FOS upholds two Keydata complaints against IFAs but concludes that compensation should only be paid in one
The Financial Ombudsman Service ("FOS") has provisionally upheld two complaints made by Mr W and Mr and Mrs K against IFAs who recommended that they invest in the Keydata Bonds in 2005. FOS found that the products presented a greater risk than the investors were willing to take. Interestingly, however, compensation has only been offered to Mr and Mrs K.
Keydata products, such as the Keydata Bonds, were invested in "life settlement funds" which buy and sell US life insurance and generate high returns. However, as has been widely reported, in June 2009 Keydata was fast-tracked into administration by the FSA. It subsequently emerged that it was at the centre of a huge fraud and that assets of potentially £103m had been "misappropriated". It was as a result of Keydata's administration that Mr W and Mr and Mrs K stopped receiving interest payments and suffered significant losses on their investments in the Keydata Bonds, which the consumers had understood to be guaranteed.
FOS's provisional decisions in the two cases were that the IFAs should not have recommended the Keydata Bond as suitable because they were inconsistent with the consumers' investment objectives in terms of attitude to risk. In making this decision, FOS referred to "information readily available" to the IFA about the Keydata Bonds in 2005 which pointed to the fact that they were high risk investments. However, notwithstanding its decision on suitability in relation to the advice provided in both cases, FOS concluded that it was not fair and reasonable in the circumstances to make a monetary award of compensation to Mr W. FOS's usual approach on compensation is to put the consumer in the position they would have been in but for the poor advice. However, FOS accepted that the "special feature" of this case was the fact that the misappropriation prevented FOS from assessing what the true value of the investment was and may have represented an intervening event, thus breaking the chain of causation.
However, this "special feature" was common to both cases - so why did FOS' analysis result in different outcomes on compensation? The simple answer seems to be that, although, the advice for the Keydata Bonds was unsuitable, overall, FOS found that the IFA for Mr W gave thoughtful and considered advice in that the other investments recommended to him were suitable. Further, FOS considered that Mr W had had the benefit of legal advice from his solicitor and it was not, therefore, a case where the IFA had complete disregard for the interests of its client. Conversely in relation to Mr and Mrs K, FOS held that the IFA's advice did represent a complete disregard for the interests of its clients given that the IFA had, for example, provided considerable assurance about the Keydata Bond's viability as an alternative to cash deposits despite the investment not offering capital protection. The award made to Mr and Mrs K is also significant in that FOS awarded: (i) the capital invested less withdrawals; and (ii) a return at 4% on the capital sum from the time the funds were invested to 4 November 2008 and 2.5% per year thereafter.
In both cases FOS was mindful of the applicable legal principles of "causation" and "remoteness" which FOS accepted might result in a Court not attributing the loss suffered to the IFAs' advice but to the misappropriation. If the loss had been attributed to the misappropriation, then there would have been no claim against the IFA. This is therefore another example of FOS having the ability to reach a different result to that which a Court might reach on the same facts. Now that the upper limit of a FOS award has reached £150,000, one might expect even wealthy investors to seek recompense through FOS rather than through Court proceedings.