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The Keydata saga was further complicated this week as a row broke out between Norwich & Peterborough and the FOS over the sales of Keydata plans through the building society.
FOS' preliminary ruling states flaws in the building society's advice exposed an elderly couple's capital to "an inappropriate level of risk" and it ordered N&P to pay £28,000 compensation.
However, N&P CEO Matthew Bullock hit back, defending his advisers' analysis of Lifemark as "a very stable product".
The building society intends to appeal the FOS ruling and hopes the FSA and Financial Services Compensation Scheme (FSCS) will take over the claim as part of its "wider implications" mandate for cases where many parties are similarly affected.
N&P should not expect thanks from investors for passing the buck. It was obviously having second thoughts about Keydata's trustworthiness as early as 2006 when it wrote to investors with concerns about the clarity of the provider's marketing material.
But Bullock does make an important point: FOS is confusing risk with complexity.
FOS says mis-selling occurred because it is "unlikely" the couple would have been willing to accept the risks inherent in the Keydata Income Plan at their stage of life.
The "risks" the FOS is talking about - retrospectively - are really only one. The risk of the total failure of the underlying funds, run in this case by Lifemark.
Ultra-cautious UK cash depositors faced exactly the same risk when they put their money in Icesave or Northern Rock accounts.
But you can bet the farm their bank managers didn't mention that risk to them, because like with Luxembourg-listed Lifemark, no-one expected such large institutions with their strong track records to fail.
The Treasury Select Committee has said Northern Rock failed because of its "reckless" business plan, adding the FSA is guilty of a "systematic failure of duty" for not spotting the looming crisis.
In short, banks' deposit accounts are only the safest place to put your money as long as the bank manager knows what he is doing and the regulator is watching to make sure he does.
Lifemark investors are currently at risk of losing their capital, having already lost their coupon payments, because the relationship between Lifemark's long-term value and short-term liquidity needs has been fractured for years by mis-management, uncurbed by the FSA.
Individual cases of mis-selling aside, N&P IFAs could not have known of this risk when they advised customers to buy into the fund.
The fund's administrator, KPMG's Eric Collard, says Lifemark needs between $20m and $30m to stave off the threat of liquidation permanently, which could be paid back with interest when the life-settlement polices mature. This is money which would be available now if Lifemark had been managed properly.
As Bullock says: "Just because you advise somebody and the product fails doesn't mean to say you have mis-sold it."
In the same way just because a company is listed on a reputable stock exchange by an FSA-regulated person apparently doesn't mean it is protected from failure.
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| Comment | FOS is confusing risk with complexity in Keydata saga |
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Stop arbitrary judgements
Many years ago I worked for a firm called Noble Lowndes (NL), who were then considered to be one of the leading Advisory companies. Within the Group we had a firm of actuaries. A special product was devised between the management of NL and an insurance company, UKPI. UKPI had a very good reputation at the time. In addition our actuaries had given UKPI a clean bill of health. With 3 weeks of the launch of the product UKPI had to be rescued by Friends Provident. It would have been impossible for the advisers within NL to have foreseen this collapse, notwithstanding the high level of in-house competence available, in just the same way that advisers in 2008 could not have foreseen the collapse of Lehman's and Lifemark. If it is contended that advisers should have been in a position to foresee the collapse one would then have to seriously question the competence of both the Bank of England and the FSA - a process that is being fastidiously avoided. Matthew Bullock is absolutely right when he demands that the regulators judge matters on reality. What is it reasonable for an adviser and/or his firm to know. By judging on false criteria the regulators undermine the quality of the market. If clients believe they can claim through retrospective knowledge, advisers will become increasingly conservative in their recommendations, and arguably, cease to provide anything approaching best advice. Real life doesn’t go “by the book” so there has to be some intelligence exhibited by clients, advisers and regulators. Based on experience, it is very difficult to know what criteria the FOS use for their judgements. Contrary to what they believe, arbitrary rulings do not improve the image of the market.
Posted by: Glen McKeown
Regulator
What is the point of having an regulator and indeed paying them, if you cannot then rely on them for due diligence. Being authorised and regulated by the FSA should mean that a firm or provider is 'sound'! Only then does is all make sense.
Posted by: Karen Malin
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N & P
Risk v Complexity I have to disagree with you about risk. These products are risky, Life settlements are risky. Paste and click and read:- http://www.insurancejournal.com/magazines/west/2005/05/23/features/56156.htm There is no "income" stream from these they have to be paid until death of holder a risk. And a monthly drain on the funds. Then the product holder has to be paid "income" if that is what they wanted from new money introduced to the scheme. And then all the very large fees expenses and other "costs" have to be borne by the scheme in addition. not to mention the lax regulation of this asset class (if any at all). Then there is the real scandal in this that so called IFAs were "encouraged" by their employer to "advise" nearly all of clients funds be used to buy just one product one plan one provider. That is not investing. The client should have been offered a portfolio of assets designed to meet their needs and risk profiles spreading their money over several providers and asset classes.
Posted by: John whipple