Alan Hughes: The FSA was asleep on the job

The FSA must be hoping that the publication of PS12/24 setting out the final rules of the redress scheme on Arch cru marks the end of debate on that particular matter.

This is a forlorn hope as there are already rumblings concerning various legal challenges to the scheme. You do not have to look very far to see why the adviser community is so angry about the s404 scheme and why they consider that the FSA has got things badly wrong.


In June 2011 the FSA announced that a “voluntary” deal had been reached with Capita, HSBC and BNY Mellon to which the three parties would contribute a total of £54m. Total losses on the Arch cru funds have been estimated at £150m-£200m. In November 2012, the FSA published the Final Notice against Capita, setting out details of Capita’s failings and clarifying that Capita had contributed £32m of the £54m.

The publication of the Final Notice raised a number of crucial questions:

Why did the FSA do a deal with Capita et al in June 2011 and then take nearly 18 months to publish details of Capita’s failings? The FSA’s reasoning is that it wanted to get a scheme established quickly to allow investors to start receiving some redress as soon as possible. But speed is never a substitute for fairness. The take up of the Capita scheme by investors has been low to date. So the FSA’s reasoning looks flawed and it also looks like the deal was rushed into by the FSA before it had properly got to grips with all the issues.

Crucially for many, the final notice did not seek to establish any clear causal link between Capita’s failings as detailed in the notice and the £32m contributed by Capita. The FSA has repeatedly said that it considers the scheme to be a “fair and reasonable” outcome for investors but has provided no explanation of why the £32m is a fair and reasonable amount. The FSA should explain why Capita’s failings mean that £32m is a fair contribution for them to make. Why not £42m or even £22m? The lack of transparency is astounding. Given the nature of some of Capita’s failings and the very specific FSA rules breached it is difficult to see why Capita should pay only £32m.

This has been compounded by the FSA’s position that as far as it is concerned, IFAs allegedly misselling the Arch cru funds caused all of the investors’ losses and so the FSA was not compelled to discount the £54m contributed by Capita et al from the redress payable by IFAs. The implication being that IFAs should be grateful that the FSA has chosen to allow the £54m to be deducted. Most advisers will disagree with that.

The FSA appears to have been reluctant to tackle Capita head on and seek a larger contribution. It noted that Capita Financial Managers Limited itself could not have afforded the contribution and it largely came from the parent company. Capita is an enormous financial group which could easily have afforded to pay a bigger sum but it appears that the FSA gave up too easily and too much credit was given to Capita for its attempts to clear up its own mess internally after the event.

HSBC and BNY Mellon

These two parties appear to have contributed £22m to the “voluntary” scheme. Whilst they have clearly not admitted any liability, it is unlikely that either would have contributed such significant amounts if they did not consider that they had some exposure.

Yet there has been no Final Notice published in respect of either party and it does not appear that there will be one. If they have been guilty of failings warranting such a large payment, surely a competent regulator would deem that their failings should be made public. If not, why not? Again, the lack of transparency beggars belief.

Arch Financial Products LLP

Decision Notices were published against the investment manager appointed by Capita and two of its directors on 14 September 2012.

Again, they list a host of failures on the part of all three parties – no surprises there. But perhaps the most interesting fact is that in the decision notice against Arch itself the FSA states that it was “..noted that AFP does not have sufficient resources to contribute to a redress package for investors who have suffered losses from their investments in the UK Funds”.

This appears to imply that the FSA would have compelled Arch to make such a contribution if the funds had been available. Logically, the FSA must therefore consider that Arch was responsible for at least some of the investors’ losses.

So then, who is paying the share of investors’ losses for which Arch are responsible? The suspicion is that this residual liability is simply being dumped onto IFAs. Again the FSA have made no attempt to provide any clarity on this issue.


It can be seen above that the FSA’s actions as regulator in cleaning up the mess after the funds were suspended is open to serious question. But it should not be forgotten that it is the FSA who authorised the funds in the first place (and authorised a new Arch cru fund only six months before suspension), authorised Capita as authorised corporate director and authorised Arch as an investment manager.

Yet, despite its obligation to supervise these various parties and its role as regulator of the funds, it is not clear how much, if anything, the FSA knew about what was going on at these various parties until the funds were suspended.

Furthermore, the FSA has said that it was clear from publicly available information at the time that the funds were high risk – a position that many advisers disagree with. Yet although the funds were performing remarkably well and so must have drawn themselves to the attention of the regulator, the FSA stood by for years whilst they were marketed as low to medium-risk funds and did nothing.

It is only after the event that the FSA said that it was “obvious” that the funds were high risk. This looks like a regulator that was asleep on the job and it has made no acknowledgment since the funds’ suspension that it could have done anything more, whilst expecting individual IFA firms to have been aware of all these issues.

This article only touches on the numerous failings of the FSA in relation to the Arch cru affair.

It appears to be a sad story of a regulator not up to the job and the adviser sector being asked to pick up the tab when there are other more culpable parties, with deeper pockets, who appear to have got off lightly.

The FSA may be taking one risk too many in hoping that advisers roll over and accept this. A properly funded challenge to the scheme could leave the FSA exposed.

Alan Hughes is a partner at Foot Anstey