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FSCS Keydata legal battle could lead to landmark advice rulings

Royal Court of Justice High Court 480

The Financial Services Compensation Scheme’s High Court battle against Keydata advisers could lead to landmark rulings around how the regulator assesses suitability and risk and the burden on advisers to establish where firms are acting fraudulently, say legal experts.

The FSCS instructed law firm Herbert Smith Freehills in October 2011 to bring legal proceedings against Keydata advisers in a bid to recoup up to £75m in compensation paid out to Keydata investors. The scheme has levied advisers and the wider industry nearly £400m to pay Keydata claims.

A case management conference was held last week at the Royal Courts of Justice in London to determine how the legal action should proceed against 500 adviser firms being pursued by the FSCS who have not agreed to settle. Six lead defendants are likely to be selected with AWD Chase de Vere expected to be one of the lead cases.

The FSCS failed to answer questions at the case management conference about whether it considers Keydata to be a fraudulent case and when asked specifically by the judge said it did not know.

An order currently being drafted is likely to force the FSCS to answer this point in court.

In a statement to Money Marketing, the FSCS says: “We have found isolated fraudulent misrepresentation on promotional materials as stated on our website.”

Law firm Reynolds Porter Chamberlain is representing 44 adviser firms and their professional indemnity insurers in fighting the FSCS claims.

Partner Simon Laird says the case has wider implications for advisers.

He says: “It will be interesting to see what standards the court apply in terms of what it thinks the risk profile of Keydata products is. The FSA and the FSCS have said this is a high risk product, but if the court finds this was the wrong judgement, surely it begs the question whether the regulator has been wrong in its risk description of other products.

“The issue around fraud is also interesting. The court will have to decide what advisers’ obligations are to check a provider is not acting fraudulently and the veracity of what is said in product literature..”

Laird adds: “A loss for the FSCS would call into question whether the FSCS was right to bring commercial litigation. The FSCS’s reputation is at stake here.”

FSCS Keydata legal battle Q&A

Why has the recent case management conference taken place?

It was held to establish how the FSCS’ legal battle against Keydata advisers can proceed. The FSCS has brought claims against around 500 adviser firms. This is unchartered territory in terms of having one claimant and so many defendants. The case is said to have been something of an admin headache for the High Court, given the formalities of discontinuing claims against firms that have settled, or correcting claims against the wrong firm or subsidiary. The conference set out the key arguments to be addressed and discussed the criteria for selecting six lead or test cases.

Haven’t lots of advisers already settled with the FSCS for lower amounts?

The FSCS would not disclose how many claims it has settled or discontinued but will provide an update later this year. As at September 2012 it had settled up to 103 Keydata claims, though some may relate to claims brought against the wrong firm or a firm that had subsequently gone bust. Money Marketing understands one adviser firm has settled for less than 1 per cent of the original six-figure claim against it. Money Marketing has also heard of instances of settlement discounts of up to 85 per cent and up to 60 per cent for a professional indemnity insurer.

Given the huge discounts why haven’t others settle?

For many it is a point of principle while for others the decision is in the hands of their PI insurer. Those fighting the FSCS believe they did the due diligence that was expected of them before recommending Keydata, and also could not have known that £103m worth of Keydata bonds issued by Luxembourg vehicle SLS would go missing.

What happens next?

The law firms acting for advisers have been told by the judge to agree an order as to how to proceed, including the criteria for selecting lead cases. This is currently being agreed by the different parties. The order will then have to be formally issued ahead of a High Court hearing with the selected lead cases.

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. At long last, we might see a victory for fairness and common-sense.

    Like playground bullies, the regulator and the FSCS have grown used to having it all their way, regardless of the facts.

    It is disingenous of the FSCS to claim that it had no opinion on whether fraud was prevalent in the Keydata case. Not only has it previously stated this on its website, but surely it had a duty to consider the merits of its legal case before spending millions of pounds (of our money) on vexatious litigation.

    Other matters, such as Arch cru, have called the regulators’ objectivity into question and, if the Court uphold the principle that liability must be linked to the cause of a loss, then questions will hopefully asked about the FSA’s misguided Consumer Review before hundreds of firms are slaughtered on the regulator’s altar of convenience.

  2. The courts are an arm of government, the FSA was set up by government who in turn set up FOS and FSCS, what makes AWD think they can win a case when there is such control over the courts by the government.
    It would be a very brave judge who decided to go against the FSCS arguement and strike out their right to recovery action from advisers without selling off the assets first.

    Surely if the statements in the literature were either fraudulenty or negligently misrepresentative and the firm handed £100million to a fraudster, thus precipitating the collapse of KIS Ltd and causing such chaos, there seems little merit in pursuing advisers for recovery when we have all paid into the funds at FSCS.
    Is the FSCS going to give us our money back if they recover it all.

    What has happened to the assets, have they been sold and where has the money gone?

