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Home > Regulation > UK Regulation

Data show 80 IFAs with £40m Arch Cru exposure, no PI cover

Regulator confirms that 30 per cent of “currently authorised known sellers” could breach capital requirements.

By Donia O'Loughlin | Published Apr 30, 2012 | comments

Law firm Regulatory Legal has said it suspects 80 advisers could become insolvent due to the launch of an Arch Cru consumers redress scheme, with data showing the firms have at least £40m of exposure to the funds that will not be covered by professional indemnity insurance.

In documents seen by FTAdviser, the 80 adviser firms are confirmed to be exposed to £500,000 or more worth of investments in the failed funds, with analysis revealing that they collectively have just £6m in net assets.

In each case Regulatory Legal said the firms will not be covered by their existing PI insurance due to an exclusion clause in the contracts.

The revelations follow the publication by the Financial Services Authority this morning (30 April) of a consultation on a £100m consumer redress scheme for Arch Cru investors.

In the consultation the regulator says it has identified 795 firms that it believes sold on Arch Cru, adding that mis-selling occurred in 90 per cent of cases and that 30 per cent of “currently authorised known sellers” may “potentially breach their regulatory capital requirements”.

The FSA has not confirmed how many of the 795 firms identified as having sold the investments are currently authorised.

The regulator estimates it will cost £6m-£10m to administer the scheme.

The proposed redress scheme is in addition to the £54m payment scheme announced last year, provided by Capita Financial Managers, BNY Mellon and HSBC.

A spokesperson for Regulatory Legal said: “We estimate that at best case scenario is that the firms cumulatively have £6m net asset value. There is no way that this scheme will work unless the FSA objective is to push these firms out of business.

“It is our view that the FSA are assuming that IFA firms will be covered by their insurers. Our view is much more negative on this point. We feel insurers will seek to decline or exclude liability.

“The upshot of this is a further massive liability for the FSCS and ultimately the industry. We estimate that this materially affects around 80 firms. The bulk of these firms have £500k+ invested with some having many millions.”

Regulatory Legal is currently still awaiting permission from the High Court about its judicial review claim into the validity of the £54m “fair and reasonable” offer. The law firm said this redress scheme will not affect its judicial review claim.

Last week, FTAdviser exclusively reported that the regulator had 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 consumer redress scheme will run for 24 weeks, during which time the FSA said it expects all firms to consider the cases of all relevant customers.

Depending on the outcome of this consultation, the regulator anticipates being able to issue a policy statement in early November 2012 and to make the rules effective on 1 January 2013.

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