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Q&A: What the Arch cru redress scheme means for firms

What is a consumer redress scheme?

New powers were given to the FSA in 2010  to create consumer redress schemes to deal with specific market failures. Under section 404 of the Financial Services and Markets Act the FSA can require firms to review their sales and, where relevant, pay redress.

The FSA can set up a consumer redress scheme where they believe there has been a widespread or regular failure by firms to comply with regulatory requirements. Schemes can also be set up where consumers have suffered or may suffer a loss which a court would remedy, and where the FSA believes such a scheme is appropriate to deliver redress.

The Arch cru redress scheme would be the first time the FSA has used these powers.

How will the Arch cru redress scheme work?

The scheme will apply to all firms that provided a personal recommendation to invest in Arch cru. This includes firms that were authorised at the time of the sale but have since had their permissions cancelled, and European firms that passported into the UK.

Firms will have to identify the clients who invested in Arch cru funds, and determine whether they are in the scope of the scheme. They will then have to write to all Arch cru clients to explain whether they will review the advice given, or whether the case was out of scope.

Firms will then have to assess whether advice to invest in Arch cru was suitable, based on an FSA assessment template. Firms do not have to complete a full assessment if they admit at outset advice was unsuitable.

Firms can carry out the assessment themselves or send their files to a third party to do it on their behalf.

Where advice is unsuitable, firms can use an online calculator, provided by the FSA, to determine redress which aims to put the investor in the position they would be in if they had invested in an alternative suitable investment. This calculation will take into account any payment made under the £54m voluntary scheme announced last year.

Which clients are out of scope?

Execution-only sales, investment as part of a discretionary management arrangement, and failures to provide advice to disinvest  from Arch cru funds where this was required as part of an ongoing advice arrangement, are not within the proposed scope of the scheme.

Consumers who have already complained to the Financial Ombudsman Service about advice on a Arch cru fund, or accepted a full and final settlement in relation to such advice, are also out of scope.

When will this come into effect?

Depending on the outcome of the consultation, the FSA plans to issue a policy statement in early November with the rules coming into effect on January 1.

Firms will have four weeks from when the rules come into effect to initially write to clients affected, and 24 weeks to issue a letter where redress is payable. Firms will have 28 days to pay redress from when the consumer claims.

Where does professional indemnity insurance fit in?

Some firms who face making redress payment for unsuitable Arch cru sales may be able to claim on their PII cover.

However the FSA says it is aware clauses in some PII policies will prevent a firm issuing a redress statement. Where this happens a firm can refer the case to the FSA, which will review the case itself or appoint someone else to review files on the FSA’s behalf.  The costs of carrying out the review will be passed to the firm.

Firms need to notify their PI insurer of any potential claims, especially if failure to notify or late notification invalidates their cover.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Lindsay Bateman 30th April 2012 at 4:40 pm

    Yet no similar action to date against those Banks that issued so-called “100% principal protected” structured products that failed after Lehman’s collapsed – despite the clear deficiencies in product documentation, client risk profiling, disclosure of counter party risk etc… Maybe the Banks are regarded as too tough an adversary?

  2. Joe Egerton - Justice in Financial Services 1st May 2012 at 8:47 am

    This is so far a consultation. Every IFA and every retail fund manager is likely to be alarmed at the FSA approach as its effect is to allow the FSA to hold that ANY fund that makes a loss is high risk. The proposals can be challenged in the Upper Tribunal

  3. So, let’s get this straight.

    Without proof positive of individual cases of so called “mis selling” which by another name could be called unsuitable advice, but which by definition is more emotive and promotes the regulator as the champion of the consumer, all firms, whether involved in the sale of these funds will now have to stump up another levy to set up this fund.

    There! Simples!

    Financial Stitchup Authority, way to go!

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