FEES 6.1 Application

1. (1)

   Firms which are not participant firms (such as certain types of 16 service companies, ICVCs and, for the purposes of FEES 6, pre-IP completion day incoming EEA firms1615) are not required to contribute towards the funding of the compensation scheme.

2. (2)

   The12 fees levied in relation to the carrying on of insurance market activities by members will be imposed on the 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 under COMP. The PRA Rulebook deals with funding for the FSCS’s functions for depositor protection and policyholder protection.12

Section 213(3)(b) of the Act requires the appropriate regulator to make rules to enable the FSCS to impose levies on authorised persons, and on recognised investment exchanges that are operating a multilateral trading facility or operating an organised trading facility,13 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 FSCS12 may include up to the greater of one third of the compensation costs expected in the 36-month period following the12 1 April of the financial year of the compensation scheme in relation to which the levy is imposed12, or the compensation costs expected in the 12 months following that date.

9The total amount of all management expenses levies attributable to a12 financial year and levied by the FSCS under this chapter or under the PRA Rulebook12 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 seven 17 classes:12 the General Insurance Distribution Claims class; the Investment Intermediation Claims class; the Investment Provision Claims class; the Home Finance Intermediation Claims class; the Debt Management Claims class; the deposit acceptors’ contribution class; and the Funeral Plans Claims class17.14 The permissions held by a participant firm determine into which class, or classes, it falls.

The9 provisions on the allocation of levies to classes912 2 meet9 a requirement of section 213(5) of the Act that the FCA12, 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 insurance12 to make payments to or in respect of policyholders or to safeguard policyholders, under PRA rules made under sections 216(3) or (4), 217(1) or 217(6) of the Act12;5

   6
3. (2A)

   18expenses incurred as a result of the FSCS making the arrangements to secure continuity of funeral plan contracts or to make payments under FCA rules made under sections 215A(3) or (4) of the Act;

4. (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

5. (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 50% of12 the base costs of running the compensation scheme in a financial year12, 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 The PRA allocates the other 50% of the base costs under its rules.12 Included in base costs12 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 year12. 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).12 When the FSCS imposes a specific costs levy, the levy is allocated to the class which gives rise to12 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 year12 of the compensation scheme to which the levy relates. The amount that each participant firm pays towards the specific costs levy imposed on a class14 is calculated by reference to the amount of business conducted by the firm in that class, or categories within that class14. Each class or category14 has a 14"tariff base" for this purpose, set out in FEES 6 Annex 3AR12. Participant firms may be exempt from contributing to the specific costs levy.

The20 limit on the management expenses attributable to the forthcoming financial year12 of the compensation scheme12 will be consulted on in January each year.20

In imposing a compensation costs levy in each financial year12 of the compensation scheme the FSCS will take into account the compensation costs which the compensation scheme12 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)

   [deleted]12

   9
2. (2)

   [deleted]12

   21
3. (3)

   12the compensation costs it expects to incur in the financial year of the compensation scheme in relation to which the levy is imposed; or, if greater

4. (4)

   12one third of the compensation costs it expects to incur in the 36 months following 1 April of the financial year of the compensation scheme in relation to which the levy is imposed (see FEES 6.3.1R (Imposing management expenses and compensation costs levies)).

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

1. (1)

   [deleted]12

2. (2)

   [deleted]12

3. (3)

   [deleted]12

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;

5. (5)

   in paying interest, principal and other costs from borrowing to allow the FSCS to pay claims attributable to a particular class; or18

6. (6)

   18in connection with making arrangements to secure continuity of funeral plan contracts;

are also treated as compensation costs. Compensation costs are attributed to the class which gives rise to12 the costs12 up to relevant levy limits. Classes (other than the deposit acceptors’ contribution class)14 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 year12 for the purposes of a levy.29

The FCA has made rules providing that compensation costs and specific costs attributable to the classes (other than the deposit acceptors’ contribution class),14 and 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 the deposit acceptors’ contribution class.14 The deposit acceptors’ contribution class14 may contribute to compensation costs levies or specific costs levies funded by the retail pool, but may not itself14 receive any such funding. 14