One of the great misrepresentations in the investment market in recent years has been that it was structured products that were responsible for Keydata going into administration. While Keydata issued many structured products it is a myth that the products caused the problems that led to the collapse of the company. Keydata failed because the FSA discovered, in retrospect, that some of Keydata’s life settlement products were not eligible for ISA status and this created an unexpected tax liability for the company that it was unable to pay.
This was then followed by the revelation that the assets of one of their life settlement arrangements had been misappropriated by a third party while the comparatively illiquid nature of life settlement investments had created a situation where the remaining funds did not have sufficient liquid assets to provide the targeted returns.
On its website the FSCS named the Keydata instruments against which investors could pursue their individual claims, all products issued by SLS Capital SA and Lifemark SA, the companies invested in life settlement arrangements.
Keydata products not the problem
Neither the Keydata structured products, nor the third party administration of structured products that Keydata carried out on behalf of some of the biggest names in the industry, were part of the problem. The issues all related to US life settlement based investments. Unfortunately, many media stories covering the Keydata failure also mentioned that the company was a structured product issuer without making this distinction – thereby perpetuating the misrepresentation. It is heartening to see that is no longer happening – certainly in the trade publications.
In fact, while the tax situation and the investigations into the potential fraud were in the spotlight, Keydata structured products were doing exactly what they were designed to do.
At Lowes Financial Management we had recommended Keydata structured products to our clients and when the events surrounding Keydata arose, naturally causing alarm, we were able to reassure them that their investment would not be affected.
Likewise, when the markets fell by 40% immediately prior to the Financial Crisis we were able to assure them that the products’ capital protection (many had a 50% barrier) meant that their capital was safe when all other investments had been severely impacted.
Delivering promises
Many of those products have now matured and have done exactly what they said they would on the tin – delivered defined returns based on defined market scenarios at the end of a set period of investment.
The Keydata Dynamic Growth Plans Plus Special Edition – Tranche 2 (2008), for example, matured in January 2013 returning investors’ original capital in full, plus a gain of 28.3% – four times the rise in the FTSE 100 over the same period. More recently, the Keydata Dynamic Growth Plan Plus 3 (2008) matured realising gains of 25.94%.
The Keydata Extra Income Plan has paid an unconditional gross income of 7% p.a. or 1.75% per quarter (an alternative growth option has a payment of 38.7%) – although because this multi-index structure breached a barrier during the Crisis some capital was lost at maturity.
Other plans taken out at the height of the market in 2007/08 have also done what they were intended to do and protected capital against the severe downturn in the market that occurred as part of the Financial Crisis. Investment into non structured investments taken out at the same time will not have benefited from this capital protection.
Structured products have come in for an often unfair share of criticism over the past five years and the linking of the Keydata failure with its issuing of structured products is a major piece of misinformation that it is to be hoped finally can be put to rest.
