Arch CEO: IFAs should not be ‘hauled over coals’ over Cru

Advisers should not be “hauled over the coals” by regulators for recommending Arch Cru funds as to do so fundamentally misunderstands the way that risk changed after the financial crisis hit, according to Robin Farrell, chief executive of Arch.

In an interview with FTAdviser, to be published on Monday, Mr Farrell defends the role his firm played in the funds prior to their suspension in 2009 and argues that the way the funds were categorised from a risk perspective pre-crisis was correct.

Arch is subject to a £150m litigation that has been brought by SPL Guernsey, the new manager of the Guernsey-based Arch Cru Funds.

Mr Farrell said that a Financial Ombudsman Service decision published on 22 November, which found in favour of an Arch Cru investor and ordered their IFA to pay redress, did not take into account how risk changed following the global financial crisis.

Mr Farrell said that IFAs should not be “hauled over the coals” in this way, claiming that the Fos report does not consider properly the risk element and how this changed.

The Ombudsman’s provisional decision related to a couple that had complained about the advice they were given by their IFA in relation to an £8,000 investment into the CF Arch Cru Investment Portfolio.

Among other things, the report notes that although the Investment Management Association classified the fund as cautious managed this does not mean the fund is low risk or not volatile and that this should have been understood by an IFA.

Mr Farrell said: “It [the report] doesn’t talk about how risk can change after a global event. [The ombudsman] is using that as a major part of his judgement on whether the IFA should have known.

“Quite frankly if the IFA looked at that product pre-crisis and it was in Cautious Managed sector, it was low risk. It didn’t have stellar returns but had okay returns, as it was very diversified... more so than any other Cautious Managed fund.

“So if you look on a forward looking basis that’s really diversified; it’s low to medium risk. I don’t think an IFA should be hauled over the coals simply because of that.”

Two Arch Cru funds, suspended on 13 March 2009, were in the IMA’s cautious managed sector.

Mr Farrell continued: “Who actually called it cautious? Nobody really. However, the change to the risk element is not taken into account.

“It was a game of two halves: pre-crisis it was low to medium risk and I think it was perfectly reasonable to call it low risk or cautious; after the financial crisis everything was high risk. There were cash funds losing 30 per cent.

“[But] it carried on in the cautious managed sector, as did all the funds in that sector. Who can you blame for that? Is it the IMA’s job to stop all sector classifications because of an event that has happened? No.