Matthew Vincent: Keystone cops bring down Keydata

Bracknell-Riley syndrome has struck again. This was the thought that occurred to me in Madrid airport earlier this week, en route to an FT hedge fund conference. Not because the Iberia airline staff were donning face masks against another economy-class pandemic. But because my BlackBerry had just bleeped with an update about investment company Keydata going into administration.

Why was this a symptom of Bracknell-Riley syndrome? Well, in this column last September, I suggested that the UK’s regulatory authorities had started behaving like a cross between Oscar Wilde’s Lady Bracknell and a bad football referee, in their handling of the HBOS rescue, after the Northern Rock debacle. “Clearly of the opinion that to lose one bank may be regarded as a misfortune, but to nationalise two looks like carelessness”, I argued, “… the takeover smacked of the referee who, having failed to award a stone-cold penalty in the first half, desperately tries to make up for it before the end of the match.” As a referee accused of making similar decisions, Mike Riley’s name seemed to lend itself to this over-compensating condition rather well.

And, at first sight, this appeared to be the only explanation for the decision by the Financial Services Authority (FSA) to force Keydata into admin-
istration. Having failed to protect investors who bought structured products backed by Lehman Brothers – from companies including Legal & General, Meteor Asset Management, Arc and NDFA – the regulator was now shutting down a structured products provider… for nothing more than an alleged £700,000 unpaid tax bill.

If this was the FSA over-compensating, it would certainly make sense. Only last month, it announced a full-blown investigation into the £35bn structured products industry, following 80 complaints to the Financial Ombudsman Service about the marketing of products backed by Lehman. Having heard one of these complaints from an FT Money reader at first hand – involving losses of thousands of pounds, misrepresentation of counterparty risk – I could understand the regulator’s zeal… until it became clear that the problems at Keydata were nothing to do with structured products, their counterparties or their marketing. This was some other malaise.

Gene Hunt syndrome looked a more likely diagnosis. Fans of the 1980s detective, from the BBC TV drama Ashes to Ashes, have come to relish his fisticuffs- first, ask-questions-later approach to policing. But the FSA appears equally heavy handed.

All that the FSA- appointed administrator, PwC, would say is that Keydata’s regulatory problems concerned sales of income products based on traded US life insurance policies, within individual savings accounts (Isas). To qualify as Isa investments, these products were to have been listed on the Luxembourg Stock Exchange. But the listing failed, making the investments taxable.

Keydata tried to talk its way out of trouble with HM Revenue and Customs, and even offered cash to cover customers’ tax bills.

In response, the FSA gave the company a good kicking into administration “to protect” those customers. FSA staff now even use the language of The Sweeney. A day later, the director of its market division threatened derivatives brokers with the words: “You should do the right thing, and if you don’t, you run the risk of having your head put on a spike.”

Keydata clearly did not do the right thing. Misselling unlisted life insurance products in Isas suggests incompetence or contempt for the tax rules. But why did its structured products division have to be closed, causing 85,000 clients to fear for their money, as well as investors with RBS, HSBC, Morgan Stanley, Skandia and Blue Sky – all of which used Keydata to administer their products? Why, a day later, did PwC deem Keydata “fit and proper” to service £3bn of historic structured products business? And why was a provider that had never used Lehman as counterparty already under a regulatory investigation – as the FSA disclosed on Thursday?

Eliot Ness syndrome is the only explanation. The Untouchables at the FSA must have decided to get Keydata on taxes, just as the FBI “got” Al Capone. So what, then, are Keydata’s unproven crimes? Quoting unsustainable yields for traded life insurance products, claim some. Allowing directors to take £7.8m out of the company, say others. All the FSA will allude to are “other factors”.

This is not good enough. By lurching from Keystone cop to bad cop, the FSA has destroyed confidence in a whole range of structured product providers, when none was at fault – or in default. But, as Ness, Hunt – and even Riley – might say: it doesn’t matter how you bring them down...
matthew.vincent@ft.com