In the next in our series of articles we consider the most common reasons cited by some as reasons to not consider structured products we examine the confusion around Keydata’s product set.

Challenging the case against structured products - Keydata

The Keydata debacle stemmed from investment issued by SLS Capital and Lifemark, that were underpinned by US life-settlement policies and marketed as Keydata Secure Income Bonds and Secure Income Plans. From December 2005 to June 2009, almost 40,000 people invested more than £475 million in what were, by reference solely to the marketing, appealing investments. Of these more than 30,000 retail investors ploughed more than £370 million in Lifemark bonds alone.

The catalyst to the collapse of these investments was, in the first instance when the SLS Capital founder, having established that the scheme was going to fail, allegedly fled to Singapore with the £100m of assets and then faked his own death. In the chaos that ensued Keydata used its own capital to pay income to clients that ordinarily would have come from the bonds, whilst attempting to recover the assets. Around the same time HMRC judged that the SLS bonds were not ISA qualifying meaning Keydata could be facing a substantial liability as undoubtedly clients would naturally be unhappy about finding out that their investment was never qualifying for ISA purposes in the first place, they would now have a tax liability and the opportunity of using previous years ISA allowances would be lost. When the Financial Services Authority were eventually alerted, they halted operations, appointing PWC as administrator. The collapse of Lifemark from that point became an inevitability given that it transpired that the scheme was dependent on a regular flow of new investments in order to maintain client income payments and crucially, the premiums on the viatical settlement life assurance policies on which the scheme was built.

It is important to create a distinction about what these products actually were. Rather than being bank backed, stock market linked contracts, the Keydata bonds boasted no stock market exposure and no counterparty but were dependent on a portfolio of viatical settlement policies ‘maturing’ within assessed timescales. The SLS and subsequent Lifemark bonds did not match our criteria of a structured product but as Keydata also issued genuine structured products it's clear to see why there was confusion.

To reiterate, investments linked to life settlement policies just could not be considered a ‘structured product’; indeed the FCA and the FSA before it considers a structured capital-at-risk product as being:

a product, other than a derivative, which provides an agreed level of income or growth over a specified investment period and displays the following characteristics:

·         (a) the customer is exposed to a range of outcomes in respect of the return of initial capital invested;

·         (b) the return of initial capital invested at the end of the investment period is linked by a pre-set formula to the performance of an index, a combination of indices, a 'basket' of selected stocks (typically from an index or indices), or other factor or combination of factors; and

·         (c) if the performance in (b) is within specified limits, repayment of initial capital invested occurs but if not, the customer could lose some or all of the initial capital invested.

The evidence against them being classified as structured products is irrefutable but yet under its earlier guise, this website was approached by several advisers asking why these bonds were missing from our review site.  After multiple requests we published details of the third issue annotated with a red “Not Endorsed” stamp and explained that these were not structured products.  In our explanation we cautioned that “whilst there is no stock market exposure, the risk to capital is not only un-quantifiable if there was any ultimate loss of capital it would be almost impossible for us to verify the justification”. 

Whilst far too many advisers were taken in by the headline marketing and hype of the life settlement bonds a quick scratch of the surface raised endless questions that Keydata were, for us at least, unable to provide satisfactory answers.  Even without answers, what was clear was that these were not structured products. Under the bonnet a structured product is simply a contract between the investors and the bank, promoted by a regulated plan manager with assets held by a regulated custodian. The contract is of course dependent on the bank remaining solvent but the contractual obligations of the plan manager and custodian are protected under the Financial Services Compensation Scheme.

The collapse of Keydata triggered significant shock waves across the structured product sector not simply because of the association with the masquerading, failed life settlement bonds but because Keydata were a leading third-party custodian administrator acting for many other plan managers operating in the structured product world. 

The collapse led to a very unwelcome period of uncertainty whilst PWC identified and appointed a replacement custodian but ultimately all structured product payments and redemptions were met, in full, including those for Keydata’s own, genuine structured products.

In conclusion, as far as structured products are concerned, the Keydata debacle turned out to be an administration headache with some payment delays, coupled with a case of mistaken identity of life settlement bonds, which via many, unfairly prevailed as a case of ‘guilty by association’.  What should not be forgotten is that the products which the regulator would consider as being structured products by virtue of their definition, performed as expected.


Structured Investments put capital at risk.