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FSA censures Capita for Arch Cru failings

by Jun Merrett on Nov 26, 2012 at 10:31

FSA censures Capita for Arch Cru failings

The Financial Services Authority (FSA) has censured Capita Financial Managers for failings in relation to the Arch Cru funds between June 2006 and March 2009.

The FSA said it would have normally imposed a £4 million fine on Capita but did not because of the work Capita had done following the funds failure, including contributing £32 million towards the £54 million redress scheme that it funded alongside Arch Cru fund depositaries HSBC and BNY Mellon in June 2011.

The regulator added that it did not fine Capita Financial Managers as it would not have been able to pay its contribution to the redress scheme and a further financial penalty without help from its parent Capita Group.

The FSA said the company failed in its oversight of Arch Financial Products when it delegated the investment management of the funds to Arch and did not have sufficient processes in place to monitor Arch, and that Capita did not adequately identify and mitigate the conflicts of interest between Arch and the funds that came as a result of the CF Arch Cru structure.

The regulator also said Capita failed to have processes in place to adequately monitor the liquidity risks of the funds which were suspended in March 2009 due to concerns of insufficient liquidity in one of the sub-funds when investors wanted to sell their shares.

The FSA ruled that Capita did not have adequate processes in its responsibility to price the shares of the fund and did not identify unreliable information it used to do this and see whether alternative measures should be used to price the funds fairly.

According to the FSA Capita did not begin to investigate the valuation and pricing of the funds’ investment until late 2008 and once the funds were suspended it was clear the investment was not as valuable as Capita had understood.

The regulator also revealed that Capita had spent over £2 million on a series of investigations into the existence, ownership and value of the assets held by the Arch investment cells, as it did not have the documents or information on those issues.

Capita has also invested over £33 million since 2007 in enhancing its systems, processes and control function and improving its oversight of investment manager delegates. This included creating a specialist team to oversee investment manager activities in April 2009.

The FSA’s final notice showed Capita had paid £800,000 for a firm to assess whether any of the other funds for which it acts as an authorised corporate director were impacted by the issues identified by the Arch Cru failings. The review did not find any evidence that other funds were impacted.

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39 comments so far. Why not have your say?

Andrew Watts

Nov 26, 2012 at 10:38

And ........???????? Is that it?

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Alasdair Sampson (FinServ Solicitor)

Nov 26, 2012 at 10:44

Ever heard of the expression "too big to fail"?

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Financialplanner2012

Nov 26, 2012 at 10:52

So, it's official. Capita failed woefully to meet its obligations. However, it is being let off the hook, because it doesn't have sufficient funds to meet a compensation payment as well as a fine.

Presumably, the FSA will ensure that an equal playing field is maintained by limiting IFA's financial obligations under any eventual Consumer Review to what they can afford?

If I were a cynic, I would presume that the timing of this, ever so slight, tap on the wrist and the decision to defer the announcment of the draconian Consumer Review might be linked .......

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John Smyth 3

Nov 26, 2012 at 10:53

Capita is the company that is spreading like algae over everything in our country. Their tentacles are into almost everything we do. They seem to be the national & local governments favourite outsoucing outfit for anything. They have recently been granted a contract to trace missing illegal asylum seeker. They are into IFA software systems, share dealing, mountainbike course building, the NHS etc, etc.

They appear to be a wonder outfit that can done everything and anything or is it because they are politically very well connected. They keep a very low profile but are spreading insidiously everywhere,

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Chris R Harris

Nov 26, 2012 at 11:00

I thought nthe parent of a group of companies had liabilities as well. Capita Group could have afforded a fine. It has happened in many other cases.

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Simon Mansell

Nov 26, 2012 at 11:02

Forgive me for being a bit thick but did not the FSA authorise Capita and Arch Cru?

Was it not the IMA that ranked Arch Cru Cautious Managed?

So who guards the guards, who let the dogs out, who failed to control the dogs and who censures the FSA for failing to regulate those it should be regulating?

PS Skandia refused Arch Cru access to its platform. Perhaps we ought to bin the FSA and the IMA and pay Skandia to conduct due diligence?

