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FSA reveals plans for £100m Arch Cru redress scheme

by Jun Merrett on Apr 30, 2012 at 10:04

FSA reveals plans for £100m Arch Cru redress scheme

The Financial Services Authority (FSA) has launched a three-month consultation on establishing a consumer redress scheme which could deliver more than £100 million compensation to investors who were mis-sold the Arch Cru funds.

Funding for the scheme would come from firms found to have mis-sold the Arch Cru funds. Firms would be required to review their sales of the funds, identify those that were unsuitable, and pay redress where required.

The proposed redress scheme is in addition to the £54 million payment scheme announced last year, involving Arch Cru authorised corporate director Capita and depositories BNY Mellon and HSBC .

The FSA’s proposed redress scheme is designed to put investors back into the position they would have been in had they received suitable advice. This is the first time the regulator has used this power to implement a consumer redress scheme.

The regulator said the evidence it gathered indicated widespread mis-selling of the Arch Cru funds and that they were high-risk funds, sold unsuitably as low or medium risk, leading to significant consumer detriment.

It has estimated that around £110 million in redress could be paid out, and that it will be payable to the vast bulk of Arch Cru investors, with between 15,000 and 20,000 likely to be in line for payments.

Clive Adamson (pictured) FSA director of conduct supervision, said: 'Investing money can be one of the most important decisions that anyone has to make and investors need to be able to trust the advice they are given. The Arch Cru funds were high risk and they should only have been recommended to investors who fully understood and were willing and able to accept the risks.

'We have found significant evidence that investors looking for lower risk investments have invested thousands in these funds. It is right that these consumers are put back in the position they expected to be in when they took the advice. We believe the proposed scheme is the best way to get the most money back to the greatest number of investors.

'This is the first time that we have used this consumer redress power and it is going to form an important part of our consumer protection tool kit. We will be working hard to reduce the number of large scale failures. But where they do occur it is imperative that we can get redress to consumers who have lost money through mis-selling as fast as possible.'

The key elements of the draft scheme the FSA will consult on includes that all firms which sold Arch Cru funds would have to contact their clients within four weeks of rules being made indicating whether or not their case falls within the scope of the scheme;

  • Where redress is due, firms would be able to use a FSA online calculator to calculate each payment taking account of how much money each investor is able to claim from the separate £54 million voluntary payment scheme
  • Investors should receive notification of how much redress is due within six months of the scheme starting and would receive payment wihtin 28 days of accepting.

30 comments so far. Why not have your say?

Paul Howard

Apr 30, 2012 at 10:17

So where is the £100 million coming from...

...answers on a Postcard please!

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Hickky

Apr 30, 2012 at 10:19

See the David Davis article, it shows you the FSA will not tolerate an investigation by the SFO, it may show up just how inept they were! Therefore the FSA suddenly announce a redress scheme so they can say 'no client suffered as a result of this scandal' and the SFO need not get involved. Answer me just one question, 'Who Pays?'

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Robert Johnsey

Apr 30, 2012 at 10:35

I am completely confused by this announcement - Arch have been taken to court (so that Spearpoint can obtain redress of £150m), the MPs are trying to make Capita pay more, David Davis wants the SFO involved and yet the FSA launches this with all the other actions going on - if court makes Arch pay the redress then what further redress is due?

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Imelda

Apr 30, 2012 at 10:41

Take a wild guess

So the banks, custodians, guardians and administrators, who MIGHT REASONABLY have known something was amiss and did nothing pay, £54 mill

The FSA, who allowed this to be marketed as lower risk, pay nothing

The IFAs, that this does not kill, pay some of the £46 mill. And yes, there will have been some clients advised badly but not the majority.

The rest of us pick up the FSCS tab for the part of the £46 mill the IFAs who have been killed can't pay.

I see the justice for the client but it is coming from the wrong pockets.

This is unworkable, unjust and unconstitutional

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Ned K

Apr 30, 2012 at 10:46

Perhaps David Davis could ask the Serious Fraud Office to investigate the FSA!!!

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Ewart Matthias

Apr 30, 2012 at 11:02

Sorry Ned the SFO investigate fraud and not incompetence

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Imelda

Apr 30, 2012 at 11:21

See consumer comment below when the IMA classification debate on this began.

The FSA have so much more to answer for.

