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.