FOS reveals details of upheld Arch Cru complaint against IFA

The Financial Ombudsman Service has revealed the details of a provisional judgement against an IFA who invested clients in Arch Cru.

The unnamed IFA must pay Ms P and Mr M the £8,000 they invested plus 1% more than Bank of England base rate compounded yearly from the date of investment, within 28 days.

Any compensation the couple are entitled to under the FSA-brokered Capita payment scheme is to be deducted from the total redress the IFA must pay.

However if a planned judicial review into the scheme is successful, and the couple's entitlement to it is withdrawn before 31 December 2012 preventing them from limiting their losses, the IFA will be liable for the whole £8,000, plus interest.

The FOS decision comes despite a solicitor for the Financial Services Authority having said he believes no-one may be responsible for Arch cru investors' losses.

In his decision, Obudsman Tony Boorman said to an experienced financial adviser Arch Cru "would not and should not" have appeared to represent a low or cautious investment risk in early 2008.

"I have some doubt as to whether such an investment would have been suitable for any but significantly more speculative and sophisticated investors," he said.

He also dismissed claims from the IFA that he relied on an IMA categorisation of the fund as cautious managed.

"Regardless of the general categorisation of the fund by the IMA or any other body, the IFA had a responsibility to make a suitable recommendation and describe the risks and the nature of those risks accurately to its clients.

"Of course the potential problems with these types of investments were laid bare by the market conditions of the last few years and are now well known. So it is important to avoid the benefit of hindsight in the assessment of these matters today.

"But the inherent risks in the retail market associated with such opaque investments were well known and are an established feature of market investments."

Boorman said the fund presented "significant risk to capital", especially because of its large holdings in private finance and private equity.

"If such investment by the fund manager, which was entirely at its discretion, turned out to be ‘wrong' in the sense that it provided lending to, or invested in, companies that entered difficulty or failed, then significant reduction in capital could occur.

"It would also have been foreseeable, given the nature of the investment, that liquidity issues could arise thereby preventing investors accessing their funds."

"I am satisfied that, the IFA, being a professional independent financial adviser, ought reasonably to have identified those risks from the readily available description of the fund that was available at the time to the IFA and taken them into consideration when recommending the investment to Ms P and Mr M," he said.