Bank compensation restriction: uplift to reflect administrative expenses
Banks incur significant expenses in processing claims for compensation, particularly for historic issues. These costs may include the costs of investigating, verifying, challenging and processing the compensation claim.
To reflect these costs, a 10% uplift is applied to the total compensation expenses (which include interest on the compensation amounts). As there is no expense in the accounts to reflect this uplift, the legislation operates instead by requiring this amount to be brought into account as a taxable receipt in the period in which the expenses are disallowed.
Bank A’s accounts to 31 December 2018 disclose an increase of £50m in the provision for compensation. It is agreed that £40m of this represents compensation and interest in respect of relevant conduct and should be disallowed. The uplift to reflect administrative expenses is £4m, that is 10% of the compensation expenses disallowed.