By a Newsnet reporter
Independent Financial Advisers (IFAs) have accused the Financial Services Authority (FSA) of criminal negligence over an investment fund scandal that has left some investors penniless and threatens many small IFA businesses.
In a controversy, that has received little attention from the UK media, involving missing cash running into hundreds of millions, many financial advisors are now claiming they have been scapegoated by the FSA who they say gave the investment scheme a clean bill of health.
The scandal, involving a company called CF Arch Cru, has led to hundreds of millions of pounds of investor’s money disappearing and many people, including pensioners, losing their life savings.
However, there is festering and increasingly growing anger on the part of financial advisors and investors alike at the UK regulatory body who they claim is guilty of gross negligence and of trying to cover-up its own role in the scandal.
Three years on from the collapse of the fund, the FSA is now claiming that financial advisers were to blame because they failed to explain the risks of CF Arch cru funds to investors. The FSA is also demanding that the same advisers must now compensate their clients, a move that will force many small firms out of business.
Speaking in April of this year, Clive Adamson, the FSA’s director of conduct supervision, said: "Investing money can be one of the most important decisions that anyone has to make and investors need to be able to trust the advice they are given. The Arch cru funds were high risk and they should only have been recommended to investors who fully understood and were willing and able to accept the risks."
However, speaking to Newsnet Scotland, one financial advisor who has over twenty years experience in the industry challenged the FSA’s interpretation of events.
“These funds were rated 'cautious', meaning low-risk. How can UK investors have confidence in investing hard earned cash into any FSA authorised investment funds? These investors’ CF Arch Cru money has been allowed to disappear without question by the FSA.” she said.
Highlighting the refusal of the FSA to hold an independent inquiry into the scandal, she added:
“Without an independent inquiry we will never know where the funds have gone. There have been allegations of fraud flying around and the Serious Fraud Office has been asked to investigate, but the FSA has chosen to ignore these allegations.
“This inaction by the FSA to establish the true story behind the demise of these investments gives the market no confidence at all that we have an effective regulator. Why would anyone invest in savings plans, pensions investment OEICs or ISAs if this is allowed to happen? After 3 years these investors are no further forward.”
The advisor highlighted the case of one of her clients who is angry at the lack of clarification from fund monitors Capita:
“I have one particular elderly investor who now does not keep in the best of health. She put her savings into this fund to have Arch, as they claimed, manage her money aiming to beat the bank base rate by 4%, for a nest egg to pass on to her family.
“As her health is deteriorating, she worries constantly about what has happened to this money she invested.
“ 'Who will ensure my family get their inheritance when I am gone?', she asks me. 'I do not even understand the letters Capita send me, I think they are deliberately written to confuse me. Nothing is clear from them, apart from the fact that my money seems to have disappeared.' She is very upset about the lack of action by the FSA to investigate what exactly has happened.”
In 2008, financial investment firm CF Arch Cru was offering attractive returns on investments which were categorised as low risk. According to the company’s promotional material, investors could expect a return of bank rate plus 4% with little risk.
However, within months of money pouring into the fund, investors became victims of one of the worst recorded fund collapses in UK financial history.
At the time of the collapse, CF Arch Cru, headed by Robin Farrell, had a sterling reputation for investment management. They had representation across six OEICs (Open-ended investment companies) with the total of their funds exceeding $1.5bn. They were one of the few firms to emerge relatively unscathed in the wake of the 2007 recession.
Since the firm was operating under the seemingly watchful eye of the Financial Services Authority, there was no question of the veracity of the information provided. Further, the FSA mandates a third party monitor, named an 'authorised corporate director', for even greater 'belt and braces' accountability, the investments were being overseen by the regulatory arm of corporate juggernaut Capita, a role that saw Capita rewarded handsomely.
With so many respected bodies seemingly lending credence to the fund, it was subsequently rated 'cautious', by the Investment Management Association. This was a top award winning investment fund in 2008.
In a move that further calls into question FSA claims that the fund was deemed "high risk", in April 2008 the FSA paid Capita a routine ARROW (Advanced Risk Review Operational frameWork) visit. These visits are designed to assess any potential risks, and to personally review and certify compliance with regulation. The result was they were given a full pass.
Between October 2008 and March 2009, financial advisers, buoyed by these solid ratings, good reports, and the involvement of Capita, recommended that clients invest their money into the fund. Tens of thousands of people invested hundreds of millions of pounds; some invested their life's savings, others their pensions.
By the end of February 2009, almost £450 million had been invested in the fund. One month later, £330 million had disappeared with remaining assets in the fund described as being of uncertain and indeterminable value.
Last year Capita, along with BNY Mellon and HSBC, offered a £54m compensation scheme to investors, which would have left many nursing large losses. The FSA and Capita both claimed that investors could recoup an average of 70 per cent of their investments if they accepted the offer. Acceptance also ensured that investors waived their right to further pursue Capita.
However, according to Gareth Fatchett, partner at Regulatory Legal Solicitors, the 70% estimate was "very optimistic". He added "Our view is that the managed sale of CF Arch Cru assets will produce a significantly-worse return than predicted. To invite investors to release Capita from any liability first and then hope for a miracle is entirely unfair"