This followed a consultation after the FSA had concluded that there was evidence of widespread mis-selling by firms that failed to assess the funds as high risk despite the fact that the funds were typically invested in non-mainstream assets such as private equity, private finance and commodities.
The FSA’s sample review found that 90 per cent of sales by value were unsuitable. The FSA believes that the losses suffered by consumers because of unsuitable advice are significant.
The scheme (as revised) gives consumers the opportunity to ‘opt-in’ to have their sale reviewed, rather than requiring firms to review proactively all sales and means that firms will avoid the costs of carrying out the scheme in cases where the consumer does not intend to claim redress. The FSA also amended the start date of the scheme, from 1 January to 1 April this year.
The FSA expects that between 15 per cent and 30 per cent of consumers will opt in to the scheme. Based on this assumption the FSA estimates that the redress scheme could deliver £20m to £40m in redress. The redress scheme will complement the separate voluntary settlement (payment scheme) of £54m reached with Capita Financial Managers Limited (CFM), HSBC Bank plc (HSBC) and BNY Mellon Trust and Depositary (UK) Limited (BNYM).
The consumer redress scheme will start on 1 April, allowing firms time to prepare for implementation. Firms will have until 29 April to identify all consumers for whom the firm advised, arranged or managed investments in an Arch Cru fund and identify all cases that fall within the scope of the scheme. Firms must write to all consumers within and outside the scope of the scheme by 29 April. The letter will either explain to the consumer that the firm will review the advice it gave to them if they decide to opt in to the scheme, or it will explain that their case falls outside the scope of the scheme. If consumers do not receive a letter from the firm by 29 April they can call or write to the FSA to make the regulator aware of this. Consumers who do not respond will receive up to two reminder letters following this first letter. They will have until 22 July this year to opt-in to the scheme.
Firms must consider the cases of all relevant consumers who have opted into the scheme and contact the consumers with the outcome of the review by 9 December 2013. If a redress determination is issued and the consumer accepts the redress offer, the scheme requires firms to pay redress within 28 days of receiving the consumer’s response. PS12/24 sets out how losses and redress are to be determined.
Consumers who do not opt in to the scheme before 22 July this year will still retain their right to complain to the firm and then to the Financial Ombudsman Service after 22 July, but the usual time limits will apply to such a complaint. Firms will incur costs of £500 a case if consumers refer their cases to the Fos. The FSA is assuming that 5 per cent of cases will be referred to the Fos.
The FSA expects a significant proportion of the firms affected by the redress scheme to have already cancelled their permissions, and/or to default as a result of the scheme and 17 per cent of currently authorised known sellers may potentially breach their regulatory capital requirements as a result of the scheme.
The FSA states it understands that the FSCS currently has approximately 1800 claims against circa 60 cancelled firms that sold the Arch Cru funds. The FSA estimates that £3m to £7m (of the £20m to £40m) will be paid by the FSCS.
Philip Ryley is a partner and head of financial services and markets of solicitor firm Michelmores
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