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Advisers lose Keydata FSCS judicial review

Over 200 advisers have 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, has this afternoon ruled the FSCS was justified in classifying Keydata as an investment intermediary, not a provider.

Intermediaries had to pay an £80m interim levy last year with around £58m caused by claims relating to Keydata and two failed stockbrokers.

Advisers were outraged that the FSCS decided to classify Keydata as an intermediary and 200 instructed Regulatory Legal partner Gareth Fatchett to review the 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 that the FSCS should be forced to consult before classifying failed firms.

However the FSCS argued Keydata was an intermediary as it passed clients’ savings to offshore partner firms including SLS and Lifemark.

In his formal judgement, Mr Justice Beatson rules that the advisers’ case that Keydata was acting as a provider, not an intermediary, involves splitting the firm’s activities in a “wholly artificial way”.

He dismisses 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 that the other choices left to Keydata under the terms and conditions meant it was managing the investments.”

The judge also dismisses advisers’ claims that the FSCS was obliged to fully consult members of the investment intermediary sub-class before levying the fee on them.

He says: “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.

“There was no suggestion that the claimants had any particular knowledge of Keydata or its affairs and how they related to the claims made or to be made to [the FSCS].”

He says 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 anything else being absorbed by the general pool.

The FSCS’s costs for fighting the judicial review in the Birmingham High Court were £280,000, which include 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.

Fatchett says: “Regulatory Legal Solicitors is disappointed at the result. However, the Keydata issue needed to be clarified and it was right to take this matter to trial. The law is now clarified.”

The FSCS says in a statement: “The FSCS is pleased with the High Court decision. We recognise that the application raised issues about our funding, and understand the concerns that financial advisers in particular have about the allocation of this levy.

“The FSCS always considers carefully the correct funding class or sub-class before allocating the costs of claims. The rules require us to allocate the costs of compensation by reference to the activities of the firm which gave rise to the claim. The FSCS has no power to deviate from the rules when allocating the costs of compensation, as the judgement confirms.”

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Comments

There are 44 comments at the moment, we would love to hear your opinion too.

  1. The only people who had any benefit from this is the regulatory legal………more moeny down the drain for the advisers who contributed.

  2. Well Anonymous, it doesn’t look as though Regulatory Legal will be benefiting – they have to pay the FSCS’ costs!

  3. We were always “pissing in the wind” on this one!

  4. If Keydata was not the provider of my so-called Keydata Secure Income Plan, who was? There was no mention of Lifemark, Lifemark Bond, etc. in any literatue as far back as 2007 when I invested in what was sold as a low risk UK product for a UK pension, payable in UK? into my UK bank.

    Is this what he FSA authorises and regulates?

  5. It’s interesting that FSCS managed to spend so much more than Regulatory Legal. I guess when you can simply levy whatever you want, you don’t worry about costs.

    Well done to all those who contributed. Despite the loss I believe that the action has still drawn an important line in the sand on behalf of IFA’s..

  6. Oh for goodness sake – is there anyone out there with a positive view! I’m fed up with all the negative comments from individuals we just accepted the decision on Keydata. At least 200 of us tried to change this – I’m sorry but I’m not prepared to take whatever is thrown at us without a fight. Thank you Gareth Fachett and Regulatory Legal for at least trying to overturn the decision made initially by FSCS – you can’t win them all but at least we tried.

  7. Obviously a hugely disappointing verdict but I have upmost respect for those advisers who put their money where their mouth was and at least tried to stand up for what was right and fair.

  8. Dennis Burling ACII APFS, Chartered Financial Plan 12th January 2011 at 3:53 pm

    Does anyone even win anything against the FSA or the authorities in general -the rules are so unfairly stacked against the adviser , what is the point of wasting money to challenge what is invariably a lost cause !

    The only way that the industry will ever change anuything is if everyone stands together and point blank refuses to co-operate.

    The FSA would then have to deregulate everyone and there would then be no advisers left to advise anyone -that would certainly then wake people up to the unfairness of this..

    Personally I can’t wait to leave the industry despite being chartered and am amazed that anyone in their right minds would even want to enter it !!!

  9. Well said, Deborah – we didn’t have any exposure to this but we still contributed to the ‘ fighting fund’ because I believe in the cause.

  10. What a shame, but I guess big brother was always favorite.

    I consider my money well spent and would do the same again, well done Gareth for at least having a go.

    Anonymous:- not sure how having to meet the £280,000 FSCS costs plus thier own costs of £50,000 can be seen as a benefit to Regulatory Legal, perhaps you would enlighten me please??

  11. Although I am a little disappointed at such a summary decision I still believe it was right to support this challenge to the Quangocrats.

    Sometimes the fight is worth far more than victory.

