Firm at centre of split-cap row throws down gauntlet to FSA

One of the firms at the centre of the split-capital investment trusts fiasco has made no contingency plans for the event of it having to pay compensation to investors, it emerged yesterday.

According to the latest annual accounts for BFS Invest-ments, which were filed at Companies' House last week, the investment house said it did not believe there was any need to make provisions either for investor compensation or for potential fines imposed by the regulator. This will be of major concern to the City's chief regulator, the Financial Services Authority, which hopes to secure a voluntary compensation scheme for investors who are estimated to have lost more than £600m in the saga.

BFS said it had put aside £350,000 to cover any legal or consultancy costs which may arise from the "protracted" splits investigation.

The accounts said: "The director's have considered the FSA's [Financial Services Authority] ongoing review of the sector, and the consequences for retail customers. The directors have taken extensive legal advice and do not believe that there have been breaches of regulation or failures in duties to customers or investors, and in many instances there has been a strong recovery in values. Therefore no provision has been made for redress or compensation."

If BFS is found guilty of mis-selling or collusion, it will be able to pay only a fraction of the kind of fines or compensation that the regulator is hoping for, having also refused to make provisions in previous accounts. Profits for the year to 30 September 2003 were just £44,716 after tax. However, Tony Reid, the company's chief executive and founder, has paid himself almost £8m over the past four years, including £1.5m last year when the FSA's proceedings were already under way.

The FSA is currently mulling over a compensation package of around £100m, after Terry Smith, the chief executive of Collins Stewart, called each provider to ask them how much they were willing to contribute. The proposal was put to the FSA's chief executive, John Tiner, two weeks ago.

Mr Tiner claims to have incriminating dossiers on each of the 21 firms, which he will allow them to see if they sign a confidentiality agreement. However, only three of the 21 have agreed so far, with the rest willing to fight the FSA through any internal hearings - or even in the courts - if they do not agree to their compromise.

A chief executive of one of the 21 accused firms said the process looked likely to carry on for at least another three years, and possibly longer. "If the deal isn't signed then the FSA will have to start internal disciplinary hearings for each of the firms. These will probably take up to a year each, and they won't be able to run them all concurrently - they won't have the resources," he said.

Another of the chief executives said firms were now agreeing to put up some money for compensation just to put an end to the saga. He added that the FSA's handling of the process had been a farce, with none of the companies believing the regulator's claims that it has concrete evidence against them. "The FSA's mediation process is in tatters," he said.