FINAL NOTICE

To:

Capita Financial Managers Limited (“CFM”)

1.
ACTION

1.1
For the reasons given in this Notice, the Authority hereby imposes a statement

pursuant to section 205 of the Financial Services and Markets Act 2000 to the

effect that CFM contravened regulatory requirements.

1.2
CFM agreed to resolve these matters. As part of the resolution, CFM has agreed

to make a payment of up to £66 million which will be distributed to all investors

who had outstanding claims against the Guaranteed Low Risk Income Fund,

Series 1 (later renamed the Connaught Income Fund Series 1) (“the Fund”)

when the Fund entered into liquidation on 3 December 2012 (“the Fund’s

Investors”). The Fund’s Investors include those who invested in the Fund after

CFM’s tenure as Operator of the Fund. Given CFM is not in a position to make

this payment in its entirety, CFM’s ultimate parent, Capita plc (“Capita plc”),

has agreed to fund any shortfall up to £66 million.

1.3
The aim of the payment is to return to the Fund’s Investors their capital

investments less any amounts which they have already received in interest and

by way of redemptions, distributions, payments or dividends. The payment also

provides for an interest rate of 0.52% to be applied over the period from each

Fund Investor’s capital investment and until the date on which those monies

were returned to each investor. The mechanism by which CFM’s payment will

be distributed to investors is outlined in Annex D.

1.4
The serious failings in this case warrant a substantial penalty. The Authority

has taken account of the fact that CFM itself would not have been able to make

the payment referred to in paragraph 1.2 above and that this will only be

possible with the financial support given to CFM by its ultimate parent, Capita

plc. In all the circumstances of this case the Authority does not consider that it

would be appropriate to require CFM to pay a financial penalty.

1.5
Had it not been for CFM’s (with the assistance of its ultimate parent company,

Capita plc) agreement to make the payment then the Authority would have

imposed a financial penalty of £15 million. In that event CFM would have

qualified for a 30% discount (stage 1) in accordance with the Authority’s

executive settlement procedure, which would have reduced the penalty to

£10.5 million.

2.
SUMMARY OF REASONS

2.1
The Fund was an unregulated collective investment scheme (“UCIS”) which was

established in March 2008 and which commenced its business activities in and

around July 2008. The Fund was designed to allow the Specialist Partner to

drawdown the money invested in the Fund so that it could provide short term

bridging finance to commercial borrowers in the UK property market.

2.2
The misconduct in question took place between 7 April 2008 and 25 September

2009 (“the Relevant Period”). Throughout the Relevant Period CFM was an

authorised person and the Operator of the Fund. At the end of the Relevant

Period CFM resigned as Operator of the Fund and was replaced by the

3

Replacement Operator. The Replacement Operator retained this role until the

Fund entered into liquidation on 3 December 2012.

2.3
The Fund was promoted to investors during CFM's tenure as Operator via IM1

and IM2. IM1 was approved by CFM on 7 April 2008 and it was later updated

and replaced by IM2, which CFM reviewed and approved on 29 January 2009.

The IMs stated that investors in the Fund could expect to receive a fixed return

of interest on their investment.

2.4
The Fund itself was established and directly managed by the Fund Asset

Manager which was not an authorised person. CFM, as Operator, retained the

primary responsibility for managing the investments of the Fund, although the

Fund, acting via its General Partner, accepted that CFM was not holding itself

out as competent to manage the investments of the Fund. The Operator’s

Agreement made clear that the management would be carried out by the Fund

Asset Manager.

2.5
The Fund’s final suspension began in April 2012 and it was placed into

liquidation in December 2012. Since the Fund entered into liquidation, the

Insolvency Service has disqualified two directors of the Fund Asset Manager

and the Guarantor for their conduct in matters relating to this Fund. In July

2014 the liquidators of the Fund brought a civil claim against CFM which was

settled in January 2016 resulting in a pari passu distribution of £18.5 million

among the Fund’s Investors.

2.6
As an authorised person, CFM was required to carry out its duties as Operator

in accordance with the Authority’s Principles for Businesses (“the Principles”)

and its obligations to the investors in the Fund commenced on 7 April 2008,

when CFM approved the Fund’s main promotional document, IM1. It was

important for CFM to comply with the Principles because consumers expect an

authorised firm to conduct its business in such a way that their interests are

properly taken into account. UCIS can carry a high risk of investors losing some

or all of their money, as they frequently invest in assets that are not available

to regulated CIS and they are not subject to investment and borrowing

restrictions aimed at ensuring a prudent spread of risk. As a result they are

generally considered to be high risk investments and accordingly there are

restrictions on persons to whom such investments may be promoted. Although

the Fund itself was unregulated, in the Authority’s view investors take

substantial comfort from the involvement of an authorised and regulated

Operator in the structure of a UCIS.

2.7
CFM breached Principle 2 (Skill, care and diligence) in that it did not carry out

its contractual obligations as Operator of the Fund with due skill, care and

diligence. In particular:

1.
CFM’s due diligence and take-on process contained basic failings such

that at the point at which CFM became the Operator of the Fund it did

not adequately understand the structure of the Fund’s business or its

responsibilities and duties as Operator;

2.
CFM failed to rectify its initial due diligence and take-on failings fully,

even when it recognised that its processes had been inadequate. An

important
consequence
of
this
failing
was
that
CFM
missed

opportunities to understand its role and the structural arrangements

relating to the Fund better;

3.
CFM continued to allow monies to be invested in the Fund despite its

developing concerns that the Fund’s IMs were not clear, fair and not

misleading, until suspending the Fund to new investors in July 2009;

4.
throughout most of its tenure as Operator CFM failed to monitor the

Fund adequately to ensure that the Fund’s contractual counterparties

were operating in accordance with their contractual obligations;

5.
towards the end of its tenure as Operator CFM became aware that its

contractual counterparties had breached the Fund's procedures and

parameters, and that consequently the Fund's monies were potentially

at greater risk. Some of these issues meant that some of the Fund's

monies were not secured with the appropriate legal protection. CFM

had already decided to exit this Fund and other such funds in the

context of its strategic review of investment funds. On becoming aware

of various issues which arose in respect of the Fund, CFM considered

all options for the Fund including winding it down. However, it

ultimately decided to seek to secure an alternative operator. In

continuing to pursue a strategy of handing over the Fund, CFM failed to

ensure that it either:

a.
took action to address all of the issues of which it became

aware (or conclude, if warranted, that the Fund should be

closed without delay); or

b.
informed the Replacement Operator fully about the issues which

had arisen; and

6.
although
the
Replacement
Operator
was
provided
with
some

information in respect of most of the issues identified by CFM, many of

the deficiencies in the Fund continued unaddressed after handover.

2.8
CFM breached Principle 7 (Communications with clients) in that it did not

communicate information to the Fund’s investors in a way which was clear, fair

and not misleading. In particular CFM approved the IMs which contained a

number of inaccuracies, omissions, and unclear or potentially misleading

statements, such as describing the Fund as “low risk” and “guaranteed” and

naming a particular firm as auditor when in fact that firm was not instructed.

2.9
As a consequence of making investments into the Fund, losses were suffered

by the Fund’s
Investors who collectively
made approximately 1,200

investments directly into the Fund as well as those who invested through

platforms. The Authority understands that approximately 25% of the Fund’s

Investors invested during CFM’s tenure as Operator.

2.10
CFM, with the assistance of its ultimate parent (Capita plc), has previously

made a payment of £18.5 million to the Fund’s Investors.

2.11
As described in paragraph 1.2 above, CFM has agreed to pay up to £66 million

for the benefit of the Fund’s Investors. The Authority considers that this

payment will be sufficient to ensure that the Fund’s Investors’ outstanding

principal capital investment in the Fund is returned to them together with

interest applied at the rate described above.

2.12
The Authority notes, however, that CFM itself would not have been able to pay

a sum of up to £66 million, and this will only be possible with the financial

support given to CFM by its ultimate parent, Capita plc. For this reason, the

Authority hereby imposes a statement that CFM has breached regulatory

responsibilities rather than impose a financial penalty, so that available funds

are directed towards the Fund’s Investors. This action supports the Authority’s

operational objective of securing an appropriate degree of protection for

consumers.

2.13
For the sake of clarity, this notice makes no criticism of any person, whether

individual or body corporate, other than CFM.

2.14
The FCA's investigations into other parties are continuing.

3.
DEFINITIONS

The definitions below are used in this Notice:

“the 6 August 2009 Board Paper” means the paper produced for a meeting

which included some members of CFM’s board and other employees on 7

“the 8 Point Letter” means the letter of 21 August 2009 CFM sent to the PRO

“ACD” means Authorised Corporate Director

“the Act” means the Financial Services and Markets Act 2000

“the Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

“the business unit compliance function” means the compliance function of the

business unit of which CFM formed part

“Capita plc” means the entity which throughout the Relevant Period was CFM’s

ultimate parent company

“CCJ” means County Court Judgment

7

“CFM” means the entity known throughout the Relevant Period as Capita

Financial Managers Limited and which is now known as Link Fund Solutions

“CIS” means collective investment scheme

“COBS” means the Authority’s Conduct of Business Sourcebook

“Debenture Agreement” means the Debenture Agreement between the

Specialist Partner and the Fund dated 10 September 2009

“DEPP” means the Authority’s Decision Procedure and Penalties Manual

“the First Delegate” means another entity within the same business unit as CFM

to which CFM delegated a number of administrative functions until September

“the Fund” means the Guaranteed Low Risk Income Fund, Series 1 (which was

later renamed the Connaught Income Fund, Series 1)

“the Fund Asset Manager” means the Asset Manager of the Fund during the

"the Fund General Partner" means the general partner of the Fund during the

“the Fund’s Investors” means all investors who had outstanding claims against

the Fund when the Fund entered into liquidation on 3 December 2012

“the Guarantee” means the contractual guarantee between the Guarantor and

the Fund

“the Guarantor” means the firm which provided the Guarantee

“the Guarantor’s 2008/9 Accounts” means the Guarantor’s published financial

statements and accounts for the year ending 2008/09

“Information Memoranda” or “IMs” means together IM1 and IM2

“IFAs” means independent financial advisors

“IM1” means the first information memorandum which CFM approved for the

Fund on 7 April 2008

“IM2” means the second information memorandum which replaced IM1 and

which CFM approved for the Fund in January 2009

“Investment Policy” means the Fund’s Investment Policy and Procedure Manual,

dated April 2008

“IRAT” means CFM’s Initial Risk Assessment Template process

“LP” means limited partnership

“LTV” means loan-to-value

“the Mortgage Charge” means, in respect of each loan made by the Specialist

Partner, a mortgage charge registered at the Land Registry in the Specialist

Partner’s name and against the underlying borrower’s property to secure the

Fund’s monies

“the Operator” means the Operator of the Fund

“Principles” means the Authority’s Principles for Businesses

“PRO” means potential replacement operator

“Relevant Period” means from 7 April 2008 to 25 September 2009

“the Replacement Operator” means the firm which replaced CFM as Operator of

the Fund on 25 September 2009

“the Second Delegate” means another entity within the same group as CFM to

which CFM delegated a number of administrative functions from September

“Security Mechanism” means collectively i) the registration of the Mortgage

Charges and Sub-Charges; ii) the registration of the Debenture; and iii) the

“the Specialist Partner” means the Specialist Partner which was a role defined

under the Information Memoranda and the entity which drew down the Fund

monies, which was a subsidiary of the Guarantor

“the Sub-Charge” means, in respect of each loan made by the Specialist

Partner, a sub-charge registered at Companies House against the Specialist

Partner and in favour of the Fund, corresponding to and noted on the Mortgage

Charge registered at the Land Registry in respect of the same loan

“Termination Agreement” means the Termination Agreement entered into

between amongst others CFM, the Replacement Operator, the Fund and the

“Tri-Party Meeting” means the meeting between the Fund Asset Manager, CFM

and the Replacement Operator held on 17 September 2009

“UCIS” means unregulated collective investment scheme

4.
FACTS AND MATTERS

The main entities involved in the Fund

4.1
A diagram illustrating the key entities and flow of monies in and out of the Fund

is set out below.

Diagram illustrating the key entities and flow of monies in and out of the Fund

4.2
The main parties/entities involved in the Fund were as follows:

1.
Investors in the Fund invested either through their IFAs or through

platforms. In accordance with the conditions stated in this Fund’s IMs,

investors in the Fund were required to be investment professionals or

suitably experienced investors. All monies invested in the Fund were

paid into a bank account which was in the Fund’s name but which was

controlled by CFM as the Operator of the Fund.

