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Connaught Income Fund

Volume 604: debated on Tuesday 12 January 2016

Motion made, and Question proposed, That this House do now adjourn.—(Margot James.)

Before we get into the detail of the questions I want to ask the Minister, I think it is important for me to provide some context and background on the issue.

The Connaught Income Fund Series 1 was established in April 2008. The aim of the fund was to invest in bridging loans, primarily through a company called Tiuta International Ltd. Regulatory demands resulted in the fund being operated by a Financial Services Authority-regulated firm. In the case of Connaught the initial operator was Capita Financial Managers Ltd.

Capita issued the first investment memorandum as the fund’s promoter under section 21 of the Financial Services and Markets Act 2000 in April 2008. In September 2009 Capita Financial Managers resigned and the role of the operator was transferred to Blue Gate Capital management. At the time this decision was taken, a meeting between representatives of Capita Financial Managers and Capita plc was held. Minutes of this meeting, which are in the public domain, confirm that Capita was, at the very least, concerned about Tiuta’s financial viability and was aware of the false representations promoted to investors within the information memorandum. However, despite this level of knowledge and concern about the viability of Tiuta and the improper use of moneys invested in the fund, Capita, upon transferring the operator status to Blue Gate Capital management, did not inform existing investors of its concerns. That is despite the fact that Capita did write to existing investors informing them of the change of operator.

I congratulate the hon. Gentleman on securing this debate, and the number of Members who are present is an indication of the interest in this issue. Does he agree that the Financial Conduct Authority should publish the issues that resulted in it withdrawing from negotiations with Connaught and other parties so that, importantly, those who lost out in the collapse of this fund can know who they have cause to claim against and to blame?

The hon. Gentleman makes an important point that I will come on to. Indeed, the need for information as to why that decision was taken is something I will be asking the Minister to comment on.

I, too, congratulate my hon. Friend on championing this issue. I have been contacted by constituents. They want to know why the FCA is taking so long conducting its inquiry and when they are going to get information about what is going on within it. They want to be confident that the inquiry is being properly conducted and to see a resolution of this unpleasant and long-running saga.

My hon. Friend has summarised my speech in a pithy intervention.

It is important to highlight that when the transfer of operator happened, the subsequent information memorandum issued by Blue Gate was virtually identical to the original information memorandum issued by Capita, and for a further 10 months, more or less, investors’ funds going into Connaught were still managed by Capita IRG Trustees Ltd, which handled investors’ money while Blue Gate waited to receive authority from the FSA to handle client funds.

The whole issue becomes even more concerning because in January 2011 a whistleblower—none other than the chief executive of Tiuta, George Patellis—contacted the FSA to make a principle 11 notification in relation to the misuse of fund moneys by Tiuta. In March 2011 George Patellis met Ian Conway from the FSA to highlight evidence of mismanagement and the fraudulent use of investor funds. He provided ample evidence to support his claims.

Does the hon. Gentleman share my concern that, after five years, the regulatory authorities appear to have made little progress on securing justice for the 1,500 investors, including my constituent George Devon, who lost money in what should have been a secure investment fund? They have made even less progress on working out who to hold to account for the disappearance of more than £100 million. Will he join me in calling for a comprehensive review of the regulatory framework, which is supposed to protect small-scale investors but fails to do so?

I will join the hon. Lady in that call, and I agree entirely with her comments.

On 26 May 2011, three months after the whistleblower provided evidence of wrongdoing, the FSA finally published a note on its website stating that the fund should not be compared to a bank or building society account. That was remarkable, considering it had been provided with evidence of wrongdoing. In the light of that evidence, it is difficult not to argue that a stronger warning should have been provided to investors by the FSA.

Does my hon. Friend agree that many of our constituents have waited a long time for this investigation, despite the whistleblowers? This debate provides an excellent opportunity for us to urge the Financial Conduct Authority to set out a clear timescale. It is only right and proper that full clarity should be given to all our constituents—we can see the large number of Members present in the Chamber tonight—about the scope, nature and timing of this full and much needed investigation.

