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Capita to pay investors £66 million through FCA for failed UCIS

Chris Hamblin, Editor, London, 10 November 2017

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The UK's Financial Conduct Authority has censured Capita Financial Managers Ltd and prompted it to pay up to £66 million to investors who suffered losses after investing in the Guaranteed Low Risk Income Fund, Series 1 (or as it became later known, the Connaught Income Fund, Series 1), which is now in liquidation.

Capita will pay the FCA, which will then pay the investors. The fund was an unregulated collective investment scheme which began to provide short-term bridging finance to commercial operators in the UK property market  in March 2008. Capita Financial Managers Ltd (CFM) was the operator of the fund until it resigned on 25 September 2009 and an unrelated company took its operations over. The fund ultimately went into liquidation on 3 December 2012.

The regulator found that CFM did not meet all of its regulatory requirements between April 2008 and September 2009. It said that CFM breached principle 2 of its Principles for Businesses because it failed to conduct adequate 'due diligence' on the fund before it took it on and did not do enough to rectify this failure when it became aware of it. It failed to monitor the fund for most of its tenure as operator and did not tell the replacement operator about the problems.

CFM also contravened principle 7 by failing to communicate with the fund’s investors in a "clear, fair and not misleading" way.

These failings would ordinarily have resulted in the imposition of a penalty but the FCA has taken account of the fact that CFM itself would not have been able to make a payment of up to £66 million for the benefit of the fund’s investors if a financial penalty were also imposed. For this reason, the FCA is not requiring CFM to pay a financial penalty and has censured it instead. It has also taken into account the fact that Capita plc is supporting the obligation of CFM pay the FCA up to £66 million.

The FCA is appointing Duff & Phelps as agents for the FCA to carry out the calculation and distribution of monies to investors. Geoff Bouchier of Duff & Phelps, who will head up the team, told Compliance Matters: “Since the outset of the liquidation, the liquidators have encouraged the FCA to exercise its extensive powers, which were not available to the liquidators or investors themselves, in an unprecedented manner and in a way that would result in meaningful compensation for investors.

“Our investors are aware that we and the liquidation committee have been working very hard for them ever since the fund failed in 2012, an important part of which has been our interaction with the FCA. That such a substantial payment will be made to the entire investor community, in a legal and regulatory environment of considerable complexity, is...a triumph.”

Capita set aside £37 million to cover the cost of any fine in the Connaught case in its half-year results in September, so it will now have to find another £29 million. It had reportedly already paid £18½ million to settle a claim made by Connaught liquidators. Mark Steward, the head of FCA enforcement, has also stated that investors have already received a distribution of £22 million made in the liquidation, as well as interest and other payments. These includes awards made on the orders of the Financial Ombudsman Scheme.

Capita plc has announced that the settlement with the FCA regarding the fund is 'full and final.' It also said that the FCA was previously threatening to impose a financial penalty on it. It has now disposed of its Asset Services businesses, including CFM, by selling it to the Link Group on 3 November 2017.

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