Investors have been hit by the collapse of a company they may never have heard of.
When is a low-risk investment bond sold by your local bank or building society not low-risk at all?
When it was underpinned by Keydata Investment Services.
Keydata specialised in selling structured, stock market-linked products to the risk-averse. Only last week, it could boast around 85,000 investors and £2.8 billion funds under management.
And confirming my theory that safe investments are dangerous, it was bundled into administration on Monday.
Many investors in structured products will be shocked to discover the collapse of Keydata is putting their own money at risk. In many cases, they won't even have heard of Keydata, because its name wasn't on the policy literature they had been handed.
No guarantees
A number of building societies sold Keydata's capital guaranteed plans, including Cheshire, Derbyshire and Dunfermline (now all under the Nationwide umbrella), Leeds Building Society and Royal Bank of Scotland. Now their customers have an anxious wait to be absolutely sure that their money is safe.
The FSA applied to the courts to put Keydata into administration after discovering it had sold at least £5 million of non-compliant Isas. The regulator insists it acted quickly once the fault was discovered, to protect investors. This left Keydata with a tax liability that it couldn't meet, except by paying the ultimate price of insolvency.
Show me the money
The first question thousands of Keydata investors will be asking right now is the obvious one: will I get my money back? PriceWaterhouseCoopers has been appointed administrators, and if you're worried, you should check the latest updates here.
PWC has taken the "preliminary view" that customers' funds have been held in secure custody accounts. If this turns out to be correct, and the money is segregated, investors should breathe easily. Given how worried many of them will be right now, it is strange that PWC hasn't yet been able to confirm that this is the case.
I have heard from Leeds Building Society though, which was keen to assure its customers that they have no need to worry because their money is completely safe. Keydata may have administered these products, but the funds invested in them are held either with Credit Suisse or Leeds Building Society. Any customers who would like more information should contact the society on 0113 225 7777. Lines are open from 8 am to 8 pm seven days a week.
There is nothing to suggest Keydata failed to follow standard practice and ringfence investors' money, so the chances of any private investor losing their cash seems slim.
Better still, the latest PWC update, published on 11 June, reports the promising news that up to 30 companies have expressed interest in buying Keydata. PWC says it hopes to complete the sale of the company as a going concern by the end of next week. That should further reassure anxious investors.
A taxing question
The second question facing investors is: will I retain my Isa tax breaks?
The decision lies with HM Revenue & Customs, which has so far decided to pursue Keydata for the missing tax, rather than individual investors. Quite right to, because investors who bought Keydata funds using their Isa allowance will have acted in good faith. The error is Keydata's.
If the Revenue fails to gain satisfaction from Keydata, however, it would be within its rights to pursue investors for the unpaid tax, although analysts I've spoken to think that is highly unlikely. You only have to imagine the outcry if it did. It would also heap pressure on the FSA, for failing to notice sooner that Keydata was selling non-compliant Isas.
Structural faults
I suggested at the start of this article that this is another example of safe investments proving surprisingly dangerous.
I'm no fan of structured investments, but I admit that in this case, they played no direct part in the demise of Keydata.
But it highlights once again that the company marketing these products may be several steps removed from the operation supplying the underpinning derivatives contracts.
It means that thousand of investors who popped into their local building society to buy a low-risk savings plan were unwittingly exposed to the antics of a bunch of jokers who couldn't complete their tax forms properly. Mind you, Cheshire, Derbyshire and Dunfermline building societies have also made a hash of things all on their own.
Talk about double jeopardy.
Oh no not again!
It's not as if this hasn't happened before. Only last year, investors in the NDFA Capital Secure Fixed Rate Plan came unstuck after discovering too late that it was underpinned by Lehman Brothers.
NDFA is regulated by the FSA, but Lehmans was based overseas, which meant investors weren't covered by the FSCS. Investors in the plan face a lengthy and potentially fruitless wait for compensation alongside other Lehmans' creditors.
As things stand, it seems likely that Keydata's investors will avoid that grisly fate, but they will have still had a mighty shock.
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