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FOS upholds complaint against IFA over Arch cru

The Financial Ombudsman Service has provisionally upheld a complaint against an IFA who recommended clients to invest in Arch cru, and ordered the adviser to pay redress.

In a provisional decision published on the FOS website today, ombudsman Tony Boorman (pictured) says he decided to uphold the complaint on the basis that the recommendation to invest in Arch cru was not suitable for the clients’ individual circumstances.

The IFA, who is not named in the decision, has been ordered to pay the clients redress. The redress payable is to be calculated based on the return of their original £8,000 investment, less withdrawals or distributions already paid, plus a return of Bank of England base rate plus 1 per cent as the date of the FOS’ final decision.

The amount the clients can get from the FSA agreed compensation scheme will then be deducted to give the total redress amount.

The FOS says if the £54m compensation package agreed by the FSA, Capita, BNY Mellon Trust & Depositary and HSBC Bank is withdrawn before December 31, 2012, the IFA will have to pay the same level of redress that would have been available under the scheme within 28 days.

The clients, who are only identified as Ms P and Mr M, sought investment advice from the IFA in early 2008. They had recently sold a property and held about £50,000 in various savings accounts.

Ms P and Mr M were hoping for better returns than they were currently earning on their deposit account, and hold some cash in order to reducing their mortgage.

Acting on their IFA’s advice they invested £4,000 each into the CF Arch cru investment portfolio fund, which was then placed in a stocks and shares Isa.

They complained to their IFA over concerns about forecasted losses when the fund range was suspended in March 2009.

Unsatisfied with their IFA’s response, who told them the advice had been sound based on the research he had been able to carry out, they referred their complaint to the FOS.

An adjudicator recommended the complaint should succeed, which was contested by the IFA. The IFA argued that the investment accounted for 17 per cent of the overall portfolio, with the rest held in cash.

The IFA also argued the issue with Arch cru stems from incorrect valuations by the auditors and actuaries, which was not something an IFA could have established with reasonable due diligence. The IFA also said it trusted Capita to do its job as authorised corporate director of the funds.

In his provisional decision, Boorman acknowledges that the Investment Management Association classed the fund as cautious managed, but says the IFA should have known this was not the same as ’low risk’.

Boorman says: “I am satisfied that this recommendation exposed the consumers to significant risk and not one which their circumstances suggest they were willing to take. The asset holdings are, in my opinion, non-standard and potentially specialist. This should have alerted the IFA to the fact that such specialist funds were unlikely to be suitable for unsophisticated investors such as Ms P and Mr M.”

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Comments

There are 22 comments at the moment, we would love to hear your opinion too.

  1. Feel sorry for the IFA. How many clients want a “better return for their bank deposit money” Most do!
    How many client’s also have short memories and remember a whole conversation, yet can’t remeber the risk warning bit. Most do?
    About time we had central unit to record all these FOS judgements to ensure WE are also treated fairly.

  2. …hoping for better returns than they were currently earning on their deposit account.

    For crying out loud. Aren’t we all dearie?

    What would the client have said/did say in response to the correct advice…”you ain’t got enough to be playing around with investments other than a bank deposit”?

  3. Its a dark dark day if this is upheld. 17% seems a fair risk to me, but then show me a regulaor who can forecast the future.

  4. re – Anonymous | 22 Nov 2011 2:29 pm

    Come to that, show me a fair regulator !

  5. This is bonkers. When you invest money for a client and use an asset allocation model, the assets you use in the portfolio will have varying risk, but it is the over blend that gives the final risk. It looks like the FOS have ignored this overall blend and just looked at one part of the clients portfolio.

  6. Capita et al (including FSA) must be laughing all the way to the bank here.
    They screw up the investment, mislead the distributors and then stich up a ‘compensation’ deal that leaves them still in pocket.

    Shameful.

  7. This decision is an affront to fairness and, quite frankly, it stinks of political expediency and behind-doors agreements.

    In addition, it signals a willingness to depart from the common law concept of ‘causation’, in that it holds the IFA wholly culpable, merely because it cannot consider a dispute between an adviser and a fund manager.

    No doubt, there will be much relief and merriment in Canary Wharf today, although it is with much sadness that we should mark the passing of any claim that the FOS ever had to objectivity and independence.

