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.