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Arch Cru debacle: are advisers to blame?

The regulator has torn a strip off of advisers over Arch Cru advice, but is it all their fault?

 
Arch Cru debacle: are advisers to blame?

Arch Cru investors have witnessed a lot of mud-slinging about who is to blame in the three years since the funds were suspended, and now the regulator has decided to lay culpability at the feet of financial advisers who recommended the funds to unsuspecting consumers. But are they the main culprits in this sorry story?

The Financial Services Authority (FSA) has said it will force advisers with clients in the Arch Cru funds to offer a review of the advice they gave and redress, if appropriate, which put investors back into the position they would have been in on receiving good advice.

It’s great that advisers are being made to offer all clients a review of their case; although there are investors fighting for compensation, there are many more who will not know where to turn to get their case heard.

One of the most notable parts of the announcement of this redress scheme, however, was the FSA’s dressing down of financial advisers.

Clive Adamson, director of supervision at the FSA, said that advisers had to acknowledge that ‘ultimately they are responsible for making sure their customers’ interests are protected’.

The regulator has laid the blame on financial advisers, but while they have their part to play in the saga, they are not the only villains.

Let’s look at the marketing of the funds, undertaken by Cru Investment Management. The funds were marketed as low risk, and even compared to cash in terms of risk profile. This was incorrect – the funds were in fact invested in illiquid, risky investments including Greek shipping vessels.

Look also at the authorised corporate director (ACD) of the funds, Capita Financial Managers, which was tasked with ensuring investors in the funds were treated fairly and responsible for delegating the investment management to Arch Financial Products. Last month the FSA censured Capita Financial Managers for having no process in place for monitoring what Arch was investing in and not pricing the shares of the funds properly.

Arch Financial Products must also take some blame for investing in illiquid and frankly ridiculous investments. On what planet are Greek shipping vessels a low-risk investment?

And finally let’s look at the FSA’s role in this debacle. Surely it has dropped the baton many times over Arch Cru if it failed to spot problems within the management of the funds and the marketing of the funds.

We cannot absolve advisers completely of any blame. Yes they should have looked more closely at the funds because they would have seen the funds were opaque and impenetrable, and that should be a klaxon call to run a mile.

It’s true that advisers have their part to play in the sale of these funds but we can’t expect them to investigate every investment underlying every fund, it’s not realistic. As a consumer, and adviser, you have a certain expectation that financial products should be as advertised, but if these funds are advertised as low-risk and then invest in high-risk investments, that’s not the advisers fault.

Ultimately the FSA is responsible for authorisation of companies and funds and even it, in its wisdom and vast number of supervisors, didn’t spot the red flags that were popping up all around the Arch Cru funds, so how did it expect financial advisers to?

13 comments so far. Why not have your say?

Graham S-Brown

Dec 18, 2012 at 18:49

You haven't mentioned that this was an OEIC. The OEIC regulations clearly state that no more than 5% of the fund can be invested in any one Collective Investment Scheme (or unlisted security). This is because the whole point of OEICs is to allow funds to invest in unlisted, risky assets whilst ensuring the risk is spread. Arch failed because somehow around £140m of the fund (30-40%!) was invested in one asset - Greek Shipping. CFML keep on telling me they didn't know about this - even though they were ACD - so how was anyone else going tp found out.

An OIEC is also supposed to be liquid. This fund was never liquid from the beginning but the prospectus could not say this because it is against the rules, thus misleading everyone. The Guernsey Cells were set up specifically for Arch cru and CFML were the major if not sole shareholder in every one. Major shareholders have very specific responsibilities and CFML ignored them all.

In my view the FSA and CFML are equally to blame. CFML for failing in their duties as an ACD and major shareholder; the FSA for failing to regulate the fund properly. Its no surprise they have teamed up and are using their combined might to blame IFAs who will find it difficult to defend their corner.

If there is any justice in this world this cannot be allowed to happen. Unfortunately, I believe the only way this can be fought fairly is if the Government order a Section 14 review. Despite a 100 strong All Party group of MPS pushing hard, this aint going to happen because David Cameron will not

sanction it.

There are some awfully big unanswered questions. ..

1. Why are the FSA saying there was widespread misselling by IFAs? To the best of my knowledge the FOS has received two complaints from 2,500 investors! Once investors realise that the only way they will get their money back is if they do complain there will be an avalanche of complaints to the FOS and you can bet your bottom dollar the FOS will uphold them all because they are influenced entirely by the FSA.

2. Why did the FSA censure CFML after over three years of doing nothing? Has someone embarrassed them into it? Whatever, it means nothing because CFML escape with no fine, a paltry redress scheme and no further action totally different to some 40 odd similar situations which have been judged on in the last few years..

3. Why won't David Cameron sanction a Section 14 review? What on earth has he got to lose apart from quite a few voters. This smacks of corruption in high places. It wouldn't surprise if all the key player in this scenario are all buddies who were at Eton together.

