Investment advisers are likely to face a bill of close to £30m in the first quarter of 2014 after the FSCS announced a shortfall of £29.5m in the investment intermediary sub-sector.
The shortfall comes after the compensation scheme last month began compensating clients of Catalyst Investment Group, which sold more than £50m worth of bonds backed by the collapsed ARM Asset Backed Securities life settlements fund.
The FSCS said the total costs of compensating Catalyst clients could run into “tens of millions of pounds” and have a significant impact on the 2014-15 FSCS levy as well as requiring an interim levy to raised in the coming months.
FSCS chief executive Mark Neale said: “Although [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.
“I appreciate that the interim levy will not be welcome news for our levy payers but it does reflect the need to safeguard consumers against the risk of mis-selling by often poorly capitalised intermediaries.”
Catalyst was declared in default by the FCA in October, opening the door for investors to be compensated through the FSCS. Although the ARM fund itself was domiciled in Luxembourg according to fund documents, Catalyst was regulated in the UK and sat within the investment intermediary sub-sector of the FSCS.
In addition, in the FSCS’s latest Outlook newsletter, the scheme said it had “also considered further the potential liability of financial advisers, including Rockingham Independent Limited, in relation to advice they gave their customers to invest into ARM funds”.
Rockingham was declared in default in November 2012, but its clients who were invested in ARM had until now been refused compensation.
The FSCS said it was “finalising its claims process and gathering the data it will need to process claims” against Catalyst, work which it expects to finish this month before beginning to make payments to investors by the end of the year.
As well as Catalyst-related claims, the FSCS noted “increased compensation costs” relating to Arch Cru clients and compensation for clients of failed stockbroker Fyshe Horton Finney.
Life and pensions advisers may be hit with an additional bill following the liquidation of TailorMade Independent Limited - which distributed Harlequin property investments - but this cost remains uncertain, the FSCS said.
Following reforms to the levy subclasses, investment intermediaries can now be billed for as much as £150m a year through the main levy - usually announced in the second quarter of the year - and any interim levy.