  8. This is an appalling abuse of power and reeks to high heaven of manuipulation of control.

    God help us all , investors and IFA’s alike

  9. @ Kevin Archer

    “How many client’s also have short memories and remember a whole conversation, yet can’t remeber the risk warning bit.”

    I’m not trying to be a clever dick, but surely that’s the point isn’t it? If the IFA in question had believed it was the right investment for the client, and had given those warnings, and of course covered his arse by putting it all in his report, he’d have been OK.

    If though he didn’t give the right warnings, then he was wrong, and is now paying the price.

  10. “The asset holdings are, in my opinion, non-standard and potentially specialist”

    .. then how did this end up in an arrangement entitled ‘Cautious’…

    Will the IMA introduce radical measures to really tackle the issue of fund labels, and make the changes required for consumers to understand the risk they are taking.

    IFA’s need protection too…

  11. The question is – was the investment part of an overall portfolio which was ‘low risk’?

    As Gerry Cooper mentioned – if it was documented correctly, it could have been part of a portfolio…if it was documented as a stand alone investment though, would we say the FOS decision was correct…..?

  12. The above decision is a licence for every fund manager to say the fund invests in these areas and then invest in a completely different area without fear of retribution as the IFA should have known it was happening.
    It also shows that Standard Life were a bunch of idiots to reimburse £100 million to investors in the Sterling One Fund that had been mis marketed. If they had not, then the advisers would have had to stump up the losses in the cash fund that was not actually invested in cash. After all any experienced adviser would have known that Standard Life were distributing mis leading marketing material!!!
    If Standard Life had refused to reimburse the investors not only would they have saved £100million, but would likely have avoided the FSA fine of £2.45 million, as they could have claimed they did nothing wrong.

  13. If , when the FSA investigation is finally complete, and IF fraud or fund mispricing is found to be a significant cause to consumer detriment – then surely advice is not in question under ANY circumstances. How could any IFA know that fraud is taking place or funds have been mispriced.

    IFA’s would not have this information – if they did – the invesment would not be recommended at all.

    Not knowing if funds have been mispriced or fraudelent activity being proved or ruled out within these investments – leads me to ask – why is ANY decision being made by anyone until this is clear.

    Allegations of fraud need to be fully investigated before any blame is laid out – regardless of the circumstances – to me that overrides all else.

    And so it should in a regulated industry where consumer monies have disappeared in unclear cirumstances.

    I hope the MP’s report this to the Serious Fraud Office and have a full investigation surrounding these circumstances.

    If not – how do IFA’s or consumers know that ANY invesment is priced correctly and that the fund manager is behaving etc etc

  14. In his provisional decision, Boorman acknowledges that the Investment Management Association classed the fund as cautious managed, but says the IFA should have known this was not the same as ’low risk’.

    Please define ‘low risk’, there is a risk with absolutely everything!! Nothing is risk free, nothing is guaranteed 100% watertight, not even a ducks wotsit.

  15. It is getting scary being an IFA with threats to our income and assets from both the past and the future regulation of which we have little or no control.
    What happens when any investment/pension funds are stolen, lost, miss-managed, errors in allocation etc etc does this means the IFA must make FULL redress even if their advice was fine based on infor at the time?

  16. If a customer is looking for a low risk investment, then they shouldn’t be sold something that is Cautious Managed. If an advisor thinks that Cautious Managed is low risk, they should not be let loose near a customer.

    Whilst Arch Cru is a mess, and lots of people, IFAs and customers have been very badly treated, that doesn’t change the principles of investment advice.

    I’m not the biggest Tony Boorman fan in the world, but his decision would appear to be based on fact, unless this article has been very poorly reported.

  17. Many people commemting have obviously not read Hugh Aldous’s report on the funds.

    As for due diligence investing in 1000’s of short term highly collateralised loans is not high risk it is what banks (used to)do every day, investing 25% in Greek shipping is different, the fact an FSA authorised fund manager misrepresented the nature of the fund is apparently no defence yet how could anyone know if a fund manager is not adhering to the fund’s prospectus and marketing literature.

    Look at the returns of honestly run private equity funds such as JP Morgan Private Equity or the F&C Private Equity Trust you will see both have lost money over 5 years at -2.6% and -4.7% respectively and both are under the 5 year sector average which was +5.5%. So how come Arch Cru investors are facing 50% losses.

