In a decision document issued by the FOS, and seen by Money Marketing, the FOS says the client’s £100,000 investment exposed the capital to a risk greater than the client was prepared for.
The FOS says that the low to medium risk rating did not match the CF Arch cru investment portfolio given the funds’ 55 per cent exposure to private equity. According to the FOS a medium risk investment should hold no more than 5 per cent in private equity.
The FOS also questions the classification as “a low to medium risk investment” sitting “firmly within the cautious managed sector”, due to the inherent counterparty risk increasing risk to the fund. The fund sat in the IMA cautious managed sector.
The adviser has been asked to return the initial investment as well as a capital growth equivalent of 1 per cent more than Bank of England base rate compounded from the date of the investment to the date of the letter minus any withdrawals and any money recovered from the sale of the fund’s underlying investments.
The Arch-cru fund range was suspended due to liquidity concerns on March 13, 2009. According to Capita estimates, the investment portfolio has fallen 40 per cent from March 2009 to September 2009. Capita recently announced that it would begin distributing the suspended fund’s assets, which could take three to five years.
Regulatory Legal Partner Gareth Fatchett says: “This is a worrying development for firms who relied on the IMA cautious rating”
“This case sets a dangerous precedent for firms who risk profiled the portfolio fund as cautious. It would be naïve to think FOS will not use the methodology as a precedent”
The IMA says it cannot comment on individual funds. But it says to qualify to be in an IMA sector, funds must comply with the sector definitions and regulations set out by the FSA.