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RPC’s Simon Laird: Could Keydata battle signal a changing world?

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Following last month’s case management conference we have some clarity over the future conduct of the Financial Services Compensation Scheme claim against over 500 IFAs involving the alleged misselling of Keydata SLS and Lifemark products.

 It is reported that to date the FSCS has recovered over £30m (most of which came from the settlement with Norwich & Peterborough). The law firm Herbert Smith have incurred in the region of £7m in costs according to the FSCS’ latest accounts. The FSCS has therefore recovered more than it has spent, although many IFAs who have settled on a commercial basis will argue the reason for the FSCS’ recoveries to date is not the strength of the FSCS’ arguments but the cost benefit analysis of continuing in the litigation. Some may even argue economic duress as the basis for settling.Following last month’s case management conference we have some clarity over the future conduct of the Financial Services Compensation Scheme claim against over 500 IFAs involving the alleged misselling of Keydata SLS and Lifemark products.

The substantive issues now for IFAs is what happens next and what is the likely impact on their profession of the proceedings.

We know there are going to be six test case defendants and from them a number of underlying investor claims will be considered by the court. However, given that not every defendant will be before the court and not every underlying investor claim, the court can only determine generic issues which it will then be for the IFAs to apply to their individual cases – so there is unlikely to be a clear winner or loser.

However, the court’s decision is likely to consider some key issues for IFAs, including:

1. The Court’s view on an IFA’s duty to spot possible fraud by a product provider, particularly in circumstances where the provider is FSA regulated

2. What due diligence must be conducted by an IFA before recommending a product to clients

3. The risk profile of Keydata products

The outcome of these issues is likely to have a long-term impact on the IFA industry. It could also reflect on the FCA and Financial Ombudsman Service. It is well known that the regulator has labelled life settlement products as “toxic” and “high risk”, but what will be its position if the court finds the Keydata products (life settlement products) are in fact lower than high risk products? It will call into question more generally the FSA (or FCA’s) approach to assessing product risk, at a time when product intervention powers are being introduced.

Any court judgment will also be compared with FOS decisions on the same subject. Whilst FOS determines complaints differently to the courts, it will serve as a useful barometer in terms of the different outcomes firms can expect before FOS and the courts. In turn, any meaningful distinctions will be used to argue whether advisers are getting a fair deal before FOS or looked on another way, whether consumers are getting too fair a deal.

There is a long way to go yet but the decision will no doubt have a long term effect on the IFA market. Certainly advisers will look upon the FSCS now as a potential aggressor as opposed to a comfort blanket for its clients. Firms will go out of business and insurance will become more expensive or restricted in the cover provided. The most likely outcome will be that the industry, the FSCS, the FSA and FOS will all be victims to a lesser or greater extent, which in turn begs the question as to why these proceedings were brought in the first place.

Simon Laird is partner at law firm RPC

 

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. It appears to me that the judge’s decision is likely to hinge largely on whether or not s/he accepts the position of the FSCS that the FSA had no duty of care not only to spot but to take action on possible fraud by a product provider. After all, we (and therefore counsel for the defence) know that::-

    1. the FSA conducted an ARROW visit back in 2007, presumably on the basis of concerns that not all was well.

    2. In the course of that visit, the FSA uncovered information that confirmed its concerns.

    3. the FSA apparently took no action on the findings of that ARROW visit (why not?) and that

    4. the FSA has sought to wash its hands of all and any responsibility for having taken no action on the findings of that ARROW visit but instead

    5. has tried to dump that responsibility on the IFA sector on the grounds that those who recommended KeyData products should, despite having at their disposal vastly smaller resources than the FSA should have undertaken more thorough due diligence.

    If the FSA, with a budget inxs of £500m, and the power to undertake an ARROW visit, failed to avert yet another motorway pile-up, how could IFA’s possibly be expected to do have done better?

    The key issues appear to be (lack of) accountability and whether or not the FSA is justified in casually abrogating its responsibilities for policing the activities of product providers.

