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FSA pledges clampdown on Arch Cru 'phoenixing'

by William Robins on Dec 17, 2012 at 15:54

FSA pledges clampdown on Arch Cru 'phoenixing'

The Financial Services Authority (FSA) has said it is prepared to clamp down on firms 'phoenixing' in the wake of the Arch Cru scandal.

The regulator is proceeding with its planned Arch Cru redress scheme, funded by advisers found to have mis-sold the funds. But it has amended its original proposals, so that advisers will now only be forced to review sales where clients 'opt in' to the scheme. 

Linda Woodall (pictured), FSA head of investment intermediaries, said the regulator was aware of concerns some advisers could 'phoenix' firms and escape their liabilities.

‘There is a concern we are aware of,' she said. 'We have got measures in place on our system. If they start to come back in to the industry, we will be able to make reference to intelligence in those people.  We are aware of the vast majority of these sellers.’

The FSA estimated 100 firms would fail as a result of the compensation scheme, on top of 110 firms that have already cancelled their permissions as a result of Arch Cru. However, Woodall said this as a ‘worst case’ estimate and the real number could be lower.

‘We estimate the worst case is 100 but that does not take into account those who will be able to claim on professional indemnity cover or the possibility that they may have got suitable advice,' she said.

The FSA has estimated between 15% and 30% of eligible investors will opt in to the Arch Cru redress scheme, meaning a potential bill for advisers of between £20 million and £40 million, down from the £110 million it originally estimated.

Woodall said it based its assumption on letters it received from clients who did not want advisers to be made to pay for Arch Cru liabilities.

‘There are two fundamental reasons behind that assumption. We received a number of letters for clients who didn’t want their adviser to be forced to pay out. So we assume there are other clients of that view,' she said. 

‘Also, where we have applied an opt-in in the past that sort of figure has been our experience. The reality could be more but that is our best estimate.’

18 comments so far. Why not have your say?

Cheesed off

Dec 17, 2012 at 16:16

What nonsense

1. When the free money now bandwagon gets going the vast majority of clients will opt in.

2. Advisers who have hung on, hoping for a fair outcome, will be crushed by the costs of paying out (often without the benefit of insurance). They will then try to reauthorise and be penalised again by the FSA (who did preside over this debacle). Whereas those advisers who filled their boots are gone to new homes already - their companies unable to insure.

This idea of "phoenixing" is a red herring. What sane business person closes down their business purely to rip off their clients/regulator etc. The sheer cost and disruption of doing it is too much to contemplate for most. It is a distraction from the real issues - a text book regulatory failure, greedy and mendacious fund managers and an incompetent ACD.

KBO chaps, KBO.

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Bill Ward

Dec 17, 2012 at 16:32

Vindictive, corrupt and injust 3 simple words that some up the FSA's position. I note NO FSA staff have seen their livelyhoods gone from their huge failure, NO Capita livelyhoods have gone from their huge failures and we don't even have Court results from the alleged Fraud and malpractice cases going through. They abuse thier power and are unaccountable. So was Stalin.

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Julian Stevens

Dec 17, 2012 at 16:50

She looks like a bit like a female version of Andrew Fisher.

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Philby via mobile

Dec 17, 2012 at 16:58

Unfortunately it will eventually be the firms that actually did some proper due diligenece on Arch Cru that will shoulder the bulk of the expense. It is not difficult to identify that a fund that invest in private equity backed derivitives may need a little more consideration than way the fund is categorised. Although I feel sorry for any IFA caught up in this the impact that it has had on numerous clients cannot be ignored.

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stephen lyth

Dec 17, 2012 at 17:08

If products were properly monitored before reaching the market we would not have this mess, however, it has to be said that advisers recommending Arch Cru didnt actually do a lot of research themselves and so it goes on.

At £500 Mil pa for regulation, the show can only go on for so long

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Grumpy OM

Dec 17, 2012 at 17:14

Cheesed off - I whole heartedly agree with the sentiments that you've expressed, however "Phoenixing" is alive and well. You may remember Rockingham Retirement going out of business this summer. The owners of said business also owned separate legal entities, RICH and ACH, both of which are alive and well. The FSA have neither the intelligence nor the commitment to properly supervise a complex & diverse financial services market. Every one of these firms going to the whole was admitted by the FSA or its predecessors and supervised by said bodies - they simply have never been up to the job, employing and over-paying mediocre people.

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David Hedge

Dec 17, 2012 at 18:45

Grumpy, Who was the most mediocre and overpaid pillock that has just phoenixed?

Something Rectum pants?

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phil castle via mobile

Dec 17, 2012 at 20:52

iagree with Bill Ward. if only ifas have their livlihood re,oved and not other parties something is wrongtynlisedi

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Simon Mansell

Dec 17, 2012 at 21:27

I would like to point out that the FSA is in fact a Phoenix! When LAUTRO charges were shown to be partially to blame for endowment shortfalls did the FSA not shirk responsibility blaming the earlier regulator? The FSA was of course a phoenix from this earlier regulator. They did however manage to bring across/retain earlier years service for their final salary pension? It seems Pension rights carried across but not regulatory responsibility!

