MM leader: Arch cru is a millstone around advisers’ necks


There are some investment collapses of recent years that refuse to go away, Keydata being the obvious one. As we report this week, Arch cru looks set to be another millstone around advisers’ necks. The latest twist in the Arch cru saga relates to the £36m legal challenge being brought by investors against Capita Financial Managers, the authorised corporate director of the Arch cru funds.

Clearly, when funds fall over there is a big bill attached and the natural course of action is to look for someone to blame. Was Arch Financial, the fund manager of the Arch cru range, at fault? Was it the regulator? Was it advisers for not doing appropriate due diligence?

The group litigation examines another question: What was Capita FM’s role in all this? Did it carry out its ACD role effectively?

The case is not due to be heard until 2016 but in a recent case management conference, Capita FM turned the legal challenge on its head. It plans to make advisers jointly responsible for investor redress if Capita is found to have failed in its role.

Along with the outrage this tactic has generated, it throws up some nasty challenges for advisers. Should Capita succeed in making advisers jointly liable for investor losses, will this set a precedent for future fund collapses? By dragging advisers into a case that is meant to be addressing any failings by Capita, will advisers have to defend individual recommendations to invest in Arch cru against negligence claims?

It is worth remembering the Arch cru fund range was worth £391m when it was suspended in March 2009. Since then, there has been a £54m payment scheme agreed between Capita and depositories HSBC and BNY Mellon, plus a separate consumer redress scheme funded by advisers and expected to pay out £31m. 

Advisers who have reviewed their Arch cru advice and found it unsuitable have had to pay through the consumer redress scheme, while, as is always the way, advisers who never recommended Arch cru have had to pay through the Financial Services Compensation Scheme.

Even if the action against Capita is successful, total investor redress would stand at £121m, less than a third of what the fund stood at five years ago.

The claims and potential counter claims between investors, Capita and advisers mean Arch cru is shaping up to be a legal battle of Keydata-esque proportions. If advisers are found to be on the hook for Capita failings, it is unclear at this stage to what extent they will have to pay for investor losses. 

Natalie Holt is editor of MoneyMarketing. Follow her on Twitter here



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Perhaps the blame can be segregated. We never bought a single Arch Cru fund. Why principally? Because the underlying components/the funds were opaque. We were told by its representatives/the firm that the reason why the underlying investments were not disclosed was corporate sensitivity, etc. Probably the sales’ reps didn’t know themselves in that they were just selling the glossy brochures (and where are the claims for corporate negligence there, for their and the directors’ actions?).

    However, we were asking the question – why were other advisers not asking that question and concluding as we did that without transparency of some form, how could we even consider recommending the investments to anyone – as discretionary managers we couldn’t pass the first stumbling block and didn’t. It was quite simple really and indeed, if a fund wants us to support it, it would have been quite easy for information on the type and composure of the assets to be made known to us legitimately in some form even if with slight time delay. Or put another way, the reason why there wasn’t such disclosure was because of a purposeful attempt to conceal the possible problems since arising….. is that fraud?

    Second, if Capita is negligent in its role(s) in any way, or auditors negligent in their role and allowing or not stopping activity which should have happened or should not have happened, then they are liable for the consequences of their negligence. However, if the asset values realized were simply lower as a result of market conditions, etc, then that isn’t those guys fault and that might fall on the advisers promoting something they could not hope to understand as they couldn’t see what they were selling – just a glossy brochure ain’t good enough.

    All that said and not in nativity but could it be the case that a collapse in asset values is also because of the enforced realization of assets in the wrong environment so that the ‘true’ value was not unlocked…. had an orderly wind-down over many years occurred and produced significantly greater values and avoided the extent of the shortfall regardless? Many a good investment is atrocious when being sold in a market which doesn’t want to buy, not that I am saying the underlying assets were all good – far from it I suspect. You can’t change events from yesterday but certainly you must be rational and stop compounding the problem by giving big chunks of difficult to market assets away in a depressed market as well (even if far too many never learnt that lesson after the Lehmans’ collapse either).

  2. We asked who valued the security and where told Arch Cru did. As an x banker and having seen on many occasions security being worth allot less then stated, we avoided the funds. To us if a main stream lender had refused, they had done so for good reason.

    That said, there is a far bigger issue. The life companies stated they had done EXTENSIVE due diligence, the rating agencies produced ratings and information provided on which many advisers relied. Are we then saying that these rating agencies, the regulator and accountants cannot be trusted having been paid vast sums of money to complete a task.

    However I look at this, this seems to be the message learned. They are seeking to blame the adviser, but then most advisers trusted the information they produced and had been paid for. What is the point of an adviser paying to gain access to their due diligence if it cannot be trusted?

    This therefore leads me to my next point, if I cannot trust or more to the point if the likes of Capita, the regulator, accountants, life companies with their vastly greater ability to carry out due diligence, way beyond that of any adviser, cannot see the problem, how is an adviser supposed to.

    This whole issue has been a sham from beginning to the end. There have been failings at all levels, but I find it very distasteful that those that should have prevented this, where paid to prevent this are still trying to pass the buck to those they believe cannot defend themselves. This is corporate bullying.

  3. I agree with all that Philip Milton has said above but believe firmly that adviser due diligence should be limited to ‘is it authorised and regulated by the FSA/FCA?’. My tiny little firm has to trust the information put into the public domain by the authorised firm. If that is wrong then our due diligence will also be wrong. The regulator is there to check that it is correct and the fund is what it says it is.

    Like Philip, I never recommended an Arch Cru fund because I couldn’t understand how they achieved their returns. However, I feel great sympathy for those that did as I believe that they have been victims of poor fund management, poor oversight by Capita and poor regulation. However, they are the easy ones to blame and that is wrong.

    If Financial Services is ever going to shake off its poor reputation it needs to be led by a fair and even handed regulator. It’s time the FSA/FCA put its hands up to its failings and required the firms ACTUALLY responsible to pay up.

  4. Determining the suitability of a fund for a client is a quite separate matter from managing the fund. There are two separate bits of the regulatory handbook – and there is even a formal regulatory guidance note “responsibilities of product providers and distributors”. If you determined that investment was unsuitable for your clients then well done, but it simply does not absolve the ACD from its duties to prepare truthful prospectuses, yearly and half-yearly reports, to ensure accurate valuation of fund assets and unit pricing – plus simple compliance with rules about diversification, asset holdings, liquidity, marketing and promotions. The FSA found them wanting. Please remember that Standard Life and more recently Invesco Perpetual were also found wanting in similar areas – they corrected the investors positions – I’m not noticing advisers saying they could all spot what IP did wrong?? Fortunately, you don’t have to defend what you did and what your due diligence looked like – because they have taken responsibility for their own failings. Especially when the vast majority of what they didn’t do is simply not something over which an adviser could have any degree of visibility … when did you last check that a fund valuation or a unit price was correct, or liquidity within regulatory parameters on a day to day basis??
    The point is that you can’t – you / I / we have to trust them to do their bit of the job properly – and trust that they will do the right thing if it does go wrong. If you then want to argue that advisers didn’t do THEIR bit of the job properly then fine – but do not confuse the two.

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