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Capita faces fresh attack over Arch Cru scandal

by Jun Merrett on Dec 11, 2012 at 08:33

Capita faces fresh attack over Arch Cru scandal

Capita has come under further pressure over its role in the Arch Cru scandal after ex-directors of the cell companies that make up the funds alleged it was responsible for flaws in the structure of the investments.

The ex-directors of the Channel Islands-listed cells have claimed Capita was responsible for the losses incurred by the £400 million funds, which dropped in value by around 40% following their suspension due to illiquidity.

They said the structure employed by the Arch Cru funds, of Oeics investing in the cells which in turn were invested in illiquid assets, such as private finance and private equity, was flawed.

Neal Meader, Peter Radford and Bordeaux Services, directors of the cells until December 2009, have made the allegations in their defence against claims totalling £160 million from the current directors, who have alleged they failed to understand, monitor and oversee investments.

The defence reads: ‘The losses or extent of the losses were caused by the unforeseeable actions of Capita in investing in the funds on behalf of investors in UK Oeics who required liquidity, which the funds were expressly not designed to provide (which led to investments having to be realised at a loss in order to meet their need for liquidity).’

Lawyers for the directors added they were not aware of the extent to which money flowing into the cells was coming from the Arch Cru funds, and that it was not their role to ‘second-guess’ Capita’s judgment on the suitability of the investments.

Capita has hit back, arguing that claim was ‘not credible’ and adding that the decision to invest into the cells was taken by Arch Financial Products. ‘It is now apparent it was always Arch’s strategy for the Oeics to be primarily invested in the Guernsey cells in this way, and that Arch were closely involved in the establishment of the Guernsey cells for this purpose,’ said a Capita spokeswoman.

The news follows Capita’s upbraiding by the Financial Services Authority last month over its failures as authorised corporate director for the funds. The regulator said Capita failed to monitor former fund manager Arch and the liquidity risks affecting the funds, and failed to ensure the funds were properly priced. But the regulator held back from imposing a £4 million fine, pointing to the costs Capita had already incurred due to Cru. 

Last week the Treasury held talks with the Guernsey government over a potential further payout for Arch Cru investors in addition to the £54 million redress scheme funded by Capita and depositories HSBC and BNY Mellon, and the planned £110 million compensation funded by advisers found to have mis-sold the funds.

15 comments so far. Why not have your say?

Dolores Chimichanga

Dec 11, 2012 at 09:08

And still the investors are left to suffer.

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Andrew Watts

Dec 11, 2012 at 09:19

About time Capita did the decent thing and regained some credibility.

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Knowledgable insider

Dec 11, 2012 at 09:26

Ultimately the blame for all of this lies with the FSA.....they know it, and are doing all in their power to place the blame on IFA's who sold these funds beieving that they were being correctly monitored as they had passed regulatory checks. It turns out that the funds should never have been classified as regulated as the required liquidity levels were never sustainable. Yet more incompetence from the FSA leaving investors out of pocket.

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Dec 11, 2012 at 09:35

The FSA are just trying to make it to the FCA takeover so they don't have to do anything!

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Dec 11, 2012 at 09:50

@ Nick

I think you're right there. The finishing line is in sight and the FSA may well be trying to limp over it and then play the FCA card - "well, it was our predecessors fault, inherent flaws in the system, we're different, better outcomes now for our stakeholders, learnt from our mistakes, blah, blah, blah."

Problem is:

1. It’s broadly the same hands at the wheel although the talking heads have clearly scarpered

2. The intention to blame IFAs was dishonest from the start - and the FSA knew it from the outset

3. They could have sorted this matter out promptly which would have been in the best interests of the investors (primary objective), the reputation of financial services regulation (second objective) and gained the respect of those they regulate (couldn't give a stuff about that)

4. How are they going to wriggle out of this monumental mess without persisting with their unjustified witch-hunt of IFAs or, alternatively, laying into Capita who they have consistently aided and abetted for the last four years.

A cornered animal is a tricky adversary and the FSA have repeatedly demonstrated they have the integrity of a sewer rat when it comes to addressing the real issues associated with the Arch Cru scandal.

