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What is Capita’s role in Arch Cru debacle?

As the row rages over IFAs facing the Arch Cru compensation bill, Chris Gilchrist considers the reponsibilities of the regulator and the authorised corporate director.

From the FSA website:

“Any money in an open-ended investment fund is protected by a trustee or depository who ensures the management company is acting in the investors’ best interests at all times.”

From the Treasury’s briefing on the introduction of Oeic regulations in November 1996:

“The Treasury’s policy objective in establishing powers for Oeics is to provide their shareholders with the same standard of protection as is available to investors in authorised unit trusts.”

We are about to find out if either of these official statements is still true. I fear they are not.

Over the years since I wrote the first book on unit trusts in 1975, I have often made the statement – one that nobody has so far contradicted – that no UK investor has ever lost money though fraud or mismanagement as a result of investing in a UK unit trust (excluding losses caused by poor investments). There have been frauds and there have been technical glitches but, as far as I know, in every case, investors’ potential losses have been made good by either the manager or the trustee.

The robustness of the system created by the 1959 Prevention of Fraud (Investments) Act is undisputed. American investors must wish regulation of their mutual fund industry had been as effective. But the Arch Cru case could destroy this record and inflict huge damage on the UK fund management industry.

Investors in the Arch Cru funds face losses which are the direct result of an authorised fund following an investment policy that was usually prohibited for unit trusts and Oeics.

The private equity holdings in the Arch Cru funds were held in cell funds listed on the Channel Islands Stock Exchange. This was a device to enable investments to be held within an Oeic structure that would otherwise be allowed to constitute only a small fraction of a fund’s assets. The Cru funds held almost all the units in the cells. The value of the private equity investments was determined on a mark-to-model basis – not unusual with private equity – but there was no liquidity. Effectively, the cell company structure permitted Arch to put into an Oeic a far higher percentage of illiquid private equity investments (and other illiquid investments) than the regulations would normally permit.

What of the authorised corporate director, Capita Financial Managers? It is a subsidiary of a FTSE100 company and runs 291 funds for 100 investment management companies. Its pitch to investment managers is that it handles all the technical issues and lets them get on with investing and marketing. It enabled and signed off on the structure of the Arch Cru funds. It could be concluded that CFM was instrumental in enabling the Arch Cru funds and that without Capita’s backing it is unlikely they would have been authorised.

The big issue is who should make up investors’ losses of up to 40 per cent in the supposedly low-risk Arch Cru funds? The potential liability of advisers for giving bad advice is a red herring. No doubt some did but the prime cause of investors’ losses was not bad advice but a fund structure that should never have been authorised in the first place.

The purpose of “two-way” investment fund regulations (manager and independent custodian/trustee) is to ensure thatwhere the investment manager and distributor fail, there are deeper pockets to draw on to meet investors’ reasonable expectations. If the regulations do not achieve this objective, then it is legitimate to ask what purpose they do serve.

It could be argued that the FSA was, once again, asleep at the wheel in permitting the Arch Cru structure to be authorised as an Oeic. I have been told that as many as six senior fund management CEOs and CIOs wrote to the FSA querying the basis of the Arch Cru funds – to meet
the usual wall of silence.

The FSA has in previous cases shown itself willing to permit authorised firms to dump liabilities into the Financial Services Compensation Scheme. I fear it will do the same in this case, arguing that investors can achieve redress against advisers and permitting the manager’s and custodian’s roles to go unquestioned.

In this event, the FSA will do something nobody has achieved since 1959 – permit investors in an authorised UK fund to suffer losses arising not purely from market movements but out of the actions (or inactions) of the managers and/or custodians.

The damage for the whole UK fund management industry would be colossal. Investors’ confidence in UK-authorised funds will be seriously eroded. To be effective, a regulator needs to know when to be brutal. Capita has announced it expects costs of £30m for the Arch Cru debacle. I believe it should pay up in full. If Arch Cru investors lose out, all fund managers will suffer too.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report

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Comments

There are 22 comments at the moment, we would love to hear your opinion too.

  1. Well done Chris.

    I wondered when someone would speak up regarding the regulations.

    Capita must be held responsible for this debacle, the trustees are there to protect the public, if they are asleep at the wheel or paying lip service for their fees, even more reason why they should pay compensation.

    If they are not prepared to compensate would any IFA worth their corn want to hand an investment to a trust where they are acting as the ACD. How on earth would you be able to trust what comes out of their office. I for one would not.
    Come on Capita compensate, and do it quickly, every one will benefit from the resulting boost in confidence.

  2. We also spoke to the FSA about Cru well before the problems, only to be told that “they had received no complaints” so wouldn’t be doing anything. As Chris says, they ticked all the boxes.