2.
The Specialist Partner’s role was to receive monies from the Fund for

the purpose of making short term secured loans (i.e. bridging loans)

which were intended to be secured against UK property.

3.
In return for the ability to use the Fund’s monies, it was intended that

the Specialist Partner would service the Fund’s interest payment

obligation to the investors in the Fund.

4.
The Guarantor provided the Guarantee to the Fund which could be

called upon if the Specialist Partner defaulted on any payment

obligation to the Fund.

5.
The Guarantor was placed into administration on 28 September 2012.

The Specialist Partner was placed into administration on 5 July 2012.

6.
The Fund Asset Manager’s role was to manage the assets of the Fund

and was not authorised by the Authority. The Fund Asset Manager was

responsible for reviewing loan applications submitted by the Specialist

Partner and verifying that the application complied with the terms of

the Fund’s IMs. If the application satisfied those terms, the Fund Asset

Manager was to supply CFM, as the Fund’s Operator, with the details of

the proposed underlying loan and request that monies be paid from the

Fund's accounts to the Specialist Partner.

7.
As Operator, CFM’s role was to review and approve the draft

Information Memoranda which was drafted by the Fund Asset Manager.

Pursuant to the Fund’s contractual documentation, CFM delegated to

the Fund Asset Manager the task of managing the investments of the

Fund and, although CFM retained the primary responsibility for this, it

specifically did not hold itself out as being competent to manage the

investments of the Fund.

The Information Memoranda

4.3
CFM reviewed IM1 and approved it on 7 April 2008. IM1 was replaced in

February 2009 following CFM’s approval of IM2. The Fund’s IMs were intended

to be the main promotional documents explaining to potential investors the

structure and key features of the Fund. The explanations included the

parameters of the loans to be granted and the level of return which investors

would receive.

4.4
The Specialist Partner’s underlying lending proposal ought not to have been

approved if it failed to satisfy the lending parameters in the Fund’s IMs. An

example of a key lending parameter was that the Specialist Partner was only to

advance loans to “prime borrowers”; that is, borrowers with no CCJs, previous

loan defaults, mortgage arrears or missed credit card payments in the last 12

months. In addition, the maximum LTV ratio of any underlying loan was to be

80%, or 85% where there was a “guaranteed exit route”; although this term

was not defined in the IMs. However, these percentages were stated to be a

guideline and it was open to the Fund to issue loans outside of these

parameters if the Fund Asset Manager deemed it appropriate. The IMs also

specified that the Specialist Partner would issue short term loans, ranging from

between three and six months. The Investment Policy published with the IM

provided in two places that the Fund would invest in short term bridging

finance with typically between a three and 12 month repayment period,

although it did go on to state that the term of the loan could be extended with

the written consent of the Fund Asset Manager.

The operation of the Fund

4.5
The way the Fund was designed to operate was that the Fund’s monies were

lent to the Specialist Partner. The Specialist Partner was to use the monies

which had been released from the Fund to advance short term bridging finance

loans secured on UK property.

4.6
Having identified potential borrowers, the Specialist Partner was to submit a

loan application for each loan to the Fund Asset Manager with a request to

drawdown the monies required for that specific loan. The Fund Asset Manager

was to review the application and either reject it or request that CFM as

Operator release the loan from the Fund to the Specialist Partner. Prior to

drawdown, all of the investors’ money was held in the Fund’s bank account

which was controlled by CFM.

4.7
In practice, CFM did not ensure that the Specialist Partner’s lending practices

were reviewed and monitored adequately by the Fund Asset Manager for most

of the Relevant Period and this allowed some loans to be made outside of the

parameters set out in the IM.

4.8
When the underlying borrower repaid the principal sum borrowed to the

Specialist Partner, the Fund Asset Manager was to ensure that the Specialist

Partner returned these monies to the Fund’s bank account.

4.9
IM1 specified that the investors would receive interest of either 8.15% or 8.5%

per annum, the interest rate being dependent on the size of their investment.

These returns were adjusted in IM2 to either 8.4% or 8.77% if the investor

elected to reinvest their income. The Specialist Partner was obliged to pay

interest to the Fund regardless of whether or not it had drawn down the Fund’s

monies. These interest payments were made throughout the Relevant Period.

Mechanisms intended to secure the monies lent by the Fund to the Specialist Partner

4.10
There were three tiers in the Fund’s Security Mechanism which together were

designed to protect the monies which had been lent by the Fund to the

Specialist Partner.

First tier

4.11
For each loan made by the Specialist Partner, the Fund’s monies were supposed

to be secured by two related but separate processes, being the registration of:

1.
a Mortgage Charge registered at the Land Registry in the Specialist

Partner’s name and against the underlying borrower’s property; and

2.
a Sub-Charge registered at Companies House against the Specialist

Partner and in favour of the Fund and corresponding to and noted

against the Mortgage Charge registered at the Land Registry. As such,

the Sub-Charges operated as a form of derivative security granted to

the Fund, as the rights derived from each Sub-Charge corresponded to

each mortgage charge.

4.12
Security taken in connection with the loans was to be registered at Companies

House and the Land Registry. Failure to do so could have affected the priority

of the security against third parties.

Second tier

4.13
A Debenture Agreement was supposed to be registered at Companies House in

favour of the Fund and over the real property of the Specialist Partner,

including any redemption monies held by the Specialist Partner. The Debenture

Agreement was intended to provide a further layer of security in that if the

Specialist Partner failed to repay the redemption monies to the Fund on a

redemption date then the Fund could exercise its rights under the Debenture

Agreement.

Third tier

4.14
In addition, the Guarantor provided the Guarantee to the Fund. The Guarantee

operated as a final fall-back to the Fund which was only to be called upon in the

event and to extent that the Specialist Partner failed to make the required

payments to the Fund, pursuant to the Debenture Agreement or otherwise.

4.15
Paragraphs 4.57 to 4.59 and 4.102 to 4.114 below address the deficiencies

which occurred in respect of each tier in the Security Mechanism.

CFM’s responsibilities, duties and powers in respect of the Fund

4.16
CFM’s responsibilities, duties and powers in respect of the Fund were set out in

the Operator’s Agreement (entered into between CFM and the Fund) and the

Sponsorship Agreement (entered into, among others, between CFM and the

Fund Asset Manager). Relevant clauses from both Agreements are set out in

Annex C. According to those contractual documents, CFM’s responsibilities,

duties and powers included:

1.
establishing the Fund;

2.
reviewing and approving the IM;

3.
dealing with the Fund in accordance with all relevant regulations;

4.
overseeing investor applications, redemptions and details;

5.
maintaining proper books and records for the Fund; and

6.
overseeing the flow of monies in and out of the Fund (e.g. payment of

distributions to investors).

4.17
The Fund was a limited partnership established under the Partnership Act 1907.

The Fund therefore had no legal identity separate from its partners, who were

the individual investors in the Fund. Under COBS 3.2.3(4), CFM's client was the

Fund notwithstanding that it had no separate legal personality.

4.18
CFM was contractually obliged under clause 4.2 of the Operator’s Agreement to

act in the best interests of the Fund and to exercise that degree of care and

skill as could reasonably be expected of a person experienced and skilled in the

management, operation and administration of a limited partnership. CFM was

also required to exercise the care and diligence expected of a professional

adviser in selecting the third parties to whom it might delegate its rights and

obligations and in monitoring and supervising any such third parties.

4.19
Whilst CFM had primary responsibility for managing the investments of the

Fund, it had not held itself out as competent to manage such investments and

had delegated this activity to the Fund Asset Manager. CFM was not responsible

for the acts or omissions of the Fund Asset Manager. This made the extent of

CFM’s contractual duties as the Operator to supervise and monitor the Fund

and its overall operation unclear.

4.20
CFM was throughout the Relevant Period an authorised firm. Accordingly CFM

was required to carry out its duties as Operator in accordance with the

CFM and its group companies

4.21
CFM offered various services to clients including acting as ACD of authorised

funds or authorised unit trust manager. CFM’s experience before and during the

Relevant Period was predominantly in regulated CIS as opposed to UCIS. For

example, as at 30 June 2009 CFM provided services to approximately 336

funds. Of these, 328 were regulated CIS in which CFM was the ACD or

authorised unit trust manager, and eight were UCIS in which CFM acted as the

Operator.

4.22
Initially, CFM delegated the fund administration activities to another entity in

the same group which operated as, among other things, the in-house

administrator for CFM (“the First Delegate”). In early September 2008, these

activities were transferred to a different entity in the group (“the Second

Delegate”).

4.23
The delegated activities which were to be carried out by the Second Delegate

included:

1.
reviewing the information provided by the Fund Asset Manager for

each loan application;

2.
having responsibility for the Fund’s bank account from which

drawdowns were made to the Specialist Partner;

3.
carrying out regular reconciliations of the monies held in the Fund’s

bank account to ensure it was able to maintain accurate records and

accounts. In order to satisfy this requirement it was required to

monitor investors’ subscriptions and redemptions; and

4.
overseeing the quarterly payment of interest to investors.

4.24
The above activities were purely of an administrative nature. Notwithstanding

the delegation of these administrative tasks, CFM at all times was responsible

for overseeing and monitoring the activities of the Second Delegate. The

Second Delegate was not itself the Operator and had no role in relation to the

Fund outside of acting on instructions from CFM.

4.25
CFM also used the business unit compliance function to procure information.

CFM was at all material times responsible for overseeing and monitoring the

business unit compliance function.

CFM’s initial due diligence and take-on procedure for the Fund

4.26
A diagram showing key events within the Relevant Period is set out in Annex A.

4.27
In early 2008 CFM’s process for considering whether it should take-on new

business was referred to as IRAT. This process culminated in an IRAT

Committee meeting. The IRAT Committee meeting was the key decision

making process for taking on new business or making significant changes to

current business. It is noted that CFM initiated and implemented a range of

enhancements to the IRAT process over the Relevant Period and subsequently.

However, in early 2008 these enhancements had not been implemented.

4.28
The IRAT Committee met on 26 March 2008 to consider, among other things,

whether CFM should take-on the Fund. Ahead of this meeting the IRAT

Committee was provided with a two page briefing document (the IRAT form).

The information set out in the IRAT form contained inaccuracies and omissions.

The IRAT form:

1.
stated that the name of the Fund included the words “Low Risk Income

Fund” when by this point the Fund Asset Manager was giving

consideration to including the word “Guaranteed” in the proposed

name. The IRAT Committee therefore did not consider whether the

Fund could appropriately be named and promoted as “The Guaranteed

Low Risk Income Fund”;

2.
was incorrect in stating that an accountancy firm had been appointed

as the auditor of the Fund, whereas in fact no auditor had been

appointed; and

3.
did not set out what aspects of CFM’s responsibilities and duties as

Operator were non-standard.

4.29
The CFM member of staff proposing the new business did not attend the IRAT

Committee meeting. Accordingly, no CFM employee who might have had

additional relevant information attended the Fund’s IRAT Committee meeting.

The minutes of the IRAT Committee meeting did not show that any

consideration was given to what CFM’s responsibilities as Operator of the Fund

would be or whether CFM was capable of discharging these responsibilities.

4.30
On 17 September 2009, and shortly before CFM’s tenure as Operator

terminated, CFM produced and circulated internally a paper which analysed

CFM’s IRAT process for this Fund. CFM’s own findings were that at the take-on

stage for the Fund, and then throughout its entire tenure as Operator, CFM had

failed to understand what the role of Operator required. The internal CFM paper

stated that at the point at which CFM agreed to take-on the Fund it thought

that: “… the Operator role was that of providing basic fund administration and

transfer agency functions….”. In addition, it stated that had a more robust IRAT

process occurred: “… this case would have been highlighted at [the IRAT

Committee] and given more consideration before approval, and likely would

have been rejected given the name, risks, and nature of the [Fund]”.

4.31
However, in March 2008 the IRAT Committee did not reject the Fund. Based on

the information contained in the IRAT form, and subject to obtaining the

agreement of the First Delegate (who it was envisaged would have the

responsibility for undertaking CFM’s administrative activities for the Fund), it

approved the new business.

4.32
The First Delegate subsequently raised several concerns regarding the potential

risks of taking on the Fund, including:

1.
noting that the Operator’s Agreement placed duties on CFM which it

“would not usually cover off and which have a high risk of being

missed”, and accordingly questioned how many people within CFM had

had sight of this agreement;

2.
whether there was adequate resource and structures in place to

undertake this work;

3.
whether any due diligence had been carried out on the Guarantor; and

4.
what ongoing monitoring would take place if the Fund was accepted.

4.33
To address some of these concerns it was agreed that the First Delegate would

take-on the administrator role in a temporary capacity until it could be

transferred to the Second Delegate. However, in practice these concerns were

not adequately addressed prior to the Fund being taken on by CFM.

