View more on these topics

Arch cru: A sense of justice

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

Recommended

Rathbone goes for gilts while M&G backs bonds

Rathbones head of multi-asset David Coombs has increased the £40m multi-asset total return fund’s exposure to index-linked gilts to its highest ever level, while M&G fund manager Mike Riddell sees more value in inflation-linked bonds than gilts. Gilts tend to rally in times of risk aversion but low yields have led to some bond managers […]

Power stations

The problem: Charlie and Joan are retired teachers. Joan has had experience of having her father lose mental capacity due to dementia.

1

Gross mortgage lending plunges 19% in April

Gross mortgage lending fell by 19 per cent in April from £12.6bn in March to an estimated £10.2bn according to the Council of Mortgage Lenders’ latest figures. The trade body says that the sharp decline in lending is likely to have been down to the stampede of first-time buyers who brought forward their transactions in […]

Chris Gilchrist: We need an inquiry

Who will guard the guards was a key question in Plato’s Republic and has regularly resurfaced in politics ever since. Because democracies have to entrust power to agencies acting on behalf of the people, it is vital that these agencies are held to account. The FSA is exactly the kind of guardian that most people […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 26 comments at the moment, we would love to hear your opinion too.

  1. Good article Alan. It just goes to show the level of arrogance & contempt The FSA have for the adviser community. I have a feeling this may be a last chance to have a dig at the IFA community before a certain member of FSA staff goes on “garden leave” at the end of next month. No doubt when the FCA takes over it will say something along the lines of “well all this went on before we took charge so its not our fault but we will see it through anyway”. I would love to think that IFA’s would get together to fight this but I just dont think it is likely to happen.

  2. Time for a trade body that actually represents the interests of advisers?

  3. How about we collectively decide that we will not be regulated by the FSA and be subject to the rule of law in proper courts and not kangaroo courts. What could they do if nobody recognises their authority? The uk government would have to choose between backing the IFA sector or seeing the total collapse of the uk financial services industry and ultimately themselves !!!

  4. Get your udders full guys and gals the IFA cash cows are being led to the milking parlours again.

  5. In the FSA Consultation Paper on the redress scheme they pose a series of questions. Question 5 asks:

    Q5: Do you agree with our assessment that the legal tests for making a consumer redress scheme have been met?

    I imagine that Alan’s simple answer is “no” Or at least not until they have explained how they arrived at the sum of £54m redress from Capita HSBC and BNY Mellon

    I wonder how many IFA responses there will be to that CP?

  6. I thought the FSA regulated products and their distribution? You would have thought the FSA actually look at products and funds before they rubber stamp them as regulated products?
    Once a fund is up and running you’d think the FSA would audit the fund to make sure it’s not a scam.
    Could it be that Capita, HSBC and BNY Mellon all hid the truth – yet are being let off by their pals at Canary Wharf? It does look like it.
    This is an admission by the FSA that they could not regulate their way out of a wet paper bag. They pay scant attention to the product manufacturers and fund managers they are supposed to be regulating.
    Rules are being made up as they go along. Retrosepctive regulation with the intermediary sector having to pick up the tab.
    No one at the FSA, Bank of England or treasury were held accountable for the banking crisis nor will they justify this latest outrage.
    100% not fit for purpose and answerable to no one at all.

  7. Neither Capita nor BNY Mellon nor HSBC, nor apparently theFSA bothered to look a the underlying investments, which, despite the fact that they were apparently ‘listed’ on that leading stock exchange at St Peter Port, were almost totally illiquid and impossible to value.

  8. Can we just not all agree that unless we get reasoned answers we withold all FSCS levies.
    I never signed up to be robbed. It’s like ‘Gangs of New York’. It really is time to draw a line in the sand.

  9. If this scheme goes ahead, then it is possible that my IFA who has served me well over many years may go out of business. Who should I choose to replace him? Perhaps someone recomended by Capita, BNY Mellon, HSBC, FSA? I don’t think so. These people ae simply ensuring that they can pass the buck onto anyone who is not in a position of power. It’s a disgrace.

  10. Alan succinctly exposes this flagrant, and shameful, abuse of power by the FSA. What horrifies me that they believe that they can get away with this – and apparently will.

    Arch should have recognised by advisers for what it was from the start. However, ‘unsuitable advice’ was not the catalyst behind the funds failure, and advisers were entitled to presume that the FSA had carried out the requisite due diligence before authorising the fund, and that Capita was acting as a competent ACD. If the FSA and the ACD had met their statutory duties responsibly, surely investors’ losses could have been avoided or mitigated.

    How can it be that the FSA can be allowed to blatantly ‘stitch up’ advisers, when there is such a clear conflict of interest and, as Alan says, the facts of the matter have yet to be revealed?

    Following the suspension, Capita instructed PwC to investigate the valuation of the funds’ assets and promised to publish the findings. No doubt the findings proved ‘inconvenient’, as Capita has now announced that it will not be publishing the findings.

    This is not a blameless, or unfortunate, debacle. Certain parties fell down on the job and should be held accountable. It is against natural justice that the regulator can decide on who is liable, without an objective analysis of the facts or without apportioning causation or quantum fairly.

