The Financial Services Authority (FSA) has issued a public censure against Capita Financial Managers Limited (CFM) for its failings in relation to the CF Arch cru funds between June 2006 and March 2009.
CFM is the Authorised Corporate Director (ACD) of the CF Arch cru funds, a role which carries important regulatory responsibilities for the protection and fair treatment of investors. In July 2006, CFM delegated the investment management of the funds to a third party, Arch Financial Products LLP (Arch). The funds were then invested indirectly in private finance and private equity assets. While CFM delegated the investment management of the funds to Arch, it remained responsible for the overall performance of the regulatory obligations in relation to the funds.
CFM failed in aspects of its oversight of Arch. CFM did not have sufficient processes in place to monitor Arch, even though Arch had not acted as an investment manager before. CFM did not adequately identify and mitigate the conflicts of interest between Arch and the funds that arose as a result of the CF Arch cru structure, which involved a complex network of onshore and offshore companies and private market investments.
Funds need to aim to provide a prudent spread of risk in the investments they hold. However, CFM failed to have processes in place to monitor adequately the liquidity risks of the funds. The funds were eventually suspended in March 2009 as a result of concerns that there was insufficient liquidity in one of the sub-funds to meet investors’ demands to sell their shares.
An ACD’s responsibilities also include pricing the shares of their funds. However, CFM did not have adequate processes in place to identify when the information it used to value the funds might not be reliable and whether alternative measures should be used to price the funds fairly, although it is not clear that such measures would have resulted in different prices being used. CFM did not begin to investigate the valuation and pricing of the funds’ investments in detail until late 2008. Once the funds were suspended, it became clear that their investments were not in fact as valuable as CFM had understood them to be.
Tracey McDermott, FSA director of enforcement and financial crime, said:
“Capita Financial Managers has major responsibilities in relation to funds holding a very significant amount of investors’ monies. However, its performance in relation to the CF Arch cru funds fell well short of the FSA’s requirements.
“Those firms which delegate activities to others need to have robust processes to allow them to oversee properly these third parties and protect investors. Capita Financial Managers’ processes in this case were inadequate for this.
“While Capita Financial Managers’ failings were significant, they reflect only a part of the overall picture in relation to the CF Arch Cru funds. The FSA takes the CF Arch cru situation very seriously and continues to devote considerable resources to securing the right outcome for investors.”
A £54 million payment scheme was voluntarily established in June 2011 by CFM, Bank of New York Mellon Trust and Depositary and HSBC Bank plc for investors. CFM required the financial support of its ultimate parent, Capita Group plc, to make its £32 million contribution to that payment scheme. CFM could not fund both such a substantial contribution to the payment scheme and a financial penalty. This was taken into account in the FSA’s decision not to impose a financial penalty on CFM.
Background
- The Final Notice for Capital Financial Managers Limited.
- The CF Arch cru funds comprise the CF Arch cru Diversified Funds and the CF Arch cru Investment Funds. These are Open Ended Investment Companies which are investment companies with variable capital. The funds became primarily invested in the shares of Guernsey-domiciled incorporated cell companies. These cell companies were listed on the Channel Islands Stock Exchange, with Arch Financial Products LLP as their investment manager. The cell companies were predominantly invested in private equity, private finance, hedge funds, real estate, fine wine and other private market alternative assets.
- CFM earned £1.2 million in fees from its role as Authorised Corporate Director of the CF Arch cru funds. It has contributed up to £32 million to a payment scheme for investors in the funds and another £660,000 for a hardship scheme for investors. It has also spent approximately £2.8 million investigating matters surrounding the funds.
- The FSA, CFM, BNY Mellon Trust & Depositary (UK) Limited and HSBC Bank plc announced the voluntary establishment of a £54 million payment scheme in June 2011. This is being used to make payments to eligible investors in the Arch cru funds. Investors have a choice whether to accept the offer of payment out of the payment scheme. If they accept, it will be in full and final settlement of any claims or any remedies they may consider they would otherwise have against those firms.
- The FSA has consulted on a consumer redress scheme for investors who may have been given unsuitable advice to invest in the CF Arch cru funds by independent financial adviser firms. The FSA is considering the responses to this consultation.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
- The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent in late 2012 or early 2013, subject to the parliamentary timetable.
