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FSA predicts Cru to force 200 advisers out of business

by William Robins on Dec 17, 2012 at 12:02

FSA predicts Cru to force 200 advisers out of business

The Financial Services Authority (FSA) has revealed that 110 firms have already cancelled their permissions as a result of Arch Cru sales, and said it expects a further 100 to follow in their wake.

It said it had identified up to 600 firms that advised on the Arch Cru funds, down on the 795 figure it estimated when it consulted on the measures.

It said: ‘An analysis of currently authorised known sellers indicates that around 17% of these firms may potentially breach their regulatory capital requirements as a result of the revised scheme.’

However, this figure does not include 110 firms that have already cancelled their permissions due to Cru. That has led to around 1,800 claims already falling on the Financial Services Compensation Scheme as a result of the collapses.

The FSA said around £90 million in claims relating to Arch Cru had been lodged with the FSCS and that around £30 million of this was likely to be paid. An additional £3 million to £7 million is likely to fall on the FSCS as a result of the redress scheme.

37 comments so far. Why not have your say?

Chris Miller

Dec 17, 2012 at 12:28

Great, another interim levy coming our way in 2013.

'Merry Christmas, Mr Lawrence'

It may well be that further casualties will occur, because we are finding the ad hoc interim levies a bridge too far, on top of the cap ad ramping up.

Any good news out there anyone?

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PAUL WOOLLEY

Dec 17, 2012 at 12:31

Just you and me left in then Chris.

I suppose we will have to share all the business.

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Ian O

Dec 17, 2012 at 12:37

I wonder how many of these advisers/comapnies will then simply start up again as a different company and leave the rest of us to pick up the tab?

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Julian Stevens

Dec 17, 2012 at 12:44

Of course there'll be more, thanks to the FSA having instructed the FSCS to appoint Herbert Smith to short circuit the normal complaints process, thereby enabling their PI insurers to invoke a cover invalidation clause in their policies.

One wonders of this has been discussed behind closed doors at Canary Wharf.

"Hey guys, we seem to have messed up badly on this one ~ it's going to drive over 200 IFA firms out of business."

"Yeah, bit of a screw up. Did no one think to check first before instructing the FSCS to appoint Herbert Smith?"

Silence.

"Oh well, what's 200 less IFA's? We want to get rid of as many of them as possible anyway. Off the record of course."

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Sam Gee

Dec 17, 2012 at 12:44

I don't know whether I should really say this but what I find very sad about this is that is another 100 business that the FSA expects to fold, which employ people, leaving potentially hundreds out of work largely through little/no fault of their own, causing no end of impact on their families.

It's so easy to say "it expects another 100 to follow in their wake" without thinking of the effect of the livelihoods of many many people. Very sad indeed.

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Jonathan Kirby

Dec 17, 2012 at 13:16

@ Sam Gee

Yes it is sad but the FSA is so divorced from reality the people there probably don't even think there are people affected by its actions.

It simply deals with numbers and ticks boxes. The very thing it urges us not to do.

What they totally fail to see is that we are fast approaching the point at which more and more firms will be forced out of business because of the cost of regulation and the snowball effect will lead to yet another round of closures.

On the other hand they live in a world of seemingly boundless expense because it is other peoples money.

If only we could increase our charges to cover this. Instead income will almost certainly drop again next year. We can't pass on our costs to anyone other than our clients.

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ynot?

Dec 17, 2012 at 13:16

The headline is misleading. It isn't Cru forcing 200 IFAs out of business - it's the FSA doing that. The FSA failed to monitor Capita, who were asleep at the wheel. As ACDs, Capita should have been checking what Arch were investing in, and also confirming the performance figures published monthly by Arch (figures which were presumably approved by the FSA).

The FSA have now "Censured" Capita, but not fined them 1p! How fair is that? IF Capita Fund Managers don't have sufficient assets - let their parent company pay - they're earning enough from carrying out Government outsourcing tasks (i.e. with taxpayers money).

The IFAs may have carried out appropriate due diligence on the cru funds before recommending them to clients; and many had invested their own money into cru.

