FCA proved wrong on Arch Cru as likely payout tops £50m

Donia O’Loughlin

I know it’s not the most shocking news you’ll ever hear: the Financial Conduct Authority was far too pessimistic in its prediction for investor opt-in rates for the Arch Cru redress scheme, meaning the likely payout will be far more than it had told advisers it would be.

In December last year, the then Financial Services Authority launched a consumer redress scheme over the failure of Arch Cru, forcing advisers to review files for those investors that ‘opt in’ for them to do so and provide compensation where the advice falls short of the watchdog’s criteria.

The amount the then FSA stated consumers are thought to have lost and that therefore falls within the scope of the scheme was revealed at the time to be £141m. With 80 per cent of this likely to be made up of ‘eligible’ claims this leaves a potential redress maximum of £112m.

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It said it expected between 15 and 30 per cent of investors to opt-in in this way. This would have left the total payout somewhere between £16.8m and £33.6m.

Well, according to latest data from firms that have reported back so far, the opt in rate is actually around 48 per cent. This means the total payout is now likely to be close to £54m.

Advisers had from 1 April 2013 in which to contact their clients. Firms were required to let the FCA know by 29 July 2013 how many consumers had opted into the consumer redress scheme.

The FCA has now written to firms that have not responded to remind them to provide it with figures on the number of eligible claimants for its Arch Cru redress scheme.

It’s latest data reveal 443 firms have to date provided figures of eligible claimants. Of those 7,021 are deemed to be eligible, and 3,333, or 48 per cent have opted in to the scheme, the FCA said.

An FCA spokesman said: “Firms were required to let the FCA know by 29 July 2013 how many consumers had opted into the consumer redress scheme. We have written to firms who do not appear to have met the deadline, requiring them to provide the report and explain why they have not complied with the scheme rules.”

When FTAdviser questioned the FCA about the increase and what they expect future opt-in rates to be, the FCA said this figure could go either way.

Law firm Pannone previously told FTAdviser that opt-in rates could be up to three times the regulator’s top-end estimate.

In December, Manchester-based Pannone conducted a survey among 362 Arch Cru investors, with 87 per cent of respondents stating they would opt-in to the regulator’s scheme. If the survey’s estimate of 87 per cent is realised, the redress scheme would cost advisers close to £97.5m.

How did the regulator get it so wrong? The failure of Arch Cru has been so widely publicised that surely the majority of consumers would qualify for redress - certainly almost all of the advisers facing claims with the Financial Ombudsman Service are being ruled against.

There are currently four final decisions on the Financial Ombudsman Scheme website regarding Arch Cru and, surprise, surprise, not one of them went in the advisers’ favour. I predict that the opt-in rate is not going to “go either way” as the FCA says, but will only increase.