By Natalie Holt
The Financial Services Compensation Scheme is facing total legal costs of £22.8m in its attempt to recoup compensation from Keydata Investment Services and other firms.
Legal costs relating to Keydata will be passed to investment advisers as the expenses are allocated to the class in which they are incurred.
The FSA published a consultation paper last week on a new limit for FSCS management expenses, which are separate from compensation costs and are not included in the sub-class cap calculations.
The consultation paper proposes the management expense limit for 2013/14 should be set at £94.4m, made up of £74.4m in management expenses and a contingency reserve of £20m.
Of the total, £7.2m has been budgeted for 2013/14 to cover the legal costs of pursuing recoveries, including the cost of the FSCS’s bid to recoup compensation from Keydata advisers, and the cost of pursuing recoveries from firms which sold other structured products and payment protection insurance.
Recovery costs are estimated at £7.7m for 2012/13, almost double the £3.9m the FSCS set aside in its budget last February. A further £7.9m was spent on pursuing recoveries, including Keydata, in 2011/12.
The FSA says: “Following the significant compensation paid to investors with Keydata Investment Services, the FSCS is taking action to recover costs from both the assets of
Keydata and the underlying investments, and from firms who were responsible for the sales of Keydata bonds to investors.”
In an attempt to recoup compensation paid out to Keydata investors, the FSCS instructed law firm Herbert Smith to launch legal proceedings in October 2011 against advisers who recommended Keydata.
Claims relating to Keydata triggered an interim FSCS levy in 2011 of £326m, with advisers having to pay £93m and fund firms £233m. Claims relating to Keydata SLS made up the majority of an £80m FSCS adviser levy for 2009/10.
Apfa policy director Chris Hannant says: “You do not have to be a financial genius to work out that pursuing small amounts of money from Keydata advisers through Herbert Smith is going to get very expensive very quickly.”