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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 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?
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by Gavin Lumsden on Sep 30, 2016 at 17:23