St James's Place takes compensation levy hit, shares fall

* Headline profits hit by rise in levy to near 20 mln pounds

* Underlying profits, flows, new business all strong

* Interim dividend beats forecasts; shares down 1.7 pct

By Simon Jessop

LONDON, July 29 (Reuters) - British wealth manager St James's Place said its first-half profit was hit by a sharp and unexpected rise in its contribution to an industry compensation scheme, sending its shares lower.

The fast-growing firm has benefited from growing demand for investment advice as the economy picks up and as competitors scale back their offerings to investors as they adapt to government reforms giving them more freedom over how to use their pension pots.

The prospect of a rise in customer claims related to self-invested personal pensions has led to an increase in the UK's Financial Services Compensation Scheme levy to 319 million pounds ($497.54 million) from 276 million last year.

St James's Place's contribution to the scheme, set up to compensate consumer for poor financial advice, almost trebled to 20 million pounds.

"We are really, really disappointed with the levy, and the surprise nature of the scale of it. We're all for the safety net ... (but) we're picking up a disproportionate, in our view, slug of the levy," said Chief Executive David Bellamy, adding that he thought the large increase was due to the company's relative strength and share of the advice market.

Shares (Berlin: DI6.BE - news) in St James's Place were down 1.7 percent at 0812 GMT.

Pretax profit on a headline basis was 72.9 million pounds ($113.69 million), down from 78.3 million pounds last year.

Underlying post-tax cash profits were up 8 percent year on year to 84.9 million pounds, 1 percent ahead of forecasts. Net inflows during the six months to end-June were 2.7 billion pounds, to take total assets to 55.5 billion pounds, in line with consensus.

The firm posted an interim dividend of 10.72 pence per share, beating forecasts for 10.5 pence a share.

"If the regulatory levy charge in SJP's cash accounts had been flat year on year, its underlying cash generation would have been 95.5 million pounds (up 22 percent)," analysts at Bank of America Merrill Lynch wrote in a note to clients.

"This 22 percent growth is more illustrative of the company's underlying performance, in our view," they said, adding they expected a levy charge of 5 to 10 million pounds would be more likely in future.

($1 = 0.6411 pounds) (Reporting by Simon Jessop, editing by Louise Heavens)