Financial Services Authority and Connaught Income Fund

Chris Ruane Excerpts

Wednesday 7th May 2014 Westminster Hall

[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.

--- Later in debate ---

[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 ---

[Andrea Leadsom]

My hon. Friend makes an extremely relevant point. As I was looking into the matter in some detail yesterday, I was struck by exactly the same thing. There were regulated elements and unregulated elements, and of course we have ended up with a disastrous scenario in which people have lost a lot of money and it has become difficult to get to the bottom of everything. I will try to unravel that a bit.

As I said, because of the unregulated nature of some of the entities involved, many of the usual protections and safeguards that protect investors in regulated funds were absent. That is why the promotion and distribution of such schemes are subject to strict controls. Unfortunately, it seems that in this instance even those controls did not prevent a large number of individuals from investing in the fund. In addition to the questions that have been raised, to which I will return in a moment, I would like to address two main issues: first, the actions taken by the FCA to try to protect consumers, despite most of the entities involved being unregulated; and secondly, the ongoing work for the benefit of consumers and investors to secure a fair and proper outcome.

First, despite the schemes being unregulated, the FCA has taken a number of steps to try to protect consumers. In May 2011, the FSA altered Tiuta’s permission so that it could no longer carry out any new regulated mortgage lending and issued an alert to consumers telling them what they should do if they thought they had been mis-sold the fund. In June 2011, the FSA wrote to all financial advisers who sold the fund, asking them to review the sales and to contact consumers where there might be risk of unsuitable advice. It also set up a page on its website for consumers and firms to receive information on the fund. In August 2011, it required Tiuta to instruct Connaught Asset Management Ltd to change its marketing materials so that they no longer described the fund as “low risk” and “guaranteed”. The FSA took the view that those descriptions were misleading. Finally, in June 2012, it altered Tiuta’s permission to ensure funds from redeemed loans returned to the series 1 fund.

[Chris Ruane]

In August 2012, Capita, the parent body of the Connaught fund, was given a contract by the Department for Work and Pensions worth hundreds of millions of pounds. Who should pay for the losses? Should it be Capita, or should it be the 1,200 individuals who were falsely sold the investment? Will the Minister use her position with the Secretary of State for Work and Pensions to ensure that Capita does the right thing and compensates those individuals?

[Andrea Leadsom]

I am grateful to the hon. Gentleman for making that point, which I will certainly look into further. Those two organisations belong to the same parent company, but are in fact different subsidiaries. As he might be aware, Government contracts are awarded in line with EU procurement rules.

In addition to the work by the FCA, I can also confirm that other law enforcement agencies are looking into this matter. I will urge the police to consider the case very carefully. I know that Members are interested to hear whether the police are looking at this matter, and I can confirm that they are. The FCA has been working closely with law enforcement agencies to identify and pursue avenues that will yield the best outcome for investors. It continues to look into the matter, and its work is very much ongoing. In the meantime, it is encouraging any investors who believe they might have been mis-sold a product to contact their independent financial adviser. It has disclosed information to the police and the administrators of the firms involved to help them with their inquiries.

A number of points were made during the debate, and I will try to address them. I was asked whether Capita Financial Managers Ltd was negligent in its operation of the fund and whether it breached its obligations under the Financial Services and Markets Act 2000, the operator agreement or its duty of care to consumers. The Government and the FCA take those allegations very seriously, and the FCA is carrying out its own inquiries, but the requirements on the operator of an unregulated fund are limited under FCA rules. I was asked whether the FCA has made a restitution order against Capita. I stress that the FCA is considering all the different avenues by which those who have suffered could obtain compensation. I was asked about the information provided by George Patellis.