Leading investment companies reacted angrily last night as regulators warned that the failure of a leading player in the split-capital investment trust scandal would leave them facing a multimillion-pound bill.
The Financial Services Compensation Scheme (FSCS) said the collapse of Exeter Fund Managers (EFM) would force it to confirm plans for a huge increase in its levy on members.
Earlier this year, the FSCS said the levy would have to rise from £100,000 to £27m in the 2005-06 financial year, to cope with thousands of potential compensation claims linked to the splits crisis.
The levy is currently so low because the FSCS makes payments only when financial services companies go bust. It has never before been forced to pay out on cases related to an investment company.
Heather Tilston, a spokeswoman for the scheme, said: "We made the £27m estimate on the basis that we knew claims from Exeter and possibly other splits firms could end up with us." She warned: "We still can't say exactly how much we will need - it could be more or less."
Angela Knight, the chief executive of the Association of Private Client Investment Managers and Stockbrokers (Apcims), said the increase in the levy was unfair. "Most of our members are being asked to pay for problems in businesses that are not similar to us," she said. "We have been complaining about the arrangements for this levy since 1997 and now this has come home to roost."
A spokeswoman for the Investment Management Association (IMA) said its members, which include Britain's biggest fund managers, were also angry. "Our members recognise their responsibility to pay the levy if it has been shown the funds are required but we believe it remains unclear that such a large increase is necessary," she said.
But PricewaterhouseCoopers, the administrators of EFM, said it was too early to quantify the companies' liabilities.
The investment manager Iimia, which bought EFM last summer, called in PWC after it became clear the company's £5.3m of assets would not be sufficient to meet claims from investors pursuing mis-selling claims against it.
Some 315 investors have already lodged claims against EFM with the Financial Ombudsman Service, the financial services industry's independent complaints service. But at least 15,000 more held investments in the funds concerned.
The investors all bought into two unit trusts run by Exeter, which in turn invested in zero-dividend preference shares issued by a range of split-capital investment trusts. As unit trust investors, they are entitled to claim directly from the fund managers that sold them the investments. If these managers are unable to pay, investors can claim from the FSCS.
In contrast, most of those who bought shares in splits directly have been forced to rely on the Financial Services Authority (FSA), the chief City regulator, for help. It has brokered a deal through which 18 firms accused of market collusion after the collapse of the split-capital sector have agreed to pay £195m into a compensation fund.
Investment trust shareholders with four more managers of splits are facing legal battles for compensation, because these firms have not joined the FSA settlement. The four include Exeter Asset Management, a sister company to EFM, which ran its own split-capital trusts.
William Long, the chairman of Iimia, said: "Since acquiring Exeter Investment Group in August 2004, we have continued to seek a resolution with the FSA; discussions are continuing and we hope they will be successful."
Mark Kemp-Gee, who became chief executive of the Exeter group in 1999, left the company last year. Mr Kemp-Gee succeeded Ian Henderson, the founder of Exeter, who remains a major shareholder and non-executive director at Iimia.
Iimia subsequently sold EFM's retail fund management business to New Star Asset Management for £10m but agreed to ring-fence the money to pay future compensation claims.Reuse content