Funds to pay just £5m for market timing

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Several British fund managers must pay nearly £5m to compensate investors after the Financial Services Authority found they had allowed controversial market timing to take place in their funds.

The FSA has asked about five fund managers, which it believes allowed market timing to occur, to go over their trading records for last year to calculate the sum that they must individually hand over to investors who have lost money as a result of the practice.

While the results of the FSA's investigation into market timing was not a complete clean bill of health, it has allowed the industry to breathe a huge sigh of relief. The sum the group must pay out is small compared with the total value of trades channelled through Britain's fund management industry. The FSA's findings are also mild compared with the high-profile crackdown against US companies found guilty of market timing.

Market timing is not illegal but it has become increasingly frowned upon because it harms long-term investors who tend to be private individuals holding shares in pension funds or other saving vehicles.

It is normally employed by hedge funds and allows them to take advantage of delays in the pricing of unit trusts and other investments. While market timers can make a quick profit by dipping in and out of funds, the remaining investors often have to bear the cost of large numbers of shares being rapidly bought and then sold again.

The FSA said it was "encouraged'' by the fact that market timing has been limited in the UK and that it did not find any evidence of illegal forms of the practice including late trading.

Michael Foot, a managing director of the FSA, said: "Although there is evidence of market timing having occurred within our authorised funds, we can find no sign that market timing is widespread.''

Meanwhile Paul Myners, the chairman of Gartmore who has hit out against soft commissions in the fund management industry, yesterday backed a plan by the FSA to end the practice through a new voluntary regime. Speaking at the National Association of Pension Funds annual conference in Edinburgh, Mr Myners said he was encouraged by comments from John Tiner, the chief executive of the FSA, that the regulator was fully behind his campaign to stamp out soft commissions.