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MM Leader: FSA Arch cru redress scheme will destabilise sector

The FSA’s decision to launch its first-ever consumer redress scheme to force IFAs to pay up to £110m to Arch cru investors raises a number of concerns.

The regulator has come under significant political pressure to find a solution to ensure investors receive appropriate compensation. However, the quickest and easiest way of obtaining compensation is not necessarily the fairest means of apportioning costs and blame.

As well as the dramatic affect the consumer redress scheme will have on firms which advised on Arch cru, with up to 30 per cent at risk of default, the move could have a hugely destabilising effect on the wider IFA sector.

The significant hit PI insurers may take as a result of the redress scheme is likely to lead to higher premiums in a hardening market and perhaps more insurers quitting the sector.

Some IFA firms are reporting big increases in premiums as policies come up for renewal. Underwriters are said to be very nervous about the heavy-handed way the FSA and FSCS are handling both Arch cru and Keydata.

A significant number of Arch cru firms will not have the appropriate PI cover due to policy exclusions. The FSA suggests firms may be able to find other sources of capital but the worry is most will fail capital adequacy requirements and be forced to stop trading.

Given these circumstances, it would seem sensible for the regulator to offer some short-term flexibility on capital requirements. However, no such proposal was forthcoming in a consultation paper which showed little concern for the livelihoods of those running and working for these firms.

The FSA predicts that £33m could pass to the FSCS. When this is added to the £40m compensation costs already allocated to Arch cru, it is highly likely that intermediaries will pay more in total than the £54m compensation package funded by the fund range’s authorised corporate director Capita and two depositories.

Policymakers need to ask themselves if it is fair for advisers who never went anywhere near Arch cru to end up paying more in total compensation costs then the fund range’s ACD.

They may also want to question whether putting numerous firms out of business and destabilising the entire IFA sector is the best way of getting investors the compensation they deserve. Certainly, if it was up to investors to decide where the blame lies a very different picture would emerge.

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Since when has the FSA been bothered about being ‘fair’.

    It always targets the easiest group – IFAs.

    What is the point of an ACD etc. if they fail to carry out their duties and then avoid the majority of the blame?

    As usual institutional backside covering is carried out by the public schoolboy network!

  2. Julian Stevens 10th May 2012 at 10:04 am

    “The FSA suggests firms may be able to find other sources of capital”!! Such as? Remortgaging their homes perhaps (as quite a few had to as a result of the pensions review)? The FSA appears to assume that IFA’s have limitless resources and that those who don’t, well, they’ll just be acceptable casualties of war.

    Apart from anything else, the failure of ArchCru did NOT come about as a result of a few hundred IFA firms having sold the company’s products without having foreseen the possibility of ArchCru doing things with investors’ money that it shouldn’t have.

    Once again, the FSA appears to be taking a hatchets and sledgehammers approach to the wrong people (take a look at the lawman beating up the wrong guy), with the benefit of hindsight and with impunity from challenge.

    And surely, in the same way as IFA firms are required to submit yearly RMA Returns, ArchCru would have been required to submit some sort of equivalent activities return (it’d be very strange if it didn’t) so the FSA could see what they were doing and, if something didn’t look right, act accordingly to prevent the situation getting out of hand. Isn’t that the sort of system that a responsible and competent regulator is supposed to have in place? A regulatory SYSC?

    The failure of a provider and the failure of a few hundred IFA firms with insufficient resources to meet the costs of a number of (legitimate) complaints going against them are two entirely separate issues. To me, it seems utterly reprehensible for the FSA to intertwine the two, and now it looks like another Pensions Review style exercise is on the cards. Will the FSA direct IFA firms to write to all their ArchCru clients all but encouraging them to complain?

    This is yet another example of the pernicious agenda against small IFA’s that Hector Sants would have us believe the FSA doesn’t have. The evidence simply doesn’t support such a denial.