4.34
After the IRAT Committee had considered the take-on proposal the business

unit compliance function was asked to conduct a review of the proposal. The

review which was conducted was limited and identified no deficiencies with IM1.

On 7 April 2008 the business unit compliance function confirmed that it had

reviewed the paperwork provided and confirmed that it was “in order”. CFM

treated this confirmation as being the final approval which it required in order

to accept the Fund and approve IM1.

4.35
Shortly afterwards IM1 was made available to IFAs. After allowing a period for

subscriptions the Fund became operational and was formally launched in July

2008.

Potentially misleading statements in IM1

4.36
The name of the Fund, as described in IM1, was “the Guaranteed Low Risk

Income Fund, Series 1” and there are numerous references throughout IM1 to

the Fund being guaranteed and low risk. For example, IM1 stated that: “The

guaranteed income in the Fund varies between 8.15% and 8.5%, depending on

the amount invested”. The Authority considers that this statement is potentially

misleading because the IM did not highlight the risk that the Guarantee that

was in place was dependent on the strength of the Guarantor.

4.37
While IM1 includes a number of risk factors including that an investment

"involves a degree of risk", it also contained statements that suggested the

investments were secure and low risk, for example:

1.
“Guaranteed Liquidity after 6 months”;

2.
“Investors will receive 100% of their initial Participations back”;

3.
“Low Risk… In the context of this investment described [sic] the fact

that 100% of the investors [sic] capital, together with any interest

due, will be returned on request, subject to the conditions of the

Fund”;

4.
“The [Fund] has been developed to make this market accessible

directly to investors whilst reducing risk levels through…investment

diversification; a first charge secured against the asset…”; and

5.
“[Income in the Fund] is very favourable when comparing [sic] to other

fixed rate products such as savings accounts and bonds available from

high street and internet providers” and “internet searches suggest that

the best rates achievable from long-term savings accounts are less

than 6.5%”.

4.38
IM1 also stated that a named firm of auditors had been appointed to the Fund

when in fact no auditors had been appointed, and despite CFM’s later attempts

to address this no auditors were appointed throughout CFM’s tenure as

Operator.

The business unit compliance function’s concerns regarding the initial

due diligence on the Fund

4.39
The business unit compliance function conducted a routine compliance visit to

the Fund Asset Manager on 2 October 2008 and the next day its observations

were reported internally. The business unit compliance function observed that

the due diligence performed on the Fund Asset Manager before the Fund was

taken on was focused on an examination of the Fund Asset Manager’s

compliance arrangements and directors’ profiles. Although the business unit

compliance function assumed that CFM’s staff and the IRAT Committee had

considered the details of the Fund it noted that it had not been able to find any

information to support this assumption. The business unit compliance function

also expressed concerns about the use of the words “guaranteed” in IM1.

4.40
Within the business unit compliance function, discussions on these concerns

continued through to the end of November 2008 without resolution. During

these discussions the business unit compliance function set out that:

“The terms “guarantee” and “guaranteed” appear to feature throughout

the marketing documentation in different contexts in relation to both

income and liquidity claims and we must realise that this could be

construed against us (expensively).”

4.41
However, notwithstanding the business unit compliance function’s concerns

regarding the Fund being marketed as “Guaranteed”, no changes to IM1 were

recommended until CFM made the change of the Fund's name a condition of

handing over the Fund to a replacement operator.

4.42
On 20 January 2009 the Fund Asset Manager emailed an updated version of

IM1 to CFM. The Fund Asset Manager explained that the purpose of updating

IM1 was to reflect developments in the markets and changes to interest rates

on any reinvestment of investors’ returns. The Fund Asset Manager requested

that the business unit compliance function review the document. On 29 January

2009, the business unit compliance function commented on the draft document

which in due course became IM2. Despite the business unit compliance function

having raised concerns regarding the description of the Fund as set out in

paragraphs 4.39 and 4.40 above, the members of the business unit compliance

function who reviewed this document again failed to identify and address the

inaccuracies, omissions and unclear and potentially misleading statements in

the updated IM. Instead, the business unit compliance function’s comments

were limited to correcting minor typographical errors and some inconsistencies

in the text. These comments were forwarded to the Fund Asset Manager on 29

January 2009. Subject to these comments being incorporated, CFM approved

the updated IM which became IM2. In material respects the content of IM2 was

the same as IM1.

Further concerns raised by the business unit compliance function

4.43
From around November 2008 the Fund Asset Manager began attempts to

promote the Fund in an overseas jurisdiction. In order to operate in this

jurisdiction it had first to obtain approval from that jurisdiction’s financial

services regulator. After providing information in support of its application the

overseas regulator raised questions about certain gaps and anomalies in the

Fund Asset Manager’s submissions. In particular, the overseas regulator noted

that the submissions had omitted to mention that certain employees of the

Fund Asset Manager had links to a collapsed unlawful collective investment

scheme and questioned the extent to which the Fund Asset Manager had been

candid in its application.

4.44
The questions raised, together with those raised internally, prompted CFM to

instruct the business unit compliance function to review the overseas

regulator’s concerns. On 8 January 2009, the business unit compliance function

advised CFM about its:

“...concerns vis-à-vis initial due diligence, the nature of the scheme and

its similarities to the unlawful collective investment scheme and the

potential exposure the business may have if the schemes are not to

standard”.

4.45
On 9 January 2009, the business unit compliance function communicated to

CFM that: “There are many questions being asked which should have been

asked when the business was taken on…”.

4.46
Between 23 January 2009 and 6 March 2009 the business unit compliance

function provided three due diligence reports to CFM. The conclusion of the

First Due Diligence Report, which was repeated in both the Second and Third

Due Diligence Reports, was that if the take-on of the business had been

considered at that point in time then the results of these due diligence

enquiries would have “yielded a recommendation to the CFM Board that the

business relationship should not be entered into”. However, the reports

ultimately concluded that "we have reached a position where this business

arrangement can be satisfactorily continued, subject to the usual oversight

arrangements".

4.47
CFM recognised that the connection between the unlawful collective investment

scheme (which had collapsed) and the Fund “could taint the Fund” and that

although it did not think that the Fund was a “scam” it recognised that there

were risks associated with having this connection.

4.48
CFM subsequently ensured that steps were taken to sever the Fund Asset

Manager’s key links to the unlawful collective investment scheme, consistent

with the ultimate recommendations of the Due Diligence Reports produced by

the business unit compliance function. Although there were some questions at

least in the Second Delegate regarding the effectiveness of the steps taken, at

the very least the Authority considers that knowledge of the links between the

Fund Asset Manager and the unlawful collective investment scheme ought to

have acted as a warning sign to CFM to ensure that the Fund was being

managed properly and ought to have been viewed as a matter of serious

concern if it was not.

March 2009 to May 2009

4.49
On 9 March 2009 CFM instructed the Second Delegate to review all payments

made out of all of the funds in which it had dealings with the Fund Asset

Manager, including the Fund. However, and specifically in respect of the Fund,

the Second Delegate considered that the records handed over from the First

Delegate to the Second Delegate were incomplete. These records took several

months to be properly organised and brought up to date.

4.50
In the meantime, on 14 April 2009, the business unit compliance function

advised CFM that the name of the Fund should be immediately changed and

expressed concern that under this arrangement CFM was required to approve

the promotional documentation for the Fund which was considered to be

outside CFM’s business model. On 20 April 2009 CFM informed the Fund Asset

Manager that the business unit compliance function required the words

“Guaranteed” and “Low Risk” to be removed from the Fund’s name. The

business unit compliance function was concerned about the risk of mis-selling;

specifically, that investors may have been investing in the mistaken belief that

that they would never lose their capital. This risk was considered by the

business unit compliance function in the context of the professional or suitably

experienced investors to whom the Fund was intended to be marketed.

4.51
However, the name of the Fund was not in fact changed until CFM handed over

the Fund to the Replacement Operator (where CFM made it a condition of the

transfer) and nor were any significant changes made to IM2. New subscriptions

continued to be accepted into the Fund on the basis of this description of the

Fund until 23 July 2009 with top-ups by existing investors being permitted

throughout CFM’s tenure as Operator.

4.52
During April 2009 the relationship between CFM and the Fund Asset Manager

deteriorated. On 5 May 2009 the Fund Asset Manager wrote to CFM criticising

CFM’s approach in its dealings with the Fund Asset Manager and its

performance as Operator. The Fund Asset Manager also considered that CFM

was overstepping the bounds of its role as Operator, as set out in the Fund’s

contractual documentation. In a draft response circulated internally within CFM

it was noted that:

“Underlying many of the issues we have experienced with this

relationship is the lack of specialist knowledge within all of [CFM]

concerning exactly what our responsibilities and liabilities are”.

May 2009: CFM’s decision to resign as Operator

4.53
At a meeting between CFM and the Fund Asset Manager on 15 May 2009 CFM

told the Fund Asset Manager that “it was best for both organisations to have a

parting of ways”. CFM requested in May 2009 that no new investors enter the

Fund until a replacement Operator had been appointed. The Fund Asset

Manager explained that this would be an unacceptable disruption to its business

but that it understood CFM’s position. On 23 June 2009 CFM added an update

at the end of these minutes of this meeting, stating that it had allowed the

Fund’s bank account to remain open “so as not to disrupt business or impact

investors”.

4.54
CFM subsequently considered whether it should take a more limited

administrator role in relation to the Fund. However, in a meeting on 26 May

2009 at which several CFM Board members were present, the business unit

compliance function expressed the view that “if the profit for [CFM] was

insubstantial it would be beneficial not to provide any work for [the Fund

General Partner], bearing in mind the wider reputational implications for

[CFM].” In the event, CFM decided not to take-on this more limited

administrator role.

4.55
The decision to withdraw from the role of Operator of the Fund was also made

in the context of a wider strategic decision by CFM to cease acting as operator

of all unregulated funds and focus on its core business of acting as the ACD of

regulated funds with authorised fund managers, which was implemented.

July 2009: CFM’s decision to close the Fund to new subscriptions

4.56
On 22 July 2009, and following CFM’s instruction, the Second Delegate emailed

the Guarantor’s 2008/9 Accounts to the business unit compliance function

noting that “the accounts show that [the Guarantor] made a loss in the year to

31st March 2009 of £1.4m, which draws into question the ability of [the Fund]

to guarantee a rate of return on [the Fund], which it was assumed [the

Guarantor] would cover…”. The business unit compliance function recorded on

24 July 2009 that CFM, the Second Delegate and the business unit compliance

function considered that the Guarantor might not have been financially stable

and that the Fund “… may not be able to meet its guarantee to pay 8.15 [or]

8.5% to investors with no risk to capital”.

4.57
On 22 July 2009 CFM recorded its view that the Guarantor was not in a position

to “back up” the Guarantee. As a result members of CFM, the Second Delegate

and the business unit compliance function arranged to meet the Fund Asset

Manager the following day to inform the Fund Asset Manager that it would stop

taking new subscriptions into the Fund with immediate effect and seek reasons

from the Fund Asset Manager as to why it should not begin to wind up the Fund

within one week of this meeting.

4.58
In this meeting it was agreed that the Fund would be closed to new investors

and that new subscriptions to the Fund would cease immediately. This was put

into effect on 25 July 2009 from which date CFM formally suspended the Fund

to new subscriptions.

4.59
This was, however, not a full suspension of the Fund’s operation. Despite CFM’s

concerns about the misleading promotional documentation, its serious concerns

about the strength of the Guarantee and the various issues which CFM became

aware of in the weeks that followed 23 July 2009 (as set out below) CFM

continued to accept further investments from existing investors both in the

form of top-ups and re-invested interest throughout the remainder of its tenure

as Operator. Between 25 July 2009 and 25 September 2009 (being the date on

which the Fund was handed over to the Replacement Operator) CFM permitted

existing investors to invest a further £3.23 million into the Fund. CFM also

continued to process loan drawdowns from the Fund to the Specialist Partner

until mid-September 2009.

25 July 2009 onwards: CFM’s actions to identify and consider further

issues with the Fund

4.60
In August 2009 CFM and the Second Delegate analysed in more depth the

operation of the Fund. Some of the issues which became apparent ought to

have been identified much earlier.

Breaches of the LTV ratio parameters as set out in the IMs

4.61
After CFM had suspended new subscriptions to the Fund, the Second Delegate

began to monitor the drawdown requests it received to ensure that the

drawdown requests were within the LTV ratio parameters set out in IM2. As a

result of this the Second Delegate then rejected a drawdown request on the

basis that the prospective LTV ratio would have exceeded the parameters of

IM2 and continued, on behalf of CFM, to reject requests where these appeared

to be outside the terms of IM2.

