The Financial Services Compensation Scheme (FSCS) is on track to rack up £30m in legal fees after instructing Herbert Smith Freehills (HSF) to recoup money it paid out following the collapse of the Keydata investment scheme.
The FSCS has been pursuing 820 financial advisers firms for £75m of the £400m it paid out in customer compensation when Keydata went bust in 2009, according to Money Marketing. Nearly 30,000 UK investors lost £450m as a result of the collapse, and the FSCS says advisers should give money back for providing bad advice.
It is understood that the government-backed scheme will have spent around £30m in legal fees by the end of the financial year pursuing the firms. It had found six financial advisers willing to be defendants in six test cases however, those cases have since settled leaving the FSCS on the hunt for new defendants. If it fails to do so, the case could collapse.
On Friday (16 May), the firm went back to court to request that it alter the criteria needed to qualify as a suitable test defendants. Partner Kirsten Massey led the FSCS bid at the case management conference (CMC). She instructed 4 Stone Buildings’ Robert Miles QC and Tom Gentleman. Fountain Court Chambers Richard Handyside QC has also been drafted in for the case but did not appear at the CMC.
The FSCS was hoping to remove the need for firms to have insurance or legal representation to qualify as lead defendants but it was decided that defendants should be selected based on their ability to pay, including their insurance position.
If the trial goes ahead, HSF needs to track down over five lead defendants for a test case but that has not proved easy, with only 205 of the original 820 defendants left in the case. The court will make the ultimate decision on which defendants will qualify for the test case.
Originally defendants had to have insurance and legal representation and had to have sold a certain number of both lifemark and SLA-backed products. That was intended to ensure the test cases were representative.
In a letter seen by Money Marketing, the firm was to ask the court if it could pursue defendants with claims worth over £150,000 as potential lead defendants. It was also asking to remove the requirement that lead defendants have insurance and legal representation.
The issue was that without insurance, a firm would have to fund its own legal representation, which in a case of this kind would be expensive. Money Marketing found that 74 firms in the potential pool of defendants had claims of over £150,000.
The FSCS is the UK’s statutory compensation scheme for customers of authorised financial services firms. It was set up to pay compensation if a firm is unable, or likely to be unable, to pay claims against it.