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FSCS confirms advisers to be hit by Pacific Continental costs

Financial services firms are likely to pay a Financial Services Compensation Scheme levy of £186m in 2009/10, up from £130.8m in 2008/09.

The FSCS Plan and Budget 2009/10 says there may also be an interim levy in April of up to £40m because of the default of Pacific Continental Securities.

Deposit taking firms will also pay £435m in interest costs on loans to fund the five bank defaults in 2008/09.

These loans are being used to fund compensation for customers of Bradford & Bingley, Heritable Bank, Kaupthing Singer & Friedlander, Landsbanki Islands and London Scottish Bank.

In addition, the FSCS will also accrue interest charges on the loans in 2009/10, that will be payable by October 1, 2010. It currently estimates these interest charges to be in the region of £632m depending on the prevailing interest rates during the year and levels of principal drawn down.

The FSCS says the other main drivers of costs in 2009/10 will be the insurance and investments areas.

During 2009/10, the FSCS anticipates that it will continue dealing with claims from the bank defaults, while also handling a reducing number of mortgage endowments, pensions review and other investment claims, including claims against Pacific Continental Securities.

The FSCS is also expecting payment protection insurance claims although it says it is too early to predict what the volume or value of the claims might be.

FSCS chief executive Loretta Minghella says: “2009/10 is again likely to be a very difficult year for consumers and firms alike. In such a context, we recognise the levy will not be welcome news for firms. Whilst our primary obligation is to deliver compensation to those entitled to our protection, we will be vigorously pursuing recoveries from the failed firms to help offset the costs of compensation for the levy payer. These include recoveries from the banks in default.

“We recognise the profound changes that are happening in the markets and the implications for the FSCS. We cannot be certain about the number of nature of defaults that we will handle in 2009/10 but what has come home to us in the past year is the degree of volatility to which we have to be ready to respond. This places extreme pressures on an organisation like ours in times of market stress. All these changes require us to build greater capacity to manage this volatility. As a result, we believe it is essential to enhance our organisation and invest in some critical areas to allow us to respond even more effectively in the future.”


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