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FSCS starts legal bid to recoup costs from Keydata distributors

The Financial Services Compensation Scheme has kick-started a legal process to recoup some of the compensation it has paid out on Keydata claims from IFAs who sold Keydata products.

Law firm Herbert Smith has written to Keydata distributors to begin the process of pursuing recoveries on behalf of the FSCS.

The letter from Herbert Smith to an undisclosed IFA firm, seen by Money Marketing, says: “The FSCS has an opportunity to consider whether it has claims against IFAs who advised in relation to the sale of Keydata products to investors. We and the FSCS are still investigating this matter but our strong preliminary view is that good claims exist against a large number of IFAs.”

The letter says the FSCS has claims against the firm for negligence, as the firm breached its duty of care by negligently advising them to take out Keydata products.

It also says the firm made false statements relating to the risk profile and suitability of the products, which were relied upon by investors.

Herbert Smith says the FSCS also has claims for breaches of the Conduct of Business Sourcebook rules and breach of contract, as the firm breached its contractual duty to investors to take reasonable skill and care in advising them to invest in Keydata products.

The letter says that the FSCS is working on information passed to it by the FSA.

A spokesman for the FSCS says: “The FSCS pursues recoveries whenever practical and cost effective to do so.  We believe claims may exist against IFAs for compensation costs relating to certain Keydata Investment Services products.  As a result, we have issued legal proceedings to protect against the limitation period while we analyse the potential claims in detail.”

Money Marketing reported in April that the FSCS was pursuing a number of firms for Keydata recoveries, after Norwich & Peterborough Building Society agreed to repay the FSCS £28m for compensation the scheme paid to N&P Keydata customers.

The industry was levied £326m by the FSCS in January, mainly to cover the compensation costs following the collapse of Keydata. Advisers had to pay £93m towards these costs while fund managers paid £233m.

The FSCS has said any recoveries relating to Keydata compensation will be rebated to fund firms first rather than advisers to pay for the cross-subsidy triggered by the £326m interim levy.

The FSA has been conducting its own investigation into advisers that sold Keydata products and how the products were sold. The regulator wrote to advisers in May who sold the Keydata Secured Income Bond and the Keydata Defined Income Plan between July 2005 and June 2009.

Earlier this month the FSA wrote to Keydata distributors again, telling them to ensure they had sufficient assets to meet potential liabilities.


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. so the industry paid a levie of £326m and now we will go after the IFA’s ( that paid the levie ) to pay again and you can bet that if they are sucessful these funds wont be repaid to the IFA’s and firms that paid levie. They state we have a duty of care but so does the FSA who warned Keydata about the information they were providing was wrong if not misleading but did they tell any of the industry at that time of this the answer NO

  2. There are various issues here –

    1) If the FSCS persued all firms who recommended Keydata – surely they would be able to refund the bulk of the levy to both parties (Adviser’s and Fund Managers), as they would collect back in the bulk of the money paid out (amout received would be less than the claims due to costs and firms which are declared in default)

    2) Will any of the firms contacted decline to pay, on the basis the FSCS could have overstepped their remit – i.e. the Advisory firm wasn’t in default and so the firm should have been the first port of call.

    3) Have any investors received back greater sums of money than the FSCS rules state – and therefore was the levy too high?

    A strong challenge should have been made when the Keydata issue occured – as I doubt the FSCS rules have actually been followed!

  3. Perhaps i am being thick, but there appears to be a certain incongruity with the FSCS approach here.
    How can IFAs be pursued for negligence when the reason that the FSCS had to pay out in respect of the SLS Capital investments was because David Elias wlaked off with their money.

  4. Action of this type by the FSCS was predictable.

    What level of recoveries can be made is anything but. Do not rule out the demise of some of those from whom recoveries are sought with the inevitable financial consequences.

  5. To Anonymous | 12 Oct 2011 4:08 pm
    You are not being thick, you just only have part of the pricture.
    Keydata had two products they marketed, one through SLS (where someone stole £103 million) and then their second offerring “Lifemark”, which was effectively pulled down by the SLS failure combined with FSA intervention over HMRC ISA issues.

  6. Graham Pattinson 12th October 2011 at 5:02 pm

    Surely the FSA should be accountable with the Keydata debacle. After all, they authorised and regulated Keydata. Had they not been regulated or authorised in the first place then not many IFA’s would have recommended Keydata at all!

  7. I may be being silly here but IFA’s and the public should be able to rely on the words ‘authorised and regulated by the FSA’.

    The FSA has the power to view all kinds of internal company records that these IFA’s cannot access.

    As the FSA missed Keydata it seems inequitable to go after small IFA firms whose research resources are tiny compared to those of the FSA.

    It’s time for some justice in financial services. This stinks of corruption.

  8. FSCS only paid out on SLS funds to ISA clients to ISA levels claiming the stolen funds were not covered.
    It will be interesting to know what information and source FSCS think we should have been aware of at the time the advice was given to point to our failures in our duty of care. None that I was aware of prior to the demise

  9. @ both Graham Pattinson and Mr Smug

    Keydata was indeed regulated and authorised by the FSA, so too were Northern Rock, Bradford and Bingley, the Royal Bank of Scotland and HBOS.

    Whether seen as regulatory failure, or serial regulatory failure, would you advise anyone to place their trust, let alone their financial well being, in a regulator with a track record of that calibre?

  10. The FSA have presided over this mess from start to finish. They have privately known about problems for years, identified the lower risk demographic to which the products were being sold at least by 2007, and actually helped cause the lifemark liquidity issues. They let things continue unchecked, and are to blame as much as anyone. All we are seeing here is bureaucrats with power deflecting blame by targeting the little guy. Appalling.

