It’s tempting to think of FSCS as a payments agency first and last – tempting, but wrong.
Of course, providing a responsive compensation service is FSCS’ main priority, but it’s only one part of what we do. FSCS is also closely involved in the insolvency process and, in many cases, a major creditor of failed businesses, seeking to maximise recoveries for levy payers.
That means FSCS works closely with insolvency practitioners (IP). But what does this relationship involve and how does it work?
Well, our first engagement with the insolvency practitioner (IP) is likely to come at the very outset of failure. When a business first goes into liquidation or administration, FSCS relies on the appointed IP to obtain the information and support FSCS needs to compensate eligible consumers.
The failure of MF Global is a good case in point. We worked closely with the administrators, KPMG, to establish clients’ closing positions so that we could determine and pay compensation.
Following the financial crisis, IPs have a statutory duty to co-operate with FSCS in some resolutions, but, in reality, we see partnership and collaboration as a much more effective way forward.
The most obvious manifestation of that is our annual IP seminar, jointly hosted with the Bank of England, when we explore with IPs a range of legal and operational issues involved in successful bank payout or resolution.
But this is just the formal apex of much broader base of formal and informal contacts. We have worked successfully with IPs on numerous schemes of arrangement for the run-down of insurers, on CVAs for investment firms, and on special administrations under the new statutory arrangements.
We know each other well and work well together.
As an administration proceeds, our relationship with the IP changes. As we pay compensation to savers, policy-holders and investors, we take over consumers’ rights. That makes FSCS a major (often the biggest) creditor, with an important role on the creditors’ committee.
I can spell out our objective here very simply: it is to pursue recoveries wherever it is reasonable and cost-effective to do so.
The cost-effectiveness test is critical. It underlines that FSCS’ interest is purely economic: to maximise recoveries on behalf of levy payers.
That means that we shall always pursue recoveries where there is reasonable prospect that the value recovered will exceed the costs. That includes taking action against third parties which share responsibility for investors’ losses.
But we do not use recovery proceedings as an enforcement mechanism – much less a form of retribution – where there is no prospect of an economic return.
We make many of these judgements alongside the IP and, in some circumstances, will be prepared to provide funding to an insolvent estate in order to facilitate recovery action. A good example here are the loans we have made to the administrators of Lifemark1 in order to preserve the value and facilitate the sale of the underlying assets on behalf of levy payers.
So, yes, FSCS pays compensation, but we need to work with IPs to do so. And we also work with IPs to maximise recoveries for our levy payers.
1 Lifemark is one of the Luxembourg Funds into which Keydata invested client money.