FSA unearths stock market timing abuses

The Financial Services Authority will today give details of its investigation into potential market timing abuses in the City, saying it has found evidence that the practice was carried out by some fund managers in Britain.

John Tiner, the chief executive of the FSA, told a conference of investment managers in Scotland yesterday that the regulator had unearthed instances of market timing.

The practice is frowned upon because it can harm long-term investors. In America banks and other financial services companies that have used illegal forms of market timing techniques have been forced to hand over millions of dollars of compensation under a high-profile crackdown by New York attorney general Eliot Spitzer.

Mr Tiner, speaking at the National Association of Pension Funds conference, said the problem had not been as extensive in the UK. "We found some evidence of market timing in UK authorised collective investment schemes, but no evidence that market timing is widespread or that it has been a major source of detriment to long term investors," he said.

The regulator is expected to announce a tightening up of rules surrounding the trading of shares, so that fund managers have a clearer idea whether investors intending to use market timing techniques.

Market timers are often hedge funds, who take advantage of delays in the pricing of unit trusts and other funds to make a quick turn by dipping in and out of investment vehicles.

Some British companies, including Schroders and Standard Life, have admitted in the past they have unwittingly allowed hedge funds to market time. But they have tightened their procedures to give them more information about prospective clients.

The FSA is likely to say it does not have a problem with market timing in itself. But it wants fund managers to impose financial penalties on market times, for example levying an exit fee, which will guarantee that other investors do not see their holdings lose value due to hedge funds' actions.