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End of the road: Is the FSCS Keydata legal case unravelling?

Experts say the Financial Services Compensation Scheme’s legal battle against Keydata advisers is looking increasingly desperate and question whether it may be dropped after news that the scheme could now choose uninsured firms without legal representation as lead defendants.

Lawyers warn this could see firms racking up legal bills worth hundreds of thousands of pounds, which could force them into administration. They believe the FSCS is “getting desperate” in its bid to continue with a case that appears to be unravelling.

The FSCS has settled with five of the six original lead defendants selected in its long-running battle to recoup up to £75m out of around £400m paid out in Keydata compensation. As Money Marketing went to press, it was expected that a settlement would be reached with the remaining lead defendant Chase de Vere by the end of the week. 

Since January, the FSCS has been seeking new lead defendants to take the case forward and in March FSCS lawyers Herbert Smith Freehills delayed a case management conference to give it more time to devise new criteria for lead cases.

The original criteria, devised in March 2013, required lead defendants to have insurance and legal representation. Firms also had to meet a set of technical requirements based on the claims against them, including having a certain number of both Lifemark and SLS-backed product sales.

This was intended to ensure the test cases covered a wide range of sales on which judgments could be made and applied to the remainder of the defendants.

But in a letter to advice firms, seen by Money Marketing, HSF says it will invite the court to make the following orders at a case management conference this Friday: that each defendant with claims worth over £150,000 be a potential lead defendant, and to remove the requirement that lead defendants have insurance and legal representation.

The letter says: “It is the FSCS’s view that the use of lead defendants represents the most appropriate way to advance the proceedings and that, given the significant number of settlements, a larger pool of potential lead defendants will be necessary.”

Money Marketing understands there are 74 firms in the pool with claims worth more than £150,000.

Desperation

DWF Fishburns partner Harriet Quiney says: “This could capture small firms which have sold just one or two products. The concern is without insurance, a firm will have to fund their own legal representation – likely to cost around £200,000 or more – or represent themselves.

“The legal bill could easily cost more than the claim against the firm and could force firms into bankruptcy.”

Regulatory Legal solicitor Gareth Fatchett says: “Any lead defendant without representation is simply not going to be able to present the legal arguments well enough. This litigation is descending into farce with the likelihood of most defendants going bust increasing substantially.”

Advisers have also raised concerns that firms pushed into default as a result of the litigation could lead to higher FSCS levies.

Apfa director general Chris Hannant says: “The FSCS has assured me it is not their intention to put any firm out of business.

“So I would be concerned if we were entering a scenario where legal costs could push firms over the edge, not least because those costs are going to fall back on the sector. It is essential whoever is chosen has the ability and the means to be able to defend themselves.”

Affordability

Others argue the court will not allow any firm which cannot afford to finance its legal costs to become a lead defendant.

The witness statement due to be given by HSF partner Kirsten Massey on behalf of the FSCS at Friday’s conference, seen by Money Marketing, argues firms’ ability to afford legal costs will be the key principle on which lead defendants are chosen. Firms will also be able to present evidence arguing why they should not be chosen.

FSCS Keydata in numbers 150515.jpg

The statement says: “It is accepted some of these potential lead defendants will, in fact, not be appropriate to be a final lead defendant. However, the FSCS does not consider the mere lack of insurance or representation is sufficient reason to preclude a potential lead defendant from taking an active role in the proceedings, not least because the firm may have other sources of funding to rely on beyond insurance.

“It is the FSCS’s view that the principal (but not only) consideration will be whether or not a defendant has sufficient means (taking into account its insurance coverage, financial position or otherwise) to fund the defence costs of the proceedings.”

Beale and Company partner Damian McPhun, who is representing a number of advisers in the case, says: “The original criteria ensured the lead defendants would cover a wide range of investors and circumstances but the new proposals mean all it comes down to is whether a firm can afford to pay for a defence. That means a lot of the logic behind having test cases has gone out of the window.”

