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Keydata levy is an outrage against IFAs

Nic Cicutti says it is clear that Keydata was not being effectively regulated by the FSA.

A few years ago, around mid-2007, I received a call on my mobile from a PR person. Did I know anything about a company called Keydata?

I was forced to confess that I didn’t. I had a vague idea that the firm was involved in the marketing and selling of structured products but these had never been an area of great interest to me so I had sort of let the business pass me by.

The PR person offered me the opportunity to meet with directors at Keydata, whom I was told were very eager to catch up with me. I demurred, this was not the best time, as I had just started a full-time job in North Wales and I was not doing much writing back then, so it would be a big waste of those senior executives’ time, not to mention mine.

What? Didn’t I know that Keydata had won a whole series of awards for its structured products? How could I not want to come down to London and meet them? Did I not realise I was missing a massive opportunity to find out (and presumably write about) the company? I am afraid that the PR person and I parted on bad terms.

I will come back to these blessed awards in a minute, but it is important to realise that Keydata was not prominent on the radar screens of a lot of journalists at the time.

Last summer, as I had a pint with a fellow writer, he told me of his shock at discovering – after the company had collapsed – that it had almost £3bn invested in its various products, a massive chunk of it through the many building societies that it dealt with, either as a provider or an administrator. They included Cheshire, Derbyshire and Dunfermline (now all under the Nationwide umbrella), Leeds Building Society and Royal Bank of Scotland.

What I certainly do not remember being told, as I endured a lengthy accusatory monologue from Keydata’s PR, is that the company was in any sense a financial adviser or intermediary, certainly not in the commonly understood term of that category.

Which is why, when I read last December that Aifa was taking legal advice to see whether it might be able to mount a challenge to the potential Financial Services Compensation Scheme levy on the “investment intermediation category” related to Keydata’s collapse, I naively thought it would not take the FSCS and the FSA between them a nano-second to see that it was nonsensical to make IFAs pay for this firm’s collapse.

How wrong I was. Last week, it was announced that, in addition to Continental and Square Mile, which will cost IFAs a whopping £27m, Keydata’s contribution to the bill that IFAs face having to pay would be a whopping £43m.

As one or two of you may have realised, I am not generally renowned for being a great fan of the IFA industry. However, this levy is an outrage. It offends every sense of natural justice, for a number of reasons.

First, because the more you study what Keydata was up to in the years before it went belly up, the more it becomes apparent it was not being effectively regulated by the FSA, certainly in terms of the category it was regulated under. To not spot that there was something wrong with Keydata in the year or two before it was forced into administration is pathetic.

Even so, it has to be said that no one else comes out of this with any great credit, not even IFAs. After all, it was often IFAs who were selling these structured products to their unsuspecting clients.

A quick trawl through the MoneySavingExpert website forums last week revealed this little gem from one consumer back in mid-2006: “An IFA told me today about a 7.5 per cent Isa with Keydata for five years, and 7.7 per cent for seven years. I’d never heard of it, but was told it is only something accessible to IFAs.”

Moreover, the awards to Keydata I mentioned earlier, which the company proudly boasted of on its website, did not materialise out of nowhere. They were from another trade publication and, as I understand it, are voted on by IFAs.

The company was able to market itself to a significant extent to the public because IFAs were recommending its products to their own clients.
There is no question in my mind that this is an FSCS levy that IFAs should refuse to pay en masse.

The only way that the FSCS will understand that pretending Keydata is in a certain category for the purpose of deciding who pays the bills is not on. Aifa, which supposedly took legal advice in December – and has not said anything else on the subject – must lead on this issue.

But it is equally the case that Keydata’s star would not have burned so brightly had it not been for many financial advisers themselves. In that sense at least, all IFAs are paying for the actions of a minority – as always.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 31 comments at the moment, we would love to hear your opinion too.

  1. Experienced IFA Man 24th February 2010 at 4:29 pm

    Nic you must be going soft in the head.

    However, I am waiting for your next kick in my boll*cks.

