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Apfa: FSA must put a stop to high FSCS management costs

Chris Hannant 480
Apfa policy director Chris Hannant

Apfa is calling on the FSA to hold the Financial Services Compensation Scheme to account over its escalating running costs and argues the FSCS should be more transparent about the extent of likely Keydata recoveries.

The FSA published a consultation paper last month which proposed a new maximum limit for FSCS management expenses of £94.4m for 2013/14. Management expenses are separate from compensation costs and are not included in the sub-class cap calculations.

Stripping out expenses relating to legacy banking failures, the FSA has proposed an FSCS management expenses budget of £73.4m, compared to £66.4m forecast expenses for 2012/13.

In its consultation response, published today, Apfa questions why the FSCS is budgeting for an increase in management expenses when it is forecasting a fall in the number of completed claims. The FSCS plan and budget earlier this month forecast the number of completed claims will fall from 44,546 in 2012/13 to 15,982 in 2013/14.

Apfa says: “We believe it is imperative the FSA holds FSCS to account. The costs of regulation increase each year, and we believe more needs to be done to challenge the regulatory bodies, such as the FSCS, about the level of their expenditure. We therefore call upon the FSA to be rigorous in its analysis of the FSCS budget and to halt this increase in costs.”

The trade body says the FSCS should target 5 per cent cost savings a year, and wants the National Audit Office to carry out a value for money audit of the FSCS “as a matter of urgency”.

Last month’s consultation paper also revealed out of the FSCS’ management expenses, £7.2m has been budgeted to cover the legal costs of pursuing recoveries, mainly related to Keydata.

The FSCS is facing total legal and recovery costs of £22.8m, with recovery costs estimated at £7.7m for 2012/13 and £7.9m in 2011/12. The scheme expects to recover a further £75m in Keydata recoveries, on top of £28m already recovered from Norwich & Peterborough Building Society.

But Apfa says it is not clear how much of this £75m relates to the administration of Keydata assets and how much relates to its legal action against Keydata advisers. It says it has asked the FSCS several times for details of any cost-benefit analysis that was carried out before the FSCS instructed law firm Herbert Smith to begin legal proceedings against Keydata advisers in October 2011.

Apfa says: “There is no sense of how much they are prepared to spend or how they will decide whether it is uneconomic to continue. We therefore believe it is essential that if the FSCS is spending the industry’s money on these speculative legal actions, it should be more transparent about the amount it expects to spend and the amount it might realistically recover.

“The FSCS should not be allowed to operate with a blank cheque book, employing expensive City lawyers, without being the subject of scrutiny and challenge by FSA and industry stakeholders.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Does anyone else think that the FSCS radio advertising is a pointless waste of its money? I’m really unclear what the ads are trying to achieve because they don’t say anything useful about the scheme limits etc for education – only that the scheme exists. What do others think?

  2. If FSCS/HS charges the investment intermediary adviser class overall £20m for litigation fees for Keydata and recovers say £20m in redress from selling advisers for the benefit of the fund manager class (who benefit first in any recoveries) – is this viewed as a worthwhile exercise by FSCS?

  3. Nick, i agree, They are a market driven organisation and without complaints they won’t have anything to do!

  4. I must have been hibernating, what is APFA when it is at home?

  5. In his foreward to the Statutory Code of Practice For Regulators, Pat McFadden (now a member of the TSC) wrote in late 2007:-

    Our expectation is that as regulators integrate the Code’s standards into their regulatory culture and processes, they will become more efficient and effective in their work. They will be able to use their resources in a way that gets the most value out of the effort that they make, whilst delivering significant benefits to low risk and compliant businesses through better-focused inspection activity, increased use of advice for businesses, and lower compliance costs.

    Just picking at isolated examples of how the FSA/FSCS/MAS et al completely ignore these fundamental precepts of what’s supposed to be an important item of legislation is unlikely to change anything.

    Why does APFA never say anything about the Code? Should it not be raising the matter with as many MP’s as possible, not least those on the TSC?

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