  3. Confused…
    Capita are the Authorised Corporate Director – who are the trustees to this fund? – you can’t be the ACD and trustee…can you?

  4. Excellent article.

    It is a disgrace that the FSCS should be asked to step in where Capita should be held liable.

    The FSA, yet again, have questions to answer about their competence.

  5. I don’t buy that. FSA are the regulator and they determine the legality of the structures. They signed off on this. Capita are a company wedded entirely to governance. They would never have administered such a scheme unless approved by the regulator.

  6. Effective immediately my firm is boycotting any fund where Capita is involved in any capacity. We will start switching existing clients out next month citing corporate incompetence – if all IFA’s do the same Capita might reconsider.

    Capita pay up or face going bust.

    I would suggest that every IFA witholds their FSA fees but I suspect that might be illegal – still come the revolution…

  7. Thank you. At long last someone has written a sensible and dispassionate article about this shocking situation. As a gullible investor I have learnt a lot since the fund was suspended: nothing in finance and financial services is what it seems – ‘cautious’ does not mean cautious, regulation means nothing and advice cannot be trusted. We are in a looking-glass world. No wonder, when things go wrong everyone blames everyone else. The FSA needs to behave in a way befitting its name and inject some authority to ensure standards are upheld and investors can invest with confidence.

  8. Well done Chris.
    Having read endless vitriolic comments over the last few months from the usual “wise after the event IFAs” its about time a reasoned article was written by someone who knows what they’re talking about.
    Why anyone would deal with a Capita fund after this experience is beyond me.

  9. I agree fully that the bill for this shambles will be met by the FSCS and the IFAs pockets unless all of us involved band together and make ourselves heard now. The FSAs inactivity and Capita’s denial needs to be put in the limelight and brought to the public’s attention via the national media. Any volunteers to stir things up?….Remember the Alamo!

  10. Excellent precis of the problem, but as a lone voice heavy investor via an IFA waiting to draw his pension from the fund ,is there a body of investors out there that I can connect to, to take on the might of Capita.? They cant be allowed to get away with apparent negligence or lack of DD. Does anybody know if I can subscribe to a possible legal challenge against them? Helppppp!

  11. Very well written Chris.

  12. Totally excellent article, it makes me very wary of dealing with Capita under any auspices. I take note of once of the Captia companies trying to push very poor Distributor influence funds as part of there enabler “crapform” (crap and platform!). So glad we ran a mile from it before it was too late!

  13. Having been told that my firm of IFAs was, with others, seeking recompense from all parties involved in the ArchCru debacle, I now find that, following the collapse of Alpha2Omega, all the advisers have left and the firm is unable to trade. Are these events in any way related? Am I alone in this? How should I proceed?

  14. RM, an action group has been formed to seek redress from Capita and Arch. It’s called the Arch Capita Compensation Group and is open to both advisers and investers. You can contact it at Arch Capita CG Ltd, 190 Bath Road, Bradford-on-Avon, BA15 1SP.

  15. Just to add a point: when one phones the FSA about this particular issue, the immediate response is to say that one should take up the matter with the particular IFA/file a complaint etc. However, the matter is not so simple as the various website entries and articles attest.There are layers of blame here and Capita … and indeed the FSA must admit responsibility. It is a scandal that they are chickening out.

  16. Gerry Brightman 17th March 2010 at 9:47 am

    The Arch Capita Compensation Group has been set up by Jon Maguire, the Chairman of CRU.
    I wouldn’t touch it with a barge pole.

  17. What then is your advice Gerry?

  18. Having read the article our firm will remove all investments from Capita, we are extremely concened by their casual approach to supervising and monitoring the funds under their control. If this is the way they operate there must be more problems lurking beneath the surface within the funds they administer. It must be the reason why they are trying to offload this part of the group.

  19. Re: Gerry Brightman Jon Maguire no longer has any connection with the Regulatory Legal Arch Capita compensation group. The group had in fact started to gather information from Cru and Maguire with a view to taking legal action, hence the fall out.

  20. Martin David Painy 28th April 2010 at 9:07 pm

    190 BATH ROAD, BRADFORD-ON-AVON, BA15 1SP
    Is the registered address of MAGUIRES FISH FRIARS LIMITED.
    And
    CORE SOCCER LIMITED Jon Maguire’s partner in Bath City fc Martin Brock Company,
    Do they think we are all stupid in the head to trust them now!!!
    “Could be a pun that it sounds fishy if it wasn’t so serious!”

  21. I invested £27,000 with arch cru a large part of my retirment money ,idont expect to get back any more then 40% if that its a discrace someone should be held responsable

  22. I am one of those investors who has lost confidence in the regulatory protection for investors in OEICS which has been shown to be illusory by the Arch debacle. I shall be selling the OEICS I hold and investing in investment trusts in the future.

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