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Why isn’t Capita paying the price for its Arch Cru failings?

Capita Fund Managers have been censured by the regulator over Arch Cru, but why hasn't it been slapped with a fine?

 
Why isn’t Capita paying the price for its Arch Cru failings?

The last three years have been tumultuous for investors involved in the Arch Cru scandal. They have seen their assets drop 40%, to-ing and fro-ing over compensation schemes and legal actions, and a failure of any party to take responsibility for the demise of the funds.

The censure of Capita Fund Managers by the Financial Services Authority (FSA) yesterday should have provided some closure for investors but many were left asking why, considering the myriad failings of the company, was it not slapped with a big fine by the regulator?

To recap, Capita was the ‘authorised corporate director’ of the funds meaning they had responsibility for delegating the fund management to Arch Financial Products and ensuring investors were treated fairly.

Due to a lack of sufficient processes, Capita failed to spot that Arch had invested the funds in illiquid and esoteric investments, such as Greek shipping vessels. It also had no proper processes for making an accurate valuation of the investments, which turned out to be worth a lot less than thought and investors saw their assets drop 40%.

There have been lots of characters in this saga, let’s not forget Cru Investment Management which marketed these risky funds as safe as cash, but a lot of the blame has fallen squarely at the feet of Capita.

So why isn’t it putting its hand in its pocket for a fine? The FSA said that Capita Financial Managers cannot afford to pay a penalty because it’s already had to ask its parent company Capita Financial Group to cough up £32 million to contribute towards a compensation scheme for Arch Cru investors, which was set up earlier in the year.

In short, Capita Financial Managers cannot afford it but just a small amount of digging shows that its parent company secured £2 billion worth of contracts in 2011 and the year ended 31 December 2011 profit before tax topped £385.2 million.

Doesn’t sound like a company that can’t afford a fine does it? Capita Financial Managers may not have enough cash in the bank to pay for its misdeeds but Capita Financial Group does, it’s just that the FSA has no jurisdiction over the parent company and can’t force it to pay a penny.

Only Capita Financial Managers is regulated by the FSA, its parent isn’t.

After years of battling to get their money back and prove they were sold a dud, investors see one of the Arch Cru debacle’s main protagonists get away with the regulatory equivalent of a slap on the wrist.

Capita has said it ‘accepts and acknowledges the FSA’s findings’ but for investors hoping for a bit of justice, or even an apology, they will have a long wait.

21 comments so far. Why not have your say?

Lyndon Edwards

Nov 27, 2012 at 17:31

Simple. Boycott all CF funds and move clients out of any CF holdings on the grounds that they cannot be relied on to do the job properly.

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david vick

Nov 27, 2012 at 17:51

And whatever you do don't go near any financial arrangement that has anything to do with Capita. My wife's Scottish Equitable SIPP is managed by them and it has been by far the worst managed arrangement that I have encountered, including anything I saw in my previous life as an IFA over 12 years. If I had not had professional knowlege which which to monitor it, and have mistakes corrected, she would have lost 1,000s of pounds.

I am currently moving it to HL who charge 10th of the fee and seem to know what they are doing.

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Chris Clark

Nov 27, 2012 at 17:55

There are two perspectives here.

First, why did the FSA authorise an undercapitalised (and un-insured?) company to take on a high impact activity?

Second, if Capita Group does not back its subsidiary, why should any other Capita customer, sold on the strength of Capita, ever buy from any other of Capita's subsidiaries? A lack of support for CFML will mean the increased risk of all dealing with any of the Capita subsidiaries.

Going back to the first point, I would bet £1 against a penny that the FSA received back to back assurances from Capita, as would seem to be confirmed by Capita Group's current payment.

Then considering the £30m fine that UBS have just paid for losses of £1.5bn, these funds lost over 60% of £400m (not 40%), or £240m under Capita's nose. On a pro-rata basis, for the damage caused, Capita Financial Managers should therefore be fined £4.8m.

On the clear understanding that Capita Group will have no option but to contribute to the fine for the failings of their subsidiary.

Chris Clark, Arch cru investor

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DEZ

Nov 27, 2012 at 18:22

Private Eye rudely used the term "Crapita" when they refer to this organisation in their satirical magazine ..... maybe they got it right. ie smoke...fire etc.

