Around 2004, a reasonably well performing fund run by Insinger de Beaufort, was taken over by Arch Financial Products LLP and converted into absolute return funds. These funds aimed to maintain returns in good markets and bad. With a steady monthly rate of return settling in after the takeover, the funds were invested into cells held in Guernsey, and a daily value for redemption and investment provided on the Guernsey CISX exchange. They were sold extensively through IFAs backed by a marketing programme run by Cru Investment Management.
The funds were authorised by the then regulator, the Financial Services Authority ( “FSA” ), and were advertised as being in the Investment Managers Association’s Cautious Managed Funds category. Capita as the appointed Authorised Corporate Director for these funds had oversight of in the day to day investment decisions.
The absolute returns achieved up to 2008 were at the higher end of the IMA Cautious Managed Fund sector performance, and a valuable Lipper award for outstanding performance was won in mid 2008.
In October 2008, however, an FSA inspection discovered a liquidity problem in one of the funds. The problem, believed by investors to have been severe, was never disclosed even after several Freedom of Information Act disclosures had been requested.
In March 2009, Capita advised the FSA, that the funds were too impaired to continue to attract new money and recommended suspension. The FSA then suspended the funds but, for the following two years, virtually nothing was communicated to an increasingly frustrated and vocal investor community.
We set up a membership scheme for distressed investors in 2010 to campaign for restitution. Together with our investor members, we campaigned to alert the financial regulators and MPs that investors were being denied information about the funds and investments largely because Capita and the FSA had brought down a wall of secrecy on the entire affair.
Our campaign won the support of 85 MPs and generated a large well attended debate in Parliament and attracted substantial media attention, all of which applied huge pressure on the FSA and Capita.
Prior to the debate, the continuing headlines caused Capita to announce a £54 million settlement offer, very low in value, which denied investors any right to continue to press for further monies, and was not explained. The offer had very low take-up, and we were particularly vocal in advising investors against acceptance.
In parallel with the general campaign, investors launched a Judicial Review against the FSA, requesting that they provide details of what they found when the funds were suspended, where fault lay, and investigate the possibilities of restitution.
Whilst the Judicial Review ultimately failed, it and the continuing publicity became an ongoing line of pressure which ultimately forced the FSA to look for a ground breaking solution - the section 404 redress settlement. Under section 404, the IFA sector would be asked to pay for the majority of investors losses under a sector levy scheme, if the investors claimed they had been mis-sold to by their IFA, or their IFA had gone out of business.
Claims went to the Financial Services Compensation Scheme ( “FSCS”). At present, about 65% of investor members have received all or most of their investments back. Currently, a portion of the remainder are considering legal action against Capita.
The Arch cru campaign is widely seen as a good success against an intransigent FSA and Capita, and in money terms, the biggest restitution achieved on behalf of investors to date.
Keydata Investment ( “Keydata”) traded in offshore funds, based on packages sourced from two Luxembourg-based companies, Lifemark and SLS Capital SA, neither of which were FSA registered. The principal product was the Secure Income Bond, an obscure US bond based on life insurance plans given up by their holders, which promised an annual return of 7.5%. Benefits accrued when former policyholders died prematurely. The Lifemark and SLS bonds were sold via independent IFAs who received 3% commission, recurring at £0.5% per annum, when they sold the bonds on to private clients. The Norwich and Peterborough Building Society also advised hundreds of customers to invest in Keydata.
When Keydata went into administration in 2009, it had a total of £2.8bn of funds under management and 85,000 investors. 30,000 of these investors were from the UK who had invested a total of £450m.
The Serious Fraud Office was called in soon after the collapse, but after nearly two years in May 2011 the investigation closed with insufficient evidence to back a criminal prosecution. In the meantime, we set up a Keydata Victims Action Group to help recover over £277m of investors’ money. More than 5,500 investors applied to the Financial Services Compensation Scheme ( “FSCS” ) for compensation, although some losses exceeded the FSCS maximum payout of £48,000 per application. We also successfully lobbied for action from the FSCS to against advisors who mis-sold Keydata bonds.
By March 2012, the FSCS had paid out some £328m to victims. The FSCS then set about recovering the cost of compensating investors by reclaiming £210m from 475 advisers who had sold the investments. From April 2012, fines were handed out to IFAs. Throughout this campaign, we supported our investors’ call for regulators to heed consumers’ complaints as early warning signs and put in place robust and decisive steps to investigate firms sooner rather than later.