  2. Nic

    You are quite right, as an IFA myself, my firm can no doubt expect a £2k contribution demand from the FSA soon for the Keydata saga. Have we ever sold a Keydata policy? answer no… in fact we have advised clients against such products in the past…but now we must pay the price!! Similarly to the stockbroker last year, whom we have never dealt with nor heard of and yet we had to pay over £600 for that disaster as well. The FSA does not monitor anything properly. Its repeated failings confirm this is the case. Here praying the Tories return to power and send the FSA to the wall, in the same way they send legitimate IFAs to the wall every year.

  3. Bold words which will doubtless be welcomed by the IFA community, though quite why Mr Cicutti is so generaly dismissive of all the good work done by such a large proportion of us is difficult to fathom.

    There are rogues and cowboys in every industry, but most IFA’s are diligent, professional and genuinely care about the wellbeing of their clients. Whilst I hold most bottom feeding, muck raking journalists in extremely low esteem, I am also prepared to recognise that many are as professional and condct themselves with the same degree of integrity as many good IFA’s. So please don’t tar us all with the same brush, Mr Cicutti, just because of a few bad apples in the barrel. To do so says as much about your lack of open mindedness as it does about the ethics of those you seek to criticise.

  4. What a well balanced and useful argument.
    Well done, I hope the FSCS reads your article.

  5. This is all about failed regulation.

    We pay the regulator huge fees to protect the consumer which is supposed to reduce the risk to ourselves or at least that is how it should work in my opinion.

    However the reality is that it does not work and has not worked for years as we pay twice because the regulator fails to stop any wrong doing except with hindsight (after it has happened) so we not only have to pay their costs (which are no massive nearly 1/2 £Billion), but also the costs of the failures.

    The FSA cannot lose but we lose all the time and are paying twice for a service that does not work and who accepts no responsibility for their failure.

    It is complete madness.

    May as well pur our money down the drain as it will have a similar effect.

  6. nic@inspiredmoney.co.uk 24th February 2010 at 4:43 pm

    Surely the Continental and Square mile scenarios are just as unfair on IFA’s, particularly the IFA,s who do not hold client monies or try to operate as Fund Managers.How does a Stockbroking Firm get associated with the same sector as a one adviser IFA Firm?

  7. Well things must be bad if we have the Witchmaster General – old Nic himself talking about natural justice!

    Perhaps he has a real concern that shortly he won’t have an independent sector left to undermine – what then Nic?

  8. Christopher Mrsham 24th February 2010 at 5:14 pm

    Why is the finger not being pointed to the “Counter parties” involved. The following is an extract of a letter I rote to my MP requesting action (how many IFAs have done the same?). Nobody it seems is asking these questions. The following ralates to the very first issue and over time third parties changed and I believe PWC was one.

    2. The role of HSBC.

    The brochure for Keydata’s “Secure Income Bond” Issue 1 states “HSBC (AA-rated by Standard & Poor’s) – Trading of the insurance contracts is overseen by HSBC who ensure that contracts carry sufficient credit ratings. Once bought, HSBC own the contracts as trustees for the Bond.”

    In view of the fact that the capital has gone missing the above statement raises a number of issues in itself:-

    a) it suggests that policies were never purchased and the intention was that they never would be;
    b) if they were purchased, presumably HSBC has a record and if they were, then subsequently sold, HSBC allowed this to happen. In the latter case how come? How much does HSBC know about all this?

    3. The role of KPMG.

    Again the same brochure states “KPMG – One of the ‘big four’ accountancy firms KPMG constructed the financial models used to structure the Bond. It also checks the
    credit ratings of the insurance companies issuing the contracts and monitors the credit rating of the portfolio of investments.”

    Did they do all this? Were they ever involved?

    4. The role of Mees Pierson Investment.

    The brochure – “part of the Fortis Group of Companies, Mees Pierson (A rated by Standard & Poor’s) are Custodians of the Bond, payment and registers.

    In view of what has happened it suggests that Mees Pierson was never involved but if they were how come the capital has gone missing?

    If any of the above parties were involved then it would seem they are also guilty of gross negligence. If they were not then Key Data is guilty of one massive fraud, allowed to happen under the very eyes of the FSA, who presumably authorised the investment plans in the first place. If they did not authorise how come Key Data was able to market them over the last four years?

