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IFAs gain more ammo in battle against Arch Cru redress scheme

by Jun Merrett on Dec 03, 2012 at 10:51

IFAs gain more ammo in battle against Arch Cru redress scheme

Advisers, MPs and lawyers have argued that the Financial Services Authority’s (FSA) damning verdict on Capita Financial Managers’ failings in the Arch Cru scandal will give them more ammunition to fight the regulator’s efforts to force IFAs to compensate clients invested in the funds.

Last week the FSA censured Capita for failings in its role as Arch Cru authorised corporate director, saying it did not properly monitor fund manager Arch Financial Products and the liquidity risks affecting the funds, or ensure the funds were properly priced.

However, it stopped short of imposing a £4 million fine on Capita, pointing to the costs the FTSE 100-listed group had already incurred because of Arch Cru.

The costs included its £32 million contribution towards a £54 million redress scheme for investors, separate to the FSA’s planned adviser-funded scheme.

The regulator added it had taken account of the fact that Capita Financial Managers would not have been able to make that payment without the support of its parent.

That news came while fresh doubt was cast over the regulator’s proposed £110 million Arch Cru redress scheme, which will be funded by advisers who sold the funds.

Adding weight to redress scheme protest

Reports last week said the FSA had delayed its policy statement on the scheme due to an overwhelming response to its consultation.

The FSA board has appeared divided over the proposals, with minutes of its April meeting showing members had concerns over its impact just days before the consultation was announced.

Conservative MP Alun Cairns (pictured), who chairs the Arch Cru All Party Parliamentary Groups, said the FSA’s verdict on Capita added further weight to advisers’ protests against the £110 million scheme.

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16 comments so far. Why not have your say?

Lyndon Edwards

Dec 03, 2012 at 11:08

QUOTE ". . .Capita said it accepted the FSA’s findings into its failures over Arch Cru. It added only those IFAs found to have mis-sold the Arch Cru funds would be forced to compensate investors as part of the FSA’s proposed £110 million scheme.

‘Those IFAs who correctly interpreted their clients’ attitude to risk and who sold the Arch Cru funds where it was appropriate to do so will not be affected by the proposals,’ it said...."

So is Capita now going to try turning public opinion and side with the FSA in hounding IFAs in an effort to redirect blame away from them? Since when are they the regulated experts on advice? The arrogance is beyond belief.

If only the 'mis-sold' will be compensated by IFAs, where does that leave the non-missold? Will they be treated equally? Will they be restricted to the £50k max?

Will IFAs be forced to make good 100% of the loss irrespective of the £50k limit?


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Ned K

Dec 03, 2012 at 11:27

Copy and paste the link below into your browser then go to the third paragraph and click on 'first'.. It will give you an indication of how Capita deals with problem funds:


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Michael Brown

Dec 03, 2012 at 11:46

Sorry, but RBS was fined for its misdemeanours even though it spent a fortune correcting the errors.

However, Capita do not get fined?

The rules seem therefore to be different for banks, Capita and IFA's?

Capita said it accepted the FSA’s findings into its failures over Arch Cru. It added only those IFAs found to have mis-sold the Arch Cru funds would be forced to compensate investors as part of the FSA’s proposed £110 million scheme. With the FSCS also paying out from the IFA’s who did and IFA’s who did not make one sale


So Capita Financial Management may go into liquidation because of the financial implications. Yes, they failed and have to pay the price. Surely this would make the ACD’s allot more careful in the future?

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Ned K

Dec 03, 2012 at 11:49

The whole basis of the FSA's claim against IFA's is that the funds were high risk and the the prospectus and marketing material described them as low risk and these statements were merely the opinion of the ACD Capita and Investment Adviser Arch and so they could not be relied on. This is clearly nonsense, you do not have an opinion of how you are going to manage the risks in a fund you have an intention of how you are going to run funds. The intention of the ACD and investment adviser was to manage the funds to give a low to medium risk profile. If they chose not to use risk management techniques to give a low to medium risk profile then it is they that have failed and not the adviser.

Let us not forget the wording of the simplified prospectus which enabled the fund manager to invest in a diverse range of asset classes overseen by the ACD to ensure there was a 'prudent spread of risk'. The range of assets and risk management techniques that were available would have enabled the ACD and fund manager to fulfil their intended mandate and have funds with low to medium risk characteristics but instead they chose not to.

CF Arc Simplified Prospectus 26th June 2006:

What are the funds investment objectives?

CF Arch Cru Investment Portfolio

The objective of the fund is to generate consistent returns to provide wealth preservation and capital appreciation.

The fund will seek to achieve its objective by investing directly in a broad range of collective investment schemes, transferable securities, Corporate Bonds, money market instruments cash, derivative instruments forward transactions and other instruments that the investment manager considers appropriate from time to time.

The funds will not invest directly in moveable or immoveable property but may gain exposure indirectly through allowable instruments including index based products. The ACD 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. From time to time and in particular during periods of uncertain or volatile markets, the Investment Manager may choose to hold a substantial proportion of the property of the Funds in money market instruemnts and/or cash.

