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FSCS defends legal action against Keydata advisers

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The Financial Services Compensation Scheme has defended its decision to take legal action against advisers who recommended Keydata products, saying it only pursues recoveries where it is “reasonably possible and cost effective” to do so.

The comments follow a letter from Aifa, which called for answers over the way the scheme is pursuing Keydata advisers, particularly smaller firms.

Law firm Herbert Smith has written to over 500 firms on behalf of the FSCS to start the legal process of recovering compensation paid to Keydata investors relating to SLS products.

The FSCS has accepted 5,200 claims from Keydata SLS investors and paid out £67m. Money Marketing understands the FSCS will also look to pursue a much larger amount from advisers who sold Keydata Lifemark products. An industry levy of £326m was raised to pay Lifemark claims.

In its response letter to Aifa, the FSCS says: “Once FSCS has had investors’ rights assigned to it on the payment of compensation - as is the case in the context of Keydata to a value in excess of £300m - FSCS is under a duty to ‘pursue all and only such recoveries as it considers are likely to be both reasonably possible and cost effective to pursue’.

“By doing so, FSCS seeks to mitigate the costs of compensation for the benefit of its levypayers.”

The FSCS says once it is assigned investors’ rights it is allowed to take over rights and claims to ‘any other party’ and bring third party claims relating to an investor’s claim.

The FSCS letter says: “On the basis of the legal advice we have received, we have formed a view that there are legal claims against a large number of firms that recommended Keydata products and, as a result, we consider that, consistent with our statutory function, FSCS should pursue reasonable avenues of recovery against those firms.”

Aifa has also questioned the disclosure of the list of firms being pursued for recoveries, together with personal details of investors and total amounts invested. These details were included within the letters sent by Herbert Smith last month.

The FSCS says it shares Aifa’s concerns over the disclosure of personal information about Keydata investors. But it points out the Herbert Smith letters highlighted the information was sensitive and confidential. The FSCS says it also made sure members of the public could not access confidential information from the court file.

The FSCS letter adds: “The fact that one or more of the defendant firms has taken the decision to disclose some or all of the above information is regrettable, but is not something that is within the power of FSCS to control.  We believe we have taken reasonable steps to protect the investor information.

In response to the letter, Aifa director Robert Sinclair (pictured) says: “Whilst acknowledging the FSCS considers this meets their statutory objectives, Aifa feels further discussions are necessary around ensuring any actions taken are reasonable and cost effective.

“Whilst not challenging the FSCS’ duties we remain concerned that adviser firms appear to bearing the brunt of the issues here, both in relation to the interim levy and now in terms of recoveries, against a backdrop of something that remains a complicated case.”

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Readers' comments (11)

  • If Herbert Smith deemed the information to be sensitive and confidential, why did they not even bother to send them recorded delivery?

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  • I'm even more confused that IFAonline's editor posted on their site in the comments on their article when listing the 500+ firms that this information was publically available... was that actually not correct?

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  • Did they have to go down the legal route to start of with?

    As always an extremely large amount of monies they may/will recover will be eaten up in legal fees which means that any rebate will be that much less.

    Way to go FSCS

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  • Just had the FSCS outlook report and in there re Keydata and these recoveries. Guess which sector pays the costs for seeking these recoveries and guess which sector benefits from any recoveries made in the first instance....


    The costs attributable to Keydata
    recoveries will first go to the Investment
    Intermediation sector (as it is a
    management expense and SD02 is the
    class against which FSCS has properly
    allocated the compensation costs). Any
    net recoveries (i.e. after costs) will first
    be allocated to the Investment Fund
    Management sector up to the amount that
    sector contributed (in the interim levy).

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  • On the FSCS website it states (when talking about Lifemark policies):
    "We are satisfied that the marketing materials produced by Keydata to promote the products did not comply with the Financial Services Authority’s rules."

    These are the materials that the investors, AND ADVISERS, relied upon......... how can IFA's be blamed for that???

    Way to go FSCS! lets see how many firms we can put out of business before RDR!

    Between the FSCS and the FSA they will soon succeed in getting rid of the majority of IFA's, therefore leaving a small number of nationals, and of course banks.

    How much easier for the FSA to regulate would that be????

    or am i cynical????

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  • It is the FSA that should be 'in the dock'. If the product was 'shit', why was it even available ? If the FSA was doing its job properly (and Turner has admitted that the FSA is incapable of doing the job it is paid to do) then there would have been no LifeMark product to sell. IFAs, with one-millionth of the resources possessed by the FSA, are expected to carry out due diligence and 'carry the can' for failures in this regard, whilst the FSA can simply apologise for its failure not to have done so.

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  • We have been named as a firm which has advised on Keydata products.Our firm's name has been publicly tarnished. The matter is an existing investment which transferred to us post inception. Any client or potential client of ours can see our name linked with this sorry matter.Herbert Smith have deleted our emails of protest without reading them (we sent a "read" receipt with them) and denied receiving any phone calls-they just refused to speak to us.No advance notification of this action was received by us, just the documents notifying us that we were being pursued. This is a disgraceful matter which should rightly be returned to the FSA who AUTHORISED Keydata in the first place. If their resources can't uncover irregularities and their due diligence is lacking, exactly why do we pay them for the regulation of this industry. They are not fit for purpose. Passing the buck to the IFAs is intolerable and frankly some IFAs don't recognise the thin end of the wedge when it hits them in the face and they should climb down from their pedestals, stop crowing on about their own good judgement in recognising Keydata for what it turned out to be and realise that this is a case of "there but for the grace of God..." We should get behind AIFA and fight this, it is a very dangerous precedent. By the way I usually disclose my name on these comments, I am planning to join the ranks of Anonymous correspondents now, I know a witch hunt when I see one.

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  • I heartily agree with the sentiments expressed by Anonymous 3:46. I did look at the Keydata information and decided I couldn't see the point in it. I looked at the Cru information and did think it was worthwhile, but never actually sold it. So "there but for the grace of God…" I too could be looking at recriminations.
    I did undertake due diligence on unusual funds, and on more than one occasion decided that there was a discord between the aim and the construction. Yet, by accident, I am not in the firing line in respect of a fund I did not dismiss.
    Is this really a good way to regulate a vital industry? And remember that the FSA are looking to introduce the concept of absolute liability, that is, there is no need to provide any proof of causation - the adviser is liable whatever the circumstances.
    I have taken the view that it is now far too dangerous to recommend products, especially as it is not possible to rely on normal legal safeguards.
    Others should make their own assessment. Remember that the liability lives with you to your grave, and it is an "asset" you can pass on to your survivors. There is no indication that it would lead to a repayment of IHT!

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  • The FSCS mean to say that a firm of solicitors advised them it would be a good idea to embark of a costly legal battle from which the lawyers would make a small fortune regardless of outcome - surely not?

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  • It is a shame that the expensive lawyers at Herbert Smith couldn't find the main rule applicable when making their case to be able to leach millions of pounds in fees to help decimate a sector of the industry. Rule 2.3 confirms that we are able to rely on written information from an authorised firm. FSCS confirmed they accepted liability because of the faulty literature. Everything else is a smokescreen. IFA's are not culpable. Herbert Smith should direct their firepower at Mr Sants and his snout in the trough chums! The blame lays at Canary Wharf. Ps the FSCS can kiss my ar*e if they think I am going to give them any more money to help them pursue me in further levy

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