The Financial Services Compensation Scheme has warned that it may need to place an interim levy on life and pensions advisers next year.
In the lifeboat fund’s half year outlook this morning, the FSCS revealed that a continued surge in Sipp claims from advisers moving pension funds into risky assets like Caribbean holiday resorts, storage pods and plantations of oil producing trees in Asia had been “under-estimated” by the scheme.
The FSCS said that it had received claims against 171 firms. Just four firms were responsible for 73 per cent of compensation, which in total is set to come in at just over £136m plus administrative costs of £7m in the 2016/17 financial year.
The possibility of an interim levy next year follows a £20m interim levy for life and pensions advisers last year over Sipp misselling claims.
FSCS chief executive Mark Neale says: “The full dimensions of known issues are not always easy to foresee. This is exactly the position we face with what we call Sipp-related claims.
“Of course, this is not a new issue. FSCS has been compensating investors for losses arising from these Sipp-related claims since 2014. We raised a supplementary levy on life and pensions advisers in 2015 and fully expected claims to rise again this year.”
“We under-estimated, though, the velocity of this growth. We have now received claims against 171 advisory firms and currently estimate that we shall face a deficit by year-end of about £28m.
“If that estimate is borne out by claims volumes in the remainder of 2016, we will have to raise a supplementary levy again. And because life and pensions advisers have already paid a levy of £90m this year against an annual limit of £100m, there is the possibility that a supplementary levy will trigger a cross-subsidy.”
Investment advisers, however, are due to receive a rebate on their FSCS bills, as claims have come in under expectations.
Neale says: “Claims against investment advisers have been significantly lower than we forecast and so we expect a surplus in this class this year of around £60m. We plan to apply this as a credit to firms in the class, either against next year’s levy or to offset any supplementary levy costs, or both.”
Investment advisers were hit by an interim levy in 2014 however on the back of the failures of life settlement firm Catalyst and stockbroker Fyshe Horton Finney, as well as increased compensation costs for Arch cru.