  12. Alas, I fear my fees will go up yet again over something I have absolutely no control over. Never sold one of these confounded policies never will.

    ‘It’s the poor what gets the blame’.

  13. This in effect means we can have any unlimited liability should a few larger group claims need to be met…………….we will get the 28 days to pay up or else letter!
    Never imagined becoming an IFA was also like being an old style “Lloyds Name” but with none of the up-side

  14. Well said Deborah White. For me the £200 was always going to be well spent whatever the outcome. At face value I have always percieved Key Data as a provider.

  15. Well done to Regulatory Legal for putting up a fight. It’s a pity that the cost of legal battles is so high. I wonder how the FSCS can afford to pay for television advertising…..oh, yes…..we are paying for it.

  16. What will happen if there is a Madoff PONZI type scheme involving hundreds of millions, who will the levy fall on?

  17. Please excuse my ignorance, as I’ve never mounted a judicial review before, but what happens now in respect of the FSCS legal costs for this case? I assume that Regulatory Legal has to pay these? Did they take out some form of insurance against costs or will they be billing those IFAs who originally supported the action?

  18. I agree with Pensionman. Well done for trying – it seems nuts to me that you lost. If Keydate wasn’t the provider and, instead, there was this crazy web of “partner-firms” that money was being sent to, why didn’t the FSA know about this and get them to write it on the product information as part of their authorisation and why are questions being asked now? I’m not suggesting that there’s a witch-hunt, what would be a lot better for everyone is for there to be a full understanding of what went wrong and why. IFAs don’t want the worry of problems developing with products that causes there to be (very unfair) claims against them and, at the same time, surey the FSA and the FSCS don’t want this sort of confidence-busting expensive mess either. How can we work together in a better way to everyone’s benefit?

  19. Without having the benefit of seeing the full judgement, doesn’t this throws a huge doubt into the whole UK Financial Products compensation scheme structure. If the definition of a provider is that they keep the money rather than pass it to a third party, surely this applies to just about every provider in the country because most products now use third party investment managers. This includes every investment platform and many life company bonds and pensions. Are they all intermediaries and not providers now?

    Stan Kirk.

  20. IFA’s who supported this action face no further liability on this. H

    Our support of Regulatory Legal waned somewhat when we got a client claim on one of 2 Keydata plans “distributed” by us and backed by, you’ve guessed it, Regulatory Legal.

    That aside 10/10 Deborah White.

  21. Shows how much notice you take of what is happening, Martin Bamford you obviously didnt contribute did you.
    Regulatory Legal are not billing IFA’s as originally stated.
    We are now certain that we have no justice where the F Pack are concerned. SICK.

  22. The only legal case that needs to me made is against the FSA but sadly they are protected under FSMA2000 for any wrongdoing.

    We cannot possibly achieve or obtain justice under the FSA or indeed this Government who seem keen to keep such unfair and unjust arrangements going, despite telling us all how they would give us and I quote from the speech made by the QUEEN ,
    “ My Government’s legislative programme will be based upon the principles of freedom, fairness and responsibility.”

    Should we all be writing to the Queen I wonder?

  23. Worryingly, this opens the floodgates for what will now become an endless succession of special levies in respect of institutions which everyone but the FSA considers to be a provider rather than an intermediary. How punitive will the next one be? What will be the FSA’s next idea in its concerted campaign to bash the IFA sector into oblivion?

    This is a black day, though doubtless the mandarins at Canary Wharf will be breaking out the champers and drinking a toast to victory.

  24. @Rod Leonard

    You’re quite right, Rod – we didn’t contribute to this action as a) all indications at the time suggested it stood little chance of success and b) we weren’t feeling guilty about imposing the cost of interim levies on our peers because we didn’t recommend investments in this flawed scheme. I’m also not a fan of making symbolic gestures, hence our decision not to get involved.

    As Regulatory Legal are not billing their IFA supporters for the cost of FSCS legal fees in this case, are they absorbing the £280k bill themselves or were they insured against this eventuality?

  25. Perhaps the commission grabbing moronic IFAs who sold this pile of rubbish to their unsuspecting clients might now do the decent thing (not a chance!) and cough up the money that the FSCS will now be demanding from the rest of us.

    Let’s hope that the FSA can search out these idiots and protect the UK consumer from further detriment at the hands of these useless fools

  26. I understand that the ruling is based on the contention that becuse Keydata outsourced the investment decisions they are an Intermediary. If this is so, simple logic would would conclude that all the investment houses who operate multi-manager funds are also Intermediaries as they outsource investment decisions. In that case the cost of the levy (and future similar levies) should be shared amongst all Intermediaries including multimanagers. Or does the FCSC have the power to cherry pick who to include in the Intermediary class after setting its own criteria?

