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Uninsured advisers could become lead cases in Keydata legal battle

Adviser firms without insurance or legal representation could be selected as lead case defendants in the Financial Services Compensation Scheme’s legal battle against advisers under radical proposals being drawn up by the FSCS’s lawyers.

Legal experts warn this could see firms racking up legal bills worth hundreds of thousands of pounds which could force them into administration.

The FSCS has settled with five of the six original lead defendants selected in its long-running battle to recoup up to £75m out of around £400m paid out in Keydata compensation.

In March FSCS lawyers Herbert Smith Freehills delayed a case management conference at which the selection of new lead defendants was to be discussed.

The conference has now been rescheduled for 16 May.

In a letter to advice firms, seen by Money Marketing, HSF says it will invite the court to make the following orders at the conference: that each defendant with claims worth over £150,000 be a potential lead defendant, and to remove the requirement that lead defendants have insurance and legal representation.

The letter says: “It is the FSCS’s view that the use of lead defendants represents the most appropriate way to advance the proceedings and that, given the significant number of settlements, a larger pool of potential lead defendants will be necessary.”

Money Marketing understands there are 74 firms in the pool with claims worth more than £150,000. 

DWF Fishburns partner Harriet Quiney says the proposals show the FSCS “is getting desperate”.

She says: “This could capture small firms which have sold just one or two products.

“The concern is that without insurance, a firm will have to fund their own legal representation – which is likely to cost around £200,000 or more – or represent themselves. In a case of this complexity, a firm representing itself would be a nightmare.

“The legal bill could easily cost more than the claim against the firm, and could force firms into bankruptcy.”

4 Pump Court barrister Peter Hamilton says: “Firms cannot be expected to represent themselves in complex cases. It would be inappropriate for such a firm to be a lead defendant and this could lead to injustices.

“Paying for legal costs without insurance could also push firms over the edge financially, which would force the FSCS to look for yet another lead defendant. There is an argument to say the FSCS has come to the end of the road with this litigation.”

A spokeswoman for the FSCS says: “The FSCS is committed to pursuing recoveries where it is reasonably possible and cost effective to do so.

“This delivers significant benefits for levy payers and helps to offset the costs of compensation. We are committed to pursuing defendants in the Keydata proceedings.

“At the case management conference on 16 May, the FSCS will be inviting the court to expand the criteria for the selection of potential lead case defendants, and to list as potential LCDs defendants who have total claims against them exceeding £150,000.

“To determine whether a defendant should be an LCD, the court is likely to consider whether the defendant has sufficient means to fund the defence costs of the proceedings.”

HSF declined to comment.


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Nick Pilkington 12th May 2014 at 12:13 pm

    It would be interesting to have an update on how much the FSCS has spent on recovery costs and how much it has actually recovered.
    Also will forcing firms into bankruptcy where costs of compensation will be picked up by the remaining firms be an appropriate way forward?

  2. Stephen Harney 12th May 2014 at 12:29 pm

    Perhaps the leading PI insurers ought to be approached to fund this. They have a huge vested interest in this because the wrong outcome would set a precedent. The reason that these firms would be targeted is probably that they would be unable to afford a proper defence.

  3. Of course, all the firms with claims against them could simply pay the liabilities due, saving themselves all the stress and saving the FSCS and therefore all other advisers, including those who did not sell Key Data products, who have to fund the FSCS. The liabilities should be the sums found against them for their cases less the proportionate compensation secured by others in the mix. Sadly, the sums involved could still be significantly less than the costs in defending the case – even if winning against the FSCS – and that is not assured either.

    No insurance? Professional Indemnity was and remains an obligation to practice so it should only affect redundant advisory firms/advisers which didn’t secure run-off cover…. and the claims’ possibility will have been advised to insurers as soon as the issue per client arose…. of course, excesses must still be found.

  4. Is Legal Aid an option? If so what of the recent case where the Judge threw it out because the defendants couldn’t get legal aid representation?
    This whole thing looks like generating into an ever bigger mess than it started out.

    In view of the assumed cost benefit analysis, the possibility of firms going (or declaring themselves) insolvent will there ever be any sense at the FSCS. Herbert Smith don’t give a toss as they are raking it in. One wonders why the FSCS has made an official complaint against them. If they were giving their client sensible and impartial advice they may well have advised them to drop the case before costs got even more ridiculous and the likelihood of recoveries/cost ratio degenerating into farce.

    Isn’t this precisely the sort of thing that gives lawyers a bad name? John Grisham would have a field day!

