Scandal forces FSA to reform split-cap trusts

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The Independent Online

Greater disclosure, stricter stock market listing rules and more transparent corporate governance are expected to be the main recommendations this week when the Financial Services Authority (FSA) publishes a damning report on the split-capital investment trust scandal.

The central part of the document, due out on Thursday, will be a progress report on inquiries the FSA inspectors have made at visits to the offices of individual fund management companies and independent financial advisers. Without naming names, it is understood that this will entail the extent of collusion between split-capital trust managers, and of mis-selling to the public.

Split-capital trusts normally have at least two classes of shares. One class receives all the dividends which the trust passes on from the companies in which it invests, while the other class benefits from capital growth. These are attractive to investors who want one or the other, but not both, types of appreciation in value.

However, problems have arisen in recent years through risky investments and investments by some of these trusts in one another, leading to instability compounded by the stock market weakness of the past two years. Some trusts have therefore had to suspend dividend payments or ask for extra support from their bank.

Many investors are threatening to take legal action on the grounds that they were persuaded to invest in split-caps because they were low-risk.

The FSA is expected to outline its next steps, which will probably include a consultation paper proposing further action.

A spokesman said: "The Stock Exchange listing rules are the only direct area in which we have direct influence over these trusts. The report will be fairly clear about what has happened and what should happen now."

But investors hoping to be rescued from the current plight may be in for a disappointment. In February Sir Howard Davies, chairman of the FSA said: "Like other products, split-capital trusts promise the potential of higher-than-average returns, but only if you are willing to risk losing some or all of the money you have invested.

"The FSA cannot compensate people when risky investments don't turn out to be as rewarding as they had hoped. But we can, and do, help people spot unreasonable risks and determine what sort of product is right for them."