RDR-ready IFAs face closure over ‘potential’ liabilities

Hundreds of retail distribution review-ready IFAs involved in legal claims over Keydata sales could be forced out of business over potential liabilities, an adviser has warned.

Phil Castle, managing director of Kent-based Financial Escape, said he had been ordered by the FSA to inform the regulator of a potential breach of capital adequacy requirements as a result of the Financial Services Compensation Scheme’s pursuit of advisers regarding Keydata.

Mr Castle said despite working hard to get ready for the RDR, being just three points short on his level four gap-fill requirements and already fee-based, he could be put out of business over this issue.

He said: “The FSA may have set a precedent with Keydata. It asked the court in 2009 to deem it insolvent and PricewaterhouseCoopers was appointed as administrators because of a potential liability.

“By receiving this letter from Herbert Smith on behalf of the FSCS, if you show you have a ‘potential liability’ whereby you may not be able to meet your capital adequacy requirements, you may be put into a situation where you can no longer trade.

“The FSA can decide to withdraw authorisation for capital adequacy issues alone.

“Allowing for potential costs of either fighting this claim and winning, or the effects of losing and PI excesses, could also breach a firm’s capital adequacy requirements as the potential liability shown on a balance sheet reduces available assets.

“I have already verbally disclosed the issue to the FSA contact centre and am going to disclose in writing as it has requested. The FSA and the FSCS have caused a potential liability at 600 firms, by not fully considering the implications back in 2009 of their actions.”

FSA data at the end of 2011 showed there were roughly 5142 firms authorised to do investment advice. Out of these, the 600 who received Keydata letters represented 6 per cent of all IFA firms.

Mr Castle added that the call centre representative declined to comment on whether this meant all those firms who had received letters would need to do the same.

Blair Cann, senior partner for Hertfordshire-based M Thurlow & Co, which is also on the list of firms pursued by the FSCS as a result of sales by an appointed representative, described this as a “worst-case scenario.”

He said it would be awful for firms to have prepared for the RDR and then be forced to close as a result of the Keydata claims.

He said: “We had one Keydata case from a former appointed represenative. It is with our PI insurer.

“If advisers accept responsibility and if liability is proved against them, which it has not yet been, capital adequacy could be an issue.

“However, one assumes negotiation will be allowed in these cases.”