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FOS rules against Norwich & Peterborough over Keydata

The Financial Ombudsman Service has ruled that Norwich & Peterborough Building Society must payout a claim for £28,000 relating to its sale of a Keydata Lifemark product.

A report in the Eastern Daily Press says the FOS has ruled that Norwich & Peterborough failed in its advice to an elderly couple which “exposed their capital to an inappropriate level of risk”.

The provisional judgment is still open to appeal by the building society.

The judgment says: “I do not believe that (the customers) would have invested in this product had they been fully aware of the risks.”

“Bearing in mind that they were both retired and there is no evidence of them investing before they met the advisers, it seems unlikely that they would have been willing to accept the risks inherent in the Keydata income plan fund, especially at this stage of their life.”

Regulatory Legal consultant Michael Cotter says: “Although this relates to the Norwich & Peterborough Building Society and their advice on the Lifemark product it has ramifications for any IFA with clients in these funds. The current position with the FSCS means that if no resolution is reached for investors in September 2010 then investors are inevitably going to look at the initial advice.”


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. How does this fit in with the court case against the FSCS?

    And, if the FSCS struggled with proving that Keydata was liable for the losses created by a third party how then can the FOS find an IFA (N&P for example) liable for that same loss?

    There are many aspects of all this that Gareth and his firm Regulatory Legal do not appear to be covering, Anthony Speaight QC has been instructed to represent the IFAs in the High Court and he said to me “I would naturally be delighted if there is a fresh opportunity for us to be involved together again”.

  2. I find this a bit hard to follow. Please anyone correct me if I’m wrong, because my memory is rubbish, but I thought the reason Keydata went belly up was because a thirdparty may have misappropriated a hundred million pounds or so.

    How were N&P responsible for that?

  3. Patrick, Keydata was put in to adminstration by the courts at the request of the FSA due to a failure to establish some of it’s products (although we are now told they were not a product provider) in teh right manner to be eligable as to hold within an ISA. This was then in discussion with HMRC over how to rectify the tax underpayment (said to be about 5 million) when the FSA got involved and effectively said that if Keydata didn’t have funds to cover the potential liability, they would remove their authorsation, which they did. When PWC were appointed they found that £103 million had been misappropriated by a certain Mr Elias (now said to be dead) and then otehr problems started to occur, which are as yet unclear as to whether they were as a result of the regulatory intervention itself without considering the conseqences for investors or becuase of flaws in the structure of the Keydata Life settlement plans.
    NONE of this has any relevance when looking at the complaint which has been upheld by the FOS, which is over the issue of suitabilty. This complaint could have been upheld whether the client lost £1 or their whole £28,000 if the advice was deemed unsuitable and could even be deemed unsuitable if the client actually made a gain!
    The strange thing is that if the investment has not run it’s full term, how is the quantum calculated for the actual loss which has occurred? If the consumer is paid the whole £28k quoted, do N&P get to keep the investment (as happened with endowments) or it it a case of working out a value now when their may be no market for these investments now, so giving the client nearly the full £28k AND allowing them to keep the investment.
    Surely the only fair way to N&P is to pay them the income they were expecting over the timescale and then pay them the amount they were expecting at maturity in return for the rights to the investments being transferred to N&P to do with as they wish?
    It will be interesting to see what the FOS determination is as to how to resolve this issue fairly or will their actions simply prove the FOS are NOT a true ADR system by prefering one party over the otehr in their outcome when the result in law would not have been the same as that imposed by a court had eitehr party declined true ADR?

  4. Before anyone spots my error above (not the spelling errors), my statement re endowments was not what I meant. I meant many people got compensation AND kept their investment to maturity and profited from this. This should NOT be allowed to occur again.
    It should be up to the loser (N&P) whether to pay compensation now to maintain income and at maturity any final shortfall to give the client what they thought they were getting OR If they are willing to, to give full compensation BEFORE the end of the contract, but in lieu of the consumer keeping the investment, with the provider (N&P) holding tha asset until maturity for its own benefit having repaid the consumer 100% of their capital.
    This is what SHOULD have happened with teh endowment debacle (not that I had any endowment complaints)

  5. In its review of Structured Products, which the FSA carried out in February (2010) it redesignated these plans as ‘high risk’. Previously the FSA had allowed these products to be marketed as ‘Secure Income’ Bonds or Plans. It would appear that their new classification as being high risk investments will now be applied retrospectively?

