The FCA has publicly censured fund operator Blue Gate Capital Limited and ordered it to pay £203,007 in restitution to investors who lost money in the Connaught Income Fund, Series 1. 

The fund, also known as the Guaranteed Low Risk Income Fund Series 1, went into administration in 2012 and cost investors £100m in losses.  

The move follows a critical report this week about the FCA’s role in regulating Connaught with the regulator accepting it had “lessons to learn.”

The fund was an unregulated collective investment scheme (UCIS). It began operating in March 2008 and provided short term bridging finance to companies involved in the UK property market. 

Blue Gate took over as operator of the fund from Capita Financial Managers Limited (CFM) on 25 September 2009 and remained operator until the fund’s compulsory liquidation on 3 December 2012.

As a result of FCA action against CFM in 2017, CFM agreed to pay up to £66m for the benefit of investors. CFM has so far paid out more than £58m as a result.

The FCA found, and Blue Gate agreed, that it breached Principle 2 of the FCA’s Principles for Businesses. It failed to conduct “adequate due diligence” on the fund prior to taking it on, failed to investigate potentially serious issues with the fund and failed to establish that the fund was operating as it was supposed to.

The FCA also found, and Blue Gate agreed, that it breached Principle 7 of the Principles because it failed to communicate with the fund’s investors in a way that was clear, fair and not misleading.

The FCA said these failings would have resulted in a penalty of £10m if Blue Gate had not established it was in serious financial hardship. 

The restitution of £203,007 to the investors reflects the profits earned by Blue Gate as operator of the Fund.

Once it receives the money the FCA will distribute cash to investors.

Blue Gate and the FCA reached full agreement on all facts and issues of liability and penalty but Blue Gate did not agree the issue of whether it should pay restitution, choosing instead to make use of the FCA’s partly contested case process. The issue was decided by the FCA’s Regulatory Decisions Committee.

Mark Steward, executive director of enforcement and market oversight said: “FCA-authorised operators of funds are expected to undertake sufficient due diligence on the funds they operate.

“In this case, significant and serious deficiencies existed in the fund at the time Blue Gate became operator of the fund and these deficiencies left investors exposed and unprotected. In total, the FCA’s actions in response to the failure of the fund, have led to investors receiving back, in net terms, the value of their investment in the fund.”

1. The Final Notice for Blue Gate Capital Limited (PDF)
2. The FCA’s Principles for Businesses