    Who authorised such a ridiculous situation and made the decision to put the firm into administration when it was in negotiation with HMRC to pay the tax HMRC deemed it owed due to the non compliance with ISA regulations.

    AND Who I might ask, authorised a greedy firm of solicitors to take action on this matter, when the FSAs own investigation as to the true circumstances of the collapse are not yet concluded or published.

    I personally researched the company accounts for 3yrs prior to looking at advising on this firms products and it was profitable, had a sound capital base and was doing exactly what it said it could do, trouble was the £100mill went missing and all hell broke loose.

  3. If nothing else I do hope the court ends up showing just how incompetent the FSCS and its matsers actually are. How they can say that advisers are to blame and chase them for money ontop of levies already paid when they have no clue whether or not the case in question was due to fraud. As to what consequences the out come brings for us in terms of what we need to do to satisfy ourselves remains a worry. If this falls the wrong way it could mean huge extra work just to recommend some very long established and well respected funds in the market & at what cost. Hopefully it will play out quickly and in the favour of common sense.

  4. Sounds like all stop on any present cases where possible “fraud” may be a consideration, and how much n adviser could be expected to know and what documentation provided by the different companies involved was correct, sounds a lot like the story behind Arch Cru – but that will not stop the runaway train that is the FSA/FCA.

  5. Also how long will this drag on for – this is a major point within the area of providing investment Financial Advice, If the judgement comes out against the FSCS, what are the implications and how many advisers, and support staff have been put out of employment due to this and other ongoing situations that will be based on this judgement.

  6. As he usually does, Ned has made some very pertinent points.

    I would like to expand a bit on the point that the literature was inaccurate. Particularly with regard to the role of KPMG. The Regulator knew this to be the case but for some reason kept shtum. Why?

    Then we have further regulatory issues. Why didn’t Key Data ever receive an Arrow visit? If the Regulator was so convinced that these were high risk toxic products why wasn’t KD kept on a firmer leash. Could it be that the Regulator was being wise with hindsight?

    As Ned says the firm was perfectly sound with a perfectly reasonable track record (I also bust a gut doing due diligence) – if Elias hadn’t done a runner would we be in this position today? What about those who did not use the product for ISAs? They just got caught in the backwash.

    However in common with Ned (although perhaps via a different route) I just cannot believe that the FSCS and HS will be out for a Duck in this matter. There would be so much egg on faces and such detriment to reputations I just couldn’t imagine that happening.

  7. Becoming a headcase IFA 4th April 2013 at 9:49 am

    I really hope the FSCS comes a major cropper on this issue. We told the very few customers, which we did small ISAs for, that these products did have an element of risk and that they could lose their money in some circumstances, including the company going into liquidation. We also provided an FSA factsheet about high income products and the risks associated with them and all of this was documented.
    We did not sell these products out of greed (as mentioned we were talking small amounts here) but the clients were in need of that little bit of extra income. When the proverbial hit the fan not a single client blamed us and each one remembered the warnings to them and the fact that they were in the suitability reports.
    We were given a year, by the FSCS, to ‘engage’ with them over the claims they were making against us and yet they, nor their solicitors, would look at the documentation we sent to them.
    In the end, through pressure of the RDR, qualifications we settled for the 50% figure that the FSCS offered. Their solicitor told me, on the telephone that in no way would they accept less than 50% and so (against my better judgement) I settled.
    I must say I, personally, felt like we were being blackmailed and my respect for the regulatory bodies is now zero. If we had been in a less stressful period we would have fought the case all the way and good luck to those advisers who (honestly) sold these products not knowing (how could they) that £103 million pounds would go missing from the company.

  8. Another point has just occurred. In the unlikely event that the FSCS does lose this case, then I would expect them to pursue HS for the return of all fees. After all a decent lawyer should always advise his client when not to proceed with spurious case. That too will be most unlikely to happen. HS will do its utmost to see to that!

  9. Those firms who have settled whose accounting period co-incides with the end of the tax year (or 31st of March) will be producing their accounts ready to submit their RMARs. If they are a limited company, then their accounts will be in the public domain and are likely to have to include details fof what was paid to the FSCS in settlement or a Foxtrot Oscar payment in some cases so all will be able to see how much a firm has paid for their FO payment and if they previously commented in the press as to what the FSCS was after them for, be able to work out where between 1% and the 50% that FSCS were after they stood. From that it would be interesting to work out in how many cases the legal costs of pursuit exceeded the recoveries.
    Register on companies house website and you can obtain copy account for £1 of any Ltd company and most IFA firms submit full accounts to companies house and NOT abbrivated versions as all small IFA firms used to have to be audited requiring full accounts.
    Another law of unintended consequencies as the deal that FSCS tried to strike which would gag those who settled is counteracted by the requirement to disclose the figures in the accounts.
    Fan hit in about 6 weeks me thinks, just in time for the next court sitting perhaps!

