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Nic Cicutti: The consumer journalist take on Arch cru

One of the intriguing aspects of offering a “consumer” perspective on financial services issues, as I try to do in Money Marketing, is the assumption that there is a single view on all issues.

When, for example, I tried in my most recent column to offer an analogy to the Titanic as a metaphor of IFAs coming into contact with the RDR, I was told I should be more like Jeff Prestridge and Martin Lewis, who have a different outlook on the matter.

There is a bizarre irony in the way some of the most individualistic groups of people – financial advisers – are now telling another highly idiosyncratic assemblage – journalists – that we must all sing from the same hymn sheet.

The problem with that approach is while consumer finance journalists are broadly in agreement on many issues, we do not necessarily see everything in exactly the same way. That, after all, is what democracy is all about.

The same applies to IFAs and the way they respond to clients’ needs. When constructing portfolios, for example, they will each assess those needs differently. When discussing their risk profile, they may well define it in a manner dissimilar to some of their peers.

And when constructing a portfolio, their assumption of what constitutes a “low”, “medium” and “high-risk” investment strategy is likely to involve disagreement within the adviser community.

Where we all agree as journalists – and as IFAs, often enough – is on some of the key issues that affect those we write for and you advise.

Take Arch cru, for example. Here is an assemblage of firms – Arch Financial Products, Cru Investment Management and Capita Financial Managers, among others – who marketed, took investment positions and oversaw the management of a range of funds they described as “low risk” to investors they were targeting.

We are also in agreement these products were nowhere near the definition of “low risk” that were claimed for them at the time by Cru Investment Management chairman Jon Maguire and former Arch FP chief investment officer Michael Derks in that astonishing video they made in 2008.

As a result, upwards of 20,000 savers, the vast majority of whom wanted low- risk investments were persuaded to put their money into a range of investments that included unquoted companies, private finance initiatives and even Greek shipping lines.

Where we additionally have a common viewpoint is in the responsibility that seems to have been avoided by both the FSA and Capita as the regulator and overseer of the funds respectively. That is the only way one can interpret its letter to the law firm Regulatory Legal in October last year as to who was ultimately responsible for the debacle at Arch cru.

The letter, signed by FSA solicitor Jon Gerty, suggests no one may be to blame for investors’ losses and they should not therefore expect full compensation: “It is also the case that others (or even no one) may be responsible for the losses suffered by investors, so 100 per cent [compensation] is not appropriate in this case.”

Gerty’s letter implies Capita does not bear legal responsibility for Arch cru investor losses: “I can confirm the FSA has made no determination that CFM is legally responsible for any investor losses.” It adds that the regulator will not be taking legal action against depositories of the Arch cru funds, BNY Mellon Trusts and Depositories or HSBC.

Again, there does not appear to be any indication on the FSA’s part that it is willing to accept any blame for what happened.

Was the regulator really unaware that hundreds of gullible IFAs were using the IMA sector classification, based on an assessment of underlying assets, to describe the funds as “cautious”? Did it really have to wait for two years after the funds were suspended to publish a report which has now found – to no one’s great surprise – that only 12 per cent of sales were appropriate?

Oversight? What’s that?

Ultimately, where some consumer journalists are in agreement is that the FSA was asleep on its watch – and that asking Capita to pay its share of the £54m compensation package agreed last year is astonishingly little.

That said, although I have not spoken to many journalists on this issue, where one or two disagree is over the issue of whether IFAs who sold Arch cru funds should be told to review all their sales, with a view to making up to £110m available in compensation to affected investors.

My own take on it is that it was the correct decision – it targets those explicitly responsible for the poor advice and ensures they bear the heaviest part of the cost of redress.

But the scandal that remains unaddressed is that of reforming the FSCS so the main part of the bill does not fall on all other IFAs when those who missold the Arch cru products go under and are declared in default.

I suspect that both myself and most other journalists would agree on that, and not a few financial advisers too.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 36 comments at the moment, we would love to hear your opinion too.

  1. Soren Lorenson 18th May 2012 at 12:29 pm

    Nic, Maybe you can expand on why you believe that IFA’s should conduct a greater degree of due dilligence when recommending an investment than the regulator?

    If you really do believe this then possibly you could also provide the names and addresses of potential clients who are prepared to pay fees at the level required to cover this.

    If you don’t think this then maybe you shouldn’t make silly comments like “My own take on it is that it was the correct decision – it targets those explicitly responsible for the poor advice and ensures they bear the heaviest part of the cost of redress”.

    Is it “poor advice” to trust and rely on the literature of an organisation that is authorised and regulated by the FSA?

