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.
‘The advisers wouldn’t have known about Capita’s failings in its responsibilities and then the failings of each individual company that Capita failed to monitor. So it might offer an element of protection to the IFAs,’ he said.
‘This information puts them in a stronger position to defend their corner and not be held accountable for failings of other organisations.’
Addressing the role of providers
The Association of Professional Financial Advisers (Apfa), which argued in its response to the FSA’s consultation that the redress scheme ignored the role of providers in the scandal, said the extent of Capita’s failures cast doubt over the legality of forcing advisers to pay compensation.
‘For a redress scheme to be legal, you have to demonstrate the person you’re seeking compensation from was the cause of the loss. As we now know even more details of the failings of Capita, one wonders if a case can be made against advisers as being a cause of the loss,’ said Apfa policy director Chris Hannant.
Gill Cardy (pictured above), managing director of trade body IFA Centre, said she would be renewing her lobbying against the scheme following the Capita revelations.
‘IFAs will not get a get out of jail free card like Capita did. In my original response [to the consultation], I felt Capita had done wrong, but now we have the full extent of what they have done wrong and still we have a compensation scheme on the table that holds advisers to account for the mistakes Capita made.’
Hoping for a ‘fairer outcome’
Felixstowe-based adviser Paul Schwer, who has around £700,000 from 35 clients invested in the funds, said the FSA’s censure of Capita offered a small chance the regulator would back down over its redress plans.
‘The FSA has come out and said Capita has failed on a number of responsibilities and so there is a small glimmer of hope there might be a fairer outcome for all advisers,’ he said.
Tony Granger, financial planner at Worcester-based English Mutual, agreed that the FSA should reassess the £110 million scheme in light of its findings.
‘From the IFAs’ point of view, it is deeply distressing how this has dragged out and has landed on the IFAs’ doorstep despite the obvious failings of Capita,’ he said.
‘We should call for the FSA to look again at the consumer redress scheme after this information has come out.’
Need to define the responsibility for loss
Law firm foot Foot Anstey, which is representing advisers with clients invested in the funds, said the FSA’s actions against Capita did not properly reflect the authorised corporate director’s responsibilities over Arch Cru.
‘The whole tone of the final notice is that the FSA got as much as they could out of Capita, but it wasn’t the full amount they deserved to pay,’ said Foot Anstey partner Alan Hughes.
‘The whole point of the [adviser-funded] consumer redress scheme is that IFAs make up for the difference between the £54 million redress scheme and the total losses. But why is that fair?
‘If Capita had a limited pot of money that could go towards making good what it has done wrong, then all the money it has should be used up and go towards investor compensation.
‘If the IFAs are responsible for any part of the loss, that should be defined and it should not be about subsidising Capita.’
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.