    Clients were receiving valuations each year which showed actual bid prices for the supposedly invested fund and in the case of the growth plans a rise each year. Was this another face of the fraud and totally fictitious? If not presumably at the time of the valuation the fund did exist and did contain insurance policies and therefore all the parties mentioned above would have known about it.

  9. Yet again the FSA have demonstrably failed in their fundamental job: consumer protection. They pay themselves more than the majority of those that they are supposed to regulate earn and consistantly fail to do the fundamental parts of their job.

    They faff about on how advisers are paid or the cap adequecy of advisers who pose minimal market risk and in so doing divert resources away from those who pose the real market risk. Leaving those who lose/ misappropriate millions in client money to walk away scot free on their watch.

    We too are praying for a Tory win and also that they keep their promise and get rid…

  10. It is scandalous that the IFA community should be asked to pay for the negligence and failure of the FSA to properly regulate Keydate, Continental and Square Mile.

    How can Keydata be categorised as an IFA?

    Is there also not a great need for “caveat emptor” to come back into play. I suspect many of the public who invested with Keydata, Continental and Square Mile were swayed by headline figures and failed to take notice of the old saying “if it looks too good to be true……….”.

    Where there has been fraud let the police authorites investigate. Why should my firm constantly be asked to bailout investors who have been misled by crooks or who have fialed to do some research themselves before investing.

  11. The cheque is in the post Nic, good job.

    However, an email I received today from the FSA highlighted the flaws in the system of apportioning the burden(s) of firms ‘found in default’.

    Any industry representatives who were involved back in 2000 deserve a good knee-capping.

    ************

    Evan

    As you may know [yes I was told], the whole approach to funding FSCS is under review – and the uncertainty in the current approach is one factor that is being considered. I will make sure your thoughts get fed in. This won’t help with the current situation, but may end up with things changing for the future.

    However, I should manage your expectations. I was involved with the set up of FSCS back in 2000 and there are only a limited number of approaches to funding compensation and divvying up the costs across firms – and none of them are perfect. At that time, the industry (incl IFAs) were adamant that they didn’t want a pre-funded scheme (which is one of the ways of offering more certainty) as they felt they could manage their money better than the FSA.

    *************

    So, the financial services industry itself is to blame for all the uncertainty? Even if this isn’t entirely correct we must make sure that the whole system is designed from the bottom up this time round, anyone else game for this?

    By hook or by crook we will have the ear of whoever wins the next election.

  12. As Michael Fallas observes, all of this is entirely due to the Regulator failing to properly regulate.

    There is a big question here about the ‘missing’ or stolen, as some might call it, underlying assets. Was the registration of these assets carried out in a manner approved by the FSA? Should they have been monitoring this more closely?

    Theft has always been illegal, but of course that doesn’t stop it happening, but we should expect a Regulator to be more dilligent and watchful.

    Furthermore, should this product, based on Life settlements, have been marketed in the way it was? Certainly not, and the FSA should have been sniffing around early in the process.

    Having said that, there were always so many questions and inconsistencies surrounding the assumptions built in to this product, that I really cannot see how any IFA, with at least a 50% functioning brain, could have been daft enough to recommend it, but history shows again and again that there’s always some idiot trying to sell something that sounds too good to be true, and a plentiful supply of gullible victims.

    Anyway, if the responsibilty is to fall on the rest of us, why should they care.

    To put it into context, the additional FSCS levy would probably be covered by the pay packages of the 10 or so best paid FSA officials. Come on boys, hands in your pockets!

  13. We should all refuse to pay. Unfortunately there are too many who will roll over and just accept it. You look at the easy jobs and the big money being earned on the back of the financial services industry and it seems the bigger a cheat and cretin you are the more you are paid to make ridiculous decisions.
    Buffoons and crooks in the banking sector and incompetent regulators are responsible for the mess and yet they sail blithely on with taxpayers money subsidising their grotesque salaries and bonuses.

  14. Let’s see if I’ve got this right: I lose business to competition because I advised against KeyData products, so that’s me down once. Then the investors are compensated with FSCS money, so that’s me down twice. And the FSA’s costs increase, so my fees go up, so that’s me down three times. Surely there must be some sort of Human Rights issue here?

