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Arch cru fallout highlights FSCS broken model

One of the many concerning aspects of the Arch cru debacle is that IFAs who never touched the products will together fund more of the costs than the compensation package agreed last year by the fund range’s ACD Capita and two depositories.

Announcing this week’s £110m consumer redress scheme, the FSA predicted up to 30 per cent of adviser firms which recommended Arch cru and are still authorised could be forced into default, dependent on PII arrangements, triggering Financial Services Compensation Scheme payments of up to £33m.

The FSA says these figures are a worst-case scenario and a bit of closer scrutiny suggests the calculations need to be treated with care. The FSA says 795 firms sold Arch cru. Many have already gone bust yet the FSA could not provide our reporter with an estimation of the number who are still authorised (ie 30 per cent of what ???).

However, if we take the FSA’s £33m calculation as a ball park figure, and add it to the FSCS’s factored in costs for the amount intermediaries will have to pay out for Arch cru (around £40m), the combined figure is likely to be much higher than the £54m compensation scheme that the FSA agreed with Capita, BNY Mellon and HSBC last year.

(The FSCS indicated last month that nearly £40m of extra costs would be allocated across investment and pension intermediaries to pay for Arch cru. Costs are split 70:30 between the investment and pension intermediary sub-classes.)

Since announcing last year’s £54m compensation scheme the regulator has confirmed that no regulatory action would be taken against HSBC and BNY Mellon whilst we await a finding on Capita.

Much of the concern following this week’s redress scheme has focused on the FSA’s judgement over levels of responsibility, especially as no findings on Capita have yet been published.

That IFA FSCS costs for Arch cru are likely to be higher than last year’s Capita/HSBC/BNY Mellon compensation scheme says a great deal about both the way the FSA has handled the Arch cru scandal and the desperate need for FSCS reform.

The fact adviser firms who steered well clear of Arch cru will together be paying more in compensation than the fund range’s ACD does not seem right.

Paul McMillan is the editor of Money Marketing- follow him on twitter here


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. The same things will happen with Keydata.

    Debbie Harrison the writer of the Keydata report which influenced many advisers was, according to her CV, a consultant to PWC and the Financial Services Consumer Panel And an FT contributor and author). She is also a Trustee of the Finanial Inclusion board.
    Margaret Cole (Ex FSA chief enforcer) has gone to work for PWC.
    PWC were the auditors I believe for Lifemark Luxembourg and then advised the FSA about applying to have Keydata deemed insolvent. PWC were then appointed as auditors.
    Herbert Smith represented Capita in the behind closed doors deal with the FSA with regard Capita and Herbert Smith are appointed by the FSCS to chase ALL advisers who reccomended Kedyata Lifemark plans whether the client was advised to invest 1% of 100% of their portfolio.
    Anyone see a pattern or is it just co-incidence?
    This does not imply any individual has done anything wrong. It indicates a thorough investigation is needed of both Arch Cru and Keydata issues BEFORE apportioning blame.
    Not sure if this post will get past MM’s vetting, so please let me know before not publishing and I will happily change the wording if you like.

  2. Paul – great article, well articulated as per normal. You should be sending this and other such articles to the TSC and other MP’s as we, in the business, all know the system has been broken for a long time but FSCS and FSA wont do anything about it unless really put under intense pressure to so. They just continue on with a broken model as its all they have got. If they put as much effort into sorting this system out as they did with TCF & RDR we could have had a much fairer system in place before now. The only ones that can do this are the likes of the TSC & MP’s. I have been hearing rumours that, in private, Hector the Protector was pushed into quitting and withdrawing from Deputy Gov of BoE. I just wonder if this whole consumer redress is him giving one last set of “fingers” to the industry before he leaves Canary Wharf.

  3. A good summary Paul, and highlights why Mark Hoban needs to put his thinking cap back on and sort out the mess that is the FSCS and it’s funding arrangements.

    It is simply not good enough for him to say they have thought hard about FSCS funding but cannot think of a better solution. The ArchCru debacle is one in an increasingly long list of failures that have affected the adviser community disproportionately.

    Not only are surviving firms having to shoulder more cost and responsibility, so are clients, though increased costs of advice.

  4. My funding view of FSCS and being an IFA… we are the bank that keeps on giving.

    1. Pay towards compensation to Keydata clients.
    2. Pay towards cost of sueing IFAs who sold Keydata.
    3. Be sued for selling 1 small amount of Keydata product to millionaire (by FSCS)
    4. Pay towards compensation to Arch Cru, spreadbetters, stockbrokers etc
    4. Pay towards cost for bust IFA firms for selling the above.
    5. Pay towards FSCS admin for all of the above.
    6. New one – The reports on how if PI insurers do pay a large part of the Arc Cru scheme means PI costs likely to go through the roof (x3 per Mr. Pointon) which means IFAs end up paying for it anyway!! ie IFA still paying FSCS just via PI insurer.

