Q&As about Category 1 Claims
I have an investment in a Category One fund but have not received an FSCS application form; what should I do?
All known investors in Category One products should have received an application form from us following our announcement last November. If you have not yet received an application form, please contact us.
I am an investor in a Category One fund. Am I entitled to compensation?
We expect that the vast majority of investors in Secure Income Bond 1, 2 or 3 who held their investment through an ISA ("ISA Investors") will be entitled to be paid compensation by us. This is because Keydata’s promotional materials stated that the Secure Income Bond 1, 2 and 3 was an ISA investment. This was a fraudulent misrepresentation on which investors would have relied when deciding to invest in this product which they thought qualified as an ISA. Keydata is therefore liable for the loss which this misrepresentation caused these investors and the FSCS is therefore able to pay compensation in respect of this loss.
Investors who did not hold their investment in Secure Income Bond 1, 2 or 3 through an ISA ("non-ISA Investors") may be entitled to compensation, but it will be necessary for us to consider the merits of each application for compensation from non-ISA Investors on a case-by-case basis.
I did not hold any part of my investment in a Category One fund through an ISA. In what circumstances may I be entitled to compensation from the FSCS?
The FSCS’s rules, as set out in the COMP sourcebook, state that the FSCS can only pay compensation where it is satisfied that there is a specific civil liability owed by the firm in default to the individual investor.
Accordingly, the FSCS’s role is to examine each claim and any evidence provided by an investor and to determine:
(i) whether there has been a breach of any contractual or other legal obligation owed by the firm in default to the investor; and
(ii) where there has been such a breach, whether a court would make an award of damages.
The FSCS’s current understanding is that the investors who invested in Secure Income Bond issues 1, 2 and 3 suffered a loss caused by the misappropriation, by an unknown third party, of assets belonging to the entity which issued the bond that was purchased on their behalf by Keydata. To date, the FSCS has seen no evidence that Keydata was involved in the misappropriation of those assets.
In most circumstances, a court will only award damages where the loss is a foreseeable consequence of the breach of the contractual or other legal obligation. In the FSCS’s analysis the misappropriation of assets by a third party was not a foreseeable event. Therefore, even where Keydata has made misrepresentations or breached its contract with investors, because the loss suffered by those investors was not a foreseeable consequence of that misrepresentation or breach of contract a court will not award damages.
However, there are certain circumstances where a court will award damages for a loss which was not foreseeable. One of those circumstances is where the claimant has, in deciding to enter into a contract, relied on a representation which was false and which the representor had no reasonable grounds to believe to be true when it was made (a “fraudulent misrepresentation”).
If a non-ISA Keydata investor has relied on a fraudulent misrepresentation made by Keydata, the FSCS may be able to pay compensation.
If my Category One claim is found eligible for compensation, how will my compensation be calculated?
We will compensate for the amount you invested less any amount you have received to date in relation to your investment (e.g. income payments or any other amounts received). The maximum compensation we can pay in relation to Keydata is £48,000 (100% of the first £30,000 and 90% of the next £20,000) per person.
Will investors with Category One investments that were expecting income payments from those investments receive them in compensation?
No. The FSCS is not permitted to pay compensation for failure of investment performance (including income payments on bonds) to match a guarantee or representation made. Accordingly, the FSCS will not compensate purely for the failure to make the missed income payments.
The FSCS can only pay claims where an actual financial loss has been suffered by an investor.
What standard will you use in assessing whether Keydata breached a contractual or other legal obligation and whether such a breach gave rise to a valid claim for damages?
We pay compensation in respect of civil liabilities. Accordingly, we are required to determine whether a court would make an award of damages in respect of any alleged breach of a contractual or other legal duty.
What do you mean by financial loss?
The FSCS cannot accept claims that relate simply to investment performance.
To be eligible for compensation, amongst other things, you must have lost money because the firm has breached an obligation to you which has caused you that loss.
Eligible claimants who bought these investments will be compensated by the FSCS for the loss of their investment up to the FSCS’s limit of £48,000 (100% of the first £30,000 and 90% of the next £20,000) per person.
Will investors with Category One investments in an ISA wrapper be able to keep their ISA status?
HM Revenue and Customs (HMRC) have confirmed that investors who held investments in Keydata Secure Income Bond issues 1, 2 and 3 in an ISA wrapper, will be allowed to retain their ISA allowance for the tax year in which the Keydata investment was taken out, by investing up to their original ISA subscription with a new ISA Manager.
Investors with these funds should have received a letter from HMRC in December 2009 with details of how to make their new investment. A new investment does not depend on receiving compensation from the FSCS, and investors can opt to make their reinvestment at any time up to the deadline imposed by HMRC of 5 April 2011. Further details of HMRC’s position are available at: www.hmrc.gov.uk/isa/.
Why might my FSCS compensation for my Category One investment be less than my original ISA subscription which HMRC is allowing me to re-invest into a new ISA?
The compensation sum which the FSCS will calculate will be reduced by the income payments that have been paid to you, or you may be subject to the maximum compensation that the FSCS is able to pay (being 100% of the first £30,000 of losses plus 90% of the next £20,000, up to a maximum of £48,000). However, HMRC will allow you to reinvest up to the amount of your original ISA investment.
I purchased 'secondary units' in a Keydata fund, after the standard start date for the investment. Will the FSCS accept my claim?
The FSCS can consider claims relating to 'secondary market' transactions. Each claim will be considered on a case by case basis, based on the evidence provided by the investor and in light of the investor's dealings with Keydata.
I have more than one Keydata investment; should I list all of these on the application form I have been sent in respect of my Category One claim?
For all claims other than for 'Category Two' investments, you should list all the investments you wish to claim for on the application form we have sent to you. You will need to provide details of the nature of your claim in respect of each investment, as the grounds for claim and the nature of your dealings with Keydata could be different in respect of each transaction.
However, if you have a potential claim in respect of tax losses in the case of Category Two investments, you will have been sent a separate application form in January 2010, as these investments are subject to a different claims process (with compensation to be paid directly to HMRC).
What were the responsibilities of Keydata in relation to the Category One funds?
The Secure Income Bond issues 1, 2 and 3 were promoted and administered by Keydata. They comprised investments in bonds issued by a Luxembourg company, SLS Capital S.A (the SLS Bonds). Investors in the Secure Income Bonds paid their money to Keydata, who then purchased the SLS Bonds as agent for those retail investors. The SLS Bonds were held by Keydata (through its nominee company) as nominee of the retail investors. The nominee held the legal title to the relevant SLS Bonds and kept a record of the holding of each underlying retail investor. Under the terms of the SLS Bonds, SLS Capital S.A. was required to use the investors' money to purchase senior Life Settlement Policies issued by US and Canadian Insurers rated A or above by Standard & Poors. SLS Capital S.A. was responsible for making payments on the bonds (held by Keydata nominees) and Keydata was then responsible for paying income to the retail investors. However, Keydata was not responsible for investing the monies raised by SLS Capital S.A.