classes and categories identified in (1);
(3)
calculating, in relation to each relevant class and category, the participant firm's tariff base (see FEES 6 Annex 3AR) as a proportion of the total tariff base of all participant firms in the class or category as the case may be;
(4)
applying the proportion calculated in (3) to the figure in (2); and
(5)
if more than one class or category is relevant, adding together the figure in (4) for each class or category.

(1)
This is an example of the calculation under FEES 6.5.6AR of a participant firm’s share of a compensation costs levy and a specific costs levy.
(2)
A compensation costs levy and specific costs levy totalling £100,000 is allocated to class 1 (the General Insurance Distribution Claims class) under FEES 6.5.2-AR (see FEES 6.4.6AR). That levy of £100,000 is allocated to the categories within that class under FEES 6.5.2-AR(1A), with the result that £75,610 is allocated to category 1.1 and £24,390 is allocated to category 1.2.
(3)
The reports under FEES 6.5.13R and under the PRA’s compensation rules show that there are 10 participant firms in category 1.1, each doing the same amount of business in that category; and five participant firms each doing the same amount of business in category 1.2. Two of the participant firms are in both categories.
(4)
In this example, as a result of FEES 6.5.6AR, each participant firm in category 1.1 pays a levy of £7,561 and each participant firm in category 1.2 pays a levy of £4,878. The two participant firms that are in both categories will accordingly each pay a levy in respect of class 1 totalling £12,439.

Allocation

When identifying the relevant classes to which a TP firm belongs, the FSCS must identify the activity (or activities) in FEES 6 Annex 3AR that most closely matches that for which the TP firm is treated as having Part 4A permission.

Classes and tariff bases for compensation cost levies and specific costs levies

Guidance on parts of FEES 6 Annex 3AR can be found in FEES 6 Annex 4 G.

New participant firms

A firm or a recognised investment exchange which becomes a participant firm part way through a financial year of the compensation scheme will not be liable to pay a share of a compensation costs levy or specific costs levy made in that year.

[Note: since a firm that becomes a participant firm in the course of a financial year of the compensation scheme will already be obtaining a discount in relation to the base costs levy through the modified fee provisions of FEES 4.2.7ER, no rule is necessary in FEES 6 for discounts on the base costs levy.]

Compensation costs levy for newly authorised firms

(1)
This rule deals with the calculation of:
1. (a)
  a participant firm’s compensation costs levy in the financial year of the compensation scheme following the financial year of the compensation scheme in which it became a participant firm; or
2. (b)
  a participant firm’s compensation costs levy in the financial year of the compensation scheme in which it had its permission extended, and the following financial year of the compensation scheme; and
the tariff base for the classes that relate to the relevant permissions or extensions, as the case may be.
(2)
Unless this rule says otherwise, the tariff base is calculated, where necessary, using the projected valuation of the business to which the tariff relates.
(3)
The rest of this rule only applies to a firm that becomes a participant firm, or extends its permission, on or after 1 April 2009.
1. (a)
  If a participant firm’s tariff base is calculated using data from a period that begins on or after it became a participant firm or on or after the date that the participant firm receives its extension of permission, as the case may be, the participant firm must use that data.
2. (b)
  If a participant firm satisfies the following conditions it must calculate its tariff base under (c) for the financial year following the financial year of the compensation scheme in which it became a participant firm or receives its extension of permission:
  1. (i)
    it became a participant firm or receives its extension of permission, as the case may be, between 1 April and 31 December inclusive; and
  2. (ii)
    its tariff base, but for this rule, is calculated by reference to the financial year ended in the calendar year ending 31 December or the twelve months ending 31 December before the financial year of the compensation scheme.
3. (c)
  If a participant firm satisfies the conditions in (b) it must calculate its tariff base as follows:
  1. (i)
    it must use actual data in relation to the business to which the tariff relates rather than projected valuations;
  2. (ii)
    the tariff is calculated by reference to the period beginning on the date it became a participant firm or had its permission extended, and ending on the 31 December before the start of the financial year of the compensation scheme; and
  3. (iii)
    the figures are annualised by increasing them by the same proportion as the period of 12 months bears to the period starting from when the participant firm became a participant firm, or had its permission extended, to the 31 December, as the case may be.
4. (d)
  Where a participant firm is required to use the method in (c) it must notify the FSCS of its intention to do so by the date specified in FEES 6.5.13R (Reporting requirements).
5. (e)
  Where a participant firm is required to use actual data under this rule, FEES 6 Annex 3AR is disapplied, to the extent it is incompatible, in relation to the calculation of that participant firm’s valuation date in its second financial year.