    The Ombudsman states the losses suffered by the investors was due to market conditions but this is not the case. CF Arch Cru funds lost money because the prices paid by CAPITA on the CISX quoted companies was overvalued, so no one can tell what the true losses an investor would have suffered if correct prices had been used since 2007. What has to be remembered is that hundreds of investors who surrendered their investments before March 2009 have walked away with false profits are the FSA going to go back to these people and ask for them to return monies to the fund?

    No one should rely purely on the IMA rating, but every adviser has a right to expect literature produced by fund managers is accurate. I have to confess that I have a lot of investors in Invesco Perpetual Income fund, and the top holdings show Astra Zeneca and Glaxo but I have not looked at these companies share register to actually see if Invesco own them and even if I did I would not be able to tell which actual funds within invesco owned the shares I just have to believe that Neil Woodford has not gone out and bought Greek Ships and not told anybody because if he does i will be liable.

  18. The real concern for me with the comments from advisers on here is that there is still a naive ignorance of investments. ‘cash fund’, ‘cautious fund’ etc. Just because a fund sits in a particular sector does not mean that it is cautious or whatever.

    As per usual, if you an’t explain it, you don’t understand it.

    The next Cru is just around the corner. Tip to everyone: look at the differences between the Oeic rules and the Authorised unit trust rules….. scary stuff, and gets morons like Capita off the hook.

  19. One obvious outcome for IFAs is – do not recommend any investment company or unit trust/OEIC that does not have at least 10 years history. And include warnings in the Suitablity Report that you cannot be held responsible if a regulated company fails to follow the regulator’s rules and the FSCS may not apply even if criminal activity is involved in the loss of a client’s money…

  20. Straw Poll….

    Has anyone out there actually had the FOS service find in their favour and reject a complaint?

    I’m at a firm with about 30 advisers and have not yet seen a single complaint rejected by FOS in 9 years I’ve worked here… Oh except once when the Adjudicator found against us and made a recommendation that we put things right on the basis of an alternative course of events that we should have recommended/arranged instead.

    We appealed on the basis that the course of events proposed/recommended by FOS would have involved a Breach of Pension Legislation and tax penalties on a pension scheme and possible withdrawal of Registered Pension Scheme status.

    Strangely the Ombudsman then sided with us instead as the final decision???

  21. What will Tony Boorman make of this then – and I hope the un-named IFA manages to get to read this.

    Reg Legal put out the following press release this morning:

    We note that the Financial Ombudsman Service has published a decision to uphold a consumer’s complaint about an IFA recommendation. The points need some thought and are being analysed at the moment, and we will provide advice shortly.

    However several points seem to be apparent to us on the surface.

    This IFA did apparently good research on the funds. The funds then collapsed under the FSA and Capita’s nose. Reading through the full report it does rather seem that although the FOS acknowledge the IFA did pretty much everything, FOS found them in non-compliance anyway. But what else could the IFA actually have done in 2008?

    Well, they might have rung the FSA and asked if the FSA have any concerns about the Arch cru Funds. So perhaps we should ask another question.

    What would the FSA have told any IFAs ringing up for advice on the Arch cru funds in 2008?

    The answer from the FSA is still awaited, but submitted to Parliament for today’s FSA meeting was the following from a wronged client:

    “When our IFA was advising us on the Capita investment he was concerned about the scheme so approached FSA and was told they were quite satisfied how the scheme was being run. We handed over our investment in January and by March the whole scheme was frozen. This begs the question what is your is your connection with Capita as you obviously were not reporting back to our IFA the true position, or monitoring an investment company which was already in trouble.”

    The client has since confirmed today by email, that the FSA advised the client’s IFA in December 2008, 2 MONTHS after the FSA ARROW inspection that found problems in the funds.

  22. hmmm, it is worrying how so many of you are so quick to jump on the decision as being ridiculous and stating that if the client wanted a return greater than that of a deposit account then the risk associated with 17% of their investment being in these funds was all right – however you seem to miss the fundemental point…

    The decision is that the risk associated with this investment was not a risk that these particular individuals were in most likely in a position to take, based on their individual circumstances.

    This is not to say that this is the outcome that would be reached on all complaints for all investors.

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