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.”