By Huw Jones

LONDON (Reuters) – Britain’s scheme for compensating consumers hit by financial company failures has set itself a billion-pound ($1.37 billion) budget for the coming year to cope with a likely surge in collapses due to COVID-19.

The Financial Services Compensation Scheme’s (FSCS) budget of 1.04 billion pounds for the 2021/22 financial year that starts in April is its highest in six years.

The FSCS also said it would add 78 million pounds to the current year’s budget – a lower than expected increase – due to more firms failing, pushing the total for 2020/21 to 700 million pounds.

The body is responsible for compensation arrangements for the Financial Conduct Authority, which warned this month that around 4,000 financial firms in Britain were at “heightened risk” of collapsing due to fallout from the pandemic.

The FSCS, which is financed by a levy on financial firms, also expects more claims for complex pension advice, and further failures in operators of self-invested person pensions (SIPPS).

“In any other sector, a forecast for compensation of over one billion pounds would be the focus of national scandal,” said Tim Fassam, director of government relations and policy at PIMFA, a trade body for financial advisors.

“This is a further sign that the cost of compensation is truly out of control.” Reform is needed in how the FSCS is funded so that the “polluter pays”, Fassam added.

The FCA is already considering whether to force firms that give investors bad advice to foot the bill, rather than the current system of all firms chipping into a central pot.

“I hear and share concern that the cost of the levy is too high and the pressure this places on many firms,” said Caroline Rainbird, chief executive of the FSCS.

Apart from COVID-related failures, the FSCS also faces a potential bill to compensate 11,600 investors who lost 237 million pounds due to the collapse of the London Capital & Finance investment fund.

The FSCS is in talks with the finance ministry over compensation for LCF investors beyond what it has already paid out.

($1 = 0.7317 pounds)

(Reporting by Huw Jones; Editing by Jan Harvey)