FCA's watchdog criticises regulator in Keydata saga

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FCA's watchdog criticises regulator in Keydata saga

The City watchdog has been told to compensate several people after it was criticised for its inadequate supervision of failed investment firm Keydata and for its complaints handling.

In a number of separate decisions, the Complaints Commissioner lambasted the Financial Conduct Authority, and its predecessor the Financial Services Authority, over its oversight, supervision and regulation of Keydata Investment Services.

The FCA has acknowledged the handling of the complaints was not good enough and said it is liaising with the commissioner over improvements.

The collapse of Keydata, whose products were sold to retail investors through independent financial advisers, led to £330m being paid out by the Financial Services Compensation Scheme since 2009.

'Systematic improvement' needed

In each decision, the commissioner Amerdeep Somal said the FCA’s complaint response lacked the “detailed, open reflection” about its performance that complainants expected after such a long wait, especially given that Keydata was now dissolved and all enforcement proceedings were concluded.

Somal added: “I consider that the complaint response underplays the nature and impact of the inadequacy of the FSA’s supervision of Keydata and delayed regulatory action.”

In each case Somal said the FCA should issue an apology “at the highest level” for the inadequacies identified in the FSA’s supervision of Keydata.

Somal stated: “The FSA’s inactions and inadequate supervision [...] together with delays and poor customer service in its FCA’s complaint handling [...] have clearly contributed significantly to a very high level of distress or inconvenience experienced by you and other Keydata complainants.

She added: “These are clearly exceptional circumstances making a higher payment for distress and inconvenience both appropriate and proportionate.”

Somal put the FCA on notice, saying she considered making a recommendation about the need for a “systematic improvement” in the FCA’s complaints function but said “the FCA is well aware of this need and is actively taking steps to address this”.

She said: "I have therefore decided to give the FCA a further period to demonstrate that this is being delivered through operational improvements."

Somal also said that the FCA should offer higher ex gratia payments for distress and inconvenience.

Keydata collapse

Four people complained to the commissioner about the regulator’s negligence and failure to act when it became aware of misgivings about Keydata and therefore wanted to claim compensation for their investment losses.

While the FCA had offered the complainants ex-gratia payments, this was not considered enough.

One complainant believed that the FSA had “failed in their role to protect the interests of consumers; failed in their authorisation of Keydata; failed in their regulation of Keydata and failed to warn consumers of the dangers in investing with Keydata”.

Keydata Investment Services designed and sold life settlement policy-based investment products to retail investors through independent financial advisers, before it collapsed in 2009.

Products were underpinned by investments in bonds issued by Luxembourg vehicles SLS Capital and Lifemark.

From December 2005 to June 2009, more than 37,000 investors purchased the products, investing more than £475m.

Much of this money was later paid out in compensation to investors by industry funded lifeboat scheme the Financial Services Compensation Scheme.

The FCA would go on to ban Keydata's chief executive Steward Ford and fine him £76m - the largest fine given to an individual.

Somal noted that the complainants had to wait a long time for their complaints to be resolved following a referral and delays in the FCA’s complaints investigation.

All four complaints were reactivated in January 2019 after the Upper Tribunal upheld the FCA's decision to fine and ban Ford.

FCA response

In its reponses, the regulator said it expected the recommendations made, with the exception of the level of payment for distress and inconvenience.

The FCA stated: “We acknowledge that the service provided during the handling and investigation of this complaint was not good enough and the complainant had to wait longer than they should have to receive our response.

"We have been regularly liaising with the commissioner to keep her updated on the improvements being made and will continue to do so."

While the regulator did not agree with the levels of compensation set by the commissioner it was willing to increase the amount of compensation it originally offered.

Separately, the chairman of the FCA has written to the complainants to apologise for the errors made in the supervision of Keydata, the delay in commencing effective supervisory and enforcement action, and for the level of service provided during the investigation of this complaint.

amy.austin@ft.com

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