The Financial Services Authority was forced yesterday into issuing a strong denial of the suggestion that it was closing its two-year investigation into the mis-selling of split-capital investment trusts, letting off the hook the 21 management companies and brokers involved.
Thousands of investors have lost a total of £2.5bn through the scandal, which arose after these trusts were found to be borrowing heavily and investing the proceeds in one another, boosting one another's asset value. These strategies made them far more risky than originally intended. The trusts divide their capital into income shares, which receive all dividends from the trusts' investments, and capital shares, which receive no dividends but the benefit of all the growth. This structure was invented in the 1980s, when income was taxed more heavily than capital gains. But in many cases the capital shares have turned out to be worthless.
A spokeswoman for the FSA said: "There is absolutely no truth in the report that we are abandoning our inquiry into split-caps, or the mediation process." This process is the attempt by John Tiner, the FSA's chief executive, to reach a compromise which will enable split-capital investors to receive compensation without the managers admitting legal liability. Those under investigation include Aberdeen Asset Management, Gartmore, Govett, Legg Mason, Morley, HSBC, UBS, New Star and the broker Brewin Dolphin. All deny mis-selling. After one-to-one meetings with the 21 companies last Friday, Mr Tiner decided to postpone a meeting with all of them scheduled for today. No date has been fixed for the group to reconvene.
A spokesman said: "We were going to have a meeting, but we have some points that we need to discuss with some of the firms, so we cancelled it."
The meeting was intended to be a first opportunity for the managers and brokers formally to meet Lord Alexander, the barrister and former head of NatWest bank nominated by Mr Tiner to act as mediator.
On 2 March Mr Tiner summoned the companies and tried to strong-arm them into making restitution by claiming that he had firm evidence of mis-selling. He gave them a fortnight to agree. But by the deadline only three had done so. The rest called Mr Tiner's bluff and the FSA seems to have backed down.
No further deadlines have been laid down, and the companies clearly no longer feel obliged to attend a meeting set by the FSA, although they are all authorised by the regulatory body and can in principle have that authorisation terminated.