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wildbill

Nov 26, 2012 at 11:02

so...... clients complain to Capita based on exactly the points in the censure & they refute it....they go to the FOS ,which the FSA have handcuffed (tho they constantly state that they are 2 diff bodies Ahhh), & they are not allowed to give a judgement...so....if the FSA now publically state they were at fault, surely this handcuffing, should be removed & the due process of the FOS should be allowed.....or.....am I missing soemthing here??!!

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Nik Proctor

Nov 26, 2012 at 11:08

Where is the detailed analysis that quantifies the consequences of Capita's failings? The issue of incorrect pricing of units \ unfair valuation of assets keeps coming up and not properly dealt with by the FSA. Greater fluctuations in the price history would have been one obvious indication of the fund's real volatility. In any other situation of incorrect pricing of a fund, in my experience, there has been a full investigation and the fund managers have made an appropriate payment to compensate investors. What is it different this time?

The financial implications of the catalogue of failings by Capita and alleged dishonestly by others when added together must be the equivalent to any losses suffered by investors and probably put them into profit. So why are FOS and the FSA still blaming IFAs?

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Green Eyed Monster

Nov 26, 2012 at 11:17

So can we now revert to IFA complaints being handled according to the book?

i.e. Client claims to IFA first

if not satisfied client sends claim to FOS.

If found guilty IFA settles claim

If IFA goes out of business FSCS pays.

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alan hughes

Nov 26, 2012 at 11:22

Chris Addenbrooke, told INVESTMENT ADVISER (29 Sept 2008) ‘Capita looks after the entire administration and compliance needs of any CF fund. Only stock selection and sales remain with the manager. Within this structure, Capita assumes legal responsibility for the assets, and subcontracts management back to the fund house. In the jargon, Capita becomes the “authorised corporate director” or “ACD”. Under FSA rules, the fund name therefore has to include the Capita brand – otherwise investors would not know to whom they are entrusting their savings.’

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Craig Barrie

Nov 26, 2012 at 11:25

@GreenEyedMonster

First things first:

So can we now revert to Capita FM complaints being handled according to the book?

i.e. Client claims to Capita FM for their failings as ACD

if not satisfied client sends claim to FOS.

If found guilty Capita FM settles claim

If Capita FM goes out of business FSCS pays.

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wildbill

Nov 26, 2012 at 11:29

Or as I have already stated & as many have done:

Client claims to Crapita first

if not satisfied client initiates claim with FOS

If found guilty FOS settles claim against Crapita, when surely then their PII kicks in

if Crapita goes out of business, unlikley... FSCS pays.

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Alan Smith

Nov 26, 2012 at 11:30

I reiterate below my comment placed on the NMA article in relation to the story that the section 404 decision has been delayed, the Final Notice issued against Capita Financial Managers Ltd does not even touch on the real disgrace in the management of CF Arch Cru funds which the FSA and other (including NMA) have helped cover up :-

When the FSA launched the S404redress scheme consultation paper the documentation stated

“It is the FSA’s policy to make all responses to formal consultation available for public inspection unless the espondent requests otherwise.”

Looking at the FSA’s website I can see no link to view the responses, so how does anyone get to view them?

I suspect the FSA do not want to show all the responses as some will show the deceit and lies that have occurred before and after the CF Arch Cru fund’s suspension.

I have seen one IFA’s response that was truly shocking in respect of the cover up by the FSA to protect CAPITA and Arch Financial Products LLP.

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emmajane

Nov 26, 2012 at 11:38

Surely CFM held some form of professional indemnity insurance? Otherwise

how would they get authorisation? Was it because it was assumed Capita plc would back it? Forgive me for appearing thick but I thought companies which couldn't pay their bills were placed into administration? What does it say about Capita plc managing and overviewing its own subsidiary? What about all the other funds under CFM's management? What about the people responsible for this mess - have they been censured? What about CFM giving false information to investors and therefore misleading them? If Capita cannot (or will not) stand by its subsidiary how can it be trusted with taxpayer funded contracts? I only hope that these are not operated through any subsidiaries.

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Davey

Nov 26, 2012 at 11:58

I suppose putting IFAs out of business will require less explanation than punishing the real culprits, not that the FSA ever feels obliged to explain anything.

