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MM leader: FSA’s handling of Arch cru is hard to swallow

As we await news of whether the FSA will push ahead with an Arch cru compensation scheme which could put hundreds of IFAs out of business, the regulator has confirmed it will not impose a fine on the fund range’s ACD Capita Fund Managers.

This week’s public censure of Capita FM by the FSA also confirms the firm, with the support of parent Capita Group, funded £32m of the £54m investor payment scheme agreed last year with the regulator. To put this in perspective, IFAs who never advised on Arch cru will be asked to help contribute towards up to £33m in adviser compensation costs under the FSA’s proposals.

It is hard not to be left with the impression that those with bigger resources, and more expensive lawyers, receive favourable treatment.

The FSA revealed a number of CFM failings in its role as ACD. It failed in its oversight of Arch Financial Products, which it outsourced investment management to, and did not mitigate conflicts of interest between AFP and the funds created by the range’s complex structure.

CFM also failed to adequately monitor liquidity risks. The range was suspended in March 2009 due to worries there was insufficient capital to meet redemptions.

The Capita subsidiary also failed to have adequate processes to validate the reliability of the funds’ share pricing. Since suspension the range’s value has dropped 44 per cent, from £360m to £203m.

In deciding not to impose a £4m fine the FSA highlights that Capita Group invested £33m enhancing CFM’s systems and processes and paid over £3m in investigation costs and reviewing past business. These all appear to be standard, rather than exemplary, responses to an episode of this magnitude.

The regulator says it took account of the fact CFM would have been unable to pay redress without the help of its parent, given its assets of £12.4m and £27.7m turnover for 2010. Capita Group made a profit of £302.9m for 2011, with the financial division making a profit of nearly £55m.

Such hardship considerations were not apparent in the FSA’s consumer redress scheme plans which threaten the survival of 30 per cent of firms which sold Arch cru.

This is also sure to stick in the throat of all advisers who are likely to experience higher PI costs as a result of the FSA’s scheme, as well as picking up an FSCS tab expected to be bigger than Capita’s redress payments.

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. As an IFA who never bought in to the proposition I am very unhappy with having to contribute towards the compensation costs under the FSA’s proposals.
    Providers should carry the burden of compensation and then the balance should dilute down to the business – be it single traders, partnerships etc – who actually sold the products.
    Young drivers pay the going rate for their car insurance risk not the older age groups. there are many other instances when this is employed rather than the poorly aimed scatter gun the FSA appear to be adopting.

  2. Another nail in the coffin for advice to the masses, with further advisers closing down. The industry cannot sustain the constant draw on their income(oh perhaps we are not supposed to make any)

  3. I would go as far as to question whether fraudulent preference on the part of the FSA has occurred for politivcal reasons..
    If the correct recompense and fine had been applied to capita and the depositary banks (lets be fair to Capita, they were probably NOT alone at being at faul becuase several insitutions settled whislt not accepting fault to reduce the cost to them which is good business sense) the n the evidence now suggests that unless the parent company could be held liable, then Capita FM would have defaulted and the FSCS would then have had to step in with regard the rel;evant claims. Would the liability have fallen on a different levy group to IFAs?
    My Capita and the banks being allowed to settle without accepting any liability, it means the only recourse clients can have is to their advisers (some of whom may have been at fault, but not all in my opinion, particualrly when only a modest part of a clients portfolio. If it was 100%, the n sorry chaps, I think you made a serious error of judgemement).
    Because of the way the FSA have handled it, when the 30% or more firms who reccomended Arch collpase, the complaints will fall to to FSCS and definately to the advising levcy payers, despite the fact the loss has been confirmed to have occurred due to failures of Capita and the depositary banks to carry out the basics for which they were responsible.
    I would have thought reaching an agreement before the matter had been fully investigated did give preference to Capita and the depositaries over the advisery sector and the only question then remains of whether that was relevant.
    I will post this anon I am afraid and would hope that MM phone me if they have concerns about posting it as if so, I may post under my own name if that is the only way they will publish it.
    P.S I have no clients invested with Arch Cru and whilst I did have clients with Keydata Life Settlement plans, no clients complaiend about the advice as they had modest holdings compared to their portfolio sizes, but without accpeting any fault, I had to settle with the FSCS lawyers (Herbert Smith) simply to remain in the business I had run with no upheld complaints for nearly 15 years!

  4. @MM I assume my comments have been removed with regard potential “fraudulent preference”. Can you email them back to me rather than simply delete them and I will try and reword them in a way which will be acceptable to you?

  5. The FSA does not intend to allow the facts to get in the way of its decision, and will do all that is necessary to achieve its desired result.

    While everyone agrees that Capita was responsible for this mess, this is not how the FSA sees it. Consequently, the lightest possible slap on the wrist for Capita, and a sledgehammer of a Consumer Review to crack those IFAs who advised on these funds.

    What worries me most about the Consumer Review, is that the FSA has (publically) confirmed the answer that it is looking for (£110 million please) and has full control over the questions that will be asked!

    In addition, the FSA is aware that, normally, the quantum of compensation will be aligned to the actual loss suffered. Unfortunately, this may not be known for some years, as Capita has yet to realise the funds’ assets. However, the FSA wants to wring the required sum out of IFAs today, so it has proposed that the compensation due be calculated by reference to how comparable APCIMS/IMA indices would have performed from investment to date.

    This is wholly inappropriate for a number of reasons. Firstly, the FSA has taken over 3.5 years to act – primarily because it did’nt like the facts of the matter. But, due to market conditions, ‘no-risk’ investors will receive a fraction of the payment due to ‘cautious’ and ‘balanced’ investors.

    If this is not an absolute abuse of power, then I do not know what is.

  6. “IFAs who never advised on Arch cru will be asked to help contribute towards up to £33m in adviser compensation costs under the FSA’s proposals”.

    How will we be asked? Nicely? Or will it be the usual Pay up or pack up?

    As for expensive lawyers, you can bet your boots that the FSA will engage the most expensive lawyers of all. And why not? It has at its disposal unlimited quantities of OPM and no shareholders or anyone else to which to answer.

  7. There is more to this story than meets the eye.

    The FSA have clearly favoured Capita and applied different standards to them compared to IFAs. This preference certainly appears to be for political reasons, given the June 2011 announcement came in response to political pressure. If this is the case then it is an abuse of power that should be legally challenged.

    Capita have been censured but not fined. This is justified because they have paid for a section 166 and made a large £32 million contribution. However £20 million of that appears to have been paid from insurance monies. It also turns out that another £10m has been spent by Capita’s people (SPL) suing the other parties involved. That money belonged to investors and not Capita.

    So does this mean that Capita have made almost no net contribution yet have still avoided a fine? And that the legal suits were a smokescreen to get Capita’s indemnity insurers to pay out?

  8. Canary in the Coalmine 1st December 2012 at 2:22 pm

    I am sure the regulator will be very interested in the answer, perhaps the Capita shareholders too.

    Time for Capita to change its ways and do the right thing. A business is worth nothing without its customers.

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