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FSA's shocking double standards on Arch Cru

by Daniel Grote on Nov 26, 2012 at 14:25

FSA's shocking double standards on Arch Cru

We’ve been waiting a long time for Financial Services Authority (FSA) action against Capita over the Arch Cru scandal. But despite the regulator having adopted an increasingly strident stance in the last few months of its existence, handing out fines left right and centre, it seems to have lost its aggression in this case.

It has publicly censured Capita, and published a damning final notice listing a litany of failures on the part of the Arch Cru authorised corporate director (ACD). It failed to monitor fund manager Arch Financial Products and the liquidity risks affecting the funds, and ensure that the funds were properly priced.

Those are pretty fundamental failures for an ACD, which bears the lion’s share of legal responsibility for a fund. Dig into the details of the final notice published by the regulator, and some of the claims are astonishing.

So at the time of the launch of Investment and Specialist Portfolios, we learn that Capita’s due diligence of Arch ‘was limited to checking that Arch was authorised by the FSA’. Even as late as November 2008, just months before the funds' suspension, it had not looked into how Arch managed conflicts of interests, obtained its conflicts register, or reviewed the records of its investment decision making.

Its monitoring of liquidity issues was equally woeful. According to the FSA, this was limited to ‘checking the amount of uninvested cash within the funds’. That’s fair enough as a starting point, but when the funds were invested in the likes of Greek shipping assets, fine wine and private equity and finance (not exactly known for their easy trading), it’s not enough.

Given all those failures, how on earth has Capita escaped a fine? The FSA said it would have fined Capita £4 million, but that it did not do so largely because of the financial cost Capita had already incurred as a result of its involvement with Cru, and the impact it would have had on the business.

The FSA has pointed to Capita’s payout as part of the regulator’s first Cru redress scheme (£32 million), £2 million spent on investigating the existence of Arch Cru assets (something you’d hope an ACD wouldn’t be forced into after funds are suspended) and £660,000 handed to its investors as part of its Cru hardship scheme. It has also identified £33 million spent on investment in compliance processes, and £800,000 spent on assessing whether its other funds were affected by the Cru failings.

Only £33 million of that is money paid to investors in the funds, who have been the ones that have suffered, however. Given that advisers are being asked to cough up a combined £110 million, does that represent a fair apportionment of blame from the FSA? No.

The FSA’s argument about business impact really sticks in the craw, however. Had the FSA gone ahead with the fine, Capita Financial Managers would have been forced to appeal to its parent company for the money.

The regulator said it had ‘taken account’ of this fact when deciding against the fine. But if Capita FM was forced to go cap-in-hand to its owner, would that be such a bad thing? The FSA didn’t seem to be as squeamish when it revealed its plans for the £110 million Cru scheme funded by advisers. When publishing that consultation, it admitted that 200 adviser firms could be forced into default as a result, but that didn’t seem to put a dampener on its plans.

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15 comments so far. Why not have your say?

James Marchant

Nov 26, 2012 at 15:09

You couldn't make it up Daniel, you really couldn't!

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Michael Both

Nov 26, 2012 at 15:34

Daniel, have you made any Freedom Of Information requests to see if there are any FSA staff with connections to Capita? It would put IFAs' collective mind at rest knowing the regulator's leniency was wholly unrelated to any vested interest.

As you pointed out, the FSA allegedly has no such qualms about gutting IFAs so why the apparent double standard?

As every dinosaur knows, sunlight is the best disinfectant.

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Dave Knight

Nov 26, 2012 at 16:19

Bloody Criminal.

Nothing more to add.

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Nov 26, 2012 at 16:45

Basic questions: Who regulated the ACD? What level of 'reasonable due diligence' would be expected of them? Is a precedent being set here and why does the IFA community not take the action that the FSCS is taking against IFA's, against the regulator?

If any potential fine is a risk to an IFA business we would expect the regulator/FSCS (part of the regulator), to apply the same standard. The most unbelievable part of all these issues is that when the regulator wants it white, it calls white, but then when it wants the same thing black, it calls black, and it just keeps getting away with it.

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Man in Black

Nov 26, 2012 at 19:59

This is a good article.

The other noteworthy thing looking through the Final Notice is that it does kind of demonstrate that a reasonably competent IFA undertaking due diligence on these funds (beyond looking at the brochure and which IMA sector it was in) will have found an investment chain with lots of supposedly credible players [Para. 4.6] as well as an ACD charged with overseeing that the investment managers conflicts & risk management policies...