But really, what a disgrace.....our regulators should hang their collective heads in shame.

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Bob Donaldson

Dec 11, 2012 at 09:59

It is all a bit like HSBC this morning. It is a different business now people have moved on etc etc blah blah blah.

Do you notice in these situations the correct heads never get put on the chopping block! Not me guv!

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Richard Hardy

Dec 11, 2012 at 10:15

An example of the FSA deflecting blame away from a company which has its tentacles in a rather large number of Government departments!!!

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Knowledgable insider

Dec 11, 2012 at 10:29

Ultimately ...the Government is to blame for allowing the FSA such freedom...until all involved including the public start to blame the Government we will see no changes

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Dec 11, 2012 at 10:48

Liquidity was not the real issue. The 'assets' the money were invested in was the problem. Suspension with the realisation of proper assets would not have led to this situation. It was the type of investments & the valuations that were the problem. blame game continues whilst investors suffer & IFA's still seem to be the fall guys in waiting. Thank goodness some ethical Polaticians are on board or Capita & the FSA would be at lunch!

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John Hawkes

Dec 11, 2012 at 11:06

Squabbling amongst the parties involved in Arch Cru is predictable and a classic example of the blame culture endemic to the Global business environment. As it appears to me, Capita were the "fall guys" in the Arch Cru debacle but that should not allow them to evade they're responsibilies. I am astonished that thus far they're has not ( or so it appears) been any close analysis of the laws and regulations, which were breached and what remedial action has to be taken. In the meantime, until this is done the saga will meander round in circles creating pandemonium in the advisory industry and depriving the unfortunate investors of proper redress.

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Jonathan Kirby

Dec 11, 2012 at 11:23

@ DG

I think you are being very unfair.

Sewer rats have some excellent qualities and do a valuable job in getting rid of detritus.

Perhaps a few should be introduced to Canary Wharf?

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Ned K

Dec 11, 2012 at 13:23

Well it is Panto Season and this is descending into a pantomime farce - it stretches the boundaries of credibility for the former directors of the Guernsey companies to suggest that they did not know that the investment into the funds came predominantly from the UK Oeics. You have to assess their claim against the fact that their co-director Robert Addison was non other than the Chief Operating Officer of Arch Financial Products LLP. Neal Meader was the General Manager of Bordeaux Services (the administrator of the funds) and Peter Radford was the Managing Director of Bordeaux Services. What exactly were the reporting procedures within the funds and the administrator Bordeaux? What exactly was discussed at board meetings? Given that Capita effectively controlled many of the cell companies by virtue of its shareholding in them you would expect the directors of the funds to know who controlled them.

Capita delegated the investment management to Arch but retained responsibility for it, though we know they never bothered to carry out their role as Authorised Corporate Director - so for Capita to blame everything on their delegate investment adviser is nonsense.

When OEIC regulations were introduced by the treasury they were supposed to give investors the same protection as a unit trust. The CF Arch funds are not merely a failure of regulation by the FSA they are a clear failing of legislation which created OEIC's, because investor protection is worthless in comparison to a unit trust.

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John Hawkes

Dec 11, 2012 at 15:22

I agree with Ned K although I'm not sure a unit trust structure would have made much difference. The key is in the NURS regulations which were drafted too loosely ( as FSA tacitly acknowledged by changing the regulations in August 2009 (shutting stable doors after horse had bolted. springs to mind)). What is key, as Ned K mentions is that the ACD controlled the cells by virtue of the fact that the OEICs owned most or all of the shares in the cells, as Capita have acknowledged.

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Jimmy via mobile

Dec 11, 2012 at 23:38

As dc said at start

Clients still suffering. All those involved should hang their head in shame and leave the industry by their own admission or by the strong regulators we pay good money to!!

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Dathan Steele

Dec 12, 2012 at 07:40

@ Ned. Ned you are quite correct that this issue has thrown up the fact that an ACD of an Oeic is under a lot obligation and duty than a Manager of an AUT. The Oeic regs, drafted under company law have been shown to be woeful.

Arch Cru should never have been authorised, the ACD should have done its job properly, advisers should never have sold it. A disaster all round.

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