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Nobby Clark

Nov 27, 2012 at 19:03

I got stuffed here with a bit of a double whammy, for it was the infamous highwayman Martin Rigney, of Topps Rogers fame, who took my son's inheritance from his Grandparents' estate and handed it over to Arch Cru. No doubt friend Rigney or whatever name he chooses to use this week, will have done quite nicely out of this, as he has with all the other poor schmucks he's rolled and I'm sure he'll be enjoying his holiday home in the Cotswolds and his classic cars with their personal registration plates, all tucked safely way in trust. Even as a bankrupt, there would seem to be a good trade to be had standing in the shadows on the road to York....

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emmajane

Nov 27, 2012 at 22:41

What does this situation say about Capita plc's corporate governance? How much did the directors know about their subsidiary's activities (or lack of them)? What checks did Capita plc make on those running their subsidiary? Given that the price paid for the shares should reflect the net asset value what happens to those investors who overpaid due to CFML's apparent negligence? Was there a contract between the investors and CFML in so far as the investors paid a fee on the assumption that CFML would manage their money in accordance with FSA rules and if so did CFML breach this contract? What happened to CFML's simple duty of care? Would investors have made the investment had they known that their ACD was not acting in accordance with FSA rules? Would IFA's have recommended the investment had they known the ACD did not have sufficient professionalism and competence to act as ACD? How much were investors and IFA's reassured by the "CF" prefix?

Sorry for all the questions but I am still confused.

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Chris Clark

Nov 28, 2012 at 00:23

@emmajane (and everyone else)

Questions like that repeated loudly at every opportunity are exactly what is needed right now. They will reach the 85 strong APPG and the FSA/FCA where new brooms are in place.

What is bad for Capita is the more they duck and evade the louder the protests will become. Capita are following the outmoded course of corporate denial previously trodden by companies such as Sony (rootkit), Enron/AA (Accounting fraud), and E-Clear (FlyGlobeSpan collapse), (Citywire moderator - these are in my firm opinion and easily referenceable), and all trashed now. Modern firms and practice more readily own up for their mistakes, make reparation, and take the consequences, BP being a current example.

On your last question, as an investor, I was TOTALLY reassured by the "CF" compliance prefix that CFML CEO Christopher Addenbrooke also confirmed responsibility for in an interview with Steven Wilmott of Investment Advisor in September 2008 just prior to the Oct 2008 ARROW inspection (extract on file).

I cannot emphasise this point strongly enough.

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Michael Walters

Nov 28, 2012 at 01:17

This is the FSA taking care of small investors. What do you expect?

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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 investors.

You really could not make it up.

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Chris Clark

Nov 28, 2012 at 11:26

The Capita fine was calculated at over £4m:

The serious nature of the breaches identified in this Notice would ordinarily have led the FSA to impose a penalty of £4.025 million after the application of a 30% discount for early settlement. However, in light of the specific circumstances of this case and for the reasons set out more fully in section 6 below, the FSA has decided that it is not appropriate to impose a financial penalty on CFM.

I disagree. Fine them!

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Nobby Clark

Nov 28, 2012 at 15:14

I'm with you my namesake, that way the FSA will have a bit more float to compensate those whom they took down.

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Anonymous 1 needed this 'off the record'

Dec 18, 2012 at 10:36

It is about time the whole of the Capita organisation was investigated. This is a prime example of an organisation born out of a government department that was initially taken in to the private sector by labour supporters.

Capita was formed in 1984 as a division of Chartered Institute of Public Finance and Accountancy. It became an independent company with 33 staff as a result of a management buy-out in 1987, led by Rod Aldridge, and was first listed on the London Stock Exchange in 1991. Capita continued to grow year on year.

In March 2006 Executive Chairman Rod Aldridge resigned in the aftermath of claims that contracts awarded to the Group were influenced by his loan of £1 million to the Labour Party. Aldridge resigned saying that he denied the claims, but to avoid any lingering doubts about it, he was leaving the company. Aldridge a lifelong Labour supporter had overseen the company's growth from a small company in 1987 to a FTSE 100 member in 2006.

