The Financial Services Compensation Scheme has made a fresh wave of payments to Keydata investors with large-scale losses as it seeks to mitigate any disadvantage suffered by those that accepted its compensation offer promptly, with more payouts set to follow in the coming months.
FSCS announced in September it will begin making additional compensation payments to investors in the Lifemark life settlment bonds distributed through Keydata with losses of more than £30,000, who it admitted may have been better off delaying acceptance of its offer.
The scheme said the payments came from distributions made by the trustees of the Lifemark vehicles and followed sales of assets underpinning the bonds.
Under the regulator’s compensation handbook rules, the scheme must ensure “that a person who promptly accepts its offer of compensation is not disadvantaged compared to a person who delays making a claim for compensation”.
However, based on its previous methodology those who delayed making a claim would have benefitted from an 8.075 per cent payout from the Lifemark vehicle.
While this amount would have been deducted from the ‘compensatable amount’ that was then payable from FSCS, the way the scheme applied its compensation caps up to a total of £48,000 meant they would have received more than those who did not benefit from the distribution.
As an example, the scheme cited a hypothetical investor with a £100,000 nominal claim. If this investor promptly accepted the FSCS offer they would have received £48,000, while if they waited they would have received an £8,075 distribution and, due to the way the cap was applied, the same £48,000 payout.
This is because despite their nominal claim value dropping to £91,925, they would still have received 100 per cent of the first £30,000 of their claim and 90 per cent above this level up to the £48,000 hard cap.
Under the new methodology, which follows a recent court ruling, the FSCS will base claims on the nominal value of the claim only and will seek to make ‘balancing payments’ to ensure all investors receive the same, higher payout. Under this new approach, any income received from the bonds will also no longer be taken into account.
In addition, the scheme will add back into its payments the costs it had taken from investors as part of a 6.53 per cent payout to investors with large losses.
Approximately 16,000 Lifemark investors have been compensated with a combined total of £228m. This is £32m lower than the £260m value of claims from these investors as assessed by the FSCS, before the scheme deducted “reasonable costs of recovery and distribution”.
Keydata had originally distributed $605m worth of Lifemark bonds.
Despite this latest wave of payments, FSCS said some claimants with Lifemark losses over £30,000 have not received any payment from FSCS yet “because of the complexities of the calculation”.
It emphasised it is still working on these calculations and will now make a payment to each of these claimants based on the calculation method above, with the majority of payments likely to be paid “during November”.
In April, the FSCS admitted that only 10 per cent of the money invested in Lifemark-backed Keydata products had been recouped following a £6.5m loan in 2011 to Lifemark administrator KPMG in an effort to salvage more capital.
Although the FSCS said its loan had been repaid and had helped fund some recoveries, it warned that the recoveries would “fall some way short” of the original investment value. However, it did argue that the amounts recovered would be substantially higher than they would have been if the FSCS had not stepped in.
