Financial Services Authority and Connaught Income Fund

Alun Cairns Excerpts

Wednesday 7th May 2014 Westminster Hall

[Alun Cairns (Vale of Glamorgan) (Con)]

It is a pleasure to serve under your chairmanship for the second time today, Mr Brady. I welcome the Minister to her role, and welcome her involvement in this important issue.

As you can see, Mr Brady, this debate has drawn much attention from colleagues and investors alike. Naturally, investors want explanations of what went wrong and why. Colleagues who have looked into the case recognise the scale of the wrongdoing, and want to know how it happened and about any recourse available to their constituents.

This issue has developed over some time, but this is the first time we have had the opportunity to raise concerns about it and ask questions on the record. The Connaught Income Fund was launched in April 2008. It was promoted and operated by Capita Financial Managers Ltd, which was also the custodian of investors’ assets. Its original name was the Guaranteed Low Risk Income Fund, series 1—something that proved not to be the case. It was a UK-based unregulated collective investment scheme. By definition, these funds are not subject to direct regulation. However, elements of the process and funds were regulated, which means that the regulatory framework and responsibilities are not necessarily straightforward—in fact, they are complex—and that there is a responsibility on the Financial Services Authority.

[Guy Opperman (Hexham) (Con)]

I congratulate my hon. Friend on securing this important debate. Both he and I have fought Capita for more than three years following the Arch Cru disaster, which entailed similar losses, and several constituents of mine lost money through Connaught. Does he agree that it is appropriate to invite the Minister to seek the police’s involvement and to find out whether an investigation should take place?

[Alun Cairns]

I pay tribute to my hon. Friend’s work on Arch Cru as secretary of the all-party group on the Arch Cru investment scheme, and on his involvement in issues relating to Capita. He raises pertinent points that I will come on to, so I am grateful for his contribution.

[Albert Owen (Ynys Môn) (Lab)]

I am grateful to the hon. Gentleman for giving way to me so early. I have to leave, having been in the previous debate with him for an hour and a half.

Is the hon. Gentleman as concerned as I am that so little information is available on Capita, and particularly on the signing-off of the information memorandum? That is a matter of great concern to a number of my constituents and, I am sure, to constituents of hon. Members of all parties.

[Alun Cairns]

I am grateful to the hon. Gentleman for raising important points about Capita that I will come on to. A central factor is what knowledge it had at various stages.

[Chris Ruane (Vale of Clwyd) (Lab)]

I congratulate the hon. Gentleman on securing this debate. Is this the same Capita that won the personal independence payments contract with the Government, for Wales and the west of England?

[Alun Cairns]

I am grateful to the hon. Gentleman for his contribution, but of course Capita Financial Managers Ltd is different from other subsidiaries of Capita. The parent company will be the same; there are several subsidiaries. The point was well made, and I accept it in the way that it was intended.

I should like to pursue the matter a bit further before accepting any other interventions, to provide some background. The proposition was that investors’ money would be loaned to borrowers requiring short-term residential bridging loans. Loans would not exceed modest loan-to-value guidelines, no sub-prime lenders or properties would be financed, and all loans would be secured by first charges against those properties. Specifically, there was to be an average loan-to-value rate of 56%. People were told that it would seldom be above 70% and that anything above 80% would have guaranteed exits. All interest and fees would be taken up front, and there was a guarantee from Tiuta, a company that I will mention shortly, to meet any shortfalls.

The borrowers would pay an interest rate of 17.9%, while investors would receive quarterly distributions of between 8.15% to 8.5%. Capita appointed Tiuta plc and Connaught Asset Management Ltd, both UK companies, to identify suitable borrowers and approve the loans. However, investors’ funds were used differently. Money was transferred to Tiuta, rather than being released directly to the borrowers’ solicitors. It is even suggested that there was no differentiation between the firm’s funds and those of the investors; investors’ money was used to meet the working capital needs of Tiuta, and to pay directors’ salaries, bonuses and pension contributions.

In many cases, where bridging loans were made, the borrowers, properties or loan-to-value ratios were not as committed to in the promotional literature. It is believed that Tiuta proposed loans and drew down the money, but did not proceed with the lending. It is suggested that Connaught provided a monthly statement to Tiuta’s management accountant, switching the true loan book and the approved one.

In March 2009, Capita became aware that the original information memorandum was misleading. The fund should not have been described as low-risk, the guarantee from Tiuta was of no value, the money was used largely for purposes other than bridging loans, and the auditors of the fund were not engaged. In addition, the loans that had been made were not as described and were being rolled over.

In August 2009, after Capita met Connaught’s senior management, investors were informed by Capita that it was resigning as operator of the fund. It was to be replaced by Mourant Fund Services Ltd, but for some unknown reason Mourant did not complete the transaction. Perhaps it became aware of the problems with the fund.

[Guto Bebb (Aberconwy) (Con)]

I congratulate my hon. Friend on securing this debate. Is it not a significant concern for all of us who have been looking at this issue that, in 2009, it became apparent that Capita had significant concerns about the way that the fund was being operated, but those concerns were not conveyed to those who had invested in the fund?

[Alun Cairns]

I pay tribute to my hon. Friend for his support in investigating this matter. He raises an important point. There is a serious question about what Capita did and did not know, and what it should have communicated to the investors, to whom it had a responsibility.

[Bill Wiggin (North Herefordshire) (Con)]

I draw the House’s attention to my entry in the Register of Members’ Financial Interests. My constituent, Mr Sudworth, who is a victim of this fraud, asked me a question; I wonder whether my hon. Friend knows the answer. Does the Financial Conduct Authority outsource some of its work to Capita?

