In the last month we’ve seen another demonstration of just how suddenly and unpredictably FSCS’ workload can change.
Some may have wondered about the prudence of the decision of the Swiss Central Bank to set a ceiling on the value of the Swiss Franc against the Euro and to buy Euros without limit to maintain that ceiling. Almost no one foresaw the decision to abandon the peg on 15 January.
Certainly no one – FSCS included – foresaw that this decision would then impact on a number of regulated firms providing FX broking and other services in the UK. Alpari failed within days; LQD Markets and Boston Prime a few weeks later.
Storms for FSCS really do blow up with no warning out of a clear blue sky.
The failure of these FX brokers ushered in a period of intense activity for FSCS.
In all cases, we work closely and collaboratively with the appointed insolvency practitioners to establish, in the first instance, whether FSCS protection may be triggered by the failure.
We do not, of course, protect investors from the consequences of mistaken bets on foreign exchange movements.
But FSCS may protect client money where investors have positive balances with failed brokerage firms arising from regulated and protected activity.
Establishing the existence of positive balances is, though, just the first step; it doesn’t automatically trigger FSCS compensation payments.
The insolvency practitioner will always, for one thing, attempt to find buyers for the failed business, or parts of it, and so transfer the associated clients and client accounts. We regard this as the best possible outcome. It maintains continuity of service for the investors concerned and may avoid an FSCS pay-out. Alternatively FSCS may provide funds for client accounts to be transferred.
In many cases, however, a transfer proves impossible. That is so far the case with Alpari, LQD Markets and Boston Prime. No buyers have yet been identified by the IPs, so FSCS now has to decide whether to compensate investors for their positive balances up to our limit of £50,000 and seek recoveries from the estate or, alternatively, to it leave to the insolvency practitioner to return client money (maybe with a top up from FSCS for any shortfall).
This decision obviously matters a lot to levy payers because, even if substantial recoveries are eventually made, an FSCS pay-out leaves them bearing the cash flow cost of the compensation payments.
So how do we make this decision?
Well, straightforwardly, FSCS will generally compensate investors where it becomes clear that client money is not intact or where there is likely to be a significant delay in its return. We did this, for example, when MF Global failed in 2011, Worldspreads failed in 2012 and Fyshe Horton Finney failed in 2013.
Where we do decide to step in to protect investors, we shall generally seek to do so as efficiently as possible by using the client records signed off by the insolvency practitioner to generate automatic compensation payments without the need for applications. This is good for investors and substantially cuts the administrative costs for levy payers.
By contrast, if client money is intact and the insolvency practitioner is able to return it promptly, FSCS will not step in.
So what about Alpari, LQD Markets and Boston Prime? Well, we are still working with the insolvency practitioners to resolve clients’ positions and eligibility for compensation. I hope we shall be able to make an announcement soon.
The Financial Conduct Authority website includes a searchable database of all firms authorised and regulated by the FCA and the Prudential Regulation Authority (PRA).