IFA Centre: FSA predetermined Arch Cru mis-selling

The FSA “predetermined” that Arch Cru funds were missold before it launched a probe into sales as part of a proposed redress scheme, IFA Centre managing director Gill Cardy has claimed.

In her submission to the FSA’s consultation on the planned £110m consumer redress scheme, which is to be funded by advisers who sold Arch Cru funds, Ms Cardy challenged the mis-selling figures published by the regulator.

Announcing the redress scheme in June, the FSA claimed “reasonably competent” IFAs should have been aware of the high risk nature of some investments which backed Arch Cru, which made the funds high risk investments.

The regulator also said it had uncovered evidence of “widespread mis-selling”, citing research that showed 78 per cent of 179 sales assessed were unsuitable, and a further 10 per cent were of “unclear” suitability.

Ms Cardy pointed out, however, that of five previous thematic reviews carried out by the FSA since 2008, none had found as many cases of mis-selling. The previous highest level of unsuitable advice was 46 per cent, relating to sales of Lehman Brothers-backed structured products after a review in 2009.

The IFA Centre founder said: “It is inconceivable that adviser files would have been constructed any differently... or with less regard to suitability to those reviewed for any of your previous thematic reviews.

“We therefore conclude that the only way in which the FSA could have generated this ‘outlier’ result when compared to the more usual distribution of thematic review results, is by having predetermined that the funds (considering them all as one entity, not the individual funds) were high risk and that any file where the funds were recommended would demonstrate unsuitable advice unless the file clearly indicated an investor with appetite for higher risk investing, at least for a part of their portfolio.”

Ms Cardy also argued that bringing all advice relating to all six of Arch Cru’s retail funds regardless of which fund was bought and when was a “significant flaw” in the FSA’s proposals.

“To assess all of the Arch Cru funds at all times as high risk is inappropriate,” Ms Cardy added. “It is possible to argue that some of the more specialist funds were higher risk. It is possible to note that over time the funds deviated ever further from their stated objectives and thus became higher risk.

“But one cannot conclude from this that all advice relating to all investments made into all funds at all times during ‘the relevant period’ could only have been suitable for investors with a high risk appetite.”

Previous FSA thematic reviews (source: IFA Centre):

Case	Date	Unsuitable sales
Pension switching follow up	2009	34%
Lehman Brothers structured products	2009	46%
Platform advice	2010	16%
Replacement investments	2011	18%
Arch Cru	2012	78%