New interim levy could reach £70m as costs rise

The Financial Services Compensation Scheme has warned advisers may face an interim levy of up to £70m due to rising costs relating to Keydata, Arch cru, MF Global and failed stockbrokers.

Writing in the latest FSCS Outlook newsletter, chief executive Mark Neale warns of higher than expected compensation costs for the investment intermediation sub-class for claims relating to Keydata, Wills and Co and other stockbroking firms.

In the newsletter, Neale says: “Our current projection is that we may face a deficit of at least £40m on investment intermediaries before the next levy becomes available.”

But he also warns compensation costs could rise above the £100m threshold for claims that can be paid by the investment intermediary sub-class each year due to claims relating to Arch cru and broker-dealer MF Global. The FSCS has already levied the investment intermediary sub-class for £30m in 2011/12.

The FSCS has received around 600 claims against IFAs that advised on Arch cru that are no longer trading.

It says firms should treat the £40m estimate “with caution” due to the unpredictability of claim volumes. It will make a final decision on whether to raise an interim levy later in its financial year.

Last January, the FSCS raised an interim industry levy of £326m, mainly to cover compensation costs for Keydata. Advisers paid £93m of the levy while fund management companies had to pay £233m.

MF Global UK, the UK subsidiary of the failed investment brokerage, was placed into special administration last October. A list acquired by Money Marketing through a freedom of information request shows that MF Global UK is in the investment intermediation sub-class.

The FSCS has refused to rule out whether IFAs will have to foot the compensation bill for US investors affected by MF Global’s collapse.

Aifa director Robert Sinclair says: “The disappointing thing is that what seem like manufacturing firms keep ending up in the investment intermediary sub-class because of the nature of their permissions.”