Absolutely. My hon. Friend has just covered part of my speech very well, and I agree entirely with her comments.

Despite the warnings, and the acknowledgment of those warnings by a note that was issued on the FSA’s website, money was still being invested in the fund for a further 10 months. That is scandalous.

I congratulate my hon. Friend on calling this debate. It is obvious that there is interest across the House in this matter. Is not the situation made even more dreadful by the fact that constituents like mine who invested £100,000 in 2011 did not receive those warnings earlier? One of the financial advisers who advised several people to invest in the fund is based in my constituency. They are now exposed and they want timely and transparent answers from the FCA. Everything seems to have been concealed in this case.

I am grateful to my right hon. Friend for that intervention. I will come on to the way in which independent financial advisers have been badly treated under the regulatory framework in this regard.

Does my hon. Friend agree that the new body, the FCA, is as toothless as ever and that it is more likely to refer people to the ombudsman than to do anything itself? Will he urge the Government to change that?

I regret that I have to agree with my hon. Friend. The financial ombudsman service is too often seen as an option by the FCA when problems are brought to its attention. Unfortunately, I also have some comments to make on the performance of the ombudsman in relation to this issue.

I am extremely grateful to the hon. Gentleman for calling this debate. It is unacceptable that people such as my constituent Paramjit Tank, whose family invested some £60,000 in the fund over three years, do not know what has happened to their money. Whatever authorities we have set up, those people are in limbo. Their money has gone and they do not know what is going to happen next.

The hon. Lady speaks for all of us in this regard, and the constituents who are the worst affected are often old and vulnerable and have invested their life savings in the scheme. I share her concerns.

In March 2012, the fund was finally suspended. It is important to point out, however, that more than half the investment in the fund was invested after the original warnings had been given to the FSA. That issue needs to be addressed. The fund went into administration in May 2012 and finally entered liquidation in December 2012.

When I first came across this matter through my constituency casework, most interested parties and stakeholders were complaining that the FSA—and subsequently the FCA—were unresponsive to their concerns. However, that situation appeared to change following the establishment of the all-party parliamentary group on the Connaught Income Fund. At its first meeting in July 2014, the FCA’s director of supervision, Linda Woodall, announced unilaterally that the FCA would facilitate negotiations between the liquidators of the fund and the former operators of the fund, Blue Gate and Capita. This was not a perfect solution, but it offered the hope that some redress and compensation would be offered to investors. That commitment was made during the APPG meeting, but again a question arises: given that a warning was made by a whistleblower so much in advance of this fund being suspended, should the FCA be looking not just at contributions towards compensation from the operators of the fund, but at itself? Did the FCA owe the investors a duty of care?

As a member of the APPG, will my hon. Friend say how concerning it is that there has been no communication from the FCA since March 2015? This long period of anxiety for our constituents is what is really troubling so many of us.

As the chair of the APPG, I have felt extremely frustrated when Conservative and Opposition Members have asked me for an update, as I am unable to offer one, because there is nothing to be said.

I, like most colleagues here, have had correspondence with constituents who have lost considerable amounts of savings, with this often changing the direction of their lives as the amounts are so significant. Does my hon. Friend share my hope that the strength of feeling being shown in this Chamber today will force some urgency to be put into finding a solution to this?

Again, I fully agree with my hon. Friend’s comments, and I do think that tonight’s turnout indicates the concern across the House on this issue. It is important to point out again that the proposed mediation was described as the fastest way of getting some compensation to investors, which is why the APPG welcomed it, although with some reservations. A deadline date of 31 October 2014 was offered for the completion of that mediation. Subsequently, in November 2014 the FCA announced a new date of the end of January 2015, and then in January 2015 it announced a new date of the end of March.

On 9 March 2015, I was asked to meet Martin Wheatley, the now former chief executive of the FCA, in Portcullis House, where I was informed that the FCA was withdrawing from the mediation process—that was announced the following day. Again, the decision was unilateral. In effect, the decision to go for mediation was a unilateral one made by the FCA without consulting other stakeholders, as was the decision to end the mediation. As chair of the APPG, I think it essential that the FCA explains why it took those decisions. It needs to explain why it thought it was better to end the mediation rather than continue with a method of dealing with this issue that it had claimed would be the most effective way to proceed.