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Knowledgable insider

Nov 26, 2012 at 12:39

The Government is to blame for not repramanding the FSA for its many errors over the years and now the biggest error is being played before our very eyes - RDR! If you want a good example of bad Government its here for all to see. They had the opportunity to sort out the FSA when they were elected and I know for a fact taht many senior Tories had this in mind but unfortunately Cameron prefered his school chums who seem to be a bunch of lazy no hopers.

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Ned K

Nov 26, 2012 at 12:44

The final notice on the FSA website, suggests that the failings identified did not have an impact on any other CAPITA FINANCIAL FUNDS. I note that CAPITA ACTED as OPERATOR AND MANAGER OF SOME OF THE CONNAUGHT FUNDS. The notice also states CFM has not previously been the subject of disciplinary action by the FSA. It is on record that CAPITA FINANCIAL ADMINISTRATORS has been been the subject of disciplinary action by the FSA and on companies house it is possible to check that a number of directors hold/held postions at both companies. I suppose if the FSA told the whole truth it would be difficult to justify a S404 redress scheme against IFA's.

You would also have to scrutinise the Capita Groups financial position to understand why the FSA want IFA's to cough up £110 million. The capita group has over a £billion in issued corporate bonds!!

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David Craik

Nov 26, 2012 at 13:17

'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.' - We are still going to carry on the deceit we started and hold the IFA's accountable!

You couldn't make this up!

It get's smellier the longer it runs!

Is there an honest man at the FSA?

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Alan Smith

Nov 26, 2012 at 13:25

Having now read the 27 page final notice published on the FSA website, I do not know whether to laugh or cry. What is certain is that the final notice should be entered for the Pulitzer prize for fiction 2013.

In the FSA’s attempt to cover its own failings it is having to justify its leniency towards CAPITA Financial Managers Ltd and therefore still do not address a fraction of the underlying failings of the funds.

To pick just one finding at random Page 10 section 4.17 states –

4.17. CFM had recognised by July 2007 that its processes and controls for taking on new funds, making changes to existing funds and appointing investment manager delegates did not include sufficient in-depth scrutiny and due diligence. New procedures were therefore developed and introduced by CFM, but were not fully implemented until May 2008.

So the new procedures were implemented in May 2008? Then why was the Private Finance Fund allowed to be launched in October 2008 to much fanfare and allowed to raise over £50million by January 2009 only to be suspended two months later in March 2009? Investors face losses of over 60%from this supposedly better regulated fund.

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Ned K

Nov 26, 2012 at 13:44

@ Alan Smith -

I'm laughing! The FSA authorised Capita to act as ACD to £19.9 billion of funds under management with £12 million in the bank. The Capita Group has over £1 billion in corporate debt and the FSA cannot get any more money out of them. The FSA knew this in 2009 and they wait till 1 month before they 'restructure' to announce it.

Tee HEE!!

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Lyndon Edwards

Nov 26, 2012 at 15:06

Extraordinary reasoning from the puzzle palace! Do they have enough fingers to point in all those different directions???? I have always been taught that if you point one finger at someone else there are three pointing back at you!

Would they let an IFA off the hook on the groundsthat they would be bankrupted - I think not. Anyway what are shareholders for?

A simple suggestion which could go through Parliament (assuming enough MPs understand) on a one-line amendment to current rules.

ALL UK OEICs should be forced to have trustees in-house and not out-sourced to so-called 'professionals' like crapita.

OEICs are companies, not a trust, they are not duty bound to have in-house trustees and once the day- to- day link you get with a UT and their in-house trustees is removed it's easy to see the opportunities for 'slippage' and less rigorous due diligence.

The cru funds started off as UTs and were later changed to OEICs on the grounds of tax efficiency.

@Ned K

I dont know a lot about company law but if the figures you quote are true surely crapita should not be paying dividends?

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Financialplanner2012

Nov 26, 2012 at 16:05

I presume that, once the dust settles, the FSA will proceed with their Consumer Review proposals; regardless of the responses received to the consultation paper.

