IFAs resigned to missing out on Keydata cash

14 April 2011 | By Natalie Holt

Advisers say the Financial Services Compensation Scheme’s decision to award recovered Keydata money to fund companies ahead of IFAs was inevitable but they are still angry over the original decision to class Keydata as an intermediary.

The FSCS revealed last week it would repay fund firms first rather than advisers to pay out the cross-subsidy which was triggered by the £326m interim levy announced in January, which was raised mainly to cover compensation costs relating to Keydata unit Lifemark.

Advisers paid £93m towards the interim levy, as investment intermediaries can only be levied up to £100m annually for compensation costs. As a result, a cross-subsidy was applied to fund firms which were required to fund a further £233m.

Norwich & Building Society rec- ently set aside £57m to repay customers who invested in Keydata products through the society. The £57m fund will also go towards refunding the FSCS for payments the scheme has already made to N&P customers.

It had been hoped that advisers would see some of the money they had paid towards the interim levy returned.

But in its Outlook document, published last week, the FSCS says: “Following the interim levy, any recov- eries in respect of investment intermediation sub-class claims funded from the 2010/11 levy year will be first credited to the investment fund manager sub-class in repayment of the cross-subsidy.”

Costs of pursuing recoveries will be met by the investment intermed- iary sub-class, with these costs rep- aid before the refunded money is returned to the fund management sub-class.

The FSCS says this is in line with the FSA’s fee rules that were introduced in 2008 following the last review of the FSCS funding model.

In February, Informed Choice managing director Martin Bamford set up an FSCS action group and sent an open letter and petition to the FSA and the Treasury calling for urgent reform of the current FSCS funding model.

He says: “I think the FSCS dec- ision to repay fund manager first was inevitable as fund managers were effectively paying for the overspill in respect of this levy. It feels entirely unfair because Keydata should never have been categorised as an investment intermediary in the first place but, as this decision remained in place, we could not have expected to see a refund on our share of the levy.”

He adds that if other intermediaries were to follow N&P in accepting liability for N&P advice and repaying the FSCS, there would be sufficient refunds to pay back advisers some of their interim levy costs.

Aifa director general Stephen Gay says: “Aifa is disappointed by the announcement concerning the allocation of recoveries by the FSCS. Aifa is already engaged with the FSA on FSCS reform which is scheduled for the latter part of this year.”

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