As usual, the FSA's hindsight has 20:20 vision - "If the investment has gone wrong - it must have been bad advice - let's blame the IFAs who recommended it rather than the perpetrators of the fraud"

These 200 IFAs may regularly service 100 clients each - that's 20,000 investors who will no longer have an Adviser to look after them in the future.

How does this action help even one of these clients?

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David Curley Dip extrodinaire

Dec 17, 2012 at 13:28

It is sick that they ( The FSA) do not appear to give a toss for all the staff and advisers who will be out of work.

So between them they have managed to remove access to access for at least 30000 IFA clients.

If I am the last one in business, I am not going to turn the light out because I am not paying the bill, get Hector to do it with his first years bonus from Barclays

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David Curley Dip extrodinaire

Dec 17, 2012 at 13:33

Regarding Capita, there is a rumour that because of the Meteoric rise of Capita and this due in great part to Capita's support from Tony Blair and the contracts the last government gave them, no one is going to charge Capita anything over Arch Cru.

We will all stand it one way or another, unless we can get a judicial review of the FSA handling

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Arthur Schopenhauer

Dec 17, 2012 at 13:34

no sense no feeling

The IFA's have no voice and the institutions they support have been silent

Remember well who your friends are

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Arthur Schopenhauer

Dec 17, 2012 at 13:38

@ David Curley

I am no fan of Tony B liar however

Capita did well initially on the back of the poll tax software and the obsession of the Thatcher Government with out sourcing so those jobs well done by government were placed with Capita at a profit which probably increased costs to the tax payer

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Billy

Dec 17, 2012 at 13:38

@Ian O

you are spot on, we have already seen it happen. Wasnt there an article on NMA a while back naming them?

As this happens it means the employees will just work for a 'new' company.

I know its the rules but its just wrong to leave the mess with the rest of us.

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Anitaki

Dec 17, 2012 at 14:21

What do they care?

It's almost as if it was their business plan for IFA firms to disappear and this was one way of achieving that objective.

And how many Phoenixes are there??

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Arthur Schopenhauer

Dec 17, 2012 at 14:27

When will the writer to this blog ever learn to watch what people do NOT what people say it is usually a better indication of objective

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Polfers

Dec 17, 2012 at 14:50

Although I (very fortunately – as I could have), did not recommend any Arch Cru investments to anyone, I have seen the literature supplied by them, both for Advisers and for Clients at the time and frankly, on the particular product details I saw at least, they categorically stated how very Low Risk the investment was - in plain English - and why.

If the FSA et-al cannot determine from its own due diligence with all the resources and bottomless (so they seem to think), pit of cash and time they have available to them, how on earth do they expect IFA's to be able to glean and determine what they and their cohorts could not?

In my view, this is quite frankly, an obscenity and, I suspect, would represent a clear miscarriage of justice in any other walk of life and by any normally recognised standards.

I would suspect that whilst there may be some cases of “miss-selling” in terms of actual suitability based on client attitude to risk versus (the supposed) risk profile of the investment as then understood, very many cases would not fall under that particular small umbrella; most would have been implemented in great good faith for all the right reasons. And the Advisers were as much victims as the clients subsequently became – only more so.

A regulator unanswerable even unto its own conscience and with no self awareness of its own responsibilities that palm’s off such responsibility to scapegoats and whipping boys is its self duping the public as well as the industry it is meant to control and serve. This is a disgraceful state of affairs and the worst kind of hypocrisy.

Are there any “Class Action” barristers out there who would fancy taking this on?

THE EPLIOGUE

Just to summarise, then, we are:

Being priced out by ever higher regulatory costs and Levy’s

Subject to being fined or even expunged from practice for things we are not responsible for

Potentially hounded for life and beyond the grave with no long-stop and no recourse

Subject to run-off cover becoming increasingly expensive or unavailable entirely

Subject to erosion of business valuations

Subject to erosion of income

Examined and tested and report laden to the brink of insanity

In receipt of:

• All the disadvantages of being employed with none of the advantages

• All of the disadvantages of being self employed and none of the advantages

• All the disadvantages of running a Limited Company and none of the advantages

• And for Network Members, all the disadvantages of collecting and charging VAT but none of the advantages

Last but not least, if it hasn't yet occured to the brainwashed happy-clappy's amongst you, we're regulated by a near Stazi type organisation that frankly, my dear, doesn’t give a damn.

