FSA to force split cap firms into early payout

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The Independent Online

The Financial Services Authority will attempt to frighten fund managers who were involved in the split-capital investment trust débâcle into agreeing to pay compensation at a key meeting tomorrow.

Contrary to reports that the watchdog has been unable to find any hard evidence of wrongdoing by fund managers involved in the distressed sector, the FSA is preparing to emphasise the gravity of potential proceedings and suggest they agree to an early compensation settlement.

The meeting, which will be attended by 21 parties involved in splits, has caused consternation because no one has yet seen the evidence the FSA has been amassing in its two-year investigation. Sources close to the situation said the FSA had not yet sent out "warning notices" to anyone involved.

According to rules governing the FSA's enforcement proceedings, it is only at the warning notice stage that the FSA is required to outline what it is potentially accusing split-cap managers of. The stakes could not be higher over the FSA's split-cap investigation, its most high-profile probe into potential market abuse so far. It began the probe in late 2001, after a series of trusts collapsed in value due to the fall in the stock market.

The regulator, which will make a statement after the meeting, is investigating whether splits were mis-sold to consumers. It is also looking at the more serious charge of whether there was collusion between a "magic circle" of fund managers to invest in each others' trusts to artificially inflate their share prices.

This second line of inquiry, which could lead to criminal prosecutions, has required the FSA to sift through emails and taped telephone calls. It has also been interviewing key players. Sources said John Tiner, the chief executive of the FSA, called the meeting with fund managers to "expedite" the process. "It wants to reach a general settlement rather than to have to go after one company after another," one source said.