The trade association said the industry has reacted with “disbelief” over the plans for a levy a third higher than the previous year amid a backdrop of soaring claims and firm failures.
PIMFA says the soaring FSCA levy highlights that urgent regulatory reform is needed.
Tim Fassam, director of government relations and Policy at PIMFA , said the soaring cost of the levy is a symptom of a system that is out of control.
PIMFA wants the Treasury to find an alternative way of funding the FSCS levy which is used to compensate savers and investors when their provider has failed.
The levy has soared due to pensions and SIPP failures and the collapse of £236m mini-bond firm London Capital & Finance.
Mr Fassam said: "In any other sector, a forecast for compensation of over £1bn would be the focus of national scandal - £1bn of compensation represents £1bn worth of financial loss, emotional stress and economic hardship for thousands of UK consumers.
"We cannot continue to normalize this level of loss, accepting that the compensation scheme will hopefully pick things up on the other side, every single person who has had to claim on the FSCS has received a poor outcome that it would be better to avoid. This is a further sign that the cost of compensation is truly out of control.
"This cost is a symptom of a system that fails both customers and the industry. Reform is now urgent but will take time. HM Treasury must find other sources of revenue to cover these extreme costs.”
PIMFA believes the fairest choice is a levy on all firms set by the FCA to ensures “polluters pay” and it remains an industry-funded regime.
The body has put forward a number of recommendations to the government and the regulator to reform the FSCS.