The consumer redress scheme published by the Financial Services Authority (FSA) requires firms to write to all of their clients who invested in the funds to ask them if they would like to be put forward for a review. The regulator said that there was evidence of "widespread mis-selling" of investments in the funds, which had wrongly been assessed as low risk by firms.
Investors entitled to compensation will be "put back into the position they would have been" if they had been given suitable advice. This is the first time that the FSA has used its statutory consumer redress power it was granted in 2010 to implement this type of scheme without seeking authorisation from the Treasury.
"Advisors have to accept and understand that ultimately they are responsible for making sure their customers' interests are protected," said Clive Adamson, the FSA's director of supervision. "If they don't understand a product or haven't done the due diligence on it, they are in no position to recommend it to their customers."
The Arch cru funds were two high risk open-ended investment products which invested in a series of companies, based in Guernsey and listed on the Channel Islands Stock Exchange. They were suspended in 2009. The FSA said it had gathered evidence indicating "widespread" mis-selling of the products as low or medium risk, despite their investing in high risk non-mainstream assets. This meant that the products should only have been recommended to people who fully understood the risks and were willing and able to accept them, the FSA said.
Under its original proposals, firms that sold Arch cru products would have had to have pro-actively reviewed each sale to see whether customers were due compensation. This would have resulted in total compensation costs of around £110 million, a substantial proportion of which would have fallen on the Financial Services Compensation Scheme (FSCS) with firms unable to pay. The FSA has estimated that approximately one in six selling firms could still fail as a result of having to pay out under the revised arrangements.
Advisers will be given one month from 1 April 2013 to contact affected investors, and must let each customer who opts in to the scheme know of the outcome of their case by 9 December 2013. The wording of the "clear and straightforward" notification letters has been set out by the FSA, which will also monitor firms' progress in implementing the scheme. Investors will only have to fill in a short form to confirm that they want their case reviewed, the FSA said.
Compensation due will be calculated with reference to what would have been a suitable investment for that individual investor, and will reflect the current value of the suspended funds. Any compensation an investor is eligible to claim under a separate £54m payment scheme, set up by the three main parties involved in administering the funds, will be deducted from the amount due.
If there is no evidence to suggest that the adviser mis-sold the funds then no compensation will be payable under the consumer redress scheme, however investors may be able to claim under the existing payment scheme. This was set up by the FSA and funded by Capita Financial Managers, as administrators of the funds, and deposit banks BNY Mellon and HSBC. The scheme runs until the end of next year.
The FSA has also published decision notices setting out its intention to fine executives at investment manager Arch Financial Products (AFP) and ban them from further involvement in regulated financial services. The firm failed to demonstrate fair management of conflicts of interest and would have received a fine of £9m for misconduct if it had been in a position to pay, the FSA said. Robin Farrell, AFP's chief executive, and Robert Addision, a senior partner and former compliance officer at AFP, have referred the regulator's decisions to the Upper Tribunal for appeal.