    If (as we desperately need) we had an Independent Regulatory Oversight Committee, cases such as this would probably never need to go to Court. The Committee would simply say to the Regulator: This is your screw up for which you must accept the blame, instead of shucking it off by way of the FSCS onto those forced to pay for your very existence. YOU must accept responsibility for sorting it out and YOU must name the individuals in your employ who have failed in their duties and the Committee (not you) will accordingly consider the appropriate action to be taken against those individuals. Report back to us in 3 months.

    This might well mean ~ quite rightly ~ that the costs of compensation would have to come out of the regulator’s own budget, with the regulator prohibited from merely lumping those costs onto its budget for the following year. That, in turn, would mean the imposition of rigorous external controls over just how the regulator sets and allocates its budget, instead of allowing it free rein merely to announce that because it’s going to have to do more it’s going to have to charge the industry more.

    All, all sectors of the industry are under ever-increasing pressure to do more and more for less and less. Why should the regulator be exempt from the same requirements to up its game and to use its resources in a way that gets the most value out of the effort that it makes, whilst delivering significant benefits to low risk and compliant businesses through better-focused inspection activity, increased use of advice for businesses, and lower compliance costs? The regulator’s long established stance of Do as we say, not as we do must end and if the regulator won’t itselfd take that step, then it will have to be forced to do so by an outside agency.

  2. Soundly put, Julian.

    You should have a column, my firend.

  3. If FSCS gain a “Blanket win” on Keydata, we may as well shut up shop and go home.

  4. Julian,

    What an excellent piece!

    I would commend the whole of your post to the court.

  5. @ Simon Laird would you be kind enough to provide an estimate of what you think the least cost mind have been for HS pursuing any one individual IFA or firm if the case was settled? We can then assess whether the blanket “carpet bombing” off all firms who had recommended even the smallest amount in fo a Keydata Life Settlement Plan AFTER the FSA’s undisclosed Arrow visit was good use of money. Those of us who have settled will then know how much more it cost FSCS to pursue us than we paid as I for one suspect it was a good 5 times more.

  6. Some additions to Julian’s post.

    I was under the impression that Key Data did NOT receive an Arrow visit, therefore whether Julian or me is correct – either way the Regulator failed.

    Due diligence or not, in my view the whole thing hinges on the fact that Mr Elias did a runner with the money. If that had not happened, Arrow visit or not, would we now be in this position?

    The sin is losing money – all rest is just film flam to justify a Regulators existence.

    Appropriate, high risk or whatever, if the clients had not lost money no one would be jumping up and down. However even if profits were made it may not detract from the fact that in certain cases this product was unsuitable and high risk – but in this case the Regulator would have been shtum. Rather reinforcing my view of what the sin actually was.

    Then of course we have the issue of the Regulator knowing but not telling that KPMG did not have the role as outlined in the literature. Why didn’t the Regulator make this more widely known? (Again on Julian’s point of the Regulator having the wherewithal for almost unlimited due diligence).

    OK if we are to live in a dream world and the Judge says that the FSA and the FSCS are silly billies and should not have brought the case at all – where does that leave us? Is it even likely? I don’t want to be a conspiracy theorist, but is it even conceivable (even if right) that a Judge would make such a decision? It would be a very severe blow to the FSCS. The Regulator gets away scot fee because the FSA no longer exists! However a lesson for the FCA no doubt.

    There are those who have made offers for settlement, but have received no acknowledgement. If the Judge finds against the plaintiffs then:

    a) They will have blown that money, which they could have accepted before proceedings commenced

    b) Those who have engaged solicitors could presumably pursue the FSCS for costs.

    Even if the FSCS wins the current test case what does that indicate? Presumably it will be the largest firms in the test case and presumably they sold these products like sweeties without much regard to the clients’ circumstances or suitability. How can they then infer that everyone else is guilty in the same way without examining each firm and each specific case?

    I freely admit that I don’t have a good understanding of the law or procedures. It seems that logic has no place. But if I was to summarise I could only say:

    What a balls up!

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