CP1/26 – Financial Services Compensation Scheme – Management Expenses Levy Limit (MELL) 2026/27

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Responses are requested by Tuesday 10 February 2026.

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Responses can be sent by email to: CP1_26@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
David Lamb
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1: Overview

1.1 In this consultation paper (CP), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) set out the proposal for the Management Expenses Levy Limit (MELL) for the Financial Services Compensation Scheme (FSCS) for 2026/27. The MELL covers the FSCS’ costs of operating the UK’s statutory compensation scheme. This CP is supported by the FSCS’ publication of its Budget Update for 2026/27.

1.2 The FSCS is an industry-funded scheme which protects consumers when financial services firms fail. Its other functions include:

• making recoveries from failed financial institutions;
• promoting awareness of FSCS protection; and
• verifying account information provided by firms that enables faster pay-out to depositors.

1.3 Under the Financial Services and Markets Act 2000 (FSMA), the PRA and FCA must set a limit for the total management expenses that the FSCS can levy on financial services firms.^{footnote [1]} The MELL is the maximum amount that the FSCS may levy in a year for its operating costs without further consultation. It ensures that the FSCS has adequate funding to exercise the functions conferred on it by Part XV of FSMA and by rules made by the PRA and FCA.

1.4 This CP is relevant to all PRA and FCA-authorised firms, who fund the FSCS through levies. It contains no material of direct relevance to retail financial services consumers or consumer groups upon which they might need to act. As costs to authorised firms may be passed on to consumers in the form of higher prices, consumers may indirectly contribute to part of the costs of the FSCS. However, an efficient and adequately funded compensation scheme benefits all consumers. It helps secure an appropriate degree of protection for consumers of financial services firms and promotes the stability of, and confidence in, the UK financial system.

1.5 This CP proposes to set a MELL of £113 million for 2026/27, consisting of a management expenses budget of £108 million and an unlevied reserve of £5 million. The budget of £108 million represents an increase of £4.4 million from 2025/26, which is broadly in line with inflation. Excluding the cost of a new enhancement to the FSCS’ revolving credit facility (RCF), the proposal represents a nominal £6.6 million reduction on a like-for-like basis to the 2025/26 budget and an £11 million real terms reduction.

1.6 The proposed MELL would apply from Wednesday 1 April 2026, the start of the FSCS’ financial year, to Wednesday 31 March 2027.

1.7 The PRA has a statutory duty to consult when changing rules under FSMA s138J. The FCA is also required to consult when changing rules under FSMA s138I. The proposal would result in changes to the FSCS Management Expenses Levy Limit and Base Costs Part of the PRA Rulebook (Appendix 1) and the FEES 6 section of the FCA Handbook (Appendix 2).

1.8 In carrying out their policymaking functions, both the PRA and the FCA have had regard to all applicable legal obligations. This includes all matters that have informed the MELL proposal. The PRA and the FCA explain the ways in which having regard to these matters has affected the proposal in Chapter 3.

Structure of the CP

1.9 Chapter 2 of this CP contains the proposal for the FSCS’ MELL for 2026/27. The key points to note in the budget are set out, alongside further detail on the proposal, and an explanation of the FSCS’ unlevied reserve. A breakdown of the budget by line item is provided in Appendix 3. Detail on how the budget is allocated between the PRA and FCA funding classes is provided in Appendix 4.

1.10 Chapter 3 contains an analysis of legal requirements relevant to this CP. It assesses the costs and benefits of the proposed rules (including the impact on mutual societies) as required under FSMA.^{footnote [2]} It also contains the PRA’s and FCA’s assessment of the compatibility of the proposed rules with their respective statutory objectives (including the PRA’s secondary objectives) and regulatory principles.^{footnote [3]} Both authorities also assess whether they have carried out their duty to have due regard to the need to eliminate discrimination and to promote equality of opportunity in carrying out their policies, services and functions.^{footnote [4]}

Implementation

1.11 The PRA proposes that the implementation date for the changes resulting from this CP would be Wednesday 1 April 2026.

Responses and next steps

1.12 This consultation closes on Tuesday 10 February 2026. The PRA and the FCA invite feedback on the proposal set out in this consultation. Please address any comments or enquiries to CP1_26@bankofengland.co.uk. The PRA is accepting responses on behalf of both authorities. Any responses will be considered by both authorities and shared anonymously with the FSCS.

