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Financial Services Compensation Scheme

Answer

The Financial Services Compensation Scheme (FSCS) funds its compensation costs through levies on the financial services sector and recoveries against firms that have failed. As FSCS levies industry following payment of compensation or securing continuity for policyholders, it has the ability to borrow privately from a £3 billion revolving credit facility to meet short-term funding needs, with any lending repaid through levies. As a last resort, it can also request to borrow from HM Treasury, with any government borrowing also repaid through levies. This means that, even in the event of last-resort public financial support, the financial services sector will fund FSCS’s costs through a levy alongside recoveries.

Under rules set by the Prudential Regulation Authority (PRA), eligible life insurance policyholders – including customers of life annuity and bulk purchase annuity contracts – are 100% protected by the FSCS for any claims against an authorised insurer in the event that it fails. For a life insurance failure, levies would be payable by other life insurance and pensions providers.

The PRA sets the rules for policyholder protection including the FSCS funding of insurance compensation, including long-term insurance such as annuities. In doing so, it has rules in place to ensure FSCS can safely levy the insurance sector and meet its costs. The FSCS also closely monitors and regularly forecasts potential claims and compensation costs to ensure it can meet these within its available financial means. The PRA also conducts stress tests of life insurers, most recently in 2025.

Finally, FSCS also maintains contingency plans for a potential life insurance failure. These plans are subject to independent assurance through FSCS's assurance framework and are designed to support an effective and coordinated response, including engagement with regulators, firms and other stakeholders.

Secondary information

Type

Written question

Reference

HL1950

Session

2026-27

Grouped for answer

Yes

Subjects

Financial Services Compensation Scheme

Link

View this Written question on www.parliament.uk