Law firm slams FSA over ‘small’ Arch Cru investigation
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In focus: Arch Cru
It is “wholly unreasonable” for the Financial Services Authority to claim “widespread mis-selling” by advisers of Arch Cru investments given that it only investigated a sample size equivalent to less than 4 per cent of those that advised on the funds, one law firm has told the regulator.
In a response to the regulator’s consultation over a planned section 404 consumer redress scheme that is aiming to return £100m to investors from adviser firms, a copy of which has been seen by FTAdviser, the unnamed law firm criticises the FSA’s investigation and “strongly” disagrees with its conclusions.
The regulator said in its consultation paper on the scheme that it has gathered evidence which indicates widespread mis-selling of the CF Arch Cru Investment and Diversified funds.
These were high-risk funds that were sold unsuitably as low or medium risk, leading to significant consumer detriment, the regulator said.
In a detailed response that covers the IMA sector classification and reasonable due diligence expectations on the part of advisers, the responding law firm counters these arguments, saying the FSA’s conclusion that there was widespread mis-selling of Arch Cru funds was based on a sample of just 29 out of the 794 firms that recommended the products.
In other words, the FSA has determined that a sample selection of 3.65 per cent provides a sufficiently accurate profile on which to judge whether there are grounds to invoke “severely onerous and wide reaching powers”.
In its response, the firm adds: “We strongly disagree with this conclusion. In our view, it is wholly unreasonable for the FSA to reach a general assessment on the conduct of all firms having investigated such a small number.”
Moreover, it says it is unclear whether the sample was based on a balanced cross-section of firms, taking into account the size of the firms that were selected, the number of customers they advised to invest in Arch Cru and the overall level of investment made.
The response says this “seriously calls into question” whether the FSA can rely on the sample as providing a fair and reasonably representation of the advice provided to consumers.
It also highlights that it isn’t clear how suitability was assessed specifically whether it was on a product or a portfolio basis and urges the regulator to publish the basis upon which it assessed suitability to provide clarity.
In addition, the law firm states that it does not agree with the regulator’s conclusion that absolute return funds automatically equal higher risk fund, stating that “it depends on the underlying absolute return investment strategy”.
The response said: “Fundamentally, we do not accept that, based on the investigations a reasonable IFA should have undertaken, the Arch Cru funds should have been rated as high risk.
“It is our view that the information and documentation that a reasonably competent IFA could be expected to gather... all indicated that the funds were not high risk.”
The FSA declined to comment.