The Financial Services Compensation Scheme is facing total legal costs of £22.8m in its attempts to recoup compensation from Keydata advisers 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.
In a consultation paper last week the FSCS proposed a new maximum limit for FSCS management expenses of £94.4m for 2013/14, which is separate from compensation costs and is not included in the sub-class cap calculations.
Of the total, £7.2m has been budgeted to cover the legal costs of pursuing recoveries, including the cost of pursuing compensation from Keydata advisers, and firms who 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 plan and budget last February. A further £7.9m was spent on pursuing recoveries including Keydata in 2011/12.
The FSCS was unable to provide a breakdown of how much of the £22.8m in legal costs relates to Keydata but it is understood to form the majority of the bill.
Law firm Herbert Smith began legal proceedings on behalf of the FSCS in October 2011 against advisers who recommended Keydata to try and recoup compensation paid to Keydata investors.
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.
Last year the FSA said claims connected to Keydata should be complete in 2012/13. It will publish its plan and budget which sets out expected compensation costs and the resulting levy on firms in the next few weeks.
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.
“The FSCS’s budget for Keydata recoveries keeps on rising, but we are no closer to knowing whether legal action has been effective or not. Apfa has been asking what money has been recovered to date, and how large are the amounts being pursued and we have no answer. If the FSCS wants to keep increasing this budget, and burdening the profession, it must provide a transparent account of its cost effectiveness.”