Capita have been awarded many many government and council contracts I wonder why?

They run

The London congestion charging,

TV licensing

Military salaries and pension payments,

Many councils use them for collecting council tax.

They act as recruitment agency for the

NHS

Education

Nuclear industry

They were appointed to run the Gas Safe register

(without have any qualified personnel at the time).

They are involved with the Driving standards Agency.

Criminal Records Bureua

They were involved in the Individual Learning Account fiasco

plus many other schemes.

They have become involved in financial scandals.

Most of the employeesat the workface are low paid workers.

This organisation has become too powerful and there should be an in depth investigation how they have evolved.

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Nobby Clark

Dec 18, 2012 at 22:30

Anonymous 1 - If what you say is true and I've no reason to think otherwise, then you are right, they should indeed be investigated, because I bet it's riddled with corruption and bungs. There's no wonder Rigney liked it...

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Chasp

Mar 20, 2013 at 22:43

Nobby, and anyone else interested, a little bird tells me that the highwayman Rigney, is no longer living in Hope!! EVICTED is the word about town!

Whatever next?

Chas

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Nobby Clark

Mar 21, 2013 at 03:32

Chas - Really? My word, the plot is thickening...

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Chasp

Apr 02, 2013 at 09:16

Name: MARTIN EDWARD RIGNEY

Date of Birth: 03/06/1949

Date of Order: 14/03/2013

Length of order: 8 Years 0 Month(s)

Court Number: STOCKPORT COUNTY COURT 260 OF 2011

Last Known Address: SMITHY COTTAGE, STATION ROAD, HOPE VALLEY, , , S33 6RR

Conduct: Martin Edward Rigney (Mr Rigney) whilst trading, with another, as Topps Rogers Financial Management promoted and sold Unregulated Collective Investment Schemes (UCIS) to at least 7 clients without informing them sufficiently of the risks involved in the investment and at least two of these clients have stated that they were unaware that their investments had been moved into a UCIS. This has resulted in losses of at least £1,055,928 to these clients, one of whom subsequently petitioned for his bankruptcy. The failure to inform his clients sufficiently of the risks involved in the UCIS was also a breach of the Financial Services Authority regulations. On 10 December 2010 and 21 January 2011 Mr Rigney transferred assets totalling at least £42,900 in respect of 6 vehicles into the Sammax Trust for no consideration for the benefit of family members, at a time when he was insolvent to the detriment of his creditors: Mr Rigney failed to disclose the transfer of his 6 vehicles valued as at least £42,900 into the Sammax Trust to the Official Receiver or his Trustees on the making of the Bankruptcy Order. He further failed to disclose an asset worth £16,067, comprising of funds held in two undisclosed bank accounts as of 15 November 2011 to the Official Receiver or his Trustees with the funds being subsequently dissipated. He also failed to declare his interest in a joint investment held in Trust valued as at least £14,836 and his collection of shotguns and cherished number plates, the value of which is not known.

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Nobby Clark

Apr 02, 2013 at 15:00

Nice one Chasp, thanks for that. Length of order - what does this mean? Has he been slammed up? Whatever, I hope this allows the powers that be to dib into his ill gotten gains and help bail out those of us he robbed.

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Chasp

Apr 02, 2013 at 16:38

Nobby, I believe there are terms and conditions imposed by the receiver. He must comply with them for the extended period of 8 years, instead of being discharged after 12 months.

Unfortunately I do not think they are that onerous.

And no he has not been 'slammed up' as far as I am aware!

Whether he should be is another argument.

Mrs Rigney got a 6 year order I hear.

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Nobby Clark

Apr 02, 2013 at 17:26

Cheers Chasp - shame he's not gone down, I'm sure being so expert at screwing people, he'd have been very popular in the showers!

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Chasp

Sep 04, 2013 at 16:41

A little bird up in Derbyshire tells me that Mr R has had his collar felt. Arrested, but released on bail. Offences involving money laundering, fraud and forgery.

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Nobby Clark

Sep 04, 2013 at 18:01

Aye, heard the very same today, got to report back to the heat on 3 December. I've ordered the timber to make the big cross, already got the nails...

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