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Arch cru package does not hide FSA failings

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

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. jeff prestridge 27th July 2011 at 12:58 pm

    A simply brilliant article on the Arch Cru debacle

  2. A superb article. The FSA was comatose at the wheel on many fronts. It is time that the law of the land be brought to bear.

  3. Could not agree more but in the end the FSA and their buddies will get away with it and we all know where the buck will stop yet again!!

  4. Excellent article. I’m sure the FSA will be so shocked at their lack of regulation in this case that they will have no other option but to break out a case of champagne to ‘forget’ their shortcomings, award themselves a decent pay rise to enable them to ‘do it better’ and more professionaly next time and give themselves a large ‘bonus’ so that they can have a fantastic holiday to recover and lick their wounds. I really feel so sorry for them. I thought IFAs were being persecuted but the poor FSA are really getting it tight! If they weremade accountable they would really get it tight, but thankfully they aren’t and can get on with doing a shoddy job! PHEW!!!!!

  5. simply brilliant article. Why do we allow the FSA to get away with it? Whats wrong with our government, isn’t this what we elect them for?

  6. Brian Weatherley 27th July 2011 at 3:05 pm

    Having been found “not fit for purpose” regarding the banking crisis, the FSA sought to re-assert itself with a massive regulatory assault on IFAs. Can you imagine the response had an individual been resonsible for such disregard of fundamental legislation and guidance.
    “Not fit for purpose” again appears to be appropriate

  7. If any IFA’s feel motivated to do something about this injustice, tehy should press for a S14 inquiry FSMA 2000. Joe Egerton of Justice in Financial Services is running a campaign for more information contact

    joe@ignacity.info

  8. Darrell Monteith 27th July 2011 at 6:20 pm

    Northern Rock, Bradford & Bingley, Dunfermline building society, Alliance & Leicester, Key data, Arch Cru, NDFA, Stirling Mortimer. You wonder what would have needed to happen on Hectors sants watch for him to be sacked instead the mugs in Westminster keep him on and give him even more power. It al males Mugabe look like a democrat.

  9. Chris, I agree. This will be the first time that an investor has lost out due to the failings of the ‘protections’ of the ACD/Depository. In the old AUT days my understanding is that no investor EVER lost money as a result of trustee incompetence or failing.

    As the open ended fund industry has pretty much converted lock, stock and barrel to the Oeic regime then the failings of all the third parties here is deeply concerning.

    ‘Rent an ACD’ organisations are a real worry. Most of the DFS are run by such organisations and it is of real concern the that much vaunted protections appear to be potentially built on sand. At least the Oeics run by bigger fund houses tend to have proper operational risk and compliance people monitoring and regulating them.

    I’d love to see an S166 report on this. Maybe Jon Maguire should be forced to pay for one?

    Anyone want an onshore bond???

  10. If the FSA do indeed cite Capita Financial Managers lack of money as a reason for not fully compensating investors then that would be truly amazing ie how could the FSA authorise them to be ACD for Funds that they cannot cover?
    Also how could Capita Group defend this ie that they would not underwrite the liabilities of their wholly owned subsidiary ?
    So if FSA Investor justice is to be limited by citing the ACD’s ability to pay and Capita Group unwilling to contribute why not allow CFML to declare bankruptcy and have the FSCS pay whatever can’t be recovered from CFML assets ?

  11. We, innocent investors, who have been caught and made to suffer in this debacle should get together quickly to form a strong Action Group.As individuals we are weak and will be further kicked on the ground by huge solicitors’ fees,another breed who will enjoy profiting from our misfortunes.I’ve just been charged £1,500 for what was defined as 8 hours work,the breakdown being making enquiries, phone-calls and reading e-mails!

  12. This is an excellent article with accurate observation of the circumstances. I am still awaiting after four years of very little accessibility to my own money and no interest on investment from Arch Cru, information from the FSA as to how I can get back the original amount invested in my ‘LOW RISK’ Arch Cru investment Portfolio advised by my IFA after a very traumatic divorce in which this money was meant to help with a pension. The whole matter is totally devastating that we still have no answer and no funds!!!!

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