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Simon Mansell

Dec 17, 2012 at 21:33

This is like the drug agency who approved and licensed Thalidomide declaring open season on the Pharmacists who dispensed the drug in reliance on their earlier approval. This all rather stinks to me!!

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Richard Hardy

Dec 18, 2012 at 08:41

As the FSA prepares to phoenix into the FCA!!!!!!!!!!

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alan hughes

Dec 18, 2012 at 08:48

@Richard Hardy, Totally agree the FCA is to be the biggest phoenix in Financial Services. A failed regulator operating at the same premises with the same staff under a slightly different name.

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Richard Hardy

Dec 18, 2012 at 10:53

I wonder when the FSA/FCA will eventually realise the way they are heading there will be no one left to pay their fees and in turn they will eventually go the same way as the industry they are supposed to be regulating.

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Simon Mansell

Dec 18, 2012 at 11:38

@Richard Hardy

A bureaucracy is a group of non-elected officials within a government or other institution that implements the rules, laws, ideas, and functions of their institution. The FSA is an unelected, unaccountable bureaucracy/dictatorship! Max Weber (1864–1920), a German sociologist saw distict paterns resulting in threats to individual freedoms. How right he was!

The growth of bureaucracy is inexorable even if the ultimate consequence is the terminal decline of it victim and in consequence. its own destruction. Rather like a terminal disease that pays no credence to its own death following on from the death of its host.

Note more often the spores of this disease will jump ship and move on to other new victims prior. All sounds rather familiar?

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Richard Hardy

Dec 18, 2012 at 14:52

@ Simon - very true, we just need to look to Hector as an example.

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Alan Smith

Dec 21, 2012 at 12:25

Quoted directly from the ACD’s Annual Short Report produced by CAPITA Financial Group every six months from June 2007 to June 2009 “There are no borrowings or unlisted securities of a material nature and so there is little exposure to liquidity risk” – yet the FSA and CAPITA would have the outside world believe liquidity issues caused the failure of the CF Arch Cru funds.

Quoted directly from the Prospectus produced by CAPITA Financial Group:-

“CF Arch Cru Investment Portfolio is suitable for those investors wanting to achieve consistent returns, wealth preservation and capital appreciation by investing in a broad range of collective investment schemes, transferable securities, both Corporate and Government bonds, money market instruments, cash, derivative instruments, forward transactions and other instruments that the investment manager considers to be appropriate from time to time.”

This is not a third party opinion as alleged by FSA and who are using Seymour V Ockwell as justification for the S404, rather it is a statement of fact from those legally responsible for the fund. I think the key words here are BROAD RANGE – nowhere does it say over 20% in one investment in a Greek shipping company.

Therefore there was clearly misinformation given by the ACD CAPITA Financial Managers and the ACD has legal responsibility for all affairs of the fund such as information provided by Arch Financial Products LLP and CRU Investment Management. Mr Addenbrooke of CAPITA Financial Managers Ltd stated this in 2008 in an interview with a trade paper.

Ironically just this week there has been reporting of a case that is almost identical to the CF Arch Cru debacle yet no client has had to wait for their money back (now nearly 4 years for CF Arch Cru Investors).

I refer to the Standard Life Sterling Pension fund that fell in value almost overnight by £100million in early 2009. Within a month Standard Life accepted the fund had been mis-marketed and injected £100million into the fund so no client lost money and informed every investor they had two months to get out of the fund penalty free after that date if still invested the client would be accepting they were aware of the extra risks the fund did have following production of correct marketing material.

Subsequently Standard Life went to their PI Insurers and recouped the £100million as the incompetence that had resulted in the mis-marketing which led to investors being invested in the fund was Standard Life’s incompetence and after all that is what PI is meant to cover.

Obviously Standard Life’s PI Insurers did not like this but their appeal to not pay has been unsuccessful.

Standard Life were fined (and paid) over £2million by the FSA.

Why therefore did CAPITA Financial Managers do exactly as Standard Life did – make up the investors losses immediately in 2009 and allow investors to leave if they did not like the risks when the true nature of investment operandi was provided to them.

CAPITA Financial Managers PI would have had to pay out and if subsequently the PI Insurers wanted to take the Legal Action currently being undertaken by Hugh Aldous against various parties then that would have been their prerogative. However these actions would have taken place behind closed doors and investors would not have suffered the loss for nearly 4 years.

The above behind closed door deals would have been much palatable than the sordid behind closed door deals that the FSA have obviously been undertaking with CAPITA, Guernsey Authorities and Government Ministers.