Graduates! send you're CV in now to join this stress free profession!

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Michael Both

Dec 17, 2012 at 14:51

The shame of the way the FSA appears to have handled this is that it has muddied the line between IFAs who DID give bad advice in recommending the funds (and who SHOULD be punished) and those who did accurately explain the real risk to their customers, who were then defrauded by bad management.

It is the second category where we need much more clarity. Why did Capita not do a more effective job and why does the FSA seem to have been soft on them?

If the FSA were to explain this openly and honestly they would earn some belated respect. Sorry, must go and feed the flying pigs now...

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Annoymous

Dec 17, 2012 at 14:54

staying annoymous for the reason you will read

then everyone just does not pay the levy - and I mean everyone - the more the merry

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philip spierling

Dec 17, 2012 at 14:56

How come no body at Capita and the other institutions involved have not lost thier jobs or livelyhoods as many well intentioned IFA s have, or are going to, over this unfair process.

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Michael Both

Dec 17, 2012 at 15:02

@ Polfers,

I too read Arch's marketing literature. On an objective analysis, it never occurred to me that the fund could possibly be considered low risk based on its underlying investment strategy.

We need to learn the process that allowed the FSA to let it be marketed as such because it was seriously flawed. We may conjecture that it ticked the boxes marked "diversification" and the promoters "said it was low risk" but if anyone at the FSA had paid any attention to the ratings agencies' role in the sub-prime mortgage debacle they certainly didn't pass that valuable insight on to the department responsible for Arch Crud.

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Derek Young

Dec 17, 2012 at 15:11

Good old Capita!!!! Ofcourse there is nothing in the rumour about old boys network!! Not bad for an old government dept, privatised off!

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Julian Stevens

Dec 17, 2012 at 15:16

Let us not forget that the FSA was happy to endorse Split Cap Investment Trusts as low risk and what a disaster they turned out to be. The FSA declined to accept responsibility for that debacle too ~ another motorway pile-up for which everybody but the FSA had to pay. It does seem to have become something of an established regulatory pattern, doesn't it?

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alan mcintosh

Dec 17, 2012 at 15:40

Shame on the FSA for not regulating these products in the first place.

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Julian Stevens

Dec 17, 2012 at 15:56

I'll bet the FSA monitors are reading the comments here and thinking smugly to themselves something along the lines of Yeah, we know we're shafting you lot with a red hot poker and abrogating all responsibility for our own failings. But there's damn all any of you can do about it because we have all the money, all the power, no accountability and we certainly don't give a tinker's cuss if a few hundred more IFA's go to the wall because what's most important to us, certainly more important than justice or even fairness, is keeping our jobs and getting a nice big Christmas bonus.

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Arthur Schopenhauer

Dec 17, 2012 at 16:01

@Julian

They are not shafting the IFA that is just a side show they are shafting the UK as a viable jurisdiction

Just look at the Luxenbourg issues in the last year and the number of closures of funds in the UK

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sol trader

Dec 17, 2012 at 16:34

It strikes me as odd, that the IFAs who gave reasonable advice based on reading the Arch Cru literature including those whose clients have lobbied the FSA / FSCS / FOS not to charge them - do not come onto these blogs complaining about the injustice. Either they have got other things to worry about or, I hope, they are not actually being made to cough up...

Which begs the question - does anyone know the standard of due diligence expected of an Adviser by the FSA,FCA, PRA, LAW, BOE, TSC, FSCS, FOS with regard to solvency, probity and asset make up of product providers or firms pretending to be product providers?

One of those "1 minute guides" from the FSA would be useful

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Stuart Rathbone

Dec 17, 2012 at 16:44

Arthur,

I am so sure that you are right I am not going to bother checking it out. As we all know (or should know) money goes where it is treated best. Sounds to me like just another outcome of this maxim.

Now where that big nosed Frenchman gone ;-)

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Arthur Schopenhauer

Dec 17, 2012 at 17:12

@ Stuart

http://www.ft.com/cms/s/0/3a0eaa5a-4458-11e2-932a-00144feabdc0.html#axzz2FKX4qXbr

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Anitaki

Dec 17, 2012 at 17:13

@ Julian

I suspect you are wrong

I don't think the FSA do read these comments - there is no evidence that they do, and when you consider the 'whistleblowing' that has taken place on these boards with no action, IF they do read these boards, it verges on criminal negligence for not acting on the information that many posters have given out.

