The FSA has today published its final rules on the previously proposed Arch cru consumer redress scheme.

The redress scheme applies to all instances where a firm made a personal recommendation to a consumer in relation to Arch cru funds. The rules will take effect from 1 April 2013 and firms will have until 29 April to write to all Arch cru customers to inform them whether their cases fall within the scope of the scheme.  

The scheme proposed earlier this year would have required all advice in relation to Arch cru funds to be reviewed, whether or not the customer requested it. However, in the one significant change to the originally proposed scheme, the final rules provide that only those customers who opt-in to the scheme by 22 July 2013 will have their cases reviewed.  

Where customers opt-in, firms will have to review advice files and assess them according to the FSA’s template to establish whether the advice provided was unsuitable. If unsuitable, the firm will have to assess whether the advice led the consumer to invest in an Arch cru fund. The firm will then have to assess whether redress is payable using an online redress calculator.  

Consumers will have to be informed of the outcome of their review by 9 December 2013, explaining whether the advice they received was suitable and what redress (if any) will be paid to them. Firms will have to pay the redress within 28 days of receiving the consumer’s response.  

These rules follow the FSA’s consultation paper, issued in April this year, in which, crucially, it concluded that:

  • a reasonably competent IFA should have concluded that the Arch cru funds were high-risk investments and therefore only have recommended them to consumers who were willing and able to bear this level of risk consistent with their financial situation and objectives, and who had the knowledge and experience to invest in such funds; and
  • an investment in the Arch cru funds would, therefore, only have been suitable when recommended as a small, high risk portion of an investment portfolio. Any recommendation to invest a significant part of a consumer’s available capital would in the FSA’s view be unsuitable.  

As a consequence, the FSA estimated that as few as 12% of Arch cru sales were suitable and that redress of £110 million could be paid to between 15,000 and 20,000 investors.  

In changing the final scheme so that only those consumers who opt-in will have their files reviewed, the FSA now estimates that only 15-30% of effected consumers will elect to participate in the scheme. As a result, the FSA has reduced its estimate of total compensation payable under the scheme to between £20-40 million.  

This is the first time that the FSA has used its powers under s.404 of the Financial Services and Markets Act 2000 to make rules requiring firms to establish and operate a consumer redress scheme.  

The redress scheme is in addition to the £54 million Arch cru compensation scheme that the FSA agreed with Capita Financial Managers, BNY Mellon Trust and HSBC Bank. Consumers now have until the end of December 2013 to accept compensation under this arrangement (until recently the deadline was the end of December this year).