Rick Johnston

Dec 16, 2009 at 15:33

.As a consumer I looked at the FSAs MoneyMadeClear on investment & Savings. It recommends asset allocation and diversification as the way to minimise risk. It lists the main assets and then directs you to related links.

The first link the "consumer" is directed to by the FSA is the IMA. The "Cautious Managed" asset allocation catches any consumer's eye and so one naturally presumes that relatively speaking this is more cautious than others.

So the FSAs guidance to consumers is asset allocation and the top "related" link is IMA whose asset allocation of 60/30 whatever is called "Cautious" Managed.

No warnings about "Cautious" not being literal - just a gentle guide from investment - risk - asset allocation - IMA sectors - Cautious.

How has a consumer a hope?

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Martinifa

Apr 30, 2012 at 11:33

If a person is accused of murder and pleads he is innocent there is still a case to answer, all the facts are seen and a jury decides the outcome. When and how did the FSA got Diplomatic Immunity and why is the FCA being allowed to retain this power.

This has gone far enough and why the MP’s, TSC and other Government departments are allowing the FSA to continue with this clear smoke and mirror campaign just makes me want to ……………

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Julian Stevens

Apr 30, 2012 at 11:44

"the first time the regulator has used this power to implement a consumer redress scheme"??? This looks to me about as close as anything I can think of to the PIA's Pensions Review ~ forcing intermediaries to review all their pension transfer recommendations, regardless of whether or not any complaints have been raised, and then forcing them to pay redress. In all probability, the FSA will force intermediaries to write to clients all but inviting them to complain, even though up to that point they might have had no intention of so doing.

Ah well, it's all a few more bricks in the FSA's Grand Extermination Plan, whilst accepting no blame at all for having allowed this latest motorway pile-up to happen in the first place.

Yet Hector Sants.............

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Joe Egerton

Apr 30, 2012 at 11:52

I have been saying that this is coming for some time.

The FSA can be challenged before the Upper tribunal.

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Davey

Apr 30, 2012 at 11:53

So far my PI insurers have refused to accept any notification of a "circumstance". A circumstance is defined as an event that might lead to a claim. According to them the suspension of the fund was not a circumstance, the section 165 notice was not a circumstance and no doubt the announcement of a redress scheme that will ensure IFAs carry the can for this shambles will not be a circumstance either.

In answer to the question who pays. It won't be the PI insurers; it won't be the FSA or Capita; it will be all IFAs through the FSCS

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Imelda

Apr 30, 2012 at 12:05

This has gone far enough

1400 IFAs put their name on a petition last week

£100 teach to a fighting fund for Joe Egerton to challenge FSA

That's £140,000

And there are far more than 1400 IFAs who are affected and COULD contribute.

Time for all of us to stop talking and start walking

And enough of the "I didn't advise my clients to do..........."

Get over it and start fighting - for long stops, for justice, for fairness, the list is endless.

We are ALL affected. We ALL need to stand together. Division and internal sniping just adds to our own demise

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Robert Johnsey

Apr 30, 2012 at 12:16

Wasn't aware of a petition sorry - if you provide a link i will sign it and if Joe Egerton wants a £100 from me to help fund the fight - let me know where to send it!

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Joe Egerton

Apr 30, 2012 at 12:25

I agree with Man in Black

But if there is to be a legal challenge then people need tor each into their pockets to afford the costs of a QC. If not, forget it.

Perhaps the PI insurers will challenge? They are most at risk.

I add that if I were a PI insurer I would be getting out of this market: quite clearly PI insurers are now being asked to cover the risk of losses in any CIS, authorised or not.

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Ned K

Apr 30, 2012 at 12:57

For those advisers that signed the petition against the latest FSCS levy and for those that are exposed to CF Arch funds, you should consider funding a challenge at the upper tribunal. It would be a great opportunity to make a stand against regulatory injustice.

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James

Apr 30, 2012 at 13:37

So Joe, just how much would be needed in order to have a fair chance of bringing action against the FSA?

Would the FSA then be able to hike our fees to pay for it to defend itself?

If so, it is the perennial problem of us all having to pay twice or three times, as with the FSCS's actions through Herbert Slimesmith.

What Freedom of Information options are there for finding out about the FSCS's tendering that appointed HS? (They did put it to a number of law firms to tender, didn't they?!!!)