Use of derivatives - Hedging

The company may use its property to enter into derivatives transactions for the purposes of obtaining or shorting exposure to an asset, and risk management through hedging.

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Dec 03, 2012 at 12:08

“The FSA board has appeared divided over the proposals, with minutes of its April meeting showing members had concerns over its impact just days before the consultation was announced.”

For “impact” presumably this is the notion that perhaps 30% of IFA businesses would be forced into liquidation. The inference, therefore, is that if the IFAs could, somehow, all afford to carry the can then the FSA would forge ahead anyway. In other words, if the FSA could simply get away with imposing the Consumer Redress Scheme onto the adviser community it would have done so – irrespective of whether it was the right thing to do or not. Is there any semblance of the TCF culture in that strategy?

Here is the perfect opportunity for the FSA to show their true colours either as a world class regulator – or a clueless, bullying organisation with no integrity. Sure they made a complete mess of the situation from the word go and tried every possible, devious and lowlife method to chummy up with the big boys and foist the blame onto the blameless. But, hey, we all make mistakes!

Here is a perfect opportunity for the FSA to back track, revisit Capita and clobber them in the way they seem to think IFAs should be destroyed. But at least Capita, even if it were to be driven onto the rocks, would be the cause of this scandal...not the IFAs who seem to be ripe for the slaughter instead.

Such a move would restore considerable faith in an otherwise unaccountable and seemingly clueless regulator which, given their parlous reputation with all and sundry, would seem like an eminently sensible course of action.

So, here’s a chance for the FSA – surely saving face isn’t the sole reason for crashing ahead with this disgraceful action. And think of the improvement in their standing should the right decision finally be taken by someone with the guts to stand up to Capita. They could even achieve this without too much shuffling and fidgeting once they’ve phoenixed into the FCA – just blame it on the previous idiots at the helm, especially as most of them have gone anyway.

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Ned K

Dec 03, 2012 at 12:09

This is an extract from an article which appeared in the mail online 1st December 2012 (Richard Dyson)

'Just before last Christmas, as Financial Mail reported, campaigning Tory MP David Davis spotted in correspondence from Hector Sants, the FSA’s then boss, the assertion that ‘one of the firms involved’ was ‘unable to pay’.

Davis swiftly wrote to Sants, asking whether that company was Capita. And from documents released by the watchdog last week, we now know the answer was yes. Technically, the division of Capita responsible for the mess was too small to make amends for its failures.'

If David Davis was aware that Capita Financial Managers had insufficient funds then surely the Financial Secretary to the Treasury would have been aware! Is this why we never had a S14 inquiry? Would the findings have been too damaging for government and UK PLC?

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Nik Proctor

Dec 03, 2012 at 12:23

It could be quite revealling to read copies of the minutes of meetings between Capita and Arch from 2006 to 2009. Are these available?

Why do Capita have a limited amount of money? Where is there professional indemnity cover to pick up the costs of the losses their negligence has incurred? We appear to be in the TwiLight Zone where there has not been a detailed calculation of the cost of Capita's negligence, a figure has been estimated, Capita have said they have only got a limited budget SO THEREFORE IFAs must be responsible for the shortfall!! This does not stand up to rationale scrutiny or common law justice as anyone looking in on this would agree.

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Eden W

Dec 03, 2012 at 13:14

Isn't there another point behind the question on Capita FM's responsibility and potential inability to pay (without the unwilling support of its parent) - no not PI (but surely there must be some?) but the responsible group, should Capita FM (be allowed to) fail, would surely not be intermediaries anymore?

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Lyndon Edwards

Dec 03, 2012 at 14:55

@Nik Proctor and others.

It's not only PI that is questionable. CF is a subsidiary of the Capita Group, not the main body, and they are trading on thise discrete arrangement to avoid paying any more..

This begs other questions.

1. How many directors are / were common to both Capita companies, because if so, there is a clear line of responsibility back to the main Capita board for compensation.

2. The CF directors should have D & O Liability cover if their FD is on the ball.. If they are found to be negligent or are sued personally, the cover should be there to meet a claim. Does Capita have D & O in place on their directors, and may we see a copy of the policy please? As a public company providing government services we should expect all directors to be covered.

3. When the FSA vetted CF for suitability presumably they did the requisite due diligence to confirm that they were sufficiently capitalised. I would like to see a copy of the paperwork and minutes under the FoI Act. please.If this is not available it suggests that this was not done, which looks careless to say the least.

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David Craik

Dec 03, 2012 at 15:45

Regardless of fact the FSA must see this through. Senior people at the FSA are entrenched. The APPG are not making any progress, so what does a whinging blog achieve. The FSA has become a stranger to the truth!

The Board were not concerned about the sins of its employees simply the outcome of the 404!

The Treasury should be concerned but want to protect Capita. This really stinks!!

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Phil Castle

Dec 03, 2012 at 15:56

Eden W - I agree they woold not be intermediaries and it would therefore result in the FSCS levy group being different, hence why I said on anotehr blog that the word "preference" may need to be considered.

