Treating Customers Fairly?
Posted by robin in Financial Articles Friday September 25, 2009 6:08 pm
“Treating Customers Fairly.” That was the banner under which the FSA launched an initiative last year to improve the professional conduct of financial advisers.
To those advisers who have only ever tried to do right by their clients, it was a little bemusing - a statement of the obvious. The regulator, however, saw the need to enforce a decent soul in financial organisations deemed devoid of one. TCF must now be stamped on processes, literature, training and culture to instil satisfactory client “outcomes”.
Away from the glass towers of Canary Wharf in the streets below, after nine months of exhaustive enquiries Narinder and Vijay Sood are still seeking a satisfactory outcome for an investment gone wrong…
The story begins with a business sale. After decades of hard work and long hours the Soods successfully sold their grocery business in early 2005 and retired. They are debt free and during their working years had never invested in anything more than bank deposits.
Following the conclusion of the sale, Mr Sood recalls being tipped the wink by his accountant, at Doshi & Co. that he could get him 10% interest on his money. It was an attractive rate at a time when bank base was under half that and he placed implicit trust in his accountant. This, in spite of the fact his accountant was not licensed to give investment advice. Also, in 2001, he had reportedly been banned from being a director for 12 years and ordered to repay £2m following the demise of a wine import business. Mr Sood was aware of this history.
The accountant put him in contact with an IFA at Doshi Financial Services Ltd, a company owned and controlled by his wife and trading from the same premises.
The IFA, Mr Valjinder Virdee, duly relieved the Soods of £100,000 from the sale proceeds of their business. The investment presented by the IFA was in a 5-year bond. The “Asset-Backed Securitisation Bond” was to start on 31 March 2005 and end on 31 March 2010. It promised 10% pa income in quarterly instalments and, the Soods believe, but are not totally sure, return of capital at the end of the period.
As novice investors, they did not question the eye-popping interest rate and did not understand the underlying asset-backing. They placed absolute faith in their advisers. Ultimately these bonds were invested in Life Settlements, ergo second-hand US life insurance policies. Unhappily, the issuer was the Luxembourg-based and now notorious (post-Keydata) SLS Capital SA.
It was marketed, say the Soods, by Global Holdings International Ltd, a Gibraltar-based “fund and service provider to financial advisers and wealth creation specialists around the world” announces their website. Their representatives appeared with Mr Virdee at the Soods’ home to help secure the deal.
The Soods account of Mr Virdee’s conduct implies scant regard for the regulatory process required of IFAs for such transactions. A full picture of their circumstances was allegedly not obtained, neither was a risk profile and so on. The only letter they have in their possession from Mr Virdee is the briefest of notes to tell them where in Luxembourg to transfer their money.
They were only ever offered this single investment product, they say, and don’t remember ever seeing a brochure - just “paper photocopies”. Being an offshore investment, commission was not disclosed.
Still the bond worked for a while, so everyone was happy. But then when the balloon went down on SLS Capital SA, the Soods income payments stopped. The net payments amounted to more than £8,000 pa, more than a third of their joint retirement income. They now cover this hole by dipping into their remaining capital.
After the last payment in December 2008, their wild goose chase started. What happened they wanted to know and what can we do about it?
The Soods have been tenacious in their enquiries. They contacted their accountant. They were no longer clients and he didn’t want to know. They spoke to their IFA, Mr Virdee. He was sympathetic but hasn’t been much practical help. He’s also now set up a new business after Doshi Financial Services was wound up in 2006 “upon the petition of” Legal & General.
His new practice G11 Financial Management Ltd includes on its Home Page a tab entitled “Favourite Stocks”. The contents to be found there at time of writing include:
“Everybody has been worried about the financial markets with the news that Northern Rock are in trouble. To be truthful Northern Rock are only in trouble if we think so, and start to withdraw, sell shares. NR is one of the strongest companies in the world. Click on the links below (not included) to get some more information on the way the company is shaped up to face the future. We know some people will be busy buying the NRK shares to capitalise on the down turn in the company.”
And on…they spoke to their contacts at Global Holdings International Ltd. They were initially sympathetic but now no longer take their calls. The Soods spoke to the FSA about a claim against their IFA. They were advised that because his former business had now ceased and he had started a new one, there was no claim against the individual concerned.
The FSA put them on to the Financial Services Compensation Scheme to explore a compensation claim. They understood it as a complaint against the bond itself and informed the Soods it was an offshore investment and so not their problem. They passed on contact details to the Luxembourg regulator.
So they contacted the Luxembourg regulator – the Commission de Surveillance du Secteur Financier. There they discovered SLS was not a regulated entity, so investors are not eligible for compensation anyway – a key point causing the UK’s Financial Services Compensation Scheme to dwell on its decision as to whether to compensate Keydata investors.
