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Advisers question FSA’s Arch cru estimates

FSA Front 480

Advisers are unconvinced by FSA estimates that Financial Services Compensation Scheme levies will fall following the regulator’s decision to introduce its Arch cru consumer redress scheme on an opt-in basis.

The regulator published a policy statement on its Arch cru consumer redress scheme this week, which amended the proposed scheme first set out in April. Under the amended scheme, firms have to write to clients who were recommended Arch cru and clients have to opt in to have the advice reviewed, rather than advisers being required to review all Arch cru advice as originally proposed.

The FSA estimates between 15 and 30 per cent of clients who were advised to invest in Arch cru will opt in, reducing the redress paid out by the scheme from the proposed £110m to between £20 and £40m.

In its paper in April, the FSA said up to 30 per cent of firms that recommended clients to invest in Arch cru could default as a result of the scheme. Out of the £110m redress, up to £33m was expected to be paid by FSCS.

Based on its opt-in estimates, the FSA now predicts between £3m and £7m will fall on the FSCS as a result of the opt-in scheme. In total, the regulator estimates up to £37m in Arch cru claims will fall on the FSCS, including £30m for existing claims which were not factored into the FSA’s claim estimates.

Hudson Green & Associates principal Ian Hudson says: “It does not matter how strong a relationship an adviser has with clients, if the client has lost money they will seek redress unless they fully understood the product. The FSA opt-in estimates seem too low, which of course will have a worrying impact on FSCS levies.”

Capital Asset Management chief executive Alan Smith says: “The FSA is appearing to appease intermediaries, but given our heavily-driven compensation culture, if people are receiving a letter indicating they are in line for compensation most will opt in.”

Following the policy statement, law firm Regulatory Legal polled 362 Arch cru investors it is working with in connection with the £54m payment scheme agreed with Capita, BNY Mellon and HSBC last June. A total 87 per cent of respondents say they would opt in to have their advice reviewed and 71 per cent say they would ask for redress if the advice is deemed unsuitable. The FSA says 400 investors contacted the regulator to say they did not want their adviser to be forced to pay redress.

FSA head of investment intermediaries Linda Woodall told Money Marketing: “We have come up with a solution that recognises consumers may be owed money for unsuitable advice, but does not force them into having that money whether they like it or not.”

Firms must write to Arch cru investors by 29 April to offer a review. Consumers will have until 22 July to opt in.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Clever timing by the FSA! The optimum date to leave the FSA is 31st March, just in time for the first dead line! Coincidence?

  2. Question – does the regulator have the authority to do this ?

    Potential answers :-

    1. They can do anything they want to do as there is no requirement to be accountable or answerable for their mistakes.

    2. No , but they will do it anyway.

    If the FSA is going to ask investors what they want to do, why do we have the FOS.

    Arch Cru’s failings were the result of poor management not the consequence of bad advice.

    A Bit like the Keydata debacle.

    A well, the world ends tomorrow anyway so why bother (lol)

  3. I cannot quite get my mind around all this. Following advice from compliance, in our Data Protection Statement we require that clients opt in to receive communications from us on the basis that it was TCF. The default position was fairer to the client i.e. they would not get unsolicited emails and letters unless they specifically asked for it. Perversely, the default position chosen by the FSA is that clients have opt opted of a review when surely it is treating the consumer fairly to assume the default position is to have advice reviewed?
    And if the intention of the FSA is to reduce the burden on FSCS, is this not the most blatant admission by the regulator that the FSCS is seriously flawed, unaffordable and unjust?

  4. If investors of failed advisory firms are limited to £50k via FSCS will the same limit be applied to claims against advisers under this FSA ruling?
    If not, why not?

  5. Quoted directly from the ACD’s Annual Short Report produced by CAPITA Financial Group every six months from June 2007 to June 2009 – “There are no borrowings or unlisted securities of a material nature and so there is little exposure to liquidity risk” – yet the FSA and CAPITA would have the outside world believe liquidity issues caused the failure of the CF Arch Cru funds.

    Quoted directly from the Prospectus produced by CAPITA Financial Group:-

    “CF Arch Cru Investment Portfolio is suitable for those investors wanting to achieve consistent returns, wealth preservation and capital appreciation by investing in a broad range of collective investment schemes, transferable securities, both Corporate and Government bonds, money market instruments, cash, derivative instruments, forward transactions and other instruments that the investment manager considers to be appropriate from time to time.”

    This is not a third party opinion as alleged by FSA and who are using Seymour V Ockwell as justification for the S404, rather it is a statement of fact from those legally responsible for the fund. I think the key words here are BROAD RANGE – nowhere does it say over 20% in one investment in a Greek shipping company.

    Therefore there was clearly misinformation given by the ACD CAPITA Financial Managers and the ACD has legal responsibility for all affairs of the fund such as information provided by Arch Financial Products LLP and CRU Investment Management. Mr Addenbrooke of CAPITA Financial Managers Ltd stated this in 2008 in an interview with a trade paper.

    Ironically just this week there has been reporting of a case that is almost identical to the CF Arch Cru debacle yet no client has had to wait for their money back (now nearly 4 years for CF Arch Cru Investors).

    I refer to the Standard Life Sterling Pension fund that fell in value almost overnight by £100million in early 2009. Within a month Standard Life accepted the fund had been mis-marketed and injected £100million into the fund so no client lost money and informed every investor they had two months to get out of the fund penalty free after that date if still invested the client would be accepting they were aware of the extra risks the fund did have following production of correct marketing material.

    Subsequently Standard Life went to their PI Insurers and recouped the £100million as the incompetence that had resulted in the mis-marketing which led to investors being invested in the fund was Standard Life’s incompetence and after all that is what PI is meant to cover.