Have Capita and the fund management groups been given "preference" over the other FSCS sections.

Not only was it decided by the FSA/FSCS that Keydata's life settlement plans were not a product, but an intermediary, but now it looks like the same is going to be done with Arch Cru, lumped on up to the 100million max and only the excess going to other levy paying groups.

Mind you, if you look at it logically, as the banks effecively all collapsed, their sector of the levy would have been exceeded and put every advisery firm out of business too!

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Ned K

Dec 03, 2012 at 16:45

@ David Craik

As I mentioned in an earlier blog how long has the treasury (FST) known that Capita FM had inadequate resources to pay the appropriate level of compensation to investors? Why has this information not been given to parliament by the treasury?

Its a very very murky business!

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Dec 03, 2012 at 22:44

If ever there was a state of affairs for which the word "omnishambles " was invented this must be it! An "omnishambles" is a situation that has been comprehensively mismanaged and is characterised by a string of blunders and miscalculations. Or, to quote Wikipedia, "a situation which is seen as shambolic from all possible perspectives." The resolution to this disaster appears so far to have taken longer than the actual funds existed (or at least were liquid!) and there appears no end in sight. It is surely not onlv giving the parties involved a bad name but the financial services industry in general.

The FSA have delivered such a damning indictment on Capita Financial Managers to such an extent that CFM have been totally discredited. I am surprised they are still being allowed to carry out ACD duties at all, quite apart from any consideration of a fine. Although they may now have invested in appropriate systems, the words horse and stable door spring to mind and the belated investment will not help Arch cru investors.

When the funds were first approved, was the involvement of Capita, with all their supposed credibility and expertise, a source of comfort to the FSA, the IFAs and consequently the investors? Indeed, in view of the apparent complicated and somewhat opaque structure was Capita's involvement actually crucial to the funds' authorisation? If so, it would appear the FSA's trust in CFM was totally misplaced.

The problem seems to be - where to point the finger? There are no doubt some IFAs who mis-sold the investment. There are undoubtedly many IFAs who were genuinely acting in what they thought was their client's interest. There will be some investors who are of the opinion that their IFA was acting in good faith and are themselves victims. However, it would appear that these funds were suspended not because of poor performance but because of a lack of liquidity. Had the investments been made in accordance with the prospectus, and the liquidity situation been properly managed by the ACD in accordance with FSA Rules, for all we know the funds may still be trading. In that sense a reasonable person would surely reach the conclusion that if Capita are responsible for the liquidity position, they are responsible for the losses since upon suspension the situation is crystallised and the funds have no chance to recover.

As to CFM avoiding a fine, which ever way one looks at it for the subsidiary of a FTSE100 company with a market capitalisation of around £5billion to plead poverty beggars belief and frankly says as much about them as it does anyone else. Capita earns much of its income from the public sector - in other words taxpayers and ratepayers including no doubt Arch cru investors. It remains to be seen whether they will continue to treat those same people with contempt or whether they will see reason and stop digging a hole marked "Corporate Reputation."

The message that comes across to someone not involved is that the IFAs are being asked to bear a much greater share of the liability than they should. Of that there appears to be no doubt and if the proposals are implemented it would appear that a good number of IFAs will be forced out of business, their livelihoods lost and their liability shared by the remaining IFAs through the FSCS. That would be patently unfair to many genuine people and I would not have thought that would be good for the financial services industry in general and the country at large, given that we need to save more. The only saving grace is that the FSA seem now to have created a precedence in that if you cannot afford to pay a fine you are let


Surely there is someone with a scintilla of common sense who could resolve this matter around a table with all the parties involved, including Capita?

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miles jon

Dec 07, 2012 at 11:47

Why is it that Spear Point are suing several parties inclucing the previous fund manager Arch for loss as a consequence of alleged lack of due diligence and management control capability but are not bringing a similar action against Capita Financial Management given this damning citing and censure from the FSA?

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Alan Smith

Dec 07, 2012 at 16:44

@ 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


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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Welsh Wizard

Dec 08, 2012 at 10:35

Lyndon Edwards @ NED K and others Tottaly agree, What a murky mess indeed.

Latest News - A really good friend of mine, IFA for 30 years, Chartered and more qualifications in Law/Accountancy, due to a take over from another firm, has been refused re- authorisation by the FSA due to his involvement in advising two clients in the Arch Cru Fund ! Although adhering strictly to the statement below.

‘Those IFAs who correctly interpreted their clients’ attitude to risk and who sold the Arch Cru funds where it was appropriate to do so will not be affected by the proposals,’ it said

So anyone else out there who advised on Arch Cru who may wish to move firms in the future or been subject of a takeover, YOU WILL NOT GET RE AUTHORISED ! This is shocking news indeed, what redress does my friend have ?

All the captains have now left this shoddy ship (FSA) to sink on its own, there again RATS never drown ! They have left to mess up another firm being left unpunished,unaccountable with payofffs and new contracts while my friend an IFA of 30 yrs and man of supreme integrity is left unemployable and jobless. Where is the Justice in that ?

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