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FSCS stands firm on IFA litigation as it sets aside £7m

Advisers that recommended Keydata investments who were hoping to avoid a major legal bill may find this has merely been delayed after the industry compensation scheme set aside more than £7m and signalled its intent to pursue the case in the coming year.

Reports over the past couple of months had indicated the Financial Services Compensation Scheme was in a quandary over the case after it settled out of court with five of the six initially chosen lead defendants.

In the latest edition of its industry newsletter, published yesterday (15 April), the scheme said one defendant remained that had submitted its defence in the proceedings.

FSCS also confirmed it had pushed back a case management conference to early May at the earliest.

However, hopes previously expressed that this might mean the case is being reconsidered seem to have been dashed by the revelation in the same document that £7.2m has been set aside in 2014 to 2015 to cover the costs of recovery in relation to Keydata.

This is close to double the £3.8m spent in the past 12 months, though 2013 to 2014 spend was down from an originally budgeted £7.2m due to the legal action being delayed.

FSCS states in the newsletter that expenses “have been less than budgeted due to lower than anticipated activity in the on-going litigation”, but that this is “planned to increase to the previous year’s levels as the cases get closer to trial”.

It adds: “Given the need to have a representative set of investor claims heard by the court, FSCS is currently identifying appropriate replacement lead case defendants from the remaining pool of defendants.

“FSCS will make representations to court about its specific intentions with regard to the selection of lead case defendants at the upcoming case management conference, now likely to be scheduled in early May, when it is anticipated that further directions for trial will be made and a revised timetable will be set.”

The news follows on from the announcement of the final annual levy for 2014/2015 yesterday, the first under the new 36-month funding approach.

The overall levy dropped from £313m forecast in January to £285m, but investment advisers’ allocation was increased by £7m to £112m. The intermediation sub-class was expected to be hit with a top-up after a £30m interim levy relating to Catalyst claims was delayed in March.

In a blog post to be published today, Mark Neale, chief executive of the FSCS, will say that some £336m in recoveries and close to £80m relating to Keydata in particular have been party responsible for keeping levies lower than they might otherwise be.

The newsletter revealed that recoveries in relating to Keydata stand at £44m for the past year, but it is not clear how much of this is related to the out of court settlements that have been agreed.

Mr Neale will say: “In some cases, we shall return these recoveries to the industry. Fund managers who contributed to the Keydata levy will receive a proportionate cheque, for example. The recoveries due to investment intermediaries will be used by FSCS to offset compensation costs.