£300m recovered over five years for levy payers
The Financial Services Compensation Scheme (FSCS) has recovered just under £300 million[i] over the past five years from failed financial services firms. These sums reduced FSCS levies on the industry.
In addition, FSCS recovered billions of pounds following the resolutions of the 2008 banking failures, where FSCS needed to take out loans totalling approximately £20 billion from the Government at the time of the financial crisis. Those loans have now been repaid in full, largely through FSCS’s recoveries work.
In order to reduce the costs of compensation for its levy payers, FSCS seeks to recover amounts paid in compensation from any party that it considers has a legal responsibility. As part of the process of paying compensation, the legal rights of our customers are transferred to FSCS. FSCS then “stands in the shoes” of its customers in pursuing any recovery action.
A recovery action is a legal claim which FSCS pursues in order to recover the compensation it has paid to customers, whether through a formal insolvency process, through litigation or some form of dispute resolution. In pursuing recoveries, FSCS must apply what is in essence a commercial test – is the recovery worth pursuing, and is the defendant good for the money? It doesn’t pursue recoveries just to make a point or to punish the parties in question.
In taking recoveries action, FSCS increasingly deals with a number of other Government agencies, such as the Financial Conduct Authority (FCA), the Serious Fraud Office (SFO) and the Insolvency Service. FSCS also deals very regularly with a wide range of insolvency practitioners (IPs).
Mark Neale, CEO of FSCS, commented: “Recoveries are an unsung part of FSCS’s vital work of compensating customers and contributing to confidence in financial services. I am very proud of the professionalism of our Recoveries Team in navigating complex cases to successful outcomes. Recoveries will play an essential role in our new strategy for the 2020s.”
James Darbyshire, FSCS’s General Counsel, who leads on FSCS’s recoveries work, explained: “The usual avenues of recovery we pursue include actions against the firms we’ve declared in default, and their Professional Indemnity insurers. Increasingly, however, we are taking ever more complex recoveries action, and in those instances we tend to make use of our panel of law firms, who have both the expertise and jurisdictional reach to assist us.
In addition to the more usual avenues of recovery, FSCS has been involved in some high-profile, high-value and complex recoveries work in recent times:
- Keydata litigation: court proceedings against a large number of IFA firms in relation to their mis-selling of Lifemark investments – a large and complex piece of litigation against hundreds of IFAs, resulting in recoveries of over £50 million.
- PPI litigation: court proceedings against a number of lenders for undisclosed and excessive commissions as part of PPI arrangements, resulting in recoveries of just under £20 million.
Harlequin: a case study
Harlequin is one of FSCS’s most interesting, current recoveries cases. The Harlequin group is a collection of companies involved in the marketing, sales and development of overseas investment properties connected through the common ownership of a Mr David Ames and/or his family members. Harlequin sold speculative overseas property developments promoted by a UK registered company, Harlequin Management Services (South East) Limited (HMSSE).
Customers purchased, through UK-based IFAs and SIPP providers (and sometimes directly), various off-plan property development investments and hotel rooms primarily in Caribbean resorts, operated by offshore Harlequin overseas Resort Development Companies. Approximately 6,000 investors invested a total of circa. £400 million in the projects, with in some cases the same property being sold to multiple investors.
For a myriad of reasons, the developments failed and the funds invested by consumers were not used to develop the resorts. Mr David Ames is subject to an ongoing prosecution by the SFO; he and his wife have both been made bankrupt and a number of the Harlequin entities are now in formal insolvency processes. As a result, FSCS, has so far compensated in excess of 2,700 investors who had collectively invested more than £125m in Harlequin.
After taking their legal rights as part of the compensation process, FSCS is currently pursuing recoveries against various Harlequin entities, largely through the insolvencies which are already on foot in the UK, St Vincent and Grenadines, St Lucia, Barbados, and the Cayman Islands.
For more information contact Adam Smith or Suzette Browne at firstname.lastname@example.org
[i] From FY 2014/15 to FY 2018/19 year to date to 31 Jan 2019. This figure is gross i.e. before any amounts repaid to customers with claims over FSCS’s compensation limits. Calculating recoveries income can involve complex accounting and figures can differ according to which methodology is used. Nonetheless, in any given year FSCS saves the financial services industry millions of pounds through recoveries.