McPhun says it is also unclear how the FSCS will determine which advisers can and cannot afford to be a lead defendant.

The managing director of an advice firm in the pool of potential lead defendants, who wishes to remain anonymous, says: “No financial adviser, including national firms, can
afford this without insurance. I have no idea why the FSCS has done this other than through desperation.”

Lawyers have also suggested the judge may object to firms becoming lead defendants without legal representation.

4 Pump Court barrister Peter Hamilton says such a move would be “inappropriate” and the principal behind the recent decision to throw out an FCA fraud case because the defendants failed to get legal representation should apply in the Keydata case too. He says: “The judge’s view that the defendants would not get a fair trial in that case applies here. Individuals cannot be expected to represent themselves in complex cases and, where they do, injustices are likely to occur.

“There is an argument to say the FSCS has come to the end of the road with this litigation.”

Settlements

The FSCS is so far facing total legal costs of £30m in the litigation, close to half the £75m it said last year it expects to recover in Keydata compensation. It has also settled with many firms at a  significant discount.

The organisation has set aside £7.2m for Keydata recovery costs in 2014/15, on top of £7.2m in 2013/14 and £7.7m in 2012/13. A further £7.9m was spent on pursuing recoveries, including Keydata, in 2011/12.

According to Friday’s witness statement, the number of defendants has reduced from 820 at the start of the proceedings to 205 currently.

“A lot of the logic behind having test cases has gone out of the window.”

Since the last case management conference in March 2013, the FSCS has reached settlements with 368 defendants and agreed in principle to settle against a further 49 firms.

Together, this represents 67 per cent of the defendants in the proceedings at the time of the last conference.

Quiney says: “As soon as a firm is selected as a lead defendant, it has a huge incentive to settle. So there is a risk the FSCS will have to keep replacing them with smaller and smaller firms.”

Another lawyer involved in the case says: “The FSCS may be expecting every firm with claims worth more than £150,000 to panic at the prospect of huge legal bills and rush to settle.”

A spokeswoman for the FSCS says: “The FSCS is committed to pursuing recoveries where it is reasonably possible and cost-effective to do so. This delivers significant benefits for levy payers and helps to offset the costs of compensation. We are committed to pursuing defendants in the Keydata proceedings.

“To determine whether a defendant should be a lead, the court is likely to consider whether the defendant has sufficient means to fund the defence costs of the proceedings.”

Expert view

Harriet-Quiney-DWF-Fishburns-2014-700.jpg

When the FSCS originally chose lead defendants, its concern was that firms might get into financial difficulties and the last thing it wanted was for a firm to drop out midway through the case because it had gone bust. 

But with most of the insured firms having now settled, the FSCS is getting desperate. There are lots of firms left in the litigation with just one or two claims against them and £150,000 is quite a low limit. 

The concern is that without insurance, a firm will have to fund its own legal representation, which in a case of this kind would be very expensive. Legal bills could easily run to £200,000 or more and how many advice firms have that kind of money? The other alternative would be for firms to represent themselves but in a case of this complexity that would be a nightmare. 

It seems firms are being sucked into something which is way over their heads. There will be a lot of struggling businesses which have been ignoring this because they do not have insurance and hoping it would go away. There is a risk that as soon as a firm is selected as a lead defendant, it has a huge incentive to settle. So the FSCS would have to go to the next set of firms and the figures will get sillier and sillier.

It would be very difficult reputationally for the FSCS to discontinue the case so it is doing the only logical thing it can to take the case forward by expanding the pool of potential lead defendants. But this is going to cause huge problems for the firms involved.

Harriet Quiney is a partner at DWF Fishburns

Keydata legal case: The story so far

October 2011: FSCS instructs law firm Herbert Smith Freehills to bring legal proceedings against Keydata advisers – in a bid to recoup up to £75m in compensation paid out to investors – on the grounds that firms breached their duty of care and made false statements about the suitability of the products.

