November

Fund managers to get refund and recoveries offset costs for intermediaries

It’s not every day you get a cheque for £50m from FSCS.  But this is what will happen for fund managers in December.  And financial intermediaries also had the benefit of our recoveries work this year and last year with some £30m being used to offset the costs of compensation and the costs of recoveries.

How come?  

Well, because these returns of funds by FSCS represent one part of the significant recoveries we’ve achieved following the 2010 failure of Keydata.

Many people will probably assume that FSCS simply exists to pay compensation when regulated financial services firms fail. We certainly do that - £330m in the case of Keydata.

But when FSCS compensates savers, or policyholders or investors, it takes over their rights against the failed business. That makes it a major creditor – often the largest creditor.

And with that comes an important responsibility to maximise the recovery from the estate of the failed business. Where we achieve recoveries, we return the value to levy payers, either in the form of a cheque in the post or in the form of a credit against future levies.

This is a responsibility we take very seriously. One of the imperatives in our five year vision and strategy is to achieve excellence as a creditor.

We do this on the basis of a very clear economic test.  We pursue recoveries wherever it is cost-effective to do so.  

So we won’t pursue recoveries as a punishment or for the sake of it.  And we won’t spend more pursuing recoveries than we think we’ll actually recover. 

What we will do is to explore all the possible avenues to maximise value for levy payers. That includes, obviously, realising as much value as possible from the assets of the failed business.  It may also include taking action against third parties who shared responsibility for the losses suffered by consumers.

In the case of Keydata, FSCS pursued both avenues.

We took steps to secure and realise the value of the life policies which underpinned the bonds sold by Lifemark and distributed by Keydata. This involved complex legal issues and intensive engagement with the Luxembourg-appointed liquidator of Keydata and the trustees of the assets. It also involved FSCS making a short-term loan to the liquidator in order to maintain the payment of premia on the policies and so to preserve their value. 

We have also taken legal action against the independent financial advisers (IFAs) who mis-advised their clients to buy Keydata products and so were instrumental in their losses.

The result has been to recover over £100m so far for levy payers. 

This action continues; it will continue while there remains value to recover. But it has already made a major contribution to recoveries we have achieved.  FSCS has reached fair settlements with many of the businesses against whom we took action.  And, for the avoidance of doubt, we have already recovered several times more than we have incurred in costs through this legal action. 

In short, the industry is significantly better off as a result of FSCS’s action to recover value and is already seeing substantial returns.

In the New Year, we shall publish a full account of exactly how much FSCS has recovered following the Keydata failure, and how much we’ve spent to achieve those recoveries. 

Our refund to fund managers this year and a lower levy for IFAs demonstrate our commitment to recoveries is right. That, we believe, is good news for the industry.