The FSA’s proposed £110m Arch cru consumer redress scheme has met with industry resistance since the regulator published its consultation on the scheme on 30 April. If implemented, it will require IFAs who recommended Arch cru funds to review their sales and pay redress where appropriate.
The consultation closed this week. Here we look at some of the arguments the industry has submitted to the FSA on why the scheme should not go ahead in its current form and which challenge the grounds for the scheme being set up at all. Minutes from the FSA’s April board meeting suggest the regulator is still undecided on the scheme, with a “convincing case” needed before it is rubberstamped.
Foot Anstey partner Alan Hughes: Hughes argues many advisers recommended Arch cru funds as part of a balanced portfolio. He challenges the FSA’s assumption that one fund included as part of a wider portfolio can be treated as a standalone recommendation, which could lead to suitable recommendations being classed as unsuitable.
Hughes, alongside other respondents, also questions how the £54m payment scheme agreed by the FSA with authorised corporate director Capita and depositaries HSBC and BNY Mellon in June 2011 was arrived at. He says: “It looks like the FSA is not prepared to use its extensive powers to deal firmly and appropriately with large powerful institutions, and instead prefers to focus its attention on the adviser sector which is more disparate and easily targeted. Such an approach does not meet the FSA’s objective of market confidence.
“If consumers consider that large fund managers and administrators are able to avoid public justice and enter into ‘secret deals’ with their regulator to minimise their losses, consumers are likely to have less confidence in the financial system, not more.”
IFA Centre managing director Gill Cardy: Cardy points out the funds within the Arch cru range were set up with different risk profiles, objectives, and investment strategies so cannot all be classed as “high risk”. She also argues the asset allocations within the funds changed dramatically from what was set out in the initial fund factsheets to shortly before the funds were suspended in March 2009.
Cardy goes on to say the FSA’s consultation does not acknowledge that investor losses may not have been caused by advisers’ failures to demonstrate suitability, but by the maladministration of the investments and mispricing of the underlying holdings.
She says: “The FSA’s determination that all the funds are high risk and that any ‘reasonably competent’ IFA should have realised as such, in fact merely raises the question why, if it was indeed so obvious, the FSA permitted the publication of regulatory fund materials which were clearly not fair and very misleading, or why it has failed to enforce against those with regulatory responsibilities for the production of this material.”
Informed Choice executive director Nick Bamford: Bamford’s submission looks at the knock-on impact the redress scheme would have on firms that did not recommend Arch cru.
The FSA has estimated the redress scheme could cost the Financial Services Compensation Scheme £30m, but Bamford says this is a “substantial understatement of the true position”. He says though some firms’ redress costs will be covered by professional indemnity insurance, this may lead to an inability to renew cover in future which will then force the firm to collapse.
Bamford says: “Firms are already suffering under successive FSCS levies and the consequences of the consumer redress scheme will be to further damage, in some cases irreparably, those intermediary firms who have not missold.
“The domino effect of firm failure which adds further burden to other IFAs in the form of further FSCS levies is massively understated in the cost benefit analysis. We strongly urge the FSA to consider the unintended consequences of the scheme which will be to drive IFA firms out of business even though they are not the ones who have missold this product.”
Former FSA head of retail policy David Severn: Severn’s submission centres around the issues with the risk rating of the Arch cru funds. The Investment Management Association labelled the funds as cautious managed.
Severn says: “I can see some advisers may feel the FSA is having its cake and eating it over the issue of risk ratings. The FSA rightly places the obligation on product manufacturers, but if the manufacturer fails to reflect fairly the risk inherent in a product the FSA then feels free to accuse intermediaries of a lack of due diligence.”
Severn also asks whether the FSA was warned about the funds, and if so what action it took as a result. He says the FSA should at least explain why it failed to pick up at an earlier stage that fund information was misleading.
He adds: “IFAs should not be expected to fund compensation costs arising from poor advice by some firms to the extent the problems were compounded by the use of inadequate or misleading promotional material by other parties or by supervisory failings on the part of the FSA.”
Aifa policy director Chris Hannant: Hannant says the FSA has not met the legal test for setting up a redress scheme, which requires evidence of a “widespread and regular failure by firms”. He picks apart the FSA’s figures which stated 795 firms sold Arch cru affecting between 15,000 and 20,000 customers, and estimated redress scheme costs of between £5.9m and £10.6m.
Analysis of the statistician’s report published alongside the consultation suggests only 263 firms may have missold with between 7,500 and 14,100 consumers affected. Aifa estimates the costs of implementing the redress scheme would be more likely to be between £8m and £13.8m.
Hannant says: “We are very concerned about the FSA’s misuse of the data to misrepresent the basic facts. This can be said to be due to not understanding the statistical analysis, which is worrying to say the least, or a deliberate attempt to create a misleading impression to endeavour to support a conclusion that has already been made by officials. Either way, it does not reflect well on the FSA.”
SimplyBiz chairman Ken Davy: Davy argues it would been impossible for IFAs to know if net asset values of the funds had been overstated, as has been suggested by investment manager Spearpoint. He points out that despite negative publicity few clients have complained about the advice they received to invest in Arch cru, and that many firms that advised on Arch cru have since gone bust.
Davy says: “A number of firms that were previously involved with Arch cru have since become insolvent. We understand a number of these firms have since become recently authorised as new entities and approved by the FSA. It does not follow natural justice that these new firms will make no contribution to any redress payable despite a history of involvement in Arch cru.
“The significant burden of cost will fall on the FSCS and larger investors. Those with actual regulatory and fiduciary responsibilities will avoid being held to account for their shortcomings. This consumer redress scheme cannot be considered as likely to deliver a satisfactory outcome either to the FSA as a responsible regulator or to investors in Arch cru.”
The FSA is expected to put out a policy statement in November if the Arch cru redress scheme is approved.