The FSA has today announced that it will proceed with the Arch Cru Consumer redress scheme on which it consulted earlier this year.
The regulator received a substantial response to its consultation paper and has made some amendments to it as a result of the feedback it received.
The redress scheme will now be based on an ‘opt-in’ approach under which advisers will have to write to their eligible clients and invite them to participate in a review, rather than automatically reviewing all of their clients who have investments in the Arch Cru funds.
The regulator believes this will have affect of reducing the overall cost of the redress scheme to IFAs from some £110m down to a figure closer to £20-40m.
We believe this change will not have the suggested outcome.
The letter to be issued to Arch Cru investors is a template letter written by the FSA. It makes it very clear to the addressee that the only people who should have been advised to invest in Arch Cru are ‘high risk’ investors who fully understood the risks that they were taking.
To ‘opt-in’ simply requires the investor to tick a box and sign and return a copy of the letter and this means the adviser then has to review the advice given, again following an approach prescribed by the regulator.
Even clients with a very good close and long-standing relationships with their IFA will more than likely tick the box and sign the copy letter.
Many IFAs by the FSA’s own admission will either not be covered by their Professional Indemnity Insurance policy, will have specific exclusions to Arch Cru under this policy or have high excess amounts under their PI Insurance policy.
This means they will have to fall back on their own capital to pay such compensation. Many IFA firms will therefore go into administration as a result of this exercise.
The consequences of this are that significant levels of claims will fall upon the Financial Services Compensation Scheme (FSCS).
Many claims (at least 1,800) are already are lodged with the FSCS.
The FSCS compensation is paid for by those IFAS who continue to trade and many, like us, did not advise our clients to invest in Arch Cru.
We anticipate that this will cost us tens of thousands of pounds in 2013. As I have said before this is a classic case of it not being the “polluter who pays”.
The FSA has done a deal with Capita Financial Managers and others to create an available consumer redress scheme but it has not disclosed how the numbers in that scheme were arrived at. We have utmost sympathy for those advisers who recommended the Arch Cru funds who believe that they have been put in the position they find themselves because of the way these funds were mis-managed.
But as much as we have sympathy for them we feel very bitter indeed about the position that we have been put in. We did not recommend these funds but we are required to compensate the investor victims and this is costing us a small fortune.
As supportive as we are of a robust consumer protection scheme bought about by effective regulation this has now reached the point where well run and client centric advisory firms are being forced into difficult financial positions through no fault of their own.
It is not right and it is not fair and it has been bought about by I am afraid regulatory rather than advisory failure.
