Financial Conduct Authority (FCA) executive director Sheldon Mills has warned the Treasury Committee that the compensation payments might increase in the coming years.

He was answering questions from the MPs yesterday (Monday 21 February 2022).

He said that the Financial Services Compensation Scheme (FSCS) estimated last year that the total levy was just above £1bn.

“What happened was that fewer firms failed, so consumers didn’t need to call on the FSCS to get compensation.

“I think the actual numbers for 2021/2022 are around £717m.”

Yet he stressed that there are still firms at risk of failure, especially in self-invested personal pensions.

Mills added: “We do expect, however, that this number will probably increase in the coming years.

“There are still firms that might be at risk of failure, particularly in self=invested personal pensions and a few other areas.”

The FCA published a discussion paper aiming to improve the compensation framework of financial services. The paper specifically looks at how the FSCS is funded.

Mills admitted that it is difficult to have a sensible levy which reflects the principle of “the polluter pays”.

He said: “We recognise that larger firms, by and large, have been meeting the standards and complying.

“There are some smaller firms that might not contribute as much because of their size, which might fail to consumers. That is putting a significant cost on the levy.

“I think the intermediaries and investment firms’ part of the levy is around £300m or so at the moment.”

Mills said that the FCA needs to tackle that harm.

“Our consumer investment strategy, which we published last year is seeking to improve standards in that area and tackle that harm. It’s something which we’re looking at,” he added.

Mills also showed reserve on potentially using fines collected from rogue firms by regulators to help fund the compensation.

He said: “Obviously, the fines go into the Treasury’s consolidated fund, but we get calls that they should fund the organisation, they should fund the FSCS and also fund the levy.

“In a sense, that’s a matter for the government to think through.

“My only caution about things like that is the incentives that it can drive in terms of the agency and what it does in terms of its activity.

“I’m always personally cautious in relation to those sorts of suggestions.”