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Advisers will have to pick up legal bill for pursuing Keydata IFAs

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The adviser sub-class will foot the legal bill for pursuing IFAs who sold Keydata products while any recoveries will be paid back to fund management groups.

In the latest FSCS outlook, the scheme confirms that any costs attributable to Keydata recoveries will be paid for by the intermediation sub-class.

It adds: “Any net recoveries (that is, after costs) will first be allocated to the investment fund management sector up to the amount that sector contributed (in the interim levy). Any remaining recoveries will be applied to the investment intermediation sector.”

Claims relating to Keydata triggered FSCS levies for 2010/11 of £326m, with advisers having to pay £93m and fund firms £233m. Claims relating to SLS Capital made up the majority of an £80m FSCS adviser levy for 2009/10.

The FSCS recently instructed lawyers Herbert Smith to write to around 500 firms to start the legal process of trying to recover compensation claims paid out to Keydata SLS investors.

The outlook states the scheme’s continued operational expenses for 2011/12 are likely to be £11.85m more than originally projected - rising from £23m to £34.85 - due to a combination of fees associated with pursuing Keydata recoveries and bank facility fees for short-term liquidity funding for the FSCS.

Online reaction to the news of another Financial Services Compensation Scheme adviser levy

This cannot go on. There is clearly no incentive toward prudence. That is the lesson of all the debacles to date. We need to rethink the whole concept of investor compensation.
Neil Liversidge

This is no joke. In the past, I have just got on with it and paid the bill I am faced with. Well, finally, my patience has snapped and I will be writing to my MP and asking him his opinion as something needs to be done, namely, who regulates the regulator?
Gareth Smith

My clients and myself cannot keep paying extra fees for this kind of collective responsibility. It is like financial fly-tipping.
Andrew Moore

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Readers' comments (5)

  • It has become your prison, who predicted this over 20 years ago?

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  • Why? Surely some common sense has to prevail, recovery from all but the larger firms will be impossible as the smaller firms simply won't be able to afford to pay, it appears the PI insurers are not going to pay out so we will have lots of firms entering administration with any future claims (for non Keydata cases) falling upon the FSCS. A vicious circle, but hey the big city lawyers will do alright........

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  • Let me start (what I hope may be allowed by the Editor of MM to be a series of posts), the first being the answer to Evan Owen - above.

    Let's go back to 1987. and the genesis of the current situation re levies from the FSCS.


    Meeting place: Royal Exchange - opposite the Bank of England.

    Date: 1987

    Present: Professor James Gower, 3 of his staff, and yours truly.

    Purpose of meeting: To put on record:

    - for Professor Gower, the author of the Gower Report which was a blueprint for the upcoming Financial Services Act,

    - and for the then Conservative Government

    - and for those employed to establish the SIB etc

    ... that the Gower Report, and the subsequent Government White Paper both contained (at least)one crucial error, and in many ways it was that error which has imho inexorably produced the complaints which are raised so vocally over the FSCS some 20+ years later.

    Am I in any way justified in stating that conclusion - or in hoping that another article from me (as mentioned above) might lead to a positive debate on alternatives?

    Well, let's go back to what I said in this very paper shortly after that meeting took place.

    I recorded that one error in this very paper shortly thereafter ... I said "If you re-read the Government's White Paper you will find a crucial mistake. The Government described the Policyholders Protection Act 1975 as offering its 90% provision only to private policyholders. This is incorrect. The 90% provision extends to all policyholders if it is long term business."

    I also said ... in that same article, back in 1987.

    " Failure to obtain the necessary authorisation is not solely based on an objective assessment of what is right or wrong, nor indeed of what is deemed criminal. The criteria which may dictate whether you are guilty of a potential criminal act may not be the commission of such an act. The over-riding criteria may be your ability to adhere to a set of subjectively assessed rules and, even more significantly, your ability to absorb the running costs involved in enforcing such rules. Ignore honesty! It may be the rules and costs which prove to be your prison."

    "It is also a recipe for disaster. Simple arithmetic is all that is required to produce "criminals out of the hat".

    "Take any drop in the number of intermediaries to be regulated, add any increased regulation costs and multiply by a call on the compensation fund and they equal an immediate cost increase. Any such costs are uncontrollable and there is no compensating price increase. An inability on the part of an intermediary to absorb totally all such costs becomes a potential criminal offence. You do not have to commit an offence, it can just happen to you."