My hon. Friend is getting to the crux of the matter. For an organisation that many of our constituents see as being an appropriate regulator and an arbiter of what should happen, this lack of accountability is totally unacceptable. The number of vulnerable people who are reliant on this organisation to act wisely means that it is outrageous that this situation is allowed to continue. Does he agree that urgent action needs to be taken by the Minister to ensure that the FCA steps up to the mark immediately?

I agree entirely with my hon. Friend, who has been a firm supporter of the APPG since its establishment. He makes the point we wish to make: we might be annoyed that the all-party group has not been kept informed, but we should be outraged that the investors and the stakeholders involved in the fund have also been treated with such disrespect.

May I declare an interest, Mr Speaker? As a barrister, I was instructed by the FCA to prosecute serious Ponzi fraud. I agree with my hon. Friend that this is about clarity and certainty; it is only by being clear that the investigation is being concluded that investors who have been left in limbo can get the certainty they deserve.

Again, I fully endorse those comments. We are in this House this evening almost giving a cry for help to the Minister, where the all-party group and Members of Parliament have failed to deliver on behalf of their constituents. I sincerely hope that she can intervene and ensure that at least a degree of clarity is offered.

I wish to raise a wider issue. Unregulated collective investment schemes are not permitted to be marketed to the general public, as one would expect, but does the hon. Gentleman not agree that this needs proper enforcement and that it may not always take place?

That is a point that I subscribe to and agree with, and it should be considered in due course.

The questions that I have for the Minister are pretty clear. First, in view of the FCA’s recent decision to cancel its proposed review of banking standards and culture, can we have a guarantee that the investigation will be completed by the FCA? Many people affected by this issue have contacted me, expressing their concern that, in view of the delays and the lack of information from the FCA, the review will be completed.

Secondly, the FCA unilaterally withdrew from the mediation process, without any consultation with stakeholders or investors. Can the Minister assure us that the FCA will, upon completion of its investigations, publicly justify its decision to curtail the process of mediation and the subsequent delay in compensation and redress?

Thirdly, it has also been implied that the reason for curtailing the mediation process was a result of a realisation within the FCA that the financial compensation on offer from the mediation process would not be sufficient. Is that the case? As we have had no clarity or confirmation that that is the case, will the Minister give us some assurances on the matter? If it is not the case, will the FCA be able to explain why it therefore curtailed the mediation?

I wish to add my voice to those of other hon. Members who have expressed concerns on behalf of their constituents. I also wish to express the request of my constituent Mel Carney, who says:

“I have already waited over three years to learn what has happened to my money.”

He is asking for transparency from the FCA and for the investigation to be concluded in a timely manner.

The hon. Lady has asked my fourth and fifth questions.

My fourth question is this: 10 months after the mediation was cancelled, are we in a position to get an update from the FCA, and, if we are, how soon can that update be offered?

Finally, we need an end date. We need to know when this investigation will be completed. I ask the Minister to implore the FCA to provide that information.

I understand this situation very well. My constituent Charles Rodbourne has lost the bulk of his life savings. This scandal has been going on for seven years now. Will my hon. Friend urge the Minister to do all she can to bring it to a conclusion as swiftly as possible, as so many people across this country are affected?

I join my hon. Friend in urging the Minister to do just that.

In relation to my five questions, I think that the FCA has hidden behind its claims that, because this is a live investigation, it is not in a position to comment. Will the Minister confirm that there is in fact no statutory reason why the FCA cannot provide a progress report for those who are interested in this issue?

Finally, it is important to address the ongoing concern about the way in which the IFA community is being treated by the regulatory authorities in relation to the Connaught issue. Emails and other information in the public domain imply that the Financial Ombudsman Service, when dealing with complaints about Connaught, is instructing its caseworkers to find against IFAs regardless of the facts of the matter, and indeed regardless of the fact that there is an inquiry and an investigation into possible fraudulent wrongdoing within Connaught in the first instance.