    Obviously Standard Life’s PI Insurers did not like this but their appeal to not pay has been unsuccessful.

    Standard Life were fined (and paid) over £2million by the FSA.

    Why therefore did CAPITA Financial Managers do exactly as Standard Life did – make up the investors losses immediately in 2009 and allow investors to leave if they did not like the risks when the true nature of investment operandi was provided to them.

    CAPITA Financial Managers PI would have had to pay out and if subsequently the PI Insurers wanted to take the Legal Action currently being undertaken by Hugh Aldous against various parties then that would have been their prerogative. However these actions would have taken place behind closed doors and investors would not have suffered the loss for nearly 4 years.

    The above behind closed door deals would have been much palatable than the sordid behind closed door deals that the FSA have obviously been undertaking with CAPITA, Guernsey Authorities and Government Ministers.

    If anybody would like more information about the true goings on regarding CF Arch Cru they can request from the FSA a copy of my response to the Section 404 consultation which the FSA have to release to those requesting a copy, once having read that if they want to contact me further I will send them even more revealing information.

  6. As stated in my post above I believe it is an absolute disgrace that investors have had to wait nearly 4 years for the FSA to put a scheme in place where investors will get their money back. Yet even after 4 years it is a scheme that is so perverse that many investors will not be covered such as those who were high risk, those who invested directly without using an adviser and those using discretionary fund managers.

    Those investors that are covered will end up receiving compensation either from an IFA that they do not “blame” for the loss otherwise the investor would have just complained via FOS during the last three years or alternatively (and more likely) an IFA the investor does not even know because the claims will fall on the FSCS.

    The FSA are living in cloud cuckoo land if they think only 15%-30% of investors will opt in to a redress scheme. Most investors have waited and not complained because it has been so obvious to them as to who and what caused the loss of money that they naively believed the FSA would eventually put a solution on the table where the true culprits paid out. Unfortunately this has not happened and they are faced with only one choice to complain against their adviser they will take it.

    This is also true for advisory firms that have already gone into default over CF Arch Cru. The FSCS had until a few months ago received relatively few claims (around 600), this has now swelled to over 1800 as a deluge of investors thought they could wait no longer and accepted CAPITA’s compensation offer.

    Once the compensation offer has been accepted the investors have basically accepted the FSA will not come up with an honourable solution.

    The S404 implementation confirms to the investors of defaulted firms the FSA’s intentions and therefore the FSCS will be flooded with complaints from investors of departed firms who again have waited for the FSA to get them compensation from those they know caused the losses, however as this will now definitely not happen they are left with no choice but to go to the FSCS.

    Therefore IFA’s should prepare for an FSCS bill next year of at least £100million from CF Arch Cru alone.

    No doubt Connaught will also fall on the FSCS next year – another fund where CAPITA and FSA conspired on when changing operator of the fund in 2009 when they knew there was a problem but did nothing and allowed a new operator to launch further funds.

  7. Whilst writing the last two posts I have thought of a plan so cunning you could stick a tail on it and call it a weasel – or the FSA if you prefer.

    The FSA’s logic on who is responsible for CF Arch Cru compensation is so irrational if it were applied to the banking collapse then anyone who held a bank deposit and had an IFA should complain against the adviser for the loss they have suffered. After all the adviser’s should have been aware of the mis-management that was going on within the banks and their imminent collapse. All depositors have lost money but as it was not directly lost they cannot work out how much exactly!

    The Government decided the banks were too big to fail just as the FSA decided CAPITA Financial Managers were too big to fail – although it is perfectly acceptable for 200 plus advisory firms to fail.

    If you consider the actual bank bailouts and subsequent quantitative easing which has resulted following the bailout has cost over £1trillion pound which is more than £40,000 for each tax paying adult in the UK it is scandalous that only 1 banker – Peter Cummings – has been censured by the FSA.

    But hey we are all tax payers in this together, or are we? When you consider that Mr Average on £25,000 per annum and a few thousand in the bank probably pays more tax than the likes of Sir Philip Green the notion of proportionality and responsibility are thrown out of the window.

    Given the above logic here is the cunning plan.

    CF Arch Cru has shown that any fund with CF in front of it will not have action taken against it for over 3 years and when there is action no fines will actually need to be paid. The FSA enforcement notice shows that CAPITA Financial Managers Ltd are ACD for 231 funds with just shy of £20 billion under management. The 231 funds are split between around 100 fund management groups.

    5% of £20 billion gives £1 billion. Therefore why don’t the 100 fund managers just buy the 200 IFA firms for £1billion with no independent valuation on any of the 200 IFA firms – indeed just pay a flat £5million for each IFA firm regardless of size.

    The 200 IFA firms who now have £1billion in the bank can repay investors the £100million leaving them £900million. Before buying the IFA firms the fund management groups would obviously have put an agreement in the purchase arrangement that stated that in return for not bothering to get a valuation on the business they were buying on behalf of investors then the fund managers would be entitled to a “transaction bonus” of £300million giving each management group £3million for a Christmas knees up.

    Leaving £600million for the 200 IFA firms so they get £3million each to walk away into the sunset and enjoy a peaceful life without the FSA having to worry about them.

    In 3 months time when the fund management groups admit there is no value in these IFA firms as all the staff are sitting on a beach in the Bahamas and Winterflood Securities the market maker says there is no secondary market, luckily the fund managers will have to report only a 5% fall in investors fund values but as this will have been within the investors capacity for loss as documented by all the advisers that recommended those 231 funds in the belief that the fund managers did not operate as Arch Financial Products did.

    The above is obviously farcical, but no more farcical than the FSA’s handling of this disgraceful fiasco.

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