    Disclaimer: Never sold Arch Cru or Keydata but feel that those responsible for their fiascos are not being held to account.

  2. Never got involved with Keydata, have a small exposure to Arch Cru.
    All clients were at least medium risk (whatever that is now) with a maximum of 10 to 12% of their overall portfolios in Arch Cru as a diversifier.
    Nobody has complained all are aware of the background to what has been going on yet the FSA have to all intents and purposes out the blame very firmly at our door.

  3. If products were regulated to the same degree as the adviser then surely disasters like Arch Cru would be far fewer?

  4. Nothing new again Nic, we all have opinions on the systems in our industry but penalising the girl on the checkout at McDonalds because the burger made you ill does not seem fair.

  5. All Journalists are guilty of perverting the course of justice.

  6. Nic, Are you out of your tiny mind?
    Are you being paid by Arch, Cru or Capita to trot out this drivel? Do you really believe this tosh?
    The FSA regulated these guys. Under the FSA rules literature has to be ‘fair and not-misleading’, balanced even. So the fund ‘craps out’ due to extraordinarily poor execution / malfeasance by third parties unknown (albeit employees of these three firms). There is no possibility of the IFA’s knowing of what was going on internally at these organisations until the ‘shit hit the fan’.
    AND you now say IFA’s are fair game to pay compensation?! It is true they are the easiest targets – i.e. the one place least able to defend themselves in the courts as most firms will have no where enough money to do so.
    You are a despicable coward of the first order. I am disgusted by your twisted sense of what you think is right. You should be standing up for the IFA’s who’s cause you say you support. What is you motivation? Extraordinary!
    You should be ashamed of yourself.

  7. Nic, Any good IFA will have been reviewing the Arch Cru holdings constantly since this debacle. We used this fund as a small part of clients portfolios ourselves. The fund was chosen because it had a track record and most importantly it had liquidity to enable it to be a regulated and ISA qualifying fund. Unbeknownst to us Arch removed the liquidity and invested all of the fund in the private equity sector. This should immediately have made it unregulated and non ISA qualifying surely and as the overseers should not Capita have told Arch it can’t be done, change it back and threatened to advise the FSA? The most important issue here is that Capita did not do their job and in fact were totally negligent. Asking us to pay towards wholesale compensation is a nonsense – should all fund managers who invested collapsed banks in the last 5 years now pay compensation for investing into them? However certainly all investors have a right to complain if they feel too much has been invested into an inappropriate investment. We have discussed this with each investor and to date all have agreed that we are not at fault here. By the way we selected the fund based on it’s low volatility and lack of correlation – however given subsequent markets we would have sold it if we could as it’s volatility and correlation to the FTSE increased. Still it makes headlines doesn’t it.

  8. As there appears to be a very cosy relationship between the regulator, Capita and all other parties involved in this debacle, how can any IFA be called to account when the blame for the incorrect assessment of risk profile of the fund was so clearly erroneous. Advisers need to be able to rely on information from providers and that the regulator takes some responsibility for its failings.

    Arch Cru, Keydata, Lehmans and many more screw ups will happen because the nut jobs who work in the regulator are basically only retrospectively competant.

  9. Not involved with arch cru thank goodness!

    My heart goes out to those IFA who are!

    Are we to believe then that product providers are not responsible for what they say in any marketing information?

    If that is the case we are all in serious trouble!

    I live in hope that Mr Cicutti might one day stop writing articles to get the maximum response from financial advisers, especially on a Friday, he must have been a failed tied agent in his former life!

  10. Simon Webster 18th May 2012 at 2:27 pm

    “it targets those explicitly responsible for the poor advice”

    After the event we now all know that Arch Cru was a disaster. When the plans were purchased the FSA “was asleep on its watch”

    So who is responsible for the poor advice. Apparently anyone who is not the regulator.

    In the words of Ian Hislop “if that is justice – I am a bannana!”

    As for you Nick I agree with the other commentators here “shame on you”

  11. What was it about the 1% renewal commission conversion from 0.5% % p/a and the offer of a buy out from CruIM which made IFA’s want to recommend the fund ?

    The guilty people are those who oversold this. It is right they are made to review their advice. It was unsuitable from outset. What did Capita / FSA have to do with that ?

  12. It’s obvious that the FSA was to blame for not correctly regulating Arch Cru and ensuring their approved literature correctly indicated the truth of their investments. Unfortunately H Sants et al are bumbling idiots who were / and are out of their depth but unaccountable for their buffoon-ness. Nic? Protect the consumer, realise what the FSA are doing to the masses and use you influence to get them a great regulator and independent advice.