  27. Hey!!! come on Nick, there may have been a little ineptitude on behalf of some but your comments are a little heavy. Not everybody is blessed with perpetual brilliance

  28. Re Martin & Nick Bamford’s comments – we also were not involved in the sale of this product, nor indeed any similar type of product. Our contribution to the “fighting fund” was not made out any any feelings of guilt but purely to make an effort to right a wrong which had/has the potential of costing us a substantial increase in fees. I would hope that many of the other 200 IFA’s that contributed did so for exactly the same reason

  29. Graham Reeve has hit the nail on the head. Is anybody else listening or are they all too busy hurling abuse at each other about who is to blame? If the court is right on the definition of ‘intermediary’ then many providers are now intermediaries and the list should be widened accordingly to share the pain more widely.

  30. Martin Bamford | 12 Jan 2011 4:15 pm

    Please excuse my ignorance, as I’ve never mounted a judicial review before, but what happens now in respect of the FSCS legal costs for this case? I assume that Regulatory Legal has to pay these? Did they take out some form of insurance against costs or will they be billing those IFAs who originally supported the action?

    *****************************

    Ignorance is bliss, what an utterly ridiculous saying.

  31. Deborah White really is a shining example to us all – unlike the petty minded side swiping, holier than though Nick Bamford. I assume he is the younger of the family, and the less mature? Can’t be bothered to investigate though to confirm my suspicions.

    It seems that rather than such pettiness he should be directing his vitreole at the banks and certainly N&P building society who were selling this ‘product’ in droves despite their much greater research and complaince department capabilities. Indeed i think it was Barclays who were reported as promoting Keydata products branded in their name right up until they went bust. I for one wholeheartedly reject his ‘commission grabbing IFA’ smear as a Chartered planner with two affected clients – but just a part-time administrator. Perhaps Nick would be kind enough to warn us all of all the other bear traps out there and for the record confirm he has never sold an endowment, contracted anyone out or otherwise left himself exposed to retrospectively wise people on the make (many making fraudualent claims based on spurious memory lapses). I look forward to Nick’s considered in depth research on all the ‘products’ he is avoiding and why.

    Oh how Nick Bamford has fallen from his perch – still not that far to fall i imagine despite his illusions of grandeur!

  32. Martin, if you decided not to get involved, why are you so interested in who is paying the £280k bill?
    It should be of no interest to anyone other than those involved in the legal proceedings.
    Nick, the fact that this pile of rubbish was available says more about the regulator than the “useless fools”
    What is the difference between a useless fool and a smug self righteous fool?

  33. Nick Bamford,

    I think it’s a little rich to have called people who sold this ‘commission grabbing’. I seem to remember that this paid 3% with no trail. Less than even a basic ISA. The commission grabbers were all off selling Aviva bonds at 6.4%.

    Maybe you should count to ten before pushing the submit button as you’ve made yourself appear a little silly.

    BTW. Never sold one of these myself so no Axe to grind. Just believe that if it says A&R by the FSA at the bottom of the form it should do what it says it will do, but that’s another argument.

  34. How I love the bamfords, I would love to spend a pleasant evening with these lovely fellas, could we not have a bandied appreciation society ? Lovely fellas

  35. what is the difference between a useless fool and a smug self righteous one?

  36. Is it a corollary to this that, as a big life office (e.g. Standard Life) invests in FTSE 100 companies and companies overseas, it is also an intermediary?

    May God help us all!

  37. At Adviser Alliance we discussed the potential success of the JR and due to the restricted parameters of a JR we felt that it was very unlikely to succeed.

    However, we also felt that it was important for an adviser supporting body to be supportive of an effort to bring about commonsense and balance. Fort this reason we made a contribution.

  38. The problem is that it is simply not possible to get justice or sense from the FSA and as long as they exist and are protected by statute from any wrongdoing that will continue .

    The issue is not the law but how it is applied and the fact it is not applied fairly in the financial services industry.

    You can take the Police to court even the Government but trying to do that with the FSA is virtually impossible and very expensive as we have now discovered.

    Justice and fairness is not something we all share equally as the FSA knows too well.

    Any organisation that has protection from any wrongdoing (under FSMA2000) when it acts as judge and jury over those it regulates is in my view just as bad as those it prosecutes as it fails to apply the same rules and regulations to itself.

    If the FSA regulated MP’s then Mr Cameron would not be Prime Minister he would no doubt be accused of miss-selling as the polcies he was voted into power on are not those we now have, ditto Mr Clegg.

  39. Maybe this is why Regultory Legal changed from LLP to Limited or did no one notice.

  40. @Messrs Bumford.

    I paid a few pounds towards this Judicial Review, whilst being utterly certain it would fail. My money, my choice.

