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FSA Cru scheme hit by delays after flood of responses

by Daniel Grote on Nov 26, 2012 at 08:26

FSA Cru scheme hit by delays after flood of responses

The Financial Services Authority (FSA) has delayed the publication of a policy statement on its proposed £110 million Arch Cru redress scheme following an overwhelming response to its consultation on the measures, according to the Mail on Sunday.

The regulator was due to publish the document this month on the scheme, which will require advisers who sold the failed funds to pay out to clients.

Adviser trade bodies the Association of Professional Financial Advisers and IFA Centre have railed against the proposals in their submissions to the FSA consultation.

Minutes of a FSA board meeting held in April highlighted divisions at the top level of the regulator over whether to go ahead with the scheme.

11 comments so far. Why not have your say?

Nick

Nov 26, 2012 at 08:52

one day, hopefully soon, the dodos will hit the FSA fan!

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JM Keynes

Nov 26, 2012 at 08:52

Here's an idea - the FSA allowed Capita to limit its liability to only £54m - when they were repsonsible for overseeing the Arch Cru investment funds - what about them paying the shortfall out of the fines they are levying on anything that moves?

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David Craik

Nov 26, 2012 at 09:16

How long can we keep this under wraps?

Hmmm, how do we continue to cover this one up? Everyone involved understands what a mess we have made of this. Even the board suspects we have failed to regulate, again! We can't come clean, who would pay then! Ok, short term - let's defer this and enjoy our Christmas parties. Let's wait for something else to break, that is bigger than the mess we made of PPI and then simply continue to blame the IFA's. Then we'll change our name, engage with the industry and hopefully those pesky MP's won't get re-elected.

That sounds like a plan!

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Knowledgable insider

Nov 26, 2012 at 09:44

Thiis whole debacle magnifies the ineptitude of the FSA - they passed this fund as being ok, meaning, one would assume t,hat the inner working of the funds were suitable for these funds to be classed as regulated. It transpires that actually due to the illequid nature of the stock being held it was in fact impossible to value the funds - didnt those dummies at the FSA know this: if they did then they are guilty of missleading investors and if they didnt they are giuily of gross incomptence either way they should take the blame for what has happened and heads should roll. Instead, as always they are attemting to pass the buck onto advisers whose sin has been to consider a 'Regulated' fund as being legitimate in its operations.

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Alan Smith

Nov 26, 2012 at 10:13

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 respondent 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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Hickky

Nov 26, 2012 at 10:32

OK the FSA are in full panic mode and probably do not want to deal with this situation at all! Maybe they are waiting to be abolished, then allow the FCA to deal with it. If an about turn was then done, the FCA could blame the FSA for not doing it's job and no one would lose face.

Sounds reasonable to me, if you are a bureaucrat. To the rest of us, the lack of openness means the stench is only seeping out gradually. Throw open the cover, then be prepared to place a clothes peg over your nose.

"What miserable drones and traitors have I nourished and brought up in my household, who let their lords be treated with such shameful contempt by a low-born regulator" to adapt Schama's translation of Henry II's statement about Becket. Or 'Will no one rid me etc.'

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DG

Nov 26, 2012 at 12:12

Wouldn’t it have been far simpler for the FSA to look at this matter with honesty and integrity from the word go and not let it descend into the mess that now resides, stinking, on the doormat of Canary Wharf.

Honesty is, I would assume, a given in our game and yet the regulator has exhibited anything but since this scandal erupted four years ago when their ARROW visit (still unpublished) first, presumably, revealed major shortcomings at Capita.

I must say it’s also funny, in a VERY sad way, to read comments from some of those that, in the past, have been so vitriolic in their condemnation of affected IFAs, their clients who have been so very badly treated since 2009 and their calls for intelligent support from the adviser community to demand a better stance from the FSA over this matter.

Some of the comments posted, for example, in January regarding Arch Cru are starting to look rather naive in light of the subsequent wriggling on the part of the FSA:

http://citywire.co.uk/new-model-adviser/new-regulator-will-have-power-to-ban-products-without-consultation/a560980

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David Craik

Nov 26, 2012 at 12:38

@DG - so true

Regardless, the FSA have backed themselves into a corner and cannot let the IFA's off the hook now. Who would pay? As per Alan Smith, the FSA is unlikely to publish the responses received so we need a mechanism to view the responses to CP12/09. If these are public prior to the publication of the FSA outcome, it may embarass the FSA into dropping their (alleged) deceit.

Would New Model Adviser facilitate their publication or has anyone any suggestions?

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Knowledgable insider

Nov 26, 2012 at 13:10

Is the FSA immune from public information legislation as well as everything else? This legislation has proven effective against the Government and many others so why should the FSA be any different?

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Alan Smith

Nov 27, 2012 at 14:09

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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David Craik

Nov 27, 2012 at 15:41

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!

PS Could Alan Smith please email me on dcraik@optima-fs.co.uk

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