Arch Cru Compensation Scheme

Tom Greatrex Excerpts

Wednesday 19th October 2011 Westminster Hall

[Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship again, Mr Owen, in what is an important debate. Since it was announced last week, a number of hon. Members have spoken to me about the issue, and I am far from alone in having received e-mails, correspondence and surgery visits from people who have been affected by the collapse of the Arch Cru investment fund. I am pleased that the Minister is present to respond to the debate. I know from previous debates that he has a reputation for seeking to answer questions as fully as possible, and I hope that he will continue to do so today. In recognition of his reputation in that regard, and given the high number of Members present who wish to speak or intervene, I will keep my remarks as brief as I can to give the Minister the maximum time possible to respond. I also wish to recognise the efforts made by the hon. Member for Vale of Glamorgan (Alun Cairns) who is present for the debate. He has been trying valiantly for some time to secure a parliamentary debate on Arch Cru, but it was my fortune that my name happened to be picked. I know that he will contribute to the debate in due course.

Many hon. Members are familiar with aspects of the background that led to the collapse of Arch Cru, but some salient points bear repetition. Arch Cru was established in 2006 to provide low-risk, cautiously managed funds that were sold through independent financial advisers and, like all investment funds in the UK, were regulated by the Financial Services Authority. The authorised corporate director was Capita Financial Managers Ltd, part of the listed Capita group. The two depositories of the funds were Bank of New York Mellon and HSBC. Having spoken to a number of investors and financial advisers over recent weeks, I am in no doubt that the association of those names with the fund lent credibility and provided a degree of comfort for many investors. Approximately 20,000 people invested in Arch Cru, many of whom were small investors who invested retirement savings or lump sum pension payments into the fund, following advice from financial advisers. Those to whom I have spoken invested on the basis that since it involved their retirement pots, funds needed to be cautiously invested. That was the attraction and the reason for their investment.

The fund was suspended in March 2009 by the FSA following a warning that it was insolvent. At that time it was worth a total of £363.6 million but since then—unsurprisingly—the value has fallen and at the most recent evaluation in March 2011, the fund was valued at £148.8 million. Estimates vary but between 4,000 and 10,000 people suffered losses following the collapse of that fund. Many of those people never expected to be in such a position because they were attracted to the low-risk, cautiously managed fund in which they invested. This is not a tale of a get-rich-quick scheme gone wrong, or of a high-risk, high-return investment vehicle. It is a story of thousands of people who were advised to invest savings for their retirement precisely because the fund was categorised as cautiously managed. As we now know, the reality was somewhat different. Far from being cautiously managed, funds were invested via Guernsey cells in what some would argue was a high-risk and cavalier manner. Investments included property in Dubai, Greek shipping and ferries.

My constituents—and, I am sure, those of other Members—have questions that fall within four key areas. First is the role of Capita Financial Managers which, as I have stated, was the authorised corporate director with responsibility for providing assurance that the fund was operating correctly. It sold its services as a hosting solution. I have some of its marketing material with me that states:

“For investment managers looking to manage current assets with authorised fund structures there exists an alternative to establishing your own unit, trust manager or authorised corporate director…Capita offers a ‘hosting’ solution which enables investment managers to focus on investment activities. In this arrangement Capita Financial group becomes the authorised entity by the Financial Services Authority and thereby undertakes the management company function on your behalf, delivering comprehensive administrative and investment servicing and support to your funds.”

That is how Capita sold its services. It is an outsourcing group.

[David Simpson (Upper Bann) (DUP)]

I congratulate the hon. Gentleman on securing this debate. The research papers we have received state that investors were

“sucked into the funds by some of the slickest marketing ever put together in financial services. Marketing so good, in fact, that it bamboozled many good independent financial advisers”.

People will lose 30% or 40% of their money. Does the hon. Gentleman agree that that is unacceptable and that it was a sham from start to finish?

[Tom Greatrex]

I agree wholeheartedly with the hon. Gentleman and I will go on to develop the point about marketing to independent financial advisers.

[Mr Jim Cunningham (Coventry South) (Lab)]

A number of my constituents have written to me voicing their concern about this issue. Does my hon. Friend think that there should be an urgent inquiry into the matter? On the basis of what he has just said, the situation is more serious than a lot of people realised.

[Tom Greatrex]

I agree with my hon. Friend and I will make some of those points later in my remarks. We are only at the beginning of uncovering what went on, and the situation is worrying for many other funds. There are also questions for regulators that I will go on to address.

[Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)]

I congratulate my hon. Friend on the way he presents the subject under discussion and on securing the debate. The fact that MPs from all four nations of the UK and five political parties are present indicates how widespread the problem is throughout the country. We clearly need an inquiry and to find out what has been going on. We do not want a repeat of the Equitable Life saga when it took 10 or 15 years before people got sight of any money. We need an inquiry, but we also need action by regulators and the Government to try and help people who, as my hon. Friend pointed out, in many cases made what they believed to be a low-risk investment for their later years. They will not be able to wait 10 or 15 years.

[Tom Greatrex]

I agree with my hon. Friend. It is important that people get their money and that they get it in the right way. I will make that point later in my contribution. Capita is an outsourcing group. The structure works so that Capita assumes a legal responsibility for the assets and subcontracts management back to the fund house. It is effectively an outsourcing operation.

While preparing for this debate I had the opportunity to speak to some individuals who used to work for Capita. What they told me shocked and appalled me. I was told that there was relatively little oversight over funds in Capita Financial Managers, and that there was a small team of people, a high staff turnover, and lots of relatively young and inexperienced staff who worked for over 300 funds at the same time. One individual who previously worked for Capita told me that Capita was

“not the best managed firm and the compliance culture left a lot to be desired. Capita is not particularly well respected in the industry and it is no surprise to me that they found themselves in trouble.”

Those remarks contrast greatly with the way that many people viewed Capita on the basis of their investments. Capita is a household name that for many people has a degree of respectability. People made their investment decisions partly because Capita’s name was attached to that investment.

[Bob Stewart (Beckenham) (Con)]

Capita is also international. How much power might we have over Capita if it spreads to New York and other places?

[Tom Greatrex]

The hon. Gentleman is right to say that Capita group is involved in a range of businesses across the world. Capita Financial Managers, however, was regulated by the FSA and was supposedly in a position to provide assurance in this case. That is where questions need to be asked.

[Sammy Wilson (East Antrim) (DUP)]

The hon. Gentleman makes the important point that whatever management inadequacies there may have been in Capita, it was regulated by the FSA. It oversaw what was supposed to be a prudently managed fund. Money was being put into totally illiquid assets and very dodgy assets, yet that was never identified. Was there not a regulatory failure in that regard?

[Tom Greatrex]

The hon. Gentleman makes an important point. I want to come on to the role of the FSA as the regulator and I particularly want the Minister to respond on the potential role of the Financial Conduct Authority in the future as the FSA is wound up.

[Mr Iain McKenzie (Inverclyde) (Lab)]

Does my hon. Friend agree that Capita needs to step up to its responsibilities? What it is offering in compensation is derogatory to the people who have lost their life savings. It needs to step up to its responsibilities and offer 100% compensation.

[Tom Greatrex]

My hon. Friend makes a very important point. I want to come on to the inadequacy of the payment deal—it is not a compensation deal—on the table at present, because there are serious questions to ask about that as well.

If what I have set out was Capita’s reputation among some in the industry, it is perhaps not surprising that Capita appears not to have known about the activity of the sub-funds investing in the very high-risk activity via the Guernsey cells; that Capita appears not to have been aware of the illiquidity in the fund by 2008; and that Capita appears not to have provided a proper sign-off for the accounts. I say “appear” because we do not know for certain the detail of the failings, because the FSA, in correspondence that it has copied to Members of Parliament, says that it is unable to provide details of its investigations.

Suffice it to say that those independent financial advisers who trusted the Capita brand worked on the basis of the CF Arch Cru marketing material, which Capita would have had responsibility for signing off and copies of which I have with me. It includes material headed “Going Well” from November 2008, by which time the FSA had, we know, started looking into Arch Cru. There is also a weekly update from 9 March 2009—four days before suspension of the fund. In approving tones, it boasts of cumulative decline year to year of 2.6% compared with double digit falls in most major traditional public asset houses. It says that all its UK funds retain a top five rank in their category. Those statements were issued to financial advisers just four days before the fund was suspended.

In addition to that type of material, the chief executive of Capita Finance Managers, Chris Addenbrooke, in Investment Adviser in September 2008, said:

“We’ve got the credibility to take on the ACD”—

authorised corporate director—

“role. Our clients see that as attractive.”

