FSA consultation will establish a redress scheme for investors incorrectly advised to put money in high risk investment funds
Investors who were mis-sold high risk investment funds could be in line for more than £100m in compensation from those who incorrectly advised them, according to the Financial Services Authority (FSA).
The regulator has launched a three-month consultation to establish a redress scheme for people advised to put money by their independent financial advisers (IFA) into CF Arch Cru investment and diversified funds, which collapsed three years ago. The proposed redress scheme is in addition to a £54m payment scheme announced in 2011, involving Capita Financial Managers Limited, BNY Mellon Trust & Depositary (UK) Limited, and HSBC Bank plc.
Approximately £400m was invested in the Guernsey-based funds run by investment manager Arch Financial Products. The funds were suspended by the FSA in March 2009 because of an apparent lack of liquidity.
Evidence gathered by the FSA indicates widespread mis-selling: analysis of a sample of 179 clients of 24 IFA firms found the advice was unsuitable in 140 cases. These were high risk funds sold unsuitably as low or medium risk, leading to significant consumer detriment. FSA rules require authorised advisers to understand the product they are recommending, carry out their own assessment of its risks, and only recommend products that match the customer’s risk appetite.
The FSA says 795 IFA firms were involving in selling Arch Cru funds to about 15,000 investors, and this is the first time it has proposed a redress scheme designed to return investors to the position they would have been in had they received suitable advice.
Key elements of the draft scheme include:
• All firms which sold Arch Cru funds would have to contact their customers within four weeks of any rules being made, indicating whether or not individual cases fall within the scope of the scheme
• Where redress is due, firms would be able to use an FSA online calculator to calculate each payment, taking account of how much money each investor is able to claim from the separate voluntary payment scheme
• Investors should receive notification of how much redress is due within six months of the scheme starting, and would receive payment within 28 days of accepting
The FSA’s director of conduct supervision, Clive Adamson, 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. We have found significant evidence that investors looking for lower risk investments have invested thousands in these funds.”
He added: “This is the first time that we have used this consumer redress power and it is going to form an important part of our consumer protection tool kit. We will be working hard to reduce the number of large scale failures. But where they do occur it is imperative that we can get redress to consumers who have lost money through mis-selling as fast as possible.”
The consultation will close on 31 July 2012, and details of the proposed redress scheme can be viewed on the FSA website. If the scheme goes ahead and investors believe they may be entitled to compensation, but are aware their IFA has gone out of business, the FSA suggests they make direct contact with the regulator.