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

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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.

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Readers' comments (15)

  • Can anyone explain to me what the point of the FSA is. When they fail we pay the bill and they get a bonus.

    How about we scrap the FSA and use the money saved to meet the compensation?

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  • Bravo! wouldnt it be easier just to give you guys the keys to the office and do the job for me, take my banking passwords and simply have done with it? and err.. you must be kidding....No.

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  • Would it be possible to find a picture of Mark Neale that doesn't make him look triumphantly smug as I fear for the poor man's safety.

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  • more levies, do they think we are made of money, pathetic!

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  • How much of this to cover Herbert Smith's inflated fees?

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

    That is a good basis to start our 2012/2013 business plans then! !!
    So how much of our hard earned profits for the next few years do IFA's need to set asside for the "Train Crash" that is comming our way to make up for the failed regulation of firms no longer trading.

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  • This cannot go on. There is clearly no incentive toward prudence. That is the lesson of all the debacles to date. We need to re-think the whole concept of investor compensation.

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  • As Donald Rumsfeld said, there are known, knowns i.e we as IFA's will face vere increasing levies,

    known unknowns, i.e we will face the bill for there incompetence over arch cru, key datya and now US MF Global clients, future of legacy/trail commission

    and finally unknown, unknowns .ie what is the point of being an IFA, spiralling costs, RDR implications reviews of business that today meets compliance requirement but at the drop of an hat in the future the FSA can claim as bad advice, also is there a big event just waiting to happen to blow us all out of the water and bankrupt us in the process.

    Reality this is no no joke in the past I have just got on with it and paid the bill I'm faced with, well finally my own patience has snapped and as of tonight i will be composing a letter to my MP and asking him his opinions as something needs to be done namely who regulates the regulator.

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  • Am I reading this right. UK IFA's could be liable for compensating US Investors?

    "FSCS refused to rule out whether IFAs would face a compensation bill for US investors affected by the collapse of MF Global"

    Am I dreaming this? How have we got to the point of being on the hook for virtually anybody that goes bust.

    My clients and I can't keep paying extra fees for this kind of collective responsibility. We have no influence over these matters, its like financial fly tipping!!

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  • Rumour has it the FSCS has agreed, off the record, to accept claims for compensation from Greek citizens who own bars in Greece that will not be frequented by IFA`s anymore because we cannot afford any further costs either business wise or personally.

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