  10. To anon Anonymous | 4 Apr 2013 9:49 am
    I refer you to the section of the article “Haven’t lots of advisers already settled with the FSCS for lower amounts?”
    He who blinks first….. The FSCS and Herbert Smith picked the fight and forgot to make sure they knew when to blink in some cases, just as they did with Stewart Ford who has not as far as I am aware bene required to pay a penny to the FSA or FSCS, but has run up a very large legal bill defending himself.
    Unfortunately all these failurs of the FSCS legal eagles (or more like Eagle Vultures) will have cost more in FSCS levies due to extra legal costs for pursuing those who either continue to stand or were willing to stand firm on principle.
    To anon at 9.49, you did the right thing for your business, but for some of us standing on principle was or is more important than our businesses, so blinking will not or did not occur.

  11. The FSCS seems to be disputing the settlement figures quoted in this article:

    FSCS Litigation
    26th February 2013

    The FSCS is aware of recent media reports purporting to describe the terms of a confidential settlement entered into between FSCS and Lighthouse (and its Appointed Representatives) in connection with Keydata. The terms of that settlement are and remain confidential. Neither FSCS nor Lighthouse nor its Appointed Representatives can confirm the details or comment on the substance of their negotiations. However, the FSCS wishes to make clear that the information in this report is materially incorrect and misleading.

    As the industry will be aware, the FSCS is pursuing claims against a large number of firms in connection with Keydata. We have agreed numerous settlements with firms, all of which are confidential. Where we have not agreed a settlement with firms, FSCS is committed to pursuing recoveries through these proceedings to fulfil its obligations to pursue recoveries where possible.

  12. Both sides are entrenched, would it not be better to enter into a meaningful discussion?

  13. I can’t see how a ‘lead case’ procedure would work because of the variety of adviser opinions and quality of information on file.

  14. @ Exasperated Me

    I’m sure that your comment is well intended, however, have you ever tried having a meaningful conversation with a bully?

    It doesn’t work.

    The only option is to stand up to them. Otherwise, you will simply encourage them.

  15. Anonymous | 4 Apr 2013 10:28 am
    As mentioned earlier, whilst the terms of any settlement remain confidential the amount of any financial settlement will be public where the PI insurer refused to pay where no client complaints were received about the ADVICE. The FSCS choice then woudl be to pursue the firm only for recovery of the sum and if a Ltd co, then the maximum obtainable would be the capital adequacy figure less fixed assets if the FSCS wanted to put the firm out of business or a maximum of the excess of cash over capital adequacy, hence bearing in mind most small firms only have a requirement for a maximum of £10k for capital adequacy, the maximum payout could have been failry small compared to the legal costs, hence why a blanket servcing of legal papers by the FSCS was probably a little unwise BEFORE looking at both merits and ability to pay as disbuted sum.

  16. @Evan It might work if the case gets kicked out as having no merits due to it being down to Fraud That would set a precedent many advisers would be happy with 🙂

  17. @Phil It might not work because some of the files I have seen from large firms would invite any judge to question the ‘advice’ given.

    However the few files from small firms might persuade the same man in a wig to find the advice was suitable and all risks were pointed out in writing. The only risk nobody could see coming was what the FSCS described as ‘misappropriation’ of funds and this triggered their compensation machine.

    If these products were deemed unsuitable why did the FSCS pay out and then expect the firms who didn’t get involved to pay out?

  18. Julian Stevens 8th April 2013 at 9:44 am

    Harry Katz asks why the FSA didn’t undertake an ARROW visit to KeyData ~ it did (so it’s been reported), as long ago as 2007, but then failed to take action on the findings of that visit.

    Why are the FSA or, more pertinently, the specific individuals within the FSA responsible for initiating that visit and then taking appropriate action on the findings of that visit not being held to account for their failings?

    This whole business appears to be yet another example of the regulator having failed in its responsibilities and then foisting onto other parties the blame for (and the costs of) those failures.

    As reported here, the FSCS itself has failed to answer questions at the case management conference about whether it considers Keydata to be a fraudulent case. Presumably on the instructions of the FSA, the FSCS is pursuing a malicious and bullying vendetta against intermediary firms (using our money) without even knowing whether or not fraud is a factor in the equation.

    Should, as we very much hope, the High Court rules against the actions of the FSCS, this will surely generate yet more repercussions in terms of the competence and integrity of the FSA and the way in which it tramples roughshod over the reasonable rights of those it regulates.

  19. IFAs should also look very closely at any settlement offers their PI insurers want to make to the FSCS and whether the IFA is being asked to contribute one or two policy excesses, or an excess for every investor advised to invest in Keydata.

    My view is that (depending on the policy wording) only one or two excesses should apply to the IFA’s claims under its PI policy. PI insurers, for obvious reasons, would disagree: the difference would be tens if not hundreds of thousands of pounds….

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