  6. Thank you Phil, for your explanation. The only thing I am still confused about is that I thought these plans (from the literature) were supposed to be very low risk and backed by HSBC, KPMG etc. Were they not supposed to return the capital, although not actually guaranteed? I guess it doesn’t matter if the brochures were misleading…it still falls back on the IFA to compensate.

    But weren’t Keydata the IFA?

    What a mental business this is.

  7. Anon – Are you referring to “structured products” or life settlements as the FSAs statements on these differ?
    The FSA structured product report was November I think and their comments on Life Settlements was by Peter Smith of the FSA in Feb 2010 I think.

  8. Phil, Have checked the FSA website, and you are right, they now define ‘Life settlements’ as high risk.(Feb 2010) However, as I previously stated, they had allowed these products to be marketed as ‘Secure Income Bonds’. I don’t see the connection between the words ‘Secure’ and High Risk? But hey, in the crazy world of Canary Wharf nothing ever makes sense

  9. Phil .. may I follow on from your comments, but expand them somewhat?

    1) How will the FOS (or will it be the FSA) assess how to put an investor in Keydata into the position they expected to be, with neither loss nor gain?

    2) Is there a mechanism that ensures that payments from the FSCS to an investor are not duplicated by any awards adjudicated by the FOS? (Asked in ignorance.of any such).

    But for me the bigger questions remain.

    3) Was the decision by the FSCS that Keydata be adjudged an intermediary a valid conclusion on their part?

    4) But bigger still – Do the existing FSCS/FOS regimes offer the best solution to situations of this nature, not just for the public, but for the market as a whole?

    May I speculate?

    I speculate that there will be those with examinations to their credit, and I include those within the FSA, that did not forsee the risks involved with Keydata, and the other examples that could be listed.

    I also speculate that there will be those with little but long experience who did see the risks, and did not therefore advise their clients to become involved.

    And yet it will be many of those in this latter category who will be asked to pick up the tab. Experience is supposed to pay, but in this fashion?

    Let me speculate just one stage further – if for example the FOS let rip, encouraged by MPs, the press, lawyers and claim chasers – can one rule out the possibility that the tab will increase for those in the latter category because the final tab may include IFA firms (those in the former category above) who are eventually unable to meet the FOS awards and themselves are declared in default?

    Way above my simple speculations sit on high the FSA sure and certain that RDR is THE solution.

    There are those of us who disagree, and let me speculate one last time – perhaps it is time that other solutions were found?

  10. Mike said “can one rule out the possibility that the tab will increase for those in the latter category because the final tab may include IFA firms (those in the former category above) who are eventually unable to meet the FOS awards and themselves are declared in default?”
    If you have a small network, where their advisers did 80 7k plans of this type, I suspect the PI excess will be 5k per claim, so upheld complainst would mean the firm had to find £400k. Minimum capital adequacy is only £10k, so where does this other £390k come from to pay the clients back? The directors may decide to let the business collpase, in which case FSCS and other advisers will pay in the end.
    For smaller firms, where an adviser, firm might have done say 10 plans x £5k PI excess, that’s still £50k and a lot with RDR coming, even if they pay the £50k from their own resources, may decide that even if they were pretty much RDR ready, it’s time to call it a day.
    If adviser numbers drop too low, that’s less people to spread F-pack fees across and at what point does the IFA industry start to loose critical mass before the banks (no capital adequacy at all) can step in to the gap?

  11. To deal with Mikes point 2. All rights to pursue third parties are assigned to FSCS when a compensation payment is accepted. To keep the levy on IFAs generally as low as possible, should the FSCS now pursue individual IFAs who recomended Keydata products? This would be by making a complaint to FOS on behalf of thge investor. Investors who have lost more than 50,000 should presumeably use the FOS route anyway. Where will all this end?

  12. Keydata were authorised in the Investment Adviser Sub class That is why we have all had to pay this FSCS levy.

    The N&P in their advice to their customers have only said that we are passing you on to another adviser (if we assume that the authorisation in this sub class is correct. Then the N&P have acted as an introducer only and the complaint should have been levelled at Keydata (the adviser).

    For the FOS to uphold a complaint against the N&P then they must be accepting that N&P placed this clients money with a product provider who’s “risk potential” did not meet the clients risk profile.

    My my what a jolly mess.

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