Why did the FSA and the providers not reassure savers sooner?
Another week has gone by – yet another that tested the nerves and trust of tens of thousands of investors.
By Paul Farrow
For the past couple of weeks we have received calls from worried customers of West Bromwich Building Society who had read reports that the mutual was in financial strife.
The reports were denied by West Brom, yet on Thursday it announced a complex deal to put the society on a firmer financial footing.
West Brom savers can now sleep easy (see opposite page), as can many of the 85,000 investors caught up in the insolvency of Keydata, the fund manager and administrator. They were reassured on Friday that their money appeared safe, but it was not before they had endured an anxious few days.
Keydata was declared insolvent on Monday by the Financial Services Authority (FSA) because two dozen Isa plans held by 30,000 investors were found to be non-compliant with Isa rules during a recent investigation. This had triggered a tax liability of £5m that the company was unable to meet.
Keydata is a provider and manager of capital-protected structured products issued both in its own name and by banks and building societies.
These plans have proved hugely popular with risk-averse investors and are typically linked to stock market indices such as the FTSE100 or a basket of shares and guarantee “high levels” of capital protection.
For a couple of days investors would have feared that their money in Keydata plans was at risk. One 90-year-old Telegraph reader was stunned to learn that his income payments, on which he relied for his pension, would be suspended because Keydata’s business was frozen.
The FSA’s action appeared swift (Keydata was busy promoting a new product just days earlier), and that gave rise to rumours and speculation.
In the FSA’s defence it would not want, given the events of the past few years, to be accused of resting on its laurels, but you wonder whether it could have done more to reassure investors in the first instance.
If you look at the breakdown of Keydata funds under management, the vast majority were funds it simply administered, rather than managed.
It looked after hundreds of plans for building societies including Leeds, Cheshire, Dunfermline, Derbyshire and Scarborough. Whether savers’ money was safe was down to whether the accounts were segregated “for investors only”.
But as Keydata simply administered many plans, it did not hold the deposits. In effect, building society savers’ money was always safe.
I can’t understand why the FSA and providers with Keydata links could not have made such assurances sooner than they did. Many building societies were unprepared when worried savers got in touch.
Only Nationwide moved quickly to publish a statement to calm investors’ nerves, but that came too late to prevent the first raft of stories hitting the presses.
The FSA refused to quash any rumours about why Keydata had been made insolvent. Yet the Keydata saga had nothing to do with the investment products themselves – it was a tax liability issue.
The regulator argues that it had no choice but to announce the insolvency once it had made an application. It said it had to act swiftly to protect investors’ interests.
It said it was unable to comment on individual companies and that once the matter had been passed to PwC, the administrator, it was out of its hands. It said it wasn’t its fault that Keydata was able to sell two dozen non-complaint Isas for more than three years. That was an issue for Keydata and the taxman, it said.
The FSA also didn’t believe it had a responsibility (even a moral one) to liaise with Keydata partners such as the building societies to prevent sleepless nights for savers.
The regulator did apologise to investors because it “more than most understands what it means to create uncertainty”. That is as may be, but it doesn’t appear to want to act on it."
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