[Alun Cairns]

I am grateful for my hon. Friend’s question. I do not have the answer, but he points to a general defensive approach that has been taken by the FSA and the FCA. We are seeking greater transparency to get the answer to many such questions, so that we can identify where the responsibility lies.

Perhaps Mourant became aware of some of the issues that have now become apparent. Instead, Capita passed responsibility on to Blue Gate Capital Ltd, which agreed to the appointment in September 2009.

George Patellis was appointed chief executive of Tiuta in April 2010. He became concerned about the quality of the financial reporting at the company. In January 2011, a shortfall of at least £20 million was identified, suggesting insolvency. He also became aware that Tiuta had retained the proceeds when some loans had been redeemed, and of Land Registry DS1 inconsistencies.

Mr Patellis appointed BDO to investigate in January 2011, and it confirmed his initial concerns. He then resigned and alerted the FSA to the situation, to report financial irregularities at Tiuta. As a result, a case was opened by the FSA and supervisory engagement with Tiuta began. The FSA required Tiuta to engage investigative accountants to monitor its financial performance. That may relate to what my hon. Friend the Member for North Herefordshire (Bill Wiggin) mentioned. Tiuta was responsible for reporting to the FSA monthly. However, instead of undertaking independent investigations, BDO, which had secured the role, relied on information supplied by directors of Tiuta, which then produced a series of reports that persuaded the FSA that the firm should be allowed to continue to trade.

In May 2011, the FSA issued a consumer alert because marketing materials indicated that the fund was low risk, and that returns were guaranteed. The marketing material was amended for independent financial advisers, and Blue Gate was made aware of the issues with the security of the loans. In March 2012, Blue Gate notified the 1,200 investors that the fund had been suspended due to an inability to pay quarterly interest payments to investors. Tiuta was placed in administration in September 2012.

It is suggested that investors face losses of at least 70% of the £106 million that was invested. In addition, investors have to date lost up to £20 million in unpaid quarterly distributions. Since then, a number of MPs have written to the FSA—and now the Financial Conduct Authority—and the Treasury to establish whether there is a regulatory responsibility to investigate the fund, and whether there is any potential for compensating investors.

Having considered the background, I will make a number of points and ask a few questions of the Minister. Although I recognise that the Connaught fund was an unregulated investment scheme, various elements were regulated, as I mentioned at the outset. The advice process was regulated. I am not suggesting for a minute that advisers were responsible for the failings and misappropriation of funds. There is a need, however, to clarify where their responsibility ends.

In fairness to IFAs, they depend on the key financial documents, which were not accurate or adhered to, yet questions should be asked about why unregulated funds were recommended to investors in the first instance. The time for advice on such funds is clearly very limited. What did Capita know in August 2009 when it sought to pass on its responsibilities? What action did Capita take to ensure proper management of the fund at earlier stages? If Capita had doubts or questions, why was that not communicated to investors? Was Capita’s letter to investors misleading, or did Capita withhold information indicating there was unsecured and unauthorised lending from the fund?

[Guy Opperman]

Is it not incumbent on the Minister to clarify the legal position of investors on that specific point? If investors are to sue for their loss, they need to know the date of the knowledge of the fund’s decline. Secondly, they need to know the state of the assets at that time and the extent to which the FCA will assist in the recovery.

[Alun Cairns]

There could clearly be a statute of limitations that affects investors, on which I hope the Minister can offer advice.

There was obviously a gap between Capita’s original letter of 20 August 2009 advising investors of its intention to pass responsibility to Mourant and the letter of 24 September advising that Blue Gate would become responsible. Should Capita have suspended the fund when it realised that it was not being managed in accordance with the financial information documents?

As we have discussed, this is not the first time that Capita has needed to answer questions about its role. As the authorised corporate director of Arch Cru, Capita was forced to compensate investors to the tune of £32 million. Terms, how that sum was reached and Capita’s responsibilities and failings have still not been disclosed, but a sum of that size suggests some form of culpability.

Questions should be asked about the actions taken by the FSA, and now the FCA. Some investors believe that the FSA and FCA have taken little action, but the Minister’s predecessor, my right hon. Friend the Member for Bromsgrove (Sajid Javid), advised me in general terms of some of the work they undertook. That needs to be published to reassure people and to allow further questions to be raised about what could have happened.

[Chris Ruane]

Does the hon. Gentleman believe that the FSA has let down Connaught investors? Is he aware of the case of Burges Salmon, which was a similar scam of which the FCA has washed its hands and for which it has taken no responsibility? Does he think that the FCA needs to be looked at?

--- Later in debate ---

[Alun Cairns]

I am not familiar with that case, but greater transparency on the FCA, into which the FSA has now evolved, would be helpful and may dispel the criticisms. We simply do not know the specific actions that it took, if indeed it took any at any point. I hope that there has been more than evolution; there needs to be a different culture at the FCA to ensure that the failings of the past are not repeated.

What about the FSA’s actions following the intervention of George Patellis? The Financial Services and Markets Act 2000 gave the FSA a statutory duty to maintain market confidence, ensure public awareness, reduce financial crime and protect consumers. We can also ask questions of the police. Surely there are sufficient grounds for the police to investigate the matter, given the misappropriation of funds.

Finally, is the Minister able to advise us of any statute of limitations that falls on investors? That is the point raised by my hon. Friend the Member for Hexham (Guy Opperman). Ultimately, is any recourse available? In closing, I underline that although the saga has gone on for an awfully long time for investors, this is our first opportunity to discuss it in Parliament. I would like to think that this is the start of parliamentary scrutiny, and certainly not the end of the matter. I look forward to the Minister’s response.