Revealed: Terms of Arch cru investors' FSA showdown

The FSA could face legal action for breach of its own rules unless it lifts restrictions on Arch cru investors claims at the Financial Ombudsman Service and launches a public consultation into the amount of redress they should receive.

The regulator has exercised its powers to bind the FOS so it must consider Arch cru complaints only on the basis of what an investor's entitlement would be under the £54m payment scheme the FSA brokered with Capita, HSBC and BNY Mellon on investors' behalf.

Investors argue this amounts to less than 50% of their capital, including any further distributions from the fund which are not guaranteed. The FSA claimed the figure is closer to 70%.

Acceptance of an offer of payment from the scheme will be in "full and final settlement" of any claims against the three firms, under the deal.

However, lawyers acting for 2,738 investors claim the Capita scheme and the restrictions on FOS are not lawful under section 404 of the Financial Services and Markets Act (FSMA). They have notified the FSA they will issue proceedings to sue in a month unless it revokes the conditions.

In a letter to the regulator and the three companies due to be sent at 8am this morning, Regulatory Legal argued the deal failed to meet the requirements of a consumer redress scheme, while also denying investors full recourse to the usual channel of the FOS.

Under section 404 of FSMA, a consumer redress scheme set up by negligent firms determines fair levels of compensation after an extensive period of formal public consultation, and an "objective, evidence-based judgment" by the FSA.

However, Arch cru investors argue no public consultation of the Capita deal took place and none of the requirements of openness, consultation or transparency have been followed in the FSA-brokered deal.

The letter also argues the Capita scheme contravenes the FSA's Dispute Resolution (DISP) rule 3.3.4 which would otherwise provide FOS with the discretion whether or not to dismiss a complaint.

"The effect of the Payment Scheme is unfair and unlawfully fetters the discretion of the Ombudsman in ensuring that redress is fairly determined," Regulatory Legal stated in the letter, seen by IFAonline.

"This is contrary to the basic objective of redress followed by the Ombudsman Service."

Today at 9.30am shadow energy minister Tom Greatrex will hold a debate in Parliament on the adequacy of the Arch cru investors' deal on offer from Capita, and the role of the FSA in the fund range's downfall.

Regulatory Legal argue the deal also fails to meet the requirement of fairness, because a time limit means investors must decide to apply for compensation before the FSA releases its findings of a review into Capita.

"It is wrong for the FSA to have agreed to a Scheme without making public the determinations reached during the review as to what errors and omissions occurred during the operation of the underlying funds," the letter stated.

At its peak the Arch cru fund range of six unit trusts held assets valued at £425m. But on 13 March 2009, the decision to suspend dealing on the funds was taken by Capita (acting as the funds' trustee) and the FSA due to liquidity problems. The value of the fund plummeted by abut 40%.