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The pursuit by the FSCS and FSA of advisers who recommended Keydata products looks set to create a domino effect that will cascade far and wide.
The FSA has proposed a ban on traded life policy investments (TLPIs), arguing the products “provide no benefit to investors”.
This total censure comes hot on the heels of a decision by the FSCS to recover some of the £327m it paid out in the highest profile failure of the TLPI market Keydata, by pursuing through the courts advisers who recommended it.
Emotions are running high. Time then for a sober reflection on what the two decisions mean. In a nutshell, it is very likely all advisers will pay a financial price for TLPIs’ troubled existence in the market place.
The FSCS’ pursuit of advisers it believes mis-sold Keydata is now a legal matter. Herbert Smith, the lawyers acting on behalf of the FSCS, undoubtedly hope many IFAs will decide it is quicker, easier and cheaper to settle out of court.
Firms which sold low levels of Keydata investments can take this route, via their professional indemnity insurance (PII) or out of their profits. Advisers which sold more will rely heavier on their PII, which will be where the problems start.
As early as last September, I wrote advisers face bankruptcy because a common exclusion in PI insurance is cover for failed firms. Keydata has been in this category since the FSA dumped it into administration in June 2009.
If PII providers manage to play this exclusion – and there is some argument for the FSCS claim being a civil liability claim which may prevent this – advisers involved in the action will be left to carry the can.
Firms with PII will pay between £5,000 and £10,000 excess per claim. Without PI insurance, advisers that Herbert Smith successfully prove negligence against will be liable for the total available to investors under the FSCS scheme - up to £48,000 per claim.
Larger firms, networks and nationals have exposure to Keydata running into the millions of pounds. Smaller firms which decided many of its clients were suitable for Keydata will suffer similarly. Many of the 537 businesses on the Herbert Smith hitlist are sole traders. Many would lack the resources to survive such a hit.
Some firms should not be on the list. Where firms can prove they gave suitable advice, Herbert Smith will lose, and the defendant IFA pays nothing. Except the announcement this week from the FSA makes that outcome almost impossible.
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See ya
Would the last IFA to leave the building please switch the light off
Posted by: Last post
Rumour, innuendo and tittle tattle.
“....that Herbert Smith successfully prove negligence against” This is key. Whilst I freely admit I am no legal expert – with reapect neither are you. I would float a couple of points: If the FSA so disparages these products – why didn’t it do so before now? Proving negligence against advisers who only advised a very small and carefully selected few of their clients and then only attributed less than 10% of investible assets may be hard to nail down in court as negligent (but who knows?). If the FSCS fails against an adviser – it will have to pay costs. Will the FSCS peruse an adviser firm to bankruptcy? It could cost them more than they recover. Then of course there are all the other arcane legal points – some may be valid defence. At this stage it is all opinion and proving it one way or the other could prove to be very expensive – perhaps more so for the prosecution than the defendants. There are more twists and turns in this than the Hampton Court Maze and it has more holes than Gruyere cheese. For you – or anyone else to assert anything with conviction or certainty at this stage I would have thought it very unwise. I would say that all the advisers have to treat this with the utmost seriousness and I do agree that in the end for many firms the likely outcome may well be an arbitrated settlement. We shall see as the farrago is played out. As ever Martin Bamford make a valid point. I think it would be fair to say that thus far the whole thing has been poorly handled.
Posted by: Harry Katz
Long way to go............
I tend to agree with Harry, no one can be sure of the outcome, not even the lawyers themselves. DAC Beachcroft, a top 20 international law firm with more than enough muscle to challenge Herbert Smith, has entered the fray and begun an action group of IFA's. In its' press releases, DAC Beachcroft believes the FSCS and FSA face major obstacles in proving negligence. IFA's may have a strong defence based upon causation and foreseeability, in both of which the FSA looks particularly culpable. Oddly, one group of IFA's seems to have been forgotten here, namely those many IFA's who have retired since 2006. Could it really be that those with a long and proud career giving advice without a single complaint who have now retired without run off PII cover will be diminished and have their lives wrecked by an incompetent regulator? Obviously, there's a long long way to go.
Posted by: Sage
Tangled webs
Just because the FSA made the pronouncement (is it attributed?) doesn't make it so. Using skill care and diligence cannot mean knowing more than the collective wisdom of everyone engaged in product design, compliance and regulatory overlook sorry, oversight, auditors, bank trustees etc etc. Much the same argument was made albeit admittedly lost over endowments and the utter cobblers used in calcuclating premiums/sums assured when everyone knew that LAUTRO's rules actually proscribed the use of anything other than their own generic costs thus committing plans to fall short from day one. And as for the legal challenge. As has been said before, is it really that. The best means of defence is attack backed up by a good client file and don't be stunned into submission by "legales" and bluster. If they make a contnetion get them to proove it; in most cases they won't be able to. If advisers have ever just accepted things at face value without more than a modicum of understanding then they are selling and not advising.
Posted by: David
Disgraceful
IFA online should do something useful: rally behind the IFA community, raise public awareness of FSA and FSCS disgraceful steps being taken and lobby parliament. If there is any justice in this world this legal action will fall flat on its face. Why did the FSA take 4 years to conclude its investigations into Keydata? Why did they authorise the HC1 life settlements fund (see Financial Adviser edition dated 8/12/11) only in March with a 200% leverage facility?! Why the U turn only nine months later, by branding life settlements as toxic investments and causing mayhem in the market place?! There is nothing wrong with the asset class; it’s the way that FSA allowed these investments to be poorly managed (Keydata and the like). Had FSA done their job satisfactorily none of this would have happened. Why are they behaving like dictatorial thugs instead of following the principles and ethics that they ask members to abide by? Same old same old, people at the top get away with daylight robbery, people at the bottom get protected and compensated and the ones in the middle get shafted to putting it bluntly! Very poor state of affairs.
Posted by: Mars
Love It
I will be over the moon if my IFA gets hit by this action. Their behaviour towards me concerning my £100,000+ investment in keydata has been despicable.
Posted by: maddy
balance please
two key points to remember, advice is based on what information and literature was available AT THE TIME advice was given. I urge all affected advisers to acquaint themselves with COB rule 2.3, as Keydata were an unconnected regulated firm reliance on the keydata issued literature is sufficient to rely on as the basis of the advice given. Whatever regulators or expensive London lawyers may argue to the contrary with their reliance on the benefit of hindsight. Secondly, companies house website confirms that when a firm is in Administration it places a moratorium on insolvency, ergo as keydata are in administration they are not insolvent!
Posted by: Colin Stratton
TLP Ban??
The FSA have NOT proposed a ban on the sale of TLP's, they are conducting a review which will culminate in the probable ban on MARKETING of TLP's in Unregegulated Funds to the mass retail investor. Why has no reporter got this right yet?
Posted by: simon
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be careful what you wish for
That is rich coming from Bamford who wrote to the FSA demanding this action? Be careful what you wish for Bamford
Posted by: domino