The Financial Services Authority (FSA) has moved to ban and fine Arch Financial Products (AFP) directors Robin Farrell and Robert Addison for failings related to the management of the Arch Cru fund range.
AFP, Farrell and Addison have referred the matters to the Upper Tribunal where they and the FSA will each present their case.
The Tribunal will then determine the appropriate action for the FSA to take.The Tribunal may uphold, vary or cancel the FSA's decisions. The Tribunal's decisions will be made public on its website.
The FSA's Decision Notices, which reflect the FSA's belief as to what occurred and how the behaviour concerned is to be characterised, set out that the FSA has decided to bank Farrell and Addison from performing any role in regulated financial services.
It also resolved to to fine Farrell and Addison £650,000 and £200,000 respectively and that the FSA would have fined AFP £9m for its misconduct, were it not for the firm's financial position.
Instead, the FSA has decided to issue a public censure in respect of AFP's conduct.
AFP was the investment manager of the CF Arch cru Funds. AFP predominantly invested the funds in Guernsey cell companies listed on the Channel Islands Stock Exchange, which it set up and for which AFP was also the investment manager.
The Guernsey cells then invested in private market assets, such as private equity, private finance, hedge funds and other alternative asset classes.
AFP was in a position of trust and needed to demonstrate fair management of conflicts of interest. In the FSA's opinion, AFP failed to do so.
In respect of certain transactions where there was a risk of AFP (or its associates) making a gain at the expense of the Guernsey cells, the FSA's view is that AFP was reckless as to the risk that the conflicts of interest would not be managed fairly.
For example, in one transaction, the FSA understands that AFP received a fee of £3m from the Guernsey cells, which AFP did not disclose to the independent directors of the Guernsey cells or record in any contemporaneous transaction documentation.
Given their roles, managing conflicts fairly was a key responsibility of both Farrell and Addison, and, in the FSA's opinion, their failings in this regard were reckless and therefore demonstrated a lack of integrity.
Firms must put in place sufficient controls over material non-public information.In the FSA's opinion, such controls were not in place at AFP and that led to a risk that the firm could use such information inappropriately.
The FSA's view is that Addison, as compliance officer, failed to mitigate the risk that non-public information relating to the publicly listed Guernsey cells was available to those making decisions on behalf of the funds.
In the FSA's opinion, AFP pursued an investment strategy which resulted in significant liquidity risks for the funds.
Further, the FSA believes that AFP and Farrell failed to ensure that the funds aimed to provide a prudent spread of risk by adopting an investment strategy of allocating a majority of the funds' assets in the Guernsey cells for which there was a limited secondary market.
The liquidity risks increased when AFP increased the funds' investments in the Guernsey cells' shares at a time of market turbulence and illiquidity, rather than retaining cash in the funds.
In the circumstances, investors were exposed to the risk that the funds would not be able to liquidate their investments to meet redemption requests from investors. The funds were ultimately suspended in March 2009 as a result of liquidity concerns.
In the FSA's opinion, AFP and Addison adopted an informal, ad hoc approach to compliance monitoring with insufficient recording of the monitoring that was undertaken.
The FSA believes that this was inappropriate given the size and complexity of AFP's business; it increased the likelihood that key compliance risks were not detected, monitored or mitigated effectively.
Tracey McDermott, director of enforcement and financial crime, said:
"When making investment decisions, a fund manager should ensure that it puts investors' interests ahead of its own and be able to demonstrate that it has managed conflicts of interest.
"Those with responsibility for managing authorised firms must ensure not only that the firm complies with regulatory requirements but also that they personally act with the highest standards of integrity."
AFP, Farrell and Addison applied to the Tribunal for an order preventing the FSA from publishing the Decision Notices. Their application was not successful.
Speaking at PA360 North
Speaking at PA360 North
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