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Nic Cicutti: Where’s the Arch cru justice?

Imagine for a minute that you are the subject of a police investigation. The investigation is not yet completed and a report has not been passed to the Director of Public Prosecution for a decision on whether to charge you with any offence.

If you are charged, you might expect to be allowed to have your day in court and to mount a defence against

the charges, providing any proof you have that you are innocent and should walk free from the dock.

At which point you discover that far from a proper trial of all the evidence, the judge has already come to a judgment. More bizarrely, whatever the charge and irrespective of the judgment, the penalty itself has already been decided.In fact, the penalty was set long before the investigation even started. In other words, the crime is tailored to fit the punishment, not the other way round.

It is this situation that many IFAs now find themselves in as a result of the FSA’s requirement that those among them who sold Arch cru products to their clients must review their sales.

The regulator’s three-month consultation period expired at the end of July and advisers will learn soon whether the regulator intends to go ahead with the “proposed” redress scheme it wants to set up.

I use the word proposed in inverted commas because in more than 20 years of writing about regulatory matters, I have yet to come across

a case where the outcome of a consultation period from the FSA or its predecessors is significantly different from what it came up with in the first place.

The FSA’s stance is designed to come up with a large slice of the money it believes will be needed to pay compensation to an estimated 20,000 investors whom it believes may have been missold Arch cru products.

Now, I do not have any objection whatsoever with the concept of IFAs carrying out a review of their Arch cru sales. The number of advisers involved in the marketing of Arch cru products was relatively small – not even 800 – and assessing whether a sale was compliant should not be terribly onerous.

Were I an IFA, I would first want to look at whether I had understood the real risk rating of the Arch cru funds themselves – as distinct from simply applying the IMA sector classification to them, based on an assessment of underlying assets, to describe the funds as “cautious”?

Or even, more stupidly, whether they accepted the definition of “low risk” claimed for them in the video made in 2008 by Cru Investment Management chairman Jon Maguire and former Arch FP chief investment officer Michael Derks.

Second, I would want to see whether I had a cast-iron understanding of my clients’ own risk profile and what my previous portfolio creation

on their behalf was. I would then want to overlay that understanding of both Arch cru funds and clients on top of each other to see whether there was any justification for recommending the former to the latter.

It could be that there is, for example, I have read some IFAs arguing that their advice was based on an assessment of an entire, overwhelmingly low-risk portfolio, of which Arch cru formed only a small part.

If that is so, I would expect to be able to justify this in writing at the time of the recommendation, showing both a detailed understanding of the risk involved in Arch cru, placing them in the context of the other funds the adviser was discussing and their precise fit. Assuming all those elements are on record, it should be impossible for a regulator to argue that the same was non-compliant.

Which is where the problem comes in. Because what the FSA is doing is precisely the opposite of this. It is less interested in a proper review of the evidence and more in screwing IFAs who recommended Arch cru to their clients.

Hence the fact that, like the dodgy second-hand car salesman who expands the price of the car to fit a punter’s pre-set budget, the FSA has set a target of £110m for the IFA sector to stump up. And how did the regulator come up with this amount? Forget the research it carried out into what proportion of sales were compliant or otherwise.

That may be accurate or it may not, as Money Marketing’s own research shows.

No, the way the regulator came up with this sum of money was that it had already pre-determined the level of culpability of other constit-uents involved in the overall process: Capita Financial Managers, BNY Mellon Trust & Depositary (UK), and HSBC. In this case, the FSA decided last year they should pay £54m, which it decreed “a fair and reasonable outcome, which is in the best interests of investors”.

In other words, affected IFAs are paying £110m not because they might have actually responsible for that amount of misselling – they might or they might not, who knows? – but because several months before the regulator chose to agree a deal for another constituency which saw it pay a lot less money. A deal by the way that allowed the FSA itself to avoid having to take any responsibility for what happened. Sounds like justice to me.

Nic Cicutti can be contacted at


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There are 18 comments at the moment, we would love to hear your opinion too.

  1. Lets face it the FSA has always behaved like a puppet dictatorship.

  2. A good and well balanced article, Nic, highlighting yet again the need for an Independent Regulatory Oversight Committee with the unassailable authority to say to the regulator: This is wrong and you aren’t going to do it. This IS wrong and the FSA SHOULDN’T be allowed to do it, but it will anyway.

    I’ve not read a single report anywhere of anyone agreeing with or supporting or endorsing the FSA’s statement of intent (for that is all its “consultations” really are, let’s face it). EVERYBODY (except for Capita, BNY Mellon and HSBC, who probably consider themselves fortunate indeed to have been let off so relatively lightly) appears to be opposed to the FSA’s proposal to (as Nic puts it) screw the IFA community yet again.

    Yet what justification has the FSA put forward for this course of action? To the best of my knowledge, none whatsoever. It’s just another case of the FSA announcing that this is what’s going to happen, secure in the knowledge that those affected have no means of resisting it other than to refuse to cough up and, as a result, being put out of business ~ pay up or pack up. It really is that simple and another example of an FSA “consultation”, the outcome of which is a foregone game, set and match conclusion before even the first ball has been served.

    Martin Wheatley has expressed a bit of token sympathy for the plight of the IFA community, but clearly he has no intention of actually trying to do anything about it.

