FSA compensation plan requires thousands of Arch Cru investors mis-sold high-risk funds to opt-in to scheme
Thousands of investors who were mis-sold high-risk investment funds look set to share up to £40m in compensation – far less than half of £110m originally proposed.
The Financial Services Authority has launched a scheme to compensate people who lost money after investing in two Guernsey-based funds, CF Arch Cru Diversified and CF Arch Cru Investment funds, which were suspended in 2009.
It is thought up to 20,000 investors, many elderly and with a low appetite for risk, lost about £140m when hundreds of millions of pounds poured into the funds between 2006 and 2009. In some cases, people were advised to cash in their Peps and Isas, and put the money into the CF Arch Cru funds.
But while firms which advised on the controversial investments will have to contact all their clients to ask if they want their case reviewed, the FSA has decided to make the compensation scheme one where investors must opt in to having their case looked at, rather than one that orders firms to pro-actively review all sales.
The regulator said it expected between 15% and 30% of consumers to opt in to the scheme, and as a result, it estimated that between £20m and £40m in redress would be paid out. However, it added: “The exact amount of redress will depend on how many consumers opt in to the scheme, firm responses and prevailing market conditions.”
The funds were UK open-ended investment companies, regulated by the FSA, which invested in Guernsey-domiciled investment companies. They were sold as low or medium risk but were, in fact, high risk.
The new scheme is separate to a £54m payment scheme set up after talks between the FSA, the funds’ administrator, Capita Financial Managers, and HSBC and BNY Mellon Trust and Depositary, the depositaries. Meanwhile, Capita Financial Managers has so far made six interim payments to investors totalling £103m.
The FSA said it had concluded there was evidence of “widespread mis-selling” by firms. It said the compensation scheme “as originally proposed” would have produced an estimated £112m of redress, adding: “We believe our revised scheme would produce total redress of around £20 to 40m.”
The FSA said when it consulted on its compensation plans, concern was expressed by some that the scheme would be “disproportionate” and “add to the challenges faced by the independent financial adviser (IFA) sector”, which is preparing to implement new rules on commission payments.
However, the regulator added that firms which advised on the investments must contact their clients asking if they want their case reviewed to determine whether they were mis-sold the funds and might be eligible for compensation.
Advisers will have one month from 1 April 2013 to contact their clients, and the wording of the letters has been set out by the FSA to ensure they are clear and straightforward. “Investors will only have to fill in a short form to confirm they want their case reviewed,” it said.