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Joe Egerton

Apr 30, 2012 at 13:50

The FSA would run up bills dealing with a JR but these would be insignificant on the fees it levies. Unless at least £20K were made available just for the barrister I think that it would be a mistake to start anything

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Davey

Apr 30, 2012 at 14:11

I wonder how the redress calculator will work? Capita's miserly offer to clients was based partly on the fact that the financial crisis would have resulted in losses wherever clients were invested. Will the calculator factor in that argument? - probably not.

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Chris via mobile

Apr 30, 2012 at 15:01

Please excuse me for butting in on a professional site but as an investor I am quite perturbed by this news. Like all investors it was deeply distressing to lose funds in Arch Cru, I took advice from an IFA of over 30 years standing with no complaints against them. I may well get my money back under this scheme, but until Capita/HSBC etc have had their involvement and responsibilities fully reported for all to see that they are blameless, I am worried that distress and hardship will be passed on disproportionately to my IFA. I want the people at fault to compensate me and I don't think Capita etc have been adequately proved to be the lesser offenders.

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Alan Smith

Apr 30, 2012 at 15:13

Interesting that it is Clive Adamson who is being quoted, does he not remember sending an email on 21st September 2009 to one of his friends invested in Arch Cru the exact content of the email is 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”

So the FSA were perfectly aware in September 2009 there were serious flaws actual assets held by the funds, which was later confirmed by the new fund manager Spearpoint in December 2009 when recalculated values for the funds between March 2009 (fund suspension) and December were announced.

The FSA would also knew that they did not give CAPITA enough rules as ACD to administer what was effectively a Fund of Alternative Investment Fund (FAIF) as opposed to a normal OEIC, as FAIF rules did not come out until 2010. CAPITA and their brilliant Lawyers Herbert Smith and lobbyists Quillers would also have known this fact. Therefore impasse between FSA and CAPITA as going to court would make them both look stupid.

Far better to do absolutely nothing and let investors get frustrated and wait for the investors to start a mass of complaints against advisers.

Unfortunately for FSA this did not happen as investors suspected something much larger than poor advice had occurred, instead they waited and when nothing had happened by May 2011 they started to get their MP’s involved.

Then the FSA got into gear as they did not (and still don’t) want this scandal investigated, so quickly CAPITA, HSBC and BNYM offered up £54 million to make matter go away, this just got investors and MP’s more curious and frustrated and further questions were asked.

It came as no surprise to many investors and advisers when a £150 million law suit against Arch Financial Products LLP was launched by the Guernsey Board of the Guernsey Cell companies. However this raises more questions the FSA do not want to answer, so the best solution for FSA is to silence all the IFA’s by putting them out of business never mind how unjust this is so that there are no further calls for an independent inquiry.

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Alan Smith

Apr 30, 2012 at 15:57

Interesting that it is Clive Adamson who is being quoted, does he not remember sending an email on 21st September 2009 to one of his friends invested in Arch Cru the exact content of the email is as follows

"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”

So the FSA were perfectly aware in September 2009 there were serious flaws actual assets held by the funds, which was later confirmed by the new fund manager Spearpoint in December 2009 when recalculated values for the funds between March 2009 (fund suspension) and December were announced.

The FSA would also knew that they did not give CAPITA enough rules as ACD to administer what was effectively a Fund of Alternative Investment Fund (FAIF) as opposed to a normal OEIC, as FAIF rules did not come out until 2010. CAPITA and their brilliant Lawyers Herbert Smith and lobbyists Quillers would also have known this fact. Therefore impasse between FSA and CAPITA as going to court would make them both look stupid.

Far better to do absolutely nothing and let investors get frustrated and wait for the investors to start a mass of complaints against advisers.

Unfortunately for FSA this did not happen as investors suspected something much larger than poor advice had occurred, instead they waited and when nothing had happened by May 2011 they started to get their MP’s involved.

Then the FSA got into gear as they did not (and still don’t) want this scandal investigated, so quickly CAPITA, HSBC and BNYM offered up £54 million to make matter go away, this just got investors and MP’s more curious and frustrated and further questions were asked. It came as no surprise to many investors and advisers when a £150 million law suit against Arch Financial Products LLP was launched by the Guernsey Board of the Guernsey Cell companies. However this raises more questions the FSA do not want to answer, so the best solution for FSA is to silence all the IFA’s by putting them out of business never mind how unjust this is so that there are no further calls for an independent inquiry.