  3. Don’t you just love the interent and freedom it offers to find the truth. The problem is sifting fact from fiction, but I am pretty sure which bits in the Arch and Keydata cock ups are fact and which are fabrication (I mean fiction)

  4. The FSA could not give a monkeys about destabilising the IFA community. It never has and never will. This is just another addition to getting rid of us. All the changes and exams in the current world of the FSA will not stop this happening

  5. The main concern here from PI Insurers is not just the Arch Cru Re-dress Scheme. Insurers feel that the FSA are going to use re-dress schemes far more widely in the future. This means that a fund manager / ACD could completely fail in their duties however the IFA’s will end up picking up the compensation bill when the fund fails despite the fact that they could not have reasonably foreseen this happening when they recommended the fund. You can bet that the FSA will set a very high level as to what passes as suitable advice hence insuring that most IFA’s will have to pay up under a re-dress scheme. We should all be cery concerned for our futures.

  6. Duncan Carter 10th May 2012 at 6:28 pm

    Given how Capita as ACD, the depositories, the auditors and regulators all failed here and elsewhere, I am increasingly at a loss as to understanding how any form of due diligence can effectively be done.

    Consequently to describe any form of saving/investment product as being anything other than of a ‘high risk’ nature is to invite a complaint/redress claim that cannot be defended especially where behind closed doors deals are being done and a rear view mirror approach is being taken.

    It appears that if a fund manager fails, any IFA who recommended it will be deemed guilty of ‘mis-selling’ irrespective of the actual circumstances or facts and this is a very worrying development. It certainly means that a fund manager being ‘authorised and regulated’ doesn’t actually mean much when the chips are down.

  7. Duncan Carter is right, ALL investments are “high risk” and if not advised as such IFA’s will pay the redress bill regardless if the loss was due to fraud, bad management, market conditions, regulator, Etc Etc

  8. The final line of the article sums this situation up very well – “if it was up to investors to decide where the blame lies a very different picture would emerge”. I have complete faith in my IFA who has served me well for many years but is in no position to defend himself when he has been lied to by various bodies about the risk level involved in the Arch Cru funds, particularly when our investment was moved there by Canada Life with assurances that the risk profile was unchanged from IDB. How can IFAs be at fault when Capita and all the regulatory bodies failed us all?

  9. I think those investors and their advisers with Keydata and or CF Arch exposure have a case for suing the treasury. It would need funding to do it but I believe it could be done. The PI brokers have voiced their concerns at a very late stage, but given their exposure would it not be worth their while to help fund an action against the treasury.

  10. randal vaughan 14th May 2012 at 3:55 pm

    I put (£ 170000) a good proportion of my life savings into the Arch Cru funds and like 20000 or so others fear that I may only see (but God knows when) just a small proportion of this again.

    Prior to signing up I made several visits to my IFA going with him through the alternatives for a cautious investment, that would give a steady though perhaps unspectacular return and one which I could access should it become necessary.

    Now coming up to age 78 it is indeed necessary but I have no access to what may now be just a fraction of my £ 170000

    The scale of this debacle beggars belief and exhibits mismanagement to the extent it is little short of a massive swindle. Dressed up worthless funds sold to and through the financially educated to thousands of genuine savers, many of them laymen

    I do not understand how IFA’s can be held responsible and the video (below) illustrates why

    http://www.citywire.co.uk/personal/-/video/funds/content.aspx?id=379266….

    Compare what we have today with the Arch Cru executive “mission statements”.

  11. A key point has to be the the fund objective as stated in the CAPITA report as
    ‘wealth preservation and capital appreciation and that

    ‘CAPITA as the ACD review the policies for managing the risks in order to follow and achieve the investment objective as outlined above’

    The above are written statements of fact. The FSA have stated that IFA’s could rely on statements of fact.

    It is clear that CAPITA have failed in their duty and the blame is being heaped on the IFA’s! God only knows how this injustice has been allowed to happen

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