Given that material and comments such as that, there is no doubt that people thought that they were investing in something that was very different from what it turned out to be. It is apparent that at the very least there were serious shortcomings in the role of Capita as the ACD.

Secondly, there is the role of the FSA. Earlier this week, I spent some time with representatives of the FSA, discussing Arch Cru, and I am grateful for their time and their engagement in seeking to answer some of my questions, but serious questions remain for the FSA to answer. It was statutorily responsible for regulating Capita Financial Managers. Why did it not know or not appear to know what was happening with Arch Cru? I also spoke to people who had previously worked for the FSA. They said that the ARROW—advanced, risk-responsive operating framework—visit was not until late 2008 and that was not atypical given the risk matrix, which would have meant that the likely ARROW visits would have taken place only every 18 months approximately. I understand and accept that this matter can be complex.

[Anne Marie Morris (Newton Abbot) (Con)]

Is the hon. Gentleman making the point that this is not simply a matter of what the FSA did and whether it did it appropriately, inappropriately, negligently or otherwise, and that there was something fundamentally wrong with the processes of the regulatory regime that was operating at the time?

[Tom Greatrex]

I thank the hon. Lady for her intervention. There are two points: a point about what the FSA did in relation to Arch Cru, and a further point about the regulatory regime. As I said, with the FCA about to be set up, there is an important issue for the Government to deal with in that regard as well.

[Mr Andrew Smith (Oxford East) (Lab)]

I congratulate my hon. Friend on obtaining the debate and on the forensic and effective way in which he is presenting a very important case, which affects my constituents as it does others. Does it not pass all understanding how the FSA could have said on 21 June in its statement that it “considers that this package”—the £54 million package—

“is a fair and reasonable outcome, which is in the best interests of investors”

when it is not fair, not reasonable and clearly not in the best interests of investors?

[Tom Greatrex]

I agree wholeheartedly with my right hon. Friend. I hope to make a couple of remarks about that package in a few moments.

[Sir Alan Beith (Berwick-upon-Tweed) (LD)]

May I return to the point that was made a moment ago? Does it not appear that the structure set up for Arch Cru was designed to ensure that the FSA did not notice what was going on, although the setting up of the structure should have been noticed by the FSA and picked up at an earlier stage?

[Tom Greatrex]

I thank the right hon. Gentleman for his intervention. When I spent some time with representatives of the FSA, they showed me a diagram of the structure of the fund and it was amazing to see quite how labyrinthine it was and is. The right hon. Gentleman is right to say that that is the root of part of the problems. At the same time, seeking to say, “Well, that’s the responsibility of the Guernsey regulator. That’s the responsibility of someone else,” does not deal with the central issue. That is the lesson for the future that we need to be conscious of.

[Fiona O’Donnell (East Lothian) (Lab)]

My hon. Friend is being extremely generous in giving way. Although it is welcome to see cross-party support today for the investors who are innocent victims of absolutely disgraceful behaviour by Capita, will my hon. Friend seek an assurance from the Government that their red tape challenge will not get in the way of effective regulation of this sector to prevent other people from losing out in the way in which the Arch Cru investors have?

[Tom Greatrex]

I thank my hon. Friend for her intervention. I am sure that the Minister heard her entreaty. I agree with her that in seeking to ensure that the regulation is right, there is a great danger in looking to light-touch regulation. The consequence of that could well be the position that we find ourselves debating this morning. I am sure that the Minister will take that warning on board.

The third issue is the payment scheme negotiated by the FSA from Capita, HSBC and BNY Mellon. As everyone knows, they are careful to say that that deal is not an admission of liability. The FSA says and has said to investors that it is a “reasonable outcome” for them. It says that it saves time, given that a breach does not have to be proved in what the background note describes as a very complex case, involving multiple parties with different responsibilities. It says that it considered that it was appropriate to align the Financial Ombudsman Service decision making with the payment scheme rules.

[Derek Twigg (Halton) (Lab)]

I congratulate my hon. Friend on securing the debate. It is nothing less than a scandal that hard-working people are being treated in this way. They are suffering anxiety and concern when all they wanted to do was to secure their future. Two of my constituents have written to me to say this:

“Would it be possible for you to support a request for a Section 14 enquiry under the Financial Services Act? This will provide the best opportunity for all investors to receive an improved compensation package.”

