FSA and FSCS step up in their battle against Keydata

The ramifications of Keydata’s fraudulent activity is still being felt today, as the FSCS claim against over 500 IFAs. However, if the FSCS lose, what effect will this have on their reputation?

FSCS claiming against over 500 IFAsIn the middle of 2009 Keydata – a leading provider of structured products – went into administration with PricewaterhouseCoopers.

At the time it had around 85,000 customers and managed around £2.5 billion of funds.

It was understood that Keydata had been selling non-compliant ISAs, incurring a tax liability of £12 million. Unable to pay their liabilities, they were declared insolvent by the FSA.

The ramifications of Keydata’s collapse are still being felt today. The Financial Services Compensation Scheme (FSCS) is currently bringing a claim against over 500 IFAs who had mis-sold Keydata products. The concern now is what will be the consequences of the proceedings.

The court’s decision is likely to have an impact on advisers concerning what due diligence will be required from an IFA before suggesting a product to a customer.

If the courts are in favour of the FSCS and Keydata are deemed to have acted fraudulently, then the need for advisers to investigate the products they sell for signs of fraudulent activity will increase. One of the particular focuses will be whether it is in fact the duty of the IFA to spot any fraudulent activity on the part of the provider.

What will this mean for the market?

According to MoneyMarketing, since the implementation of the RDR, the number of IFAs and tied advisers has fallen by 20% and the number of bank advisers has dropped by 44%.

At Grovelands we have already seen a slight increase in the number of advisers enquiring about becoming a contractor and this could increase with the fear of further claims from the FSCS.

However, it may not be as bleak for advisers as it seems. Also under question is the FSA’s determination of structured products as high risk.

Simon Laird, partner of law firm Reynolds Porter Chamberlain who represents 44 firms in the claims, states: “If the court finds this was the wrong judgement, surely it begs the question whether the regulator has been wrong in its risk description of other products”.

If the FSCS does lose it may severely damage its reputation, with many of its previous decisions sure to come under close scrutiny. It will also bring into question the FSCS’s aggressive and expensive tactic in pursuing these claims and may result in a more passive regulator in the future.

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