IFAs face £40m FSCS levy to cover cost of failed stockbroker

The FSCS today (28 January) confirmed that as many as 4,500 investors with Pacific Continental Securities, which ceased trading in June 2007, could be eligible for compensation up to £48,000 each.

It is estimated that this could result in a total cost of £40m to £70m for the scheme, with the investment intermediation sub-class, to which many IFA firms have exposure to, likely to cover the cost.

The FSCS said it would announce an interim 2008/09 levy for this sub-class before 31 March and payable in April, of up to £40m to cover potential costs in the current year and to fund estimated compensation costs until the next annual levy is collected in early 2009/10.

However, the Association of Independent Financial Advisers (Aifa) voiced concern over the impact of the increased levy on its members.

Director general Chris Cummings said: "The intention of the FSCS to raise a levy of £40m from this sub-class risks the financial stability of good firms in what is already recognised as being one of the most difficult trading years in over a decade.

"The levy will be part of the annual Financial Services Authority (FSA) fees. We have a genuine concern that the combined impact of these fees and falling revenues will put members under severe financial strain.

Cummings added: "While legitimate claims must be paid, there are important questions that now must be answered given this new regulatory failing.

"We must ask FSA why this firm was allowed to gain authorisation and then operate a flawed business model for so long. This seems to be yet another case of regulatory failure and the fault must be acknowledged by FSA.

"Good firms are now being forced to pay for the misdeeds of bad ones. An immediate enquiry into the circumstances that led up to this situation is needed. Further, we expect FSA to come to the table with proposals for helping firms meet this new, unexpected levy."

The FSCS has already received 375 claims from consumers in relation to Pacific Continental Securities and expects to make its first compensation payments by the end of the month (January).

FSCS chief executive Loretta Minghella said: "We realise that today’s announcement is not good news for the investment firms who will have to pay our levies to meet the cost of this default.

"By phasing the levies until the full costs are clearer, we are seeking to manage the impact on firms at a difficult time, whilst an interim levy will ensure that we are able to pay valid claims as they are decided."

The comments come after the Financial Services Authority also announced that it had banned and fining of two executives of Pacific Continental Securities a total of £175,000.

The FSCS said it would be sending application forms to the 4,000 customers of Pacific Continental Securities over the next week. It will then aim to deal with the majority of claims within six months.