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 firstname.lastname@example.org