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Alan Smith

Apr 30, 2012 at 16:10

could citywire email me as to why my comments are not being put on.

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Nick

Apr 30, 2012 at 16:22

thats what we think Chris, trouble is the FSA is in bed with Capita!

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Martinifa

Apr 30, 2012 at 16:26

Chris thank you for your comment and for showing understanding at what for you and your adviser must be a very difficult time.

All we are asking for is a clear and just investigation. The insult is we pay for the FSA, FOS, FSCS and yet we cannot seem to get any request that might highlight their failings investigated or made public.

It seems to me that hundreds of IFA's can be sent to the wall to save Capita, HSBC from paying larger amounts and the FSA to save face.

All we are asking for is for the truth, at this time it is to easy for the FSA to just blame the IFA as clearly the fund was not what it said it was on the tin.

PS, I did not have any clients involved, but this will not be the first or the last time this will happen.

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Ned K

Apr 30, 2012 at 17:11

Joe Egerton,

Would you be prepared to take this to the tribunal on the proviso that sufficient funds were at your disposal?

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Andrew Watts

Apr 30, 2012 at 17:55

I find the whole thin sickening. Personally I had just 4 clients in the funds. I did what I considered fair due diligence (without being able to see precisely what was under the bonnet - this was confidential information, understandably so) and watched and waited a long time before deciding the funds were what they said they were.

I invested relativley small sums of money in comparison to an investors total worth and always did so through a platform in order to take the same trail and initial as with any other fund (never once taking the 1% trail on offer, always 0.5%) to eliminate commission bias. 3 of the 4 investors were medium risk, the other was high risk.

Yes, I took notice of the fact that the fund was classed as "cautious" by the IMA - why wouldn't I? But I tell you what - I put more faith in the fact that I believed that Capita was doing its job and the FSA were happy with the marketing material.

I saw nothing in the marketing material about huge loans to Greek shipping companies, or other loans to incestuous related companies. Silly me - I thought that Capita, "supported" by the FSA, was responsible for making sure these things didn't happen. I saw diversification, multi managers, private finance backed by collateral ........ a cautious fund rating, a respected name in Capita and our watchful, responsible FSA. The fact that I put only small relative amounts in makes no difference to the feeling I have of letting down my clients.

Yet I feel even more let down now. We as a profession need to support each other and make a stand on this. It's no good standing back and saying "I didn't do one", as the repercussions of what is happening here will make it dangerous for us ever to advise a client on any investment again.

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Man in Black via mobile

Apr 30, 2012 at 18:25

@Andrew Watts

Well, I didn't do Arch Cru.

But sadly, I know other advisers just like you who demonstrated a natural scepticism, waited for the track record to emerge, for more literature to be produced et cetera...before then using these funds as a Diversifyer...

Looking through the FSA paper, it would seem the FSA are ignoring basic principles of portfolio construction in adopting the "the client was low risk...but one of the funds used was high risk" line...

That frankly has all sorts of ramifications - are cautious investors expected to invest in bond funds only?..."but the 20% you put in equities are high risk"...

What happens next is not a question of "will the FSA face a challenge?" but "will the challenge be properly funded, or will it fall to a compliance consultant alarmed at FSA's increasingly arbitrary behaviour to dust down his old copy of De Smith on Judicial Review of Administrative Action and do it himself?'

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You must be joking

May 01, 2012 at 06:57

@ Man in Black

Your third paragrapoh above hits the nail squarly on the head, the most worrying aspect of the FSA paper (I haven't read it all YET) is the apparent lack of acknowledgement of ALL common sense/investment principles:

Diversification by asset classes - ignored

Diversification by funds - ignored

Diversification by 'risk' of funds - ignored

The FSA appeared to be making great strides on their understanding of diversification in recent papers (risk profilers, CIPs etc), but this particular paper seems to, perhaps intentionally, wash over any mention of diversification...

So a client with 3% of their investment portfolio in Arch Cru will be reviewed in the same manner as a client with 100%... this cannot be correct.

Whilst not involved in this, I do feel it possibly sets a worrying trend for the future...

Imagine that Neil Woodford loses the plot at some stage in the future (extremis I know).

His high income fund has been reviewed and analysed to the nth degree.

