How to budget for FOS and FSCS annual levies

Every regulated financial firm in the UK must pay annual levies to the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS). These are mandatory costs that fund the industry's "safety net" and dispute resolution services; failing to budget for them can lead to significant cash flow pressure and regulatory scrutiny.

Understanding the levies

While your FCA authorisation fee is a separate cost, these two levies are collected by the FCA on behalf of other bodies:

• The FOS Levy: This funds the ombudsman's work in settling disputes between consumers and firms. Even if you never have a complaint, you must pay the annual levy. If a complaint is escalated to them, you may also have to pay individual 'case fees'.
• The FSCS Levy: This is a "lifeboat" fund used to compensate customers if a financial firm goes bust and cannot pay claims. It is split into two parts: a management expenses levy (the cost of running the scheme) and a compensation costs levy (the money paid out to claimants).

Step-by-step: How to estimate your costs

Estimating these fees can feel like a moving target because the rates change every year based on the total claims the industry faces. However, you can reach a sensible estimate using these steps:

1. Identify your "Fee Block"

The FCA categorises businesses into "fee blocks." For most small financial advisers, you will fall under Fee Block A.13 (Advisers, arrangers, dealers, or brokers). Your levy is calculated based on how much "relevant business" you do within this category.

2. Calculate your "Relevant Income"

Most levies are calculated based on your annual eligible income (AEI). This is essentially the gross income you receive from activities that the FOS or FSCS cover. You should use your most recent year-end figures or, if you are a startup, your projected first-year turnover.

3. Use the FCA Online Fee Calculator

The easiest way to get a figure is to use the FCA Online Fee Calculator. You can input your firm type and your projected income to get an estimate of the total regulatory burden, including the FOS and FSCS portions.

Key considerations for your budget

Levy Component	Budgeting Factor
FOS Case Fees	Usually, the first 3 cases each year are free. Budget for at least one case fee (£750 currently) as a contingency.
FSCS Volatility	The FSCS levy can fluctuate wildly year-to-year. It is wise to add a 10-15% buffer to your estimate.
Minimum Fees	Even if your income is zero, there is usually a minimum "flat" fee for being regulated.

Pro Tip: These levies are typically invoiced in the summer (July/August) for the upcoming year. Set up a dedicated business savings sub-account and transfer a monthly "regulatory accrual" so the cash is ready when the invoice arrives.

Best practices

• Keep clean records: Ensure your bookkeeping clearly distinguishes between "regulated" income and "unregulated" income (like general consultancy), as you only pay levies on the regulated portion.
• Monitor the "Plan and Budget" papers: Every spring, the FOS and FSCS publish their "Plan and Budget" for the upcoming year. Reading the executive summaries will give you an early warning if levies are expected to rise significantly.
• Check your exemptions: If you do 100% of your business with professional clients (not retail consumers), you may be exempt from certain parts of the FOS levy, though this is rare for standard financial advisers.