The FSA has censured Capita Financial Managers in relation to its failings as authorised corporate director of the Arch cru fund range.
The regulator says Capita Financial Managers could not fund both its contribution to the £54m payment scheme agreed in June 2011 and a financial penalty, which is why the FSA has chosen not to levy a fine on the company. Parent company Capita Group contributed £32m to the payment scheme, with depositaries HSBC and BNY Mellon paying the remainder.
Capita earned £1.2m in fees from its role as ACD of the CF Arch cru funds. In addition to the £32m payment scheme contribution, it has paid £660,000 towards a hardship scheme for investors, and has also spent around £2.8m investigating the funds.
In July 2006, Capita delegated the investment management of the funds to a third party, Arch Financial Products. Capita remained responsible for the overall performance of the regulatory obligations in relation to the funds.
The FSA says Capita did not have sufficient processes in place to monitor Arch, even though Arch had not acted as an investment manager before. Capita did not adequately identify and mitigate the conflicts of interest between Arch and the funds, which involved a “complex network” of onshore and offshore companies and private investments into assets such as Greek shipping and student accommodation.
The Arch cru fund range was suspended in March 2009.
Despite acting as ACD for the fund range between June 2006 and March 2009, Capita did not begin to investigate the valuation and pricing of the funds’ investments in detail until late 2008. Once the funds were suspended, it became clear the investments were not as valuable as Capita had understood them to be. Last November Capita admitted there was “significant difficulty and uncertainty” in assessing the value of around 75 per cent of the £149m in assets held in Arch cru funds.
FSA director of enforcement and financial crime Tracey McDermott says: “Those firms which delegate activities to others need to have robust processes to allow them to oversee properly these third parties and protect investors. Capita Financial Managers’ processes in this case were inadequate for this.”
McDermott says although Capita’s failings were significant, they reflect “only a part of the overall picture in relation to the CF Arch Cru funds.”
She adds: “The FSA takes the CF Arch cru situation very seriously and continues to devote considerable resources to securing the right outcome for investors.”
The FSA agreed a £54m payment scheme with Capita Financial Managers and depositaries HSBC and BNY Mellon in June 2011, of which Capita’s parent company Capita Group contributed £32m.
The regulator says: “Capita could not fund both such a substantial contribution to the payment scheme and a financial penalty. This was taken into account in the FSA’s decision not to impose a financial penalty.”
In addition to the £54m payment scheme, the FSA has proposed a £110m Arch cru consumer redress scheme which if approved would require advisers to review their Arch cru sales and pay redress where appropriate. It was reported over the weekend the FSA has delayed its policy statement on the scheme due to the number of industry responses.