  5. John D Ex-IFA 4th May 2012 at 9:31 am

    When the FSA chooses to demonise whole product categories on an industrial scale and then encourages everyone to make claims without any come back for making fraudulent claims it is little wonder we are in such a mess.

  6. Terence P. O'Halloran 4th May 2012 at 9:35 am

    Karl McCartney MP for Lincoln

    Dear Karl,

    On 30 April FSA launched CP12/9, a consultation on establishing a consumer redress scheme aimed at compensating investors who were ‘mis-sold’ the CF Arch cru Investment and Diversified funds.

    If the proposals are implemented this will be the first time that we have seen FSA use its powers to put a consumer redress scheme in place. The decision to go down this route was taken following a review of files from a sample of firms that advised clients to invest in the funds; FSA’s conclusion was that there had been “widespread mis-selling”. But, on what premise. IFAs had been confident that the FSA considered these funds ‘cautious’ PLUS the subsequent losses are reportedly fraudulent or at best negligent in nature BY THE ADMINISTRATORS, who have agreed to pay damages.

    Key elements of the draft scheme FSA is consulting on include:

    firms which sold Arch cru funds would have to contact their clients within four weeks of rules being made, indicating whether or not their case falls within the scope of the scheme;
    where redress is due, firms would have use of an FSA online calculator to calculate each redress payment – taking account of how much money each investor is able to claim from the separate voluntary payment scheme;
    investors should receive notification of how much redress is due within six months of the scheme starting, and would receive payment within 28 days of accepting
    The paper includes FSA’s thinking on an IFA’s duty to determine suitability (which cannot be delegated), based on the risks in the product. FSA estimates that the proposed scheme will see 15-20,000 investors redressed to the tune of £110m as a result of the proposals, with the cost of implementing the scheme at between £6m and £11m.

    FSA considered 5 options for obtaining consumer redress:

    Option 1 – supervisory action on a firm-by-firm basis

    Option 2 – issue guidance on complaints handling to firms

    Option 3 – reach an agreement with firms

    Option 4 – issue a call to action to consumers inviting them to complain

    Option 5 – a s.404 consumer redress scheme as applied to a number of firms

    FSA’s preferred option is option 5 – there is very little detail about the other 4 options in the paper.

    We are particularly concerned that a number of parties (Capita Financial Managers Ltd, BNY Mellon Trust and HSBC) involved in the Arch cru funds made just £54m available to investors who remained in the scheme, when IFAs are being expected to fund redress of around £110m, potentially without consumer complaints.

    The paper raises questions about what is an appropriate model for compensation including what is affordable and will support the sustainability of the sector. FSCS envisages a limit that was deemed reasonable, but redress schemes such as this potentially doubles the contribution from the advisory sector in 2012/13. Hence, we are interested in your views on the specifics of the proposal and the broader issue of affordability.

    Many intermediaries are finding that their current PII insurer indicated that they aim to withdraw from the IFA market.

    Surely the criminal nature of the Arch Cru situation means that it is outside the scope of the FSA? The disproportionate arbitrary allocation of responsibility to Independent Financial Advisers is driven by the perceived access to PII funds and nothing else. Is this being done in order for the FSA to somehow ‘look efficient’? It is surely tantamount to fraudulent conversion for which the FSA should be censured.

    Please, parliament must hold some power over the FSA? What is happening is scandalous.

    Our firm had nothing to do with Arch Cru but I have colleagues, friends, who will be driven out of business if this travesty of so called justice and compensation goes ahead. Please STOP THE ROT NOW.

    I look to you to bring this to the notice of the government at the highest level before the ‘rats’ that are perpetrating this farce leave their s(t)inking ship!

    Yours ever

    Terence P.O’Halloran FCII Eleanor Downie FCII

  7. The parade of injustices continues to shamble past the helpless and bewildered onlookers.
    NObody defends this scheme any more , do they? Who? And If not, why is nothing URGENT being done? The inaction in such circumstances is the ultimate manifestation of the inept system in place.
    And Arch Cru isnt even a BIG failure – if the Equitable happened today the scheme couldnt cope without putting virtually every other business out of business, so whats the point of a protection scheme that wouldnt even work when most needed?
    PRe funded IS the only answer, even if its imperfect too, because it will at least make the polluters pay while they are trading, and will get rid of the madness of out of the blue levies that can cause firms to go bust at a stroke
    And it once more shows the hollowness of the argument for capital adequacy (for those firms NOT holding client money) when clearly thats not working either (as predicted) to prevent claims against firms ending up with FSCS.
    Is it jsut me or is anyone else getting ever more weary of this? All we want to do is run a decent small business employing decent people offering decent advice. Why does that have to be made to be so so complex?