  13. It’s no use, I can’t put up with this imberciles drivel anymore. Cancel my subscription.

  14. Vic Blizzard@2:33pm

    We reviewed this fund and were considering recommending it. The offering I saw had the standard 3%+0.5% trail. It was just another fund manager and there was no ‘buy-out’ offer. I suspect you are thinking about something else (True Potential possibly?) Please get your facts right before accusing others – although, if anyone else knows what Vic is talking about please post.

  15. Cancelled mine last article Bob.
    MM should have no place for this type of baiting on what is otherwise a quality paper

  16. Soren Lorenson 18th May 2012 at 2:56 pm

    As IFA’s we need to stand together on this. It’s fine for the Vic Bilzzard’s of this world to have a go but in truth we all know that any of the investment firms we recommend could collapse. I have no way of knowing whether their is fraud, theft, creative accounting or just poor business going on at any of the firms I recommend. I HAVE to rely on the regulator to do that. It is their job and they have been given ample resources to do it.

  17. Mark Reynolds 18th May 2012 at 2:56 pm

    Call me old-fashioned but I believe we should all be totally accountable and responsible for our behaviours and not look to blame anyone and everyone else when things go wrong. Only you can make the choice to recommend a product and you need to be suitibly confident of your decision and then stand by it.

  18. man on the moon 18th May 2012 at 3:17 pm

    @Mark Reynolds

    if advice is based on the information available and the client or clients are acting with informed consent who is to blame?

    PS advice as I am sure we are all aware is not limited to Products nor is the liability.

  19. John Constable 18th May 2012 at 3:19 pm

    So often, bureaucracies are self-serving and the FSA fully lives up to this.

    The FSA is responsible for allowing Arch Cru to be marketed as ‘cautious’ and ‘low-risk’ and therefore should bear the ultimate responsibility for the debacle.

    I am so glad that as far as the financial services sector is concerned, I am just an ‘interested bystander’ watchng this madness unfold.

    PS. I agree with those IFA’s who state that post-RDR, the great majority of people will not pony upfront for financial advice.

  20. QCF Level 4- Due Diligence Test

    You are asked to read a product brochure (you are not required to do any other research) as part of your due diligence for recommending an investment fund to your client

    The fund manager sets out what it describes as its “strategy allocation (broad)” in the form of a pie chart. These are
    :
    Private equity (28.4%)
    Private Finance (23.6%)
    Sustainable Opportunities (17.6%)
    Cash (committed) (10.6%)
    Structured Finance (8.4%)
    Real Estate (7.1%)
    UK equity Income (3.2%)
    Water and Power (0.8%)
    Clean Tech (0.3%)

    In your professional opinion does this asset class mix constitute?

    a) A low risk fund;
    b) A medium risk fund;
    c) A high risk fund.

  21. Boris the Spider 18th May 2012 at 3:31 pm

    Mark Reynolds – Do you still feel that you are responsible if the approved information provided by the FSA authorised and regulated company is wrong. How would you know?

  22. IFAs comments are always more interesting than financial journalists’ articles. If it were not for the comments I’d never read this stuff. Would you?

  23. Tell the client to put all the money in a high interest bank account. If the CEO of the bank runs away with all the money, phone the client and tell him you are responsible and you want to pay back what he has lost.

  24. Mr Bamford has only given you half a question, 1a. 1b asks: This fund was listed in IMA Cautious Managed sector. In not more that 250 words what does this tell us about the UK financial regulatory structure?

  25. Nick is quite right. Even a FPC level adviser should have worked out CF Arch Cru funds were not low risk.

    They have been recommended as such by advisers taking advantage of the need to return on deposit accounts. How convenient that 1% renewal was paid at the same time.

    The advisory firms have nothing to fear if their advice is suitable. Problem is, we know the end of the story before we get there !

  26. Soren Lorenson 21st May 2012 at 1:33 pm

    Nick Bamford@18th May

    Nick,
    I think you are missing the point. I accept that IFA’s who placed cautious investors solely in a fund like Arch Cru might be liable for poor investment advice. However they should not be expected to pick up the bill for the fact that the FSA, ACD and HSBC failed to oversee the fund correctly.

    Be careful what you wish for. The next fund that fails could be one that you or I have recommended.

  27. @Anonymous 9.07

    Your question is a good one it tells us that the UK financial sector (not just the regulatory sector) is in a mess, possibly because of a lack of personal/corporate responsibility?

