The Financial Services Authority (FSA) has today published Decision Notices in respect of Arch Financial Products LLP (AFP), Robin Farrell, AFP’s chief executive, and Robert Addison, a senior partner and former compliance officer at AFP.
AFP, Mr Farrell and Mr Addison have referred the matters to the Upper Tribunal (the Tribunal) where they and the FSA will each present their case. The Tribunal will then determine the appropriate action for the FSA to take. The Tribunal may uphold, vary or cancel the FSA’s decisions. The Tribunal’s decisions will be made public on its website.
The Decision Notices, which reflect the FSA’s belief as to what occurred and how the behaviour concerned is to be characterised, set out that the FSA has decided to prohibit Mr Farrell and Mr Addison from performing any role in regulated financial services, to fine Mr Farrell and Mr Addison £650,000 and £200,000 respectively and that the FSA would have fined AFP £9 million for its misconduct, were it not for the firm’s financial position. Instead, the FSA has decided to issue a public censure in respect of AFP’s conduct.
AFP was the investment manager of the CF Arch cru Funds. AFP predominantly invested the funds in Guernsey cell companies listed on the Channel Islands Stock Exchange, which it set up and for which AFP was also the investment manager. The Guernsey cells then invested in private market assets, such as private equity, private finance, hedge funds and other alternative asset classes.
AFP was in a position of trust and needed to demonstrate fair management of conflicts of interest. In the FSA’s opinion, AFP failed to do so. In respect of certain transactions where there was a risk of AFP (or its associates) making a gain at the expense of the Guernsey cells, the FSA’s view is that AFP was reckless as to the risk that the conflicts of interest would not be managed fairly. For example, in one transaction, the FSA understands that AFP received a fee of £3 million from the Guernsey cells, which AFP did not disclose to the independent directors of the Guernsey cells or record in any contemporaneous transaction documentation. Given their roles, managing conflicts fairly was a key responsibility of both Mr Farrell and Mr Addison, and, in the FSA’s opinion, their failings in this regard were reckless and therefore demonstrated a lack of integrity.
Firms must put in place sufficient controls over material non-public information. In the FSA’s opinion, such controls were not in place at AFP and that led to a risk that the firm could use such information inappropriately. The FSA’s view is that Mr Addison, as compliance officer, failed to mitigate the risk that non-public information relating to the publicly listed Guernsey cells was available to those making decisions on behalf of the funds.
In the FSA’s opinion, AFP pursued an investment strategy which resulted in significant liquidity risks for the funds. Further, the FSA believes that AFP and Mr Farrell failed to ensure that the funds aimed to provide a prudent spread of risk by adopting an investment strategy of allocating a majority of the funds’ assets in the Guernsey cells for which there was a limited secondary market; the liquidity risks increased when AFP increased the funds’ investments in the Guernsey cells’ shares at a time of market turbulence and illiquidity, rather than retaining cash in the funds. In the circumstances, investors were exposed to the risk that the funds would not be able to liquidate their investments to meet redemption requests from investors. The funds were ultimately suspended in March 2009 as a result of liquidity concerns.
In the FSA’s opinion, AFP and Mr Addison adopted an informal, ad hoc approach to compliance monitoring with insufficient recording of the monitoring that was undertaken. The FSA believes that this was inappropriate given the size and complexity of AFP’s business; it increased the likelihood that key compliance risks were not detected, monitored or mitigated effectively.
Tracey McDermott, director of enforcement and financial crime, said:
“When making investment decisions, a fund manager should ensure that it puts investors’ interests ahead of its own and be able to demonstrate that it has managed conflicts of interest.
“Those with responsibility for managing authorised firms must ensure not only that the firm complies with regulatory requirements but also that they personally act with the highest standards of integrity.”
AFP, Mr Farrell and Mr Addison applied to the Tribunal for an order preventing the FSA from publishing the Decision Notices. Their application was not successful.
Background
- The Decision Notices for Arch Financial Products LLP, Robert Addison and Robin Farrell.
- 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 and other private market alternative assets.
- The FSA has published a Final Notice issuing a public censure against Capita Financial Managers Limited, the Authorised Corporate Director of the CF Arch cru funds.
- On 9 November 2012 the FSA sent a “Dear CEO” letter entitled “Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks”.
- The FSA understands that the Tribunal will publish its decision dated 30 November 2012 concerning the publication of the Decision Notices on its website in accordance with its usual practice.
- 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.