1.13 When providing your response, please tell us whether or not you consent to the PRA or the FCA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.14 Please also indicate in your response if you believe the proposal in this consultation paper is likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.15 Following consideration of the responses, the PRA proposes to issue a policy statement (PS) and the FCA proposes to issue a Handbook Notice so that the final rules can be in place for the start of the FSCS’ financial year on Wednesday 1 April 2026.

2: Proposal for the MELL 2026/27

2.1 In this chapter, the PRA and FCA set out the proposal for the FSCS’ MELL for 2026/27. The MELL covers the costs of operating the compensation scheme and is the maximum amount that the FSCS can levy for its operating costs to fulfil the obligations imposed on it by FSMA and as set out in the rules made by the PRA and FCA.

2.2 The MELL has two components: the management expenses budget, which is the forecast cost of running the compensation scheme over the year; and an unlevied reserve, which allows the FSCS to raise additional funds at short notice to meet costs that were not foreseen. It does not include claimants’ compensation costs as these depend on the number of claims received and are determined separately by the FSCS. More details about the compensation costs levy for 2025/26 and the forecast levy for 2026/27 can be found in the FSCS November 2025 Outlook.

2.3 This CP proposes to set a MELL of £113 million for 2026/27, consisting of a management expenses budget of £108 million and an unlevied reserve of £5 million.

2.4 The FSCS’ actual expenses for the year may differ from its budget according to the total number and type of claims received. At the end of the financial year, the FSCS will perform a reconciliation of the actual expenses for the year against the total amount levied and the allocation across classes. The FSCS is currently forecasting that its management expenses for the current year, 2025/26, will be £103.6 million, which is consistent with its budget for the year. If actual expenses are lower than the budget when reconciled at year end, the difference will be returned to firms by providing rebates or will be used to reduce firms’ future levies.

2.5 Both the Prudential Regulation Committee (PRC) and the FCA Oversight Committee considered the proposal for the MELL and gave approval for the consultation. The proposed rules through which the PRA and FCA set the MELL are in Appendices 1 and 2 respectively.

Management expenses budget

2.6 The proposed management expenses budget is £108 million for 2026/27. This represents an increase of £4.4 million (4%) from 2025/26, which is broadly in line with inflation. Excluding the new cost of an enhancement to the FSCS’ RCF, the proposal represents a nominal £6.6 million reduction on a like-for-like basis to the 2025/26 budget and an £11 million real terms reduction. The increase to the RCF is necessary to ensure that the FSCS can: support a new recapitalisation power of the Bank of England, facilitate faster payout in insolvency, and ensure that industry meets the cost of failure, reducing the risk that public funds will be needed in a default. The proposed budget absorbs the bulk of the cost of the enhanced RCF, which the FSCS attributes both to its ongoing efficiency efforts and to an expected fall in FCA advice claims for next year.

2.7 In line with previous years, the FSCS’ budget distinguishes between controllable costs, volume and complexity driven costs, and investment costs:

• controllable costs are the costs of running the FSCS that do not directly fluctuate with changes in the volume and complexity of claims;
• volume and complexity driven costs are costs that depend on the number and nature of claims; and
• investment costs support the FSCS’ delivery of its strategic ambition.

Splitting costs in this way helps to identify and communicate the key drivers for the FSCS’ expenses.

2.8 This section provides an overview of each cost category and discusses the central themes underlying the budget within those for 2026/27. A breakdown of the budget by line item is provided in Appendix 3.

Controllable costs

2.9 The FSCS’ controllable costs budget is £69.8 million for 2026/27. This is an increase of £13.4 million from 2025/26, driven primarily by the projected £11 million cost of the necessary enhancement to the FSCS’ RCF as well as a much smaller increase in people costs. Excluding the cost of the enhanced RCF, controllable costs are £58.8 million, which is an increase of £2.4 million (4%) from 2025/26 and broadly in line with inflation.

2.10 Enhanced RCF to support funding readiness: The RCF is a borrowing facility, available within one business day, that the FSCS maintains to fund pay-outs following significant or multiple firm failures. Industry bears the cost of maintaining the RCF, which is distributed, as a shared FSCS management expense, in proportion to each firm’s level of FSCS-protected business.

