JEFF PRESTRIDGE: Arch Cru investment fund scandal and the lengthy list of shame

The Arch Cru investment fund scandal is probably the most damaging affair to hit the retail investment fund management industry since 1996, when Morgan Grenfell fund manager Peter Young was found to have defrauded investors.

The investment bank was forced to pay 400 million compensation to 180,000 investors.

The Arch Cru affair – although smaller in scale – has still caused irreparable reputational damage to all parties involved, including:

A pile of twenty pound notes

Loss: Biggest damage has been done to the investors who paid into Arch Cru

Fund managers
(Arch) who went beyond their investment brief and invested funds in
illiquid assets (those often of dubious quality such as Greek shipping
companies), causing investors to suffer horrible losses;

Companies
(Capita, HSBC and BNY Mellon) that were meant to safeguard investors’
savings by ensuring that the fund manager was adhering to the investment
mandates laid down – but failed to carry out their responsibilities;

Marketeers (Cru) that overhyped the funds to starstruck financial advisers;

Organisations
such as the Investment Management Association, which weakly allowed
highly toxic Arch Cru funds to be labelled ‘cautious managed’, implying a
much lower level of risk;

Financial advisers,
a rump of whom sold Arch Cru funds by the bucket-load and overexposed
their clients, breaking the golden rule of ‘diversify, diversify’;

And regulators here in Britain and Guernsey that gave Arch Cru funds a badge of respectability they never deserved.

Of
course, the biggest damage has been done to the 20,000 investors who
were advised to put money into Arch Cru. Many were elderly and depended
on the funds to bolster their retirement.

Despite
a 54 million financial redress scheme agreed between the Financial
Services Authority and Capita, HSBC and BNY Mellon, and money received
from some of the assets sold since the funds were suspended in March
2009, investors will get back, at most, only 70 per cent of their
investment.

Indeed it
could be much less if the remaining fund assets are as worthless as
Spearpoint – the investment house brought in to dismantle the Arch Cru
funds – seems to think.

Since
the 54 million compensation package was announced last June, groups
representing financial advisers and investors have sought to get the
scheme reviewed in the hope of an improved deal. Last week, the High
Court refused to sanction one request for a judicial review of the
redress scheme.

Financial
adviser Coull Money had argued that the limited redress meant advisers
would ultimately pay a disproportionate price for their role in Arch
Cru as clients sought to pursue them for the shortfall between the value
of their original investments and the money returned to them.

Coull
Money had claimed that the FSA had breached three of its obligations in
putting together the redress scheme – protecting investors,
safeguarding market confidence and preserving financial stability.

It also argued that the regulator should have conducted a public consultation.

Mrs
Justice Dobbs ruled that the scheme was in the best interests of
investors and there was no reason why redress should be set at 100 per
cent. She sent Coull Money packing with a 6,000 bill for costs,
although the FSA – harshly – had asked for 18,000.

What’s
next Law firm Regulatory Legal is still on course to request another
judicial review of the redress scheme later this month. Investor rather
than adviser-focused, it will argue that the 54 million package was
based on incomplete data, notably Spearpoint’s later assertion that the
remaining Arch Cru assets were worthless. As a result, there is no
chance of investors getting back 70 per cent of their money as the FSA
has indicated.

Regulatory
Legal hopes that the High Court may be persuaded to force the FSA and
Capita, HSBC and BNY Mellon back to the drawing board. It has a better
chance than Coull Money of obtaining a judicial review.

So
should Arch Cru investors fear the worst and resign themselves to
losing a big chunk of their hard-earned savings Maybe not, after all.

At
some stage, the Financial Services Compensation Scheme will show its
hand and probably make good a lot of the losses. It happened with past
scandals such as Keydata so there is no reason why it shouldn’t at Arch
Cru.

So Arch Cru
investors could walk away largely satisfied. But there will be a price
to pay in the form of the demise of many good independent advisers, a
further breakdown in consumer trust in financial services and a
suspicion that if you’re a big fish in the industry, you tend to get off
more lightly than the tiddlers.

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JEFF PRESTRIDGE: Arch Cru investment fund scandal and the lengthy list of shame