  8. Rise up, wise up, all ye CEO’s of large networks, you will be ever more burdened by this injustice if you do not engage together with the FSA and close down this scheme by refusing to pay up.

    Get off your butts and do something about it.

    Then again, who gives a toss, they surely don’t

    FSA – Financial Stitchup Authority

  9. Joe Egerton - Justice in Financial Services 4th May 2012 at 11:11 am

    One of the more irritating and offensive aspects of this is the large cheques that ambulance chasers will bank. Many of these tell direct lies to get business – nobody needs to use a third party claims firm or solicitor to access FSCS and FOS. At least one such firm stands to make over £4M out of FSCS payments on Arch cru

  10. The UK is in my mind the most corrupt country in Europe, if not the world. (and that’s saying something).

    In years gone by we used to look down our noses at countries where slipping a border guard cash in an envelope to pass through easily was a terrible indictment of less civilised places. At least you knew what the score was and how much it was going to cost.

    From politicians to international accountancy firms, Quangos and public bodies as well as corporate fat cats and banks. The whole rotten system stinks. The little man always pays and the public school old boys continue to milk the systems they control. This is definitely “Broken Britain”.

    Long live the revolution!

  11. Terry

    May I use your letter to write to my MP?

  12. It’s dreadful that the FSA has done nothing to alleviate this situation.

    Although I am not involved in Arch Cru etc. myself, saw them people coming, I feel sorry for IFAs who get claims against them lodged too late for them to claim on their p.i.

    P.I. is on a claims made basis, so the IFA who receives a claim before renewal has the resources to meet it. When the claim comes after renewal insurers have excluded such claims and the FSA requirement to have p.i. has been frustrated.

    That is unfair and unreasonable.

  13. I am told by my Network, that the FSA are now observing closely to intervene in preventing such products as Arch Cru et-al being sold.

    If they are so capable of jumping on this now, why weren’t they able to do so before hand then?

    The FSA have clear responsibility here, not us.

    Why do we have this continued refusal by the FSA to regulate product design ( “we don’t want to stop innovation”. Yeah, right!)? Dodgy products are allowed a clean bill of health. We then find miraculously that they are anything but what they claim to be. The FSA then shut the stable door long after the horse has bolted, following which they then have the arrogant and unmitigated gall to hang the blame on the poor suckers who went out and advised on products they were told were perfectly OK.

    The FSA screw up (AGAIN), and we pay with our sanity as well as what little money we have left.

    At the risk of sounding boring (like I care any more), where is the sense in this:

    1/. Neither I nor my firm have ever advised upon, or sold any of the products this whole débâcle revolves around.

    2/. Neither I nor my firm has ever received a single complaint in over 20 years of trading.

    3/. My network fees are now £1000 per month, per IFA. £450 per month of this is to commence from May 2012 and is attributable directly to the aforementioned débâcle. How bizarre; having not contributed to any of this mess in any way, I must find a further £450 per IFA every month (’till it rises again, which won’t be long), whilst the FSA who are clearly more than culpable, abdicate all responsibility for their own failure in allowing this stuff to come to market in the first place!

    What is the average per-capita IFA cost now of such fees? What is it going to be over the next few months?

    This is entirely untenable. I agree wholeheartedly with the previous contributor in saying to Networks (and to directly authorised firms), that a strong stand has to now be made. Simply say NO. WE ARE REFUSING TO PAY. DO SOMETHING ABOUT THIS! NOW!! That is my own intention.

    You may as well all do the same – either you fight back now or you continue to suffer death by a thousand cuts. There will be more and more of this until we are erased from our livelihoods. Stand up and shout. Be counted. Write to your MP’s. Get you clients to sign your own petition (while you still have some left.!).

  14. More incompetence from the FSA they couldn’t stitch up a pair of socks properly.

    The risks of the fund have been stated in the Consumer Redress Scheme CP – the FSA have demonstrated more bungling incompetence
    Consumer Redress Scheme CP the FSA state:
    We do not believe that there was anything in the marketing material that would have given a reasonably competent IFA comfort that either the investment strategy employed or the specific assets invested in would have mitigated these risks and therefore justified the claims that the overall risk level of the funds was low or medium. Furthermore, the Arch cru funds were NURS, meaning that they were able to take on debt, up to certain limits, to fund their investments, which would exacerbate these risks.
    They have been investigating the funds for three years and they haven’t read the prospectus which said:
    The ACD has decided to restrict the investment and borrowing powers which would be available to a non-ucits retail scheme under the regulations, and the investment and borrowing powers available to the Funds in money market instruments and/or cash deposits.

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