If so, on the basis of the proposed benchmarks and liability calculation formula, 'no risk' investors will receive a fraction of the payment that will be made to 'balanced' investors. Surely, there should be a correlation between suitability and compensation - otherview, 'grossly inappropriate' advice will generate less compensation than 'marginally unsuitable' advice!

In addition, as the Consumer Review only affects 'advised' clients, investors who held Arch Cru in discretionary portfolios will receive no compensation from their manager; unless they can demonstrate that the overall portfolio mandate was unsuitable for their stated objective.

I would not be surprised if, in order to bridge the gap, the FSA decides to include discretionary clients in the Review!

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Ned K

Nov 26, 2012 at 17:02

@ Lyndon Edwards, The figures are true, they are taken from both the FSA's final notice and Capita's accounts.

Would it not have been natural justice for the FSA to impose a substantial redress scheme on Capita FM and fine them, resulting in involuntary liquidation? The problem with that is that there would be hundreds of funds worth £19.9 billion with no ACD that would be more than a simple regulatory failing it would be a regulatory disaster.

If the ACD had performed its regulatory obligations properly it is unlikely that investors would have suffered such catastrophic losses, yet it is still far more expedient for the FSA to blame advisers for not realising the ACD was failing to perform some of the most basic aspects of its regulatory obligations, such as ensuring their was a prudent spread of risk and adequate liquidity to allow daily trading of shares.

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Phil Castle

Nov 26, 2012 at 17:47

I liked this para from the FSA report 4.16. "In respect of the Investment Funds,...... CFM’s due diligence of AFP was limited to checking that AFP was authorised by the FSA."

That is what the FSA's rules implied for IFAs with Keydata i.e. they could rely non the accuracy of statements made by other FSA authorised and regulated firms such as Keydata and yet the FSCS got Herbert Smith to pursue practically ANY adviser who reccomended their Life Settlement Plans.

and then there is 6.6. "The FSA has considered the extent to which CFM’s actions were reckless or deliberate. CFM did not deliberately or recklessly contravene regulatory requirements."

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Alan Smith

Nov 27, 2012 at 14:07

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.

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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”

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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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Phil Castle

Nov 27, 2012 at 14:29

What about Nationwide fined over £2million when a laptop was stolen from an employees home and it was found to contain member details?

So not only was their personal data stolen, but they wre fined (indirectly) as the members own Nationwide, there being no shareholders.

WHO personally at Capita, Arch and the deposiraties etc has been held responsible? NO-one.

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Knowledgable insider

Nov 27, 2012 at 15:48

This is simple....if the assets held in the Jersey cell companies were illiquid and there wasnt a market to speak of then how were Capita able to value them on the purchases and sales that took place before suspension? Clearly all trades, both purcases and sales were dealt with at incorrect prices in which case purchasers may have paid to much or too little and sellers may have been paid too much. In which case Capita are at fault and should compensate all losses...i'm sure that the FSA is fully aware of this but for whatever hidden reason is keeping quiet.

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Green Eyed Monster

Nov 27, 2012 at 17:11

" i'm sure that the FSA is fully aware of this but for whatever hidden reason is keeping quiet." Hold that thought, Knowledgable insider!

Who at FSA could possibly benefit from letting Capita off the hook with this smokescreen slap on the wrist, and token contribution to compensation?

Or how about a twist to this. Perhaps they were 'directed' in their findings by someone 'above'?

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David Craik

Nov 27, 2012 at 17:32

Complaint against the FSA

One thing we can all do, is to raise a complaint against the FSA. Of course the initial investigation is carried out by the FSA but eventually it would get to the Complaints Commissioner.

http://www.fsa.gov.uk/static/pages/about/complaints/pdf/complaint_leaflet.pdf

I suggest everyone also calls Stephen Robinson at the FSA 020 7066 1338 to query the Final notice especially the section...... ‘consider the application of an alternative fair value pricing methodology for the Funds at a sufficiently early stage and to have specific policies and procedures in place setting out when fair value pricing should be invoked, although it is not clear that the invocation of fair value pricing would have resulted in a different price being used.’

This wording was restated many times and is clearly not an acceptable outcome of an expensive investigation.

The truth will out. Please help!