I would welcome my hon. Friend’s view on that. Clearly, I would support such an inquiry if it could deliver an improved compensation package, because the concern and anxiety that people are suffering is terrible. Listening to what they have to say is heart-rending.

[Tom Greatrex]

I thank my hon. Friend for his intervention. I agree with him and will go on to ask the Minister—I am sure that he is expecting this—for a section 14 inquiry and for him to explain why one has not been instituted so far.

To me and to many of the investors, the deal brokered by the FSA—the payment scheme—sounds like an admission of defeat. They cannot work out what went wrong and why.

[Heather Wheeler (South Derbyshire) (Con)]

I thank the hon. Gentleman for the sterling work that he has done, along with my hon. Friend the Member for Vale of Glamorgan (Alun Cairns), to bring this matter to the fore. I am delighted that it is my hon. Friend the Financial Secretary to the Treasury who is here to answer questions. What the 15 people in South Derbyshire who have written to me about the matter have experienced is heartbreaking. They thought that they were doing the right thing, but they have been presented with this letter by the FSA saying, “Take it or leave it—70%. You’re lucky to be getting something quickly.” Is that really how we should play the financial game? Perhaps there should be a bigger inquiry into the way the FSA has been carrying out its duties?

[Tom Greatrex]

I thank the hon. Lady for her intervention. That all points to the case for a section 14 investigation to get to the bottom of these events and to prevent them from ever happening again.

To return to the payment scheme, it sounds like the FSA cannot work out what went wrong and why, and where the liability was.

[Angela Smith (Penistone and Stocksbridge) (Lab)]

My constituent Linda Marsh is particularly exercised by the fact that she is being pressured to accept the payment offer on the table because of the looming November deadline. Is it not really urgent that we remove that deadline and allow a proper inquiry to take place?

[Tom Greatrex]

I thank my hon. Friend for her intervention. She makes an important point about people being able to make the right decision when they are offered this payment deal, particularly given that it seems to bind in the Financial Ombudsman Service in a way that makes it impossible for it to take a case subsequently. My hon. Friend makes an important point.

[Naomi Long (Belfast East) (Alliance)]

On that point, one of the concerns raised by constituents who have come to me is that the compensation offer is conditional and precludes legal action against Capita being brought to court by any investor who accepts it. However, it leaves open the option of the investor pursuing the financial advisers, who were, as Members have rightly said, misled by the information provided to them. That seems a very unjust transfer of responsibility.

[Tom Greatrex]

The hon. Lady is exactly right. It is almost as though the deal that has been reached leaves the liability with people who have, as she said, been misled, with the result that they end up carrying the can, which would be very unfair. That is why the deal on the table is wholly inadequate, and I will go on to make a few points about that.

[Ann McKechin (Glasgow North) (Lab)]

Does my hon. Friend agree that it is inappropriate, given that such serious regulatory failures have been identified in this crisis, for the FSA to be so directly involved in the negotiations and the settlement being offered? The FSA lacks the appropriate independence, because it might be to its advantage for the settlement not to result in legal action and further inquiry.

[Tom Greatrex]

I thank my hon. Friend, who makes an important point, which goes to the heart of this issue—the role of the FSA as the regulator and, it seems, the broker of a deal that might help to get something off its back.

It seems the FSA cannot work out what happened. It wants a line to be drawn under this issue, but thousands of unhappy people expected the regulator to prevent this abuse from happening. The FSA has said that the deal will return to investors approximately or up to 70% of their investment, and the words “up to” are quite significant. That 70% is based on the £54 million that has been returned already, £149 million from the sale of other assets, which were valued at that level at 31 March 2011, and an additional £54 million, which Capita, HSBC and BNY Mellon agreed to without accepting liability in a deal brokered by the FSA. However, that £149 million might well not be realised, especially when we consider that the asset base included Greek shipping and what have been described to me as rust-bucket ferries, as well as middle eastern property, the value of which—if there is any left at all—could have fallen, even in the short time since March, given the current economic conditions.

The question I put to the FSA—it was entirely reasonable, but the FSA was unable to answer it—was why it did not add up the asset sales and projected asset sales and subtract them from the investors’ losses to give a figure that would make the compensation up to 100% of what people invested. In that way, people could get their money back; they would not make a profit, but simply get back what they invested, based on the assurances they were given by an organisation that was regulated by the FSA when they took out their investment.

