FSA Arch cru deal fails the confidence test

Speaking at the recent Arch cru Parliamentary debate, Labour Shadow Treasury minister Chris Leslie warned the debacle has undermined people’s trust in the financial services industry.

Unfortunately, it is hard to see how the FSA’s £54m compensation package does anything but erode this confidence further as investors are served up an inadequate rescue package from a regulator charged with protecting their interests.  

The compensation package, agreed with the funds range’s authorised corporate director Capita as well as BNY Mellon and HSBC, is designed to offer investors around 70 per cent of the value of the £400m range when it was suspended in March 2009, when set alongside distributions already made and residual assets. It could take a number of years before these assets are realised.

With individual offers sent out over the last few days many investors are finding out how little they will be receiving from the package.

Investors have little choice but to accept as any claims taken to the Financial Ombudsman Service against the firms involved are capped at the levels agreed in the compensation deal.

They are therefore left having to claim against their IFA to make up further losses. Many investors will do so reluctantly as they see the major blame for their losses lying elsewhere.

Investors fall into two camps – either their adviser is still trading and is likely to rigorously defend themselves against any claim or, as appears the case for a significant number, the firm has ceased trading and IFAs across the land will be left to pay the compensation through the Financial Services Compensation Scheme.

For these investors, and the general public now following the saga unfold in national newspapers, neither option is likely to instil much confidence in the way the financial services industry and its regulator deals with such scandals.

Another significant FSCS levy is a tax on advice which is more than likely to filter down to the end customer. A drawn out battle with their IFA through the FOS or the courts is not an enticing prospect for investors who just want to see their losses returned.

Some poor advice may well have been given over the Arch Cru funds. Commentators in Money Marketing and elsewhere had raised significant concerns about the private equity range being promoted by former Arch cru chairman Jon Maguire.

The FSA knows the adviser firms which sold Arch cru at significant levels and it is likely the quality of advice given by such firms has, or will, come under tough scrutiny.

But the regulator’s priority should be ensuring investors have the best chance of getting their money back as quickly as possible, funded by those with the biggest responsibility.

The FSA has managed to get three firms, including the range’s ACD, to agree to fund its compensation package.  However, the current arrangement has the feel of a behind-the-scenes deal designed to make life easier for the regulator and the firms who will have any possible liabilities capped, rather than offering investors the best chance of the compensation they deserve.

We do not know how far the FSA has gone in attempting to broker a higher compensation package, although publicly it appears happy with the deal on offer. It will not find many investors agreeing with this sentiment.

 The current arrangement has led to a Parliamentary debate from outraged MPs while investors and IFAs seek judicial reviews of the FSA’s decision. We also have the prospect of adviser/client battles through the FOS and the IFA community once more being hit with a levy for something most of them did not sell.

If this is the way investors continue to be treated we are a long way from Leslie’s goal of restoring confidence in financial services and getting more people saving for their future.

Paul McMillan is editor of Money Marketing- follow him on twitter here