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MM Leader: Blanket FSCS approach raises concerns

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.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Why legal action and not FSA action

    Perhaps because of what the FSA rulebook says. The FSA says you should have carried out due diligence but does not say how you should have done it in its latest decree. However, COBS 2.4.6R says: ?(1) This rule applies if the rule on reliance on other investment firms (COBS 2.4.4 R) does not apply. (2) A firm will be taken to be in compliance with any rule in this sourcebook that requires it to obtain information to the extent it can show it was reasonable for it to rely on information provided to it in writing by another person.? COBS 2.4.4 R talks about information relating to the customer but the phrase ?any rule in this sourcebook? means it clearly applies to the whole of COBS. My view is supported by the pre 1 November 2007 equivalent in the old COB sourcebook ? COB 2.3.3R says: ?A firm will be taken to be in compliance with any rule in COB that requires a firm to obtain information to the extent that the firm can show that it was reasonable for the firm to rely on information provided to it in writing by another person.? So we must ask ourselves what the provider (which is, in the legal sense, ?another person? has said about the product in writing and if it is reasonable to rely on it. In my view, it IS reasonable to rely on a brochure or KFD published by a firm regulated by the FSA itself. If, on the other hand you have an e-mail from somebody in Nigeria claiming to be a penniless member of its Royal Family I might take a little more persuading.

  2. How many Networks & IFAs are now insolvent

    HS, Simply be threatening legal action where a firm’s PI either has an excess per claim or as many do, excludes the situation with Keydata must mean that firms have to make provision for a prospective or contingent liability. If this exceeds the firms assets, then they are insolvent. How many Networks and IFAs on the HS list of over 562 firms are already insolvent as a result but no one has done anything about it? One man band directly regulated firms may only be carrying £10 or so capital adequacy (assets over liabilities), so to excesses of £10k will mean £1 more and they are insolvent! Was this the intention of HS legal threats as if it was it is lunacy. The Insolvency Test Does the company owe more than you own. This includes where your liabilities exceed your assets. If you feel this is the case with your company then you could be seen as insolvent. This test is set out in S123(2) of the Insolvency Act 1986, which states that: “A company is also deemed to be unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities taking into accounts its contingent and prospective liabilities”

  3. I see the FSA have told Arch Cru IFAs to ring-fence assets. Keydata next?

  4. This “constructive dialogue” in the last paragraph makes me smile.

    Nearly 6 months on for the 1 SLS case I face, still involves HS ignoring any facts on the clients circumstances, research, risk tolerance, wealth etc.

    It is limited thus far to “look at the claim particulars, give us 50% and we might go away, otherwise see you in court”.

  5. Without having examined in detail each and every file, on what basis has the FSCS formulated its blanket assumption that every recommendation to clients to invest in these KeyData/LifeMark products is defective?

    Recipients of these nasty solicitors’ letters might well be tempted to reject them flatly on the basis that the accusations they contain have been formulated with no evidence to support them. And is the FSCS legally entitled to demand sight of IFA’s client files in the absence of any complaint from the investors themselves?.

    Though going to court would be an intimidating prospect for any small IFA, I imagine the first line of defence would be to ask just what evidence the FSCS has for its accusations. If all the counsel for the prosecution is able to say is Well, our client doesn’t actually have any, it just assumed….. I imagine there’d be a fairly good prospect of the case being thrown out.

    Given the might of the FSCS, whether or not it would actually work like that in practice is another matter.

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