2.11 Following recent regulatory developments, which may mean that the FSCS needs to provide larger sums, more quickly, after a failure occurs, the FSCS has been working closely with HM Treasury and the Bank of England to enhance its RCF. Those developments include the introduction of the recapitalisation mechanism for resolution under the Bank Resolution (Recapitalisation) Act, the recent increase to the deposit protection limit, the development of the FSCS’ portal to allow for faster payout in insolvency, and planned increases to minimum requirement for own funds and eligible liabilities MREL^{footnote [5]} thresholds. A larger facility that allows for longer repayment schedules will enable greater flexibility in how the FSCS responds to insolvency and contributes to resolution – particularly in the event of large or concurrent deposit failures. The facility should help to ensure that industry meets the first cost of failures and to reduce the risk of public funds being called upon.

2.12 The FSCS forecasts the total cost of its RCF for 2026/27 to be £18 million, which is an increase of £11 million from 2025/26. This will fund an enhanced RCF of £3 billion and includes termination fees for the existing £1.45 billion RCF, which is expected to terminate early when the new facility is finalised. The additional cost of the enhanced RCF will be allocated to the deposits class only (see Appendix 4) and distributed in proportion to each firm’s level of protected deposits. This means that each firm in the deposits class will continue to bear some of the costs associated with the facility. This is in line with the general approach to shared FSCS management expenses, and is judged to be appropriate because the purpose of the enhanced facility is to ensure that the FSCS has the liquidity and flexibility it needs to discharge its functions in relation to the entire population of deposit-taking firms.

2.13 People costs: People costs are projected to increase by £3.2 million. A significant driver of this is the addition of 14 permanent staff members – primarily in the areas of technology and communications – and 4 contractors. This generally reflects the FSCS’ strategy of bringing previously outsourced services in house to reduce overall costs and increase efficiencies, whilst making use of contractors to manage short-term needs (see also paragraph 2.15, below). Other factors affecting people costs include salary inflation (see paragraph 2.16, below) and increases to staff benefits in line with inflation.

2.14 Cost efficiencies: The FSCS will partially offset increases to controllable costs through efficiencies in other areas. For example, reductions to communications costs – achieved by prioritising media, social media, and third-party engagement over paid advertising – have produced a communications budget that is now 51% lower than it was three years ago.^{footnote [6]} Moreover, the FSCS continues to prioritise recoveries from past failures, which lower the overall cost of the FSCS to industry by reducing levies.

Volume and complexity driven costs

2.15 Volume and complexity driven costs are budgeted to fall by £9.5 million (23%) relative to 2025/26, to £32.7 million for 2026/27. There are three main factors driving this change: the FSCS’ new claims handling model (with a new outsourcing partner and a greater proportion of complex claims being processed in-house), a projected reduction in new advice claims for the year, and a variety of process enhancements designed to improve productivity, efficiency and speed. This budget proposal reflects cost savings from previous investments being realised.

Salary inflation

2.16 For 2026/27, the budget includes a proposed salary increase of 3%, on average, which is applicable to staff salaries across both the controllable and volume and complexity driven cost categories. 2% of this is earmarked for general salary inflation, with a 1% pot to be utilised for areas of greater retention risk and the lower paid. Additionally, there is a proposed bonus provision of 10%, which is in line with the 2025/26 budget.

Investment costs

2.17 The proposed investment budget is £5.5 million, which is an increase of £0.5 million, or 10%, relative to 2025/26. This is largely to support year 1 of the FSCS’ new 5-year strategy, which the FSCS plans to commence in 2026/27, and which is expected to be publicised shortly. The budget covers 8 strategic initiatives (3 ongoing projects from 2025/26 and 5 new ones), all of which support the delivery of the FSCS’ core statutory functions. These include plans for improvements to advice claims handling, further enhancements to depositor and policyholder outcomes, and upgrades to risk management processes and cybersecurity operations, in line with FSCS’ objectives and regulators’ priorities.

