FEES 6.1 Application

1. (1)

   Firms which are not participant firms (such as certain types of incoming EEA firms, service companies and ICVCs) are not required to contribute towards the funding of the compensation scheme.

2. (2)

   Although a member is a participant firm for the purposes of most provisions of COMP, a member is excluded from the definition of participant firm for the purposes of FEES 6 (see definition of participant firm in Glossary). This is because the fees levied in relation to the carrying on of insurance market activities by members will be imposed on Society rather than individually on each member (see FEES 6.3.24 R).

The purpose of this chapter is to set out the requirements on participant firms to pay levies imposed by the FSCS to provide funding for its functions.

Section 213(3)(b) of the Act requires the appropriate regulator to make rules to enable the FSCS to impose levies on authorised persons in order to meet its expenses. These expenses include in particular expenses incurred, or expected to be incurred, in paying compensation, borrowing or insuring risks.

Section 224F of the Act enables the appropriate regulator to make rules to enable the FSCS to impose levies on authorised persons (or any class of authorised persons) in order to meet its management expenses incurred if, under Part 15A of the Act, it is required by HM Treasury to act in relation to relevant schemes. But those rules must provide that the FSCS can impose a levy only if the FSCS has tried its best to obtain reimbursement of those expenses from the manager of the relevant scheme.6

The FSCS may impose three 6types of levy: a management expenses levy (consisting of a base costs levy and a specific costs levy)9, a compensation costs levy and a MERS levy.6 The FSCS has discretion as to the amount and 9timing of the levies imposed.

In calculating a compensation costs levy, the FSCS:9

1. (1)

   for claims for protected deposits, may include compensation costs expected in the 12-month period following the date of the levy; and9

2. (2)

   for other protected claims, may include up to the greater of one third of the compensation costs expected in the 36-month period following the date of the levy, or the compensation costs expected in the 12 months following that date.9

9The total amount of all management expenses levies attributable to a financial year will be restricted to the amount set out on an annual basis in FEES 6 Annex 1 R.

10In order to allocate a share of the amount of specific costs and compensation costs to be funded by an individual participant firm, the funding arrangements are split into twelve classes: the deposits class; the life and pensions provision class; the general insurance provision class; the investment provision class; the life and pensions intermediation class; the home finance intermediation class, the investment intermediation class; the general insurance intermediation class; the deposit acceptor's contribution class; the insurers - life contribution class; the insurers - general contribution class; and the home finance providers and administrators' contribution class. The permissions held by a participant firm determine into which class, or classes, it falls.

The9 provisions on the allocation of levies to classes9 up to their levy limits2 meet9 a requirement of section 213(5) of the Act that the appropriate regulator , in making rules to enable the FSCS to impose levies, must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised person reflects, so far as practicable, the amount of claims made, or likely to be made, in respect of that class of person.

Section 223 of the Act (Management expenses) prevents the FSCS from recovering, through a levy, any management expenses attributable to a particular period in excess of the limit set in COMP as applicable to that period. 'Management expenses' are defined in section 223(3) to mean expenses incurred or expected to be incurred by the FSCS in connection with its functions under the Act, except:

1. (1)

   expenses incurred in paying compensation;

   5
2. (2)

   expenses incurred as a result of the FSCS making the arrangements to secure continuity of insurance set out in COMP 3.3.1 R and COMP 3.3.2 R or taking the measures set out in COMP 3.3.3 R and COMP 3.3.4 R when a relevant person is an insurer in financial difficulties;5

   6
3. (3)

   expenses incurred under section 214B or section 214D of the Act as a result of the FSCS being required by HM Treasury to make payments in connection with the exercise of the stabilisation power under Part 1 of the Banking Act 2009; and65

4. (4)

   expenses incurred under Part XVA of the Act as a result of the FSCS being required by HM Treasury to act in relation to a relevant scheme.6

A management expenses levy may consist of two 2elements. The first is a base costs levy, for the base costs of running the compensation scheme in a financial year, that is, costs which are not dependent upon the level of activity of the compensation scheme and which therefore are not attributable to any specific class.9 Included in this category are items such as the salary of the members of the board of the FSCS, the costs of the premises which the FSCS occupies, and its audit fees. It would also likely include the cost of any insurance cover secured by FSCS against the risk of it paying claims out in circumstances where the levy limit of the particular class to which the claim would otherwise be attributable has exceeded its levy limit for the year, as the insurance cover is likely to benefit all classes which may have costs allocated to them if the levy limit of another class is breached.2 The amount that each participant firm pays towards a base costs levy is calculated by reference to the regulatory costs paid by the firm. All participant firms are liable to contribute towards a base costs levy.