    This all smacks of a hidden agenda, and a desire to sweep this shabbly little affair under the carpet without the inconvenience of waiting until the investigation is concluded (if it ever is) and actual loss is quantified (ie, following the court case).

    How can it be right that advisers who never recommended this fund could end up paying more (through the FSCS levies) than the ACD responsible for appointing and supervisor the errant fund manager?

    Sadly, everyone from investors through to Parliament knows what is happening, but we appear powerless to prevent this terrible injustice from wreaking the adviser community.

  11. Whilst completely accepting that the FSA is at best spineless and at worst incompetent, this whole debacle drives home the fact that the vast majority of so-called IFAs are either unable or incapable of completing sufficient due diligence on funds to be worthy of the ‘independent’ title. How many of you who sold Arch Cru funds provided clients with sufficient analysis of the various types of risk involved and what could happen should the leveraged elements of the fund default, or the assumed mortality aspects of the traded life market fail. How can IFAs provide sufficient analysis if they have clients to see and meetings to attend? Perhaps this is why most IFAs are not independent or impartial at all, and are largely influenced by fund manager marketing, entertaining and favouritism. The sooner the FSA realises that to be truly independent an adviser must show sufficient research to justify a recommendation, and that this just isn’t possible without outside intervention and the inevitable influence this brings, the better! roll on RDR!

  12. Johnathan- sO for earning a few grand in commission (dirty word i know) we are suppose to carry out better due diligence on finds then the FSA. If multi million pound funds are do something dodgy how the f@”;)k am I suppose to spot it if the FSA and the companies auditors can’t such as in arch cur and keydata!!!! You make it found that we are easily swade by marketing entertainment …. Get real it’s the million pound back handers the fund mangers give us to place a few quid of our clients money with them……..

  13. Julian Stevens 22nd May 2012 at 8:08 pm

    On its website, the FSA claims to be “an open and transparent regulator”.

    At his appearance before the TSC back in March 2011, Hector Sants claimed that the FSA has “no prejudicial agenda against small IFA firms”.

    A central pillar o the FSA’s statutory remit is to protect consumer interests and to promote public confidence in the UK’s financial services system.

    Martin Wheatley has said (in his letter to Martin Bamford) that the FSA is keen to find ways of minimising the [financial] burden of regulation on firms.

    A cornerstone of English Law is that any accused person shall be deemed innocent unless or until proven guilty.

    Discuss, contrast and compare (with the reality of the situation).

  14. The advice came before the fund failures. The advice downplays the real risk of the funds. The losses are caused by the advice.

    The mis-management came second.

    IFA’s will bleat, blog and whine and then do nothing about it.

    When a bit of backbone is required, IFA’s would rather blog !

  15. When myself and two others formed Adviser Alliance back in 2010 we asked for support from the adviser community.

    We argued that AIFA had failed utterly to represent the interests of advisers by accepting the RDR proposition.

    We further argued that rather than cosying up to a regulator that listens but doesn’t hear we need to use the legal system and the might of Parliament to force various issues.

    Many advisers have joined with us but not enough. With Foot Anstey we recently attempted a Judicial Review against the FOS and whilst our application was ultimately unsuccessful it confirmed that here is a trade body that is prepared to do something rather than just preach.

    Those disaffected advisers smarting from the RDR, Keydata, Arch Cru and the many, many more that will afflcit us in the future, should decide whether it is appropriate to sit back and moan or actually do something. Individually we are isolated but together we have power and influence.

    Go to http://www.adviseralliance.co.uk and join with us now. If we are unable to represent worthwhile numbers of advisers thern we might as well pack it in and let these unreasonable bureaucrats kick us around the block for another decade.

  16. @Paul
    Arch should have recognised by advisers for what it was from the start. Difficult to do when the prospectus is factually inaccurate and the FSA chose to secretly change the marketing material without notifying advisers/investors. Just like the Madof case large institutions invested in Arch. For example 7IM had money with Arch, Royal Liver was a substantial investor in the Guernsey Cells. With all the research capability available to the institutions they never spotted anything amiss with Arch. The losses suffered by the clients of the institutional investors never suffered loss through advisory issues – presumably then it was loss suffered through investments that went badly wrong!
    Why cannot the FSA just admit they approved a Fund of Alternative Investment Funds as a NURS four years before the instrument to allow such a fund was introduced.

  17. Clearly IFAs are not responsible for the collapse of the scheme. However, the issue that IFA’s should face is where this was sold to individuals who needed a low risk investment.

    I really like the ‘simple terms’ way of asking for an explanation of £54m….. I hope continued pressure will lead to an explanation.

  18. @ Jonathan

    As an individual who did not recommend these funds, I accept that there is some underlying truth in what you say.

    However, this is not a case of incompetent salesmen trying to avoid responsibility. Any objective individual can see that the FSA and Capita are using all their powers and legal might to avoid an open and transparent review of the facts of this matter.

    It should be borne in mind that many firms did not recommend these funds until mid 2008, when the funds had won an award from hindsight and a price history (under Capita’s control) that asserted consistency and low volatility.