February 2012: FSCS offers Keydata distributors with claims against them of less than £50,000 a 50 per cent early settlement discount.  

September 2012: FSCS settles 103 claims it was pursuing against firms.  

March 2013: Case management conference held to determine how the legal action should proceed against firms being pursued by the FSCS and the criteria for selecting six lead defendants.

June 2013: Money Marketing reveals advice firm Financial Escape secured a 99 per cent settlement discount with the FSCS over client recommendations to invest in Keydata, paying just £400 in an out-of-court settlement.  

August 2013: FSCS selects six lead defendants, among them Positive Solutions and Chase de Vere.

December 2013: FSCS settles with all of the lead defendants, with the exception of Chase de Vere.

January 2014: FSCS writes to other advice firms about becoming lead defendants.  

March 2014: Case management conference due to be held in March is postponed until May after HSF asked for more time to consider the selection of new lead defendants.

April 2014: FSCS writes to firms informing them of its intention to expand the criteria for replacement lead defendants.

May 2014: FSCS proposes expanded criteria for replacement lead defendants at a case management conference. It expects to serve notices to new lead defendants in July.

Adviser views

Ian Thomas 2014

Ian Thomas, director, Pilot Financial Planning: “If firms have done wrong then it is right they are made to pay and my main concern is that the cost does not fall on the rest of the industry through higher FSCS costs.”

Tom Kean, director, Thameside Financial Planning: “The FSCS seems to be moving the goalposts for the firms involved, which is

Tom-Kean-MM-Peach-300.jpg

unfair, and appears unconcerned about the risk of firms going bust.”

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Philip Castle 20th May 2014 at 4:14 pm

    Sent to the Financial Services Consumer Panel today

    Dear Sue Lewis, 20 05 2014

    I would like the FSCP to consider very carefully the following and respond publicly as THIS Email IS SUBJECT TO FREEDOM OF EXPRESSION – ARTICLE 10 THE HUMAN RIGHTS ACT 1998:

    I have no personal animosity towards Dr Debbie Harrison who currently sits on the Financial Services Consumer Panel, however, she WAS the writer of the glowing report on Keydata’s Lifemark products which I read in 2005 prior to first recommending the Keydata Life Settlement products in late 2007 to some of my clients.

    This same report from Dr Harrison was still being issued by Keydata throughout 2007 and 2008, despite the now public concerns of the FSA (now known as the FCA). My level of due diligence was probably similar to Dr Harrisons (although she had additional access to more information at Keydata itself than I did) and yet unlike ALL advisers who used Keydata, she has NOT been asked to comment publicly on her report and in fact was (I believe) appointed to the FSCP AFTER the Keydata debacle.

    I am not sure on the timings, but I believe her appointment was also AFTER Margaret Cole (FSA legal) made a statement describing ALL Life Settlement Plans as “Toxic” and Peter Smith (also FSA) made similar comments which contradicted Dr Harrison’s original report.

    As we all know now, in due course the FSCS threatened legal action, by this action implying ALL advisers due diligence was insufficient.

    If advisers due diligence was insufficient, then QED both Dr Harrison’s and the FSAs supervision Team may have been and in light of this Dr Harrison’s position on the FSCP is I believe *currently) untenable.

    I would call upon any remaining staff of the former FSA involved with the Keydata debacle and DR Harrison to step down from the FSCP and any similar role still being undertaken at the FCA by the same staff and only apply for reappointment when or if any advisers are exonerated in court.

    If advisers continue to be left in limbo with no court case taking place, then I am afraid to be seen to be fair to both the advisory committee and the regulatory community and poor old consumer that is also where Dr Harrison needs to be along with several FCA staff I suspect too.

    I look forward to hearing from you shortly.

