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FSA censures Capita Financial Managers for Arch Cru failings

The Financial Services Authority has censured Capita Financial Management for its involvement in the Arch Cru funds.

 
FSA censures Capita Financial Managers for Arch Cru failings

The City regulator has censured Capita over its failure to protect investors in the Arch Cru funds between June 2006 and March 2009.  

Capita Financial Managers was the ‘authorised corporate director’ (ACD) of the Arch Cru funds. As well as having responsibility for the fair treatment of investors, Capita also delegated the investment management of the funds to a third party, Arch Financial Products, in July 2006. The funds were in turn marketed by Cru Investment Management.

Arch invested the funds in illiquid investments, including private equity assets including a fleet of Greek shipping vessels. The illiquidity of these investments saw the funds suspended in March 2009 and investors’ assets drop by 40%.  

The Financial Services Authority (FSA) has said Capita did not have a suitable process in place to monitor liquidity risks.

Neither did Capita adequately identify and mitigate the conflicts of interest between Arch and the funds that arose as a result of the CF Arch Cru fund structure, which involved a complex network of onshore and offshore companies.

Capita also failed in its responsibilities for pricing the shares of the funds and did not have an adequate process in place to identify whether the information used to value the funds might not be reliable and whether an alternative measure should be used. The company did not begin to look at the valuation of the funds until late 2008 and once the funds were suspended the investments were shown to be worth less than Capita believed them to be.

Tracey McDermott, FSA director of enforcement and financial crime, said Capita’s performance fell ‘well short’ of the FSA’s requirements. However, Capita has escaped a regulatory fine as the FSA said the company could not afford to pay a fine in addition to its contribution of £32 million to the Arch Cru compensation scheme that was set up in April to provide redress to Arch Cru investors.  

‘While Capita’s failings were significant, they reflect only a part of the overall picture in relation to the CF Arch Cru funds. The FSA takes the CF Arch Cru situation very seriously and continues to devote considerable resources to securing the right outcome for investors,’ said McDermott.  

3 comments so far. Why not have your say?

Robeson de Vert

Nov 26, 2012 at 14:17

It's a source of mild curiosity that the FSA accepted Capita Financial's application to 'vary permission' ["to carry on one or more regulated activities" under article IV of FSMA] as recently as 31st August 2011. Here's the release: http://www.fsa.gov.uk/pubs/other/cfm_vvop.pdf The FSA did say "nothing in this document shall be regarded as establishing a precedent for the FSA's approach in the event of similar matters or issues arising, whether on respect of other aspects of the firm's business or otherwise." Even so, a curious sequence of events.

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Alan Smith

Nov 28, 2012 at 10:01

The final notice against CAPITA Financial Managers Ltd is a Pulitzer Prize for fiction contender the whole notice is fabricated in a manner to let the FSA justify their collaboration with CAPITA.

I could provide a contrary comment on virtually every statement on the 27 pages but will mention just 3.

Page 15 – 4.34 – “In relation to the Arch ICs, however, there were no readily identifiable alternative benchmarks or values to which regard could be had for the purposes of fair value pricing, other than the published NAVs of the Arch ICs. This was not a matter considered by CFM at the time. However, subsequent analysis shows that the CISX share prices closely tracked these NAVs. Given that the NAVs were produced by an independent administrator and also subject to periodic external audit (the first of which was published in October 2008), an ACD of the Funds may have concluded, that at least for some period of time, it remained appropriate to rely on the CISX quoted share prices of the Arch ICs.”

The so called “independent “ administrator responsible for producing the NAV’s was Bordeaux Services (Guernsey) Ltd whose directors were Neal Meader and Peter Radford.

Both of these individuals were also directors of Arch Guernsey ICC ltd along with Robert Addison of Arch Financial Products LLP. I would hardly say the directors of Bordeaux producing NAV’s for another company they were also directors of was independent.

--------------------------

Page 18 – 5.3 (2) – “COLL 6.3.3R and COLL 6.3.5R(1), through its failure adequately to consider whether or not the Arch ICs’ share prices as quoted on the CISX represented a fair value price upon which to price the Funds’ investments in those shares, given the liquidity of the shares and the Funds’ status as majority shareholder of many of the Arch ICs. However, it is not clear that the invocation of fair value pricing would have resulted in a different price being used;”

I think the previous statements since 2010 by Hugh Aldous (appointed chairman of Guernsey funds in 2010 and also a CAPITA official) make it quite clear that fair value pricing would have resulted in different prices being used.

