It’s been a while since we’ve talked about the Arch Cru fiasco, last discussed in Nick’s blog here in December 2012.
Back then, the Financial Services Authority (as they were known at the time) announced details of their Arch Cru Consumer redress scheme.
This was designed to inform investors of the opportunity for their adviser to review the suitability of their adviser, with the opportunity to receive compensation from their adviser should that advice turn out to be unsuitable.
At the time, the regulator believed that it would result in redress payments of £20-40m.
Nick didn’t think that changing the consumer redress scheme from an ‘opt-out’ to ‘opt-in’ basis would dramatically reduce the total amount of redress paid.
Last August, the FCA published figures showing potential adviser payouts under this consumer redress scheme at around £53m, much higher than original estimates.
Today we learn that those advisers who sold unsuitable Arch Cru investment schemes will pay out £31m in consumer redress.
We have a couple of observations to make about these figures.
No doubt much of this redress will not be paid by the advisers who made unsuitable investment recommendations, but by the rest of us.
This is because the FSA originally estimated that the Arch Cru consumer redress scheme would prompt 30% of the adviser firms involved to go bust, with their liabilities falling on the Financial Services Compensation Scheme (FSCS).
Given the perilous state of many adviser firms (with debt and consistent trading losses), I personally believe the level of IFA firm failures will be much higher.
So, as a result of many of the 795 adviser firms who sold Arch Cru doing so unsuitably, we (and indirectly our clients) end up paying for their errors in judgement.
Secondly, the FCA found that of the 3,414 sales of Arch Cru funds by advisers, 86% were found to be unsuitable.
In a sense this is not too surprising; the suitability template imposed by the regulator made this conclusion all but inevitable in the majority of Arch Cru cases.
That said, we agree with the FCA that Arch Cru was unsuitable for the vast majority of retail investors.
It took very little in the way of due diligence to understand that a fund containing private equity and private finance was only potentially suitable for investors with a very high risk tolerance and capacity for risk.
Despite the bitter taste this whole fiasco leaves in our mouth – from the perspective of damage caused to the reputation of all advisers and the cost of compensating the clients of other firms who recommended such junk – hopefully we are getting closer to drawing a line under the whole sorry episode.
Once done, we can then move forwards and start restoring collective trust in retail financial services, hopefully with those advisers who remain acting in a more informed, more responsible manner when selecting investment funds.
