In the dock: Stewart Ford, FCA and advisers on trial over Keydata


Advisers’ role in the Keydata saga has been thrown into question after FCA evidence shows they were misled over the risks of the products.

Last week the FCA published decision notices seeking to fine and ban Keydata founder Stewart Ford, former sales director Mark Owen and former compliance officer Peter Johnson. Ford is facing a fine of £75m, the largest penalty ever imposed on an individual by the regulator, while Owen and Johnson are facing fines of £4m and £200,000 respectively.

All three individuals have referred their notices to the Upper Tribunal, which legal experts say is set to be a “show trial” where the rights and wrongs of both the regulator’s and the former Keydata directors’ actions are exposed.

But with the FCA having set out its version of the disastrous events leading up to the collapse of Keydata, what do we now know about the roles of the key players in the failure? And could the FCA’s evidence help the legal case of advisers who claim they should not be held accountable for Keydata losses?


Keydata’s administration in June 2009 prompted a £326m Financial Services Compensation Scheme interim industry levy in 2011.

The FSCS has since pursued litigation against 820 advisers, recovering £52.4m through settlements. It has incurred legal costs of £15.8m in the process.

The case continues to progress towards court but only around 10 active defendants remain.

Law firm Beale and Company partner Damian McPhun says: “I have been contacted by a number of IFAs in the last week who consider the decision notices prove correct much of what they told the FSCS from day one about them being hoodwinked as much as the investor.

“They also consider it ‘convenient’ that these decisions only came out once the vast majority of the cases were settled. I suspect the decisions will also make those who have dug in their heels so far in the Keydata litigation continue to do so.”

The FCA says in the decision notices that Ford allowed Keydata’s products to continue to be promoted and sold, despite knowing IFAs and investors were unaware of their risks.

It says: “As a result of the professional advice and other information he received, Ford could not have been in any doubt that material risks to the performance of the Lifemark portfolio existed and needed to be addressed as a matter of urgency.

“Despite this knowledge, Ford took no effective steps to ensure that such risks were managed or that the regulator, IFAs and investors were alerted to the existence of such risks.”

According to the notice, in April 2008 Ford was advised by Keydata’s finance director that Keydata had funded £916,000 in missed income payments to SLS investors. By February 2009, Keydata’s board minutes revealed the figure had risen to £2.95m and Ford reported discussions were ongoing with SLS to resolve matters.

The FCA says Ford would have been aware that in making payments in lieu of SLS, Keydata was concealing SLS’s failures from investors and the advisers who were still marketing the products.

Ford was also aware of a draft valuation of the Lifemark portfolio in May 2008 which projected the portfolio would face a deficit of $172m (£113m) to $84m between 2011 and 2013 and that the number of lives in the Lifemark portfolio were small.

Lawyers say while the findings add weight to advisers’ argument that they were victims in the collapse of Keydata as much as investors, using the notices as part of a legal argument against the FSCS will be difficult.

The FCA states in the decision notice that the SLS and Lifemark products were high risk, as they invested in highly illiquid assets and their performance was dependent on the deaths of those insured under the life settlement policies confirming to life expectancy.

DWF partner Harriet Quiney says: “The FCA says the products were high risk, but many advisers sold them as low risk, which is where the issue still lies.

“The marketing materials for the SLS bonds were found to be misleading, but the FSCS’s view is advisers should have done more than read and rely on the brochure.

“Lifemark is trickier. According to the FCA, some of the risk factors relating to Lifemark were concealed by Ford, particularly in relation to small portfolio size. This had a number of knock on effects, including the impact of volatility when policies were sold to meet redemption payments.”

She says this means Lifemark was “higher risk than an IFA could reasonably discover”, although known risk factors mean it should still not have been labeled as low risk.

Quiney says advisers who assessed the product as medium or medium/high risk might be able to bring a claim against Ford on the basis that he was jointly liable for investors’ losses.

But she says: “That said, time limits may apply and there is no point bringing claims against Ford unless he looks good for the money. There is a bit of a Catch 22 as if Ford’s application to the Upper Tribunal is unsuccessful this would bolster a case against him, but he is unlikely to have funds to pay up; whereas if his case is successful then he would have funds, but any case against him would be considerably weakened.”

Clarke Willmott partner Philippa Hann agrees: “Unless Ford has assets significantly in excess of £75m, any claimant risks a hollow victory at best.”

She says whether or not the findings might assist advisers in defending claims for negligent advice on Keydata will depend on whether if they can show they asked the relevant questions of Keydata and were entitled to rely on the information given to them.

Hann says: “If the allegation is that the investment was improperly sold as a low or even medium risk product then the actions, or inactions, of Keydata’s directors are unlikely to have broken the chain of causation, given that the FCA’s own view of the SLS products was that they were high risk.”

Regulatory Legal partner Gareth Fatchett says: “Regardless of what the decision notice says about misrepresentation, advisers still got the risk profiling wrong. They knew what the asset classes were.”

A spokeswoman for the FSCS says: “It is possible for a number of different parties to be legally liable for the losses suffered by investors – as in this case. However, the regulator’s ruling does not mean the directors are legally liable. The proposed penalties imposed on Ford, Owen and Johnson constitute regulatory sanctions for their wrongdoing, rather than their legal liability.”

