Financial Services Authority and Connaught Income Fund

Guto Bebb Excerpts

Wednesday 7th May 2014 Westminster Hall

[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.

--- Later in debate ---

[The Economic Secretary to the Treasury (Andrea Leadsom)]

It is a great pleasure to serve under your chairmanship for my second outing in Westminster Hall, Mr Brady. I congratulate my hon. Friend the Member for Vale of Glamorgan (Alun Cairns) on organising this debate on an incredibly important subject. I also have constituents who have lost a huge amount of money as a result of the devastating investment they made. It is important that we get to the bottom of the matter and try to ensure that, if possible, investors can be compensated in some way. Those who are responsible should face the maximum justice available.

This is an important issue not just for my hon. Friend’s constituents and mine. I see many Members in Westminster Hall today whose constituents have also suffered as a result of investing in the fund, so it is important that the FSA, as was, and now the FCA take the matter extremely seriously. I reassure him and all other Members here today that that is indeed the case.

Many investors have lost their life savings as a result of the events involving the Connaught funds, which has caused real hardship for people across the country. As my hon. Friend made clear, the Connaught funds comprise three separate funds: the Connaught Income Fund series 1, series 2 and series 3. In total, approximately £145 million was invested in the funds, which, as we know, were unregulated collective investment schemes. By definition, such schemes are not subject to direct regulation by the FCA or, previously, the FSA.

[Guto Bebb]

I visited the FCA with my hon. Friend the Member for Vale of Glamorgan (Alun Cairns) to look at the issue in question. We were shown a flowchart identifying the selling process for this investment. The number of elements that were regulated and the number not regulated implied that there was significant confusion about the way the regulatory process actually works in the UK.