Giant FSCS levy looms as ARM seller declared ‘in default’

Investment intermediaries are facing an extra FSCS levy bill of up to £54m, after the regulator declared a major distributor of ARM Asset Backed Securities in default for compensation purposes.

The compensation scheme is set to pay out on investor claims of up to £50,000 from clients of Catalyst Investment Group who have lost out by investing in ARM, after the FCA declared Catalyst in default.

Catalyst sold sold £54m worth of ARM bonds, which were backed by a portfolio of second-hand life insurance contracts that have since floundered. The portfolio is now being liquidated by a Luxembourg court.

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The FCA said investors faced losing “a significant part of their investment” meaning FSCS claims for levy-paying investment intermediaries - who will cover the cost of compensating Catalyst’s clients - could be high.

A statement from the FSCS said it was “finalising its claims process” and would confirm the compensation process for investors in November.

“We will contact directly the investors who have already registered claims with FSCS against financial advisers, and investors who have referred complaints against Catalyst to the Financial Ombudsman Service to confirm the process at this time,” the FSCS said.

The FCA has also announced a censure of Catalyst, saying it was guilty of “recklessly misleading investors” as it did not communicate to investors the problems ARM was experiencing in gaining a license to trade in Luxembourg.

In addition to the censure of Catalyst, the FCA fined three senior staff a total of £570,000, including founder and chief executive Tim Roberts. Mr Roberts was fined £450,000 and banned from working in financial services, while former director Andrew Wilkins was fined £100,000 and banned from holding senior roles in the future.

Former compliance officer Alison Moran was fined £20,000 for “failing to act with due skill, care and diligence” and failing to communicate issues with ARM’s licence to investors.

Tracey McDermott, the FCA’s director of enforcement and financial crime, said: “Catalyst showed a reckless disregard for investors’ interests, exposing them to significant risks. We expect firms, and their senior managers, to put customers’ needs first - and will take tough action against those who fall short of our standards.”

In April the FSCS announced a £78m levy bill for advisers for 2013/14, and an update from the scheme in August reported a £1.2m shortfall in the investment intermediaries sector from Arch Cru claims and other company failures.