It is entirely appropriate that independent financial advisers should be held to account for any poor advice offered. However, that would demand that each case, or each complaint brought to the FOS, is considered on merit. The instructions to FOS officials to ignore such evidence of wrongdoing and the on-going investigation into what happened in Connaught makes it very difficult for us to have any confidence in the decisions made by FOS in relation to complaints against individual IFAs.

I understand the need to ensure that both the FOS and the FCA operate independently of each other. However, is it too much to ask that they at least consider each other’s actions before making decisions that are clearly based upon only a partial understanding of the facts?

I congratulate the hon. Gentleman on securing this debate, because I, too, have constituents who have been affected by this matter, including Anna Hughes who lost 90% of her investment and three years of interest. Is it not right that our constituents who have been affected by the Connaught scheme should have confidence not only in the process of investigation and resolution on this issue, but in the financial system and in the belief that their investments are safe wherever they put them?

Again, I would agree with those comments.

If blanket decisions are being made on the basis of rules that do not take into account individual cases, I ask the Minister to ask whether the FOS and the FCA are acting properly and fairly as regards their duty of care towards independent financial advisers. The debate has shown, if nothing else, that there is a degree of concern across the House. I apologise to the Minister for having over-extended my allotted time, and I will therefore sit down and allow her to answer some of the very important questions that have been raised by colleagues.

I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate, chairing the all-party group and raising the serious issues concerning the Connaught Income Fund. His constituents and, clearly, those of many other colleagues have been seriously affected by this event and have written to me many times.

Many investors have lost substantial sums and, indeed, sometimes their life savings as a result of the events involving the Connaught funds. I am very much aware that that has caused real hardship for people across the country. It is important that the FCA and the all-party group get to the bottom of this matter and try to secure the best outcome for investors in these funds. Those who are responsible should face justice for their actions. It is equally important that steps are taken to ensure that this situation does not arise again in the future.

I reassure my hon. Friend and all other Members that the Financial Conduct Authority takes this matter extremely seriously.

Given the lack of time, I will make a bit of progress. If I have time, I will come back to the hon. Lady.

The FCA also knows that what happened with the Connaught funds has caused serious distress to many investors and continues to work closely on this case to secure the best possible outcome. As my hon. Friend the Member for Aberconwy said, the Connaught funds comprised three separate funds, income series 1, series 2 and series 3. In total, approximately £147 million was invested in the funds, which, as we know, were unregulated collective investment schemes. By definition, such schemes are not subject to direct regulation by the FCA or, previously, by the Financial Services Authority.

In the case of Connaught investment funds, many of the usual protections and safeguards that protect investors in regulated funds were absent, owing to the unregulated nature of some of the entities involved. On this point, I want to touch on two main issues. The first concerns the actions taken by the FCA to try to protect consumers, despite most of the entities involved being unregulated. That includes the ongoing work to secure a fair and proper outcome for investors. The second involves the steps that can be taken to ensure that this sort of situation does not happen again.

First, despite the schemes being unregulated, the FCA has taken a number of significant steps to try to protect customers right from when the first problems arose. In May 2011, the FCA, which was at the time the FSA, altered Tiuta’s permissions on issuing new regulated mortgage lending. Shortly thereafter, it wrote to investors who might have been mis-sold the fund and all financial advisers who sold the fund, asking them to review the sales and to contact customers where there may have been the risk of unsuitable advice. The FCA has continued to provide updates on the situation via its website. Once the funds were suspended and steps were taken to wind them down, the FCA announced on 16 July 2014 that it would support a negotiated settlement to address investor losses.

As hon. Members may know, the FCA initially supported the negotiations between the parties involved, as it believed that doing so was in the best interests of investors. However, having extended the negotiations more than once, in March 2015 the FCA announced its decision to withdraw from them. The FCA decided that a further extension to the negotiation period was not in the best interests of investors. I am sure my hon. Friend will understand that as the negotiations were voluntary and confidential, the FCA cannot provide specific details on what happened during the negotiations.

I have so little time.

