Firms who advised on investments in the CF Arch Cru Investment and Diversified Funds must contact all their clients asking if they want their case reviewed to determine whether they were mis-sold the funds and may be eligible for redress.
The Financial Services Authority (FSA) said if clients who invested in Arch Cru opt for a case review and receive redress, it will put them back into the position they would have been in had they received suitable advice.
The FSA said expected between 15% and 30% of consumers will opt in to the scheme. Based on this assumption it added the redress scheme could deliver £20m to £40m in redress.
This is the first time that the FSA has used its statutory consumer redress power to implement a scheme of this type.
The FSA has concluded that there was evidence of widespread mis-selling by firms who failed to assess the funds as high risk despite the fact that the funds were typically invested in non-mainstream assets such as private equity, private finance and commodities.
The redress scheme launched today means advisers will have to write to all of their clients who invested in the Arch Cru funds and ask if they would like to ‘opt-in' to have their case reviewed.
The original proposal regarding advisers proactively reviewing each sale was modified as a result of the consultation process.
What happens now?
• Advisers will have one month from 1 April 2013 in which to contact their clients and the FSA will monitor their progress in implementing the scheme;
• The wording of the letters to clients have been mandated by the FSA to ensure they are clear and straightforward;
• Investors will only have to fill in a short form to confirm they want their case reviewed;
• Advisers will be required to let customers who opt-in know the outcome of their case by 9 December 2013;
• The amount of redress will be calculated by reference to what would have been a suitable investment for the individual investor;
• The final amount of redress paid will reflect the current value of the funds and deduct the amount an investor is eligible to claim from the separate £54 million payment scheme;
• Investors can apply separately to the payment scheme involving Capita Financial Managers Limited (CFM), BNY Mellon Trust & Depositary (UK) Limited (BNY) and HSBC Bank plc (HSBC), which runs until 31 December 2013.
Clive Adamson, FSA director of supervision, said: "Advisers have to accept and understand that ultimately they are responsible for making sure their customers' interests are protected. If they don't understand a product or haven't done the due diligence on it, they are in no position to recommend it to their customers.
"It is important that when mis-selling occurs that consumers can be redressed. The vast majority of advisers maintain very high standards and mis-selling by a few only further erode trust in the market which harms the whole sector."
The watchdog's consultation response had been expected in November but was pushed back due to the number of industry responses.
The CF Arch Cru funds were two UK open-ended investment companies, authorised and regulated by the FSA. These funds invested in a series of Guernsey-domiciled investment companies listed on the Channel Islands Stock Exchange.
The FSA believes that these funds were unsuitably sold to investors as low or medium risk products. In actual fact, they were high-risk and should only have been recommended to people who fully understood the risks and were willing and able to accept them.
The existing payment scheme and the redress scheme announced today are intended to provide money to consumers in relation to the roles of different parties, one relating to the management of the funds and the other relating to the sale of the funds.
If there is no evidence to suggest that the adviser mis-sold the funds, the adviser will not be liable to pay redress under the consumer redress scheme.
The FSA will tell advisers how to write to their customers and will take action against those who deviate from the prescribed wording. It said it "is imperative that investors understand this scheme and make an informed decision about whether to have their files reviewed".
It added that consumers retain the right to complain even if they choose not to pursue this scheme but time limits will apply for making complaints to firms or taking legal action through the courts.
'Exact timescale' of complaints not yet provided
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