[Note: FEES 6.5.9CR was previously in FEES 6.4.10AR.]

Application of FEES 6.5.9CR

The table below sets out the period within which a participant firm’s tariff base is calculated (“the data period”) for second year levies calculated under FEES 6.5.9CR. The example is based on a participant firm that extends its permission on 1 November 2009 and has a financial year ending 31 March.

References in this table to dates or months are references to the latest one occurring before the start of the financial year of the compensation scheme unless otherwise stated.

Type of permission acquired on 1 November	Tariff base	Valuation date but for FEES 6.5.9CR	Data period under FEES 6.5.9CR
Dealing in investments as agent in relation to General Insurance Distribution	Annual eligible income	Financial year ended 31 March 2009 – so projected valuations will be used.	1 November to 31 December 2009

[Note: FEES 6.5.9DG was previously in FEES 6.4.10BG.]

Membership of several classes

A participant firm may belong to more than one class.

Reporting requirements

(1)
Unless exempt under FEES 6.2.1A R, a participant firm must provide the FSCS by the end of February each year (or, if it has become a participant firm part way through the financial year, by the date requested by the FCA) with a statement of:
1. (a)
  classes and categories to which it belongs; and
2. (b)
  the total amount of business (measured in accordance with the appropriate tariff base or tariff bases) which it conducted, in respect of the most recent valuation period (as specified by FEES 6 Annex 3AR (Financial Services Compensation Scheme - classes)) ending before the relevant year in relation to each of those classes and categories.
(2)
In this rule the relevant year means the year in which the month of February referred to in (1) falls.
(3)
Where the FCA grants a person’s application for annulment of a cancellation or variation of Part 4A permission under Schedule 6A to the Act and on the date the annulment takes effect the time for providing the statement in (1) has passed, then the requirement to have provided the statement does not apply, but a person must comply with (1) and (2), by providing the statement to the FCA on the date on which the person’s annulment takes effect.
(4)
[deleted]

For example, when the tariff base for a particular class is based on a firm's annual eligible income the valuation period for that class is the firm's last financial year ending in the year to 31 December preceding the financial year of the compensation scheme for which the calculation is being made.

If the information in FEES 6.5.13 R has been provided to the FCA under other rule obligations, or in accordance with the PRA Rulebook, a participant firm will be deemed to have complied with FEES 6.5.13 R.

The FSCS may use information provided in accordance with the PRA Rulebook or the FCA’s rules even where that information is provided other than by the end of February each year.

The FSCS may use information provided in accordance with the PRA Rulebook or the FCA’s rules that relates to a previous period, if that information has not yet been provided in respect of the financial year of the compensation scheme in which a levy is being imposed, applying FEES 6.5.16R(2).

If a participant firm does not submit a complete statement by the date on which it is due in accordance with FEES 6.5.13 R and any prescribed submission procedures:

(1)
the firm must pay an administrative fee of £250 (but not if it is already subject to an administrative fee under FEES 4 Annex 2A R, Part 1 or FEES 5.4.1 R for the same financial year); and
(2)
the compensation costs levy and any specific costs levy will be calculated using (where relevant) the valuation or valuations of business applicable to the previous period, multiplied by the factor of 1.10 (or, if it has become a participant firm part way through a financial year, on the basis of the information provided to the FCA for the purposes of FEES 4.4.2 R) or on any other reasonable basis, making such adjustments as seem appropriate in subsequent levies once the true figures are known.