Investors in life-insurance based income products offered by Keydata Investment Services may have become the victims of a £103m suspected fraud, according to the administrator appointed by the Financial Services Authority to sell the company.

PwC said on Tuesday that the second-hand life insurance policies backing Keydata’s Secure Income Bonds 1,2 and 3 had been liquidated and the proceeds “misappropriated”, and that income and redemptions had been paid “in an irregular fashion” out of the company’s own funds, rather than from the underlying investments.

Its investigation discovered that income payments had not been deducted from Keydata’s underlying Luxembourg-domiciled investment vehicle, known as SLS Capital, since October 2008.

Dan Schwartzman, joint administrator and partner of PwC, said: “We have found that the company was funding the coupons and redemptions,” “The company was using its funds, but you would expect to see the funds where investments are to be used. It’s from there that you would expect the payments to be made.”

Keydata’s directors issued a statement on Tuesday night saying “although there had been some delays in payment of income by SLS...in recent months [they] only became aware this weekend that the underlying assets of SLS appear to have been liquidated”.

The directors said they were only a distributor of products backed by SLS and were not connected in any way with it.

They added that they have been working closely with the Financial Services Authority and PwC and will continue to do so.

The Financial Services Authority is now in discussions with the Serious Fraud Office about the potentially missing assets underlying the Secure Income Bond products.

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 has caused these customers to suffer a financial loss and the company is unable to meet its liabilities, the Financial Services Compensation Scheme (FSCS) may 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.

The administrator is also seeking confirmation of the status of the underlying assets of Keydata’s Income Property Bonds 1-6, in which 240 investors have invested £2m.

As a result of the irregularties, PwC, has announced that a sale of Keydata “as a whole” will no longer be possible, and that it has been forced to suspend interest payments and redemption rights on a number of products.

No income can be paid out to investors in Secure Income Bonds 1, 2 and 3 and in Income Property Bonds 1-6, and redemption have been suspended while PwC tries to trace the assets underlying these products.

Investors in Secure Income Bond 4, Secure Income Plan 1-12 & 14 and Defined Income Plan 1-8, Special Editions and other Lifemark branded will continue to receive income from their investments, but redemptions have been put on hold. However, PwC has confirmed that the assets underlying these products are secure.

Third party structured products, administered by Keydata and backed by major financial banks, are not affected.

Allegations that Keydata assets may have been misappropriated raise questions about the level of scrutiny Keydata received from its auditors and the FSA. “I find this very surprising that the auditors didn’t spot this,” said Simon Morris, partner with CMS Cameron McKenna.

Keydata – which had over £3bn in assets under management and specialised in selling structured products through a network of independent financial advisers – was initially put into administration by the FSA after it emerged that it had failed to list its investments on an Inland Revenue recognised stock exchange – triggering a tax liability that it could not pay.

But the FSA on Tuesday revealed that it had also been investigating Keydata for “targeting investors with potentially misleading advertising materials.”

A source close to the investigation said: “The major concern was around their financial promotion. These products were marketed as low risk, but a [second-hand life insurance policy] has no redemption date, which makes it most risky. When you look at the income bonds, they were tranche based, so the first investors would redeem before the subsequent investors – and the risk to the first investors was much lower.“

PwC will be providing further updates through its Keydata website at www.pwc.co.uk/KIS. Customers can also call its helpline on 020 7804 4424.