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Financialplanner2012

Nov 28, 2012 at 14:39

So, is it conspiracy or cock-up? If the latter, then the FSA should stop digging. If the former then, they cannot be allowed to get away with this stitch-up.

It is crystal-clear that the Final Notice is a tissue of half-truths, ineptness and ommissions.

As regards the ommissions, it is germane to most IFAs' defence against the politically-inspired Consumer Review that, while the Final Notice does set out Capita's wide range of duties and responsibilities, it makes absolutely no reference to the published marketing material, fund updates that promoted the funds as low risk - not to mention the funds inclusion in the IMA Cautious Managed sector.

Are we to believe that Capita FM, as ACD of the funds, had no obligation to check or control the contents of such material?

Or is it the case that reference to such responsibilities, and Capita's failure to act, might undermine the justification for the Consumer Review?

I believe that this is the FSA's Achilles Heel, and formal clarification should be sought from the FSA (a job for Daniel?) as to whether Capita had any regulatory duties or obligations in this regard. If so, then surely a failure to correct this information should provide a defence for advisers who acted on it in good faith?

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Ned K

Nov 28, 2012 at 14:47

This is all good news, the FSA has agreed a settlement with Capita amounting to £32 million or 0.66% of assets. I am sure the FSA will be proportionate in dealing with IFA's. We have £50,000 on the balance sheet so proportionately we need to find £333. We are prepared to round this up to £400 as a voluntary payment without admitting/accepting liability. Who do we make the cheque payable to?

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Financialplanner2012

Nov 28, 2012 at 14:56

@ Ned K

LMFAO ....... if only!

Being serious, I guess that the FSA will respond that they are being proportionate by only driving IFAs to the wall and closing them down.

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Ned K

Nov 28, 2012 at 15:54

@FP 2012 I was LMFAO when I read Dan Waters FSA Press Notice in March 2007 which ultimately led to the introduction of NURS 'Fund of Alternative Investment Funds' in April 2010

'We think the time is right to permit access to a wider range of innovative strategies through authorised onshore vehicles'

We know the FSA has a specialist investment team to monitor schemes that invest in assets such as private equity and private finance. If the ACD Capita were failing to monitor or control the investment manager ARCH and the underlying investments, then what exactly was the FSA doing or not doing? A NURS scheme investing in specialist investments should have been monitored by the specialist investment team at the FSA. I believe it was treated as a standard OEIC and so it flew under the FSA radar. We know the FSA conducted Arrow visits with the ACD in 2006 and 2008 but what monitoring did the FSA do on the fund manager ARCH FP? If the answer is little or none then this is most likely to be the reason why the FSA had to negotiate such a feeble settlement with Capita.

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Financialplanner2012

Nov 28, 2012 at 16:13

@ Ned K

Good point!

So following on from my earlier comment, perhaps NMA could ask the FSA to formally comment on why neither Capita or the FSA's compliance visits picked up that this 'high risk' fund was mascarading as 'cautious'.

Had the FSA or Capita identified this mislabelling at outset, the fund could never have been mis-sold.

Strangely, the FSA seems happy to focus on this issue of risk when seeking to nail IFAs under the Consumer Review, but is reticient to consider it in respect of Capita's or their own responsibilities.

If the media could take up this issue, then it could provide some very interesting ammunition when the FSA seeks to hammer IFAs for not knowing that this was a high risk fund.

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Ned K

Nov 28, 2012 at 16:39

IFA's PI insurers were already putting up a strong defense prior to the Final Notice against CAPITA, now they know officially that the ACD was asleep at the wheel they are going to fight tooth and nail against settling claims. The point is that any redress scheme against advisers will fold any Advisers Ltd Co or LLP and bankrupt any sole trader with any significant exposure to the funds as I think it is increasingly unlikely that the PI insurers will settle claims.

Folding IFA firms is I believe the cynical objective of the FSA, they cannot get Capita to pay they cannot get the IFA's PI insurers to pay so who else is left to pay other than the FSCS?

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David Craik

Nov 28, 2012 at 17:00

You guys are spot on.

