2. Farrell and Addison are appealing a fine and ban meted out by the FCA’s predecessor regulator, the Financial Services Authority (FSA), in 2012.
3. It had accused the pair of “reckless” failings in managing conflicts of interest at AFP, which was the investment manager of the failed CF Arch cru fund range.
4. The CF Arch cru Investment and Diversified funds invested in Guernsey-domiciled investments listed on the Channel Islands Stock Exchange, which were also set up and overseen by Arch.
5. But the funds’ illiquid investments left investors exposed to the turbulent market conditions in 2008-2009 and ultimately led to their suspension.
6. The FCA alleges that liquidity risks in the Arch funds escalated when AFP increased their investment in the Guernsey cells’ shares at a time of market turbulence.
7. Monica Carss-Frisk QC, of Blackstone Chambers and representing the FCA, suggested
a. Farrell and AFP failed to ensure the funds had the necessary liquidity to cater for possible redemptions during the financial crisis.
b. If further shares in the illiquid Guernsey cells were bought when the funds’ cash buffer was already low, or the buffer was drained further by buying the cells’ shares, AFP breached Principle 2 and Farrell Principle 6 of the regulator’s rules, Carss-Frisk added.
8. She claimed Farrell had been aware – and the Arch funds’ prospectuses had outlined – that the funds should hold a minimum of 10-15% of cash by default and an even higher ratio in times of high volatility, but that this was not maintained.
a. “We do accept [that], come the Lehmans debacle… it would have been difficult to raise a cash buffer. But [AFP] should have raised it at an earlier stage and maintained it.
b. The funds consistently failed to maintain the default 10-15% cash buffer.”
9. However, the judge said the rules required a fund manager to “aim” to provide a prudent spread of risk, not to have it in place all of the time.
10. AFP could have still had the intention to spread risk but the buffer may have been depleted at certain points in time, he added.
11. The judge said the firm may also have been in the difficult position of attempting to preserve investment returns and holding cash as volatile periods kicked in.
a. “We have to be careful not to apply hindsight. We are not experts, we are not in a position to judge investment decisions,” the judge said.
b. “The rule is not as black and white as one might think.”
12. But Carss-Frisk said, taking into consideration the facts and ‘expert witness’ statements used to support the FCA’s case, “[one is in] a position to inform the view that what happened here was not appropriate.”
13. AFP said it was Capita’s regulatory responsibility, as authorised corporate director of the funds, to maintain a prudent spread of risk, of which liquidity is one element.
14. The case continues… http://www.professionaladviser.com/professional-adviser/news/2345869/judge-warns-fca-against-hindsight-in-arch-case?utm_term=&utm_content=Judge%20warns%20FCA%20against%20%27hindsight%27%20in%20Arch%20case&utm_campaign=IFA.AM_Update_RL.EU.A.U&utm_medium=Email&utm_source=IFA.DCM.Editors_Updates
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