  11. All the above comments I agree with, but, and it is a big but, smaller IFA firms have absolutely no legal protection or sufficient funds to fight the FSCS unless our PI insurance covers such an event.

    Check your PI cover guys and gals, it just may be that you are covered to defend an action by FSCS.

    The FSCS as far as I am aware only has powers to recover money paid out in compensation from the product providers, it is not and never should be allowed to suborn the adjudication process that the FOS has in place and is not allowed under its own rules, to make arbitrary decisions as to suitability.

    Look at the mess they allowed TEP Portfolio provider Integrity to leave clients in and the failure to ensure that the product had a properly researched risk factor assigned.

    it is obvious we need a product vetting procedure in place to prevent such messes occuring in future and to prevent the marketing of products which do not meet the publics need and expectations.

    I feel for anyone who has lost a significant proportion of their savings, but the literature was known by the regulator to be deliberately misleading, IFA firms have a right to rely on the approval of the regulator for a firms activities and if the regulator did not, as in this case, correct and put KIS in order, since 2005 when they knew the problems, then any defence of an FSCS action must be on the grounds that the regulated entities (US poor saps paying our fees) were entitled to rely on the regulator to conduct its regulatory processes with due, skill, care and diligence.

    In the case of KIS and the many failings of the regulator, the issues of liability are clear, not our fault, the regulator got it wrong and compounded the problem when it placed KIS into administration instead of allowing the firm to sort its issues with HMRC.

    One other thing, why are IFAs liable for the actions of a crook who stole £103m and then allegedly died??

    You could not make this rubbish up!

  12. I very much agree with Anonymous | 12 Oct 2011 7:41 pm. None of my clients complained about my advice. They all complained about misrepresentation in the product brochures. All were paid out by the FSCS on this basis.
    I advised my PI insurers of the potential for claims when I thought there was a potential (late 2009 I think), but by that time they had put an exclusion on claims based on advice linked to any business which had gone bust (i.e. Keydata/Lifemark)
    At the time it is NOW known the FSA had concerns about “Low risk” brochure description of keydata products, my PI in 2007 and 2008 did NOT have this exclusion and would have covered me and the consumer.
    Pursuing me will not get much more than a few pennies back for the FSCS as it will wipe out my capital adequacy and then probably put me in default. Who does that help? My clients? The advisers who will be left to pick up any future claims on my other business as we all know spriosu complainst become more likely when an advisers leaves and do not have teh adviser to defend their corner anymore.
    All for an issue that the organisation who took money from me (FSA) to regulate another firm, failed to act on it’s own concerns and bring them to the attention of firms at an early stage!
    What P*sses me off is that I did not arrange many Keydata Life settlement plans, they were all a modest proportion of a clients porfolio (or the monies they had placed in Trust) and I didn;t arrange any until 2007 after the FSA had had several years to identify any problems with Life Settlement Plans and report/suggest changes. They had the opportinity and failed to act. That is negligence on a grander scale than any small IFA.
    Is anyone coming out of this badly other than clients, small IFA firms who sold the product and any IFA firms who did NOT?
    I don’t think so, do you.
    The lawyers, regulators and politicians are making money, being paid bonsuess and gaining political capital for THEIR failures.

  13. Joe Egerton - Justice in Financial Services 13th October 2011 at 12:59 pm

    The critical issue is whether an adviser has a legal liability. Although the founder of the FSA moved effortlessly to advising Col Gadafi, we should remind ourselves that this is Britain, not pre-revolutionary Libya, and there is a rule of law. Justice in Financial Services ( is organising advice for those threatened by Herbert Smith

  14. Keydata was a failure by the regulator, the FSA, pure and simple.Keydata failed due to a fraud and personally I do not think this complicated product should have been allowed except through suitably qualified advisers.
    The regulator was set up to protect consumers as as such they must ensure all products offered to consumers stand up to scrutiny and are not so complicated it is hard to evaluate the risks. The FSA had concerns about Keydata before it failed yet they failed to act on them and when they di they probably made matters far worse.

    If advisers are expected to predict fraud when recommending a product then quite frankly you may as well not bother as the risk is far too high to be worth it as some will soon discover.

    The blame gave will eventually end up with those that started it but they cannot be held to account and it is now Government that has failed the industry with the current one refusing or failing to use the numerous powers of Parliament to make the necessary changes and as long as that continues more damage will be done.

  15. Whilst it appears that FSA wants two bites at the cherry, it seems to me that FSA has identified pretty much the same complaints and failures as set out in its SCARPS review. NDFA and Lehmans were both regulated by FSA. Back in the early 2000’s FSA condemned Precipice bonds. What happened? Well they became SCARPS. Same product, same misleading advertising and marketing. FSCS sued Abbey over the Plans marketed by it in conjunction with NDFA in an attempt to recover some of what it paid out and despite the Judge conceding the valid concept of FSCS’s claim, it lost. Latterly following Lehmans collapse, and FSA’s condemnation, FSCS decided to compensate some Plans and not other, identical,Plans. A levy was demanded. I wonder if FSA will ask IFA’s for more cash as in the above example?After all its far easier, and cheaper, than going to Court. The common complaint from IFA’s of why should the good guys bail out the victims of the bad guys. A legitimate argument, but that was the price of self-regulation. As for the requirement for Plans to be fair,clear and not misleading, when is such a determination made? When FSCS says so, even if its Regulator has already ruled on it. The need for this chaotic empire to be disbanded is long overdue, but will its replacement be any better? I doubt it. It will be the same people wearing different badges- and as FSA has already said higher salaries will be needed to attract the right sort of people.
    The only thing that is consitent within FSA/FSCS is that it is consistently inconsistent.

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