The industry is fighting the FSA’s proposed £110m Arch cru consumer redress scheme, saying the regulator’s logic for setting up the scheme is flawed.
The FSA published a consultation on the scheme in April, which, if implemented, will require IFAs who recommended Arch cru funds to review their sales and pay redress where appropriate. Money Marketing has obtained several industry responses to the consultation, which closed last week.
Foot Anstey partner Alan Hughes argues many advisers recommended Arch cru funds as part of a balanced portfolio, which cannot be treated as a standalone recommendation.
Hughes, alongside other consultation respondents, questions why details of the £54m payment scheme, agreed by the FSA with authorised corporate director Capita and depositaries HSBC and BNY Mellon in June 2011, were not made public.
He says: “Such an approach does not meet the FSA’s objective of market confidence. If consumers consider that fund managers and administrators of large funds are able to avoid public justice and enter into secret deals with their regulator to minimise their losses, consumers are likely to have less confidence in the financial system, not more.”
IFA Centre managing director Gill Cardy notes asset allocations changed dramatically from what was set out in the initial fund factsheets. She says they took on more risk shortly before the funds were suspended in March 2009.
Cardy says if it was obvious all the funds were high risk, it raises the question of why the FSA “permitted the publication of regulatory fund materials which were clearly not fair and very misleading”, or why it has “failed to enforce against those with regulatory responsibilities for the production of this material”.
The FSA estimates the redress scheme could cost the Financial Services Compensation Scheme £30m. But Informed Choice executive director Nick Bamford says costs could escalate above this as professional indemnity insurance claims forced by the redress scheme may lead to an inability to renew cover in future. He argues this will force more firms to collapse and trigger higher FSCS costs.
Bamford says: “The domino effect of firm failure, which adds further burden to other IFAs in the form of further FSCS levies, is massively understated in the cost benefit analysis.”
Former FSA head of retail policy David Severn says advisers should not be forced to fund compensation where there was misleading promotional material or regulatory failings.
He says: “IFAs should not be expected to fund compensation costs arising from poor advice by some firms to the extent the problems were compounded by the use of inadequate or misleading promotional material by other parties or by supervisory failings on the part of the FSA.”
The FSA claims 795 firms sold Arch cru to between 15,000 and 20,000 customers, and estimates the redress scheme would cost between £5.9m and £10.6m.
But Aifa’s analysis of the statistician’s report published with the consultation suggests only 263 firms may have missold to between 7,500 and 14,100 consumers. Aifa estimates the redress scheme would cost between £8m and £13.8m.
Policy director Chris Hannant says: “We are very concerned about the FSA’s misuse of the data to misrepresent the basic facts.”
SimplyBiz chairman Ken Davy argues few clients have complained about the advice they received to invest in Arch cru. He is concerned some firms that recommended Arch cru have gone bust, only to become reauthorised as new companies. He says this “does not follow natural justice”.
Davy says: “This consumer redress scheme cannot be considered as likely to deliver a satisfactory outcome either to the FSA as a responsible regulator or to investors in Arch cru.”
The FSA will publish a policy statement in November if it approves the scheme.