4. Why won't anybody answer any questions? The FSA are accountable to no one so can do what they like and they are. CFML haven't been ordered to answer a single difficult question yet. Why have the FSA quashed publication of the PWC report on Arch?

The whoie thing beggars belief.

PS I am not an IFA, just an inquisitive and very angry private investor

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Maverick

Dec 18, 2012 at 20:45

Michelle - So are you saying the investors themselves are not to blame even in the slightest? If I go to a specialist for advice, I am not bound to follow his advice.

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Ian Lewthwaite

Dec 19, 2012 at 08:40

the teflon kid , in this case the FSA cannot absolve themselves of blame, when it took them two years to do anything about a company which they authorised. Shall we just add this to the FSA's failure list of the UK Banks lending more money than they prudently had available, the Libor dance still unfolding, being to often in bed with PWC. This continued blame of every body without any of the involved personalities themselves loosing their jobs and pension. This stupid fining of these various bodiesmega amountsis all wrong, just another money merry go round, the Govt give the banks the money to stay solvent, they get fined mega amounts and the taxpayer picks up the tab, either in serupticious feesoneway or another or as another QE.

I want to see somebodys balls in the mincer- then they will know that they have done wrong!

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Nick

Dec 19, 2012 at 08:52

I want to see somebody's balls in the mincer- then they will know that they have done wrong

Best comment EVER Ian!!!!

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Mike Deverell

Dec 19, 2012 at 11:00

Let's not forget the role of the IMA, who let this be classed as a Cautious Managed fund! The FSA, Capita and many others have all played their part.

Nevertheless, IFAs have a responsibility to do due diligence on anything they recommend. Anyone who even read the brochure knew that the funds were invested in private finance and private equity. Any IFA who believes that this made this a cautious fund needs their head testing and their authorisation revoked!

That doesn't mean that all recommendations to buy the fund were inappropriate. Private equity might have a role in a portfolio if it is a small enough chunk, the liquidity issues and other risks are understood, and clients have an appropriate risk tolerance.

On the other hand I have no sympathy for those IFAs who invested 40% or more in the fund. They deserve everything they get and their clients deserve compensating.

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Lyndon Edwards

Dec 19, 2012 at 19:01

And we haven't yet started on the unfolding scandal of the Connaught Fund, which also uses Capita as ACD. . . . .

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Jim Smith

Jan 03, 2013 at 14:59

Whether the advisers are at fault is of no matter to the many investors where as a result of the Arch Cru scandal the advisers have gone bust. I am in that position as a result of my late father and late stepmother's adviser being part of the shamed and banned Alpha to Omega network. Whilst investors with current advisers still going can seek redress from them following the FSA's review and possibly achieve a no loss position we can't. The total investments for both of my late relatives was well into 6 figures and the FSCS compensation agreement still stands at a maximum of £50,000 per person. The family loss is going to be well into 6 figures and yet we have no-one to turn to now it appears.

It really is about time Capita and the FSA were brought to book and I would agree with Nick's comments and would happily turn the handle of the mincer!

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Graham S-Brown

Jan 19, 2013 at 09:01

I've been trawling the Financial Services and Markets Act 2000 (as you do) and Section 153 part 6 appears to suggest that the FSA cannot apply their S404 redress scheme retrospectively to IFAs. Am I interpreting this correctly?

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Nick

Jan 19, 2013 at 09:51

Graham

The FSA can do what they like they are not subject to the law of the land!!

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Graham S-Brown

Jan 19, 2013 at 10:17

Nick..I realise that but does that mean they can also ignore their own rules? You don't need to answer to that because obviously they can and do! But they are answerable to the Finance Industry so what would happen if regulated firms complained that they were being misrepresented by the FSA? Would they listen or are they so far removed from reality that nothing touches them. I think I know the answer to that too!

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Nick

Jan 19, 2013 at 17:25

No, they are answerable to no one! They won't listen to anyone! They are a juggernaut out of control!!!

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Ian Lewthwaite

Jan 20, 2013 at 09:46

i recall that the infamous heads of FSA were bing intreviewed by the Parliamentary dept when the told the chairman? whoever that they were not answerable even to Parliament.

I think it was Charles 11 who lost his head over that same argument, that was way back when Parliament had balls- unlike today

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Gillian Cardy

Mar 23, 2013 at 21:17

Investors should be aware that an action by investors against Capita is being proposed. This action will be of interest to anyone whose losses will not be recovered by the redress scheme, or to anyone whose losses (like Jim Smith suggests above) vastly exceed the compensation available through FOS or FSCS.

A letter explaining the action and setting out what to do if you are interested in joining the action is posted on the IFA Centre website : www.ifacentre.org.uk

Advisers who wold like more detail on what we propose should contact me on enquiries@ifacentre.org.uk

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