4.62
On 4 August 2009 the Second Delegate informed CFM that some historic loans

which had already been approved had exceeded the 80% LTV ratio parameter.

The Second Delegate also told CFM that it was uncomfortable with the Fund

Asset Manager’s application of a “Special Asset Value” to properties “in order

for the 80% [LTV ratio] to not be breached”. These issues were raised with the

Fund Asset Manager who provided CFM with assurances in relation to its

concerns.

4.63
On 20 August 2009 the Second Delegate provided the business unit compliance

function with a loan schedule which detailed the LTV ratios which, as part of its

review into LTV ratios, it had been able to identify at the time. The schedule

showed that two loans had been drawn down in respect of one property which

had resulted in a collective LTV ratio of 152%. The Second Delegate stated that

it was aware of two loans which breached 80% LTV ratio, but added that it did

“not know all the LTV ratios”, despite it or the First Delegate having approved

all of these loans.

4.64
The Authority has reviewed a sample of 38 of 113 loans packs for loans

approved during CFM’s tenure as Operator. Of the loans reviewed, the

Authority has identified seven loans which were approved during CFM’s tenure

which had LTV ratios in excess of 85%. Subsequent to the Relevant Period CFM

conducted an investigation which showed that of 116 loans drawn down during

CFM’s tenure as Operator, 14 appear to have exceeded an LTV ratio of 85%.

4.65
Before CFM began to identify potential issues in relation to the Fund it did not

routinely procure adequate checks of loan requests or ensure that adequate

records were being maintained of the loans which had been approved.

4.66
At a meeting between the Fund Asset Manager and CFM on 16 September 2009

CFM reiterated to the Fund Asset Manager that the practice of issuing loans

with LTV ratios which breached the IMs must not continue. This issue (among

others) was also raised at a meeting the following day with the Replacement

Operator.

Rolling over loans

4.67
The IMs informed investors that bridging finance “is specifically utilised for

funding short term property mortgages” and that the term of the loans would

be “between three and six months”. However, a different period was set out in

the Investment Policy which was published with the IMs and which was

intended to be read in conjunction with them. The Investment Policy provided

that the Fund would invest in short term bridging finance with a repayment

period of typically between three months and 12 months. This period was also

capable of being extended with the written consent of the Fund Asset Manager.

4.68
Not all loans which were approved during CFM’s tenure as Operator had fallen

due at the point of handover to the Replacement Operator. However, by early

August 2009, the Second Delegate had identified that capital repayments for a

number of loans which ought to have matured had not at that point been

repaid to the Fund. On 5 August 2009 the Second Delegate wrote to the Fund

Asset Manager to ask why of the 25 loans that had been made by the end of

September 2008 only seven of those loans had been repaid to the Fund as at

31 July 2009. The Fund Asset Manager told the Second Delegate on 7 August

2009 that the Specialist Partner, with the approval of the Fund Asset Manager

but without CFM or the Second Delegate being aware, had been allowing the

term of those loans to roll over.

4.69
CFM ought to have been in a position such that it could identify the rolling over

of the loans. However, partly due to the length of the loans and in any event

because the loan book and the corresponding reconciliations of the Fund’s bank

account were not being adequately monitored, CFM was not aware until August

2009 that any loans had been rolled over, and therefore that monies had not

been returned to the Fund’s bank account when due. While the Fund Asset

Manager was able to provide explanations for the loans that had been rolled

over, the practice could have masked the extent to which the borrower might

have defaulted on the repayment had it been called upon when due instead of

the loans being allowed to roll over. Therefore, CFM did not know the extent to

which these loans may have been distressed loans which exposed the Fund to

an adjustment in risk levels.

Recycling loans

4.70
On 6 August 2009 the Second Delegate circulated the 6 August 2009 Board

Paper for a meeting on 7 August 2009. This was an ad hoc meeting which was

convened to discuss the Fund and was attended by various CFM employees,

including several board members.

4.71
The 6 August 2009 Board Paper provided a summary of the issues pertaining to

the Fund including LTV ratio breaches and the recycling of loans.

4.72
The 6 August 2009 Board Paper recorded that the Second Delegate believed

that it had identified five instances where the Specialist Partner had recycled

monies which had been repaid to it by its borrowers and had then used these

monies to issue new loans to different borrowers without CFM’s awareness or

approval. Subsequent analysis conducted after the Relevant Period shows that

the actual number of instances was either three or four.

4.73
This issue had been identified by CFM as part of its enquiries in relation to loans

that were due for repayment. When queried with the Fund Asset Manager, it

confirmed that certain of these loans had been repaid and the monies advanced

to a new borrower. The Fund Asset Manager stated this had been done in the

early stages of the Fund with the Fund Asset Manager's express permission.

4.74
CFM considered this to be an administrative error which was resolved following

discussions with the Fund Asset Manager. It also believed any further instances

would have been identified by its ongoing monitoring of the redemptions.

However, the Authority considers that this was a serious breach of the Fund’s

procedure. By bypassing CFM, the Fund Asset Manager prevented CFM from

having sight and control over the whereabouts of these monies. Had CFM

ensured that its reconciliations were being adequately performed and ensured

that the Security Mechanisms were in place for each loan, it could have

identified this issue when it first arose in October 2008 and then taken steps to

ensure that it did not occur repeatedly.

4.75
The Second Delegate’s own assessment of the Fund Asset Manager’s

explanation as to why recycling had been allowed was that it did not make

much sense. However, beyond challenging the Fund Asset Manager (referred to

at 4.74 above) and seeking an explanation, neither CFM nor the Second

Delegate made any further enquiries to the Fund Asset Manager as to why it

had allowed recycling to occur or why it had not brought this to CFM/the

Second Delegate’s attention prior to the Fund Asset Manager being prompted to

do so. Nor did CFM make specific enquiries as to whether the new loans which

had been made were in accordance with the IMs or whether the Mortgage

Charges and Sub-Charges had been put in place in respect of these new loans.

Subsequent to the Relevant Period, CFM conducted an investigation which

showed that the appropriate charges had, in fact, been registered in respect of

these recycled loans.

4.76
As set out above, in August 2009 the Second Delegate began assessing when

all the loans were due to be returned to the Fund, monitored when they had

not, and made enquiries to the Fund Asset Manager, as appropriate. The

Authority considers that whilst these steps might have reduced the risk that

future recycling may occur, CFM should not have considered the issue of

recycling loans to have been fully resolved.

CFM’s internal meeting on 7 August 2009

4.77
On 7 August 2009 some members of the CFM Board and others employees met

to discuss the funds in which CFM and the Fund Asset Manager were involved.

This meeting was specially convened and was not intended to be a formal

board meeting, although it was referred to by an employee of the Second

Delegate internally as a board meeting. A document entitled "summary of

points for CFG Board" was prepared ahead of it. However, despite the

importance of the matters being discussed, no minutes of this meeting were

taken. In the ordinary course the Authority would expect regulated firms to

take detailed notes and minutes of meetings of such importance.

4.78
The 6 August 2009 Board Paper was produced for the purpose of this meeting.

As well as setting out several issues identified with the Fund, the 6 August

2009 Board Paper set out the nature of some of the risks to CFM as a

consequence of its involvement in the Fund and recommended next steps.

4.79
The 6 August Board Paper noted that CFM’s exposure to investors in the Fund

was £47 million; although the basis on which this statement was made is

unclear. It considered whether the Fund ought to be handed over “where

[CFM’s] exposure could escalate, or do we maintain that [the Fund] should be

put into run off and we remain Operator until [the Fund] is fully closed”. It

explained that in run off CFM would be able to “manage… and potentially

minimise [its] liability”.

4.80
At this meeting CFM affirmed its earlier decision to retire from the Fund.

However, notwithstanding the consideration of winding up the Fund, CFM began

corresponding with the PRO thereby taking steps to retire from the Fund by

securing a replacement operator.

CFM’s interactions with the PRO

4.81
In July 2009 the Fund Asset Manager approached the PRO to discuss whether it

might take over as Operator of the Fund. By 11 August 2009 CFM had

communicated to the Fund Asset Manager its intention to try to hand over the

Fund to the PRO.

4.82
On 13 August 2009 CFM recorded that it would not:

“release the [Fund] to [the PRO] as Operator until we are comfortable

that it is functioning properly, e.g. that loans are redeeming back into

the [Fund] … and that auditors are appointed”.

4.83
Although both these issues remained unresolved, on 16 August 2009 CFM

recorded that its “primary focus is on the transfer of [the Fund] to [the PRO] at

the earliest juncture”.

4.84
On 17 August 2009, the PRO told the Fund Asset Manager that it required a

letter from the Fund Asset Manager setting out its reasons for wanting to resign

as Operator of the Fund. Whilst awaiting this letter, an internal email exchange

took place within the PRO on 18 and 19 August 2009. In this email exchange

an individual within the PRO queried “Why is [CFM] pushing to get rid of this

business so quickly? Are we sure we have all the information about the

breakdown in communication between them and [the Fund Asset Manager]”.

4.85
On 21 August 2009 CFM sent to the PRO a letter setting out its reasons for

wanting to resign (“the 8 Point Letter”). CFM explained that it had taken a

strategic decision to not operate collective funds where the asset manager was

not an authorised person and it did not want to continue to issue financial

promotions. The following six points were also included:

1.
CFM was “no longer willing to operate [the Fund] in the absence of a

guarantee from a UK authorised bank. [The Guarantor] is not a UK

authorised bank”;

2.
the Guarantor’s Accounts showed a “substantial fall in net assets from

£2,430k at 31 March 2008 to £148k at 31 March 2009”. CFM also

noted that two banks intended to withdraw their facilities to the

Guarantor;

3.
CFM was no longer comfortable with the Fund Asset Manager’s strategy

of investing all of the monies in the Fund in loans issued by the

Specialist Partner and which were guaranteed by the Guarantor;

4.
CFM had recently become aware that the Fund had advanced loans in

excess of 80% of LTV. CFM stated that it had not conducted any work

to assess whether these loans had a guaranteed exit route, as the IMs

stated that they would;

5.
CFM had become aware that loans were being rolled over for longer

periods than stated in the IMs; and

6.
the named auditor in the Fund’s IMs had not accepted the appointment

and no auditor had been appointed.

4.86
The PRO immediately reconsidered whether it “still wanted to take on the

business” after receiving the 8 Point Letter. CFM was informed that the PRO

“…was not of the opinion that [the Fund Asset Manager] had informed [the

PRO] of all the issues.” It was recorded that “…This came as a bit of a shock to

CFM as we were informed by [the Fund Asset Manager] that [the PRO] were

fully aware of all the concerns outlined in the [8 Point Letter]”.

4.87
On 21 August 2009 the Second Delegate noted that there was a concern

regarding whether the Fund Asset Manager had been open and honest with the

PRO. The Second Delegate observed that responding to questions was not the

same as being open and honest.

4.88
Between 21 August 2009 and 2 September 2009, the PRO carried out

additional due diligence and carried out a site visit to the Second Delegate. On

2 September 2009 the PRO, by letter to the Fund Asset Manager and copied to

CFM, stated that it would not accept the role of Operator and that it was

withdrawing from the take-on process. The PRO’s letter stated that:

1.
certain information in the Fund’s documents was “inaccurate and

misleading and that the operational procedures currently in place do

not reflect those set out in the limited partnership agreement and the

information memorandum relating to the Fund”;

2.
current investors may have “been misinformed as to the nature of the

Fund and its investments, due to a number of inaccuracies contained in

the offer documentation”;

3.
it was not satisfied that the Fund currently, and in the short term,

would be “at a satisfactory level of compliance with its stated

objectives or, indeed, that these are achievable”; and

4.
The PRO did not have a level of satisfaction with the operation of the

Fund that it would both desire and that is incumbent upon an

authorised operator to ensure.

4.89
The Authority’s view is that the PRO’s withdrawal letter reaffirmed to CFM that

the Fund was in a serious condition.

4.90
Following the PRO’s withdrawal letter, the relationship between CFM and the

Fund Asset Manager further deteriorated. On 2 September 2009, the Fund

Asset Manager blamed the PRO’s withdrawal on the manner in which CFM

relayed its position regarding the Fund to the PRO. The Fund Asset Manager

had already threatened CFM with legal action if the transfer to the PRO did not

come into effect by 21 August 2009. Now that the PRO had withdrawn from the

process, the Fund Asset Manager told CFM that if an alternative replacement to

CFM could not be found in the next few days or if CFM did not lift the Fund’s

suspension to new subscriptions, then the Fund Asset Manager would begin

litigation. The Fund Asset Manager also communicated to CFM that “it is vital

that [CFM] discuss with us in detail any further communication with potential

operators” and that the Fund Asset Manager would now “approach [the

Replacement Operator] and others with regard to the Operator role and would

expect [CFM] to facilitate the move in quick time and with a high level of

cooperation”.