[Jim Shannon (Strangford) (DUP)]

One thing that has come to my attention through my constituents is that the FSA has given advice to investors pushing them towards independent legal advice. Some of that legal advice has led to further complications and added to the money they had already lost. Does the hon. Gentleman feel the direction the FSA pushed investors in should be addressed, given the extra heartache and money losses they have experienced as a result of seeking legal advice that has turned out to be wrong?

[Tom Greatrex]

I thank the hon. Gentleman for his intervention. I do not wish to get drawn into the background dispute between people who have paid into a class action legal fund and people involved in a different action group on behalf of investors. To be frank, I have spoken for far longer than I intended, and I want to give others the chance to get in. There are lots of complicated issues, and I want to focus on the compensation scheme before I draw my remarks to a conclusion. I hope the hon. Gentleman will forgive me.

The approach I have suggested would simply enable people to get their money back—to get up to 100%. This case has been described as one of the worst investment scandals of recent years. There was a similar scandal under the FSA’s predecessor, the Investment Management Regulatory Organisation, and the name Peter Young will mean something to many people here. The relationships and problems involved were broadly similar, but following the suspension of the fund in question in 1996, IMRO achieved a settlement whereby people got their money back. The deal was funded by Morgan Grenfell, which was broadly in the same position as Capita.

That settlement was agreed three months after suspension. Although IMRO took action against the chief executive of the fund manager, the offer was not paid until January 1999—two years and four months after suspension. In the case of Arch Cru, however, it is now two years and eight months since suspension, and only now are letters starting to go out to people with the payment offer—I understand that they are going out now or will be going out in the next couple of weeks. Why was the FSA unable to get close to the resolution achieved by its predecessor as regulator in a similar time frame? Why is up to 70% acceptable to the FSA, when IMRO managed to get 100%?

Fourthly, there is the issue of ensuring that these events do not happen again. Something needs to change if these things are not to happen again, and people who invest their retirement nest eggs or lump sums on the basis of being told that a fund invests cautiously are not to lose their money, not to have to battle through the press to get a hearing, not to have to get a debate in Parliament so that issues can be aired and not to experience the stress, anxiety and rank unfairness of losing their money in a high-risk gamble they were told was a cautious investment.

In this regard, the FSA is about to be replaced by the Financial Conduct Authority, and the relevant proposals are beginning their pre-legislative scrutiny. What will be put in place to enable the FCA to prevent something similar from happening again? All of us, including the Government, have an opportunity to get the proposals right, and that is why these issues are a matter for the Minister and the Government. The Minister and the Treasury correspondence unit have been clear that this affair is a matter for the regulator, not them, but when the ACD fails, the regulator admits it did not know what was happening because of the structure of an investment vehicle, and the basis of a payment offer is so woefully inadequate, these things become a matter for the Minister; it becomes the Government’s responsibility to prevent or minimise the risk of such things ever happening again.

It also becomes a matter of my constituents and those of other Members present being entitled to information, but the FSA and others are not releasing much information. That is why I am putting the questions to the Minister today. Does he believe that Capita fulfilled its role effectively? Does he accept that the FSA has been hampered in fulfilling its role as regulator by its structure? Does he understand that in not providing information, there is suspicion among the investors? Does he realise that on that basis, up to 70% is just not good enough? Does he now know that the FCA needs to be bolstered for the future? Given all the above, will he now ensure that there is a section 14 investigation into what went on with Arch Cru?

I have spoken for far longer than I had intended, so I will conclude. It is easy, when looking into the matter, as I have done over the past few weeks, to get into the details and get lost in the technicalities and minutiae of the regulatory regime, and in the reputations of blue-chip companies, the statements of their chief executives and other individuals, and even the reputations of some of those in high-profile positions in the investment fund. Ultimately, the matter is about people—people such as my constituent Mr Pringle of Cambuslang, whom I have been in correspondence with. He e-mailed me yesterday and asked me to include a final point in the debate, which I will conclude on. He said that

“my wife…and I invested all our pension money with the Cru in this ‘Low Risk’ venture. Being pension money we obviously did not want any high risk ventures that would put our money at risk…We are extremely disappointed in the FSA’s attitude towards this case, by saying that they think Capita’s offer is ‘Fair and Reasonable’. Not in any way is their offer ‘Fair and Reasonable’. Investing in Greek Shipping is not ‘Low Risk’!”

That is the crux of the issue. That is why it is a matter for the Government as well as the regulator, and that is why the Minister needs to respond to the debate this morning.