FSCS warns industry faces extra levy due to Catalyst failure

The Financial Services Compensation Scheme is likely to impose a supplementary levy on investment intermediaries as the cost of compensating Catalyst and Arm investors could run into the tens of millions of pounds.

In a blog published today (29 October) on the FSCS website, Mark Neale, chief executive, says although the compensation costs of the Catalyst/Arm failure are likely to be smaller than those of Keydata, the costs will likely make an additional levy necessary.

Catalyst, a major distributor of Arm asset backed securities, was declared in default earlier this month (4 October). The company had sold £54m worth of Arm bonds backed by second-hand life insurance contracts which have since collapsed.

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Arm was placed in liquidation in the UK in September.

The levy, yet to be determined or confirmed, would be imposed before the end of the current levy year in June 2014.

Mr Neale said: “We know this will be difficult for firms and is unwelcome news, but we have a duty to compensate investors with a valid claim.”

Meanwhile, the FSCS is still pursuing legal action under the guise of a Keydata creditor to maximise the recoveries from products and the IFAs who mis-sold them. It has so far recovered more than £23.5m from the business, which it says will go towards a refund to the industry.

Mr Neale continued: “We shall publish more information about the costs and when they are likely to arise in...November. There is still a good deal of uncertainty about [Keydata and Catalyst]. So we cannot yet provide robust guidance on the total bill.”

He added that the failure of Catalyst draws attention to how little capital such firms have compared to the costs of failures.

Mr Neale said: “Catalyst had assets in the hundreds of thousands to set against investors’ losses in the tens of millions.

“On the face of it, firms take on risks which they are not financed to absorb. When the risks eventuate, the costs are then passed back to the sector - or in the Keydata case beyond - via FSCS’s funding mechanism.

“Professional indemnity insurance might be the answer, but all too often FSCS’s experience is that it too is a broken reed. The excess on policies is often set higher than firms’ capital. Some policies explicitly exclude claims by FSCS.”