Updated Tuesday, 10.45am: FSCS requires additional compensation cost of £15m, and £5m to manage them
Investment intermediaries have been warned they may have to pay higher levies to the Financial Services Compensation Scheme from next year as a result of increasing endowment and precipice bond compensation.
Information released by the FSCS suggests the compensation scheme seriously underestimated the amount required to both manage the scheme and cover the cost of compensation when it announced its current levy in March this year.
Fresh information from the FSCS this morning (6/7/04) also suggests another £15m is needed to cover the additional costs of compensation as the number of endowment complaints being handled has been much higher than expected.
As a result, the FSCS will have to raise an additional £5m through levies to cover the rising cost of managing those claims where the original advisory firm no longer exists, as well as another £15m to cover a huge number of compensation claims on both endowments and potential precipice bond payouts.
A statement from Ron Devlin, interim chief executive of the FSCS, says not only have they underestimated the number of potential claims at present, but the likelihood is precipice bonds have yet to impact on the compensation scheme:
"Despite allowing for a substantial increase in endowment claims when we did our budget planning in October 2003, at double the rate then being received, the number of enquiries and claims coming to the Scheme has exceeded all expectations.
"Claims volumes increased dramatically in the last six months of 2003/04 and current trends suggest that these increases will continue for the foreseeable future. We are also having to take into account claims that might come to the Scheme which relate to ‘precipice’ bonds, following the failures of investment firms that sold these products,"” he adds.
High profile closure of IFA firms David Aaron Partnership – thought to have a large contingent of potential precipice bond claims – as well as the winding-up of a division of Berry Birch Noble Financial Services – are thought to be contributing to the rising number of claims where intermediary firms no longer exist.
The FSA will consult the industry later this month on increasing the FSCS Management Expenses Levy limit from £12.5m to £17.6m, but will not impose the new levels until 2005/06, says the FSCS, and will keep a watching review over the need to increase the actual compensation levy.
This story was first published on Monday 5th July, at 13:00.IFAonline
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