Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/new-model-adviser/article/a343909
FSA forced Keydata into administration over contingency fund for tax dispute
by Iain Martin, Charlie Parker on Jun 09, 2009 at 17:00
The Financial Services Authority pushed Keydata Investments Services into insolvency after forcing it to set aside millions to cover potential legal claims from investors relating to a tax dispute with HMRC.
The management of the firm is set to argue that the dispute could have been resolved if the regulator had not intervened.
The dispute relates to an income-based structured product, the Defined Income Plan, which was issued by the firm in December 2005. The product was sold as eligible for inclusion in an ISA. The product hit problems quickly after accountancy firm KPMG sent a legal letter to Keydata complaining that its name was used in marketing to provide reassurance that the financial modelling was robust. The product subsequently failed to successfully gain a listing on the Luxembourg stock exchange. The listing was necessary if it was to be eligible for inclusion within an ISA.
Sources close to Keydata have told Citywire that the group began negotiations with HMRC with the intention of covering the cost of the tax bill that would have been incurred by these ISA investors. The cost was believed to be estimated by Keydata to be in the region of £700,000.
However, in recent weeks the FSA is said to have intervened to insist that Keydata set aside a contingency - thought to be in the region of £4 million to £5 million - to cover the costs of potential legal action from investors who had incurred the tax charge. This surprised Keydata which believed that it was poised to eliminate the legal risk.
It is understood that the cost of the contingency fund demanded by the FSA was such that it rendered the firm insolvent.
The product that triggered the problem generated some concern from the intermediary community at the time of its launch over its claim of delivering 7% income at a time when rates were low and fears arising from the aftermath of precipice bonds lingered in advisers' minds.
The product used traded US life policies to generate the income. Assets were invested into bonds that should have been listed on the Luxembourg Stock Exchange but this process broke down triggering the problem.
Management of the firm are set to pursue the matter in the courts but rival bidders are already emerging to take the firm off the administrator' PriceWaterhouseCoopers, hands. Jubilee Investment Services has thrown its hat into the ring although Citywire understands others are likely to follow in coming days.
Markets
News sponsored by:
Today's top headlines
- Ofqual criticises CII level four diploma over gaps and easy questions
- FSA: Platforms can't reward IFAs for assets after RDR
- SimplyBiz's Ken Davy to launch restricted national
- FSA warns over advisers failing to consider cost of fund switches
- Concept hopes to fill client knowledge gap with ISA handbook
More about this article:
More from us
- Shepherds Select scandal: the fallout
- Asset allocator: Life settlements
- Wealth managers remain sceptical on life settlement funds
7 comments so far. Why not have your say?
Paul Bruton
Jun 09, 2009 at 14:47
Dear Iain,
It is highly unlikely that it is Keydata's involvement in Traded Life Settlements that has caused the FSA to have an interest in them.
I am Managing Director of Opus Life Assets PLC which offers Debentures under a prospectus approved by the UK FSA which then invests in portfolios of US life Settlements.
During the approval process the FSA held a Board meeting regarding the asset and our product offering in particular and had no concerns.
regards
Paul Bruton
report thisPhil Castle
Jun 09, 2009 at 16:23
This article seems to have been overtaken by events (16.22) as there are artciles appearing intimating it was a legal error which has resulted in a hefty HMRC tax liability.
The damage the speculation of the last two days has caused due to the lack of swift information and clarity from the FSA and PWC may in fact have unfairly damaged other businesses.
Can the FSA PLEASE at least give more facts than those on their website.
report thisRichard Brydon
Jun 09, 2009 at 17:52
I have two clients in the Defined Income Plan referred to. On my client reviews earlier this year, these products provided the only light in an otherwise very dark tunnel. Indeed, I was offering other clients the latest Keydata product recently as everything appeared to be fine and I certainly had no reason to suspect that anything was awry..
Today I have contacted my clients again but, I could offer no reason as to the firms demise or what the prospects were for getting their money back.
Surely this mess could and should have been forseen by the FSA, especially allowing the marketing of the latest Defined Income Plan 2009 version.
All this bad news has affected every adviser and investor alike. Investors need confidence and this event has once again put a stop to that prospect.
report thisTony Hill
Jun 09, 2009 at 18:34
Good old FSA in with both feet again.
report thisBrian Hubbard
Jun 09, 2009 at 20:00
I sincerely hope there is more to this than yet another government department woefully underestimating the intangible costs of its own knee jerk reactions. Why are the FSA convinced that every client will always sue for the highest possible outcome. The high majority of clients simply don't, and in the main only those that are prompted to do so (by the FSA!), do. At a time when the whole financial industry needs some stability, this intervention by the FSA could not have come at a worse time.
report thisPhil Castle
Jun 09, 2009 at 20:43
Please do NOT change the original article and leave comments based on it when overwriting your new article to update it. I note teh article is now dated 17.00 hours, but both my comments (16.23) and that of Paul Burton (14.47) related to your previous editotial.
Commenting on your new article, it will be interesting to see why Keydata arrived at a potential liability of £700k and the FSA at 5 Million.
report thisMark Ring
Jun 10, 2009 at 10:21
Your article says that the process for listing on the Luxembourg Stock Exchange broke down, but the key features for the last tranche of the DIP states that the investment will be "a bond denominated in sterling and listed on the Luxembourg stock exchange, and will qualify for ISA status".
Presumably, from what has been stated thus far,this is factually incorrect on both counts ?
report thisleave a comment
Please sign in here or register here to comment. It is free to register and only takes a minute or two.