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FSA censures Capita FM over Arch cru

FSA Letters 480

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.

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Bless them…so Capita and its directors get off scot free whilst the advisers that recommended their products get put out of business.

    This is a multi-million pound company with its tentacles into just about every part of government. It can afford whatever the FSA wants to fine.

    This is pure speculation on my part but does any else suspect there is something going on behind the scenes that we are not seeing?

  2. This is utterly outrageous, and a total abuse of power.

    The FSA grudingly accepts that Capita failed woefully to meet its obligations. However, it is being let off the hook, because it doesn’t have sufficient funds to meet a compensation payment as well as a fine.

    Presumably, the FSA will ensure that an equal playing field is maintained by limiting IFA’s financial obligations under any eventual Consumer Review to what they can afford?

    If I were a cynic, I would presume that the timing of this, ever so slight, tap on the wrist and the decision to defer the announcment of the draconian Consumer Review might be linked …….

  3. What do you expect?
    The FSA is dedicated to destroying the current form of the iFA sector and one of the best ways is by economic sanction, even if you did nothing wrong.

    If a file is reviewed independently and deemed to be fully compliant, then that should exonerate any firm / adviser from payment of compensation.

    Trouble with that is that no one at the FOS or FSA will accept the results.

  4. There is a smell of corruption in the air!!!

  5. Maybe they are saving up to properly compensate Connaught Income investors who had their monies stolen from them and are victims of fraud. That fund, which was described by Capita as the operator as a low risk fund and as a matter of fact never operated in the way it was intended to from day one.

    Capita knew this and palmed it off to a two bit operator to try and distance itself from another mess it is responsible for. Mis-buying, theft, fraud, misrepresentation, dishonesty, hopefully a criminal investigation, a regulator that knew about this and did nothing for 20 months or so – yep that will be yet another mis-selling exercise again from the FSA. Cynical – Naw!

  6. Lets assume for one moment, that the FSA IS dedicated to destroying the current form of the IFA sector. It is certainly a widely held view. If such view were to be partly accurate, then might one ask WHO is actually dedicated to ensuring that such injustices do not occur?
    Answers on a postcard please.. but bear in mind the FSA have statutory immunity and being heavily legal in nature, are fairly good at giving politicians and the industry short shrift.

  7. Farewell, brave Wellard. Trusted friend; resident of Albert Square, Canary Wharf

    Wellard was briefly written out of the series under executive producer Gordon Brown, but returned when Brown was succeeded by Alistair Darling. Wellard’s keepers for the majority of his duration in the soap were Adair Turner, Hector Sants and Margaret Cole. He was voted “Best Pet” at the 2004 Soap Awards, and named the UK’s favourite soap opera pet in a 2008 Inside Soap poll.

    In October 1997, UK chancellor Brown takes in a dog he assumes to be a stray, naming him Wellard. The dog’s owner Mr Large locates him and demands him back, but Wellard later returns to Canary Wharf of his own accord. Brown realises he has run away and keeps him.

    Wellard eventually fathers puppies with Mervyn King and George Osborne’s greyhound, Frieda; however, the puppies are stilborn. When Turner passes on Wellard to a new keeper Mr Griffith-Jones, Ms. Cole gives him the ultimatum of choosing between her and Wellard: Turner chooses Wellard. A few months later, Wellard is run over. He is cared for by Turner’s sister, who gives him to her friend Mr. Wheatley after Sants’ departure. When Sants is involved in a minibus crash, Wellard is able to save his former keeper by leading him to a spot from where he can call the emergency services.

    Wellard is reported to the police when he bites local café owner Goldman Sachs on the buttocks. While on probation he also bites locals UBS and JP Morgan, before drawing blood from Barclays in the worst attack ever seen in the Square. He is taken away to be euthanised, but Turner and Wheatley launch a campaign to save him, under the moniker “Walford One Owed Freedom” (WOOF).

    When Wellard is put on trial, he is found guilty, but Wheatley is allowed to take him home as long as he keeps him on a lead at all times. When Wheatley leaves on a business trip with his girlfriend Tracey, he leaves Wellard with his friend Mark Carney. Carney feeds Wellard a chocolate, causing him to suffer from theobromine poisoning. He has to be put down and his ashes scattered on the local allotment.

  8. I am an Arch Cru investor. I belive my IFA acted in good faith and that the fund managers are to blame for gross mismanagment. They did not get fined but have to pay £54 between themwhilst the FSA expects the IFAs to fund over £100M. mnay won’t survive. I am now retired and it looks like YEARS until I see my pension from this fund. It is about time common justice and fair play were done!

  9. The final notice against CAPITA Financial Managers Ltd is a Pulitzer Prize for fiction contender the whole notice is fabricated in a manner to let the FSA justify their collaboration with CAPITA.

    I could provide a contrary comment on virtually every statement on the 27 pages but will mention just 3.

    Page 15 – 4.34 – “In relation to the Arch ICs, however, there were no readily identifiable alternative benchmarks or values to which regard could be had for the purposes of fair value pricing, other than the published NAVs of the Arch ICs. This was not a matter considered by CFM at the time. However, subsequent analysis shows that the CISX share prices closely tracked these NAVs. Given that the NAVs were produced by an independent administrator and also subject to periodic external audit (the first of which was published in October 2008), an ACD of the Funds may have concluded, that at least for some period of time, it remained appropriate to rely on the CISX quoted share prices of the Arch ICs.”