Table 1: Management expenses, activity-based costing (£ million)^(a)

Budget allocation

2.18 The management expenses budget component of the MELL is allocated across PRA and FCA firms to broadly reflect how the operating costs of the FSCS are spent. This determines the levy each firm pays in relation to the MELL. The split between PRA and FCA regulatory fee blocks is made up of:

• a base costs element, which is related to the general running costs of the FSCS and is not directly dependent on the volume or type of claims received. Base costs are split 50/50 between the PRA and FCA regulatory fee blocks as set out in the PRA and FCA rules, and allocated to individual firms in proportion to their regulatory fees; and
• a specific costs element, which includes the costs of assessing claims, achieving recoveries, and making payments. Specific costs are allocated to the PRA and FCA regulatory fee blocks based on the cost and volume of claims relating to the PRA and FCA funding classes.

2.19 The budget proposal includes base costs of £36.6 million and specific costs of £71.4 million. Appendix 4 shows a breakdown of the proposed budget by funding class. The PRA funding class allocation is forecast to increase from £40.4 million to £51.1 million due primarily to the cost of the enhanced RCF being allocated to the deposits class (see paragraphs 2.10-2.12, above). The FCA funding class allocation is forecast to fall by £6.3 million, from £63.2 million to £56.9 million.

2.20 Further information about the proposed management expenses budget is in the FSCS’ Budget Update for 2026/27.

Unlevied reserve

2.21 The unlevied reserve is an important part of the FSCS’ contingency planning. It allows the FSCS to raise additional funds at short notice, without further consultation, to meet costs that were not foreseen when the management expenses levy was set.^{footnote [7]} The PRA and the FCA consider this an appropriate way to manage uncertainty and avoid unnecessarily burdening firms.

2.22 The proposed unlevied reserve for 2026/27 is £5 million, which is unchanged from 2025/26.

3: Legal Requirements

3.1 Under FSMA, the PRA and FCA are required to carry out and publish a cost benefit analysis (CBA) when proposing draft rules,^{footnote [8]} as well as to set out:

• an explanation of the reasons that making the proposed rule is compatible with the PRA’s and the FCA’s objectives;
• a consideration of whether making the proposed rule is compatible with their duty to have regard to the regulatory principles; and
• a statement as to whether the impact of the proposal upon mutuals will be significantly different than upon other authorised persons.

3.2 The PRA and the FCA should also have regard to aspects of the Government’s economic policy as recommended by HM Treasury.^{footnote [9]}

3.3 The PRA and FCA are also required by the Equality Act 2010 to have due regard to the need to eliminate discrimination and to promote equality of opportunity in carrying out their policies, services, and functions.^{footnote [10]}

PRA objectives analysis

3.4 The PRA has two primary objectives: a general objective to promote the safety and soundness of regulated firms, and an insurance-specific objective to contribute to the securing of an appropriate degree of protection for those who are or may become policyholders. The PRA also has two secondary objectives:

• a competition objective, which is focused on facilitating effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities; and
• a competitiveness and growth objective, which is focused on facilitating, subject to alignment with relevant international standards: (a) the international competitiveness of the economy of the UK (including, in particular, the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term.

3.5 The PRA considers that the proposed rule on setting the MELL is compatible with its general primary objective. The continued operation of the FSCS with a MELL set at an appropriate level assists in minimising the adverse impact of a PRA-authorised firm’s failure on consumers and enables the FSCS to fulfil its core functions without placing an excessive burden on firms. This promotes firms’ safety and soundness and supports the stability of the UK financial system. The increase in the MELL proposed for the 2026/27 budget year is broadly in line with inflation, and includes an enhanced RCF to provide increased liquidity and support the operation of resolution tools, which helps to enhance confidence in the UK financial system.

3.6 The PRA considers that the proposed rule to set the MELL is compatible with its insurance-specific primary objective because the continued operation of the FSCS with an adequately set MELL assists in ensuring an appropriate degree of protection for policyholders of a PRA-authorised firm that has failed.

3.7 The PRA considers the MELL is beneficial for competition as the good functioning of the FSCS helps to facilitate orderly failures within the financial system. In turn, that allows for the orderly exit of firms without causing systemic disruption, maintaining consumer confidence in the market and fostering a competitive environment. The FSCS also imposes levies on firms proportionately, promoting a level playing field. Any levy on a firm as a result of this proposal will take into account the business volume of the firm levied, as well as the claims received in the relevant classes. As such the MELL is not likely to disadvantage specific groups of firms, in particular smaller firms.

3.8 The PRA also considers that the MELL is compatible with its international competitiveness and growth objective. Setting the MELL will support the FSCS in the timely payment of compensation in the event of firm failures, helping to ensure a compensation scheme that is efficient and effective. This is likely to help increase consumer confidence in authorised financial services where the FSCS applies, supporting international competitiveness and growth.

