The FSA is seeking to ban Arch Financial Products chief executive Robin Farrell and senior partner Robert Addison and fine them a total of £850,000 for their role in the collapse of the Arch cru funds.
The regulator has today published decision notices relating to Arch Financial Products, Robin Farrell, and former Arch compliance officer Robert Addison.
The decision notices reveal the FSA is looking to fine Farrell £650,000 and Addison £200,000. The FSA would have also fined Arch Financial Products £9m for its misconduct, were it not for the firm’s financial position. Instead, the FSA has decided to issue a public censure in respect of Arch’s conduct.
Arch FP, Farrell and Addison have referred the matters to the Upper Tribunal. The three parties also applied to the Tribunal for an order to prevent the FSA from publishing the decision notices, but were unsuccessful.
Arch FP was the investment manager of the CF Arch cru funds and mainly invested the funds in Guernsey cell companies listed on the Channel Islands Stock Exchange, for which Arch FP was also the investment manager. The Guernsey cells then invested in assets such as private equity, hedge funds and alternative asset classes such as Greek shipping and student accommodation.
The FSA says Arch FP was “reckless” about the risks of managing conflicts of interest fairly. It cites one transaction where Arch FP received a £3m fee from the Guernsey cells, which Arch FP did not disclose to the independent directors of the Guernsey cells or record in transaction documentation at the time.
The regulator says Arch FP pursued an investment strategy which resulted in significant liquidity risks for the funds, and that Arch FP and Farrell failed to ensure the funds aimed to provide a prudent spread of risk by allocating a majority of the funds’ assets in the Guernsey cells for which there was a limited secondary market.
It says Arch FP also increased the funds’ investments in the Guernsey cells’ shares at a time of market turbulence, rather than retaining cash in the funds. The funds were suspended in March 2009 due to liquidity concerns.
FSA director of enforcement and financial crime Tracey McDermott says: “When making investment decisions, a fund manager should ensure it puts investors’ interests ahead of its own and be able to demonstrate it has managed conflicts of interest.
“Those with responsibility for managing authorised firms must ensure not only that the firm complies with regulatory requirements but also that they personally act with the highest standards of integrity.”
Money Marketing revealed last month the FSA was pursuing three separate enforcement cases against Arch FP, Farrell and Addison, and that all three parties had referred their case to the Tribunal. At the time no details were made public about the nature of the cases.
A statement from Arch FP says : “Despite the fact we have fully co-operated with the FSA throughout, the FSA has not properly engaged with Arch in trying to understand the facts in these cases, and did not interview either Robin Farrell or Robert Addison for 18 months after launching its investigation.
“As a result, the criticisms in the notices are wrong. We believe the FSA still fundamentally does not understand the structure in place but has approached the investigation with a predetermined view as to alleged fault. Given all of this, we have no real choice but to refer these notices to the Upper Tribunal, where the cases will be heard from scratch.”
Wingate Financial Planning director Alistair Cunningham says: “I think most advisers will be relieved when the industry can move on from this debacle, but it is clearly important that the FSA pursues and fines anyone it believes has not acted in investors’ best interests.”