Over 200 advisers last week lost a judicial review of the Financial Services Compensation Scheme’s decision to levy Keydata compensation costs on intermediaries.
High Court judge Mr Justice Beatson, sitting in Birmingham, ruled on Wednesday the FSCS was justified in classifying Keydata as an investment intermediary, not a provider.
Intermediaries were forced to pay an £80m interim levy last year, with around £58m caused by claims relating to Keydata and two failed stockbrokers.
Regulatory Legal partner Gareth Fatchett led the challenge on behalf of IFAs after lobbying by Aifa failed to reverse the FSCS decision. It was argued the decision was unfair as Keydata branded itself as a provider, not an intermediary, and was previously regulated by the Investment Management Regulatory Organisation. It was also argued the FSCS should be forced to consult before classifying failed firms.
moneymarketing.co.uk online pollThe FSCS said Keydata was an intermediary as it passed clients’ savings to offshore partner firms, including SLS and Lifemark.
In his formal judgment, Mr Justice Beatson ruled that the advisers’ case that Keydata was acting as a provider, not an intermediary, involved splitting the firm’s activities in “a wholly artificial way”.
He dismissed the claim that Keydata had the discretion to make certain decisions that affected clients’ investments.
He says: “The line between a discretionary activity and a ministerial administrative one can be fine but I do not consider the other choices left to Keydata under the terms and conditions meant it was managing the investments.”
The judge also dismissed advisers’ claims that the FSCS was obliged to fully consult members of the investment intermediary sub-class before levying the fee on them.
He said: “The liability of a class or sub-class to be subjected to a levy is one imposed by the rules made by the FSA. The FSCS has no relevant discretion in the way it allocates compensation costs to the class or sub-class of persons subject to the levy.”
He said a duty to consult all 5,000 members of the investment intermediary sub-class would impose “a significant burden” on the FSCS.
The FSCS is set to unveil another interim levy to compensate Lifemark investors before the end of January, which is expected to breach the £100m limit for total levies that can be applied to intermediaries in one year.
Any further claims, up to a total of £370m, will be paid by investment providers, with any additional cost absorbed by the general pool.
The FSCS’s costs for fighting the judicial review in the Birmingham High Court were £280,000, including hiring Charles Flynt, QC, as counsel.
Advisers paid around £200 each into a fighting fund to absorb costs resulting from the challenge. Any extra costs will be paid by Regulatory Legal.
Regulatory Legal’s own costs, including hiring Anthony Speaight, QC, and Andrew Maguire, were £50,000.
Both sides will now make representations as to how costs for the case should be divided up and a judge will decide whether Regulatory Legal should pay all the FSCS’s costs or if further assessment is required.