    The so called “independent “ administrator responsible for producing the NAV’s was Bordeaux Services (Guernsey) Ltd whose directors were Neal Meader and Peter Radford.

    Both of these individuals were also directors of Arch Guernsey ICC ltd along with Robert Addison of Arch Financial Products LLP. I would hardly say the directors of Bordeaux producing NAV’s for another company they were also directors of was independent.
    ———————————————————————————–
    Page 18 – 5.3 (2) – “COLL 6.3.3R and COLL 6.3.5R(1), through its failure adequately to consider whether or not the Arch ICs’ share prices as quoted on the CISX represented a fair value price upon which to price the Funds’ investments in those shares, given the liquidity of the shares and the Funds’ status as majority shareholder of many of the Arch ICs. However, it is not clear that the invocation of fair value pricing would have resulted in a different price being used;”

    I think the previous statements since 2010 by Hugh Aldous (appointed chairman of Guernsey funds in 2010 and also a CAPITA official) make it quite clear that fair value pricing would have resulted in different prices being used.

    Mr Aldous’s statement from the Guernsey Cells March 2011 accounts :- “Throughout our investigations we have discovered what we consider to be negligence, lack of diligence, the use of unsuitable counterparties and the making of improper gains by the former managers. In our view the Net Asset Value (NAV) of several of the cells was overstated from 2007 onwards and the share prices of cells were influenced so that they tracked the overstated NAVs unreasonably. We are pressing our action and reporting our findings to the Guernsey Financial Services Commission and, through them, to the Financial Services Authority. We are in pursuit of the previous owner of ships and other parties whom we consider caused loss to the Cells and, in some cases, misappropriated funds. A consequent cascade of claims will follow to others who failed in their duty of care to the cells.”

    —————————————————————————————-
    Page 1 – 1.2 – “CFM agreed to settle at an early stage of the FSA’s investigation. As part of the settlement reached between CFM and the FSA, CFM has agreed voluntarily to contribute, without admission of liability, £32 million towards a £54 million payment scheme for investors who hold investments in the CF Arch cru Investment Funds (the “Investment Funds”) and in the CF Arch cru Diversified Funds (the “Diversified Funds”) (together the “Funds”).”

    How can the FSA say there was early settlement.

    The compensation package was hastily announced in June 2011 following intervention by several MP’s on behalf of investors and the package had been rushed through so quickly that the actual terms could not be detailed until October 2011 over 2 ½ years after the funds suspension.

    Yet the FSA were aware of issues from October 2008 and as detailed in an email from Clive Adamson – Director of Supervision at FSA to a friend who was invested in CF Arch Cru the FSA were fully away of CAPITA Financial Manager Ltd’s failures in September 2009 but knew they had problems financially to resolve the issue and wanted to pass blame to IFA’s

    The email reads as follows:- “From: Clive Adamson [mailto:clive.adamson@blueyonder.co.uk]
    Sent: 21 September 2009 21:10
    To:
    Subject Re:
    I have found out something about this situation and while I can’t tell you everything as it is not public I will try to outline what appears to have happened.
    Essentially, the Arch cru funds invested in a series of entities listed in the Channel Islands which themselves invested in a range of illiquid investments. When it became clear that there was insufficient liquidity in the Arch Cru funds (which became apparent when the funds tried to sell the Channel Islands vehicles and failed as there was no market) they were suspended. As I understand it, Capita were the manager of the funds but outsourced this function to Arch Investment Managers.
    It seems the best case is that Capita make some sort of restitution for the lost value (unlikely to come from Arch as they don’t really have any significant resources) but this may take time and depends on Capita having sufficient resources. There are also other entities which acted as depositories that may come into any action.
    The worst case is that there is no compensation and investors are stuck in the funds with uncertain prospects of recovery due to the nature of the underlying investments. It is also not clear that compensation can be obtained from the FSCS compensation body as this can only be obtained under certain circumstances which may not occur here.
    The best course of action is to make a formal complaint to any advisor you used and to Capita. If you don’t receive satisfaction you can complain to the Financial Ombudsman Service.
    You also mentioned an Investor Committee which should be able to put pressure on Capita (including writing to the top company in the Capita Group, which I think is a quoted company, and writing to the national newspapers may also help. Getting in contact with the FSA may help in applying pressure on Capita.
    I’m sorry this is not very positive but this is a very difficult situation. Please treat this information very discretely as it is very sensitive.
    Best wishes
    Clive”
    ——————————————————————————————

    Over the last 3 ½ years this whole debacle has been covered up and publications such as Money Marketing, FT Adviser and New Model Adviser have removed comments following articles regarding CF Arch Cru either through not wanted to hear the truth or from threat of legal action from CAPITA’s lawyers, and no doubt this will continue.

    Finally how can the FSA justify this decision when compared to other decisions made recently. One can only presume that if the systems were not in place to be ACD of the CF Arch Cru funds then there were no systems in place prior to October 2008 to any of the other 200 or so funds they were ACD for, so potentially the disaster that is CF Arch Cru could have occurred in any of the other funds.

    Look at Standard Life and the Pension Sterling fund – Standard Life paid over £100million into the fund within a month of fund falling in value to ensure investors suffered no loss from the mis-marketed fund yet Standard Life were fined over £2million.

    AEGON were fined over £2million for systems errors in which no client lost money.

    UBS fined over £32million for losing its own money not that of investors.

    You really could not make it up.

  10. I am absolutely convinced that Capita have the resposibility to repay, in full, investors. IFA’s were seriously misled about this bogus investment scheme.

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