Keydata: PI insurer leaves IFA to face FSCS lawyers alone

An IFA who contacted his professional indemnity (PI) insurer to cover Keydata advice redress claims from lawyers for the FSCS has had his application rejected.

Law firm Herbert Smith is pursuing 530 financial firms for a return of the tens of millions of pounds it has paid out in compensation to investors in failed investment firm Keydata - paid for by intermediaries and fund managers in the form of compulsory industry levies.

In a letter to one adviser, who asked not to be identified, the unnamed insurer stated it had investigated Herbert Smith's claim against it and concluded exclusions within the terms and conditions of the PI policy meant it did not cover the negligence action.

The insurer cited exclusions for traded life investments and for claims arising out of an insolvent firm as reasons it would not pay out should the adviser require it.

Keydata has been in administration since June 2009 at the order of the Financial Services Authority (FSA) on the grounds the firm was insolvent. In addition, Herbert Smith is pursuing advisers who recommended Keydata products backed by SLS traded life settlements.

The IFA's PI policy was issued for the period 15 June 2011 to 31st May 2012, with a limit of indemnity of £1.75m for any one claim and in the aggregate, plus costs and expenses.

Even if the PI insurer had accepted the application for cover, the IFA would have had to pay a policy excess of £5,000 per claimant.

However since the insurer has refused the cover, the IFA will be forced to meet any successful claims against it using the firm's reserves or his own money, or face bankruptcy.

The letter from the PI insurer stated: "We have no doubt that these exclusions apply and therefore the claims made by Herbert Smith on behalf of FSCS are not covered.

"It is likely that you may wish to take urgent advice from your solicitors in relation to responding to Herbert Smith letters as, if you have been served with proceedings, the Acknowledgement of Service needs to be filed today."

All advisers who recommended Keydata products to low or medium risk clients who later claimed compensation, face the threat of legal action and crippling repayments to the FSCS.

At the time the FSCS announced it would compensate investors, it blamed investors' losses on misleading marketing material produced by Keydata.