BIG FISH, LITTLE FISH…

Rumors are reaching us Stateside that the recent coverage in Private Eye magazine of Connaught investors’ losses has come to the attention of producers at the highly regarded BBC current affairs program Panorama. We understand they are interested in how regulated firms such as Capita and their regulator, the FSA, could have allowed Unregulated Collective Investment Schemes (UCIS) such as Connaught and Arch Cru to go so horribly wrong, especially given that many of the losses have been sustained by pensioners or people of working age saving for their pensions, and that the British government is phasing in mandatory pension contributions for all workers.

We hear that the program will be very critical of the FSA. Another recent criticism of the regulator came from an unlikely source: its own Head of Enforcement, Tracey McDermott, who recently admitted to the Parliamentary Commission on Banking Standards (PCBS) that the organisation finds it easier to go after the ‘little guys’ such as IFAs, rather than the large regulated firms, including the banks.

In response, the PCBS’ chairman, Andrew Tyrie, observed:

‘It needs some dramatic statement from the FSA saying “we have been missing in the past and captured by the banks and we will do something to demonstrate our independence”. I suggest that the integrity of the FSA has been lacking over PPI or holding people to account.’

We think his comment could equally well apply to other FTSE 100 listed regulated firms, such as Capita. In the Arch Cru case, the FSA let Capita settle with investors for around 30 per cent of their losses, accepting the firm’s argument that the subsidiary involved with that UCIS fund was relatively small and if the FSA issued a formal restitution order for a larger amount it would simply place the subsidiary in administration and walk away.

We find Capita’s defense lame and the FSA’s acceptance of it laughable. There is no way one of the world’s largest outsourcing firms would allow a subsidiary to fail rather than compensate victims of its negligence. If it did so just one, customers across all of its operating divisions, including those unrelated to financial services, would take it as a powerful signal to take their business to more solvent providers. Such a course of action would amount to a corporate suicide note, and the FSA should have called the firm’s bluff and insisted on a proper settlement for investors.

The Connaught case is more serious, and clearer-cut. Arch Cru was about mismanagement; Connaught is about fraud and theft. And as we all know, Capita was aware of the problems in June 2009, if not before, and chose not to blow the whistle; and the FSA itself knew of the problems from early 2011. So we very much hope that, at a time when the eyes of the media are likely to be on the FSA, it will achieve the high-profile victory that Mr Tyrie expects of it, by ordering Capita to compensate investors in full. Capita will then be in the driving seat to pursue claims against the directors, shadow directors, valuers, borrowers, BDO and the auditors if it wishes to do so. And investors, whose role in this affair was limited to believing in good faith what was written in an Information Memorandum issued and approved by CAPITA, the FSA-regulated Operator, will be in the position they would have been in had the whole sorry saga not happened.