Arch Cru Compensation Scheme

Jonathan Evans Excerpts

Wednesday 19th October 2011 Westminster Hall

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

It is a pleasure to serve under your chairmanship, Mr Owen. I want to congratulate and pay tribute to the hon. Member for Rutherglen and Hamilton West (Tom Greatrex) on securing the debate and on the way in which he introduced it. He set an absolutely right tone to try to uncover the scandal and seek justice for many innocent investors.

This debate is the first opportunity to air serious issues that have cost some 20,000 people significant sums in respect of a fund once valued at £400 million. The title of the debate relates to the compensation scheme, which is the obvious priority of investors. However, there is also a need to interrogate the background, which raises questions about the scale, source, timing and conditions of the scheme.

The investors’ starting point in the financial scandal was to receive and consider advice from their independent financial adviser. As the hon. Gentleman suggested, the funds were clearly advertised and marketed as cautious managed. That would have sounded reasonable and fitted the risk profile of many private investors across the country.

[Jonathan Evans (Cardiff North) (Con)]

May I be the first on this side of the Chamber to pay credit to my hon. Friend for his tenacity in assisting people in bringing this matter before the House?

The point that my hon. Friend is making specifically relates to the decision made by investors. I have constituents who have invested, including one who wrote to me only yesterday to tell me that he invested £120,000—the totality of his pensions and savings—primarily because he wanted to be in cautious-managed funds that were safe. That highlights the regulatory failure to which my hon. Friend is alluding.

[Alun Cairns]

The cautious-managed issue is a common theme throughout regarding the Arch Cru funds. Cautious managed, from my time in financial services, would be argued as an investment category that fits the majority of people across the United Kingdom. However, investigation shows that the Financial Services Authority does not regulate the risk classification of funds, which is assessed by the Investment Management Association. I find that staggering, considering that that is a fundamental element in the decision-making process of any investor. The IMA is merely an industry managers’ representative body. The FSA has told me that classification is not a regulated activity, so it does not have the powers to amend the classification of funds. However, the FSA needs to be reminded of its statutory objectives, specifically the one relating to maintaining market confidence.

The reality of the investment was that it was not cautious managed. The open-ended investment company invested in unconventional investments, as we have heard. Cell companies were formed and floated on the Guernsey stock exchange, investing in private equity and shipping loans, among other high-risk transactions. As that was a recognised exchange, it circumvented the FSA radar, although FSA rules banned such illiquid investments in open-ended funds. Therefore, it was no surprise that in March 2009, almost three years after they were launched, the funds were suspended.

However, the situation is not that simple. The FSA identified issues with the funds in October and November 2008, but the funds were permitted to continue to trade. It conducted an advanced risk responsive operating framework test at the time, which should have highlighted the issues, particularly pricing concerns. Yet, the funds were only suspended four months later.

Capita became the authorised corporate director, and had failed to act. It had responsibility for corporate governance and daily pricing, and control over the underlying assets. It initially denied having control of the underlying assets, but the auditors’ report from Ernst and Young showed that it held more than 75% of the shares. I suggest that Capita mispriced the funds before suspension due to its failure to exercise control to value the underlying assets accurately. There was a breach of the investment mandate and a pursuit of a reckless investment strategy by Capita’s designated fund manager.

Clearly, that negligence led to Capita’s £54 million compensation offer—70% of the value of the funds at the time of suspension, together with the remaining assets from the valuation on 31 March. That has been criticised as unlikely to hold up. Investors are being asked to accept an offer without knowing what they will receive, as that depends on the value secured on the sale of the remaining assets, which will take years. That is an obvious disparity and injustice.

The auditor was Moore Stephens. It surely should have identified the issues, but it has still yet to offer any form of explanation, let alone compensation. The Guernsey regulators also have some explaining to do and have to accept their part of the responsibility and liability.

--- Later in debate ---

[Tristram Hunt (Stoke-on-Trent Central) (Lab)]

It is great privilege to serve under your chairmanship, Mr Owen, and to follow the hon. Member for Vale of Glamorgan (Alun Cairns) who, along with my hon. Friend the Member for Rutherglen and Hamilton West (Tom Greatrex), has pursued this matter with such dedication.

I rise to speak on behalf of my constituents who have been affected by this debacle, including Michael Sharkey, Ian Matthews and Donald Tart. They have invested not hundreds and thousands of pounds but smaller amounts, which are highly significant for their future standard of living. There is widespread concern, nay fury, among my constituents that they are seeing only up to 70% of the returns in this so-called £54 million funding package. In many circumstances, they face the loss of more than 40% of their investments. As we have heard, we are discussing people’s lives and money that people had worked hard for and put away for retirement or hoped to pass on to their children or grandchildren.

Of course, we will not know the full scale of the negligence involved and the real losses until all the remaining assets of the fund are eventually sold. However, private advice has conservatively estimated the losses in my constituency alone at around £1.5 million, which is a sizeable amount of money for my constituents, or to put it another way that is around 1.5% of the value of the contract recently awarded to Capita to run the national pension scheme. As the authorised corporate director for the Arch Cru investment fund, and therefore having the regulatory responsibility that we have heard so much about today, the Government might think about stepping back from giving Capita further powers and authorities. We have heard about the extraordinary negligence and even allegations of criminal activity involved in the running of these funds.

In June, I tabled 19 parliamentary questions to find out just how much business this Government have awarded to Capita. As of 3 August 2011, the Government had awarded 447 contracts worth at least £112 million to Capita. The hon. Member for Worthing West (Sir Peter Bottomley) has suggested that the Government have a role to play in bringing people to the table. I suggest that if someone is awarding £112 million-worth of contracts, they have a powerful role to play in bringing people to the table.

[Jonathan Evans]

Has the hon. Gentleman done the research to help hon. Members understand how many contracts Capita received before 2010, under the previous Administration? My guess is that it would be a significant multiple of the figure that he has just given.

[Tristram Hunt]

I was going to say that I thank the hon. Gentleman for his intervention, but he seemed to be making an unnecessarily partisan point when we are trying to work together for the good of our constituents. I will simply let it pass in that manner.

That figure of £112 million does not include contracts from the Department of Energy and Climate Change, contracts from the Ministry of Defence, which would only provide ranged values of contracts up to a total of £20.6 million and contracts awarded by the Department of Business, Innovation and Skills, which simply did not answer my question. I hope that the Minister will seek out the truth himself.