The Financial Services Compensation Scheme has a duty on behalf of industry levy-payers to try to reclaim as much money as possible that has been paid out on their behalf.
With this in mind, its lawyers have sent letters to an undisclosed number of firms asking them to stump up for client Keydata losses which the scheme believes they are responsible for.
Letters have focused on losses associated with SLS Capital, the Luxemburg special purpose vehicle which administrators found had over £100m “misappropriated” from it. The FSCS will also be looking to take action in relation to Lifemark, a separate SPV which triggered a £326m levy.
The FSCS believes firms have breached their duty of care to the client in advising them into what it judges to be high-risk investments.
It is likely to focus most of its energy on bigger distributors and it is uncertain how far it will go in its attempts to reclaim costs from a raft of smaller firms. It may well be that pursuing a large number of small firms through the courts, and possibly triggering the bankruptcy of some, is not economical.
However, any firms who have received an FSCS letter should contact their PI insurer immediately to make them aware of the action.
Many readers who have suffered the huge FSCS bills associated with the downfall of Keydata will no doubt back the actions of the scheme. Money recouped should be rebated to levy-payers or used to pay for future levies.
But the FSCS’s action does raise a number of questions. Losses associated with SLS Capital were found to be principally the result of fraudulent activity while concerns have been raised about the accuracy of Keydata marketing literature and the role of the regulator in overseeing the firm. Bearing this in mind, should the IFA firm carry the can for all associated losses?
Would a wave of litigation lead to a large number of small firms going bust and hitting the FSCS with more costs in the long term? With a number of deals to rescue Lifemark assets currently on the table, which could offer considerable recoveries to the FSCS, is it too early to try and hold individual firms culpable for such large sums?
Firms found to have misold Keydata plans should pay the price but we need to make sure it is a fair price.