The release by the FSA of CP12/9 on April 30 confirmed the worst fears of many IFAs – yet again, the FSA was looking to what it sees as an easy target – the advice sector – to pick up the tab for a debacle that has never been properly explained by the FSA or anyone else.
In simple terms, the FSA states in CP12/9 that:
- From the sample files it has looked at, the vast majority of advice given to invest in the Arch cru funds was unsuitable and
- Consequently, once the £54m that Capita, HSBC and BNY Mellon put into the pot (the Capita scheme) has been taken into account, the advisers should pick up the remainder of the bill – estimated at around £110m.
The CP contains only four short paragraphs on the Capita scheme.
Since the announcement of the Capita scheme in June 2011, there have been repeated calls for the FSA to explain how and why it concluded that Capita, HSBC and BNY Mellon should be held responsible for £54m of the losses suffered by investors in the Arch cru funds and why the FSA considers that to be a “fair and reasonable outcome”.
No such explanation has been forthcoming. We have written to the FSA ourselves asking this question and have received no substantive resp-onse. The FSA simply ignores this inconvenient question.
We even put the question in the simplest terms we could think of – why £54m and why not £44m or £64m? No response.
The FSA took over two years from the suspension of the Arch cru funds in March 2009 to announce the Capita scheme. It must be assumed that during that period, it investigated what happened and worked out, on some logical and reasonable basis, that £54m was the correct amount of liability that was attributable to Capita, HSBC and BNY Mellon.
If that is the case, then why won’t they tell us? The absolute refusal by the FSA to justify that amount leads to suspicions that the FSA did not perform a thorough investigation following the suspension of the funds and/or that the FSA was simply too afraid of the might of Capita, HSBC and BNY Mellon to take them on and demand more from them.
This fundamental issue has again been ignored in CP12/9. It is the elephant in the room. If the FSA is asking advisers (by paying redress and FSCS levies) to stump up the difference, then they must first justify the £54m figure. To ask advisers to pay £110m without doing so is completely unreasonable, lacks transparency and goes against fundamental principles of natural justice.
The FSA started asking advisers for their Arch cru files around Christmas – it has taken the FSA only four months to reach the conclusion that advisers should pay £110m. It took over two years to agree that Capita, HSBC and BNY Mellon should pay only half that amount, with no explanation as to why.
Is that because the FSA spent much of that two years negotiating with Capita’s lawyers rather than getting to the bottom of what really went on and so do not actually have sufficient information and conclusions to justify the £54m figure?
Perhaps the FSA concluded that imposing a £110m levy on the adviser sector would be easier as IFAs would not be as organised in their defence as three giants of the industry and would not have such expensive lawyers immediately at their disposal.
To have any credibility the FSA simply must justify why advisers are being asked to pay the majority of redress before any rules are made imposing this redress scheme on the industry. To do otherwise smacks of heavy-handedness and picking on the easy target rather than directing the FSA’s vast resources at identifying the true cause of the funds’ collapse, holding the correct parties to account for the correct amounts and explaining to all involved their conclusions. Is that too much to ask?
If the FSA does not do this, then its “consultation” is being held in a vacuum – it pays lip service only to the interest of those on whom it is seeking to impose this liability.
The CP also makes no reference to the fact that even if advisers should not have recommended the Arch cru funds, neither the courts nor the Ombudsman would necessarily hold the advisers responsible for any loss caused.
On Keydata, the Ombudsman has followed case law in determining that if losses were caused by misappropriation of funds, then notwithstanding that the investment was unsuitable, the adviser is not responsible for the loss caused as the misappropriation was not foreseeable.
The same principle could apply here. There is an ongoing £150m claim against the investment advisers to the funds and the cell companies in which they were invested.
Nothing has yet been proved either way but it is clear that there is a lot of uncertainty about what caused the collapse of these funds and, again, in the interests of justice and fairness, until that has been determined, IFAs should not be asked to foot the bill.
Of course, the investment managers were FSA-authorised – has the FSA performed any sort of investigation into their conduct? We suspect not.
Depending on the precise cause of the fund collapse, it may not have been foreseeable by any adviser and so they should not be asked to pay.
Perhaps it is finally time for advisers to join together and take on the FSA on these issues, show them that they must be treated fairly and that they will not be bullied yet again.
Alan Hughes is a partner at solicitors Foot Anstey