The High Court is due to issue a decision over the Financial Services Compensation Scheme’s Keydata levy this month, following a showdown between the FSCS and law firm Regulatory Legal representing over 200 IFAs.
Judge Justice Beatson heard at a judicial review in Birmingham last week from Anthony Speaight, QC, acting for Regulatory Legal, that the FSCS’s decision to classify Keydata as an investment intermediary and levy IFAs with the compensation costs was flawed.
The court set aside two days for the hearing but proceedings ended last Thursday after just one day. The judge told the court he will deliver a decision later this month.
If the judge finds in favour of Regulatory Legal, the FSCS would be forced to reconsider its decision to levy the industry with claims resulting from the collapse of Keydata.
Speaight said Keydata was acting as an investment provider and so providers should have to foot the compensation bill.
He said: “With regard to Keydata, we believe a mistake has been made. The critical questions, which are ultimately very short, although may not be easy, are, was there a situation where Keydata was acting as an agent for customers, or is it a situation where it was safeguarding investments through its nominee companies? Or, which is our case, was it a situation where there was a significant exercise of discretion, where it might have been acting as an investment provider?”
Speaight argued that Keydata had been making investment decisions because it was deciding on the timing of purchases of investments after clients had handed over their capital.
The FSCS believes that Keydata was an intermediary because it simply marketed products that were really being managed by Keydata’s Luxemburg-based partners Lifemark and SLS.
Speaight cited as evidence letters from Aifa, voicing strong concerns about the FSCS decision shortly after it was made. He also said that, unlike intermediaries, Keydata played “a key and critical role” in the construction of the Keydata bonds.
The claim focuses on wording in Keydata’s brochures that suggests the company exercised discretion over when to purchase bonds to clients.
However, Charles Flynt, QC, representing the FSCS, defended the Keydata decision, saying the firm did not have any discretion when it came to investment decisions.
He said the bonds’ purchase and sale dates were dictated simply by administrative issues, not by any discretionary work by Keydata. He said the decision on when to sell investments was dictated simply by the fact that the Keydata bonds invested in assets that had a set maturity date anyway.
Flynt was acting for the FSCS’s law firm Bingham McCutchen, which helped to advise the FSCS on its original decision to classify Keydata as an intermediary.
He said: “Keydata had no discretion, they were not bonds to be traded, they were bonds to be purchased.”
The Regulatory Legal team also made a second series of complaints in the judicial review, claiming the FSCS failed to complete an adequate consultation before making its decision. The law firm believes if the initial charge that Keydata was a provider, not an intermediary, fails, then the consultation issue should be sufficient to force the FSCS to reconsider its decision on where to charge the levy.
Regulatory Legal said the FSCS should have consulted widely and taken the results into account because the levy had a significant financial effect on a large number of people.
Speaight said: “It is admitted that there is no express duty to consult in the Financial Services and Markets Act or fee rules. The claimants say a duty to consult existed because of the inherent importance of the decision to levy the large sums of money involved in the interim levy and the likelihood that it would set a precedent for even larger financial sums in future levies.”
He claimed the FSCS did not give “conscientious consideration” to what little consultation it did do and that it appeared to have already made up its mind before consulting some industry participants.
Speaight also said that even if the FSCS was not obliged to launch a thorough consultation, it did speak to a number of trade bodies, including Aifa, and this constituted a consultation of sorts. He said: “In the process that we have called consultation, the defendant should either have investigated further if it needed to do so or said, ’we have done that, now here are the facts’.”
But the FSCS rejected these claims, saying an obligation to consult could set an unrealistic precedent.
Flynt said: “The scheme does not require consultation, still less does it require the hearing of representations. If it did, it might give rise to considerable problems. Does the duty then fall to consult all members of the other classes as to where the levy should fall?”
He added that while the investment intermediary FSCS sub-class contains around 1,200 firms, the investment provider class contains closer to 7,200 firms.