4.91
On 7 September 2009 the Fund Asset Manager repeated its warning to CFM

that any written communications to either the potential incoming Operator or to

investors regarding CFM’s retirement from the Fund must first be approved by

the Fund Asset Manager. However, there is no evidence to show that the

Replacement Operator was provided with any less information than the PRO.

September 2009: CFM’s decision to try to secure the Replacement

Operator as its replacement

4.92
In September 2009, the Fund Asset Manager sought to secure the Replacement

Operator as the replacement Operator. CFM reassessed its options, namely

whether to wind down the Fund, which could not have been done without the

agreement of the Fund General Partner, and/or resign as Operator (which

would have required giving the Fund six months' notice), or find a replacement

operator. CFM decided that its preferred option was to transfer the role of

Operator (this time to the Replacement Operator) and that resigning or winding

down the Fund was its fall-back option.

4.93
After the PRO’s withdrawal from the handover process, CFM was concerned that

the Replacement Operator might also decline to take-on the Fund. On 3

September 2009 CFM recorded internally that it ran “the risk of [the

Replacement Operator] not taking on this Fund. Therefore [this Fund] does

remain a high risk!”.

4.94
One explanation for why this Fund was described as being “high risk” is that by

this point in time CFM had graded all UCIS as being “high risk”. However, this

description appeared to be pertinent in respect of this Fund and the next day

CFM further recorded that: “So far as [it was] concerned this has the potential

of being a 42m [sic] problem and another regulatory issue that could

potentially double the impending fine on arch [Cru] and is a very complex

issue”. CFM also noted that it was “heading for a potential situation with [the

Fund Asset Manager]”.

The business unit compliance function’s risk assessment

4.95
On 7 September 2009 a further meeting to discuss the Fund took place

between various members of CFM’s board and other employees. Whilst this

meeting was also referred to as a “board meeting” and several members of

CFM’s board attended it, as with the 6 August 2009 meeting no minutes or

formal notes of the 7 September 2009 meeting were taken.

4.96
Ahead of the meeting on 7 September 2009, a “CFM Board paper” was

produced which set out the key risks associated with the Fund. This paper was

circulated ahead of the meeting on 7 September 2009. The paper stated under

the heading “FSA Principles 1 and 2”, that the incoming Operator should:

1.
be provided with appropriate access to information prior to accepting

the appointment to enable it to carry out appropriate due diligence.

This included providing appropriate information in relation to “open”

issues;

2.
have a proper appreciation of CFM’s reasons for retiring in addition to

disclosure of “open” issues. This was seen as minimising the risk of

future claims by the new Operator and action by the Authority; and

3.
issue a disclosure letter. It was noted that this would not eliminate the

risk of there being other matters that the new Operator could claim

ought to have been known to CFM and which should have been

disclosed. The view expressed by the business unit compliance function

was that this risk, “is minimised by giving the new operator full access,

disclosure of all relevant documentation and sufficient time so as to

enable them to undertake appropriate due diligence”.

4.97
CFM’s board took the view that if CFM was to comply with its regulatory

obligations then it ought to ensure that the Replacement Operator had a proper

understanding of CFM’s reasons for retiring in addition to the Replacement

Operator being provided with appropriate information regarding the “open”

issues with the Fund.

September 2009: CFM’s understanding of further additional issues with

the Fund

4.98
After the PRO’s withdrawal CFM became aware of further serious issues with

the Fund. CFM did not take steps to address all of these issues. Instead CFM

continued to focus efforts on securing the Replacement Operator as a

replacement operator.

The continued rolling over of loans

4.99
During this period, as part of its monitoring of the Fund CFM became aware

that the Specialist Partner’s practice of rolling over loans was continuing. On 15

September 2009, CFM recorded that the Fund Asset Manager had agreed to

notify CFM when the Fund was not going to receive the repayment of its loans.

CFM noted that this process appeared to be working as the Fund Asset Manager

had advised CFM of two instances where this had occurred the previous day.

However, this did not accord with the correspondence between CFM and the

Fund Asset Manager the previous day in which CFM requested an explanation

for why none of the five loans which were due to be repaid on 10 September

2009 had been returned to the Fund. Following this enquiry the Fund Asset

Manager confirmed an extension had been granted to the term of these loans.

4.100 At a meeting between CFM and the Fund Asset Manager, as part of the

discussion of issues prior to a meeting with the Replacement Operator on 16

September 2009, CFM reiterated to the Fund Asset Manager that its practice of

allowing loans to roll over must stop as it was outside the parameters of the

IMs.

4.101 In early September 2009 CFM identified and informed the Fund Asset Manager

that the Debenture Agreement, which should have been registered at

Companies House prior to any lending taking place, had not been so registered.

The Fund Asset Manager only registered the Debenture Agreement at

Companies House on 10 September 2009. The Fund Asset Manager told CFM

that it would seek to ensure the Fund’s rights under the Debenture Agreement

would have retrospective effect. However, there is no evidence to show that

the Debenture was backdated. As a result, there existed an unmitigated risk

that the priority of the Debenture Agreement as a form of security could have

been affected.

4.102 At this point, therefore, CFM knew that the Debenture Agreement (being the

second tier in the Security Mechanism) was not effective. CFM also had

concerns around the Guarantor's ability to meet the Guarantee (being the third

tier in the Security Mechanism) if it were called upon to do so. As a result,

neither the second nor third tier offered the necessary protection to the monies

which the Fund had lent to the Specialist Partner. This increased the risk profile

of the Fund.

The registration of securities in the first tier of the Security Mechanism

4.103 As explained in paragraphs 4.11 to 4.12 above, in respect of the first tier in the

Security Mechanism there were two separate (but linked) processes. These

were (i) the registration of a Mortgage Charge in favour of the Specialist

Partner at the Land Registry and over a borrower’s property; and (ii) the

registration of a Sub-Charge in favour of the Fund and corresponding to the

relevant Mortgage Charge.

4.104 CFM instructed the Second Delegate on 9 March 2009 to obtain a list of the

Mortgage Charges. In the period following this instruction this exercise was not

conducted in respect of those charges connected to the Fund’s business.

Instead, it appears that this instruction was understood to relate to the other

funds which CFM and the Fund Asset Manager were involved with. During a

meeting on 26 May 2009 (at which several CFM board members were present)

it was recorded “that if [CFM] were to perform any work for [the Fund Asset

Manager], the issues surrounding registration of titles and the basis of property

valuation would be non-negotiable”. The other funds were land funds which

invested directly in land rather than having indirect interests via bridging loans.

CFM did not immediately consider whether the Fund had been affected by the

same issues as, unlike these other funds, the arrangement of this Fund was

such that it did not hold title to properties.

4.105 On 9 September 2009 CFM asked the Fund Asset Manager to clarify how the

Mortgage Charges (in respect of the Fund) were being registered at the Land

Registry and asked the Fund Asset Manager to provide examples to show this.

On 14 September 2009 CFM recorded as an action point that all Land Registry

records were to be obtained in order to ensure that CFM had a full record. Prior

to this date CFM had not checked that the Fund Asset Manager had ensured

that this security was properly in place.

4.106 On 16 September 2009, the business unit compliance function reported that its

preliminary checks of the Land Registry showed that a member of the

Guarantor’s group of companies owned ten of the properties in respect of which

loans had been issued. This could have raised questions regarding the

Specialist Partner’s independence from the loans which it had made and

whether because of this there were appropriate controls and safeguards in

place to ensure the Fund’s lending was not at risk. CFM had not investigated

this issue before processing the drawdown to the Specialist Partner and did not

investigate it once it became aware of the issue.

4.107 At the same time the business unit compliance function recorded the following

additional concerns:

1.
records for 35 loans could not be identified at the Land Registry.

Subsequent to the Relevant Period CFM conducted an investigation

which showed that 19 of these 35 loans had been registered; and

2.
for several loans the Land Registry records showed that the Specialist

Partner was not the company which had the benefit of the charge.

4.108 The failure to register these charges was a key breach of the Services

Agreement entered into between the Fund and the Specialist Partner. Where

charges were not correctly registered the effect was that the Fund was not

protected by the first tier in the Security Mechanism in circumstances where

there were competing creditor claims over the same asset.

4.109 The Authority considers that, whilst in isolation this issue was serious, in the

context of the other potential failings and concerns with respect to the second

and third tier of the Security Mechanism it should have been clear to CFM that

the Security Mechanism of the Fund was materially flawed in practice. At this

point CFM knew that errors or concerns had arisen in respect of each layer in

the Security Mechanism with the effect that adequate protection was not in

place. Despite the seriousness and extent of this issue, CFM did not take any

action to address it.

4.110 During September 2009 CFM and the Second Delegate also began making

enquiries into the registration of the Sub-Charges at Companies House.

4.111 As explained in paragraphs 4.11 and 4.12, the Sub-Charges should have been

registered in favour of the Fund and have corresponded to the Mortgage

Charges in favour of the Specialist Partner. However, on 8 September 2009 the

Second Delegate informed CFM that certain Sub-Charges might have been

registered in the name of the Guarantor at Companies House, although the

property details were not held on the Companies House website which meant

that these charges could not be linked to any particular property/loan related to

the Fund.

4.112 On 11 September 2009 CFM informed the Fund Asset Manager that it had

reviewed the Sub-Charges registered at Companies House and found that

approximately 20 loans did not have a corresponding charge. The total value of

these loans was £6.3 million. CFM asked the Fund Asset Manager for an

explanation. The Fund Asset Manager did not respond and CFM did not pursue

the matter any further. Whilst a key individual within the business unit

compliance function (at a subsequent interview with the Authority) described

registration generally as being “absolutely critical”, CFM did not take steps to

address this issue, viewing this issue as being “administrative in nature” as it

affected a comparatively small proportion of the total loan book. Subsequent to

the Relevant Period CFM conducted an investigation which showed that security

for ten of these loans was in fact registered.

4.113 Later that same day CFM recorded internally that the total value of charges

exceeded the total value of loans, as some charges had not been removed for

loans which had been repaid and some charges had been duplicated or

incorrectly filled out. It appears that CFM took comfort from this. However, the

Authority considers that CFM should not have done so. Instead, at this point in

time CFM understood that the first tier in the Security Mechanism had failed to

apply to loans with a total value of £6.3 million, and that elsewhere across the

loan book the registration process was not always operating as intended.

4.114 On 15 September 2009 it was further reported internally within CFM that it had

“a good handle on the security of the assets in the Fund (re debenture and

charges)…” and that “… all in all we are happy to continue the transition to the

new operator”. Notwithstanding CFM’s review of the charges, the Authority

does not consider that CFM had any credible grounds to conclude that it had a

good understanding of this issue.

4.115 On 17 September 2009 the business unit compliance function identified that

four Sub-Charges had been registered in the name of persons connected to the

Fund's General Partner and not in the name of the Fund. This was a further

indication that the Security Mechanism was not always functioning correctly.

Despite this, CFM did not take steps to address this.

CFM’s understanding of the structural arrangements connected to the Fund

4.116 As late as September 2009, neither CFM nor the Second Delegate understood

which entity within the Guarantor’s group was the lending entity. The Second

Delegate sent an email to CFM and the business unit compliance function on 8

September 2009 in which it stated: “We are sending money to [the Guarantor],

we are not sure if they onward lend to [the Specialist Partner], or direct to the

borrower.”

4.117 To address this on 9 September 2009 CFM emailed the Fund Asset Manager

and asked it to confirm whether the Specialist Partner was the lending entity as

the IMs did not clearly reflect this.

4.118 In response, the Fund Asset Manager confirmed that the lending entity was the

Specialist Partner. CFM reacted to this in the following three ways:

1.
CFM recognised that the IMs did not accurately set out which was the

lending entity within the Guarantor’s group and therefore the recipient

of the Fund’s monies. The business unit compliance function

recognised this was “fundamental” and that the IMs were misleading;

2.
CFM decided to prohibit further drawdowns from the Fund; and

3.
CFM raised this as part of the handover to the Replacement Operator

and potential solutions to take this forward after CFM's resignation

were discussed.

4.119 On 16 September 2009 CFM communicated to the Fund Asset Manager that

lending the monies invested in the Fund to only the Specialist Partner resulted

in a concentration risk which was not adequately reflected in the risk warnings

in IM2, which needed to be updated accordingly. In response to this the Fund

Asset Manager commented that there had been no companies of a realistic size

to deal with over the previous 18 months but this was changing and the Fund

Asset Manager intended to review these new lenders.

