Out-Law News 1 min. read
28 Mar 2012, 9:47 am
In a letter issued on Monday, the Financial Services Compensation Scheme (FSCS) announced an "interim levy" as a result of revisions to its earlier estimates of the compensation it expected to pay out during 2011/12. The increase was a result of the high profile failures of investment companies including Keydata Investment Services and MF Global. The scheme had previously raised the possibility of an interim levy as part of its annual plan and budget, published in Feburary.
"FSCS has made more decisions on Keydata claims than previously predicted with a higher average compensation payment than earlier claims. There have also been two new failures," the letter said.
"We appreciate that the interim levy will not be welcome news... but we have a duty to compensate consumers with eligible claims. We sympathise with firms about the unpredictability of compensation costs but funding is required to cover the costs of compensation until the next levy is raised and becomes available in July," the letter added.
The FSCS can pay compensation to eligible customers of financial firms including banks, building societies, credit unions, insurers, fund managers and intermediaries where the firm in unable to pay claims against it. It is funded by levies paid by over 16,000 participating firms.
In its plan and budget for the next financial year (29-page / 1.3MB PDF), the FSCS said that it was expecting a "dramatic rise" in the number of consumers making claims for another kind of activity for which it manages compensation, the mis-selling of payment protection insurance (PPI). It has estimated a total payout in PPI compensation of around £70m for 2012/13.
The majority of defaults by large investment intermediaries such as Keydata and Wills & Co. would be "largely worked out" by the end of 2011/12, the FSCS said. However, it warned that the projections in its budget for next year did not take into account claims in respect of MF Global as the failed broker's administrators were still calculating the amount of compensation likely due to clients.
Firms authorised on 26 March 2011 which fall within the investment intermediary sub-class, labelled SD02, will be liable for an amount calculated by reference to their annual eligible income earned within that sub-class. In an explanatory note financial services regulator the Financial Services Authority (FSA) said that this meant that smaller independent financial advisers would pay less than larger brokers.
Firms required to pay the interim levy will receive an invoice; however, the FSA said the additional fee would work out to approximately £160 per £10,000 of a firm's annual eligible income.