    Phil Castle
    Financial Escape Ltd
    Advisers answering to you, with a focus on free will
    Cliff Street Chambers, 12 Cliff Street, Ramsgate, Kent, CT11 9HS

    THIS Email IS SUBJECT TO FREEDOM OF EXPRESSION – ARTICLE 10 THE HUMAN
    RIGHTS ACT 1998: This guarantees the right to pass information to other people and
    to receive information that other people want to give you. It also guarantees the
    right to hold and express opinions and ideas. Journalists and people who publish
    newspapers and magazines can use Article 10 to argue there should be no restrictions
    on what they write about. Artists and writers can use it to defend themselves against
    people who try to censor their work. Article 10 is a ‘qualified’ This means that the
    Government or a public authority may be allowed to restrict or interfere with the
    right in certain circumstances. The Government or the public authority must show
    that there was a clear legal basis for the restriction or interference. Its actions must
    pursue one of the eight aims set out in Article 10, which include: No 1 the prevention
    of crime; No.2 the protection of morals; No.3 the protection of other people’s rights or
    reputations; No. 4 the protection of confidential information. It also has to show that
    the interference was ‘necessary and proportionate’ (that it was done for a very good
    reason and went no further than it needed to).

  2. Philip Castle 20th May 2014 at 4:15 pm

    From: Financial Services Consumer Panel [mailto:Enquiries@fs-cp.org.uk]
    Sent: 20 May 2014 15:40
    To: Phil Castle
    Subject: RE: FAO Sue Lewis as the Chair of the FSCP concerning Keydata

    Dear Mr Castle

    Thank you for your e-mail regarding Dr Debbie Harrison’s membership of the Consumer Panel in light of her report on KeyData, which I am responding to on Sue Lewis’s behalf. The KeyData misselling scandal had an impact on a great many people and the Panel has every sympathy with those who lost out. In terms of Dr Harrison’s role she has said previously that she felt herself misled by KeyData and believes that sections of her report were misused to promote the product. You can read more about this here: http://www.ftadviser.com/2012/05/03/ifa-industry/companies-and-people/fscs-keydata-letters-arrive-on-ifas-desks-qAYei3rEJpnKggqlWAkjtI/article.html

    The Panel’s membership is drawn from a broad range of backgrounds with expertise including market research, law, financial services industry etc. so members have a depth of expertise to call on when advising the regulator. Given that diversity of membership and the fact that Consumer Panel members have to separate their roles outside the Panel from their work when on it the Panel feels that Dr Harrison is able to make a significant contribution to its work.

    Thank you for taking the time to contact the Panel.

    Kind regards
    Graham Collett
    Panel Secretariat

  3. Philip Castle 20th May 2014 at 4:16 pm

    Dear Graham, 20 5 2014

    You have sent me what appears to be Dr Harrison’s one and only public comment on the matter which compared to the amount of other input and cross briefing from the F-pack is understandable should we miss this ONE article.

    I would once again re-iterate, with the settlement of the lead cases resulting in it looking like they may NEVER reach a court of law before smaller advisers are put out of business. Choosing Dr Harrison for the FSCP was a slap in the face for those caught up in the shenanigans, both advisers and consumers and until this matter is resolved makes her position untenable.

    Please forward my request on to Dr Harrison that she considers resigning until either a court case finds that ALL advisers were at fault (QED Dr Harrison would then be at fault too and re-joining the panel inappropriate) or it is accepted by the FSCS and FCA that to advise using Keydata Life Settlement Plans in a diversified manner in a client portfolio WAS an acceptable approach.

    I have CCd my MP who I discussed the Keydata issue with BEFORE the last election when she was a prospective candidate standing against the then Government. When I last met with her, she raised the issue of Arch Cru claims (I have no clients involved here) and I would encourage her to ask a pertinent question in Parliament about the ongoing Keydata witchunt and the selective nature of the pursuit of those involved at different levels.