  15. you feeling ok nic? IFAs have been subjected to unnatural justice under the FSA for years now. Surely you have missed your chance to give IFAs another kicking?

  16. one useful message here is’don’t pay the fscs contribution when the fees demand comes in. if i am taken to court, i will have the chance before an independent sensible judge to see where this demand goes. hopfully in the rubbish bin

  17. The only way you can challenge the FSCS levy decision is via a judicial review.

    Not paying and then seeking to challenge when the debt collectors knock is a waste of time. It is also a breach of a whole load of Threshold Conditions.

    Militancy is great when it is well thought through !

    Gareth Fatchett

  18. Blimey! Did someone write that article for you Nic?
    If you wrote it you had probably better go and lie down for a bit so that you can awake refreshed and get back to bashing IFAs, most of whom are honest, very hardworking people.

  19. Kim Lee and Gerry Cooper sum it up nicely.

    Q1. How can IFAs sell products which have so many variables and complications?

    A1. ‘Cos the work on a product flogging basis where they have to keep earning commission to earn a living or, indeed, meet sales targets.

    Q2. Why should IFAs who did not sell these products foot the bill?

    A2. Exactly! They shouldn’t. Refuse. This has nothing to do with them. Totally unfair. Ok, so if they pass this bill onto their clients, the FSA will hit them for TCF. This joke has gone too far – so stand up and be counted. Refuse en mass.

    Q3. Who should pay the fines?

    A3. Easy – everyone and every firm which sold these products AND the FSA for failing to do their job again.

    This is why RDR is coming. To get rid of these idiots who flog products without doing necessary due diligence, complicating financial planning, and THEN complaining and blaming others when things go wrong.

    The sooner we get rid of them the better.

  20. I agree with Gerry Cooper’s assessment that it is a problem with the Regulator. Clearly the FSA did not do it’s job, not even having the company correctly categorised, presumably because it did not understand Keydata’s business model.
    Had the FSA had understood that business model it may have categorised the company correctly thus giving it a fighting chance of proper regulation.
    This debacle illustrates how a lack of basic industry knowledge, coupled with a failure of joined up thinking, is probably the root cause of the Regulators many failures and something we have seen paraded before us time and time again. This is ‘institutional incompetence’ on a major scale and is partly due to a lack of good, industry experienced, staff. However the main problem is the lack of competent management who are more concerned with fire fighting, because of their previous incompetence and image building, PR and spin all of which is designed ultimately to keep the gravy train rolling for their own advancement and benefit rather than delivering on the FSA’s ‘raison d’etre’.
    A bit of responsibility and a strong dose of accountability, affecting the pay packet when failures occur, for the senior management should be the order of the day. They do so like the PRP (performance related pay) when they get bonuses but totally refuse to accept that there is another side to the coin. Hiving off the costs of Regulatory failures to anyone is absolutely wrong but to compound this by doing so to the wrong sector compounds the inherent failures. I hope this proves a step too far and is resisted, preferably legally.
    The FSCS is really in the middle of this one, it lacks independence and in any event can only work with what is presented to it. Questioning the sector or category under which a firm is regulated would probably be outside the Compensation Schemes remit and the FSA would undoubtedly have told the FSCS to go jump if it had had the temerity to raise this issue.
    I do hope the Tories win sufficiently strongly at the election to give them the confidence to carry out a total disbandment of the FSA and make sure that, at the very least, the Regulators management never work in anything to do with ‘Finance’ ever again. Much as the FSA makes a virtue out of ‘banning’ individuals. With such an example such it would make all regulatory personnel ‘very afraid’ of failure in the future. Maybe Hector sees this coming and has arranged himself a safe berth with one of the companies who’s business he has successfully bolstered during his time at Canary Wharfe.

  21. After 30 years in this Industry it just gets worse.
    The Regulators, the Government, the Press, The quangos owned by the above, the Banks, those who consider the validity of the claims they receive and any other regulatory body are in denial.

    As usual the solution to their dilema is make the IFA sector pay.

    Our solution could be to refuse to pay “on mass”

    All it needs is a degree of courage on our part.

