SIPP providers could be hit by additional FSCS levy, says expert

The money relates to additional charges, due from fund managers and investment advisers, to cover the cost of compensation claims relating to failed investment firm Keydata and others.

Tim Dolan of Pinsent Masons, the law firm behind Out-Law.com, said that due to the way the FSCS levy is calculated firms that operate self-invested pension plans (SIPPs) could also have to pay additional charges. A SIPP is a type of personal pension plan which allows individuals to choose how their savings are invested from the full range of investments.

Dolan explained that SIPP operators that receive income from operating the SIPP fall into the same broad funding 'class' for the purposes of calculating their share of the FSCS levy as investment managers and private equity fund operators. For the purposes of the calculation, income that those firms receive from operating the SIPP could be taken into account.

"The way in which the FSCS levy works is too complex and often results in odd consequences," he said. "We really do need a levy system which accurately matches the risks that firms pose to the levies that they pay."

The Association of Member-Directed Pension Schemes (AMPS), the SIPP industry body, called for clarification from the FSCS about the circumstances in which a SIPP provider should have to pay additional charges to cover the funding of an investment product

"SIPP operators have faced significant FSCS levies over the last few years for failures by investment products such as Keydata," said AMPS chair Andrew Roberts. "We are keen for clarification that we are true participants in the FSCS and not just a convenient source of funding."

"There needs to be a benefit to our consumers if their SIPP operator fails – this point is critical to the current discussions regarding capital requirements of SIPP operators. An industry-funded solution is more efficient than each operator holding doomsday scenario reserves themselves," he said.

The FSCS can pay compensation to customers if a regulated financial services firm goes out of business or is otherwise unable to pay claims made against it. The scheme is funded by contributions from over 16,000 participating firms, classified according to the type of business that they carry out.

Over the past four years, the FSCS has had to make significant payouts to groups of customers of failed firms as a result of the economic downturn, most notably those of failed investment firms Keydata and MF Global. These payouts have increased the levies charged to firms in some funding 'classes', which in some cases have had to be clawed back in the form of additional 'interim' levies halfway through a funding period.

Firms covered by the FSCS are organised into five broad classes, with two sub-classes in all but one class which are generally divided along provider and distributer, or intermediary, lines. The five broad classes cover deposits, investments, life and pensions, general insurance and home finance. Firms can be allocated to more than one sub-class depending on the activities that they carry out.

The FSCS had already imposed an interim levy for 2010/11, initially amounting to £326m across the two affected categories. The additional £31.3m reflects overpayments and underpayments by firms which had been invoiced for payments based on incorrect data. Of this, £31m is due from fund managers and £300,000 from investment advisers.

Firms that had originally underpaid will receive an invoice for the balance from the end of this month. The FSCS said that around half of the 960 firms to receive an invoice will owe between £50 and £1,000, while a further 285 will get invoices for between £1,000 and £10,000. It will not invoice those firms that owe less than £50 as the cost of doing so would be disproportionate, it said.

"This levy will close the tariff data resubmission and the 2010/11 interim levy truing-up exercise," said FSCS chief executive Mark Neale. "This has been a highly complex issue and involved reviewing scores of requests from firms to resubmit their correct tariff data. We are pleased the issue is now closed and thank firms for their patience while we completed the process."