They contacted Luxembourg replacement Custodians, Equity Trust. Nothing. They contacted the original Custodians too, MeesPierson Intertrust via their parent, Fortis bank. They even got in contact with the judicial authorities in Luxembourg, “all in vain”.
They contacted PwC’s Luxembourg office, ex-auditors of the now defunct SLS Capital, and coincidentally, appointed administrators in the UK clear up job of the Keydata mess. It’s out of hands now PwC Luxembourg told them.
They emailed BWT Holdings, the Labuan-based holding company of SLS Capital. An operations manager promised to get back to them but hasn’t. They called BWT Holdings Chairman David Elias at their Malaysian tax haven lair of Labuan, to find the line, like the Chairman, was dead. BWT’s London legal representative told them it’s with the judicial authorities in Luxembourg and he can’t discuss it.
Experienced investors will have tut-tutted at the warning signals screaming from the get go and ponder the old cliché that a fool and his money are soon parted. The morality tale may be as old as the hills but the regulator is not there to pass judgment but to provide the greatest protection to those most in need of it. Yet here we find a situation where the Soods appear to have fallen between the cracks in between, in spite of what appear more than reasonable grounds for some form of compensation claim. They have been left alone floundering in a bewildering world of international trustees, agents, custodians and regulators…with little help yet from anyone.
Treating customers fairly? The Soods are left to wonder.
The real reason Keydata failed..?
Posted by robin in Financial Articles Monday June 29, 2009 2:00 pm
Satirical magazine and admirable scourge of the rich and powerful, Private Eye, invariably refers to the Financial Services Authority (FSA) derisively as the Fundamentally Supine Authority.
Post credit crunch, this perception may have passed its sell by date as the chastened UK regulator is reorganised and reinvigorated under the new leadership of Lord Turner.
The recent case of Keydata Investment Services Ltd gives cause to wonder. This regulated investment firm was forced into administration by the FSA on June 8, 2009.
A history of success
On the face of it this seems a highly successful business with a canny knack for giving consumers what they want. The 30-40 suitors vying to buy the business adds credence to this view.
So why didn’t the FSA like this business? And what went wrong?
Well, let’s start with a little history…
Keydata was started in 1997 by Stewart Ford to provide investment information to IFAs. The business really took off in 2001 when Keydata Investment Services (KIS) was established. This business for the most part created and administered structured products for retail investors. Between 75-80% was on behalf of third parties such as RBS, HSBC, Skandia, Blue Sky Asset Management and Morgan Stanley and the balance was their own products.
Structured products have been popular sellers with cautious retail investors as they offer both a return and capital security (up to a point) over a fixed term, typically 5-7 years. A backdrop of bank failures, economic upheaval, and interest rates at a three hundred year low, has prompted nervy investors to pile in. Even after many lost money following the Lehmans failure, where the investment bank acted as market counterparty for a range of structured products.
Such favourable conditions helped KIS increase turnover over 50% in the past two years to £15.7m. Staff numbers increased too to help administer it from 60 in 2006 to 95 in 2008. By the time PwC was appointed it boasted 85,000 investors and £3bn under management with the directors expressing “confidence” in the future outlook for the business.
In spite of this expansion the company had managed to pay off £2.9m long-term debt in the preceding two years. In October 2006 it paid £1.2m of a £1.85m debt to 3i Plc. The £650,000 balance was waived as an inducement to early repayment by the FTSE venture capital firm.
More recently it paid off a final £400,000 to leave the company debt free, not bad in the teeth of a severe recession and at a time when financial services businesses generally are suffering.
As at its latest accounts to 30 September, 2009, prepared by BDO Stoy Hayward, the company had £3.4m cash and current assets exceeded current liabilities by some margin.
FSA pounce on tax trouble
So how does a debt free company with cash in the bank get brought down?
Well, it turns out the FSA was conducting an ongoing investigation into the company and when it discovered it had a tax problem with HMRC, it stepped in.
What triggered their probe and how long it had been going on prior to their taking action is a mystery. It had managed to avoid the obvious banana skin of having used Lehmans as a market counterparty unlike competitors such as NDF and Arc, so was not tainted by its failure.
The tax problem was caused by KIS’s own in-house products. Some appeared to fall foul of the ISA rules reported the FT on June 9. They had not been properly listed on the Luxembourg stock exchange, a core requirement, so did not qualify as tax exempt. SLS Capital, was hired by KIS to arrange this for them. Who screwed up here is unclear but the ultimate HMRC bill lay at KIS’s door.
The total investment sum caught in the debacle has been estimated at £200m. Though Dan Schwarzmann of PwC, the appointed administrator, chose his words carefully when he told the FT Secure Income Bonds 1-3 did not qualify for ISA status, and other plans which “may be impacted” include the Defined Income Plans 1-8, and Secure Income Plan 1-12 and 14.
