Since it came into force on 1 April 2013, the FCA has been keen to prove it is no fool and to distance itself where possible from its predecessor, the Financial Services Authority (FSA).
It has struck a more decisive tone and succeeded where its forerunner failed on policy issues like platforms and discretionary fund manager kick-backs.
With its new product intervention power firmly in hand, the FCA has been keen to take a proactive stance on potentially dodgy investments, but has not been able to avoid having to pick up the pieces left behind by the FSA’s failures, of which the Arch Cru scandal is glaring example.
Since it suspended the funds in March 2009, the FSA twice tried to secure compensation for investors, firstly by agreeing a £54 million payout funded by authorised corporate directors Capita Financial Managers and fund depositaries BNY Mellon and HSBC in 2011. Then last year it launched its controversial adviser-funded redress scheme, which it originally predicted would raise £110 million, a figure it revised down to as little as £20 million by the time the scheme was rubber-stamped.
Both bids have been criticised. The Capita payout has been attacked for not being high enough, and for the scope of investors it compensates. The redress scheme was met with hostility by advisers, who argued it punished them for the collapse of the investments and could put many firms out of business.
Given the shortcomings of these efforts, it is perhaps unsurprising the new regulator has thrown itself into supporting the initiative led by the government in Guernsey, which is aiming to bring a number of parties involved in running the funds round a table to negotiate a settlement.
What the FCA is doing
In April New Model Adviser® revealed that barrister William Wood, who brokered the £54 million payout, had been appointed to head Guernsey’s mediation effort. Wood is currently trying to secure out-of-court settlements with defendants in cases brought by SPL, the current board of the cell companies that make up the Arch Cru funds.
It was always known that the FCA was involved in the process, but the extent of its support emerged last week when it was reported that it intended to divert any fines it receives from planned enforcement action against Arch Financial Products director Robin Farrell and Robert Addison into the mediation group’s compensation pot.
A source close to the situation said: ‘The FCA wants to put Arch Cru to bed. It [the regulator] has never been able to do this. It tried with Capita but it is still in trouble because it wasn’t enough.
‘The regulator misjudged the £54 million payout and the consumer redress scheme: neither was as successful as it had hoped it would be. They think this will go a long way to ending the problem.’
Legal action for a settlement
If the negotiated approach of the mediation process offers a carrot to the parties to come to the table, the series of law suits from SPL acts as a stick on their backs.
The board has launched legal action against Arch and its chief executive Farrell, former Arch Cru board directors Addison, Neal Meader and Peter Radford, former administrators Bordeaux Services and auditors Moore Stephens. The total amount of the claims adds up to £334 million.
It is understood that any settlement would be significantly lower than this figure.
The source said: ‘Some of the parties have agreed to write cheques, maybe not enough to satisfy [the mediator’s demands]; and some other parties are held back because they might want to settle, but their insurance companies do not want to pay out. The insurance companies’ co-operation in this is vital. You can’t spend the insurance company’s money without their permission and it suits them to hang onto their money as long as possible. The amount they would hand out is the same so they don’t care if it’s in compensation or in legal fees.’
The mediator is understood to be establishing how much money each party has and how much he can recoup but sources estimate that the total amount could be between £10 million and £20 million.
‘The mediator knows he cannot get the figures the board is taking the parties to court over because those figures are based on how much the parties should pay, not how much they can realistically pay,’ said the source.
Pessimism over mediation
With the SPL board’s first case against Arch set to be heard in November, the mediator will be racing against the clock to secure a settlement.
Alan Hughes (pictured), partner at law firm Foot Anstey, said Woods would have a tough job getting meaningful amounts back to investors. Foot Anstey abandoned its attempts to apply for a judicial review of the regulator’s redress scheme in April.
‘There’s a long way between having a mediation process and getting money out of it. The problems are what the indemnity limit for the insurance is, and will that cover it? There is a big hurdle for the mediator in getting as much money as possible, and if it does, will it even touch the sides for the investors?’
Gill Cardy, managing director of the IFA Centre, who has launched a legal challenge against Capita in an effort to secure compensation for investors not covered by the FCA consumer redress scheme, was equally pessimistic about the mediator’s chances.
‘I can’t see how it could come up with anything, this is the same person who brokered the £54 million Capita payout, which was meant to be fair and reasonable but clearly wasn’t.
‘It is behind closed doors again so how do we know this will be a fair and reasonable outcome?’
Cardy’s allegation that Capita should bear more responsibility for the Arch Cru funds failure is at the heart of her claim against the firm.
Attempt at political pressure
Cardy is not the only one who thinks more focus should be on Capita. MP George Galloway (pictured) has rallied political support for his early day motion against the authorised corporate directors and the FCA for their alleged failures in relation to Arch Cru.
The motion has so far received the support of 31 MPs. Galloway’s camp is optimistic that a change of regulator could lead to a change of approach.
A spokesman for the Bradford West MP said: ‘We’re currently trying to seek a meeting with the FCA on the matter. The rebrand from FSA to FCA means we’d like to see the new regulator wipe the slate clean and have a chance to make good.’
Source : http://citywire.co.uk/new-model-adviser/news/fca-steps-up-cru-redress-efforts-after-predecessor-s-flawed-attempts/a695865