The Thing Is: FSA calls in managers for split decisions

Split capital trusts
Click to follow
The Independent Online

On Tuesday, John Tiner, the chief executive of the Financial Services Authority, will call the heads of 21 fund management groups and stockbrokers to a meeting at the FSA's headquarters in Canary Wharf. There he will attempt to find a compensation settlement for investors who lost up to £6.5bn from collapsing split capital investment trusts between 2001 and 2003.

The UK regulator is investigating whether there was misleading literature given to investors about the risks of splits, and whether there was any illegal collusion between fund managers trying to support each other's fund prices.

The meeting is in part an effort to avoid expensive and lengthy court cases. No company lawyers are expected to be present, though, which might weaken the chances of the managers admitting to or being held to any decision for compensation, according to commentators.

Aberdeen Asset Management was the biggest fund manager in the sector and ran six funds whose shares are now suspended. LeggMason Investors and BC Asset Management managed another three each out of the 26 funds where investors are unlikely to see any money returned to them.

These groups are expected to be attending the FSA's meeting, although all declined to comment, with one saying: "We just want to keep our heads down."

Coincidentally, however, the Financial Ombudsman Service on Thursday ordered Aberdeen to repay one investor in its Progressive Growth unit trust that bought splits and then lost money in their collapse. The assessment paves the way for up to 7,000 investors in the unit trust, marketed as the "one year-old who lets you sleep at night" for its supposed safety, to claim compensation of up to £40m.

This announcement was seen as applying pressure on the fund groups ahead of Tuesday, although the groups have denied any responsibility or compensation claims for splits sold through directly, and Aberdeen is appealing against the ruling but has offered voluntary compensation to these investors.

The case for compensation hinges on whether the fund managers recklessly issued highly geared or heavily cross-invested splits that subsequently collapsed when the markets fell. One head of investment trusts at a large fund manager, who saw the crisis coming and didn't back any of those types of trust, said the FSA's meeting was a sign that the regulator had no evidence of illegality and was trying to pressurise the groups into compensating without admitting its weak hand.

He added, however, that it was surprising the London Stock Exchange was not invited to the meeting, as it had been responsible for vetting and signing off the prospectuses for these split cap trusts, and should have picked up any possible internal contradictions. This action by the UK Listing Authority - which has now become part of the FSA - might have prevented some of the launches or boosted the risk warnings, he said.

Until May 2000, by which time many of the collapsed splits had launched, the Authority was part of the London Stock Exchange. The LSE declined to comment. But experts said it was unlikely anything could have been done as the splits' lawyers and stockbrokers would have combed the reports for any discrepancies and the problems were less at the listing stage and more about how they were susequently managed.

With the FSA being criticised over its new insurance regulation regime, Mr Tiner needs a good resolution of the split scandal. But few think Tuesday's meeting will deliver one.