3.9 The PRA considers that the proposed FSCS MELL is appropriate. The limit proposed ensures that the FSCS has adequate resources to perform its statutory functions for the coming year. In addition, in setting the MELL for 2026/27, the PRA and FCA have ensured that there is an adequate unlevied reserve to prevent any disruption to the work of the FSCS if it needs to exceed its operating budget for unexpected reasons. The PRA believes that an appropriate balance has been struck between the need to ensure its regulatory objectives are fulfilled and the need to keep regulatory burdens proportionate.

PRA ‘have regards’ analysis

3.10 In developing this proposal, the PRA has had regard to its framework of regulatory principles as set out in section 3B FSMA. The regulatory principles that the PRA considers are most material to the proposal include:

• The need to use the resources of each regulator in the most efficient and economical way: The FSCS is operationally independent of, but accountable to, the PRA. This means that the PRA’s resources are not directly involved in carrying out the proposed activities. Moreover, the PRA Rules require the FSCS to use its resources in the most efficient and economical way when carrying out its functions. Setting the MELL, after public consultation, encourages good internal management and effective operating procedures.
• The principle that a burden or restriction should be proportionate to the benefits: The PRA’s assessment of the fairness and proportionality of the burden and benefits relating to this proposal can be found in the cost benefit analysis section of this CP.

3.11 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA consider that ‘have regard’ to not be a significant factor for this proposal.

FCA objectives and regulatory principles: Compatibility statement

3.12 When consulting on new rules, the FCA is required by section 138I(2)(d) FSMA to include an explanation of why it believes making the proposed rules is compatible with:

• its general duty, under section 1B(1) FSMA to, so far as is reasonably possible, act in a way which is compatible with its strategic objective and which advances one or more of its operational objectives;
• the requirement under section 1B(4A) FSMA to, so far as is reasonably possible, act in a way which advances the secondary international competitiveness and growth objective; and
• its general duty under section 1B(5)(a) FSMA to have regard to the regulatory principles in section 3B FSMA.

3.13 This section of Chapter 3 sets out the FCA’s view of how the proposed rules are compatible with its duty to discharge its general functions (which include rulemaking) in a way which promotes effective competition in the interests of consumers (section 1B(4)). This duty applies in so far as promoting competition is compatible with advancing the FCA’s consumer protection and/or integrity objectives.

3.14 The FCA considers that the proposal set out in this consultation is compatible with the statutory objectives.

Consumer protection

3.15 The proposal is primarily intended to advance the FCA’s operational objective of consumer protection (section 1C FSMA). The role of the FSCS is, in general, to provide compensation to consumers of financial products when authorised firms are unable, or likely to be unable, to meet their obligations. A compensation scheme provides a safety net, offering protection to consumers, which in turn leads to greater confidence in their dealings with financial services firms, benefitting all firms and leading to a stronger financial system. If the FSCS was unable to process claims because of financial constraints due to an inappropriate MELL, this would undermine the protection offered to consumers.

Competition

3.16 The proposal is also considered to be compatible with the FCA’s competition objective to promote effective competition in the interests of consumers (section 1E FSMA). Any levy placed on a firm because of this proposal will take into account the firm’s size, and as such is not likely to disadvantage specific groups, in particular smaller firms.

International competitiveness and growth

3.17 The FCA considers that the MELL is compatible with the secondary international competitiveness and growth objective. Setting the MELL will assist the FSCS in the timely payment of compensation in the event of firm failures and meeting its objective of providing a compensation scheme that is efficient, fair, approachable, and responsive. This is likely to help increase consumer confidence in authorised financial services where the FSCS applies, supporting international competitiveness and growth.

Conclusion

3.18 Subject to this consultation, the FCA considers that the proposed FSCS MELL is appropriate. The limit proposed ensures the FSCS has adequate resources to perform its functions for the coming year. In addition, in setting the MELL for 2026/27, the PRA and the FCA have allowed for sufficient unlevied reserve to prevent disruption to the work of the FSCS if it needs to exceed its operating budget for unexpected reasons.

