‘Misleading’ Keydata literature flagged up as early as 2005

The Financial Services Compensation Scheme (FSCS) could be forced to pay out to hundreds of investors who lost money in Keydata, not just through ISAs, in light of evidence directors knew as early as 2005 their promotional literature was “misleading” and “inaccurate”.

In a document seen by Professional Adviser and dated 22 November 2005, lawyers Norton Rose tell Keydata’s directors its promotional literature for the Secure Income Bonds (SIB) failed to meet FSA requirements.

Currently, the FSCS needs non-ISA investors to prove Keydata created a civil liability towards them in particular and they are reviewing claims on a “case by case” basis.

But the FSCS could now be forced to accept a case of blanket civil liability against Keydata, because the firm ignored legal advice in respect of misrepresentation in documents used for all SIBs 1-3 investors.

IFA Geoff Hartnell, who has clients’ money caught up in the SIBs, says: “If the Norton Rose letter had got into the public domain at the time the bonds would have had to be withdrawn in November 2005.

“Norton Rose informed Keydata there were problems with the literature. KPMG informed the FSA its name was also being used against activities it wasn’t carrying out.

“But no-one told investors. Every person buying into Keydata investments was relying on information which wasn’t true.”

Law firm Norton Rose, hired by Keydata to assess its brochures’ compliance, gave a damning line-by-line review of material for SIBs 1-3.

Keydata had been using the material to market the products, backed by SLS Bonds, to investors from 26 July 2005 for SIB 1, 19 September for SIB 2, and 7 November for SIB 3.

Norton Rose told Keydata’s directors: “As currently drafted, we think the SIB brochures are not sufficiently compliant with the FSA financial promotion rules and we think the brochures should not be used until certain amendments have been made.”

In just seven pages, Norton Rose warns Keydata directors five times the literature it sent investors is “misleading”, and twice it is “inaccurate”.

At one point in the correspondence marked ‘confidential’ and ‘draft for discussion purposes only’, Norton Rose warns references to the role played by accountancy firm KPMG are “inaccurate and are likely to be considered misleading”.

Other parts of the literature “lack the necessary clarity to comply with the requirements of the FSA’s financial promotion rules”, it says.

All three SIB brochures, under the heading ‘Strong Management’, state: “One of the ‘big four’ accountancy firms KPMG constructed the financial models [in the SIB 1 brochure it continues “used to structure the Bond”]. It also checks the credit ratings of the insurance companies issuing the contracts and monitors the credit rating of the portfolio of investments.”

Norton Rose told Keydata directors: “The use of the word ‘structure’ … could be read as suggesting KPMG plays a wider role developing the SIB than is the case. We think this could be considered to be misleading.”

The law firm added it could “find no evidence” to support claims in the literature KPMG checks and monitors the credit rating of the portfolio of investments.

It says: “We would advise you do not use this section in any future product literature or promotional material.”

But Keydata continued to market the bonds using the literature until 24 November 2005, a further two days after receiving the warning they did not comply with FSA rules.

KPMG also sent Keydata directors a “cease and desist” letter in October 2005 for unauthorised use of the company’s name in promotional literature.

In an e-mail to a Keydata SIB 1 investor dated 7 October 2009, KPMG chairman John Griffith-Jones says the accountants had not been associated “in any way with the services referred”. He says he also told Keydata to inform “all and any third party recipients of the brochure” of KPMG’s non-involvement with the investment.

References to KPMG were eventually deleted from the material for future plans and Keydata informed the FSA about the issue but crucially, existing investors and advisers were not notified of the company’s removal from the marketing literature.

The FSA then began an investigation into Keydata, led by Esra Moitra and Richard Laws from the financial promotion division, but no attempts were made to correct faulty literature in circulation.

Keydata was sent to formal enforcement by the FSA in December 2007. Another two years passed before the regulator applied to have Keydata put into administration for insolvency as a result of a tax liability on 8 June 2009.