    Comments please on the following FSA statement

    “However, it is no defence for an IFA to say that they relied, or were justified in relying, on statements made by a product provider or a third party’s opinions about suitability of an investment. This is because the duty to determine suitability cannot be delgated. It is up to the IFA to determine risk in the product to assist their judgement”

    I empathise with those who were misled by statements made by fund managers and a mis-categorisation of this fund but a simple read of the brochure would surely have done the trick

  28. @ Lola’s imaginary friend (Soren Lorenson)

    What I wish is that I did not have to pick up any part of the bill that will come our way via the FSCS.

    If any fund that I recommned “fails” I promise that I will not dump the potential liabilities on my fellow IFAs

    Still I wonder if you have an answer to my original question. When you read the brochure what risk category did you put this multi asset class fund into?

  29. man on the moon 21st May 2012 at 2:22 pm

    @ Nick B

    I was fortunate enough not to recommend clients place money with Arch Cru. I do not dare attempt to understand it and for that reason did not get involved.

    That in itself does not absolve those who market/mismanage or misrepresent investment vehicles. The asset allocation you listed would not lead me to assume cautious if such a thing exists.

  30. Soren Lorenson 21st May 2012 at 3:35 pm

    Hi Nick,

    Most of my clients are relatively cautious and I felt that the private equity section as well as other elements of Arch Cru would not sit comfortably with them so I did not recommend it.

    I don’t think we disagree on this. If an IFA advises a cautious client to go into a high risk fund (which is not just a small percentage of a properly selected portfolio) and that fund loses money then clearly the IFA is liable for poor advice.

    What is unjust in this case is that the reason for the failure of the fund was not the normal ups and downs of a high risk fund but something much more sinister. IFA’s should be able to rely on the regulator and ACD to do their job properly.

    I strongly believe that we need to stand together and not allow blame to land disproportionately on good IFA businesses because if a precedent is set it could be a fund that we have recommended next.

    Also most of those businesses do not have the funds to meet the compensation and that leaves the rest of us paying.

    PS Nice to find someone else on here with a love of literature aimed at the under 5’s.

  31. @Soren Lorenson

    I have three grandchildren 5 and under so Charlie and Lola are part of my life

    It is the rest of us paying that really gets to me

  32. @ Nick
    I have no grandchildren but you can bet some of my taxes are paying for yours.

  33. @N Bamford

    Some of your statements above are very bold – “if any fund I recommend fails I will not dump the liabilities on other IFA’s”

    As you are of the older generation of IFA’s I am sure you will remember the case of Peter Young and the Morgan Grenfell European Trust.

    For the younger fraternity here is a brief background.

    In 1996 Peter Young was a fund manager at investment bank Deutsche Morgan Grenfell (“DMG”) in London. He joined DMG in April 1992. In 1994 he was given responsibility for a £300 million PEP fund called the European Growth Trust (“EGT”). By 1996 it had become one of the largest unit trust funds in the country. At that time Young had responsibility for more than one billion pounds of investors’ funds.

    Mr Young had made investments totaling £180 million that broke the fund mandate causing considerable investor loss, which cost IFA’s nothing in compensation and Deutche Morgan Grenfell £210 million in compensation.

    Below is a link as to how IMRO and SIB handled the affair.

    http://www.fsa.gov.uk/pubs/additional/imro001-99.pdf

    Why are IFA’s, FOS, FSCS being dragged into the Arch Cru affair until the result of the £150 million lawsuit against Arch Financial Products LLP has been heard and why are the FSA not leading the lawsuit as opposed to the board in Guernsey utilising investors monies remaining in the funds.

    So Mr Bamford, if Neil Woodford were to do a Peter young would you really expect to have to compensate all the clients you have in the funds managed by him? if you do can I then ask how much money you have sent to the Treasury/Bank of England in respect of the bailouts of Lloyds, HBOS and RBS, as I am sure you would have had clients with money on deposit in those organisations that would have been lost without the bailout that every taxpayer has paid for, how did your due diligence miss these failures were about to happen?

    One area that is being missed here is that yes there will be some investors who were misadvised yet there will be many more that were not. The FOS has rejected 5 complaints from investors, now these clients have no hope of redress. One can only presume that the FOS found in favour of the IFA because the client’s attitude to risk was above cautious or the overall mix of investments in their portfolio (including the CF Arch Cru) kept them within a cautious rating. However it would not matter if the investors were the highest risk investors in the world and their other monies were invested in an outer Mongolian goat shearing fund, no investor no matter how high a risk taker would invest in a fund where the reality of what the fund actually invested in compared to what the fund brochure/prospectus stated were completely different.