3.19 When consulting on new rules, the FCA is also under a duty to discharge its general functions in a way which promotes effective competition in the interests of consumers (section 1B(4) FSMA). This duty applies in so far as promoting competition is compatible with advancing the FCA’s consumer protection and/or integrity objectives.

3.20 Setting a FSCS MELL has no material significance in relation to minimising the extent to which it is possible for a business carried on by an authorised person or a recognised investment exchange, or in contravention of the general prohibition, to be used for a purpose connected with financial crime.

FCA ‘have regards’ analysis

3.21 As part of this consultation process, the FCA also has to have regard to the regulatory principles set out in section 3B FSMA. The FCA believes that the proposed MELL is compatible with these regulatory principles. The regulatory principles most relevant to this proposal are:

• the need to use the resources of each regulator in the most efficient and economical way; and
• the principle that a burden or restriction should be proportionate to the benefits.

3.22 The FSCS is operationally independent of, but accountable to, the FCA. This means that the FCA’s resources are not directly involved in carrying out the proposed activities.

3.23 The FCA rules require the FSCS to have regard to the need to use its resources in the most efficient and economical way when carrying out its functions. Setting the MELL, after public consultation, encourages good internal management and effective operating procedures.

3.24 The FCA believes that an appropriate balance has been struck between the need to ensure their regulatory objectives are fulfilled and the need to keep regulatory burdens proportionate.

3.25 The FCA’s assessment of the fairness and proportionality of the burden and benefits relating to this proposal can be found in the cost benefit analysis section of this CP below.

Cost Benefit Analysis

Introduction

3.26 FSMA s138I and s138J require the PRA and the FCA to publish a CBA when proposing draft rules, defined as ‘an analysis of the costs, together with an analysis of the benefits that will arise if the proposed rules are made’. Before making those rules, the PRA and FCA are required to: (a) consult each other, and (b) after doing so, publish a draft of the proposed rules in the way that appears to be best calculated to bring them to the attention of the public.

3.27 In this section, the PRA and FCA focus on the costs and benefits associated with the incremental change in the MELL for 2026/27, relative to the MELL for 2025/26. The analysis also illustrates the costs and benefits of regulatory action by setting them against a baseline of the MELL not being levied and the FSCS not paying out. The incremental change is an increase of £4.4 million, which is small when compared with the overall costs and benefits associated with the MELL.

3.28 The analysis presents estimates of the significant impacts of the proposal, including monetary values for the impacts where it is reasonably practicable to do so. For other impacts, a qualitative explanation is provided. The proposal is based on weighing up all the impacts expected and reaching a judgement about the appropriate level of regulatory intervention.

3.29 The PRA, in line with its Statement of Policy on the PRA’s Approach to Cost Benefit Analysis (December 2024), has not consulted with its CBA Panel as the increase in costs of £4.4 million relative to 2025/26 is well below the PRA’s materiality threshold that determines which CBAs go to the Panel.

3.30 The FCA, in line with its Statement of Policy on Cost Benefit Analyses (July 2024) (paragraph 3.20), has not consulted with its CBA Panel in respect to the rules for setting the MELL.

Benefits

3.31 Setting the FSCS budget at £108 million and the MELL at £113 million would ensure that the FSCS can continue to operate and meet its objective of providing a compensation scheme that is efficient, fair, approachable and responsive.

3.32 The proposed increase of £4.4 million is accounted for, in large part, by the increase to the RCF, which benefits the financial system by supporting the new recapitalisation power of the Bank of England, facilitating faster payout to consumers in insolvency, and ensuring that industry meets the cost of failure, reducing the risk that public funds will be needed in a default. Additional detail on the costs and benefits of the Bank of England’s new recapitalisation power may be found in HM Treasury’s Cost-Benefit Analysis, to which the PRA contributed alongside the Bank, HM Treasury, FSCS and FCA, as referenced in CP4/25 and PS13/25. The other significant factor contributing to the increase is staff costs. The FSCS’ strategy to recruit and retain permanent staff not only reduces risk and improves the service FSCS provides to consumers, by helping to ensure that expertise is retained, but also reduces the need to rely on more expensive external resources, in line with the FSCS’ general strategy. Moreover, these costs are offset by efficiencies in other areas, which benefits firms by keeping the cost of the compensation scheme lower than it otherwise would be.