In addition:

1) The Final notice, while it has a short section entitled - Liquidity monitoring and prudent spread of risk, does not mention the 25% plus of the fund that was lent, allegedly against legal advice, to purchase the tankers.

2) Sadly, the Final notice persists in restating the entrenched FSA position of high risk - 4.5. From around 12 January 2007, AFP began to invest the assets of the Investment Funds primarily in the shares of the Arch ICs. The Arch ICs were predominantly invested in private equity, private finance (including asset-backed lending), hedge funds, real estate, fine wine, and other private market alternative assets - This is again setting up the position that IFAs should have recognised the high risk and have mis-sold regardless of the actions of lack of actions of the ACD.

Prepare to be reamed!!!

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Ned K

Nov 28, 2012 at 17:13

list of capita companies

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Ned K

Nov 28, 2012 at 17:49

Hit the post button in error hence meaningless statement. I was merely going to comment that Capita has according to the Guardian in October 2011 359 companies in the group of which 53 are based in what are perceived to be tax havens! I have little knowledge of the activities of all the companies in the group or why they are based in the various juristictions. Though Ministers undertaking due dilligence when placing contracts would hopefully have a full understanding of the group with whom they are placing important contracts!

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emmajane

Nov 30, 2012 at 15:04

To be fair to the FSA for a moment, their report is an absolutely devastating indictment on Capita Financial Managers and its management. As I see it, the FSA found that CFM failed to comply with their rules in significant instances, including:

CFM did not monitor Arch FP, the manager they themselves appointed

CFM did not monitor the liquidity risk

CFM did not have adequate processes in place re pricing

It appears that CFM has also had to spend £2M simply to investigate whether the assets in which their clients invested actually existed. (I suspect that people who are not acquainted with the situation will think I have made this last point up!)

Are there any FSA rules that CFM did actually comply with?

Would it be appropriate to ask on precisely what the fees paid by investors were spent?

Is it also appropriate to ask - if CFM have had to spend £33M updating its processes, why did it not do this years ago? Is it not somewhat inappropriate that they should be excused a fine simply because they have now had to spend a considerable sum updating their processes? What message does that send to other financial services companies (IFAs included) who fall under FSA regulation? Surely that is a normal business expense which they would have had to incur anyway - were they starved of such investment by their parent company for some reason? Did the directors of the parent company know that their wholly owned subsidiary required investment in its processes? If so, given that these are subject to regulation (and therefore threatened CFM's viability) why did it not sanction the investment, and if they did not know, why not?

If no other funds are affected by the shortcomings highlighted by the FSA why was Arch cru singled out? What is it about all the other funds for whom CFM acted as ACD that they complied with all the FSA rules for them and not Arch cru? What have CFM got against Arch cru investors?

Would the Arch cru funds have been set up or structured in the way they were without the "credibility" of CFM behind it? If not, I presume IFAs would not have had an investment to recommend in the first place.

Did CFM have any responsibility for the prospectus in any way?

Have any of the management team of CFM been censured by the FSA?

What do the principal investors in Capita plc think of this "omnishambles"?

What safeguards are in place when taxpayer and ratepayer funded contracts are carried out by a subsidiary of Capita plc?

As I see it, Capita plc does not manufacture anything, and does not hold any valuable patents. Its principal asset (and hence its value) is the experience and expertise of its staff. Given that Capita plc and its subsidiaries are entrusted with many government and local authority contracts, and are a significant presence in financial services, before this tragedy (and tragedy it is for both IFAs and investors) it would have been reasonable to assume by an ordinary person that it is an ethical and well managed company and certainly, by definition, one to be trusted. It is also therefore reasonable to assume that IFAs and investors would be totally reassured by their presence and involvement in these funds. Ordinary investors, IFAs and other members of the financial services community with whom CFM and its parent deal both now and in the future (particularly in an ACD capacity), may now take a different view - that is for them to decide.

Sometimes a company rises to the occasion in a crisis, particularly when it concerns its corporate reputation - that is often when you see its true "character." It remains to be seen whether Capita plc has any "character" and will live up to its sense of public responsibility so widely pronounced on its website. I am sure the eyes of many people will be on them in the coming months and not just the investors in Arch cru.

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