Prudential Regulation Authority Rulebook

28.

Section 213(3)(b) of FSMA requires the PRA to make rules to enable the FSCS to impose levies on authorised persons (or any class of 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.

29.

Section 224F of FSMA enables the PRA 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 FSMA, it is required by HM Treasury to act in relation to relevant schemes. These rules are set out in the Management Expenses in respect of Relevant Schemes Part.

30.

Section 223 of FSMA prevents the FSCS from recovering, through a levy, any management expenses attributable to a particular period in excess of the limit set in the Management Expenses Levy Limit and Base Costs Part and FCA rules as applicable to that period. These rules are set out in the Policyholder Protection Part and Management Expenses Levy Limit and Base Costs Part.

31.

Although a member is a participant firm for the purposes of most provisions of the Policyholder Protection Part, the PRA expects a member to be excluded from the definition of participant firm for the purposes of Chapter 21, and transitional provision Rule 22.6-22.8 in Chapter 22, the Management Expenses Levy Limit and Base Costs Part and the Management Expenses in respect of Relevant Schemes Part. This is because the fees levied n relation to the carrying on of insurance market activities by members will be imposed on the Society rather than individually on each member.

32.

The PRA’s rules enable the FSCS to impose levies on participant firms. The PRA has given the FSCS discretion to apply levies on the general insurance provision class (Class B1) and the life and pensions provision class (Class C1). The FSCS may impose three types of levy on the insurance classes Class B1 and Class C1: a management expenses levy (consisting of a base costs levy and a specific costs levy), a compensation costs levy and a management expenses levy in respect of relevant schemes levy (ie a levy to meet the management expenses incurred by the FSCS under FSMA Part 15A). The FSCS has discretion as to the amount and timing of the levies imposed.

33.

The PRA expects that in calculating a compensation costs levy, the FSCS 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 twelve months following that date.

34.

In 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 between the two PRA insurance classes, Class B1 and Class C1. 

35.

The Policyholder Protection Part, which requires the FSCS to allocate levies to classes up to its levy limit, meets a requirement of section 213(5) of FSMA that the PRA make rules to enable the FSCS to impose levies that 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.

36.

The PRA expects the FSCS to collect a management expenses levy. A management expenses levy may consist of two elements. The first is a base costs levy for the base costs of running the compensation scheme in a financial year. This includes costs that are not dependent upon the level of activity of the compensation scheme and which therefore are not attributable to any specific class. 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 the 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. This is because the insurance cover is likely to benefit each class which may have costs allocated to the other if the levy limit of the other class is breached. 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.

37.

The 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 the FSCS secures against the risk of the 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. 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 the class to which the FSCS has allocated specific costs. Each class has a separate ‘tariff base’ for this purpose, set out in Annex 2 of the Policyholder Protection Part. Participant firms may be exempt from contributing to the specific costs levy.

38.

The PRA and FCA will consult on the limit on the management expenses attributable to the forthcoming financial year of the FSCS in January each year.

39.

Insurance compensation costs are attributed to the general insurance provision (Class B1) or the life and pensions provision (Class C1). The PRA expects that, when the FSCS imposes an insurance compensation costs levy, the levy is allocated to Class B1 or Class C1 up to its levy limit.

40.

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

41.

The PRA expects that if a participant firm is a member of more than one class, the total compensation costs levy and specific costs levy for that firm in a particular year will be the aggregate of the individual levies calculated for the firm in respect of each of the insurance classes for that year. Each class has a levy limit which is the maximum amount which may be allocated to that particular class in a financial year for the purposes of the levy.

42.

A participant firm to which the conditions in Rule 21.5 of the Policyholder Protection Part no longer apply will then become subject to levies in accordance with Rules 21.7 to 21.9 of the Policyholder Protection Part and the Management Expenses Levy Limit and Base Costs Part, as applicable.

43.

If a firm fails to notify the FSCS of an exemption under Rule 21.5 of the Policyholder Protection Part by 31 March, the PRA expects that it will be treated as non-exempt for the whole of the next financial year.

44.

The PRA expects that the FSCS will usually levy once in each financial year to meet expected expenditure. For compensation costs, the PRA expects the FSCS will levy for the greater of the period of twelve months of expected expenditure or, one third of the expected expenditure in the period of 36 months following 1 July in that year, if greater. However, if the compensation costs or specific costs incurred, or expected to be incurred, exceed the amounts held or reasonably expected to be held to meet those costs, the FSCS may, at any time during the financial year, do one or more of the following:

1. (a) impose an interim compensation costs levy or management expenses levy; or
2. (b) borrow, including from the National Loans Fund; or
3. (c) utilise money collected from firms.

45.

The FSCS will generally impose a levy rather than borrow or utilise funds as described in (c), unless the latter options appear to it to be preferable in the specific circumstances prevailing at the relevant time; for example, to address short-term liquidity issues or in order to deal with a significant failure without having to wait for a levy to be imposed or collected.

46.

Paragraphs 31(7) and 35 of Schedule 1ZB of FSMA permit the PRA to recover fees and section 213(6) of FSMA permits the FSCS to recover shares of the FSCS levy payable, as a debt owed to the PRA and the FSCS respectively. The PRA and the FSCS, as relevant, will consider taking action for recovery (including interest) through the civil courts.

47.

The PRA may also take regulatory action in relation to the non-payment of a share of the FSCS levy, after reference of the matter to the PRA by the FSCS. What action (if any) is taken by the PRA will be decided upon in the light of the particular circumstances of the case.

48.

The PRA does not expect that a poor estimate or forecast by a fee or levy payer, when providing information relevant to an applicable tariff base, is likely, of itself to, amount to an exceptional circumstance for the purposes of Rules 21.2 or 21.3 of the Policyholder Protection Part. By contrast, a mistake of fact or law by a fee or levy payer may give rise to such a claim.