Lawyers acting on behalf of the Financial Services Compensation Scheme sent letters last week to 162 firms who recommended two tranches of Keydata Lifemark products in a bid to reclaim industry costs paid out to investors.
The move follows similar letters sent late last year to over 500 firms who advised clients to invest in Keydata SLS products, for which the FSCS paid out £67m of claims. Further letters in relation to the remaining 20 Lifemark offerings should be sent later this month. An industry levy of £326m was raised to pay Lifemark claims and so the sums involved should dwarf the SLS action.
As IFAs undertake a day of action this week to highlight the unfairness of the current FSCS funding model, some firms have serious questions to answer around the sale of Keydata products. The FSCS has a duty of care on behalf of industry levy-payers, and their clients, to ensure it tries to reclaim as much money as possible that has been paid out on their behalf.
However, there are a number of concerning aspects to the blanket approach taken by the FSCS.
The letters have been timed to ensure the FSCS does not fall foul of limitation rules and state the scheme’s view that all firms failed in their duty of care to their clients through the recommendation of inherently risky products.
But it is unclear how thoroughly, if at all, the FSCS has judged the individual circumstances of each case before sending out these letters. Recommending a 5 per cent Lifemark position in a high-risk portfolio is very different to recommending risk-adverse individuals invest 50 per cent of their portfolio in such a product.
A number of bigger players have signalled they are willing to fight any action in the courts.
However, smaller firms may well be intimidated by the legalistic correspondence and unable to afford the costs of contesting the matter. The individual firm liabilities are small in many cases but may well be the difference between surviving the current economic downturn or going under, if the claims are excluded from their PI cover.
FSCS lawyers suggest they will undertake “constructive dialogue” with regard to any payments. Such dialogue must take account of the individual circumstances of each sale and the list of parties involved in the failure of Lifemark, rather than conveniently passing 100 per cent of the blame on to the adviser firm.