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Court ruling gives advisers Arch hope

A recent court judgment may offer advisers hope in the Arch cru fund debacle, a legal firm has claimed.

Regulatory Legal Partner founder Gareth Fatchett says a county court judgment passed in favour of John Petrie against Standard Life means that providers may be liable if a fund has the wrong risk rating.

The case related to an investment made into the Standard Life sterling one pension fund, a cash fund in which Mr Petrie placed over £500,000 in November 2008, only for the fund to fall in value a few days later.

The judgment of the court was that Standard Life misrepresented the risk profile of the fund by making it appear lower risk than it actually was.
Fatchett says the decision is significant as it shows that providers have some responsibility for the risk-rating of funds, which he says they have trad-itionally tried to steer away from.

He says: “The judgment says if the overarching risk rating misleads the average client, there is provider responsibility on behalf of the client.

“Although it centres on the Petrie case, the judgment applies to all products and risk ratings. This is a good thing for the IFA community as it sets out a very basic principle that IFAs can rely on the risk ratings of providers. If you draw a parallel with the Arch finance fund, you can see the same arguments and issues would apply.”

However, last month, the Financial Ombudsman Service upheld a complaint against an adviser who it deemed to have inappropriately placed a “low to medium-risk” client into the CF Arch cru investment portfolio.

Candidmoney.com founder Justin Modray says: “The line is 50/50 between the provider and the adviser. In the Arch cru fund case, I believe the provider did not make the risks clear enough but the advisers need to get under the bonnet of the products to see what it is they are and what they do.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. The buck stops where?

  2. This is an interesting case as I have had similar discussions regarding the splits debacle, where even with due diligence, clients lost a lot more money than they should have done during the splits meltdown.

    It has always appeared that fund managers can and often do get away with a miriad of things when seeking growth.

    No risk should mean no risk and low risk should also mean such.

    The problem is that fund managers have too wide mandates and go off piste on occasions. Only where fraud is found to be committed has an advisor got any recourse.

    Remember the Peter Young debacle at Morgan Grenfell where investors were compensated compared to the Rory Powe saga at Invesco Perpetual where they were not. One was off piste the other was simply packing the fund full of tech stocks.

    As we are accountable so fund managers should be

  3. No risk is simple and straightforward. Any other level of risk is a matter of opinion.
    Whilst there is a general perception of risk levels (which will vary from person to person) there is no working definition upon which one could base a water tight case. Any measurement or statement, given our present state of knowledge, will be merely opinion. Consequently, no one will know where the buck stops, except when there is fraud, and possibly negligence.
    And never forget that it is quite possible to have a high risk investment in a lower risk portfolio, so long as the over perceived risk level of the portfolio is low – just protect your back by explaining the matter to the client. If he/she goes pale think again!
    The point is that risk management is complex. Other than No Risk statements, I wouldn’t trust a providers indication of Risk level so again do you own homework, leave an audit trail and protect your back.

  4. To be fair to Standard Life, they risk rated the fund and, if the fund manager had stuck to the brief, the risk would probably not have happened.

    Evan Owen’s question is apposite. The adviser has to explain the risk to the customer. When the customer claims not to have understood the risk, where is the arbitrage on the duty?

    In future the RDR is pointing towards paying a fee for advice or going direct to the big names. This may leave the future for IFAs in doubt as they calculate the cost of what happens if this goes wrong.

  5. This was a very specific case, and the judgement hinged on the fact that SL described the fund as “cash” whilst in fact up to 44% of it was held in Asset-Backed FRN’s. Furthermore, this point was kept hidden by SL from investors and advisers until after the fund had fallen.
    So, it was more than just a case of intepretation of risk, but more a case of misrepresentation.
    The Arch-cru case is different, It’s not just a matter of “risk” but whether they were being clear in their literature where the fund was investing. With non-“cash” funds, it’s a more difficult point to prove and I’m not sure if much of a parallel can be drawn between the two cases.

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