FSA in U-Turn over Arch Cru Fund Manager Capita

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  By a Newsnet reporter
 
The Financial Services Authority (FSA) has issued an unexpected public censure against Capita Financial Managers Limited for its failings in relation to the CF Arch cru fund which collapsed in March 2009, losing hundreds of millions of pounds of investors cash.
 
However, despite the censure which also includes a detailed list of failures which “would have ordinarily” led to a £4m fine, it has been announced that no fine will be levied against the firm as they would be unable to afford it.

As authorised corporate director (ACD) between June 2006 and March 2009, Capita was meant to safeguard investors’ investments, a task it failed to fulfil.  An estimated 20,000 people were hit by the collapse of the fund which was marketed as low risk.

Speaking in a debate in January this year, Labour MP Tom Greatrex described the so called low risk fund as anything but, and said:

“Far from being cautiously managed, funds were invested via Guernsey cells in what some would argue was a high-risk and cavalier manner.  Investments included property in Dubai, Greek shipping and ferries.”

Mr Greatrex added: “While preparing for this debate I had the opportunity to speak to some individuals who used to work for Capita. What they told me shocked and appalled me.  I was told that there was relatively little oversight over funds in Capita Financial Managers, and that there was a small team of people, a high staff turnover, and lots of relatively young and inexperienced staff who worked for over 300 funds at the same time.

“One individual who previously worked for Capita told me that Capita was ‘not the best managed firm and the compliance culture left a lot to be desired.  Capita is not particularly well respected in the industry and it is no surprise to me that they found themselves in trouble.”

Capita FM had previously been insulated from investigation by the UK Treasury in relation to the CF Arch Cru losses.  Prime Minister David Cameron, in a written response to calls from MPs in January for an inquiry said he was “yet to be persuaded that an investigation is appropriate”.

This left many affected investors with no other options but to take legal action against their Independent Financial Advisors (IFAs), and many small firms around the country were forced to close due to the expected cost of the pending litigation and effectively enforced redress costs.
 
This has left many in the industry angry, as the FSA have now issued a public censure which states that Capita FM “failed” to provide adequate oversight over the fund.
 
The scandal had originally led to hundreds of millions of pounds of investor’s money disappearing and many people, including pensioners, losing their life savings.  IFAs at the time had accused the FSA of criminal negligence  and “turning a blind eye” in their apparent refusal to investigate Capita FM for any wrongdoing in the loss of the funds.
 
Noted failures in the FSA’s report include:

  • Not having sufficient processes in place to monitor Arch, which had not acted as an investment manager before.
  • Not identifying or managing conflicts of interest that arose between Arch and the funds due to the complexity of the arrangements that were made.
  • Not monitoring the liquidity risks associated with the funds.
  • Not identifying the reliability of the pricing information supplied by Arch and not independently verifying the ‘fairness’ of the price offered.

Tracey McDermott, FSA director of enforcement and financial crime, said:
 
“Capita Financial Managers has major responsibilities in relation to funds holding a very significant amount of investors’ monies. However, its performance in relation to the CF Arch cru funds fell well short of the FSA’s requirements.
 
“Those firms which delegate activities to others need to have robust processes to allow them to oversee properly these third parties and protect investors. Capita Financial Managers’ processes in this case were inadequate for this.”
 
Capita FM had originally offered clients a compensation package of £54m for the loss of the fund, which ran into the hundreds of millions at its peak.  Written into this agreement was a clause that waived the client’s right to further complaint on the matter against either Capita FM or other banks involved in the provision of oversight, but permitted further action against their IFAs.

The judgement confirming Capita were culpable will be seen as vindication by many IFAs who felt they were being scapegoated by the Financial Services Authority who claimed investors had received poor advice.

Speaking in April of this year, Clive Adamson, the FSA’s director of conduct supervision, said: “Investing money can be one of the most important decisions that anyone has to make and investors need to be able to trust the advice they are given.  The Arch cru funds were high risk and they should only have been recommended to investors who fully understood and were willing and able to accept the risks.”

However, speaking to Newsnet Scotland in September, one financial advisor who has over twenty years experience in the industry challenged the FSA’s interpretation of events.

“These funds were rated ‘cautious’, meaning low-risk.  How can UK investors have confidence in investing hard earned cash into any FSA authorised investment funds?  These investors’ CF Arch Cru money has been allowed to disappear without question by the FSA.” she said.

Highlighting the refusal of the FSA to hold an independent inquiry into the scandal, she added:

“Without an independent inquiry we will never know where the funds have gone.  There have been allegations of fraud flying around and the Serious Fraud Office has been asked to investigate, but the FSA has chosen to ignore these allegations.

“This inaction by the FSA to establish the true story behind the demise of these investments gives the market no confidence at all that we have an effective regulator.  Why would anyone invest in savings plans, pensions investment OEICs or ISAs if this is allowed to happen?  After 3 years these investors are no further forward.”