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Keydata costs see FSCS legal bill for recoveries hit nearly £23m

FSCS Interior 480

The Financial Services Compensation Scheme is facing total legal costs of £22.8m in its attempts to recoup compensation from Keydata advisers and other firms.

Legal costs relating to Keydata will be passed to investment advisers as the expenses are allocated to the class in which they are incurred.

In a consultation paper last week the FSCS proposed a new maximum limit for FSCS management expenses of £94.4m for 2013/14, which is separate from compensation costs and is not included in the sub-class cap calculations.

Of the total, £7.2m has been budgeted to cover the legal costs of pursuing recoveries, including the cost of pursuing compensation from Keydata advisers, and firms who sold other structured products and payment protection insurance.

Recovery costs are estimated at £7.7m for 2012/13, almost double the £3.9m the FSCS set aside in its plan and budget last February. A further £7.9m was spent on pursuing recoveries including Keydata in 2011/12.

The FSCS was unable to provide a breakdown of how much of the £22.8m in legal costs relates to Keydata but it is understood to form the majority of the bill.

Law firm Herbert Smith began legal proceedings on behalf of the FSCS in October 2011 against advisers who recommended Keydata to try and recoup compensation paid to Keydata investors.

Claims relating to Keydata triggered an interim FSCS levy in 2011 of £326m, with advisers having to pay £93m and fund firms £233m. Claims relating to Keydata SLS made up the majority of an £80m FSCS adviser levy for 2009/10.

Last year the FSA said claims connected to Keydata should be complete in 2012/13. It will publish its plan and budget which sets out expected compensation costs and the resulting levy on firms in the next few weeks.

Apfa policy director Chris Hannant says: “You do not have to be a financial genius to work out that pursuing small amounts of money from Keydata advisers through Herbert Smith is going to get very expensive very quickly.

“The FSCS’s budget for Keydata recoveries keeps on rising, but we are no closer to knowing whether legal action has been effective or not. Apfa has been asking what money has been recovered to date, and how large are the amounts being pursued and we have no answer. If the FSCS wants to keep increasing this budget, and burdening the profession, it must provide a transparent account of its cost effectiveness.”


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Just wondering what hourly fee are we being charged for professional services? It should make it easier to justify our fees if we are ever asked

  2. Of course these details should be transparent and the FSCS should be accountable but these people are above normal law, which is a governmental mistake (deliberate or not) and therefore the government should also be held to account. The whole thing is an undemocratic obscenity.

  3. £23 million? Seriously? Treating Customers Fairly obviously doesn’t apply to the Legal Profession – perhaps they decided to go on a flat %age instead of hourly rate – or is that too cynical……

  4. I’m afraid in this case APFA are being rather hypocritical. While I was on the board of AIFA I tried on several occasions to get first Stephen Gay and then Chris Hannant to engage on this – to absolutely no avail. I even had an undertaking from a very well renowned compliance consultant and financial services legal expert that he would be prepared to help pro bono.

    The problem was (and still is) quite simple – the FSCS had no one to negotiate with who represented the majority. They really wanted to and would probably have come to an accommodation. Putting it technically, they are now ‘Pissing in the Wind’ as they have to look at each case in isolation. Herbert Smith is accordingly very overburdened (and probably wants to drag things out in their own interest).

    Now all of a sudden APFA is interested in the statistics! They didn’t want to get into representational mode to help sort out the mess. Frankly this is hot air and playing to the gallery.

  5. At the bottom of all this is the question: Why did Keydata fail? Until we know the answer to this question no blame can be apportioned to anyone other than Keydata and the Regulator that inspected quarterly accounts and allowed Keydata to trade. From what I can gather Keydata failed because of a combination of fraud, actuarial miscalculation, and misleading the regulator by running a Ponzi scheme when the fund had failed. None of this is the responsibility of financial advisers.

  6. And that Ken is the nub of the problem, the so called FSA investigation has quietly been put on hold and has not been concluded so how in law can these people who purport to be an ethical law firm even think about pursuing a case against an adviser and the next issue is “Where is the money that was invested and retained prior to the collapse ?”

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