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  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"

Comments  

 
# alexb 2012-09-02 09:42
"If it walks like a duck". A few years ago I had a small financial windfall and enquired of my bank, one of the ones now mainly owned by the taxpayers, about investing the cash. After a number of meetings, I realised that my money would be used to benefit the bank, and not me, so I walked away. Relatives of mine invested a substantial amount in a scheme in the U.S.A, run by a brother of one of them, which promised, on paper, fabulous returns on their investment. Guess what? After a few years doubling their money, again only on paper, the cash simply disappeared, leaving them hundreds of thousands of pounds out of pocket. As I say, "If it walks like a duck".
 
 
# peter,aberdeenshire 2012-09-02 09:43
No surprise here the FSA are a waste of space and the London financial sector sucks in money from around the country to fill the pockets of investment management firms. How many of us have been shafted when Endownment providers moved the goal posts when the returns for them were not as expected. Did the FSA help? did they fek!
Pensions another great scam to suck money into the London financial sector and again they want us to work longer to pay before we can access the pension pot, really hoping we will die before reaching retirement. As my mate says "thief b....... "
 
 
# tartanfever 2012-09-02 10:27
If you want a good read from an insiders perspective, I would recommend the blog of Rowan Bosworth-Davies who worked for both the met and the serious fraud office for many years.

It can be found here:

rowans-blog.blogspot.co.uk/

It's actually quite frightening to read the stories of misdeeds and wrongdoings in the the city that he shares, and utterly confirms all the suspicions we have regarding the the whole system.
 
 
# From The Suburbs 2012-09-02 10:59
Tripartite financial regulation was Gordon Brown's folly but don't expect supine Scottish press to dwell on this.
 
 
# SL2 2012-09-02 12:24
These funds were rated lower risk and authorised by the FSA as suitable for retail investors or "the man in the street". Now that they have failed the man in the street, the FSA state they were high risk and only suitable for more high risk individuals. Questionable timing FSA - what about the millions lost , allegations of fund mispricing, allegations of secret profits made by the fund manager, 3 court cases suing the fund and fund manager. After the horse has bolted the FSA speak out. What is the Government doing for the man in the street now? A speedy resoluion please with the culprits identified and held to account as Bernie Madoff was in a similar scandal.
 
 
# cirsium 2012-09-02 13:01
And so it goes.

For another example of this captured regulator's work, see Ian Fraser's history of HBOS
www.ianfraser.org/.../

What was that about being 'Better Together'?!
 
 
# Barontorc 2012-09-02 13:03
Rome's burning - cinders are flying and the "fire brigade's" out to tea!
 
 
# proudscot 2012-09-02 14:02
Seems to me these perpetual incidents of frankly corrupt practices in the much-vaunted City of London financial sector, which cost investors millions, are a good and valid weapon for attacking the "Better Together" cabal.

How are we Scots "better" shackled to such an overtly corrupt London establishment, especially when many of the Westminster MPs and HoL peers are directors in these financial sector firms?
 
 
# J Wil 2012-09-02 16:06
We are told that the regulatory regime the FSA is supposed to monitor works on the basis of trust, therefore little or no regulation is needed because there is no crime amongst honourable people. Those who handle our money are extremely trustworthy.

On the other hand, the lower echelons are wicked, not to be trusted and will stoop to any low type of activety in order to beat the system, therefore the law should only apply to them.
 
 
# stercusa22 2012-09-02 16:28
The FSA are not negligent they are incompetent. FSA caused the fund suspensions in 2009 and everything that followed. FSA and Capita continue to pile blame on advisers and everyone else linked to the funds, except themselves of course.

Advisers well know that all investments became high risk following the 2008 financial crisis and guess who was a major contributor to that - the FSA.

The loss of value since then has been caused by the fire sales by Capita and their cronies in Guernsey. The lawsuits are a smokescreen to cover off their liability.

The FSA is all about pinning the blame on advisers using flawed arguments and perfect hindsight. THEY HAVE ALL THE POWER AND ARE IMMUNE FROM PROSECUTION(the root cause of their belligerence). Government take note. Power corrupts - absolute power corrupts absolutely.
 
 
# brusque 2012-09-02 16:52
My Dad used to say "Sharks don't bite Sharks" I can't think of a time when this was more appropriate!
 
 
# rapid 2012-09-02 21:00
nice story - except the author has not properly researched what "appetite for risk" is and what investment fund risk is.

Essentially, all funds are indepently assessed between cautious and crazy-horse-nuts.

Financial advisers are meant to ask their client a series of to assess their appetite for risk for a given context, e.g. I may be gung ho saving for my sons school fees but ultra-cautious with my pension funds on the run up to retirement.

The problem is that IFA's (who req'd no formal qualification unti jan 1st 2013 aka R-date) have been terrible at doing this because they've been chasing fat initial and trail commission, often with the client no knowledge of the true extent if commission kickback.

none of the arch cru funds were rated for cautious investers. So not unlike the Barclays Wealth debarkle, the registered firm thst gave tbe poor advice is at fault and a reportable complaint can be made.

There's no real london/unionist/indy/edinburgh angle to this story. Sorry, but there are so many incorrect facts in this article. Check the FT/guardian versions.

An article on the problems of RDR, Now that would be a story that has helped break the FSA.
 
 
# geeksaregood 2012-09-02 21:35
There have been a number of these scandals over the past few years. The fact is that anyone who believes that a single company has found the magic touch to beat the market on a regular basis is being very naive. Regulation should be based on stopping crooks. It is not the job of any government to stop people being stupid.
 
 
# fairliered 2012-09-03 07:16
The uneven way in which the FSA treat IFAs (commission hungry endowment salesmen) and bankers (pillars of society) may be because most of the top people in the FSA are ex bankers.

However, there is a wider issue. The RDR, which comes into force on 1st January 2013, will have the effect of making financial advice too expensive for many ordinary people. Who will start a pension - thereby saving the Government benefit payments in the future - if they have to pay a fee to set it up before they even start paying into it?

Why, when I arrange a pension or an ISA for a client, do I have to send them a 20 page "suitability letter", but if they wish take out a loan - arguably a more risky and less suitable action - no such letter is required?

Why, unlike lawyers, accountants, doctors or architects, is there no long stop on complaints about advice, meaning claims companies will still be able to hound me 30 years or more after I retire.

Those of you that use an IFA will realise we are not all crooks. Why treat us as if we are?

I am an IFA.
 
 
# Terry McD 2012-09-03 16:09
The main problem with the CF Arch funds is they were not as described in the prospectus or the weekly/monthly bulletins. There are court cases valued at over £300,000,000 which are being brought against some of those parties who were responsible for the management and administration of the funds, by the Guernsey based company. There are no claims being brought against advisers by the guernsey company and yet the FSA holds advisers responsible for over £100,000,000 of investor losses. It would not matter whether the investors were categorised as high or low risk by their adviser the losses would have been the same.
It is wrong to suggest that financial advisers do not have to be qualified until 2013, they have to be qualifed now some already hold higher qualifications than those that are required from Jan 2013, others need to sit further exams. The point is that regardless of the advisers assessment of the investors risk tolerance the investors would have lost money. Hugh Aldous Chairman of the Guernsey Company stated that the Guernsey company share prices were overstated from 2007 onwards.
 
 
# rhymer 2012-09-05 12:34
Until we get full control of our own Scottish revenues and taxes
we will always be at the mercy of the con men and the political parasites who inhabit the financial sewers of Westminster in London.

A YES vote for independence is the most positive way fo us.
 

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