4.120 CFM ought to have identified at take-on stage:

1.
which entity within the Guarantor’s group received and lent out the

Fund’s money to the borrowers; and

2.
that lending 100% of the Fund’s money to only one entity, even where

that entity was lending to multiple counterparties itself, resulted in a

concentration risk.

4.121 In the event, these matters were not identified until two weeks before CFM

ceased to be the Operator of the Fund, although CFM did make the

Replacement Operator aware of them.

CFM’s interactions with the Replacement Operator and the Fund Asset

4.122 The Fund Asset Manager identified the Replacement Operator as a prospective

successor to CFM. The Replacement Operator signed and returned a

confidentiality agreement to CFM on 11 August 2009 and thereafter CFM

exchanged information about the Fund with the Replacement Operator.

4.123 On 3 September 2009, the Fund Asset Manager told CFM that it had met the

Replacement Operator the previous day. The Fund Asset Manager said that it

had not provided a copy of the 8 Point Letter to the Replacement Operator but

that the content of “the points in general and [the Fund Asset Manager’s]

response in particular” had been discussed. The Fund Asset Manager described

the meeting as disclosing “warts and all”. However, a report produced for a

meeting of members of CFM’s board on 7 September 2009 recorded that “in

light of the [PRO] scenario and the apparent informality of the meeting [with

the Replacement Operator], [CFM had] doubts as to how much has been

declared”.

4.124 The Fund Asset Manager informed CFM that the Replacement Operator would

take-on CFM’s role on the basis that the issues with the Fund were “legacy

issues” which would be resolved by the Replacement Operator and the Fund

Asset Manager. The report for CFM’s Board meeting on 7 September 2009 set

this out and noted that the Fund Asset Manager might not have fully explained

the situation to the Replacement Operator.

4.125 On 11 September 2009 the Second Delegate sent an internal email to CFM and

the business unit compliance function in which it queried:

“Would we not want to set the scene with [the Fund Asset Manager],

before meeting [the Replacement Operator]? So [the Fund Asset

Manager] know where we stand in terms of situation, remedies etc.. it

would not look good to have a disagreement with [the Fund Asset

Manager] in front of [the Replacement Operator]. Which could well

happen…”.

4.126 Shortly after this email CFM and the business unit compliance function spoke to

the Replacement Operator. The note of this call recorded that the Replacement

Operator would visit the Second Delegate’s office but that: “The discussion

around the reasons for [CFM’s] wish to exit this relationship will not be

conducted then as [CFM] want [the Fund Asset Manager] present for that

meeting.” This appeared to stem from a desire by CFM to ensure that the Fund

Asset Manager had an opportunity to hear CFM’s characterisation of the issues

and to provide its own views given the difficulties in the ongoing relationship

between CFM and the Fund Asset Manager.

4.127 The Replacement Operator carried out its site visit to the Second Delegate’s

office (which was in a separate location to CFM’s offices) on 15 September

2009. The Replacement Operator’s internal assessment of this visit was that:

“It was not clear who controlled or managed the whole process of

operation of the Fund and this appeared to be because the Fund was not

a typical fund of the type for which [CFM] regularly undertook roles as

Fund Operator”.

4.128 After the Replacement Operator’s visit CFM recorded that it had not received

any communication from either the Replacement Operator or the Fund Asset

Manager to suggest that the Replacement Operator was “put off from taking

the [Fund]”.

4.129 CFM and the Fund Asset Manager agreed to meet on 16 September 2009, the

day before the Tri-Party Meeting with the Replacement Operator. Ahead of its

meeting with the Fund Asset Manager on 16 September 2009, CFM produced

an internal briefing note. This note explained that the purpose of this meeting

was to “make it clear to [the Fund Asset Manager] that [CFM would] be verbally

sharing our reasons for exiting this relationship with the new Operator” during

the Tri-Party Meeting. It also explained that “[The PRO had] pulled out,

possibly because [it was] scared off”.

4.130 The note of this meeting recorded that:

1.
notwithstanding the issues with the Fund CFM was “committed to

making the transition as smoothly and swiftly as possible, and that all

assistance would be given where possible”;

2.
if the Replacement Operator withdrew from the process then CFM

would support the Fund Asset Manager’s efforts to try to locate an

alternative replacement; and

3.
if a replacement could not be found and CFM gave three months' notice

to resign then “the [Fund] will have no choice to wind up as it cannot

operate without the appropriately authorised entity performing that

function”.

4.131 The Tri-Party Meeting was the only meeting in which CFM, the Fund Asset

Manager and the Replacement Operator were present. As such, this meeting

was an opportunity for CFM to inform the Replacement Operator directly of the

issues that it had identified with the Fund and the steps that it had taken to try

to remedy them. It failed to do so adequately.

4.132 Interview evidence suggests that CFM wanted the handover to the Replacement

Operator done “in the right way” and that its main priority was to ensure the

new operator “had an understanding of the issues that we’d identified” and be

“open and honest”. The business unit compliance function’s view of what CFM’s

disclosure obligations entailed was that: “if there are things that [CFM] knows

as operator, that it would be beneficial for the new operator to know to enable

them to do their job properly, they should be communicated.” However, the

record of the Tri-Party Meeting does not show that CFM disclosed the full extent

of the Fund’s problems at the Tri-Party Meeting.

4.133 CFM drafted and circulated an agenda for the Tri-Party Meeting which set out

some details of CFM’s reasons for exiting the role of Operator. The agenda

contained the following nine points:

“1) … rationale for terminating the agreement with [the Fund Asset

Risk appetite to act as Operator

Name of the Fund

[the Fund Asset Manager] not authorised by FSA

2) Additional issues

Information Memorandum needs to be amended

Guarantee – concerns with Balance Sheet of [the Guarantor]

Debenture not filed at Companies House until 10 September 2009

[the Specialist Partner] not authorised by FSA

Loans being rolled over

Loans made outside terms of IM”

4.134 In addition, CFM understood that the Fund Asset Manager had shown the

Replacement Operator its 8 Point Letter. CFM recorded that its approach to

disclosing issues to the Replacement Operator would be to ask the

Replacement Operator if it was aware of all of the points referred to in the

agenda. If the Replacement Operator communicated that it was aware of these

points then CFM would be satisfied that the Replacement Operator was aware

of the relevant issues. Beyond this, CFM also proposed to answer any questions

which the Replacement Operator raised which would be informed by the 8 point

letter and the due diligence that the Replacement Operator was carrying out.

This approach was not adequate.

4.135 The attendance note of the Tri-Party Meeting recorded that this meeting lasted

for 40 minutes and the discussion around the issues outlined in the agenda was

very limited. The Replacement Operator’s recollection is that “it was agreed

that most of the issues were either historic, had been resolved, were in the

process of being resolved or could be easily remedied with the changes to the

information memorandum at Operator transfer.” The Replacement Operator

determined that none of the issues was significant enough to require the

continued suspension of the Fund and that it would accept the role as Operator.

It noted that CFM “did not disagree”. The meeting finished with it being agreed

that the Replacement Operator would liaise directly with the Fund Asset

Manager in respect of any questions that it might have had regarding the

transfer and the agenda items.

4.136 It is unclear whether CFM informed the Replacement Operator about the

recycling of loans issue which had arisen. There is also no evidence that CFM,

at the Tri-Party Meeting, informed the Replacement Operator about the

discrepancies found in respect of the first tier in the Security Mechanism. Whilst

an employee of the business unit compliance function considered this latter

issue (in their account at interview with the Authority) to be a “material

disclosure” and was “absolutely” something which ought to have been

disclosed, this issue was only just emerging around the time of the handover

and was being investigated by CFM. However, CFM could have informed the

Replacement Operator of this issue at any point after the Tri-Party Meeting.

There is no evidence that CFM did so.

Matters arising after the Tri-Party Meeting

4.137 In an internal paper dated 17 September 2009, CFM recorded that it did not

understand fully what the responsibilities and duties of an Operator were and

that “work was underway now to clarify this before any more Operator business

is taken on”.

4.138 On 23 September 2009 a Termination Agreement was entered into by, among

others, CFM, the Replacement Operator, the Fund and the Fund Asset Manager.

Pursuant to clause 1(c) of the Termination Agreement, CFM was to “use all

reasonable endeavours… [to] deliver all records relating to the operator’s

business…and shall do all such further acts and things as [the Replacement

Operator] may reasonably require in consequence of such retirement”.

However, there is no evidence of any discussion taking place between CFM and

the Replacement Operator following the Tri-Party Meeting.

4.139 On 24 September 2009 CFM wrote to all investors explaining that the

Replacement Operator would replace it on 25 September 2009. CFM stated that

IM2 would be withdrawn and replaced by a new IM which would be issued by

the Replacement Operator. CFM also enclosed a copy of the Guarantor’s 2008/9

Accounts and drew this to investors' attention in the context of the Guarantee.

The Replacement Operator took over as the Operator on 25 September 2009.

5.
FAILINGS

Relevant statutory and regulatory provisions

5.1
The statutory provisions relevant to this Notice are referred to in Annex B.

5.2
The Authority’s statutory objectives are set out in section 1B(3) of the Act. This

Notice supports the Authority’s objective of securing an appropriate degree of

protection for consumers.

5.3
CFM was required to carry out its duties as Operator in accordance with the

Principles from the time of its approval of IM1. For these purposes the Fund

(and the investors in it) constituted CFM’s client.

CFM’s breach of Principle 7

Statements in IM1 and IM2

5.4
In breach of Principle 7, CFM failed to ensure that both IM1 and IM2 were clear,

fair and not misleading. Specifically, the IMs represented that the Fund was

“guaranteed” and “low risk”.

“Guaranteed”

5.5
The IMs failed to make clear that investors’ capital would be at risk. On the

contrary, the IMs named the Fund as the “Guaranteed Low Risk Income Fund”.

The IMs also included such statements as:

1.
“Investors will receive 100% of their initial Participations back” (under

the heading “Guaranteed Liquidity within 6 months”); and

2.
“The guaranteed income in the Fund varies between 8.15% and 8.5%,

depending on the amount invested”;

This conveyed the impression that the income and capital returns were

guaranteed, without making clear that the Guarantee was dependent on the

financial strength of the Guarantor.

“Low risk”

5.6
The IMs named the Fund as the “Guaranteed Low Risk Income Fund”. The IMs

also contained statements such as:

1.
“Low risk… In the context of this investment described the fact that

100% of the investors [sic] capital, together with any interest due, will

be returned on request, subject to the conditions of the Fund”;

2.
“The [Fund] has been developed to make this market accessible

directly to investors whilst reducing risk levels through…investment

diversification; a first charge secured against the asset…”; and

3.
“[Income in the Fund] is very favourable when comparing [sic] to other

fixed rate products such as savings accounts and bonds available from

high street and internet providers” and “internet searches suggest that

the best rates achievable from long-term savings accounts are less

than 6.5%”.

5.7
These statements conveyed to investors the potentially misleading impression

that the Fund was a low risk investment. The Authority considers that UCIS

funds are rarely to be considered to be low risk and, aside from how the Fund

was allowed to be operated in practice, the structural arrangement of the Fund

did not, in the Authority's view, support this statement.

5.8
CFM did, during its tenure as Operator, conclude that there was a concentration

risk associated with only lending the Fund’s monies to a single counterparty

and that the risk warnings in the IMs should be updated.

5.9
As described in paragraph 4.39 above, the IMs incorrectly named a well-known

firm of accountants as the auditors to the Fund. In fact, when CFM approved

IM1 and later IM2, no auditors had been appointed, and despite CFM’s later

attempts to address this no auditors were appointed during CFM’s tenure as

Operator. This incorrect statement risked misleading investors by suggesting

that the Fund would be audited by a particular well-known firm of accountants.

5.10
The above statements were left uncorrected throughout CFM’s tenure as

Operator. As a result, the Authority considers that throughout CFM’s tenure it

failed to pay due regard to the information needs of its clients and

communicate information to them in a way which is clear, fair and not

misleading.

CFM’s breach of Principle 2

5.11
CFM breached Principle 2 in that it failed to conduct its business in relation to

the Fund with due skill, care and diligence.

Failings in CFM’s initial due diligence

5.12
As CFM later recognised, when it conducted due diligence on the Fund when

deciding whether to become Operator, it failed to obtain an adequate

understanding of the following critical information:

1.
the structure of the Fund’s business;

2.
its responsibilities and duties as Operator; and

3.
whether it was capable of adequately fulfilling these duties and

ensuring that the Fund operated within the envisaged parameters.