    Take a look at the 190 page document filed in the lawsuit and you will see that Soren Lorenson’s view that if the CF Arch Cru liability is dumped on IFA’s then it will be a mandate for fund managers in the future to play Russian roulette with the funds investments knowing there will be no comeback on them.

    I would like to bet that the executive at Standard Life are wondering why they were fined £2.45 million for their failures on the Pension Sterling fund despite paying £107 million to investors to ensure the investors did not lose money, again the link to the FSA bulletin is below.

    http://www.fsa.gov.uk/library/communication/pr/2010/010.shtml

    There is something very wrong about the way CF Arch Cru has been handled and only an independent inquiry will allow the truth to emerge.

  34. @ A Smith (full name witheld because?)

    Due diligence and reading are clearly not some of your greater strengths. I made one bold statement but you imply many!

    I do indeed remember Peter Young he of self inflicted sex change fame!!

    You seriously miss the point of this thread. If you read the brochure and the asset class mix would you have rated Arch Cru suitable for a low risk investor? Why the reluctance I wonder to answer a direct question?

    Yes, there obviously were things done with that fund that require full investigation. But should low risk clients have been in it in the first place?

  35. @N Bamford
    Some of your statements above are very bold – “if any fund I recommend fails I will not dump the liabilities on other IFA’s”

    As you are of the older generation of IFA’s I am sure you will remember the case of Peter Young and the Morgan Grenfell European Trust.

    For the younger fraternity here is a brief background.

    In 1996 Peter Young was a fund manager at investment bank Deutsche Morgan Grenfell (“DMG”) in London. He joined DMG in April 1992. In 1994 he was given responsibility for a £300 million PEP fund called the European Growth Trust (“EGT”). By 1996 it had become one of the largest unit trust funds in the country. At that time Young had responsibility for more than one billion pounds of investors’ funds.

    Mr Young had made investments
    of several million that broke the fund mandate causing considerable investor loss, the resulting investigation cost IFA’s nothing in compensation and Deutche Morgan Grenfell £210 million in compensation.

    Attached is link as to how IMRO and SIB handled the affair.

    http://www.fsa.gov.uk/pubs/additional/imro001-99.pdf

    Why are IFA’s, FOS, FSCS being dragged into the Arch Cru affair until the result of the £150 million lawsuit against Arch Financial Products LLP has been heard and why are the FSA not leading the lawsuit as opposed to the board in Guernsey utilising investors monies remaining in the funds.

    So Mr Bamford, if Neil Woodford were to do a Peter young would you really expect to have to compensate all the clients you have in the funds managed by him? if you do can I then ask how much money you have sent to the Treasury/Bank of England in respect of the bailouts of Lloyds, HBOS and RBS, as I am sure you would have had clients with money on deposit in those organisations that would have been lost without the bailout that every taxpayer has paid for, how did your due diligence miss these failures were about to happen?

    One area that is being missed here is that yes there will be some investors who were misadvised yet there will be many more that were not. The FOS has rejected 5 complaints from investors, now these clients have no hope of redress. One can only presume that the FOS found in favour of the IFA because the client’s attitude to risk was above cautious or the overall mix of investments in their portfolio (including the CF Arch Cru) kept them within a cautious rating. However it would not matter if the investors were the highest risk investors in the world and their other monies were invested in an outer Mongolian goat shearing fund, no investor no matter how high a risk taker would invest in a fund where the reality of what the fund actually invested in compared to what the fund brochure/prospectus stated were completely different.

    Take a look at the 190 page document filed in the lawsuit and you will see that Soren Lorenson’s view that if the CF Arch Cru liability is dumped on IFA’s then it will be a mandate for fund managers in the future to play Russian roulette with the funds investments knowing there will be no comeback on them.

    I would like to bet that the executive at Standard Life are wondering why they were fined £2.45 million for their failures on the Pension Sterling fund despite paying £107 million to investors to ensure the investors did not lose money, again the FSA bulletin is listed below.

    http://www.fsa.gov.uk/library/communication/pr/2010/010.shtml

    There is something very wrong about the way CF Arch Cru has been handled and only an independent inquiry will allow the truth to emerge.

  36. As an investor I’ve been following this quite closely since suspension, we must all now stick together and set firm on a single target, Capita. They breeched, they have means to offer full redress, they are on the hook. Let’s get behind Foot Anstey and take them to the High Court, I’ve already offered to sue we simply need the funds to cover my legal costs, large IFA firms and PI insurance companies please get in touch? Thanks Nic for running with this, we must get justice and make sure this never happens again.

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