Outlook: Watch out for investments claiming to be safer than a Volvo

British Telecom; Strip price fixing; Kiss of death for euro Ê
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The Independent Online

The split capital investment trust crisis is the sort of mess the Financial Services Authority relishes: for the FSA there's power without responsibility. Fortunately for the FSA, it wasn't responsible for regulating the investment trusts industry, so unlike the Equitable or Independent Insurance débâcles, where the FSA is in it up to its neck, it cannot be held culpable.

None of this has stopped the FSA taking a keen interest in the debacle, and to the extent that there may have been mis-selling of split capital investments by intermediaries that are regulated by the FSA, then that's perfectly right and proper. After setting out the issues in a report published yesterday, the FSA now proposes a full investigation to establish the extent of the mis-selling and, inevitably, the case for compensation.

Split capital investment trusts were widely sold as "safe as houses" investments which carried little or no risk. Indeed part of the difficulty of the split cap scandal is that the shares were marketed more as savings products, for which the FSA would normally be responsible, than straight, high-risk equities, which is in fact what they were. In one gloriously inappropriate puff, split caps were described as having "more safety features than a Volvo", a claim, you might have thought, which would have alerted even the most naive of investors to their risks. In another piece of promotional literature it was said that split caps "tend to come into their own when stock markets are flat or falling". As we now know, the very reverse was true.

The aptly named "zero dividend preference shares" (many of them are indeed now worth nothing) were marketed as a means of saving for known outgoings, such as school fees, while the income shares were sold as high income deposit accounts, capable of delivering a regular source of income. Nobody thought to warn of the dangers. Bizarrely, hardly anyone thought there were any.

In many cases, the prospectus was less than transparent. More than half of split capital trusts invested in each other. Nearly 10 per cent of them had the great bulk of their portfolios invested in other split caps, but there may have been little or no warning of these investment strategies in the literature. In many cases, the borrowing intentions weren't spelt out either. Some trusts may have operated outside the mandates set by the board. Many directors served on several split cap boards, undermining their independence of view and exaggerating the industry's incestuous tendencies.

With the benefits of hindsight, it is possible to see a myriad of different flaws which regulation was at the time insufficient to expose. It took the bear market finally, and painfully, to do so. As Warren Buffett has observed, it's only when the tide goes out that you get to see who's been swimming with their trunks off. Another way of saying the same thing is that the receding tide exposes all the wrecks that normally lie hidden beneath the surface. In any case, the regulators are having their field day, eventually after long and costly litigation there will be barrow loads of compensation, the rules will be reformed and strengthened, transparency increased, and next time around there will be a whole new generation of suspect products and practices which everyone failed to notice until it was too late.

British Telecom

It's always nice to welcome a company back to the land of the living, and while British Telecom is not yet out of the sick ward, it does at least seem to be off the critical list. Sir Christopher Bland, chairman, and his chief executive, Ben Verwaayen, will soon be able to go around wearing T-shirts saying "I survived the telecommunications meltdown". Revenue and profits from continuing operations are up, debt is down and there's even going to be a dividend, the payment of which Mr Verwaayen refreshingly calls "an important financial discipline for any company".

All this is in marked contrast to the situation a year ago, when the company was forced into a humiliating £5.9bn rescue rights issue in a desperate effort to keep its creditors at bay. It is also in marked contrast to the continued nightmare of indebtedness that has engulfed both France Telecom and Deutsche Telekom on the Continent. What they would give for BT's balance sheet now. Mr Verwaayen says he's happy to swap the glamour industry status telecommunications once aspired to for the dull, boring, utility image it now has. Not all telecommunications companies are going down the pan, he points out. Those with entrenched market positions and a decent balance sheet may even emerge strengthened and reinvigorated.

Telecommunications volume is continuing to grow at a rate that would make most other industries green with envy. Only trouble is that it is proving hard to the point of impossibility to convert this growth into profitable revenue. Intense competition, new technologies, flat rate packages, everything is conspiring to drive down the price of connectivity. Mr Verwaayen has made an excellent start. But the real challenges still lie ahead.

Strip price fixing

It is very nearly World Cup time again and the sense of anticipation and excitement across the nation is almost palpable. Except among one group of fans – the armchair dads who live in dread of the seven words their soccer-mad sons are about to utter: "Can you buy me an England shirt?"

As a fashion item, three lions on the shirt leaves a lot to be desired. But as an example of spending power, it says more about you than cash ever can. The price of replica football shirts has long been a gigantic rip-off and yet grown men (as well as boys) have gritted their teeth and paid up. Now the Office of Fair Trading has concluded likewise and is about to charge 11 companies, including Manchester United, the Football Association Limited, the shirt maker Umbro and a string of sports retailers with price-fixing.

It is one thing for a football club to charge fans what it thinks the market will bear for the privilege of entering the ground or wearing the team colours. It's their copyright; they can charge what they like. But it is quite another, as the OFT has belatedly recognised, for a manufacturer to rig the market by preventing retailers from competing on price to sell replica shirts. In the case of the England shirt, the price, remarkably, is £39.99 whether you shop in Debenhams, Allsports or JJB Sports.

The sanctions are non trivial. The OFT can fine companies 10 per cent of turnover which in the case of Umbro, a privately owned UK company, would amount to about £12.5m and for Manchester United some £16m. But it cannot yet send company directors to jail for running cartels. All that will change when the Enterprise Bill now passing through Parliament, becomes law. The football industry has received a yellow card. Unless it cleans up its act, the red one cannot be far behind.

Kiss of death for euro

It seems to be all over for British membership of the euro. Stephen Byers, Secretary of State for Transport, has backed it. With friends like that, who needs eurosceptics?

jeremy.warner@independent.co.uk

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