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Nov 27, 2012 at 08:47


Thank you for such a balanced, yet damning, indictment of the FSA's clear abuse of power on this occasion.

Clearly, it has deemed that Capita FM is too big to fail, and that it will do all that is necessary to pin the liability on advisers. Regardless of the facts of the matter.

This is wrong on every level and, at some point, must be dangerously close to criminal action ..... if not already.

What does NMA propose to do in order to ensure that those responsible are held to account, and what can we, your readers, do to help?

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sol trader

Nov 27, 2012 at 11:29

Mea Culpa - Part of my own due diligence used to include a positive reaction to companies authorised by the regulator. You live and learn...

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Alan Smith

Nov 27, 2012 at 14:08

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.


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.”


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


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



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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Nov 27, 2012 at 14:36

The problem was the FSA got chummy right from the start with the big boys at the top of the ACD/parent company and concocted a deal which they probably thought would appease the bulk of the investors and preserve the reputation of HMG’s biggest contract provider. How? God knows, with the benefit of hindsight - perhaps they thought that by c**pping on the advisers (again) it would work brilliantly - but, hey, they occupy Canary Wharf and we’re mostly cottage industry types who can’t even spell let alone form a cohesive rebuttal.

Of course, as with all lies and obfuscation, the longer it goes on the tighter the rope becomes – and it would have got a lot tighter, a lot quicker if it hadn’t been for digression about chips shops, due diligence, mis-selling and all the other irrelevancies that NMA and other publications have wasted their time covering for the last 3+ years.

Even now, after being backed into a corner whereby the deadline for the Payment Scheme has been extended for a year and a whitewash censure that doesn’t stand up against the failings that have occurred or is in anyway proportionate to the FSA’s other plans for redress, the regulator huffs and puffs and continues to try wriggling out of its obligations. It’s like a stunned boxer crawling to the corner for help which, presumably, it reckons will comes when it shrugs off the mantle of FSA and dons the shiny new cape of the FCA.

Slithering, underhand, dishonest actions of an arrogant regulator. And we’re supposed to be the villains in this piece.

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Andrew IFA

Dec 01, 2012 at 16:54

I agree with all of the above comments, but what as an industry are we going to do about it.

It seems to me that the regulator will continue with its course of action and ultimately lay blame for this disgrace squarely at the door of the IFA, it looks like that deciscion is already made by those in the Ivory Tower.

Its not right, never has been right, and never will be. We have a small number of clients in the funds and none of them blame us for the loss, actually their portfolios are doing OK and as a whole they are making money, but the sinister way in which the FSA are dealing with this scares me to hell

What happens when another fund where Capita are the ACD fails, better get your bank balances built for the next disaster, or should we all stop recomending funds where they are the ACD, that would take a few good performers out of portfolios.

On entering this industry in the early 80's i never had to give an open ended guarantee on any product that i advised on, seems to me thats what we are doing now days.

So come on where are the lobyists to support the IFA group, the providers are very quiet at the moment getting ready to fill their nests up with Orphan clients, and you can not rely on them.

GIll Cardy seems to have a good voice, although i dont hear her much in any thing other than Trade press, mind you i am not a member of her group so sorry Gill, maybe we should all join an action group and lobby our MPs how about


We need to get a single voice, we need to get it quick, and it needs to be very loud.

I know that the majority of the public that have used our (thats most IFA's) services appreciate what we do for them. I still have clients in their 80's that go back to when i first started advising.

Maybe every IFA should start lobbying their MP's and give them some paper to think about, I wonder how many letters that would be. Continued pressure worked for the Equitable clients, or will we just wither and die, maybe every one will be happier when there is no savings culture left.

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Dec 02, 2012 at 12:40

Probably a silly question but, in view of their almost criminal failings, will any of the Capita directors will be struck off?

If not, why not?

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Michael Both

Dec 03, 2012 at 09:57

@Andrew IFA,

I've tried lobbying my MP but they only seem interested in things which benefit them personally and directly.

The banks want a borrowing culture and they pay the MPs.

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Alan Smith

Dec 07, 2012 at 16:46

@ miles jon

It is not Spearpoint who are taking Arch Financial Products LLP to court but the new board of the Guernsey I.C Ltd companies whose chairman is Hugh Aldous. Hugh Aldous is still a CAPITA official and as the link below shows was chairman of Capita Financial Group’s specialist fund division.