5.13
CFM’s process by which it decided to take on the Fund culminated in the

consideration of the Fund by the IRAT Committee. CFM failed to ensure that the

IRAT Committee considered accurate information about the proposed Fund

including that “Guaranteed” would be part of the Fund’s name and that auditors

for the Fund had not been appointed. The IRAT Committee then failed to

ensure that the matters referred to in paragraph 5.12 above had been

adequately considered and addressed.

5.14
In failing to undertake these basic steps, CFM proceeded with the launch of the

Fund without having a proper understanding of how to perform its role as

Operator competently.

CFM’s knowledge that the initial due diligence was inadequate

5.15
Between October 2008 and March 2009 CFM was aware that its initial due

diligence when deciding whether to become the Operator of the Fund had been

inadequate. However, CFM did not take appropriate steps to revisit its initial

due diligence and ensure that the critical information in paragraph 5.12 was

obtained.

5.16
CFM therefore missed opportunities to gain adequate clarity as to the structure

of the Fund’s business, its responsibilities and duties as Operator, and whether

it was capable of adequately fulfilling these duties and ensuring that the Fund

operated within the envisaged parameters.

5.17
As a consequence:

1.
for almost all of CFM’s tenure as Operator it allowed investors’ monies

to be both invested in and released from the Fund without properly

understanding which entity received and then lent out these monies;

and

2.
throughout CFM’s tenure as Operator it did not fully understand what

its responsibilities and duties were, although the practical steps taken

by CFM increased towards the end of its tenure.

5.18
CFM also continued to allow investments to be made into the Fund despite its

concerns that the Fund’s IMs contained inaccuracies and were not clear,

although the Fund was suspended to new investors in July 2009.

CFM’s failure to monitor and supervise the Fund appropriately

5.19
Pursuant to its contractual duties CFM had responsibility for monitoring the

Fund and providing supervisory scrutiny. Throughout most of CFM’s tenure as

Operator it did not adequately monitor the Fund, which meant that it was

unable to provide adequate scrutiny. For example, CFM failed to ensure that:

1.
before it approved drawdown requests and released the Fund’s monies

to the Specialist Partner, it took steps to ascertain whether the

proposed loan was within the parameters of the IMs;

2.
the repayment of loans from the Specialist Partner to the Fund was

adequately monitored;

3.
records of what monies had been lent out and to whom were

adequately maintained; and

4.
the monies which were lent by the Fund to the Specialist Partner were

done so on a secured basis and in accordance with the Security

Mechanism.

5.20
CFM failed to carry out these straightforward checks. As a consequence, and for

almost the entire Relevant Period, CFM did not necessarily know whether the

Fund was operating as investors had been led to believe it would be.

Notwithstanding CFM’s lack of understanding, CFM continued both to allow

investors’ money to be invested in the Fund (although, as indicated, this was

subject to the suspension of the Fund to new investors in July 2009), and

throughout almost all of the Relevant Period it continued to approve lending

from the Fund to the Specialist Partner. This increased the amount of investors’

money which was put at risk.

5.21
Had CFM adequately monitored the Fund from the outset, it might have

become aware of the deficiencies which it ultimately identified with the Fund at

an earlier stage. For example, only around the end of July 2009 (being 12

months since the Fund opened for business) did CFM begin to monitor and

report on these matters. As a result, in the period following July 2009:

1.
loan requests which exceeded the specified LTV ratio began to be

identified and rejected;

2.
CFM became aware that because loans had been allowed to be rolled

over and recycled the Fund had not always received from the Specialist

Partner the repayment of its loans when due; and

3.
CFM became aware that the monies which the Fund lent to the

Specialist Partner had not been adequately secured as a consequence

of the widespread and serious failings in the implementation of the

Security Mechanism.

CFM's provision of information to the Replacement Operator

5.22
CFM should not have handed over its role as Operator to another regulated

entity without first ensuring that:

1.
it fully addressed the serious issues which had arisen with the Fund,

such that it could be handed over to a replacement Operator in the

knowledge that investors’ monies were safeguarded in the way they

expected (or to conclude, if appropriate, that the Fund should be

closed without delay); or

2.
the Replacement Operator was made fully aware of the condition of the

Fund so that it could make a well informed decision as to whether to

take-on the role.

5.23
The Authority considers that CFM dealt with both aspects inadequately.

Condition of the Fund

5.24
The Fund was not being run in the manner that investors had been informed it

would be and CFM knew that it faced risks and potential liability as a

consequence.

5.25
Prior to its handover to the Replacement Operator, CFM was aware that the

Fund Asset Manager had links to a collapsed and unlawful collective investment

scheme. The Authority considers that these links ought to have acted as a

warning sign to CFM to ensure that the Fund was being managed properly, and

it ought to have been viewed as a matter of serious concern if it was not.

5.26
After becoming aware of the Guarantor’s financial position, CFM became

concerned about the strength of the Guarantee and chose to suspend the Fund

to new investors and began to conduct closer monitoring and supervision of the

Fund. As a result, it identified for the first time a series of issues including the

occurrence of LTV ratio breaches and the Specialist Partner’s rolling over and

recycling of loans. CFM considered its options including winding down the Fund

but decided to continue instead with the process of handing over to a

replacement operator.

5.27
After discussions, the PRO withdrew from the take-on process citing serious

concerns which it had with the Fund. This was a further warning sign for CFM.

By this stage CFM considered the Fund to be “high risk” and meetings between

senior board members were being convened specifically to discuss the Fund.

5.28
Subsequent to this, CFM became further aware of errors or concerns in respect

of each layer of the Security Mechanism with the effect that adequate

protection was not always in place.

5.29
It was open to CFM at all times to address and resolve all of the issues of which

it was aware and thereby ensure that the Fund's monies were adequately

protected. However, CFM instead chose to retire and handover the Fund to a

new Operator.

Provision of information to the Replacement Operator

5.30
CFM was, during the handover period, the regulated entity with responsibility

for acting in the interests of the Fund and its investors.

5.31
CFM’s board took the view that if CFM was to comply with its regulatory

obligations then it ought to ensure that the Replacement Operator had a proper

understanding of CFM’s reasons for retiring in addition to the Replacement

Operator being provided with appropriate information regarding the “open”

issues with the Fund.

5.32
The Authority considers that this would have been appropriate and in the

investors’ best interests. In the context of the issues which had arisen, it was of

paramount importance that any potential replacement operator was provided

with full and open disclosure of these issues (some of which took CFM itself

over 12 months to identify) so that there was no delay in addressing them.

5.33
The PRO had withdrawn when it became aware of the issues with the Fund and

CFM was concerned that the Replacement Operator would do the same. As a

consequence, although CFM had understood that it needed to provide

appropriate information to the Replacement Operator, CFM’s communication of

its reasons for retiring and the condition of the Fund was carefully managed.

5.34
The Authority considers the CFM's conduct on handover fell short of the

standards it would expect in that:

1.
its provision of information relating to its concerns with, and its

reasons for wanting to retire from, the Fund were largely disseminated

to the Replacement Operator through the bullet points set out in the

agenda for the Tri-Party Meeting and those in the 8 Point Letter. The

information contained in these documents was limited such that CFM

could not have been sure that they were properly understood by the

Replacement Operator who prior to this had only received explanations

from the Fund Asset Manager; and

2.
the failures in the registration of the Mortgage Charges and Sub

Charges were not adequately disclosed to the Replacement Operator.

In addition, CFM did not make clear to the Replacement Operator that

the Fund's Asset Manager had permitted the recycling of loans.

5.35
The Authority considers that CFM did not put the Replacement Operator in a

position, having taken on the role as Operator, to address all of those issues

without delay. As a consequence, CFM allowed the Fund (including both its

current and any future investors) to continue to be exposed to these risks and

issues which had arisen and that it in doing so it acted in breach of Principle 2.

6.
SANCTION

6.1
The Authority considers that a financial penalty of £15 million (£10.5 million

after the application of a 30% discount (stage 1) in accordance with the

Authority’s executive settlement procedure) in respect of CFM’s breaches of

Principle 2 and 7 during the Relevant Period is appropriate. However, the

Authority 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, and that this has only been possible with the financial support given

to CFM by its ultimate parent, Capita plc. For this reason, the Authority does

not consider that it would be appropriate to require CFM to pay a financial

penalty, and instead hereby imposes a public censure in relation to CFM. The

Authority considers that a public censure and CFM’s payment for the benefit of

the Fund’s Investors supports the Authority’s operational objective of securing

an appropriate degree of protection for consumers.

6.2
The Authority’s policy for imposing a financial penalty or publishing a statement

of misconduct is set out in Chapter 6 of DEPP. All references to DEPP in this

section are references to the version of DEPP which came into force on 28

August 2007.

6.3
The Authority will consider the full circumstances of each case when

determining whether or not to take action for a financial penalty or public

censure. DEPP 6.2.1G provides a list of relevant factors including those factors

referred to below.

The nature, seriousness and impact of the breach (DEPP 6.2.1G(1))

6.4
In determining the appropriate sanction, the Authority has had regard to the

seriousness of the breaches, the nature and extent of the breaches, their

duration and the number of investors who were exposed to the risk of loss.

6.5
Although not deliberate or reckless, CFM’s failure to ensure the IMs were clear,

fair and not misleading as well as its failure to understand and carry out the

role of regulated operator with due care and skill exposed investors in the Fund

to unacceptable risks of loss.

Conduct following the breach (DEPP 6.2.1G(2))

6.6
The Authority has taken into account the fact that CFM and its ultimate parent

Capita plc were investing and continued to invest in significant steps to address

certain similar issues, notably investing over £33 million in a substantial

programme of enhancements to CFM’s systems and processes, including

investing in systems and technology infrastructure, strengthening its control

functions and improving its oversight of investment manager delegates. This

included the creation in April 2009 of a specialist team to oversee the activities

of investment manager delegates.

Disciplinary record and compliance history (DEPP 6.2.1G(3))

6.7
CFM has previously been the subject of disciplinary action by the Authority. On

13 November 2012, the Authority issued a Final Notice to CFM for breaches of

Principle 2 and Principle 3 in respect of its role as ACD of the Arch Cru Funds

during the period June 2006 and March 2009. The Authority publicly censured

CFM, in light of the specific circumstances of the case, including the fact that

CFM voluntarily contributed, without admission of liability, £32 million towards

a payment scheme for investors. The Authority took account on that occasion

of the fact that CFM itself would not have been able to fund such a significant

contribution to the payment scheme, and that this was only possible with the

financial support given to CFM by its ultimate parent, Capita plc.

6.8
The Authority notes that CFM’s breaches in this case are to a large degree

contemporaneous to its breaches in relation to the Arch Cru funds.

Financial penalty or public censure (DEPP 6.4.2G)

6.9
DEPP 6.4.2G sets out factors that may be of particular relevance when the

Authority determines whether it is appropriate to impose a public censure. The

criteria are not exhaustive and DEPP 6.4.1G provides that the Authority will

consider all the relevant circumstances when deciding whether to impose a

penalty or issue a public censure. The Authority considers that the factors

below are particularly relevant in this case:

1.
CFM did not profit as a result of its breach;

2.
CFM took steps to improve its knowledge and monitoring of the Fund

during the relevant period and took some remedial action in relation to

the issues that it had identified with the Fund;

3.
CFM, with the assistance of its ultimate parent (Capita plc), has

previously made a payment of £18.5 million to the Fund’s Investors;

4.
The total amount required to be paid to the Fund’s Investors by way of

a payment of no more than £66 million. The Authority considers that

this payment will be sufficient to ensure that the Fund’s Investors’

outstanding principal capital investment in the Fund is returned to

them together with a rate of interest of 0.52% being applied on this

sum;

5.
CFM itself will not be able to make a payment of up to £66 million, and

this will only be possible with the financial support of Capita plc; and

6.
CFM and its senior management have co-operated fully with the FCA

during its investigation.

6.10
The serious nature of the breaches identified in this Notice would ordinarily

have led the Authority to impose a penalty of £15 million (£10.5 million after

the application of a 30% discount (stage 1) in accordance with the Authority’s

executive settlement procedure). However, the Authority considers that its

objectives may appropriately be achieved by means of a public censure and the

payment of a sum of up to £66 million. In all the circumstances of this case the

Authority does not consider that it would be appropriate to require CFM to pay

a financial penalty, and hereby imposes a public censure in relation to CFM.

7.
PROCEDURAL MATTERS

Decision maker

7.1
The decision which gave rise to the obligation to give this Notice was made by

the Settlement Decision Makers.

