MPs demand split cap compensation for 50,000

Fund managers of split capital investment trusts were yesterday told by MPs to compensate the 50,000 investors that were duped in to investing in the high-risk funds.

The Treasury Select Committee, which has been investigating the collapse of 20 funds, yesterday published a scathing report on the behaviour of the fund managers involved. It found that they had promoted the trusts as low risk when they were in fact highly geared to the fortunes of the stock market.

John McFall, the committee's chairman, said he was "highly disturbed" by the evidence they had received, and that investors had been misled. The committee said it deplored the "inadequate warnings given about risk" and found even fund managers appear not to have fully understood how the funds would perform in falling stock markets.

The committee also concluded that fund managers had been operating a "magic circle", which involved colluding to invest in each others funds to prop up their value. The report said: "We have been left in little doubt that there is substance in the suggestions that there was some form of 'magic circle' operating in a manner harmful to the interest of shareholders."

The FSA is conducting its own inquiry in to the sector, which could result in fines and orders for compensation payouts. The committee suggested firms contribute to a compensation fund to pay investors while formal channels of redress are explored.

David Ruffley MP, who sits on the committee, urged the FSA to devote urgent resources to completing its inquiry and ensure customers are compensated. The committee also called for the Government to put investment trusts under the direct regulation of the FSA. Sir Howard Davies, its chairman who was accused of being "asleep on the job" by MPs, called the report "very useful".

Aberdeen Asset Management, which has had four funds fold in to receivership, yesterday hit back at the report. "The allegations against us are without foundation. At all times we met our legal and regulatory obligations in full," Aberdeen said.

Chris Fishwick, the former head of Aberdeen's split cap trusts, could face action by the FSA for his role in managing the trusts. MPs dubbed him the "unacceptable face of the City" for taking a £350,000 pay-off from Aberdeen on top of his £6.3m salary in 2001, when he eventually appeared before the committee in October.