RegulationMay 7 2014

MPs cite regulatory sprawl behind £100m ‘disaster’

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It may have lacked the noise, glamour and gravitas of a debate in the main commons chamber, but a small debate attended by only a dozen or so MPs in a second-tier debate hall today (7 May) could have major implications for the City regulator and one of the country’s largest companies.

The nascent All-Party Parliamentary Group looking into the collapsed Connaught income funds held its first debate in Westminster Hall this morning, during which questions were raised over the sprawling and confusing nature of regulation of so-called ‘unregulated’ investments and a perceived lack of transparency by the regulator itself.

MPs also levelled serious criticisms at Capita, the FTSE 100 stalwart outsourcing firm that has secured a host of government contracts and whose subsidiary, Capita Financial Managers, acted as authorised corporate director of both the Connaught funds and the now defunct Arch Cru funds but which is immune from liabilities relating to the failings.

Crucially, it was also revealed that the police are looking into the collapse of the funds and specifically into allegations of misappropriation of funds.

Conservative MP Guy Opperman said that he, along with fellow blue-bench campaigner and chair of the parliamentary group Alun Cairns, visited the Financial Conduct Authority and was left perplexed over the regulatory process for unregulated collective investment schemes, such as Connaught.

He said: “[We] visited the FCA to look at the issue in question and we were shown a flow chart which identified the selling process for this investment.

“The number of elements that were regulated and the number of elements that were not regulated would imply that there is a significant amount of confusion within how the regulatory process works in the UK at the moment.”

Economic secretary to the Treasury Andrea Leadsom, who represented the government at the debate, described the comment as “extremely relevant” and said that she too was struck by the confusing array of regulated and unregulated elements in cases of this nature.

She said that this had resulted in the case of Connaught in a “disastrous scenario” where investors had lost “lot of money” and in some case their life savings - as much as £145m was invested across three iterations of the income fund, with investor losses thought to be more than £100m - and it has become “very difficult to get to the bottom of it all”.

The FCA also faced criticism from Mr Cairns, who responded to questions over what the watchdog knew prior to its formal intervention in the funds in 2011 by citing a “generally defensive approach” and lack of “transparency”.

He said: “Greater transparency would be welcomed and might dispel some of the criticism being made. The fact is we simply don’t know what specific action [it] took or if [it] took any action at all.”

Mr Cairns cited the “evolution” of the Financial Services Authority, which was in place at the time of Connaught being distributed and its failure, into the FCA last year and said he hoped this would lead to a “change in culture”.

Ms Leadsom highlighted the range of measures taken by the then FSA through 2011 and 2012 to vary permissions of the lender underlying the funds, Tiuta, and to compel the financial advisers that sold the funds to conduct a review of their own sales.

She added that it was “very much a work in progress” and that the FCA is continuing to investigate Capita and the circumstances surrounding the collapse of the funds, as she confirmed the police investigation.

In relation to Capita, senior Conservative backbencher David Davis interrupted the minister to criticise the firm, saying it was “clear the financial structure of the company is set up with limited liability subsidiaries to prevent liabilities going back to the parent company”.

Ms Leadsom said she agreed “completely” with the comments made by Mr Davis and that the issue was also “being looked at by the FCA”.

In the case of Arch Cru, Capita Financial Managers has put up £30m as part of a redress fund for investors and was spared any further financial penalty by the regulator, though it was publicly censured.

It has not yet been hit with any penalty by the FCA over Connaught. It is not clear to what extent the firm knew anything of the troubles at the firm when it sought to remove itself as director in 2009.