    You have both become quite prolific bloggers of late, usually in fawning praise of the RDR. I have resisted thus far venting my spleen on either of you – even the wet behind the ears one.

    I have no need to do so now as your comments above do the job admirably.

  41. Well done for standing up to all of them. I have so much respect for all of you. Disappointed with the result, but you tried and continue.
    As an IFA I will not recommend any structured products at all, but would still support others who did and need our help

  42. Again, the credibility and attitude of advisers will be undermined by this poorly judged court action against FSCS. The comments posted will undermine advisers’ credibility even more.

    This was not a fight to pick for advisers.

    There are fights advisers can win. However, advisers, adviser trade bodies, action groups and lawyers acting for them must choose their fights more carefully to gain any credibility in the fierce debate that rages about the regulation of retail financial services.

    Advisers must also stop these vitriolic attacks on each other (especially), regulators, their own trade bodies and action groups. These awful attacks undermine the whole sector and continue to give the impression that advisers are self-interested. Regulators and politicians mistrust advisers because of the impression these poorly judged actions and comments create.

    It is clear that FSA, Bank of England and senior politicians have a low opinion of advisers as a whole because of the poor judgement of the few advisers who air the sorts of ill-judged and vitriolic opinions in these commentaries. The advisers appear anarchic and self-interested to regulators and senior politicians. They give the impression that advisers cannot make sound judgements and, by turn, regulators have concluded that advisers’ advice must be equally unsound and based on self-interest.

    It is time that these advisers, who appear full of bile and vitriol and are probably few in number, became much more aware of the impression they create when publicising their views on important matters.

    Only measured arguments and careful thought can turn the tide of opinion about the attitude of advisers. Advisers must gain credibility with regulators and politicians to have their voices heard. They have to work within the systems to change it. Advisers cannot rail against the system continually; no one will accept revolution in financial services, just evolution. Arguments have to be won on their merits. This continued anarchic collective venting of spleens is unhelpful.

    However, I suspect these advisers are not anarchists, just appear anarchic. I’m sure they are frustrated by the lack of response they get. But who in power in financial services would negotiate with people who hold views of anarchy?

    I cannot believe these advisers really wish to tear down the whole regulatory structure down. If they are anarchists they should exit the sector. If not anarchists, they should recognise that their methods are undermining the credibility of advisers as a whole.

    Finally, it is true also that Regulatory Legal acts for consumers to gain compensation against advisers in this and other matters. The publicity of this will have lifted its profile to enable to publicise its expertise in this area and increase its flow of business. That flow of business may help pay any bills that are not covered by arrangements it made to spread the risk of the loss of the court action.

  43. Chris Taylor, Managing Director, Incapital Europe 19th January 2011 at 11:45 am

    It needs to be understood that any investment provider, regardless of size, regulatory status, etc, who defaults for the same reason as Keydata will potentially fall into the intermediary ‘pot’ – as it is the activity that is important, not the provider’s regulatory authorisation categorisation. If a provider defaults for a different reason (eg Dawnay Day or mutual fund collapses) compensation will come from a different pot.

    In any event, intermediaries need to focus on the credentials, capabilities, calibre and controls of the firms they’re dealing with, as first and foremost they should avoid firms that don’t demonstrate they operate at the pre-requisite level required of any provider,in terms of adequacy of people, systems, controls.

    The final consideration has to be capital, but this should mean more than a firm simply meeting regulatory capital adequacy minimums, which have clearly been proven to be inadequate, given that any one of the four firms that became insolvent in the UK would have survived the problems that they’re business and product failings created if they had possessed sufficient capital.

    Intermediaries need to concentrate on identifying the potential for failure in the firms that they select to deal with, not where compensation scheme levies may eventually land – albeit that this is clearly of interest, not least on principal. Likelihood of failure is a consequence of adequacy of people, systems, controls and capital.

    Keydata is a good illustration of how independent structured product providers can lack credentials, capabilities and controls. Although Keydata’s demise was not driven by structured product issues – it was initially a tax issue linked to Life Settlements and marketing a product as Isa’able when it wasn’t (and, subsequently, the high profile issues related to SLS and Lifemark) – the events indicate that Keydata simply did not have the right credentials and capabilities needed of a provider, such as bona fide product development expertise or controls.

    Without any doubt, advisers need, value and benefit from dealing with independent structured investment providers. But, when events such as Keydata, NDFA, DRL, ARC, Arch Cru, etc, wreak havoc for advisers and investors it is essential that lessons must be learned.

    We believe the lesson reverberating at a structured product industry level is straightforward : advisers and investors do not need or benefit from dealing with ‘small’ independent structured product providers, who have in principle been proven to carry risks that advisers could – and should – be identifying and avoiding.

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