Angry advisers demand FSCS justify ‘opaque’ decision making

The FSCS is facing angry calls from both IFAs and investors to make its decision-making process more transparent, after two controversial judgments involving Lifemark-backed Keydata bonds and Lehman Brothers-backed NDF products.

At present, the FSCS must determine which activities have caused investor losses and then assign compensation costs. It has no express duty to consult on how it reaches these decisions or the levy amount.

In the Keydata case, law firm Regulatory Legal, acting for IFAs, called the FSCS decision to class the failed investment firm as an ‘intermediary’ for levy purposes “absurd”, during a judicial review.

At the hearing at Birmingham High Court last week, it also accused the FSCS of failing to listen adequately to industry calls to re-examine its stance during a consultation.

Now a separate case is being considered by Regulatory Legal on behalf of 200 NDF investors who lost money when the structured product provider entered administration in October 2009. It believes a similar judicial review could be brought against the FSCS following its decision not to compensate a total of 2,000 victims of the collapse.

Complainants in both cases are angry at what they say is the “opaque and arbitrary” way in which the FSCS reaches decisions.

Geoff Hartnell, an IFA with clients’ money in Keydata, said: “If Keydata is non-discretionary what do the FSCS call its bridging of Lifemark investors’ income payments between October 2008 and June 2009?

“Keydata was able to pay thousands of people for nine months with no-one knowing the payments were coming from them. That is not the role of an intermediary and could only be done with information coming from Luxembourg [where Lifemark is based].”

In court, FSCS lawyerssaid it “carefully considered” whether Keydata claims arose out of “fund management”. It found “as a matter of fact” no exercise of discretion which could put claims costs within its D1 Fund Management sub-class.

However, despite repeated calls from the IFAs’ solicitors during the review, and earlier requests from AIFA and the Association of Private Client Investment Management Services (APCIMS), the FSCS still failed to disclose the legal or regulatory basis for its decision.

Keydata compensation claims relate to misleading marketing used by the firm to sell its Secure Income Bond and Secure Income Plan products. The FSCS said Keydata marketed the bonds but acted only as “agent for its customers” in purchasing them, an activity in the FSCS’ D2 Investment Intermediation sub-class.

But Anthony Speaight QC, acting for advisers protesting against this classification, said it was “absurd” to describe Keydata as the ‘agent for the customer’ while also admitting they misrepresented its products to these same clients.

He said: “It simply can not be right. The decision made by the defendant was either wrong in law or irrational and should therefore be quashed.”

Meanwhile, NDF investors argue the FSCS made another ‘irrational’ decision when it split the structured product business in two and only compensated half of investors although the two compensation cases are identical.

The FSCS said in September it has carried out “extensive investigations and analysis” into whether customers of structured product providers NDF, DRL or Arc who held ‘Capital at Risk‘ products were eligible for compensation.

Without explaining its methodology, it decided they were not because NDF marketing materials for those products provided “adequate and appropriate warnings” there was a risk to investors’ capital if the organisation backing them (Lehmans) failed.

NDF Investors have complained their case is identical to that of the 1,700 investors in ‘Capital Secure’ products who were granted compensation by the FSCS last year.

One investor, who did not want to be named for fear of jeopardising any future FSCS claim, said: “The wording about counterparty risks in the brochures promoting each product was word-for-word identical. Very, very interestingly the FSCS will not say how they came to this decision and instead are hiding behind the pathetic excuse that they don’t have to give their reasons.”

Structured product failings have already cost the industry £22m in FSCS levies, in addition to a £58m levy for Keydata, Pacific Continental and Square Mile Securities compensation claims.

IFAs vs. FSCS

FSCS Judicial Review: Our summary