A Keydata source disputes the total putting it at about between £80-100m and maintains only “a couple of products weren’t listed”. In addition, the tax bill they say was a good deal less than £5m. The company had agreed a “simplified voiding”, whereby bonds are back-listed, and a tax take between £700,000-£2.5m had been agreed.
Given the strong financial position of the company, it would appear to have been able to meet this cost with room to spare. In addition, the directors had allegedly built up an external contingency fund with up to £6m available.
Not good enough said the FSA and it was declared “insolvent”.
“…a product development issue…”
If this doesn’t quite seem to add up, what else might have been the problem?
Well, a good number of KIS’s own structured products were invested in a relatively novel and not uncontroversial asset, a portfolio of American traded life policies aka life settlements. Is the FSA uneasy with these investments for structured products sold often to relatively unsophisticated investors? A comment from the CEO of one of Keydata’s client asset management companies, Blue Sky, in Money Marketing offers an insight:
‘Blue Sky chief executive Chris Taylor said: “This is not a structured products event. This is a product development issue about life settlements. Life settlements never were and aren’t a structured product even when they’re issued by a structured product provider.”’
If Mr Taylor is right, Catalyst Investment Group Ltd is likely to be reviewing their future structured product plans. They too have offered similar life settlement structured products with their Arm Assured Growth and Income Plans.
Suspect sales strategy
A further report on June 18 from Money Marketing disclosed the FSA has long been worried about structured products and that Keydata’s sales relationships with IFAs was ‘at arm’s length and not close enough’.
This was of particular concern in relation to outbound telephone sales practice on complex structured plans linked to traded life policies. The concern was whether customers would really understand what they were buying if they were not sitting down in front of someone.
KIS had evidently aware of this concern and made moves to address it by deploying regional sales staff last October.
“Fat Cat” greed..?
Another question mark surrounds the directors. Comments such as “loss of faith” and “lack of confidence” have surfaced. Although turnover had been going up profits had slumped from £2.4m in 2006 to £988,000 in 2007 and just £1,414 in 2008 and directors’ remuneration had skyrocketed. The three directors paid themselves £7.8m in the past two years, with the highest paid pocketing almost £2m. A Citywire report exploited the City fat cat image with the headline ‘Keydata director’s salary increased eight fold in three years’.
In their defence, it is worth remembering the business was growing, had paid off all its long-term debt, written down a dud £1m loan to Fundworks Ltd to nil and still had £3.4m in the bank. It had created a further 35 jobs in the past two years. Furthermore, the directors had built up this private business from nothing paying themselves much lower salaries in earlier years.
Some of the more recent and much higher remuneration is alleged to have gone into the contingency fund. Also, the running of the business appears to have been sound given a mere day after going into administration, PwC judged the business “fit and proper” to service its £3bn in assets. The assets themselves appear to be safe having been successfully ring-fenced against such an eventuality.
Not too shabby in the teeth of the worst downturn most can remember.
A further cause for eyebrow-raising may have been the fact that founder director and majority shareholder has become a Swiss resident. Stewart Ford owned 53.4% of Keydata UK Ltd, the holding company for KIS. Did the combination of rapidly inflated remuneration and tax haven residency raise hackles with the authorities?
Whether FTSE venture capitalists 3i saw these risks coming down the track we don’t know. They appear to have exited some time prior to its demise, having been repaid their money (albeit at a 35% discount) and hold no shares in the holding company, Keydata UK ltd, although they are listed on the register.
Would a discreet deal have been better?
FSA spokeswoman Abi Jones told FT Adviser on June 11: “We would not make the decision to put a regulated firm into administration if that was not to secure the best possible outcome for investors.”
Here’s hoping but it seems a lot of distress for the investors concerned.
Wouldn’t a sale on the quiet have been the best possible outcome? After all, this “insolvent” business has seen no shortage of suitors vying for its talents with the likes of Morgan Stanley expressing interest alongside smaller investment boutiques such as Premier Asset Management, Meteor Asset Management and Jubilee Financial Products. A deal is said to be imminent.
Why further disillusion investors attracted to what they believed to be “lowish risk” investments? A quiet sale engineered by the FSA could have ensured continuity and avoided further damaging public confidence in savings products, surely never at a lower point.
The real problem…
The FT’s Matthew Vincent suspects a new macho culture and reported the FSA “even use the language of The Sweeney”, a hard hitting ‘70s TV cop show, these days. The Feds nailed Al Capone on taxes and that’s what the FSA has done with Keydata, he concludes.
That may be what nailed them but the real reason for their demise looks like something else.
It looks like serious regulatory concern at a perceived mismatch: a mismatch of inadequately selling complex investment products, backed by exotic assets, to predominantly unsophisticated investors.
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