7.2
This Final Notice is given under, and in accordance with, section 390 of the Act.

The following statutory rights are important.

Confidentiality and publicity

7.3
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under these

provisions, the Authority must publish such information about the matter to

which this notice relates as the Authority considers appropriate. The

information may be published in such manner as the Authority considers

appropriate. However, the Authority may not publish information if such

publication would, in the opinion of the Authority, be unfair to CFM or

prejudicial to the interests of consumers or detrimental to the stability of the

UK financial system.

7.4
The Authority must publish such information about the matter to which a

Decision Notice or Final Notice relates as it considers appropriate. A Decision

Notice or Final Notice may contain reference to the facts and matters contained

in this Notice.

Authority contacts

7.5
For more information concerning this matter generally, contact Matthew Hendin

at the Authority (direct line: 020 7066 0236).

Financial Conduct Authority, Enforcement and Market Oversight Division

ANNEX A

The key events within the chronology are set out below.

ANNEX B

1.
RELEVANT STATUTORY PROVISIONS

1.1
The Authority’s operational objectives established in section 1B of the Act

include the strategic objective to ensure that the relevant markets function well

and the operational objective to protect and enhance the integrity of the UK

financial system.

Provisions of the Act

1.2
Section 391 of the Act provides as follows:

(1) “In the case of a warning notice falling within subsection (1ZB)-

(a) neither the regulator giving the notice nor a person to whom it is given

or copied may publish the notice,

(b) a person to whom the notice is given or copied may not publish any

details concerning the notice unless the regulator giving the notice has

published those details, and

(c) after consulting the persons to whom the notice is given or copied, the

regulator giving the notice may publish such information about the

matter to which the notice relates as it considers appropriate.

(1ZB) A warning notice falls within this subsection if it is given under-

(k) section 207;”

1.3
Section 394 of the Act provides as follows:

(1) “If [a regulator] gives a person (“A”) a notice to which this section applies,

it must-

(a) allow him access to the material on which it relied in taking the

decision which gave rise to the obligation to give the notice;

(b) allow him access to any secondary material which [in the regulator’s

opinion] might undermine that decision.”

1.4
Section 205 of the Act provides as follows:

“If the appropriate regulator considers that an authorised person has

contravened a relevant requirement imposed on the person, it may publish a

statement to that effect.”

2.
RELEVANT REGULATORY PROVISIONS

2.1
The Authority’s Statements of Principle for Businesses have been issued under

section 64 of the Act.

2.2
During the Relevant Period, Principle 2 stated:

“A firm must conduct its business with due skill, care and diligence”.

2.3
During the Relevant Period, Principle 7 stated

“A firm must pay due regard to the information needs of its clients, and

communicate information to them in a way which is clear, fair and not

misleading”.

COBS rules and guidance

2.4
COBS 3.2.3(R)(4): “In relation to business that is neither MiFID or equivalent

third country business, if a firm provides services to a fund that does not have

separate legal personality, that fund will be the firm’s client.”

2.5
COBS 4.2.1R: “A firm must ensure that a communication or a financial

promotion is fair, clear and not misleading.”

2.6
COBS 4.2.4G provides guidance on the what a firm should ensure for fair, clear

and not misleading financial promotions referred to in COBS 4.2.1R

2.7
COBS 4.2.4G(1): A firm should ensure that a financial promotion, “for a

product or service that places a client’s capital at risk makes this clear”.

2.8
COBS 4.5.2R: “A firm must ensure that information:

(2)
is accurate and in particular does not emphasise any potential benefits

of relevant business or a relevant investment without also giving a fair

and prominent indication of any relevant risks; and

(3)
is sufficient for, and presented in a way that it likely to be understood

by, the average member of the group to whom it is directed, or by

whom it is likely to be received.”

2.9
COBS 18.5.3R(1): “The COBS rules specified in the table in COBS 18.5.2R

apply to an operator when it is carrying on scheme management activity with

the following modifications:

(1) subject to (2), references to customer or client are to be construed as

references to any scheme in respect of which the operator is acting or

intends to act, and with or for the benefit of which the relevant activity is to

be carried on;

(2) in the case of an unregulated collective investment scheme, when an

operator is required by the rules in COBS to provide information to, or obtain

consent from, a customer or client, the operator must ensure that the

information is provided to, or consent is obtained from, a participant or a

potential participant in the scheme as the case may be.”

DEPP

2.10
Chapter 6 of DEPP sets out the Authority’s approach to deciding whether to

issue a public censure. In particular, DEPP 6.4.2G sets out factors that may be

of particular relevance when the Authority determines whether it is appropriate

to impose a financial penalty.

1.
RELEVANT CONTRACTUAL PROVISIONS

Operator’s Agreement dated 10 July 2008 between, among others, the Fund

and CFM

1.1
Pursuant to the Recital section of this agreement, CFM was appointed to act as

“operator and manager of the [Fund]”.

1.2
Pursuant to clause 2.2 of the Operator’s Agreement, CFM had, “primary

responsibility for managing the investments of the LP’s funds PROVIDED that

the GP on behalf of the LP and the Limited Partners acknowledges and agrees

that:

the Operator may and will delegate to Connaught Asset Management Limited

(“Connaught”) the managing of such investments;

the Operator will have no liability for the acts of omissions of Connaught;

if the delegation to Connaught comes to an end for any reason (or the Operator

reasonably expects that such delegation will come to an end) then the Operator

will (after consultation with the GP) as soon as practicable identify a suitable

party to replace Connaught; and

The Operator has not held itself out as competent to manage such investments

(and does not do so by entering into this Agreement).”

1.3
Clause 4.2 of the Operator’s Agreement provided that:

“In performing responsibilities, duties and powers hereunder the

Operator shall act in the best interests of the LP and shall exercise that

degree of skill and care as could reasonably be expected of a person

experienced
and
skilled
in
the
management,
operation
and

administration of a limited partnership.”

1.4
Clause 9.1 of the Operator’s Agreement provided that:

“The Operator may, with the written approval of the LP and subject to

compliance with any regulatory requirements, delegate the performance

of all or any of the rights and obligations on its part contained in this

Agreement to third parties whose costs and expenses shall be borne by

the Operator. The Operator shall exercise the care and diligence

expected of a professional advisor operating limited partnerships and

managing the regulatory and administrative aspects of limited

partnerships in selecting the third parties to whom it may delegate its

rights and obligations and in monitoring and supervising such third

parties. Subject thereto the Operator shall not be liable for the acts or

omissions of such third parties. Where appropriate the Operator will

require such third parties to acknowledge a duty of care direct to the

LP.”

Sponsorship Agreement dated 10 July 2008 between, among others, CFM and

the Fund Asset Manager

1.5
Pursuant to clause 1 of the Sponsorship Agreement: “CFM shall establish the

Scheme in accordance with this Agreement”.

1.6
Pursuant to clause 6 of the Sponsorship Agreement: “CFM will take

responsibility as issuer of the Information Memorandum”.

Asset Management Agreement dated 10 July 2008 between CFM and the Fund
Asset Manager

1.7
Pursuant to Recital A of the Asset Management Agreement “The Operator has

primary responsibility for advising the Fund on investment of its funds and

managing those investments”. Recital B provides that “The Operator wishes to

appoint [the Fund Asset Manager] as an asset manager to the Fund to provide

advice and management services in relation to loans to be made by the Fund”.

1.8
Pursuant to clause 3 of the Asset Management Agreement, “[the Fund Asset

Manager] shall be responsible for:

(i)
sourcing, identifying, negotiating and arranging suitable Loans;

(ii)
Managing and monitoring Loans;

(iii)
Arranging and negotiating the repayment or disposal of Loans;

in each case in accordance with the Investment Policy. [the Fund Asset
Manager] shall, in the performance of its duties hereunder, use all
reasonable endeavours to:

3.1.2
give the Partnership the benefit of its best judgement in relation
to the Loans in the light of the Investment Policy;

3.1.3
perform the obligations set out in this Agreement and procure
that any Delegate performs its obligations, in a good and
efficient, proper and professional manner with the degree of

skill and judgement expected of an experienced professional in
the field of bridging finance;

3.1.4
ensure that the Partnership complies with all applicable laws
and legislation in force from time to time but only to the extent
that they fall within the scope of [the Fund Asset Manager’s]
duties hereunder; and

3.1.5
make available sufficient, competent and efficient personnel and
equipment to enable it to carry out its duties hereunder
properly and efficiently.”

1.9
Pursuant to clause 5.1.3 of the Asset Management Agreement, excluded from

the Fund Asset Manager’s obligations were “any activity which would constitute

regulated activity for the purposes of the Financial Services and Markets Act

2000”.

Services Agreement dated 1 April 2008 between the Fund and the Specialist Partner

1.10
The Services Agreement refers to “Facilities” which are “monies made available

by the [Fund] for bridging loans”. Clause 3 of the Services Agreement states

that “The Facilities will take the form of a Revolving Credit Facility, the limit of

which being such available funds as [CFM] and [the Fund Asset Manager] make

available from time to time.”

1.11
Clause 4 of the Services Agreement states that:

“The facilities will only become available once the [Fund] has received and is

satisfied as to the form and content of the following items

4.1
A debenture in the form of a fixed and a floating charge over the

assets of [the Specialist Partner] granted in favour of the [Fund].

4.2
A [Guarantee] by [the Guarantor] for all obligations of [the Specialist

Partner] to the [Fund] as principal.

4.3
A sub Mortgage over all legal charges granted by [the Specialist

Partner] in favour of the [Fund].

4.4
It will ensure that each mortgage financed is to be residential,

commercial, not owner occupied and within England, Scotland and

Wales.

4.5
Each drawdown is not to exceed 80% loan to value.

4.6
That each drawdown request will be accompanied by a solicitors

certificate of title in relation to each property to be financed by [the

Specialist Partner] in the prescribed form and un-amended without the

consent of the [Fund], in favour of [the Specialist Partner] and the

4.7
A valuation on the property to be financed by [the Specialist Partner]

from a panel approved by the [Fund].

4.8
A secretary’s certificate confirming the due execution of each sub

mortgage by the Specialist Partner.”

Termination Agreement, dated 23 September 2009, entered into by, among

others CFM, the Replacement Operator, the Fund and the Fund Asset Manager

1.12
Pursuant to clause 1(c), from 25 September 2009 CFM was to:

“deliver to [the Replacement Operator] and use all reasonable

endeavours to procure that its officers servants agents advisers or any

person appointed by it in accordance with the terms of the Operator’s

Agreement shall deliver all records relating to the operator’s business as

are in the possession or under the control of [CFM] or any such

appointees and shall do all such further acts and things as [the

Replacement Operator] or [the Fund’s General Partner] may reasonably

require in consequence of such retirement.”

1.13
Pursuant to clause 2, CFM would

“cease to be responsible for issuing the information memorandum or

any other financial promotions for the Fund” and that “the parties to the

[Termination Agreement] undertake not to accept applications from new

or existing investors which refer to [CFM] or which were prepared based

on information memorandum or any other financial promotions referred

to [CFM] (or any associated company [CFM’s group])”.

ANNEX D

Calculation of the payment

1. The required payment of up to £66,000,000 will include:

a) the reasonable costs of distribution; and

b) appropriate redress for each Fund Investor calculated by:

i.
taking the total amount of capital which that investor invested,
both initially and then through any subsequent top-ups (but not
including any income which that investor may have elected to
have reinvested in the Fund);

ii.
deducting any income on their capital investment which that
investor received from, as opposed to reinvested in, the Fund;

iii.
deducting any monies which were redeemed by that investor
from the Fund;

iv.
deducting any previous distributions made to that investor in the
period the Fund was suspended and immediately prior to the
appointment of the liquidators of the Fund on 3 December 2012;

v.
deducting any dividend payments made by the liquidators of the
Fund to that investor;

vi.
deducting any other compensation payments, including any FOS
award, which has been paid to that investor in respect of any
matters directly connected to the collapse of the Fund; and

vii.
applying simple interest at 0.52% on the capital invested (at (i)
above) running from the date of each investor’s initial capital
investment in the Fund (and thereafter taking into account the
timings and amounts of any subsequent top-ups of capital, and
deductions in respect of any income received, redemptions,
distributions, dividends or payments at (ii) to (vi) above) until
the date on which those monies are paid to each Fund Investor.

Method of payment


2. CFM will make this payment to a sole entity which shall be nominated by the

Authority.


Timing of the payment

3. As soon as is reasonably practicable, the Authority will inform CFM of the

amount (up to £66,000,000) which it is to pay.


4. CFM may make this payment in tranches or in a single lump sum. All such

payments should be made on or before 31 March 2018.