  5. @Philip – PI providers refused to renew cover for any sales of Keydata Life settlement plans with no notice whatsoever and with a capital adequacy requirement of only £10k, any small firm would have to have provided incraesed capital adequacy immediately to the level of the potential claim, whether clients complained or not about the advice once FSCS and HSF started to target ALL firms who’d advised clients to use Keydata Life Settlement plans, or had it’s permissions removed for failure to meet capital aqequacy, despite no upheld complainst or due process.

    It is interesting to hear that were this a CRIMINAL case and not a civil case, it could well be kicked out by the court due to no adequate representation, so once again, we are treated worse than criminals (alledged, not proven)

    see MM article

  6. @Philip Milton

    Philip is this case I’m afraid you’re taking out of your ear.

    1. You have automatically assumed that all the advisers were culpable. Some may in fact have been perfectly compliant. Unfortunately proving that in court would probably cost them more than the compensation. And of course the law is a lottery and generally goes to those with the fattest wallets. So the dice are loaded from the outset.

    2. With regard to PII I don’t think you are in the real world. Surely you know the first rule of insurance – ‘We’ll take your money and do our very best not to pay out on a claim’.

    Well for many that is precisely the case. Many insurers had a get out if the loss was occasioned by a criminal act – and that is what some of them indeed are claiming – and indeed what was the case. If you recall the elusive and presumed dead Mr Elias did a runner with a huge wodge of the funds.

  7. @Philip Milton, please comment on areas that you know about, as it seems, that you really do not know what happened with Keydata but are quite happy to stick the boot in. You are what is wrong with Financial Advisers, you want all the cake and even the crumbs!

  8. Philip Milton 12th May 2014 at 2:18 pm

    Sadly I agree with Harry (apart form talking from one’s ear…). After having just concluded a wholly unrelated legal property battle which has gone-on for over six years, equitable outcomes, the law, costs and compensation are frequently wholly unrelated. Easy said I know but feelings of unjust outcomes have to be sidelined for practical (financial) conclusions sadly and efforts concentrated on more constructive (and unrelated) ways of regaining those losses.

    Insurance too, yes – insurers like to wriggle-out of liability from point of first advice of likely claim and so on. However, the FSCS makes a judgement and like it or lump it, we are stuck with it. Whether it should have compensated some people is almost not a matter now – it has gone on too far.

    If the FSCS shouldn’t have compensated anyone as the advice was compliant, then who at FSCS is culpable over that?

    Thus, advisers, insurers and FSCS should consider a suitable financial compromise on an individual basis as the optimum outcome however unpalatable for any adviser to pay-out when he knew that he did everything right according to the rules at the time, if that was the case. If the adviser doesn’t want to do that then yes, the costs of the claim could be immense but he’d only have himself to blame for embarking upon that route. Any unrelated campaign against administrators, custodians or whoever are unrelated to that and perhaps that’s a job for a no-win, no fee class action with ATE against other culpable parties to try to reclaim what may be paid-out to the FSCS.

  9. Magnanimous of you Philip.

    However the matter of the cost/benefit has been overlooked. If the FSCS wouldn’t have chosen the most expensive law firm in the UK, if PI insures and if that law firm would have acted with some integrity, if robust action against administrators, trustees and the managers of Key data was taken and if the regulator at the time was brought to account and if my grandmother would have had a beard – everything might have turned out differently.

    As you rightly say we are where we are and the whole sorry saga is due to run for quite some time yet. Also what you haven’t factored is that some advisers have already made significant offers to settle (admittedly less than is claimed) but have had the offer contemptuously rejected. One would have thought that ‘a bird in the hand….’

    Another example pointing to the less than logical and commercial attitude of the litigants in this case.

  10. Philip Milton 12th May 2014 at 3:33 pm

    I do have sympathy with the situation. No we never advised Key Data as the schemes were always too opaque anyway but being polite there appears to have been negligence and mischief afoot, let alone the underlying problems of the products. Those acting to recover funds haven’t done so effectively either, making the whole situation worse and compensating investors far to soon when it wasn’t even proven in individual cases if there was no advisory case to answer. If legal action ensues, make sure that offers are made as Part 36 offers so that later if an award of comparable or lesser sum is made, all subsequent costs can be reclaimed by the ‘you’ the loser and usually on an indemnity basis. It also means that it shows you mean business and could wrong-foot the FSCS if later it is shown they failed to act reasonably and rationally.

  11. The reason is pretty obvious.

    Take on some little guy who can’t defend himself and set a precedent that you can then use against others.

    The law of the playground bully.

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