If anybody would like more information about the true goings on regarding CF Arch Cru they can request from the FSA a copy of my response to the Section 404 consultation which the FSA have to release to those requesting a copy, once having read that if they want to contact me further I will send them even more revealing information.

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Alan Smith

Dec 21, 2012 at 12:35

As stated in my post above I believe it is an absolute disgrace that investors have had to wait nearly 4 years for the FSA to put a scheme in place where investors will get their money back. Yet even after 4 years it is a scheme that is so perverse that many investors will not be covered such as those who were high risk, those who invested directly without using an adviser and those using discretionary fund managers.

Those investors that are covered will end up receiving compensation either from an IFA that they do not “blame” for the loss otherwise the investor would have just complained via FOS during the last three years or alternatively (and more likely) an IFA the investor does not even know because the claims will fall on the FSCS.

The FSA are living in cloud cuckoo land if they think only 15%-30% of investors will opt in to a redress scheme. Most investors have waited and not complained because it has been so obvious to them as to who and what caused the loss of money that they naively believed the FSA would eventually put a solution on the table where the true culprits paid out. Unfortunately this has not happened and they are faced with only one choice to complain against their adviser they will take it.

This is also true for advisory firms that have already gone into default over CF Arch Cru. The FSCS had until a few months ago received relatively few claims (around 600), this has now swelled to over 1800 as a deluge of investors thought they could wait no longer and accepted CAPITA’s compensation offer.

Once the compensation offer has been accepted the investors have basically accepted the FSA will not come up with an honourable solution.

The S404 implementation confirms to the investors of defaulted firms the FSA’s intentions and therefore the FSCS will be flooded with complaints from investors of departed firms who again have waited for the FSA to get them compensation from those they know caused the losses, however as this will now definitely not happen they are left with no choice but to go to the FSCS.

Therefore IFA’s should prepare for an FSCS bill next year of at least £100million from CF Arch Cru alone.

No doubt Connaught will also fall on the FSCS next year – another fund where CAPITA and FSA conspired on when changing operator of the fund in 2009 when they knew there was a problem but did nothing and allowed a new operator to launch further funds.

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Alan Smith

Dec 21, 2012 at 12:41

Whilst writing the last two posts I have thought of a plan so cunning you could stick a tail on it and call it a weasel – or the FSA if you prefer.

The FSA’s logic on who is responsible for CF Arch Cru compensation is so irrational if it were applied to the banking collapse then anyone who held a bank deposit and had an IFA should complain against the adviser for the loss they have suffered. After all the adviser’s should have been aware of the mis-management that was going on within the banks and their imminent collapse. All depositors have lost money but as it was not directly lost they cannot work out how much exactly!

The Government decided the banks were too big to fail just as the FSA decided CAPITA Financial Managers were too big to fail – although it is perfectly acceptable for 200 plus advisory firms to fail.

If you consider the actual bank bailouts and subsequent quantitative easing which has resulted following the bailout has cost over £1trillion pound which is more than £40,000 for each tax paying adult in the UK it is scandalous that only 1 banker – Peter Cummings – has been censured by the FSA.

But hey we are all tax payers in this together, or are we? When you consider that Mr Average on £25,000 per annum and a few thousand in the bank probably pays more tax than the likes of Sir Philip Green the notion of proportionality and responsibility are thrown out of the window.

Given the above logic here is the cunning plan.

CF Arch Cru has shown that any fund with CF in front of it will not have action taken against it for over 3 years and when there is action no fines will actually need to be paid. The FSA enforcement notice shows that CAPITA Financial Managers Ltd are ACD for 231 funds with just shy of £20 billion under management. The 231 funds are split between around 100 fund management groups.

5% of £20 billion gives £1 billion. Therefore why don’t the 100 fund managers just buy the 200 IFA firms for £1billion with no independent valuation on any of the 200 IFA firms – indeed just pay a flat £5million for each IFA firm regardless of size.

The 200 IFA firms who now have £1billion in the bank can repay investors the £100million leaving them £900million. Before buying the IFA firms the fund management groups would obviously have put an agreement in the purchase arrangement that stated that in return for not bothering to get a valuation on the business they were buying on behalf of investors then the fund managers would be entitled to a “transaction bonus” of £300million giving each management group £3million for a Christmas knees up.

Leaving £600million for the 200 IFA firms so they get £3million each to walk away into the sunset and enjoy a peaceful life without the FSA having to worry about them.

In 3 months time when the fund management groups admit there is no value in these IFA firms as all the staff are sitting on a beach in the Bahamas and Winterflood Securities the market maker says there is no secondary market, luckily the fund managers will have to report only a 5% fall in investors fund values but as this will have been within the investors capacity for loss as documented by all the advisers that recommended those 231 funds in the belief that the fund managers did not operate as Arch Financial Products did.

The above is obviously farcical, but no more farcical than the FSA’s handling of this disgraceful fiasco.

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