The then Financial Services Authority had rated products sold by Keydata as ‘inherently high-risk’ and noted a “significant probability of… high potential relative loss” two years before the distributor collapsed at an estimated cost of £260m for clients, FTAdviser can reveal.
According to documents obtained via a freedom of information request by a regulatory lawyer working with IFAs and Keydata victims, the regulator placed traded life policy investments - of which it cited Keydata products including the ‘secure income bond plan’ - on its Product Risk Framework in 2007.
The documents reveal the FSA’s risk assessment group concluded in April 2008 that TLPIs were inherently high risk with“a significant probability of the risks…crystallising with high potential relative loss per consumer”. The products were given a risk rating of 8 out of 10.
A spokesperson for the regulator, now the Financial Conduct Authority, said the risk framework covered every main product in the market, with each assessment made of up of a score for performance, liquidity and complexity and an overall rating given from 0-10, with 10 the riskiest.
The regulator took no action prior to Keydata’s eventual collapse as it argued “few providers” were selling TLPIs and also concluded “aggregate uptake of the product is low…resulting in low aggregate impact at present”.
The FSA noted the products were “not suitable for the novice investor” and that they were “not just available to sophisticated investors”, but it concluded the “risk levels [are] not sufficient to justify thematic action”.
In the 2008 PRF entry, the FSA assessed that the overall risk to the retail market - that is the ‘systemic risk’ posed by the products - as “medium low”, due to the perceived low volumes of retail sales.
Keydata was placed into administration on 8 June 2009. The crisis has affected roughly 30,000 clients who had placed £449m in the firm’s Lifemark traded life policy products and SLS structured products. The Financial Services Compensation Scheme estimates consumer losses at £260m.
In 2012 the FSA issued guidance labelling TLPIs as “toxic” which stated they were unsuitable for the vast majority of retail investors.
Another 2008 document obtained via the FOI requiest reveals the regulator had considered putting out communications via the financial adviser newsletters about the complexity of the products and related suitability issues, as well as raising awareness via the consumer website.
It decided not to take any such action as it concluded this was “certainly not a priority at present”.
An IFA involved with Keydata said: “If the FSA had issued any kind of statement expressing concern about the products, then I would not have recommended them.”
Peter Hilton, a Keydata victim, added: “The FSA was aware that these sorts of investments could be marketed as very attractive to risk averse investors. It was aware of this possibility when, in 2008, I signed my cheque to invest in a product presented by Keydata.
“In common with thousands of other similarly risk averse investors I feel very badly let down by the regulator. They were aware of the problem, could have done something about it, but did nothing.”
A FCA spokesman said: “Since 2009, we have placed increased focus higher in the chain (i.e. at the design phase of products) and on identifying these problems before consumer detriment occurs.
“This new regulatory focus has led to greater involvement by the FCA in particular products where detriment is foreseeable. In such cases we are now more willing to make public statements warning the market of our concerns, rather than relying on firms to make the right decisions on their own.”
In its covering email to one of the FOI responses, seen by FTAdviser, the regulator cited potential impact on innovation as a reason for not stepping in sooner.
The FCA said: “Historically, the FCA’s approach was to allow provider firms the space to develop products and to focus our attention on the disclosure and sales elements of transactions.
“In light of the more recent emergence of a series of mis-selling problems, including in relation to TLPIs, where this regulatory focus on distributor firms to ensure good customer outcomes proved insufficient, we have changed our approach.”
The documents additionally raise questions as to whether advisers should be held broadly accountable for the Keydata losses to consumers, despite the ongoing legal action launched by the FSCS in 2011 against hundreds of advisers.
According to the file, the FSA visited 11 IFA firms in 2007 to review how they were selling Keydata Lifemark investments.
FTAdviser has seen a 2010 email from Rebecca Irving, then lead investigator on Keydata, to an IFA involved which stated it “would not be reasonable for the FSA to extrapolate from this small sample that all IFAs were misselling Keydata products”.
It added it would be “even less reasonable for us to have taken the view that Keydata’s products were generally unsuitable for retail investors on the basis that a few IFAs were not paying adequate attention to their regulatory responsibilities.”
The lawyer behind the revelations believes the PRF team “may have seriously underestimated the volume of sales/promotions” of TLPIs because the PRF entry did not include Keydata or other well known firms in its list of known distributors, despite naming the products.
The lawyer added that the reason for not intervening was “weak” and contradicted by the responses to other risky products in the retail market such as structured products.
Additional reporting by Ashley Wassall