The FCA is now conducting formal investigations into the activities of the two operators of the fund, Capita Financial Managers Ltd and Blue Gate Capital Ltd. My hon. Friend questions the length of time that the FCA is likely to take in order to conduct and conclude its investigations. Although it is too early to give a reliable estimate of the likely time frame for their conclusion, the FCA has assured me that it intends to progress the investigations efficiently and effectively. The length of time it will take to complete the investigations is affected by, among other things, the level of co-operation received from those under investigation and any related third parties.

As the FCA is in the process of carrying out its investigations it is, of course, not possible to comment on their likely outcome. The FCA is unable to provide any comment on what the level or form of compensation to investors may be if it is found that the operators have contravened any regulatory principles or rules.

I have so little time, but I will try to make progress and then give way.

The FCA is an independent, non-governmental body, so I am sure my hon. Friend the Member for Aberconwy will agree that for me to interfere in its investigations in any way would not be appropriate.

My hon. Friend raised the question of whether the Financial Ombudsman Service has indicated a pre-determination to find against independent financial advisers, regardless of the allegations of fraudulent behaviour within the fund. It is important to note that like the FCA, the Financial Ombudsman Service is an independent, non-governmental body. It provides an independent dispute resolution service for consumers with individual complaints against financial services companies. In view of this independence, it would not be appropriate for the Government to comment or intervene in the Financial Ombudsman Service’s work on complaints against advisers who sold the Connaught Income Fund.

However, although I cannot provide comment on these details of these investigations, I am assured that the FCA has put considerable resources, time and effort into trying to achieve a good outcome for the investors affected by the failure of the fund, and that it continues to act in the best interests of the investors.

I am grateful to the hon. Lady for giving way. In response to a written question I was referred to the record of ministerial meetings to find out when a Treasury Minister last met representatives of the FCA. Does the Minister understand my astonishment at finding not a single bilateral meeting between the Treasury at ministerial level and the FCA in the two years from October 2013 to September 2015? Does she appreciate that her Government seem to be asleep at the wheel as the FCA fails to clean up the financial services sector?

The hon. Lady has been assiduous in tabling a number of parliamentary questions. I think I am right in saying that they have been put on the record in the Library. I encourage other hon. Members to have a look and see the record that she has managed to get from the FCA in writing.

I am sure that other hon. Members who have constituents who have suffered losses in the Connaught Income Fund will welcome the reassurance that the FCA is doing its utmost to secure the best possible outcome for investors, and that they will support the FCA in its current investigations.

I appreciate that the Minister does not want to comment, but given the strength of feeling this evening, will she please pick up the phone in the morning to Tracey McDermott, the interim head of the FCA, and make it absolutely clear that we want some action on behalf of our constituents and we want this matter sorted out now?

I am sure my hon. Friend would not want me to interfere in a number of different FCA matters, but I am quite sure that the FCA will have seen the strength of feeling in the Chamber this evening.

I have one minute left so I will take a quick intervention.

I am grateful to my hon. Friend. Does she agree that at the heart of this are many elderly people who have done the right thing all their lives, saved for their retirement and gone, like my constituents, to an IFA, and now it is time for the FCA to do the right thing for them?

There clearly is a lot to investigate in this case. As I said, the FCA is doing its utmost to secure the best possible outcome for investors.

I would like to reassure hon. Members about the steps that have been taken to ensure that this situation does not occur again. The FCA has brought in new rules banning the promotion of unregulated collective investment schemes to ordinary retail investors. Independent financial advisers should not be selling unregulated investment schemes to retail investors. The circumstances in which unregulated schemes can be promoted to consumers are generally restricted to certain types of qualifying investors, such as those who have a high level of understanding about investments, or high net worth individuals, for whom those products are likely to be more suitable. That is an important step to take in ensuring that such a situation does not occur in the future.

I thank my hon. Friend the Member for Aberconwy once again for raising these important issues. His all-party group plays an incredibly important role in the parliamentary scrutiny of what the FCA is investigating, and I hope we can move forward and secure redress for his constituents and others.

Question put and agreed to.

House adjourned.