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