For the second time, I am going to cite two documents that show Arch cru investors were entitled to a far better level of protection than they have experienced. For this, there is only one party to blame the regulator.
From the FSA website: “Any money in an open-ended investment fund is protected by a depository who ensures the management company is acting in investors’ best interests at all times.”
From the Treasury’s briefing on the introduction of Oeic regulations in November 1996: “The Treasury’s policy objective in establishing powers for Oeics is to provide their shareholders with the same standard of protection as is available to investors in authorised unit trusts.”
Exhibit A is contradicted by the behaviour of Capita as ACD of the Arch cru funds. It failed in exercising its responsibilities. The two depositories also appear to have failed. Yet the regulator has let them sneak off without a thrashing. No heads have rolled.
I have said before why I think this is. The regulator itself was asleep at the wheel and allowed the Arch cru funds to be authorised when its officials should have denied them authorisation. The FSA knows that its own role would be challenged if it tried to hammer Capita or the depos-itories for all investors’ losses. As the classic over-mighty subject, the FSA is judge, jury and executioner, so it can get away with a shotgun “solution” to the Arch cru debacle without being challenged.
Possibly the most worrying feature of the FSA’s justification of its solution is its contention that the financial services division of Capita does not have enough resources to compensate investors fully. Does the FSA really allow ACDs without substantial capital of their own to operate without insurance against such disasters? If so, this must count as a massive failure of regulation in its own right.
Now for Exhibit B.Under current regulations and established precedents, the trustee of a unit trust that failed in the way Arch cru did would be liable without limit to investors for their losses. The fiduciary responsibilities of the trustee are greater than the combined responsibilities of the ACD and depository in an Oeic but the division of those responsibilities between two parties weakens the protection provided to investors. The dangers of this division of responsibilities were evident from the outset of Oeics and could only be compensated for by greater vigilance on the part of the regulator in relation to Oeics than to unit trusts. Naturally, the FSA has held itself out as performing this function but when the chips are down, it claims the Arch cru disaster is everybody else’s fault and not the regulator’s.
What I feared would happen has happened. The FSA has permitted investors in a UKauthorised fund to suffer losses due primarily to the deficiencies of custodians and managers. It is the first time such a loss has been incurred in a UK-authorised fund where investors have not received compensation in full.
The consequences for the funds industry are somewhere between bad and terrible. Now that Jeff Prestridge at the Mail on Sunday has taken up the Arch cru cause, his columns will alert somnolent fund management chiefs to the awful reality they have allowed a feeble regulator to permit potentially lethal damage to their industry.
Chris Gilchrist is director of Churchill Investments and editor of The IRS Report