The Investment Management Association has called for the FSA to launch an inquiry into advisers who recommended Keydata and Lifemark products.
Director of wholesale Guy Sears says firms that missold Keydata products are sidestepping their liability because the FSCS has paid compensation directly to investors.
He says: “There should be a proper inquiry into what advice distributors gave. They are entitled to a fair process but an inquiry needs to happen to establish exactly where the problems arose and where the blame lies.”
Sears says the FSCS has acted as a first point of call for many Keydata investors rather than a last resort for investors who are unable to secure compensation from their adviser.
He says: “What I find strange in the case of Keydata is that clients have been paid by the FSCS but complaints have not necessarily been raised with the initial adviser. Normally, a complaint is raised with the initial adviser firm, it is investigated, and if necessary they pay compensation. But here we have a situation where the scheme has paid out before it has been decided whether or not the system should pay. I wonder about the kind of behaviour this engenders in firms.”
In January, the FSCS announced a £326m interim levy, mainly to cover the £247m cost of compensation for Keydata investors. Fund management firms had to pay £233m towards the levy while advisers paid £93m.
In February, the IMA revealed it was considering launching a judicial review on behalf of its members to challenge the FSCS levy but, two months later, decided against the move.
Sears says the IMA took this decision because it did not want to stand in the way of investors getting compensation. He says: “The Keydata situation was not of fund managers’ making and yet fund managers ended up paying £233m out of the total £247m for claims against Keydata and Lifemark.
“Clearly, we want money to come back to our members but ultimately it is not about money, it is about investors. This is partly why there was no judicial review. The last thing we would have wanted was to prevent investors losing or delaying the compensation that was owed to them.”
But despite dropping plans for a judicial review, Sears believes it is important that the structure and funding of the FSCS are reviewed.
He would like to see a compensation scheme that better reflects the risk profile of firms paying into the scheme. He is also keen for a system akin to the FOS’s wider implications’ process, where similar complaints on a large scale are referred to the FSA to investigate whether further regulatory action is needed.
Sears adds any reform will need to take into account the £18bn the Treasury loaned to the FSCS to cover the cost of winding down failed banks such as Bradford & Bingley and Kaupthing Singer & Friedlander in 2008.
He says: “The hangover from all of this is the banking loan. That loan will need to be repaid or refinanced, and the FSCS will have the right to call for it as an additional levy.
“I do not think the Treasury would want to trigger another levy on the industry but the fact is that we have a compensation scheme which owes our Government £18bn.”
The IMA is currently understood to be in talks with Lifemark administrator KPMG Luxemburg, together with the FSCS, to provide a loan facility to Lifemark of at least £18m to meet the premium payments and cover operating costs of the life settlements for 2011.
Sears would not be drawn on how those talks are progressing. He says: “We have a really good working relationship with the FSCS and we have always wanted to ensure the best outcome in terms of the Lifemark settlements.
“Everybody is focused on whether or not we would put money in but we only need to put money in if it is consistent with running the assets well. In any way we can assist the FSCS we will do but I cannot say any more than that.”