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Key facts for the FSA

Once again, the action of the FSA has come under scrutiny, following the collapse of Keydata.

For a couple of days, around 85,000 investors would have been fearful their money in Keydata capital-protected plans was at risk after the FSA announcement that the firm was insolvent.

It came as a surprise, given that just days earlier, the company was happily promoting its new offering to trade journalists.

The FSA’s action appeared swift and gave rise to rumours and speculation. The regulator apologised to investors for any concerns because it “more than most understand what it means to create uncertainty”.

One can only assume the spokesman was referring to the Northern Rock debacle, when the regulator, along with its tripartite sidekicks, the Treasury and the Bank of England, dithered so much that tens of thousands of the bank’s customers queued for hours to withdraw their cash.

In the FSA’s defence, given the events of the past few years, it would not want to be accused of resting on its laurels but you wonder whether there are further lessons to be learned. Could the FSA have done more to reassure investors in the first instance?

If you look at the breakdown of Keydata’s funds under management, the vast majority were funds it simply administered. It looked after hundreds of plans for building societies. You can bet most of the savers are cautious, risk-averse punters who care more about protecting their capital than making a high return. A revelation of insolvency would have caused them sleepless nights.

No wonder hundreds of investors fearing the worst contacted PwC in the hours that followed the insolvency announcement – many were unsure what role Keydata had in their building society-branded product.

Talking to the societies, you got the distinct impression they had no idea they were involved in Keydata’s demise or even why they might want to reassure worried savers.

The key issue for the administrators was whether the accounts were segregated for investors only, or whether Keydata could get their hands on it, if they wanted to. It emerged that the firm just administered many plans – it did not hold the deposits and so building society savers’ money was safe.

I do not understand why the FSA and Keydata-related parties could not have made such assurances sooner than they did. Only Nationwide and investment boutique Blue Sky moved quickly to publish statements to calm investors’ nerves but even that could not prevent the first raft of stories.

The FSA also did little to quash rumours of why Keydata had been made insolvent. The saga had nothing to do with the investment products themselves – this was not a Lehman situation or a precipice bond scandal. It was a tax liability issue.

The firm’s accounts suggested nothing untoward and sources close to Keydata claim that the FSA had rejected a solution to the proposed insolvency made to the HMRC. But no word from the FSA on whether this was true simply fuelled speculation of the wrong kind.

Even once it emerged that an outstanding HMRC liability was the reason, it refused to confirm or deny that the reports were correct – yet this would have diffused any malicious gossip at an instant.

The regulator argues that it had no choice but to announce the insolvency once it had made an application and that it acted swiftly to reassure and protect investors’ interests.

But if the FSA had communicated with firms whose products were connected with Keydata, they could have kept the story off the front pages and not caused the hearts of tens of thousands of investors to skip a beat or two.

Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing

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  1. A challenge to the FSA
    To answer Paul’s well wtritten and lucid article……………………………..

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