  22. I advised two clients to invest in the five year 7.5% pa return. Whether any other advisers agree with my view, that the return promised wasn’t exceptional, and that life settlement funds are an established asset class in the USA, I didn’t have any issue about counter party risk. And why should I have had? How can I then be accountable for the theft of my clients’ money. The fact is: they have been cheated and for some reason, I’m having to pay.

  23. Evan Owens email:
    The FSA email Evan was sent said that they couldnt find a compensation scheme that was “perfect”. (Bizarre that they chose to impose a scheme they knew to be flawed).
    If it is deemed (by society?) to be essential to have a scheme to protect banking deposits, ie the FSCS protection, then you SHOULD take additional money continually from the institutions who are benefiting from the protection by being able to sell more “product”, ie the banks.
    Additionally, the banks should NOT be allowed to indulge in “trading” activites with consumer monies if they want to benefit from the protection offered. The banks could then choose what to do, and clients could then choose from lower protected returns, or higher unprotected returns, and if an unprotected bank went bust their clients chasing higher returns would lose money, because they CHOSE not to have protection. And if a protected bank then DID go bust (less likely anyway if they cant “trade” and are regulated well), the prefunding of the compensation by all banks participating would cover the claims with additional levies from THEM only if needed.
    And I cant really see why any other forms of investment, other than deposits need protection from the State?

  24. Re John Harding – here, here – coudn’t agree more … …

    Though here’s the nightmare scenario …

    Cue ‘Hammer House of Horror’ soundtrack …

    What will happen if … and this is looking more likely each day we get nearer the Election … “Bully Boy” Brown gets in again (c/o all apathetic voters) … and hands the Treasury remit to … Ed (‘Golden’) Balls …

    Cue silence … …

    Truly scary.

    Then the the ‘several-headed’ FSA monster will feast on the flesh of the sacrificial IFAs … until it can feed no more … then the ‘Anti-Christ’ Banking/Supermarket Sector will reign supreme … … HA HA HA (cue evil laughter)

    Then look forward to more-pointless-complaints/mis-selling/cr*p service/ … … etc … and similar KeyData debacles … … (but the bonuses will remain in tact)

    Oh boy, sniffing the Tippex bottle (again) will have to stop … … ooh, and I’ll have to sell Neddy (my high-horse) … … (tic)

  25. To Gareth Fatchett

    Gareth, whilst I support the idea of a JR, what you are saying is simply not true. It’s a basic point of law that any ultra vires decision can be subject to ‘collateral challenge’.

    If plenty of us apportion out the Keydata portion (taking care to pay the rest!), FSA has two options: –

    1) Lots of CCJs. It is, frankly, not difficult to hold up a CCJ with legal arguments.

    2) Theshold Conditions ‘striking off’. This has to go through the whole shooting match of enforcement: –
    – They do an “investigation”
    – They have to present to the Regulatory Decisions Committee (RDC) before you are then issued a Warning Notice.
    – You then have the right to make both written and oral representations to RDC.
    – If they want to press, they have to issue you with a Decisions Notice.
    – Once this has happened, you then have the right to refer the whole matter to the Financial Services and Markets Tribunal.

    Frankly, this can take months and months and months just to get this far.

    Once its with the Tribunal, it will *easily* block the system. As you know – you’ve lost enough cases – the Tribunal got around to issuing no more than 8 decisions last year and 10 the year before (or 8 again as 2 firms became 2 cases each).

    As there’s none of this “rights of audience” rubbish, a lay representative from AIFA, AA or IFADU could handle the process…

    It is not difficult to see how 100 small firms refusing to pay would sink the whole of FSA’s Enforcement System.

  26. A well written article by Nic C. Thank you. Glad to see you got in your little bit of IFA bashing though!

    Anyway, to the point.

    I tend to be disincliend to jump in with both feet when a new fad comes along so correct me if I am wrong, Keydata have been around for about 10 or more years and their Life Setllement based plans have been around for nearly that long too.

