The Arch cru debacle has not ended with the FSA’s arm-twisted £54m compensation package funded by Capita, HSBC and BNY Mellon.
There is no reason why investors who were conned into a deeply flawed product should suffer 30 per cent losses because of the incompetence of regulators and managers.
The story in a nutshell is that a bunch of ex-investment bankers persuaded a rent-an-authorisation auth-orised corporate director to set up an Oeic investing in unconventional investments. It did so by making those investments through “cell” companies set up as plcs listed on the Guernsey stock exchange. Because these cell companies were listed on a “recognised” stock exchange, they were eligible investments for an Oeic. The cell companies invested not just in private equity but also in shipping loans and other schemes that only invest-ment bankers could consider to be investments.
The whole structure was designed to sidestep the FSA’s rules that banned illiquid investments such as private equity being held within open-ended funds. If the regulators had looked through the form to the substance, it should never have authorised the fund. In line with the FSA’s general practice of mechanistically following rules, however, it did authorise it.
The ACD changed to Capita, which seemed oblivious of the compliance issues involved until the roof fell in. Capita claimed the cell companies were not their responsibility but it now seems the auditors of the fund consider that they should have been accounted for as part of the fund from the outset. If they had been, Capita would have been liable without limit for any and all investor losses, since the fund would have been in breach of FSA rules, which it is the ACD’s responsibility to enforce.
The FSA employs plenty of people with the qualifications and skills to understand the nature of the Arch cru scheme. None of these people took action to stop the authorisation of the fund, nor took steps to close it down when it became clear that it was in effect in breach of the FSA’s rules, nor did senior management of the FSA respond to well informed criticisms of the Arch cru fund by experienced senior fund managers. Take all this into account and you have to ask why anyone should believe that more intrusive regulation or regulation of product governance processes as proposed by the FSA will make any difference. If someone cannot use a revolver, why would you trust them with a Kalashnikov?
Arguing that investors who were “missold” the Arch cru product get compensation from the FOS or that the new compensation package gives investors most of their money back, are both inadequate responses to the issue of a toxic product that should never have been authorised. As a matter of public policy, the regulator should surely have launched a proper investigation into the allegations of impropriety that have been widely circulated concerning transactions within Arch cru funds.
The FSA’s approach remains that if people follow the rules, any problems are nothing to do with the regulator. This is a recipe for endless gaming of its process regulation by financial engineers and chancers, with the bills for failure allocated to the industry via the FSCS. Only if the regulator owns up to its responsibility for ensuring that authorised financial products pass minimum safety tests will it be doing a decent job of consumer protection.
Chris Gilchrist is director of Churchill Investments and editor of The IRS Report