A Kent-based financial adviser has secured a discount of more than 99 per cent in an out-of-court settlement with the Financial Services Compensation Scheme over a £64,000 claim relating to Keydata investments.
Financial Escape has paid £400 of the £64,000 lawyers acting on behalf of the FSCS were seeking to recover in relation to compensation paid to clients that invested in Keydata investment funds.
In the advisory group’s financial statements for the year ending 31 March, the accounts said that the payment was made in full and final settlement “without acceptance of any fault or liability on the part of the company, its directors or employees”.
Phil Castle, managing director of the firm, told FTAdviser that the amount being claimed would have effectively put the firm out of business. The results show the company has total capital and reserves of £16,177.
Financial Conduct Authority rules states that limited company advice firms need to have £10,000 held in reserve, with this threshold set to increase to £20,000 at the end of 2015. The regulator can suspend authorisation if reserves drop below this minimum.
The FSCS told FTAdviser that it will take into account various factors including the “financial position of a firm” when looking to make a settlement and that it will only pursue recoveries where it would be “cost-effective”.
It added that it is “confident” that courts will find in its favour “if the matter proceeds to trial”.
A source told FTAdviser that the FCA may have stepped in to arbitrate discussions with the FSCS to help firms in similar situations, as otherwise it is highly likely that a number of firms will fail under the weight of claims.
Financial Escape had 12 clients with a total investment of £120,000. The FSCS only billed the firm for £64,000 in April 2012.
The firm told FTAdviser that clients had complained about Keydata, the underlying life settlements vehicle Lifemark and the regulator’s conduct and that no complaints had been received about the advice process.
Mr Castle said: “The PI insurer refused to register our attempt at notification when we made it to them when Keydata [was] first in trouble over [its] HMRC errors, as none of our clients were complaining about my firm’s advice and still have not.
“The complaints were about Keydata, Lifemark and the FSA’s own failures... the FSCS compensated them based on these errors and then attempted to recover for losses... from other parties, such as my firm, who were agents of the clients and not of the entities who clearly failed.
“Defending a claim in court would have been greater than settling... any small firm will - even if they wanted to stick to their guns - conclude that settling [is] the only logical way to approach things.”
A spokesperson for the FSCS said: “We are pursuing recoveries from firms in connection with the Keydata products and are confident that a court will find in our favour if the matter proceeds to trial.
“However, FSCS must also be pragmatic and commercial in its approach and accordingly, taking account various factors (such as the financial position of a firm) an agreement may be reached for settlement of the claim for less than its full value.
“This does not reflect FSCS’s views of the merits of the claim, but rather its obligation to only pursue recoveries where it would be cost effective.”
In November 2011, Herbert Smith, the law firm acting for the FSCS, launched claims against hundreds of advisers that recommended Keydata.
The Particulars of Claim, seen by FTAdviser, alleged negligent advice, breach of duty of care, mis-statements in that firms made “false statements to raise the profile and suitability of the products”, and breach of statutory duty under Section 150 of the Financial Services and Markets Act 2000.
