FSCS warns of £40m interim levy – £100m limit could be breached

Advisers may face a further interim Financial Services Compensation Scheme levy of at least £40m while the FSCS also warns compensation costs for Arch cru and MF Global could go above the £100m adviser sub-class limit and trigger a cross-subsidy for fund managers.

In its Outlook newsletter published today, FSCS chief executive Mark Neale (pictured) says the scheme may incur higher compensation costs than it estimated in the investment intermediation sub-class in relation to Keydata, Wills and Co and other stockbroking firms.

In the newsletter Neale says: “It is possible these higher costs may cause us to raise an interim levy on the investment intermediation sector this year, although we are not yet able to take a final decision on this.

“Our current projection is that we may face a deficit of at least £40m on investment intermediaries before the next levy becomes available.”

The newsletter also warns there is a potential risk of cross-subsidy if compensation costs for Arch cru and MF Global push investment intermediation costs above the £100m threshold. The FSCS has already levied the investment intermediation sub-class £30m in 2011/12.

The estimated £40m interim levy figure has excluded provisions relating to Arch cru and MF Global, as the FSCS says it currently has no basis for determining these amounts. The scheme has so far received 600 claims against IFAs that are no longer trading.

The FSCS says firms should “treat this estimate with caution” due to the unpredictability of claims volumes.

It will not make a final decision on whether to raise an interim levy until later in the financial year.

The FSCS has also warned that compensation costs in relation to mortgage brokers have also been higher than estimated, and says it has seen a substantial increase in the number of eligible claims.

In January the FSCS raised an interim industry levy of £326m, mainly to cover the compensation costs for Keydata. Advisers paid £93m, while fund firms paid £233m.

MF Global UK, the UK subsidiary of the failed investment brokerage, was placed into special administration in October. A list acquired by Money Marketing through a freedom of information request shows that MF Global UK is in the investment intermediation FSCS sub-class.

In this week’s Money Marketing the FSCS refused to rule out whether IFAs would face a compensation bill for US investors affected by the collapse of MF Global.