IFAs that advised clients to invest in Keydata products are under unprecedented attack by a combination of the FSA and the Financial Services Compensation Scheme.
The FSA is visiting selected IFAs that sold Keydata products to examine the due diligence performed by the IFAs, the risk warnings given to clients and whether the products matched the risk profile of clients. The findings of the FSA’s investigation could result in disciplinary action against individual IFAs and a compulsory review of past business.
The FSCS declared Keydata to be in default and has compensated many investors. To fund the compensation, the FSCS has imposed a levy on IFAs and investment managers (as they fall within the same FSCS class). Investment managers have complained loudly that it is unfair that they have to fund this compensation. This appears to have been a cause of the FSCS starting court proceedings against IFAs that sold Keydata products aimed at recovering some of the compensation paid to investors.
IFAs that sold Keydata products will find themselves in one of three camps: 1: Those that have confirmation of cover from their PI insurers and a manageable uninsured exposure. 2: Those that have had cover denied or have a big uninsured exposure. 3: Those that are waiting for their PI insurers to reach a decision on cover. The IFAs in the first camp can sit back and relax but those in the other camps, probably the majority, find themselves in the uncomfortable position of having to take action to defend themselves and consider whether they have a claim for contribution against any third parties.
Some of the smaller IFAs that find themselves in the second or third camp might think their only option is to close down and go into liquidation. Others will be exploring ways to fund their own defence costs and ways to control that expense while being involved in large-scale litigation.
The FSA is in a potentially embarrassing position as in 2007 it carried out a thematic review into Keydata sales but failed to publicise its findings and warn consumers of the risks. Only last month did the FSA issue guidance to warn that traded life investment products (such as those provided by Keydata) are, in the opinion of the FSA, high-risk, toxic products.
The FSCS is on potentially difficult ground for a number of reasons, not least of which include the facts that to the extent to which some of the underlying investments will pay remains uncertain, there are allegations of third-party fraud involved and these were products which were considered by the regulator at the time as suitable products for investment.
The Keydata IFA Defence Group has been formed by a group of IFAs that recognise the potential benefits and savings to be gained from co-ordinated and joint action to defend the claims and push back on all fronts against the FSA and the FSCS.
Robert Viney is a partner at international law firm DAC Beachcroft