Investor losses represent a failure of regulation

Gill Cardy

Capita Financial Managers, authorised corporate director for 230 funds valued at £20bn, has recently written to investors in Arch Cru funds to remind them of the payment scheme offer that remains available to investors until 31 December.

The letter includes a table which sets out the six funds and the returns that investors would get based on the current value of the funds, the interim distributions, and implying that the Capita payment scheme is additional to these figures. It is in fact included in the quoted returns.

But what is truly disturbing is that the losses for each fund are set out and then averaged.

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Another fund manager I looked at has six funds with five-year returns varying between 13.2 per cent and 34.5 per cent. You cannot simply add them up, divide by six and say that investors received 23 per cent. This is totally unacceptable.

A simple average assumes all funds are held in equal proportion with all investments made on the same day. This analysis ignores differences between income and accumulation units, retail and institutional share classes, and even sterling and dollar denominated share classes. Arch Cru funds actually have 23 different share classes and each one obviously has differing returns.

No adviser would get away with this kind of analysis, so why can a regulated authorised corporate director?

My own analysis is that investor losses when compared to the suspension values actually range between 27 per cent and 42 per cent.

This in turn assumes that investors have accepted the Capita payment. However they do this in full and final settlement of any claims they may have against Capita, the depositaries and their group companies, giving up any opportunity to claim for the unrecoverable losses they have suffered.

Never forget that the payment scheme was a voluntary offer, mediated behind closed doors and strictly private and confidential. We will never know the basis on which this back-room deal was agreed, but the FSA stated at the time that it was “a fair and reasonable outcome in the best interests of investors”.

The 25 per cent of investors, mostly the unfortunate souls invested in Insinger de Beaufort funds who have no recourse to the ‘industry-wide’ redress scheme established by the regulator, must truly admire the chutzpah of the FCA and the authorised corporate director which think that losing between 27 per cent and 42 per cent of their investments is “a fair and reasonable outcome in the best interests of investors”.

If that is not a failure of regulation I do not know what is.