The Financial Services Authority (FSA) has issued a public censure against Capita Financial Managers Limited (CFM) for its failings in relation to the CF Arch cru funds.
CFM is the authorised corporate director of the CF Arch cru funds, a role which the FSA said carries ‘important regulatory responsibilities for the protection and fair treatment of investors.’
However, in July 2006, CFM delegated the investment management of the funds to a third party – Arch Financial Products.
These funds were then invested indirectly in private finance and private equity assets.
Although CFM delegated the investment management to Arch, it still remained responsible for the regulatory obligations.
The FSA said: ‘CFM failed in aspects of its oversight of Arch. CFM did not have sufficient processes in place to monitor Arch, even though Arch had not acted as an investment manager before.
‘CFM did not adequately identify and mitigate the conflicts of interest between Arch and the funds that arose as a result of the CF Arch cru structure, which involved a complex network of onshore and offshore companies and private market investments.’
The watchdog said CFM also failed to monitor the liquidity risks of the funds. The funds were then suspended in March 2009 as a result of concerns that there was insufficient liquidity.
Furthermore, once the funds were suspended, it became clear that their investments were not in fact as valuable as CFM had understood them to be.
A £54 million payment scheme was voluntarily established in June 2011 by CFM, Bank of New York Mellon Trust and Depositary and HSBC Bank for investors.
CFM required the financial support of its ultimate parent, Capita Group plc, to make its £32 million contribution to that payment scheme.
However, CFM could not fund both such a substantial contribution to the payment scheme and a financial penalty. This was taken into account in the FSA’s decision not to impose a financial penalty on CFM.