    Phil Castle
    Financial Escape Ltd
    Advisers answering to you, with a focus on free will
    Cliff Street Chambers, 12 Cliff Street, Ramsgate, Kent, CT11 9HS

    THIS Email IS SUBJECT TO FREEDOM OF EXPRESSION – ARTICLE 10 THE HUMAN
    RIGHTS ACT 1998

  4. Philip Castle 20th May 2014 at 4:19 pm

    Based on a 2010 email from Rebecca Irving, then lead investigator on Keydata, to an IFA involved stated it “would not be reasonable for the FSA to extrapolate from this small sample that all IFAs were misselling Keydata products”. It added it would be “even less reasonable for us to have taken the view that Keydata’s products were generally unsuitable for retail investors on the basis that a few IFAs were not paying adequate attention to their regulatory responsibilities”.

    I have a friend who is ex FSA and was on the team who compiled the original Keydata report and this is his latest email which might interest you. Whilst it correctly doesn’t disclose anything confidential, it shows his opinion for what it is worth.

    From:
    Sent: 15 May 2014 21:46
    To: Phil Castle
    Subject: RE: Hi

    You should write an official letter to the consumer panel. (reference Dr Harrison)

    The current climate is that the FCA does not want to jeopardise the case against ford so I don’t expect much to come out

    The FSA would never have imagined that fraud was involved or that the fscs would seek to recoup compensation which is unprecedented

    Keydata’s collapse triggered this and they were regulated so should have been covered without recourse to IFAs as its regulatory status was, believe it or not, an IFA!

    I am still unclear why the fscs is still pursuing this.

    I have seen the papers from Herbert Smith and think the case is flimsy.

  5. Philip Castle 20th May 2014 at 5:22 pm

    I would like to draw your attention to some recent postings – and subsequent discussion – on the victim’s website.

    1. An outline of, and links to, a set of “Freedom of Information Act” responses will be found at: http://keydatavictims.ning.com/forum/topics/keydata-tlips-product-risk-framework-foia-responses
    2. A summary of the role of the FSA in the critical period leading up to the collapse of Keydata will be found at: http://keydatavictims.ning.com/forum/topics/the-lost-450m-what-was-the-role-of-the-fsa
    3. As a reminder a link will be found here to the earlier posting calling for victim’s – both those already fully compensated and those who are still seeking further redress – to seek support from their MPs for a proper inquiry into the Keydata affair http://keydatavictims.ning.com/forum/topics/call-for-an-inquiry-into-the-keydata-affair

    To help with this – within the last 24 hours access to the Victim’s Website – http://keydatavictims.ning.com/ – has been opened up to non members (“read only” basis). – so you can refer to any topic which you think relevant in your letter – and of course anyone (including your MP and his staff) can now have access to the website “REF. DOCS” section – where the FOIA responses can be found.

    Please help us to keep pressure on. I hope you will agree that both advisers and consumers are entitled to know the full truth as to what really happened to our client’s savings , why it happened – and who might be held accountable for the loss of the £450M.

  6. Philip Castle 20th May 2014 at 6:19 pm

    A quote from the FSCP Terms of Reference

    Membership 6. “The FCA BOard appoints Panel members, with HM Treasury’s approval for the appointment or dismissal of the Chair.”

    7. “The FCA may appoint to the Panel such consumers, or persons representing the interests of consumers, as it consider appropriate”

    Now this one is really quite important FCA Duties 10.1 “Consult the Panel throughout itd policies and practices that have a consumer impact.”

    DID the then FSA consult the then FSCP about NOT divulging its concerns about Keydata before it’s collapse? What about before Peter Smith and Margaret Cole’s statements on Life Settlement Plans in general?

  7. Please can anyone help we took out a lifemark keydata bond which should have matured 14/02/2014 but we know has gone bust.But the liquidators have not informed our bank who are charging us 500€ per year we are not looking for compensation just an end to this nightmare please HELP

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