FSCS starts legal bid to recoup costs from Keydata distributors

The Financial Services Compensation Scheme has kick-started a legal process to recoup some of the compensation it has paid out on Keydata claims from IFAs who sold Keydata products.

Law firm Herbert Smith has written to Keydata distributors to begin the process of pursuing recoveries on behalf of the FSCS.

The letter from Herbert Smith to an undisclosed IFA firm, seen by Money Marketing, says: “The FSCS has an opportunity to consider whether it has claims against IFAs who advised in relation to the sale of Keydata products to investors. We and the FSCS are still investigating this matter but our strong preliminary view is that good claims exist against a large number of IFAs.”

The letter says the FSCS has claims against the firm for negligence, as the firm breached its duty of care by negligently advising them to take out Keydata products.

It also says the firm made false statements relating to the risk profile and suitability of the products, which were relied upon by investors.

Herbert Smith says the FSCS also has claims for breaches of the Conduct of Business Sourcebook rules and breach of contract, as the firm breached its contractual duty to investors to take reasonable skill and care in advising them to invest in Keydata products.

The letter says that the FSCS is working on information passed to it by the FSA.

A spokesman for the FSCS says: “The FSCS pursues recoveries whenever practical and cost effective to do so.  We believe claims may exist against IFAs for compensation costs relating to certain Keydata Investment Services products.  As a result, we have issued legal proceedings to protect against the limitation period while we analyse the potential claims in detail.”

Money Marketing reported in April that the FSCS was pursuing a number of firms for Keydata recoveries, after Norwich & Peterborough Building Society agreed to repay the FSCS £28m for compensation the scheme paid to N&P Keydata customers.

The industry was levied £326m by the FSCS in January, mainly to cover the compensation costs following the collapse of Keydata. Advisers had to pay £93m towards these costs while fund managers paid £233m.

The FSCS has said any recoveries relating to Keydata compensation will be rebated to fund firms first rather than advisers to pay for the cross-subsidy triggered by the £326m interim levy.

The FSA has been conducting its own investigation into advisers that sold Keydata products and how the products were sold. The regulator wrote to advisers in May who sold the Keydata Secured Income Bond and the Keydata Defined Income Plan between July 2005 and June 2009.

Earlier this month the FSA wrote to Keydata distributors again, telling them to ensure they had sufficient assets to meet potential liabilities.