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IFAs face two-pronged attack over Keydata

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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

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Readers' comments (13)

  • Our firm had no involvement of any kind with KeyData other than the levy payment but these debacles highlight a growing problem. It will end up in a position where 'independence' is a nonsense because firms will decide to restrict what they dare to advise on regardless of client requirements. That list of comparatively 'safe' advice areas reduces with every passing week.

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  • He missed one very important point and two potential claims against third parties.

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  • What due diligence did the FSA do into Keydata prior to authorising them? Then what regulation was put in place to ensure that Keydata was properly run offering suitable products for distribution? Why is it if the firms the FSA authorise fail it's always the IFA's fault? What a load of 'Bankers'!!!

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  • I'm just wondering which of the bigwigs at the FSA will be called as a witness by the defence to explain why the findings of their investigation were not disclosed, had it of been done nobody in their right mind would have invested in a something so discredited.
    It's akin to the Govt introducing a law that states you have to wear a pink hat when driving and not announcing it and the first you know is PC McGarry No 452 dropping a summons on you as you drive your Skoda.

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  • Lets have (from the FSA?) a carefully thought through and joined up explanation of when an IFA IS and ISNT liable to compensate a client. Our firm steered clear of Keydata but who is to say that any of us can predict the next "failure". IF advice is given that matches a risk profile and objective, with the key "predictable" risks explained, then if it goes wrong (either investment loss, fraud, changing circumstances etc etc) then surely an IFA shouldnt be liable for anything, whether through a PI claim or via FSCS levies etc. And for the sake of clarification lets have as many examples as possible of when an IFA WOULD be liable, as I can only think of a few obvious ones such as advice not matching objectives and/or risk capacity.

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  • Marvellous

    Just another example of the unjustifiable position of the FSA.

    they may be embarrassed by their total failire, whereas adviser firms go bankrupt because of theirs as the FSA push the results of their failure in to those firms in addition to the firms own.

    Unacceptable.

    Advisers need to organise themselves and confront this cancer.

    in my view the FSA has become the most toxic part of the industry. Indeed one could describe the FSA as a Ponzi Scheme which needs to find ways of extracting increasing levels of fees from the industry to maintain its high level of binuses and expense accounts.

    Don't know about any of you lot but I'm way past fed up and wil be aiming to fight back

    Ian Coley
    Partner
    Medical Investment Services

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  • FSA product guidance rule number one. Everything is suitable for the general puiblic until it is proven to be toxic. Retrospectivity only applies to IFA`s and cannot be applied to regulators. End of!

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  • The writing has been on the wall for years: when an investment goes wrong, for whatever reason, the regulator will blame the advisers and hold them liable for compensation unless the advisers can show that every box has been ticked, and then some more.
    I would urge all advisers, whether involved in Keydata or not, to use this opportunity to join DAC Beachcroft to fight for our rights against regulation that only hits in one direction.

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  • The industry is finished!

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  • I still don't understand how, if KeyData was an intermediary (as the FSA has decided to classify it), its failure can have given rise to any losses for investors. Any client monies en route to a provider for investment must, by law, be held in a client money account entirely separate from the affairs of the intermediary company. So if the intermediary company goes down, monies in its client account should be untouched.

    Then again, if KeyData was a provider ~ well, it wasn't an intermediary, was it?

    Either way, I fail to see any logic by which it can be argued that the cost of compensation should be billed to the IFA community.

    Can anybody explain the FSA's line of reasoning?

    Hector Sants in March 2011 before the TSC: The FSA has no prejudicial agenda against the IFA community.

    The facts suggest otherwise.

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