3.33 More broadly, if a MELL was not set, the FSCS would not be able to operate and provide direct benefits to consumers through the payment of compensation to eligible claimants in the event of firm failure. While the wider benefits of the FSCS are hard to quantify, the direct benefit to consumers from FSCS compensation – based on the amount to be paid out in compensation from known and highly likely claims – is forecast to be £294 million in 2026/27 (compared with a forecast for 2025/26 of £315 million). The amount is based on an estimate of the number of completed claim decisions, the proportion of claims upheld and the average cost of each claim.

3.34 The existence of the FSCS, where applicable, reduces consumers’ financial loss and increases consumer confidence in authorised financial services firms. For example, the availability of timely compensation in the event of the failure of a deposit taker helps ensure consumer confidence in the financial system and is likely to encourage consumers to deposit money with protected firms. These wider benefits of the FSCS to the financial system – and the firms within it – are hard to quantify but are likely to be material.

Costs

3.35 The proposed increase in the budget is £4.4 million, which firms must contribute to. The proposed increase is broadly in line with inflation, with the FSCS seeking to manage its costs effectively, and provide consumer protection efficiently.

3.36 The one-off direct cost to firms for 2026/27 overall would be equal to the budget of £108 million. This total cost is relatively small when compared to the overall size of the firms that are levied, in terms of their assets, income, or profits, for example. The budget would be split between the PRA and FCA funding classes and levied on all authorised firms according to the volume of regulated financial services business they conduct, with smaller firms contributing less of the overall cost. Appendix 4 provides a summary of how the MELL costs are allocated between the PRA and the FCA classes.

3.37 While the management expenses charged to firms may be passed on to consumers in the form of higher prices, the impact is judged likely to be very small, given the size of the MELL relative to firms’ other costs.

3.38 The unlevied reserve of £5 million, which is only invoiced to industry levy payers if required, would give the FSCS some margin to meet costs that exceed its budgeted expenses and that need to be funded at short notice. The PRA and the FCA recognise that the FSCS needs to be able to respond quickly and efficiently to firm failures. Should the FSCS require funding beyond the limit imposed by the MELL due to exceptional circumstances, the FCA and the PRA would urgently consider the request. The unlevied reserve is unchanged relative to 2025/26.

Summary

3.39 The PRA and the FCA consider that the benefits of providing the FSCS with the proposed MELL outweigh the costs, and in relation to the incremental changes proposed, and the overall budget. In particular, while the benefits that accrue from the provision of compensation in the event of the failure of a financial services firm – through protecting consumers and ensuring confidence in the financial system – are hard to quantify, they are judged to outweigh the costs of operating the scheme.

Impact on mutuals

3.40 FSMA s138K(2) requires the PRA and the FCA to assess whether the impact of the proposed rules on mutuals will be significantly different from the impact on other firms. Management expenses are levied on all authorised firms, including mutual societies, according to the volume of regulated financial services business they conduct. The impact on mutual societies is therefore not considered significantly different to that on other types of firms.

HM Treasury recommendation letter

3.41 In November 2024, HM Treasury made recommendations to the Prudential Regulation Committee (PRC) and to the FCA about aspects of the Government’s economic policy to which the PRC and the FCA should have regard when considering how to advance their objectives and apply the regulatory principles set out in FSMA. The PRA and the FCA consider that the recommendation most relevant to the proposal in this CP is creating a regulatory environment which facilitates growth through supporting competition and innovation.

3.42 The PRA and the FCA believe that an adequately funded compensation scheme will enhance consumers’ trust in UK regulated firms, supporting the growth and competitiveness of the financial services sector. This aligns with the government’s priority to promote the sector’s growth and international competitiveness, while also maintaining financial stability and consumer protection. It will help to ensure that the UK remains an attractive domicile for internationally active financial institutions and help London maintain its status as a leading financial centre.

Equality and diversity

3.43 In developing this proposal, the PRA and the FCA have had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA and the FCA consider that the proposal does not give rise to equality and diversity implications. However, the PRA and the FCA would welcome any comments respondents may have on any equality issues they believe arise because of this proposal.

Statutory panels

3.44 None of the statutory panels were consulted about the proposal in this CP. This is because it is a matter for the PRA’s and the FCA’s statutory oversight of the FSCS, as explained in paragraph 1.3 above. The PRA and the FCA have not consulted their respective CBA panels for the reasons explained in paragraphs 3.29-3.30 above.