The Financial Services Authority (FSA) has launched a three month consultation process ahead of a consumer redress scheme for Arch cru investors, expected to deliver over £100m in compensation.
This proposed investor compensation is in addition to the £54m already agreed from Capita Financial Managers Limited, BNY Mellon Trust & Depositary (UK) Limited and HSBC Bank plc.
It will be paid by those IFAs who made unsuitable recommendations to their clients to invest in Arch cru funds. Judging by the figures released by the FSA, the majority of these investment recommendations were unsuitable.
Arch cru was a series of failed investment schemes which invested in such things as private equity, private finance and Greek shipping companies. They were packaged with ‘low risk’ or ‘cautious’ investment labels, when in reality they exposed investors to a very high level of investment risk.
You will not be surprised to learn that here at Informed Choice we never recommended these schemes to any of our clients.
According to the FSA, of the 179 files they sampled, suitable advice was evident in only 22 of them. Unsuitable advice had been given in 140 cases, or 78% of the cases examined in the sample.
Due to the nature of the types of IFA firms that sold investments in Arch cru, much of the £100m consumer redress is likely to fall on the rest of the IFA sector to pay, through another Financial Services Compensation Scheme (FSCS) levy.
The FSA has already estimated that 230 firms could default as a result of their Arch cru compensation scheme, which would place their liabilities on the FSCS. This is around 30% of those firms with exposure to Arch cru.
Up to £33m could be paid out to investors from the FSCS instead of the firms responsible, although we expect this figure to be significantly higher once the exercise is implemented. This means in practice that the clients of all IFA firms are paying to compensate investors in Arch cru, through the advice and product charges they pay.
It will be interesting to see the responses to this consultation process, although we do expect the FSA to implement this redress scheme as proposed this summer.
Whilst bringing the sorry saga of Arch cru towards its logical conclusion, questions remain unanswered about the role of regulation in the collapse of Arch cru and we are unconvinced that such an event has been prevented from happening again in the future.
Photo credit: Flickr/jdnx
