IFAs could pay US MF Global clients’ claims, says FSCS

The Financial Services Compensation Scheme (FSCS) has refused to rule out IFAs being hit with a compensation bill for US investors affected by the collapse of MF Global.

MF Global UK, the UK subsidiary of the failed investment brokerage, was placed into special administration in October. A list acquired by Money Marketing, Fundweb.co.uk’s sister publication, through a freedom of information request shows that MF Global UK is in the investment intermediation FSCS sub-class.

Recent reports have suggested broker-dealer MF Global used a legal loophole to place US business with its UK subsidiary. Through a process known as re-hypothecation, brokers can use collateral pledged against loans to back their own trades. There is no limit to the amount that can be repledged in the UK but it is capped in the US.

It is unclear whether this means UK advisers could end up covering the cost of compensation for US investors. One source close to the FSCS told Money Marketing “it is not inconceivable” this could be the case. The FSCS declined to comment.

MF Global UK administrator KPMG, which along with the FSCS has begun the claim process for over 10,000 MF Global UK customers, says it is too early to determine the extent of UK losses.

On whether MF Global channelled business through the UK subsidiary to circumvent US restrictions, a KPMG spokesman says: “We cannot comment on this type of speculation but any claims such as this and any credible allegations will be investigated.”

MF Global UK clients can claim either through KPMG or the FSCS but cannot be paid twice. Clients who claim through the FSCS will assign the rights to the FSCS, which will then have a claim on any recoveries.

New York-based MF Global collapsed on October 31 after a $6.3 billion (£4.05 billion) exposure to eurozone debt failed to pay off.

James Giddens, the trustee overseeing the company’s bankruptcy, estimates there could be up to £760m in missing funds.

A spokesman for Giddens says assets under the control of foreign bankruptcy trustees or administrators will be pursued vigorously. He adds: “Recovery may be more uncertain and may take more time.”

Dennis Hall, managing director of Yellowtail Financial Planning, says: “If firms have been using rules here to guide business through the UK and the regulator has allowed that to happen, then heads should roll.”