    For Mark Hoban to claim that “the FSA is already quite accountable” and to resist all calls for an independent inquiry into this flagrant travesty of justice displays an appalling lack of concern for or disgraceful ignorance of what is being done to the IFA community. And the government, by having declared that the FCA, like the FSA before it, will be accountable only to its own board, actually endorses it. It’s a rigged deck and the FSA holds all the cards. Yes, the industry needs to be regulated, but not like this.

  3. This is akin to playing an away fixture, walking up to the centre circle and on asking the ref who’s kick off is it he replies ours!

  4. A very well written article. The fair and reasonable outcome announced by the FSA needs to be revisited Capita were not only ACD to CF Arch they were also the operator of the UCIS – Connaught Guaranteed Low Risk Income Fund and this is an extract for the Information Memorandum which was issued by Capita:

    The Operator and Unit Trust Manager Capita Financial Managers Limited is authorised and regulated by the FSA and is appointed by the Limited Partnership to act as Operator and Manager of the Limited Partnership and will be
    responsible for the establishment and operation of the Limited Partnership and all elements of the management of the Limited Partnership’s investments.

  5. +1 Good points Nic & Julian, an established point of law that the FSA is not accountable to Parliament, certainly not Hobnob. All the government via the Treasury can do is dismiss the board. Given government can’t influence the FSA, how did Crapita/BNY get away with £54m, what did they say or do?

  6. If this is justice I am a banana.

  7. Anon @ 12.38
    No need to worry. You are definitely not a banana!

  8. Dear Dear Dear, Nic seems to think we are being unjustly treated.

    So what else is new.?

    The plans laid down by the FSA have the ultimate goal of depleting the IFA sector to nil and RDR and these daft schemes they come up with, which have no basis in fact, just add to that belief.

    If we were employed they wouldn’t be allowed to treat us like this. How can even those IFAs who may have been a trifle lax in their assessment of the risk factors governing these funds be held accountable for the mess that came about.

    A bit like blaming IFAs for the thieving git who stole £110 million from KIS funds and then allegedly died !!

    The FSA has no interest in keeping a vibrant IFA sector, it just wants us to pay for their lack of skill, care and diligence and screw ups.

  9. Rebecca Girling 23rd August 2012 at 1:20 pm

    Ned, you are right about ‘The FSA has no interest in keeping a vibrant IFA sector, it just wants us to pay for their lack of skill, care and diligence and screw ups.’

    The alarming thing to me though is that they are doing it all with the complete non-objection of the trade body that used to purport to represent IFAs.

  10. Thank you Nic, a good article and your support is appreciated.

    I am not personally involved with this thank goodness, but if it goes through, you would have to question the sanity of anyone wanting to give investment advice in the future, and without any longstop!

    I do know someone who is involved and he feels he is about to lose everything he has worked for, after more than 40 years loyal service to his clients.

    At the outset I thought this to be too outrageous to happen, but I thought that about the RDR proposals, and look were we are now!

  11. Just a point of info really – NIc says it is only 800 adviser firms involved – a relatively small number?

    It is actually one-sixth of all firms authorised to give investment advice

  12. I feel like some little reception age child being picked on by the headteacher and there is nothing can be done about it! I am not involved in this particular mess, but the FSA seem out to destroy the industry and we are drowing with no defense because they aren’t properly answerable to anyone and nobody really notices or cares until things go wrong. the press will be on it like mad when there are only banks available and no more IFAs but until that ppint nobody seems to give two hoots.

  13. @ Robert Johnsey

    The point that Nic is making here is that 800 firms as you say represents one sixth of the industry or roughly 18%. Therefore this can hardly be classifed as a widespread systemic failure which is what is required for the FSA to invoke a section 404 consumer re-dress scheme. The whole basis of what the FSA is trying to do is completely flawed.

  14. The additional commission created the overselling. It was bad luck to oversell a badly run fund. Bad all round.

    There should be no sympathy if people advised this stuff to be low risk. It never was.

  15. Difficult to imagine the FSA authorising and regulating a badly run fund where the ACD was a subsidiary of the FTSE100 CAPITA GROUP, where the depositaries were the international banks HSBC and BoNY, with ‘top 5’ accountancy firms auditing the funds. Why did none of the PLC’s responsible for the governance and accounting for the funds not spot a badly run fund when they were responsible for the governance and monitoring of the funds and the investment manager? Some investors will have received good advice when investing in the funds others may not have. Regardless of the quality of the advice the loss will be exactly the same for anyone invested in the funds. Investors losses are due to a misleading prospectus, false share prices, incorrect accountancy procedures, and dubious underlying investments, for which advisers are not responsible.

  16. “Investors losses are due to things for which advisers are not responsible.”

    Well, that just seems to me to be more of the slack-brained thinking that got people into this mess. If the product was never suitable for the investor, then 100% of his loss is attributable to the adviser.

  17. Adam Smith – read G Tindle. What was the regulator, auditors doing?
    Nic, at long last a bit of actual financial journalism. At least you haven’t lambasted the IFA and have looked objectively at the story.
    Why not do an in depth story on the collusion between banks and the regulator in compliance, regulation and outcomes. Point out the monies made by the banks in dodgey transactions and the pitiful ‘fines’ which make it still worthwhile doing it. Show how the regulators leave and work for the self same banks at huge salaries. Now that would be a story.

  18. The FSA has done us all a favour over Arch Cru. It has shown itself to be an abomination. If it is not stopped it will show our legislators and politicians to be an even greater abomination.

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