RegulationJul 8 2014

Five things the FSCS revealed about the industry

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The Financial Services Compensation Scheme today echoed the FCA in its warning about advice to transfer from occupational schemes to Sipps.

Here are five things the 184-page annual report revealed:

1) Growing complaints about ditching occupational pensions for Sipps

The FSCS is dealing with increasing volumes of claims relating to advice given to consumers to switch from conventional pensions to a Sipp.

The scheme said it has started to receive claims against firms such as TailorMade Independent Limited, which failed in October 2013.

Tailormade promoted products from controversial Harlequin Property.

Following this, it is little wonder that the FSCS agreed with a previous FCA warning that there is potential for significant consumer detriment as a result of investors being encouraged to invest their pension funds in high-risk assets, many of which are illiquid.

The FSCS has been establishing the liability of the firms involved in this business and the losses that can be attributed to them.

However, Mr Neale said this can be complicated by the esoteric nature of many of the investments placed in Sipps.

Many of the assets are based overseas and Mr Neale said these are subject to significant uncertainty as to their status, value or future.

2) Despite claims falling, the industry paid more for the FSCS

The FSCS received a grand total of £1.1bn in levies in the 2013/14 year, compared with £726m in 2012 to 2013.

This figure included provision for interest costs and a capital repayment levy totalling £791m arising from the major banking failures of 2008 to 2009, payable by banks, building societies and credit unions only.

FSCS management expenses for the year were £57.7m, excluding the costs of processing Welcome Financial Services Limited PPI claims, which do not fall on the industry, and the loan interest for the major banking failures of 2008 to 2009.

The increased costs come despite the compensation scheme only dealing with 200,720 enquiries compared with 359,617 in 2012 to 2013.

The FSCS received more than 39,000 new claims, compared with just over 62,000 in 2012 to 2013. The compensation scheme paid out total compensation of £243m, compared with £326m in 2012 to 2013.

Mark Neale, FSCS chief executive, also flagged up the new funding approach which looks across three years and takes account of recent history and emerging trends will create supplementary levies less likely as he admits that “many firms paying our levies find their unpredictability and volatility hard to cope with”.

Mr Neale’s total pay packet for the year was between £320,000 and £325,000.

He received aggregate remuneration of £290,463, comprising of basic salary of £246,891, a bonus of £43,206 and other “emoluments” of £366. His pension was topped up with £32,096.

3) Failures are getting more complex

In the past, investment claims tended to be relatively conventional, or were restricted to the activities of a particular failed firm.

Although the number of claims is down, the FSCS reports it is increasingly seeing claims relating to complex investments where numerous parties are involved in the design, management and distribution of the products, including some based overseas.

According to the FSCS, the failure of Catalyst in October 2013 highlighted the intricate demands arising from multiple products, difficult quantification issues and the involvement of numerous third parties and jurisdictions.

Catalyst offered bonds issued by a Luxembourg-based firm called Arm Asset Backed Securities SA, which itself was subject to insolvency proceedings in late 2013.

The FSCS had to reach a view on the liability of Catalyst, while considering the liability of other firms which might be responsible for losses, both within the UK and overseas. Indeed, investors in Malta have already started receiving FSCS compensation, as from March 2014, the FSCS started to invite claims applications.

4) IFAs will continue to be chased through the courts

Over the last year the FSCS recovered £353m in respect of failed firms, including £241m from the major banking failures of 2008 to 2009.

This compared with £777m in 2012 to 2013.

Mr Neale said the FSCS will continue to actively engage with HM Treasury while it attempts to secure returns from the estates of failed banks.

While the FSCS will only pursue recoveries where it is cost-effective and reasonable to do so, Mr Neale said his considerable success over the longer term is “because we are prepared to be proactive and open to different approaches”.

Where appropriate, Mr Neale said he would also take legal action through the courts, “as we have done against a large number of IFA firms for investors’ losses on products promoted by Keydata”.

During 2013 to 2014, the FSCS recovered about £88m from investment failures, including Keydata.

These recoveries either go back to the industry or, as in the case of the investment intermediation sector, are offset against compensation costs.

5) The movement of cash between FCA and FSCS was revealed

During the year, the FSCS entered into transactions with the FCA “as a related party”.

The FCA appoints, and has the right to remove, directors to the board of the FSCS and it establishes the rules under which the scheme operates.

The regulator was considered to be a related party but not a controlling party during the year.

During the year, the FCA provided an agency service to the FSCS to collect tariff data, issue levy invoices and collect levy monies on its behalf.

Levy invoices, net of credit notes, were raised for about £1bn, up from £703.4m in 2013 and £576.9m in 2012.

The total for this year included £790m raised as a levy for the interest and capital repayment on the loans relating to the specified deposit defaults on 25 July 2013.

Related collections of £1.1bn.

The agency fee for the service was £294,000.