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Home > Investments > Alternative Investments

By Donia O'Loughlin | Published Apr 27, 2012

FSA tells Arch Cru IFAs to ring-fence assets

The Financial Services Authority has sent a letter to IFAs that sold Arch Cru investments requesting that they voluntarily ring-fence their assets, stating that it is “concerned” about their ability to pay any future claims for redress.

The letter, seen by FTAdviser, asks IFAs to voluntarily apply for a variation of their part IV permission, meaning they must give the regulator prior notice of any asset distributions, material changes to the capital structure or other significant alteration in their assets.

In the letter, the regulator says that this is because it is “concerned” about the ability of the IFA firm to meet any future claims for redress and that they should not take any actions “that could affect the firm’s ability to pay redress, if required”.

If firms do not respond to the request before the deadline, which was redacted in the letter FTAdviser has seen, the FSA said it will “consider all available options including the possibility of using our own powers to vary permissions”.

The watchdog says: “The proposed variation of permission would enable the FSA to enter into a dialogue with you regarding any proposals that would significantly impact on the firm’s assets.

“We think it reasonable that firms with significant potential liabilities should not make transfers of capital where this may leave insufficient assets on the balance sheet to meet potential liabilities.”

According to a spokesperson for law firm Regulatory Legal, the move is a pre-cursor to the FSA launching a ‘section 404’ consumer redress scheme, which will require all IFAs that recommended CF Arch Cru products to review their advice and offer compensation.

The spokesperson said: “We have seen a number of efforts by the regulator to prevent firms with larger CR Arch Cru exposure from moving capital assets. This looks very much like a pre-cursor to a full-scale review.

“Certainty the FSA should move quickly to clarify their intentions as both firms and investors remain in limbo.”

Joe Egerton, campaigns director for Justice in Financial Services agreed that the move will likely lead to a section 404 scheme being launched.

Previously Mr Egerton, sole director of IFA firm Coull Money, which has had its request for a judicial review into Arch Cru redress turned down, told FTAdviser that a source at the regulator had told him that the regulator was “days away” from launching such a scheme.

According to Mr Egerton, the establishment of a scheme will force a large number of IFAs out of business as they will have to add the cost of paying compensation on a “generous scale” to their company’s liabilities and so will “inevitably fail the FSA’s capital adequacy tests”.

Mr Egerton told FTAdviser that under FSMA 2000 if IFAs have caused losses as defined under the FSA criteria, then they will be asked to pay compensation on the basis that the regulator lays down.

The FSA said it cannot comment on whether it will be launching a section 404.

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