    I have “sold” to some 12 clients Keydata and other structured products. As it happens, the first Keydata plan we advised on were actually ISAs written under cash ISA rules i.e. cash FSCS protection and matured quite niceley sometime ago. As we’d been happy with those (as had our clients), a few years later, we placed some stockmarket linked equity ISAs with Keydata (all pretty small stuff and always a relatively small proportion of a clients portfolio as the FSA report now confirms is good practice) and as well know Lehmans was an A rated bank up until 3 days before it’s collapse. We had/have ONE client with a Lehamns’ backed contract of £3k. We have NO clients who have Life settlement plans where there are a missing £103 million, but we do have a few taken out since 2007 by which time the FSA (who after all regulated Keydata) would have had an something like 7 or more years to raise concerns (if they ahd any). Other than one of those clients with a life settlement plan, ALL are under £10k and again only a modest proportion of their portfolio and the largest, whilst £75k, was a rolled over from a similar plan the client had arranegd with his previous IFA and represents less than 4% of their investments.

    The vast majority of the problems initially seen with the Keydata plans and the original reason they went in to administration was the fact they had not been established in a way acceptable to ISAs. That is a legal structure issue. Who were the legal advisers?

    Anyway again to the point of Nic’s article – These Structured (lets call them things) are described even by the FSA as “Structured Products”, QED, one could legitamately believe the FSA would therefore catagorise them as PRODUCTS and the firm who structured them would be a “STRUCTURED PRODUCT PROVIDER” and NOT an Intermediary as they are not on the face of it doing any intermediation are they?
    Now my PI excess (were directly regulated) is nearly as high as most of the plans I have arranegd and hence it will not be my PI company who pays if a claim is upheld, it is ME from my own pocket, so if I am found responsible (eitehr by myself as we record all our client meetings as sound files) to re-imburse my client for a failure to explain the risk correctly from my own pocket, that is one thing and I accept that, but to be forced to re-imburse via the FSCS for what appears to be a major fraudincluding a failure of the custodian bank responsibility for holding and accounting for assets as well as failure of the regulator we all pay to Police correctly things that we cannot actually check on ourselves (i.e. has the custodian bank allowed assets to be sold without making sure the sale proceeds came back or without getting title for asstes being bought), then I want to know where higher up the food chain we have been let down as I am a minnow….

  27. The regulator started really shouting about these product over 6 years ago, I was working in a role manufacturing these products, when we put clearer warnings on our products literature about the possible risks to these products the adviser community backed away from them like the plague as why would they touch the products that made the sale harder from responsible providers when there was other providers out there working with advisers firms “tailoring” solutions that they could sell easy, talking about networks and large independents. So the adviser community are to blame as well as these poor product providers.

    I am working as an adviser now and we cannot as an organisation self regulate and we jump to blame everyone else because of, not just one bad apple, it’s a whole barrel of bad apples with one or two good apples fighting to maintain our industries reputation. Ok the levy is not fair, but we need to open our eyes, put our hands up and take some responsibility for careless selling. As for Tory party sorting out things by getting rid of FSA, wake up and smell the coffee, it will only mean harsher, stricter regulation by whatever replaces them. Then we will see the moaning start about that. I’m not saying tare down the walls, it’s actually time to get these walls reinforced. Please just face the facts, we have a duty of care as an industry to our clients and we are to blame on this one, not all of us but a large group.

    At least we are not investment bankers….there is a group of overpaid cretins that has partly led to this situation.

  28. Agree that is unfair on the IFA community as a whole that we must pick up the pieces of others failings and often financially.

    I don’t really see an end to it and am gald I’ve joined Paradigm network where they pick up my FSCS and other fees!!. To be fair its more than just this, they are a refreshing change in a tough market

  29. Nicholas Barrett 1st March 2010 at 9:23 am

    It looks like HM Treasury are now to become involved in the Keydata Saga?

    Could the FSCS be in need of another £500 million, once Lifemark goes belly up?

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  31. I find it obscene that IFAs are angry about a £2000 levy when some of there clients have lose there life saving. There whole industry is at fault for giving Keydata so many awards, leading us to trust them with our saving. Funny how these financial journalise tell their reader that it was a bad investment after the collapse and not before. The whole relationship of IFAs and the company they are promoting needs to be looked at, including the commission system. The amount they can earn for there none expert guidance is outrageous.

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