Beaufort scale

FSCS has duties to both consumers and to levy payers.

Our duty to consumers is straightforwardly to deal quickly, accurately and empathetically with their claims and to pay compensation when it is due.

Our duty to levy payers is to provide this service as efficiently as possible and, where we can, to maximise recoveries from the estates of failed businesses.

We take independent decisions about the eligibility of claims under rules set by the regulators.  Our independence offers reassurance to both sets of stakeholders: consumers can be sure that we shall meet eligible claims regardless of cost; levy payers can be sure we shall only incur legitimate compensation costs and keep the costs of administration to a necessary minimum.

But every so often, we encounter a failure where it is not so straightforward to balance the interests of consumers and levy payers.  The failure of Beaufort Securities falls into that category.

You have probably read about Beaufort Securities.  It has attracted a good deal of coverage recently because, although the client money and assets in the custody of the failed firm are largely intact, the owners of those assets must meet the costs incurred by the administrators – PWC – in identifying and returning the assets. 

Where clients are eligible to be protected by FSCS, those costs will then be met by FSCS up to our current limit on investment claims of £50 000[1].

But how does FSCS navigate its duties to both consumers and to levy payers in a case like this where compensation costs will depend on both the scale of administration charges and on the distribution of those charges between the failed firm’s clients?

Let me explain our approach.

Take, first, the administration costs themselves.

There has been some public criticism that the costs of the administration should be visited on the firm’s clients at all.  After all, the cash and assets were ring-fenced.

This is not, I think, justified because it is only the administration costs involved in the return of the assets which fall to the firm’s clients.  As we know from our own engagement with the process, there is significant work involved in identifying the cash and assets and verifying clients’ positions.

However, FSCS does accept a responsibility to ensure that these administration costs are properly and reasonably incurred and that it is only the costs of returning cash and assets which fall to the firm’s clients in this way.

As probably the largest prospective creditor, FSCS will sit on the creditors’ committee.  We shall, therefore, use our representation to press for the appointment of an independent fees assessor to advise the committee on both points.

This should help ensure that the administration costs falling on clients are no more than allowed for by law.

FSCS’ share of those costs – the compensation we shall pay out - will then depend on another factor: how those costs are allocated between clients.

The more equally distributed the costs, the higher FSCS’ compensation bill is likely to be.  The more the costs are allocated on a proportionate basis – relative to the size of clients’ cash or asset holdings – the bigger share of the cost is likely to be borne by wealthy clients with cash and assets in excess of our current £50 000 limit.

From FSCS’ perspective, we judge that it would not meet our duties to consumers and levy payers arbitrarily to back an approach which either maximised or minimised our compensation bill.

FSCS will want to understand the economic costs of returning the cash and assets.  We shall ask the administrators to clarify whether the costs they have incurred are sensitive or insensitive to the size and/or the complexity of clients’ holdings.  We will also want to know the ease and speed of alternative approaches, its fairness for clients, and the impact on FSCS payments and the estate. 

Beaufort Securities is a major failure.  FSCS must provide appropriate protection, within our rules, to the consumers affected.  But, in doing so, we shall seek to ensure that we strike a fair balance between the interests of levy payers and customers. 

That means ensuring that the costs of administration are appropriate.  It also means ensuring that individual clients of the failed firm meet a share of the costs which is reasonable given the size and complexity of their holdings of cash and assets.  Of course, for the vast majority of clients, the share of costs will be fully covered by the compensation of up to £50,000 payable by FSCS

[1] FCA announced on 1 May (CP18/11) that this limit would be raised to £85,000 with effect from April 2019.