We've all looked under the bonnet and seen what his main holdings are - today!

We trust Neil, Invesco Perpetual and everyone else involved in managing / regulating the fund to make sure that the fund's investments remain within the fund's remit.

Neil then meets Miss X, who owns a chain of lap-dancing bars, becomes smitten and decides to invest 20% of the fund in her expansion plans. Good cash flow and dividends in an industry immune to recessions.

All goes well for a while, but then one of the bars gets raided and the police discover the bars are a front for prostitution. They're all closed down and the fund takes a massive hit.

FSA determine that the fund had BECOME too high risk... full review of all sales ordered... IFAs out of business.

So, the moral of this little early morning story...

You can carry out as much due dilligence as is appropriate based on HISTORIC and CURRENT information TODAY....

Absolutely NO due dilligence can be carried out on what may or may not happen in the FUTURE!

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Ned K

May 01, 2012 at 09:40

Welcome to this weeks edition of 'you've been framed'. I have suspected for some time that the problem the FSA had in dealing with Capita is that they have approved a fund of alternative investment funds as an OEIC which gave Capita the almost impossible task of running what amounted to a UCIS as an OEIC (not that Capita realised this), this was four years before the instrument to allow a fund of alternative investment funds was introduced. Little wonder that Capita's lawyers were able to negotiate a settlement which abdicated Capita of responsibility and a regulatory fine. The FSA has its back to the wall and is lashing out. They have been ineffecitve in securing proper redress form Capita and the depositaries for the reason stated.

Now they suggest the FSA authorised and regulated OEIC should have been treated as an alternative investment. These funds were OEIC's suitable for retail distribution and the alternative investment angle was not introduced until 2010. Within various FSA documents it says that alternative investments can be lower or higher risk than conventional investments . Now the FSA suggests that alternative investments are by their nature high risk - will the FSA please make its mind up.

See the evidence below - all available from the FSA!

Copyright 2008 Financial Services Authority. All rights reserved. | Privacy | Legal |

Consultative Paper 07/06 on Fund of Alternative Investment Funds (FAIF)

FAIF products are not necessarily more risky than other types of NURS or UCITS product. However, due to the strategies that can be pursued, the risks they present may be different to those posed by more traditional retail investment products. The FAIF could

provide a high or low risk and return investment proposition, depending on its

underlying investments and the use of derivatives. Some FAIFs could conceivably

rise in value in falling equity markets, others could fall in rising ones.

In our opinion, the factors set out in our due diligence guidance are relevant to investing in underlying unregulated schemes.2 FAIFs, despite their wider investment powers, are still retail schemes into which the public can invest with little or no advice. These investors rely on the authorised fund manager to know and understand the risks associated with the investments which comprise the FAIF. As a result, if an authorised fund manager can not obtain sufficient information on a target investment to satisfy our requirements, the manager should not invest in it.

FSA Policy Statement 10/3

As mentioned above, our new rules require the FAIF manager to carry out due diligence on the underlying schemes it proposes to invest in. We do not expect intermediaries to repeat this due diligence themselves, but we would expect an intermediary to understand a FAIF they plan to distribute.

Intermediaries should also understand how a FAIF may differ from other

investments or collective investment schemes with which they are already familiar.

The key document for an intermediary to consider will be the FAIF’s prospectus.

The prospectus is the document I referred to and it said (before any secret alterations from the FSA)

In the 2006 prospectus approved by Capita - 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 secuirities, both Corporate and Government bonds, money market instruments, cash derviative instruments, forward transactions and other instruments that the investment manager considers to be appropriate from time to time – “The ACD (Capita) shall ensure that, taking into account the investment objectives and policy of the Funds, the property of each Fund aims to provide a prudent spread of risk”.

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R571

May 06, 2012 at 13:12

Four points to make here: -

1. The FSA is effectively made up of, and therefore supportive of Banks.

2. Major banks would not allow their advisers to recommend Arch Cru as it would be deemed too sophisticated (no offense to the advisers concerned), this is the bank's way of dealing with investments - lowest common denominator etc.

3. Banks have had enough and told FSA we are not paying for this, get the IFA's to pay. They are such a fragmented community there will be no come-back.

4. Get your local MP to raise it in parliament, we need public awareness of the way the FSA regulate (with hindsight and inefficiency and incompetence). I do however back any representation anyone is prepared to run with.

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