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Bob Donaldson

Dec 17, 2012 at 17:21

The FSA will only be happy when we are all out of business or working for a bank where they can beat the living daylights out of senior management and fine them extraordinary amounts of money to put things right.

However, being a glass half full rather than half empty sort of guy, I look at it this way. 100 Plus less firms and advisors surely means that they can cut some of the staff at Canary Wharf or am I really looking at things with blinkered vision!

Sorry but I am extremely tired of fighting it all - we just don't win any of the arguments and it is not worth fighting until we have a proper justice system put in place for advisor where they can argue their case and I don't see that happening any time in the future and certainly not prior to my retirement.

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PD Off

Dec 17, 2012 at 17:25

Sol Trader,

The standard of due diligence expected of an Adviser seems to be very simple.

We are supposed to personally visit the product providers with a team of forensic accountants, interviewing all the funds managers, Analysts Board Directors etc.

Obviously you will want weekly updates that have been independently audited. I am sure they will all fall over themselves to help & assist in this basic due diligence.

You can then go & recommend the ISA to your client assuming they haven’t died of old age.

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DG

Dec 17, 2012 at 17:32

@ Sol trader

You talk about “[IFAs not] complaining about the injustice”...I’ve lost count of the words, not to mention the hours, spent on these blogs trying to highlight the brutality of the FSA’s approach to this subject. I had been hoping, clearly pointlessly, that a shred of decency existed at the FSA after their deferment of a decision on the s404 at the end of November.

The puerile arguments that the FSA put forward barely deserve further comment – one can only hope that the PI insurers’ lawyers finally get off their backsides, now that the FSA colours are firmly tied to their mast, and come out fighting. I, for one, would like to see these fictitious arguments lambasted in something approaching the court that none of us can access.

Scenario 1 – IFA does due diligence, based upon what a reasonable IFA could be expected to do, and relies upon information/data, call it what you will, as produced by an FSA authorised and regulated company. Is subsequently deemed to have used this information incorrectly in their recommendations, deliberately misleading valued clients in the process, and is thus liable for the losses that have been incurred.

Scenario 2 – ACD is found to have been in breach of fiduciary duty and coughs up a few quid from its massively well connected parent company and gets let off the hook. Auditors – off the hook. Managers – subject to multiple, million pound court cases (which may, of course simply be dropped as it’s the cat chasing its own tail after all – Aldous/Spearpoint/Capita) off the hook. Marketing literature “clearly” misleading but off the hook. Incidentally, what the difference is between marketing literature et al that is mis-leading and a letter of recommendation that was, seemingly, crafted purely for the purposes of duping clients (FSA’s view)...... I can’t imagine – if the latter is wrong and deserves crucifixion so, surely, does the former and everyone connected thereto.

So much has been written, so many questions unanswered or brushed to one side that, quite frankly, the motivation to argue the toss just ebbs away. Of course, having opened Pandora’s box the FSA will, forevermore, have changed the rules when it comes to the giving of financial advice. On their website, under the announcement of their decision to proceed with this shameful act (and what a waste of time that consultation has proven to be) it states:

“The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.”

What a joke.

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Polfers

Dec 18, 2012 at 09:48

@ Michael Both

Agread - my point exactly - why was this allowed to be presented as such, be that toi IFA's or the public and therefore ergo why are the FSA not themselves being brought to book on this. Answer: because they are answerable to no one.

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Arthur Schopenhauer

Dec 18, 2012 at 10:28

Absolute power corrupts absolutely

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Stuart Rathbone

Dec 18, 2012 at 12:12

Arthur,

Thanks for the link above , I rest my case & your above post goes without saying.

Late reply as I have just read yours.

To all,

We need to emulate Tuttle, the plumber played by De Niro from Gilliam’s Brazil, while remaining within the regulations (something the character does not). It is worth watching if you have not to see societies plight not just ours, It is the only way to truly serve the folks who are bright enough to value us.

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Alan Smith

Dec 21, 2012 at 12:28

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 12:34

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 12:42

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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