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PosSol and Chase de Vere among FSCS Keydata test cases

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Positive Solutions is set to join Chase de Vere as one of the lead defendants in the Financial Service Compensation Scheme’s legal challenge to recoup compensation paid to Keydata investors, Money Marketing understands.

The FSCS is in the process of finalising its list of six lead case defendants, or test cases, where the firms will have to defend themselves against claims of professional negligence. The FSCS is trying to recoup up to £75m out of around £400m paid out in Keydata compensation, and has brought proceedings against at least 500 adviser firms.

The lead cases are being selected according to a rigid set of criteria set out by the High Court, which stipulates that lead defendants have a sufficient number of clients who were recommended both SLS and Lifemark Keydata products. The selection process is also trying to a representative sample of firms to defend their Keydata advice, including networks and smaller directly authorised adviser firms.

Once the lead defendants are finalised, firms that are chosen can seek to legally challenge their selection.

PosSol and Chase de Vere declined to comment on whether they were likely to be chosen as lead defendants.

Law firm Beale and Company is acting on claims worth a total of £18m. Partner Damian McPhun says Keydata advice given by the lead case defendants will be examined in court, but they will have to defend general legal arguments rather than specific Keydata recommendations.

McPhun says: “The FSCS has not really done much due diligence around what specific advice was given to specific clients. It has not reviewed files, and its claim has always been made at a fairly high level around the brochure being blatantly misleading, which it claims advisers should have spotted. It is these kind of overarching issues that will be looked at as part of this lead case defendant process.

“The FSCS is dealing with a conflicting set of principles. On the one hand, the FSCS has to make recoveries where it effective to do so, but on the other hand the FSCS has a statutory duty to make the most cost-efficient use of their resources. It is not supposed to be throwing good money after bad if there is no reasonable prospect of recovery.”

Capital Asset Management chief executive Alan Smith says: “The FSCS seems to have approached this completely the wrong way round. If there has been misselling, there is a well-established process to address this but that process seems to have been put to one side here. It sets quite a dangerous precedent and adds confusion and complexity about how the regulatory compensation process operates.”

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  1. “The FSCS has not really done much due diligence around what specific advice was given to specific clients. It has not reviewed files, and its claim has always been made at a fairly high level around the brochure being blatantly misleading, which it claims advisers should have spotted. It is these kind of overarching issues that will be looked at as part of this lead case defendant process.”

    Quite so. Indeed the brochure may well have been blatantly misleading but:

    1. Where was the Regulator? Are we to assume that the Regulator at the time didn’t bother to examine the literature? I am a little confused as to whether KD had an Arrow visit. If not – then why not? If it did then why didn’t the regulator pick up on this failing? If they didn’t deem it misleading at the time (presuming that they even read it) then why should advisers be more culpable?

    2. One thing I do believe is the case is that the Regulator knew that KPMG no longer wished to be associated. If so why wasn’t this publicised? Indeed re-examining the brochure please explain exactly how you reach the conclusion that it was blatantly misleading. If KPMG had no further input, how would any reasonable adviser know? The trading of the contracts was supposed to be overseen by HSBC. Were we supposed to write to the then Chairman to verify this? If Mees Pierson (part of the Fortis Group) were the custodians, payment agents and registrars – didn’t they have a measure of responsibility? What culpability do they have? Are we in every case supposed to check who the administrators, trustees and ACDs are and whether they are trustworthy? What and how much due diligence is considered sufficient, bearing in mind that it is patently obvious that most IFAs don’t have the same resources for research as Goldman Sachs?

    Indeed there was at the time the Structured Products review, which also didn’t highlight how awful this product was. (Assuming that we agree with FSCS and regulatory rhetoric). Must we now check on each OEIC ensuring that they do indeed own the investments that appear on the factsheets? If not then why couldn’t we take some of the details in the KD brochure as fact? That the bond contained cash as well as the insurance contracts. That their insurance contracts were in the USA where the Federal Government guarantees pay-out. If the actuarial assumptions were awry why didn’t HSBC who allegedly owned the contracts and were trustees spot this?

    If we are looking at ‘overarching issues’ how pertinent is it that Mr Elias absconded with the money? Would we have been in the same position if he had not? Overarchingly KD was a regulated entity. If it was as bad as is being maintained – where was the regulator?

    When it comes to compensation or the recovery of funds how is it that Steward Ford seems to have escaped intact? Isn’t he the one that the FSCS and Herbert Smith ought to be chasing – or are advisers easier targets?

    There are so many additional issues, from the Mafia style actions of HS, to the presumptions taken by them to bolster their case without having done their own robust due diligence and the very odd fact that this whole farrago is being conducted in this way.

