The FSA says up to 30 per cent of currently authorised firms that recommended Arch cru could default due to the regulator’s proposed consumer redress scheme, triggering a Financial Services Compensation Scheme bill of over £30m.
The regulator published a consultation this week on plans to set up a £110m consumer redress scheme for between 15,000 and 20,000 Arch cru investors. Firms will have to assess whether recommendations to invest in Arch cru were suitable and, if not, pay redress.
The scheme will be in addition to the £54m payment scheme agreed by the FSA, Capita, BNY Mellon and HSBC Bank last June.
The FSA has identified 795 firms they believe sold Arch cru funds. Out of the £110m redress, the FSA estimates up to £33m will be paid by the FSCS.
The FSA says: “An analysis of currently authorised known sellers indicates around 30 per cent may potentially breach their regulatory capital requirements as a result of the scheme. The costs associated with this have been factored into our analysis.”
FSA director of conduct supervision Clive Adamson says the 30 per cent figure represents a “worst-case estimate” of the proportion of firms that will default as a result of the scheme.
He says: “We were focused on how to get the appropriate amount of redress to consumers. If as a result, firms do go out of business, overall, that is an unfortunate consequence of the misselling that has happened here.”
Evolve Financial Planning director Jason Witcombe says: “There seems to be an implication that every single Arch cru product was missold which I do not think is fair.”
What is a consumer redress scheme?
Under powers given to the FSA in 2010, the regulator can set up a consumer redress scheme where there has been a widespread or regular failure by firms to comply with regulatory requirements and where consumers have suffered or may suffer a loss which a court would remedy. The Arch cru redress scheme would be the first time the FSA has used these powers.
How will the scheme work?
The scheme will apply to all firms that provided a personal recommendation to invest in Arch cru. Firms will have to identify Arch cru clients and write to them explaining whether their advice will be reviewed or if the case was out of scope. Firms will assess the advice based on an FSA template. Where advice is unsuitable, firms can use an FSA online calculator to determine redress which aims to put the investor in the position they would be in if they had invested in an alternative suitable investment. This calculation will take into account any payment made under the £54m voluntary scheme announced last year which was funded by Capita, BNY Mellon and HSBC.
Which clients are out of scope?
Execution-only sales, investment as part of a discretionary management arrangement and failures to provide advice to disinvest from Arch cru funds as part of an ongoing advice arrangement are not part of the redress scheme. Arch cru clients that complained to the Financial Ombudsman Service about the advice given or accepted a full and final settlement in relation to the advice are also out of scope.
When will this come into effect?
The FSA plans to introduce the scheme on January 1. Firms will have four weeks to write to clients and 24 weeks to offer redress where necessary.
Where does professional indemnity insurance fit in?
Clauses in some PII polices prevent firms from issuing a redress statement. Where this happens, a firm can refer the case to the FSA, which will review the case itself or appoint someone else to review files on the FSA’s behalf, paid for by the firm.