Shares in Exeter Investment fell 10 per cent to 90p yesterday after it emerged that the Financial Services Authority has forced the fund manager to reserve £5.4m from a sale to pay potential compensation claims from distressed split-capital investment trust customers.
The City watchdog took the unusual step after New Star Asset Management offered to pay up to £10m for the management contracts on Exeter's 13 open-ended funds, which have £310m of assets.
The FSA has told Exeter that it must reserve the net proceeds of the deal, worth about £5.4m, in case it has to fund compensation payments from claims which are currently being reviewed by the Financial Ombudsman Service.
There was speculation that the FSA had also approached other fund managers to ensure they did not pay out dividends when they should actually be holding on to reserves to pay possible claims. However, people in the split-cap industry said they thought the problem only related to Exeter.
Aberdeen Asset Management, the largest provider of split caps, said it had not been approached by the FSA over making reserves. BFS and Framlington, which also ran spit caps, refused to comment. The FSA has been turning up the heat in its inquiry into the split-cap industry, which has seen 21 trusts go bust in the past two years. Many others are on the walking wounded list.
The FSA, which from next month will be headed by John Tiner, is looking into whether fund managers and brokers misrepresented the risk involved in investing in split caps, so-called because they invest in three different types of shares.
The authority is most interested in whether there was collusion between a "magic circle" of fund managers to keep the share price of their trusts artificially high.Reuse content