The Financial Services Compensation Scheme may be forced to drop its long-running legal battle against advisers to recoup Keydata compensation, say legal experts.
In January, Money Marketing reported the FSCS was seeking new lead case defendants as part of its bid to recoup up to £75m out of around £400m paid out in Keydata compensation.
Including the 2014/15 financial year, the FSCS will have spent up to £30m on its Keydata legal battle, almost half the amount it expects to recover.
The FSCS has settled with a number of the six original lead defendants. A case management conference was to take place on 21 March to discuss the selection of new lead defendants but FSCS lawyers Herbert Smith Freehills have requested the conference be delayed until May.
The High Court requires lead cases to have a sufficient number of clients who were recommended both SLS and Lifemark Keydata products.
One lawyer representing firms in the case says: “There are lots of small firms left in the litigation, meaning the FSCS may have to select a test case without insurance or deep pockets. If the firm cannot fund a defence, then the case may not end in guidance which can be applied to other cases. To avoid that, the FSCS may have to lower its settlement expectations and settle with the remainder of firms.”
Another lawyer involved in the case says: “I do not know how the FSCS is going to resolve this – it is two years into the case and it has not got very far. It seems to be struggling to work out how to progress the case.”
DWF Fishburns partner Harriet Quiney says: “The FSCS is left with firms with tiny cases or no insurance. If they take an unsuitable firm to court it could be hugely chaotic – if the court can see the firm is unable to defend itself properly, it will be reluctant to order that its ruling applies to others.
“The FSCS is either going to have to press on with unsuitable lead cases or drop the litigation. But if they drop it you have to question whether they have recouped enough money for it to have been worth it.”
Philip J Milton & Company managing director Philip Milton says: “The FSCS is handling this case incompetently. If it settles with firms rather than taking them to court then no one is being held accountable.”
An FSCS spokeswoman says it is continuing with recoveries and believes it has a strong case.
She says: “The FSCS currently has no plans to stop its legal proceedings as it believes good claims remain against the defendants.
“Proceedings remain stayed against all remaining defendants not selected as lead case defendants, and FSCS is in the process of identifying appropriate replacement lead case defendants from the remaining pool. The FSCS will make representations to Court about its specific intentions with regard to the selection of lead case defendants at the upcoming case management conference, now likely to be scheduled in early May.”
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 500 adviser 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: Lead defendant Investacc formally receives notice the case against it has been closed. Other lead defendants, although not Chase de Vere, are also understood to have settled.
January 2014: FSCS writes to other advice firms about becoming lead defendants.