10The second element of a management expenses levy is a specific costs levy for the "specific costs" of running the compensation scheme in a financial year. These costs are attributable to a class, and include the salary costs of certain staff of the FSCS and claims handling and legal and other professional fees. It also may include the cost of any insurance cover that FSCS secures against the risk of FSCS paying out claims above a given level in any particular class (but below the levy limit for that class for the year). The specific costs are attributed to the class which is responsible for those costs. When the FSCS imposes a specific costs levy, the levy is allocated to the class which is responsible for those costs up to the relevant levy limits. Specific costs attributable to certain classes, which exceed the class levy limits, may be allocated to the retail pool. The FSCS may include in a specific costs levy the specific costs that the FSCS expects to incur (including in respect of defaults not yet declared at the date of the levy) during the financial year of the compensation scheme to which the levy relates. The amount that each participant firm pays towards the specific costs levy is calculated by reference to the amount of business conducted by the firm in each of the classes to which the FSCS has allocated specific costs. Each class has a separate "tariff base" for this purpose, set out in FEES 6 Annex 3A. Participant firms may be exempt from contributing to the specific costs levy.

The20 limit on the management expenses attributable to the forthcoming financial year of the FSCS. will be consulted on in January each year.20

In imposing a compensation costs levy in each financial year of the compensation scheme the FSCS will take into account the compensation costs which the FSCS has incurred and has not yet raised through levies, any recoveries it has had made using the rights that have been assigned to it or to which it is subrogated and9 a further amount calculated taking into account:

1. (1)

   9for claims for protected deposits, those compensation costs it expects to incur (including in respect of defaults yet to be declared) in the 12 months following the date of the levy; and

2. (2)

   21for other protected claims:

   1. (a)

      the compensation costs it expects to incur in the 12 months following the date of the levy; or, if greater

   2. (b)

      one third of the compensation costs it expects to incur in the 36 months following the date of the levy (see FEES 6.3.1 R (Imposing management expenses and compensation costs levies)).

9Compensation costs are principally the costs incurred in paying compensation. Costs incurred:

1. (1)

   in securing continuity of long-term insurance; or

2. (2)

   in safeguarding eligible claimants when insurers are in financial difficulties; or

3. (3)

   in making payments or giving indemnities under COMP 11.2.3 R; or

4. (4)

   as a result of the FSCS being required by HM Treasury to make payments in connection with the exercise of the stabilisation power under Part 1 of the Banking Act 2009; or

5. (5)

   in paying interest, principal and other costs from borrowing to allow the FSCS to pay claims attributable to a particular class;

are also treated as compensation costs. Compensation costs are attributed to the class which is responsible for the costs. When the FSCS imposes a compensation costs levy the levy is allocated to the class which is responsible for the costs up to relevant levy limits. Certain classes may be funded, for compensation costs levies beyond the class levy limit, by the retail pool.

If a participant firm is a member of more than one class9,2 the total compensation costs levy and specific costs levy for that firm in a particular year9 will be the aggregate of the individual levies calculated for the firm9 in respect of each of the classes for that year. Each class9 has a levy limit which is the maximum amount of compensation costs and specific costs9 which may be allocated to a particular class9 in a financial year for the purposes of a levy.29

The FCA has made rules providing that compensation costs and specific costs attributable to the intermediation classes and the investment provision class, which exceed the class levy limits, may be allocated to the retail pool. Levies allocated to the retail pool are then allocated amongst the other such classes, together with certain classes (known as FCA provider contribution classes). The FCA provider contribution classes may contribute to compensation costs levies or specific costs levies funded by the retail pool, but may not themselves receive any such funding. The FCA provider contribution classes have a different tariff structure to the other classes, based on regulatory costs (see FEES 6.5A.6 R).1011

Incoming EEA firms which obtain cover or 'top up' under the provisions of COMP 14 are firms whose Home State scheme provides no or limited compensation cover in the event that they are determined to be in default. Under FEES 6.6, the FSCS is required to consider whether incoming EEA firm's should receive a discount on the amount that they would otherwise pay as their share of the levy, to take account of the availability of their Home State cover. The amount of any discount is recoverable from the other members of the incoming EEA firm's class.92