UK investors who put money into Keydata’s Secure Income Bonds 1, 2 and 3, or invested directly in the underlying ‘life settlement’ bonds run by SLS Capital through an independent financial adviser (IFA), will have to wait for the outcome of ongoing investigations before discovering if they are eligible for compensation for losses.
This week, the Serious Fraud Office (SFO) was called in by the Financial Services Authority (FSA) to investigate the disappearance of £103m-worth of assets used to back the first three issues of Keydata’s Secure Income Bonds, which were managed by the Luxembourg-incorporated company SLS Capital.
SLS claimed to specialise in ‘senior life settlements’ – buying up second-hand US life insurance policies and using payouts from them to provide a regular income for investors. But PwC – which was sent in to Keydata last month, after the FSA forced the company into administration following an investigation of its tax liabilities – found that income had not been paid by SLS since October 2008. Then, last weekend, PwC discovered that all £103m-worth of assets supposedly held by SLS to back the Keydata Secure Income Bonds had been liquidated and “misappropriated”.
However, Keydata kept paying income to investors and returning cash to those who wanted to sell, using its own corporate funds. Dan Schwartzman, joint administrator and partner of PwC, said: “We have found that the company was funding the coupons and redemptions, but you would expect to see the funds where the investments are to be used.”
People close to the investigation told the FT this week that the assets supposedly held by SLS – 200 life insurance policies and some cash – have been missing for at least six months.
A statement from Keydata’s directors said they only learned that the assets “appear to have been liquidated” last weekend.
About 5,500 investors had taken out Secure Income Bonds with Keydata, putting in an average of £18,700 each. If it emerges that Keydata caused these customers to suffer a financial loss, and the company has insufficient assets to meet claims, the Financial Services Compensation Scheme (FSCS) will be triggered. This can pay out 100 per cent of the first £30,000 invested and 90 per cent of the next £20,000 – a maximum of £48,000.
But the process is being delayed by the forensic investigation into Keydata’s assets. PwC is working to trace the assets, and is in discussions with the FSCS – but the FSCS cannot declare Keydata “in default” and consider claims, until it is clear that all the available assets cannot cover them. “We are working closely with the administrator, and once we’ve determined there are not enough assets, we can step in,” said a spokeswoman for the FSCS.
Meanwhile, the FSA is contacting advice firms that put clients’ money directly into SLS. “We are making enquires to determine whether other regulated firms invested in products backed by SLS and are contacting firms to determine the impact on investors,” said an FSA spokeswoman.
Clients of Hansard Global, Danske Bank, Global Holdings and IFA Marks Jacobson are known to have exposure to SLS, and did not receive quarterly income payments in March or June. “Our clients invested directly, outside of the Keydata issue, but it was in the same tranche of SLS as Keydata,” said Michael Jacobson of Marks Jacobson. “We are in communication with PwC and working jointly to get matter resolved.”
Keydata also offered life settlement products using assets managed by Lifemark, a Luxembourg company that it controlled.
Around 23,000 investors bought a Secure Income Plan or Defined Income Plans under the Keydata or Lifemark brands. Earlier this week, PwC said it had received confirmation of the existence of the £351m- worth of underlying assets supporting these products, and will continue to allow income payments. However, tax will be withheld from payments, pending clarification of the products’ tax status.
