The Financial Services Authority (FSA) has censured Capita Financial Managers for failings in relation to the Arch Cru funds between June 2006 and March 2009.
The FSA said it would have normally imposed a £4 million fine on Capita but did not because of the work Capita had done following the funds failure, including contributing £32 million towards the £54 million redress scheme that it funded alongside Arch Cru fund depositaries HSBC and BNY Mellon in June 2011.
The regulator added that it did not fine Capita Financial Managers as it would not have been able to pay its contribution to the redress scheme and a further financial penalty without help from its parent Capita Group.
The FSA said the company failed in its oversight of Arch Financial Products when it delegated the investment management of the funds to Arch and did not have sufficient processes in place to monitor Arch, and that Capita did not adequately identify and mitigate the conflicts of interest between Arch and the funds that came as a result of the CF Arch Cru structure.
The regulator also said Capita failed to have processes in place to adequately monitor the liquidity risks of the funds which were suspended in March 2009 due to concerns of insufficient liquidity in one of the sub-funds when investors wanted to sell their shares.
The FSA ruled that Capita did not have adequate processes in its responsibility to price the shares of the fund and did not identify unreliable information it used to do this and see whether alternative measures should be used to price the funds fairly.
According to the FSA Capita did not begin to investigate the valuation and pricing of the funds’ investment until late 2008 and once the funds were suspended it was clear the investment was not as valuable as Capita had understood.
The regulator also revealed that Capita had spent over £2 million on a series of investigations into the existence, ownership and value of the assets held by the Arch investment cells, as it did not have the documents or information on those issues.
Capita has also invested over £33 million since 2007 in enhancing its systems, processes and control function and improving its oversight of investment manager delegates. This included creating a specialist team to oversee investment manager activities in April 2009.
The FSA’s final notice showed Capita had paid £800,000 for a firm to assess whether any of the other funds for which it acts as an authorised corporate director were impacted by the issues identified by the Arch Cru failings. The review did not find any evidence that other funds were impacted.
It also revealed Capita has so far paid out £660,000 through its ‘hardship scheme’ created in December 2009 for Arch Cru investors who were experiencing financial difficulty.
Tracey McDermott, FSA director of enforcement and financial crime, said: 'Capita has major responsibilities in relation to funds holding a very significant amount of investors’ monies. However, its performance in relation to the CF Arch Cru funds fell well short of the FSA’s requirements.
'Those firms which delegate activities to others need to have robust processes to allow them to oversee properly these third parties and protect investors. Capita’s processes in this case were inadequate for this.
'While Capita’s failings were significant, they reflect only a part of the overall picture in relation to the CF Arch Cru funds. The FSA takes the CF Arch Cru situation very seriously and continues to devote considerable resources to securing the right outcome for investors.'