Mr Aldous’s statement from the Guernsey Cells March 2011 accounts :- “Throughout our investigations we have discovered what we consider to be negligence, lack of diligence, the use of unsuitable counterparties and the making of improper gains by the former managers. In our view the Net Asset Value (NAV) of several of the cells was overstated from 2007 onwards and the share prices of cells were influenced so that they tracked the overstated NAVs unreasonably. We are pressing our action and reporting our findings to the Guernsey Financial Services Commission and, through them, to the Financial Services Authority. We are in pursuit of the previous owner of ships and other parties whom we consider caused loss to the Cells and, in some cases, misappropriated funds. A consequent cascade of claims will follow to others who failed in their duty of care to the cells.”

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Page 1 – 1.2 – “CFM agreed to settle at an early stage of the FSA’s investigation. As part of the settlement reached between CFM and the FSA, CFM has agreed voluntarily to contribute, without admission of liability, £32 million towards a £54 million payment scheme for investors who hold investments in the CF Arch cru Investment Funds (the “Investment Funds”) and in the CF Arch cru Diversified Funds (the “Diversified Funds”) (together the “Funds”).”

How can the FSA say there was early settlement.

The compensation package was hastily announced in June 2011 following intervention by several MP’s on behalf of investors and the package had been rushed through so quickly that the actual terms could not be detailed until October 2011 over 2 ½ years after the funds suspension.

Yet the FSA were aware of issues from October 2008 and as detailed in an email from Clive Adamson – Director of Supervision at FSA to a friend who was invested in CF Arch Cru the FSA were fully away of CAPITA Financial Manager Ltd’s failures in September 2009 but knew they had problems financially to resolve the issue and wanted to pass blame to IFA’s

The email reads as follows:- “From: Clive Adamson [mailto:clive.adamson@blueyonder.co.uk]

Sent: 21 September 2009 21:10

To:

Subject Re:

I have found out something about this situation and while I can't tell you everything as it is not public I will try to outline what appears to have happened.

Essentially, the Arch cru funds invested in a series of entities listed in the Channel Islands which themselves invested in a range of illiquid investments. When it became clear that there was insufficient liquidity in the Arch Cru funds (which became apparent when the funds tried to sell the Channel Islands vehicles and failed as there was no market) they were suspended. As I understand it, Capita were the manager of the funds but outsourced this function to Arch Investment Managers.

It seems the best case is that Capita make some sort of restitution for the lost value (unlikely to come from Arch as they don't really have any significant resources) but this may take time and depends on Capita having sufficient resources. There are also other entities which acted as depositories that may come into any action.

The worst case is that there is no compensation and investors are stuck in the funds with uncertain prospects of recovery due to the nature of the underlying investments. It is also not clear that compensation can be obtained from the FSCS compensation body as this can only be obtained under certain circumstances which may not occur here.

The best course of action is to make a formal complaint to any advisor you used and to Capita. If you don't receive satisfaction you can complain to the Financial Ombudsman Service.

You also mentioned an Investor Committee which should be able to put pressure on Capita (including writing to the top company in the Capita Group, which I think is a quoted company, and writing to the national newspapers may also help. Getting in contact with the FSA may help in applying pressure on Capita.

I'm sorry this is not very positive but this is a very difficult situation. Please treat this information very discretely as it is very sensitive.

Best wishes

Clive”

------------------------------

Over the last 3 ½ years this whole debacle has been covered up and publications such as Money Marketing, FT Adviser and New Model Adviser have removed comments following articles regarding CF Arch Cru either through not wanted to hear the truth or from threat of legal action from CAPITA’s lawyers, and no doubt this will continue.

Finally how can the FSA justify this decision when compared to other decisions made recently. One can only presume that if the systems were not in place to be ACD of the CF Arch Cru funds then there were no systems in place prior to October 2008 to any of the other 200 or so funds they were ACD for, so potentially the disaster that is CF Arch Cru could have occurred in any of the other funds.

Look at Standard Life and the Pension Sterling fund – Standard Life paid over £100million into the fund within a month of fund falling in value to ensure investors suffered no loss from the mis-marketed fund yet Standard Life were fined over £2million.

AEGON were fined over £2million for systems errors in which no client lost money.

UBS fined over £32million for losing its own money not that of investor

You really could not make it up.

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Robeson de Vert

Nov 28, 2012 at 11:07

I would like Citywire to look into this particular case [and possibly the wider issue] in more detail. Clearly, there is a lot more going on here than immediately meets the eye.

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