    I hope my next article, and the now clear understanding that the status quo is not acceptable, will point to at least one of the alternatives - available back in 1987 and still available to this day.


    In subsequent posts, I will make reference to two "articles" which have since appeared in MM, both as they relate to alternatives to the current investor compensation scheme, and to the current situation over Keydata.

    @ Neil Liversedge: If there is indeed a serious desire to investigate and assess alternatives to the status quo, I hope what I post here (Editor permitting) may provide a platform, one in which trade associations might declare an interest?


    To those reading this post:

    Please bear heavily in mind the recently reported comments from the CEO at the FSCS that it is unrealistic for an ordinary person to carry out due diligence, and then ask yourself a more fundamental question - do the recent events over RBS, HBOS, and Keydata, etc etc etc the conclusion that the FSA is itself equally incapable of so doing?

    - and thus the need for a radical reappraisal of investor compensation is not just something of interest to IFAs - but is badly needed in the public interest.

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  • So IFAs pay the costs of any potential recoveries and investment managers are awarded first call on the proceeds - each and every decision and each and every action or inaction under the singular control of the FSCS.

    Are you happy with that situation?

    I want to take you back to February last year, and the following article, which predicted this position, and also offered the only way I could conceive of to prevent, or perhaps at best, to ameliorate it:

    I concluded:

    Let me ask you - Is “could” good enough for you? Should the FSCS be the sole arbiter in the exercise of what should be “your” legal rights? Do you really need the permission of the FSCS to recover the losses you have been asked to bear? Who pays the piper - who calls the tune?

    If ever there was a reason for both IFAs and investment managers to combine their talents and work together - it is over this issue of subrogation rights related to the Keydata affair. Not least because by doing so it may establish a precedent which influences how the eventual review of the FSCS is concluded.


    I added these comments in a follow up post:

    From everything I read the IMA are very active, but I have not seen similar activity amongst IFas or their Trade Bodies.

    The use of an arbitrary date seems to me to be perverse when the issue of Keydata is still in progress - and I suspect the FSCS may take this into account - but they need IFAs to argue that case with them - is that happening?


    We shall shortly see the FSA open up their consultation on the funding of the FSCS.

    If you are unhappy with the current position, let alone its continuance, where your income and capital is constantly at risk, but never under your control, never with even your involvement

    - is now the time to let your voice be heard, and not just let the contents of your wallet be emptied at the unaccountable behest of the FSCS, following what may ultimately always prove to be yet another failure on the part of the FSA?

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  • This is the last article to which I wish to refer - again it dates back to February last year.

    I would stress that the posts which others contributed following that article are for me of equal importance, they show both the need for debate and the willingness to contribute to such a debate.

    Let me pick up on just one of the examples I used in the article, the use of CDS.

    If you have been following the Eurozone position, you will know that the "risks" are delineated in the "price" at which finance is made available, and it does not take a genius to see how higher "risks" command a higher "price", and that may show up in the interest charged or in the "premium" paid for any Credit Default Swaps that are arranged.

    Now let me pick up on very recent comments from Mark Neale, reported elsewhere in MM, these ... " He said while savers cannot be realistically expected to do due diligence on their bank, they should understand the risks they are running with investment products."

    If you truly believe that Mr Neale, let me ask ... Do you, as the FSCS, provide that essential risk assessment to the investor Mr Neale, in advance of any investment?

    If not you ... Do the FSA provide any such pre-notified risk assessment to the public?

    Recent events suggest otherwise ....

    Did you or the FSA give prior warning to the public about the risks they were running in RBS, in HBOS, in Bradford and Bingley, in Keydata, in Arch Cru, in MF Global, etc etc etc?

    Perhaps those recent events indicate that there is a far more radical review required, not as perhaps you believe, Mr Neale, a review of the current system which addresses how to compensate investors after a loss, but one which seeks to assess, in advance, the risks of losses happening, and informing the investor accordingly?

    Perhaps, the debate on investor compensation should come - after - a far more meaningful debate on investor protection?


    I hope these posts and the articles might just lead to such a debate. Anyone interested?

    The need for just such a dbate has been outstanding, imho, since way back in the '80's.

    The events, the regulatory failures and the consequent losses which have manifested themselves in the intervening years are my irrefutable evidence for that conclusion.

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