Payouts bombshell for Keydata victims

By RICHARD DYSON
Updated:

 

In what is thought to be the first case of its kind, Britain's investor safety scheme has failed to pay out to everyone who lost money through a major authorised business linked to fraud.

Richard Guest

Out of pocket: Keydata victim Richard Guest

The Financial Services Compensation Scheme - the supposed safety net for investors if regulated businesses fail - has confirmed that it will not pay compensation to many savers who put money into Keydata savings plans.

The FSCS's decision, which emerged late last week, has stunned the investment industry. Apart from causing anguish to those directly involved, it is another blow to investor confidence and an embarrassment to the Financial Services Authority.

The Keydata scandal broke last June when the firm was forced into administration. Most of the time Keydata had merely been the administrator for savings plans, often issued by big banks. In these instances, savers' money is safe.

But in 30,000 cases Keydata had provided the investments itself. These were primarily five-year bonds offering high, fixed returns in the form of income or growth and supposedly low risk.

Keydata took savers' money and entrusted most to two Luxembourg businesses - SLS and Lifemark - to invest. SLS misappropriated the money and the Serious Fraud Office is investigating.

Lifemark mismanaged the money and a provisional liquidator has been appointed. Losses in both cases are unquantified, but the assets may prove worthless.

In November, the FSCS indicated that it would compensate savers who had invested via an Isa. But non-Isa investors were told they had to apply individually for FSCS compensation. The FSCS's decisions are now trickling out - and some or all non-Isa savers' claims are being rejected.

The reason is a legal technicality. James Derbyshire, FSCS's senior legal counsel, says: 'We have to assess claims against failed firms on a legal liability basis.'

In other words, if the liability for the loss cannot be pinned satisfactorily on Keydata itself, the FSCS is not paying. In the Isa cases, there is a liability, it seems, while in non-Isa cases the FSCS cannot prove one.

The news is a bombshell for the advisers who sold the bonds. Many now fear litigation. Horrified investors are using websites to vent their anger.

It is estimated that 1,900 investors have non-Isa plans worth £50 million linked to SLS. The numbers concerning Lifemark are thought to be far bigger.

Investors talk of 'disbelief', 'anxiety' and an 'overwhelming sense of unfairness' as they wait for their individual FSCS responses.

Some have put the majority of their pension funds into these plans. Others were counting on the income for mortgage repayments. Many have been contacting their MPs and urging them to demand answers from the FSA.

Richard and Patricia Guest are among the many worried savers, having invested £25,000 in one of the SLS-linked Keydata plans in 2005.

The investment was not through an Isa. This means the return of their capital, plus the £11,000 'return' they were promised after five years, is in jeopardy. The couple, who live near Nottingham, applied to the FSCS for compensation in January. They have not had a response.

'We await the outcome with trepidation,' says Richard, 63, a former electrical engineer. He is aware that similar, non-Isa cases have already been rejected by the FSCS.

'We are amateur investors who used a reputable financial adviser to invest the proceeds from my redundancy and pension lump sum,' he says. 'Both being retired, we cannot afford to lose this money.'

The shock waves are spreading

As some unlucky investors learn that they will not be compensated for their Keydata losses, the repercussions are being felt through the financial adviser industry and beyond.

More than 8,000 financial advisers - reassured by the fact that Keydata was authorised and regulated by the FSA - sold Keydata bonds.

The bigger firms implicated include adviser AWD Chase de Vere, accountant and adviser PKF and Norwich & Peterborough Building Society. These reputable businesses will face fury and possibly litigation from customers.

One angry executive described FSA's failure to police Keydata as 'abominable, unbelievable and unforgivable'.

Chris Cummings of adviser trade body the Association of Independent Financial Advisers says: 'The FSA failed to mind the shop.'

Warning signs

Keydata was authorised by the FSA in 2001 and regulated and supervised by it until the firm collapsed last year. There were signs of trouble all along the way, which the FSA seemingly ignored. In 2005, Keydata launched the investments at the heart of the scandal, such as the ones in which Richard and Patricia Guest invested.

Keydata's leaflet referred to HSBC and KPMG, implying that these respectable organisations 'endorsed' the investment. Both firms complained about these references and wrote to the FSA.

But the watchdog failed to halt the sale of these and successive Keydata plans, which are among those triggering losses not covered by the Financial Services Compensation Scheme.

The FSA declined to comment.

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