  2. “The FSCS has not really done much due diligence around what specific advice was given to specific clients. It has not reviewed files, and its claim has always been made at a fairly high level around the brochure being blatantly misleading, which it claims advisers should have spotted. It is these kind of overarching issues that will be looked at as part of this lead case defendant process.”

    Quite so. Indeed the brochure may well have been blatantly misleading but:
    1. Where was the Regulator? Are we to assume that the Regulator at the time didn’t bother to examine the literature? I am a little confused as to whether KD had an Arrow visit. If not – then why not? If it did then why didn’t the regulator pick up on this failing? If they didn’t deem it misleading at the time (presuming that they even read it) then why should advisers be more culpable?
    2. One thing I do believe is the case is that the Regulator knew that KPMG no longer wished to be associated. If so why wasn’t this publicised? Indeed re-examining the brochure please explain exactly how you reach the conclusion that it was blatantly misleading. If KPMG had no further input, how would any reasonable adviser know? The trading of the contracts was supposed to be overseen by HSBC. Were we supposed to write to the then Chairman to verify this? If Mees Pierson (part of the Fortis Group) were the custodians, payment agents and registrars – didn’t they have a measure of responsibility? What culpability do they have? Are we in every case supposed to check who the administrators, trustees and ACDs are and whether they are trustworthy? What and how much due diligence is considered sufficient, bearing in mind that it is patently obvious that most IFAs don’t have the same resources for research as Goldman Sachs? Indeed there was at the time the Structured Products review, which also didn’t highlight how awful this product was. (Assuming that we agree with FSCS and regulatory rhetoric). Must we now check on each OEIC ensuring that they do indeed own the investments that appear on the factsheets? If not then why couldn’t we take some of the details in the KD brochure as fact? That the bond contained cash as well as the insurance contracts. That their insurance contracts were in the USA where the Federal Government guarantees pay-out. If the actuarial assumptions were awry why didn’t HSBC who allegedly owned the contracts and were trustees spot this?
    If we are looking at ‘overarching issues’ how pertinent is it that Mr Elias absconded with the money? Would we have been in the same position if he had not? Overarchingly KD was a regulated entity. If it was as bad as is being maintained – where was the regulator?

    When it comes to compensation or the recovery of funds how is it that Steward Ford seems to have escaped intact? Isn’t he the one that the FSCS and Herbert Smith ought to be chasing – or are advisers easier targets?

    There are so many additional issues, from the Mafia style actions of HS, to the presumptions taken by them to bolster their case without having done their own robust due diligence and the very odd fact that this whole farrago is being conducted in this way.

  3. Slight problem with your comments Harry. Firstly the FSA was never a product regulator and simply does not have the resources or the mandate to look at each and every one. Secondly, advisers were mis-selling investment products long before the Arrow visit to KeyData. The FSA discovered that around a half of all investments recommended by advisers failed the basic rules of investment advice even by the standards of the time. This then led to more thematic work by the FSA which affected all of us. On that basis alone, you could argue that 50% of KeyData sales were wrong simply because of failings by the adviser! It does not matter what subsequently happened to the KeyData funds. If the adviser had done his or her job properly, then the client would have suffered the losses due to alleged fraud.
    I note today that yet again we have a warning about an interim levy because advisers in the past did not do the job properly.

  4. @ Sam
    I did my job properly and my clients, who have not complained, lost out due to fraud. They are willing to stand up in court and testify for me.
    HS is a bully who thinks he can frighten advisers into pleading guilty.
    My files are compliant and I welcome any scrutiny.
    Stop making blanket assumptions that everyone who sold a keydata product was guilty, much like HS who probably never saw a file before making that accusation.
    I am surprised you have any time for client files as you appear to spend most of your time on here, defending the indefensible.

  5. @Sam
    I defer to your good sense and clear thinking.
    However what troubles me is that without the benefit of hindsight and using information that was reasonably obtainable at the time by your ‘average intermediary’, it has never been properly explained exactly where these advisers failed to spot the weakness in the product. What exactly was so obviously wrong? Yes there were risks, but the Regulator’s own website also has mis-labeled risk profiles – as we all know too well.
    If as you correctly say that the regulator at the time didn’t regulate products, then it is a little surprising that all their statements subsequently were concerned precisely with the product. If it was so self-evident that this was a toxic product, then surely a visit would have brought to light the scale of the sales and one would not unreasonably have thought that the regulator would have made some sort of statement. Bear in mind that we were (and still are) getting veritable Tsunamis of edicts, notices and statements from Canary Wharf. Odd that they should therefore have remained so silent. Apart from which your comment doesn’t address the other regulatory issues surrounding the roles of the Trustees ACDs and other players in the saga, which surely fell under the remit of the regulator at the time.

    Perhaps I am being obtuse, but I still can’t elp feeling that this is not only regulation with hindsight, but the regulator passing the buck for what seem like evident and significant failings on their part.

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