The cost of FSCS compensation
The Financial Services Compensation Scheme (FSCS) has issued a £60m interim levy to fund the cost of compensation for investors in various failed companies.
This includes the collapse of MF Global which was responsible for £27m of investor claims to date this year.
MF Global, formerly known as Man Financial, was a large global financial derivatives broker. It was a company registered in the United States and before that in Bermuda.
The company collapsed when a ‘material shortfall’ of hundreds of millions of dollars was discovered in their segregated customer funds. This shortfall was discovered in October 2011.
At their subsequent filing for bankruptcy, the total shortfall in client accounts at MF Global Holdings Ltd has been estimated at around $1.2bn.
Compensation being paid by the FSCS, and funded by authorised and regulated firms here in the UK (including Informed Choice), is in respect of the customers of MF Global UK Limited.
Other calls for compensation were in respect of investment schemes Arch Cru and Keydata, which both collapsed in recent years. There was also cost in respect of stockbrokers Wills & Co.
Because of the way in which the FSCS is structured, all of these compensation costs fall into the investment intermediary sub-class. This means that independent financial advisers are now paying their share of the £60m liability to compensate the customers of a US investment house, UK fund managers with overseas ties and a failed firm of stockbrokers.
We expect to receive our own invoice for this FSCS interim levy within the next couple of days and have already estimated the cost at around 0.6% of our predicted turnover this year.
Whilst not expected to be as large as the FSCS interim levy we were forced to pay last year, this is yet another regulatory expense that will ultimately be paid for by the clients of our firm and every IFA firm.
The FSCS is an important compensation scheme, providing valuable protection and reassurance for UK investors.
We support the objective of the FSCS but continue to believe its funding structure needs a radical overhaul.
Blogging this morning for Citywire on the subject, I called on the FSA to move to a system of pre-funding for compensation costs, with a product levy charged based on the inherent risk of failure of the product type.
Moving to pre-funding and a risk-based product levy would result in a much fairer funding system with transparency for investors who would then be able to see the true cost of compensation.