    It is reasonable for advisers to expect that Capita was monitoring and auditing the management of the funds and ensuring that the mandate and statutory obligations were being complied with.
    We now that the price history (deleted by Capita from the internet after suspension) was grossly misleading, and that Capita’s appointed fund managers were investing 25% of the fund in second-hand Greek ships!

    Far from holding Capita to account for this gross incompetence, the FSA do a deal with them that limits Capita’s compensation scheme to only 13% of most investor’s original capital invested. And this is before the FSA has completed its investigation.

    How can this be right? Either the FSA is incompetent or acting with an agenda – which is it?

    If the former, those responsible should be sacked. If the latter, then criminal proceedings should be considered.

  19. It was clear to anyone that took the trouble to read the Guernsey cells’ prospectus that these were illiquid investments not capable of being accurately or regularly valued.While an IFA might not necessarily be expected to research each and every underlying investment held by a fund, the fund manager (Capita) certainly should have done.

  20. Exasperated Me 23rd May 2012 at 11:40 am

    The problem is that whatever the regulators propose has already been handed down to them by the policymakers at HM Treasury for implementation. When they read these comments they chuckle.

    The FSA is not independent of government, how can it be?

  21. I agree with many of the comments made here. To burden IFA’s with the majority of the blame here is clearly wrong and flies in the face of the legal principle of Causation and quantum. My question here is after being a memeber of AIFA for many years and having paid my subscriotions to them dutifully why are they virtually silent on what is probably one of the major compensation issues to hit many IFA’s in Years? Even if you have not sold Arch Cru IFA’s will suffer throiugh increased FSCS levies. It is about time AIFA woke up, had some guts and tackled this issue head on. There ever increasing requests for further funds might then receive a lot more favourable response from the IFA community.

  22. michel bendichou 23rd May 2012 at 2:58 pm

    A point by Jonathan earlier is interesting. There are literally 000s of funds out there. How is any IFA meant to be “independent” if independence means conducting forensic analysis on ALL funds before deciding upon the most suitable for a client?

  23. Why has the FSA not dealt with the CF Arch Cru fiasco in the same way as Morgan Grenfell European Growth Trust or the Standard Life Sterling Pension Fund details of both cases are detailed below.

    Although nothing has yet been proven there is a £150 million lawsuit been filed against Arch Financial Products LLP.

    CAPITA Financial Managers were the Authorised Corporate Director of Arch Financial Products LLP and therefore legally liable for the actions of Arch Financial Products LLP.

    Why has the FSA not awaited the outcome of this lawsuit before making any decision, and why has it taken over 3 years to start the legal action, did the FSA back in March 2009 think that all investors would have complained against their advisers before now instead of standing shoulder to shoulder as most have who adviser is still live.

    In 1996 Peter Young was a fund manager at investment bank Deutsche Morgan Grenfell (“DMG”) in London. He joined DMG in April 1992. In 1994 he was given responsibility for a £300 million PEP fund called the European Growth Trust (“EGT”). By 1996 it had become one of the largest unit trust funds in the country. At that time Young had responsibility for more than one billion pounds of investors’ funds.

    Mr Young had made investments that broke the fund mandate causing considerable investor loss, the result of the fund managers fraudulent actions cost IFA’s nothing in compensation and Deutche Morgan Grenfell £210 million in compensation. Attached is link as to how IMRO and SIB handled the affair.

    http://www.fsa.gov.uk/pubs/additional/imro001-99.pdf

    I would like to bet that the executive at Standard Life are wondering why they were fined £2.45 million for their failures on the Pension Sterling fund despite paying £107 million to investors to ensure the investors did not lose money, again the FSA bulletin is listed below.

    http://www.fsa.gov.uk/library/communication/pr/2010/010.shtml

    There is something very wrong about the way CF Arch Cru has been handled and only an independent inquiry will allow the truth to emerge.

  24. A Smith you have completely hit the nail on the head with your comments. Why on earth are Capita and Arch Financial Products not being dealt with in the same way as Standard Life or Morgan Grenfell. Something stinks to high heaven here!!!

  25. could someone at money marketing please email me to tell me why my comment from yesterday on this article has been removed and also why the comment on Nic Cicutti article has been removed. Information contained in both was purely factual.

  26. Julian Stevens 25th May 2012 at 10:22 am

    Without a united stand and a call to arms on the part of ALL the networks, any talk of witholding our regulatory levies is pointless ~ the FSA will just pick us off and shut us down, one by one.

    It’s all very well to knock AIFA but, no matter what they or any other similar organisation might sincerely try to accomplish, the fact is that none of them has any clout. Even if any of them did, the FSA sits ensconced in its ivory tower with statutory immunity from prosecution and a government endorsement of non-accountability.

    As posted many moons ago by somebody else, the FSA’s response to representations from the likes of AIFA and the networks is simply to smile and wave, smile and wave. If the FSA decides to reject any proposal or representation, it just says so and there’s nothing anyone can do about it. Isn’t that the reality of the situation? The root of the problem is lack of accountability, and even the TSC is getting nowhere trying to change that, so what hope can there be for the IFA community?

Leave a comment