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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


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

  1. Yet another reason why the FSA should be accountable.

  2. Well done Paul – great piece.

  3. A Labour Shadow talking about giving savers confidence?
    What about the 1.2m Equitable savers who were denied their rights to access the PPA 90%?
    What about the 10 years when Labour could have sorted it and played class war instead
    Unless the ELAS victims are properly compensated the industry will never be able to bridge the savings gap.
    If the Insurance companies had half a brain they would top up the current meagre scheme and take the moral high ground with both the regulators and the public.

  4. Investors have over 14 months until end of December 2012 to decide on CAPITA offer, and they can wait until the outcome of the Coull Money Judicial Review into the offer which is challenging the FSA’s binding of FOS with regard complaints against CAPITA. If successful CAPITA may find FOS awards full compensation for complaints made against CAPITA.
    How the FSCS could find IFA’s legally liable for investor losses given the statement by the Chairman of the Guernsey Cell – SPL Private Finance (PF1) issued on 9th August (statement can be viewed on the CISX website – and please read it before making holier than thou statements about not recommending the funds) is difficult to understand and if the IFA is not legally liable where does that leave investors? Nursing large losses unless the FSA turn attention to the manager CAPITA delegated fund management to, as the FSA clearly are in the pockets of CAPITA and are absolving CAPITA in its failures as ACD.
    MP’s have also not finished with this matter and the FSA are to appear before committee on the 23rd November, and the MP’s disgust at CAPITA’s actions in this affair were apparent at the debate on 19th October.
    It may well turn out that investors will eventually have to reluctantly complain against their adviser to recoup their losses but in delaying accepting the CAPITA offer for a few months there is still hope full compensation will be paid to them from the parties truly responsible for their losses.

  5. Elsewhere it has been suggested that the £54m compensation deal represents not 70% of what investors actually invested but 70% of the valuation of assets at the date of ArchCru’s collapse, which is a very different sum.

    That aside, as this article points out, this deal appears to skirt the issue of culpability for regulatory failure on the part of the FSA.

    How early on did the FSA become aware of what appears now to have been the patently unsound architecture of these ArchCru products? If the FSA became aware only at a late stage, then why wasn’t it aware earlier? If at an early stage, then why didn’t it take appropriate action without delay? To me, these appear to be very crucial questions to which, we hope, Hector Sants will be required to provide clear and unequivocal answers, not least now that the office of the PM appears to be taking a interest.

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