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FSCS starts legal bid to recoup costs from Keydata distributors

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The Financial Services Compensation Scheme has kick-started a legal process to recoup some of the compensation it has paid out on Keydata claims from IFAs who sold Keydata products.

Law firm Herbert Smith has written to Keydata distributors to begin the process of pursuing recoveries on behalf of the FSCS.

The letter from Herbert Smith to an undisclosed IFA firm, seen by Money Marketing, says: “The FSCS has an opportunity to consider whether it has claims against IFAs who advised in relation to the sale of Keydata products to investors. We and the FSCS are still investigating this matter but our strong preliminary view is that good claims exist against a large number of IFAs.”

The letter says the FSCS has claims against the firm for negligence, as the firm breached its duty of care by negligently advising them to take out Keydata products.

It also says the firm made false statements relating to the risk profile and suitability of the products, which were relied upon by investors.

Herbert Smith says the FSCS also has claims for breaches of the Conduct of Business Sourcebook rules and breach of contract, as the firm breached its contractual duty to investors to take reasonable skill and care in advising them to invest in Keydata products.

The letter says that the FSCS is working on information passed to it by the FSA.

A spokesman for the FSCS says: “The FSCS pursues recoveries whenever practical and cost effective to do so.  We believe claims may exist against IFAs for compensation costs relating to certain Keydata Investment Services products.  As a result, we have issued legal proceedings to protect against the limitation period while we analyse the potential claims in detail.”

Money Marketing reported in April that the FSCS was pursuing a number of firms for Keydata recoveries, after Norwich & Peterborough Building Society agreed to repay the FSCS £28m for compensation the scheme paid to N&P Keydata customers.

The industry was levied £326m by the FSCS in January, mainly to cover the compensation costs following the collapse of Keydata. Advisers had to pay £93m towards these costs while fund managers paid £233m.

The FSCS has said any recoveries relating to Keydata compensation will be rebated to fund firms first rather than advisers to pay for the cross-subsidy triggered by the £326m interim levy.

The FSA has been conducting its own investigation into advisers that sold Keydata products and how the products were sold. The regulator wrote to advisers in May who sold the Keydata Secured Income Bond and the Keydata Defined Income Plan between July 2005 and June 2009.

Earlier this month the FSA wrote to Keydata distributors again, telling them to ensure they had sufficient assets to meet potential liabilities.

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Readers' comments (14)

  • so the industry paid a levie of £326m and now we will go after the IFA's ( that paid the levie ) to pay again and you can bet that if they are sucessful these funds wont be repaid to the IFA's and firms that paid levie. They state we have a duty of care but so does the FSA who warned Keydata about the information they were providing was wrong if not misleading but did they tell any of the industry at that time of this the answer NO

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  • There are various issues here -

    1) If the FSCS persued all firms who recommended Keydata - surely they would be able to refund the bulk of the levy to both parties (Adviser's and Fund Managers), as they would collect back in the bulk of the money paid out (amout received would be less than the claims due to costs and firms which are declared in default)

    2) Will any of the firms contacted decline to pay, on the basis the FSCS could have overstepped their remit - i.e. the Advisory firm wasn't in default and so the firm should have been the first port of call.

    3) Have any investors received back greater sums of money than the FSCS rules state - and therefore was the levy too high?

    A strong challenge should have been made when the Keydata issue occured - as I doubt the FSCS rules have actually been followed!

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  • Perhaps i am being thick, but there appears to be a certain incongruity with the FSCS approach here.
    How can IFAs be pursued for negligence when the reason that the FSCS had to pay out in respect of the SLS Capital investments was because David Elias wlaked off with their money.

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  • Action of this type by the FSCS was predictable.

    What level of recoveries can be made is anything but. Do not rule out the demise of some of those from whom recoveries are sought with the inevitable financial consequences.

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  • To Anonymous | 12 Oct 2011 4:08 pm
    You are not being thick, you just only have part of the pricture.
    Keydata had two products they marketed, one through SLS (where someone stole £103 million) and then their second offerring "Lifemark", which was effectively pulled down by the SLS failure combined with FSA intervention over HMRC ISA issues.

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  • Surely the FSA should be accountable with the Keydata debacle. After all, they authorised and regulated Keydata. Had they not been regulated or authorised in the first place then not many IFA's would have recommended Keydata at all!

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  • I may be being silly here but IFA's and the public should be able to rely on the words 'authorised and regulated by the FSA'.

    The FSA has the power to view all kinds of internal company records that these IFA's cannot access.

    As the FSA missed Keydata it seems inequitable to go after small IFA firms whose research resources are tiny compared to those of the FSA.

    It's time for some justice in financial services.

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  • FSCS only paid out on SLS funds to ISA clients to ISA levels claiming the stolen funds were not covered.
    It will be interesting to know what information and source FSCS think we should have been aware of at the time the advice was given to point to our failures in our duty of care. None that I was aware of prior to the demise

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  • @ both Graham Pattinson and Mr Smug

    Keydata was indeed regulated and authorised by the FSA, so too were Northern Rock, Bradford and Bingley, the Royal Bank of Scotland and HBOS.

    Whether seen as regulatory failure, or serial regulatory failure, would you advise anyone to place their trust, let alone their financial well being, in a regulator with a track record of that calibre?

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  • The FSA have presided over this mess from start to finish. They have privately known about problems for years, identified the lower risk demographic to which the products were being sold at least by 2007, and actually helped cause the lifemark liquidity issues. They let things continue unchecked, and are to blame as much as anyone. All we are seeing here is bureaucrats with power deflecting blame by targeting the little guy. Appalling.

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