You really have to laugh at the irony at Bernie Boylan’s comment about CFM understanding the complexities of the Mithras Investment Trust which invests in Private Equities, as by May 2009 when CFM were appointed by Mithras the CF Arch Cru funds were already suspended and the FSA’s ARROW visit in October 2008 had found the complete lack of systems for the 231 funds that CFM were ACD of that resulted in the very delayed Final Notice issued against CFM on the 26th November.

Indeed you could question why the FSA allowed Mithras to appoint Capita Financial given the FSA knew of CFM’s failings at that time. However if you were to ask the FSA any question regarding Capita you will not be given any answer as the FSA have shown in the CF Arch Cru case and others that Capita are bulletproof.

Log onto the FSA website and on the main page in the top right hand corner there is a link on news about firms with CF Arch Cru a specific link. Click on this and there is no mention of the Final Notice against Capita Financial Managers – Why not ? I would have thought the information was very relevant for investors. What is also rather strange is the Final Notice against CAPITA was issued on 13th November but was not released until 26th! Virtually every other Final Notice is published on the FSA’s site and released to press the day after the notice is issued, why give Capita a fortnight to get their PR lobbyists prepare to lessen impact of news.

More worryingly why did it take over 4 years from the FSA’s ARROW visit in October 2008 when the failures of CFML’s management systems, procedures and controls were discovered until November 2012 to issue this notice? After all the failures at CFML had been ongoing for 2 years from 2006 (possibly longer) and the failures were on over 200 funds and CAPITA had not spotted these errors.

Compare this to UBS who noticed immediately themselves in September 2011 that unauthorised trades had taken place for a 4 month period between June and September 2011 and altered systems accordingly, these system errors lost no investor money yet in just over a year from UBS informing the FSA of its errors the FSA issued Final Notice and fined them £29 million.

However, nobody should be surprised about the FSA’s cosy relationship with CAPITA as it has happened before. I have looked at the link detailed by @Ned K http://www.connaughtactiongroup.com

and the link to will C(r)apita take the rap. The minutes of Capita’s meeting with Connaught Asset Management on 16th September 2009 would certainly indicate Capita knew that the Connaught Fund was going to implode in the future. Having never recommended the Connaught fund I have no idea whether in September 2009 investors were informed directly of CAPITA’S concerns and given the opportunity to exit the fund as was proposed by John Peppitt at the meeting , but given the numbers of investors caught out and the articles on the action group website I would doubt it.

No doubt CAPITA were allowed to give Blue Gate Capital a hospital pass as the FSA had mucked up in allowing CAPITA to market the fund in the first instance as individuals connected with Connaught Asset Management had connections with UKLI Ltd. Although the FSA eventually took action to close UKLI Ltd the UK’s largest illegal land banking scheme in June 2008, the FSA would have been made aware by Moore Stephens accountants of the links between UKLI and Connaught Asset Management as detailed in Moore Stephens resignation letter


as well as correspondence received from Business Opportunity Watch


Given the close relationship that CAPITA has with both the Labour and Conservative Parties and the FSA is answerable to no one then CAPITA and the FSA can go along like bungling idiots allowing one investment disaster after another to occur and others have to pay for their mistakes.

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Michael Both

Dec 10, 2012 at 13:55

@Alan Smith

Have you forwarded any of your excellent investigative findings to Private Eye? They seem good at exposing such murky shenanigans to a wider audience which occasionally has positive results for the public.

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Big Ed

Jun 25, 2014 at 10:34

Backscratchers and lobbyists close to the seat of government will join the dots on this - has anyone noticed the other common denominator here? - Oh yes, Moore Stephens that well known lame duck accountancy Firm that has just coughed up a "without prejudice" payment in lieu of its alleged "failures" concerning the Arch Cru Guernsey cells.

In the case of the Connaught Series 1 UCIS the regulatory "bungling" by the Keystone cops was even more extreme - some might say criminal. The FCA has had to be pulled kicking and screaming into the latest "investigation".

Methinks the great IFA rape and pillage exercise inflicted by its predecessor the FSA in its death throes re Arch Cru was its own "without prejudice" payment it brought to the table - via the FSCS Fund.

Moral of the story - Herbert Smith did a wonderful job for Capita and effectively neutered the Regulator! The FSA clearly have some rather murky issues to bury and would not like these to be aired before the TSC for which it shows utter contempt. Funny how Mr Hoban quickly lost appetite for a s14 enquiry.

Not surprising when "apparatchiks" from the Canary Wharf Ivory Tower end up in senior management compliance sinecures @ Capita slithering around the next Government contract.

Does this constitute a pay off for "looking the other way" earlier in their careers.

We wonder.

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