William Kay: Rules on 'funds of funds' risk new old boys' club

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After nearly a year, the Financial Services Authority has finally come up with rules aimed at preventing a recurrence of the split-capital investment trust scandal which led to the Treasury Select Committee accusing the FSA's then chairman, Sir Howard Davies, of being "asleep on the job".

The new rules rely heavily on risk warnings to investors. Listed investment companies will be required to include an explanation in the prospectus of the risk factors specific to the issuer, its industry, its investment policy and securities it proposes to issue. And there must be warnings to investors proposing to invest in listed investment companies that are either highly indebted or companies that propose to invest in highly indebted investment companies.

These warnings will have to be monitored to ensure that they are stark enough. A warning can range from the sotto voce to the grandioso, and managements and their lawyers have an obvious incentive to speak as softly as possible within the letter of the law. The FSA should lay down a model set of warnings, specifying their colour, font and size. It is disappointing that the consultation process resulted in a watering-down of the edict relating to cross-holdings, which were a key cause of the collapse of so many split-capital trusts.

The basic new rule is that listed investment companies may not invest more than 10 per cent of their gross assets in fellow UK-listed investment companies. But an important loophole has been introduced. It will not apply to companies which have "a stated policy that allows them to invest more than 15 per cent of their assets in other UK listed investment companies".

This has been explicitly written in to allow the operation of controversial funds of funds, which are supposed to save investors' time by investing in other funds. I do not see why the FSA should go out of its way to encourage these vehicles, which offer a spurious level of convenience for an extra layer of charges. Cross-holdings are cross-holdings, and the 10 per cent rule would have been a useful discipline on funds of funds, which I expect to mushroom if the stock market continues to recover.

We can also look forward to investment companies slipping resolutions into their annual meetings approving "stated policies" letting the management invest more than 15 per cent of these assets in other investment companies. This will simply perpetuate the cosy old boys' club which led to the split-capital debacle. It is depressing to see the FSA succumbing to such pressure, and marks an unfortunate start to the reign of Callum McCarthy and John Tiner as the new chief regulators.

* As private investors rekindle their enthusiasm for shares, there will be renewed demand for information about companies. Happily, the amount available on the internet increases by the month, and such sites as Hemscott.net offer an invaluable amount of data.

But the starting point for any investor must be a company's annual report, particularly if it is fresh. Much has been done to raise awareness of the need to communicate with shareholders through the annual awards organised by Proshare, the City-backed group that promotes wider share ownership and financial education. This week BP and Geest won awards for best overall performance by FTSE 100 and non-FTSE 100 companies respectively, amidst more and ever better entries. As more new shareholders join the registers of public companies, the need for spin-free descriptions and explanations is going to be greater, so companies would do well to see for themselves what BP and Geest are doing right.

* Is Which? magazine an angel or a devil in its attitude to banks? This week it published it's annual survey of current accounts, provoking an angry reaction from Tony Ashford, HSBC's general manager for Personal Banking. He accused the Consumers' Association magazine of a "Which? hunt against the big banks [that] is so indiscriminate and surveys the wrong things". Arguing that Which? is ignoring the real facts, Mr Ashford says: "We save our premium rates for where they benefit customers most."

Strange, then, that the best buys in the survey are the bank and cheque accounts provided by First Direct which, when I last looked, was owned by HSBC. Presumably Mr Ashford believes that First Direct did so well because the survey looked at the "wrong things".


William Kay is Personal Finance Editor of 'The Independent'

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