Tiner suffers ridicule over split cap crisis

City regulator's authority is tested to the limit by furious fund management firms
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The Independent Online

Relations between the Financial Services Authority and the 21 firms involved in the split-capital investment trust debacle were testing new depths this week, as talk of a libel litigation became the latest twist in the tale.

Relations between the Financial Services Authority and the 21 firms involved in the split-capital investment trust debacle were testing new depths this week, as talk of a libel litigation became the latest twist in the tale.

New Star Asset Management's outspoken chairman, John Duffield, backed by Collins Stewart's equally extrovert Terry Smith, is threatening to sue the regulator for defamation after the FSA's senior press officer was reported to have said that the firms involved in the splits sector had "ripped off consumers". The chances of securing a compromise deal on split-cap compensation have fast begun to evaporate.

The split-cap scandal blew up three years ago, after several investment trusts ran into solvency problems as markets fell. Most split-cap funds were highly geared, and had invested a large part of their portfolio in other splits. As the bear market set in, insolvency problems quickly spread across the sector, with several funds eventually becoming all but worthless. The main criticism of the fund managers and brokers involved is that they often under-emphasised the risks to their customers.

Losses in the sector are estimated to be some £620m. However, very few of these are accounted for by private investors who were totally unaware of what they were getting into. While some 50,000 are potentially entitled to compensation ­ having been misadvised of the risks ­ many other investors were simply caught out in the worst bear market in almost a century.

But what troubled the FSA most, aside from possible consumer detriment, was the suggestion that fund managers had acted collusively, exacerbating the sector's problems by agreeing to help each other out by investing in each other's fund launches. As the extent of the situation became apparent, the FSA began what its chief executive, John Tiner, regularly trumpeted as its biggest investigation, involving 60 staff, 700 files of information, and 27,000 recorded telephone calls. Two and a half years later, with its work complete, the FSA appears to be seeking its biggest fine and compensation deal as its grand finale.

But while the splits investigation may be the largest the FSA has undertaken in terms of resources, it is not the largest in terms of consumer detriment, or even in terms of the scale of wrongdoing. The mis-selling of endowment mortgages and the crisis at Equitable Life ­ to name but two obvious crises ­ win hands down on both counts. Yet it is the splits scandal which has been the first to seemingly spiral out of the FSA's control, as the collective muscle of 21 firms has proved a bigger challenge than the regulator had bargained for.

The FSA has been no stranger to conflict recently either, having publicly fallen out with both Standard Life and Legal & General over the past few months alone. But while it may be tough enough to deflect the wrath of one, or maybe even two, large British insurers, it is as yet uncertain whether it has bitten off more than it can chew by picking a fight with the 21. Not only are these companies not afraid to engage in a public slanging match, but they include among their ranks the likes of Mr Duffield and Mr Smith ­ two of the City's best-known no-nonsense litigious heavyweights.

From the very start, the regulator's seemingly miscalculated strategy put it on a collision course with the 21. Claiming to have incriminating dossiers on each of the firms, it called them all to a meeting. But instead of releasing the evidence and starting individual discussions over possible enforcement procedures, it decided to take the unusual step of asking the group to collectively come up with what they thought they should pay, also insisting on an admission of guilt from each of them.

Having seen no hard evidence, the 21 were left to wonder whether their bluff was being called: after all, suspecting and proving collusion are two very different things.

Ultimately, for example, there is nothing illegal about investing in another company's fund, and asking them to take a look at your next fund launch in return. The splits universe was relatively small ­ certainly in relation to the stock market as a whole. So funds of funds were bound to look at every launch which came along. Only if the regulator had evidence that fund managers were investing in funds simply because of casual back-scratching agreements ­ and against the interests of their funds' shareholders ­ could it pin them for collusion.

The fund managers' lawyers were also quick to point out that any admission of guilt was out of the question, as this would open the floodgates to litigation from other investors. One chief executive among the group said: "The whole process has been completely misconceived. We're not stupid people ­ we're all very sensible, and we're all used to doing deals. But there was no way we could ever make an admission of guilt. If the FSA can't back down on that, then it will have to go to enforcement proceedings."

Having refused to meet the regulator on its own terms, a handful of the 21 have seemingly now taken control of discussions, presenting their own compromise agreement which they have told the FSA to accept, or see all of them individually in court. This group, led by Terry Smith, and known to include Aberdeen Asset Management's Martin Gilbert, has collectively offered the FSA around £100m. However, it has also insisted that, once a deal is done, the entire splits issue will be closed for good, with no further spin-off investigations of individuals, and no blame ever being apportioned.

The FSA has since rejected this consortium's offer, and has given the group what it believes to be a more realistic figure, thought to be around £400m. Rob McIvor, the FSA's senior press officer, said that while the regulator has been portrayed as being on the back foot, it has never backed down on its original demands and objectives. "The media coverage is a side-show," he said. "It does not detract from what we're trying to achieve ­ a proportionate amount of compensation and financial penalties. We have never moved from that position."

Mr McIvor claims that, while the firms may be insisting that the FSA is calling their bluff, their offer of compensation illustrates that they know the regulator's dossiers are not without some substance. "If these firms are so confident that we've got nothing against them, then why have they offered any compensation? They're not charities," he said.

The group argues, however, that the offer of compensation was simply made to put an end to the whole saga. Ultimately, if no deal can be struck, it will take years ­ and millions of pounds ­ to pursue each of the companies through the tribunals and courts, a damaging and costly experience for all parties involved.

Regardless of whether libel threats by Mr Duffield are hollow or not, Mr Tiner is running out of time to regain control over the splits case. Next month, he will have to face the Treasury Select Committee once again, and will surely be subjected to another public humiliation if he has not by then managed to reassert his authority over the negotiations.

While Mr Tiner is a regulator, not a politician, his position could quickly begin to look untenable if the splits firms continue to ridicule in public his ability to apply the FSA's enforcement procedures successfully.


Standard Life and the Financial Services Authority fought a public battle at the start of the year after reports of poor solvency levels were leaked to the press in January.

The Scottish insurer remains adamant that the damaging leaks, which led to the announcement of its forthcoming demutualisation, came from within the FSA. The regulator insists that it was an insider at Standard Life who briefed the press.

Legal & General became the first large firm to challenge an FSA disciplinary action after it was told in November that it was to be fined £1.1m for mortgage endowment mis-selling. L&G has taken the case all the way to the Financial Services & Markets Tribunal, where it will be fought out in public in September. At a preliminary hearing last week, L&G accused the FSA of "unfair" and "aggressive" tactics after the regulator announced it wanted to collect further evidence before the main hearing in September.