Show trial

But while the FCA has now set out its version of events, only at the Upper Tribunal will the full facts of Keydata’s collapse be laid out in public.

In the meantime, Ford has launched a £650m legal claim against the regulator and Keydata administrator PricewaterhouseCoopers.

He claims there was a “conspiracy” between PwC and the regulator. Ford alleges that PwC wrote a “flawed” report which wrongly claimed Keydata was insolvent and which aided the FSA in forcing the closure of Keydata in 2009.

The Upper Tribunal may uphold, vary or cancel the FCA’s decisions when it hears the appeals, after giving both the Keydata managers and the regulator the opportunity to present their cases.

Experts say the hearing is set to be a “show trial” at which the reputation of the regulator is at stake.

RPC regulatory counsel Marcus Bonnell says: “The stakes are high for both sides, with Ford facing the largest fine ever imposed on an individual.”

Fatchett adds: “The FCA is trying to play hard ball with Ford, but the problem for the regulator is there will be a show trial at the Upper Tribunal and people will draw their own conclusions as to whether the regulator was part of the solution or the problem.

“We still haven’t seen internal correspondence at the regulator, which should come out during the hearing and will either back up what Ford is saying or make him look silly.

“If it backs Ford up, then somebody at a very high level of the regulator will have to take responsibility for effectively setting him up.”

Ford says the Upper Tribunal hearing will be a “spectacle” which exposes the regulator’s wrongdoing.

He says: “Apart from my successful judicial review of the FSA’s illegal use of privileged material, this will be the first time that an independent body has considered the facts of this matter.

“Up to now, the process has been entirely ‘in house’ and whatever evidence was put forward in my defence, there was only ever going to be one outcome. This was a classic regulatory stitch-up.

“It is the FCA’s turn to be afraid as I am coming after them in a public forum where the truth will be exposed for all to see.

“I invite all former Keydata investors, their advisers and the media to come to the High Court and enjoy the spectacle of a failed regulator and their dodgy accountants being exposed for what they are.”

But will the Upper Tribunal’s ruling finally be the end to the Keydata debacle, or could Ford stage yet another appeal?

Defendants can appeal an Upper Tribunal decision either by applying to the Court of Appeal or by seeking a judicial review, which looks at the fairness of the decision making process.

Michelmores associate Jonathan Kitchin says: “There is very limited scope to challenge Upper Tribunal decisions by way of judicial review.

“That may force Ford and his legal team to look at potential angles under the Human Rights Act through the Court of Appeal and potentially the Supreme Court and European Court of Human Rights.

“That would take a number of years and the Conservatives’ plan to scrap the Human Rights Act adds a further element of uncertainty. The bigger picture is that Ford could use that time to pursue his £650m claim against the regulator.”

Expert view: How long can Keydata directors fight record fines?

That this matter is off to the Upper Tribunal comes as no surprise; it would have been surprising if Stewart Ford, Mark Owen and Peter Johnson had not referred their decision notices. The stakes are high for both sides, with Ford facing the largest fine ever imposed on an individual. Whilst many individuals fight strenuously against the FCA, what is remarkable in this matter is how adept Ford, Owen and Johnson have proved at thwarting the progress of the enforcement proceedings.

In December 2007, FSA investigators were appointed to investigate Keydata. The formal investigation into the three individuals commenced in September 2008. In June 2009, Keydata was placed into administration by the FSA. Warning notices were issued to the individuals in October 2010.  At this point, the matter was derailed by a judicial review brought by Ford.

The Administrative Court decided to uphold Ford’s challenge in October 2011 because the FSA had improperly relied upon material which was covered by legal professional privilege.  The court delivered a second judgment in April 2012 which meant the FSA was free to continue with the disciplinary proceedings after a gap of 18 months.

There was then a further delay of over two years which was in part due to Ford, Johnson and Owen applying unsuccessfully to the Tribunal to prevent the FCA from publishing their decision notices.

It is likely that the individuals will try to take every potential point at the hearing and that consequently it will drag on longer than would normally be the case.

Additionally Ford is proposing to bring a civil action against the regulator. This should not necessarily impact on the tribunal process, but it seems likely that efforts will be made to use any civil action to delay the tribunal. If the FCA is victorious before the Tribunal, then one or more of the individuals could also seek to appeal at the Court of Appeal.

With such a range of potential sources of delay still available to Ford, Owen and Johnson, this matter will drag on for many more months.  Nonetheless it does now look as if the Tribunal will eventually get to decide the rights and wrongs of this case, and unlike the FCA’s enforcement proceedings, will do so in public.

Marcus Bonnell is regulatory counsel at RPC

Adviser views

Alan Dick, partner, Forty Two Wealth Management

The FCA has said where a provider provides something in writing in answer to a specific question, rather than generic information, advisers should be able to rely on that as part of their due diligence. So where advisers have tried to get the information from Keydata and been misled, clearly it is not their fault.

Lee Roberston, chief executive, Investment Quorum

We get mixed messages from the regulator that advisers should be able to rely on providers’ information, yet the minute something goes wrong we are told we didn’t do enough due diligence.