05Dec

The Financial Services Compensation Scheme (FSCS), which provides investor protection against company failures, has revealed that it is facing a £29.5 million funding shortfall, and it is said to be “highly likely” that an interim levy will be imposed on firms regulated by the Financial Conduct Authority and Prudential Regulation Authority to meet this shortfall. This additional charge is likely to be imposed in the first quarter of 2014, and the 2014/15 annual levy is also likely to increase as a result of the shortfall. The 2013/14 annual levy was £78 million.

In the November 2013 issue of the FSCS’s Outlook newsletter, chief executive Mark Neale commented: “Although [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][compensation] will come as a great relief for the many consumers who invested in those bonds, this means we expect to raise an interim levy on investment intermediaries.”

The FSCS says the shortfall has arisen largely due to the amount of compensation paid to clients of Catalyst Investment Group and Rockingham Independent Ltd. Catalyst was declared in default in October 2013 and Rockingham in November 2012. These companies sold a great many investment bonds invested in the ARM Asset Backed Securities life settlements fund, which collapsed in 2011. Mention was also made in the newsletter of the pressures placed on the FSCS by the failures of firms such as Fyshe Horton Finney, CF Arch Cru and TailorMade Independent. In addition, the FSCS continues to be forced to pay considerable amounts of compensation for mis-sold payment protection insurance.

The FSCS provides protection for investors when firms are unable to meet claims made against them. If for example, a customer’s current account provider is declared in default, compensation of up to £85,000 per person is then paid by the FSCS. For investment contracts, the protection is £50,000 per person per provider, and insurance contracts are covered for up to 90% of the claim (100% for compulsory insurance).

Similarly, the FSCS provides redress for customers in the event that complaints are upheld against failed firms. The Financial Ombudsman Service will not consider complaints against such firms, so customers need to complain to the FSCS if their firm is in default.

The levy on regulated firms is the FSCS’s only source of funding, so it really has no other choice than to increase the levy when it faces a shortfall. The inevitable debate is whether it is fair for firms who have stayed solvent and met their regulatory obligations to clear up the mess caused by those who haven’t. Chris Hannant, director general of trade body the Association of Professional Financial Advisers, commented: “This highlights the need for the FCA to look at the whole system for raising funds for compensation. Advice firms are under significant cost pressures and it is difficult for them to meet funding requests at short notice.” Syndaxi Chartered Financial Planners managing director Robert Reid accurately summed up the situation when he said: “We are subsidising a bunch of failures.”[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]