Watchdog widens inquiry into extent of market timing

The Financial Services Authority is set to widen its investigation of market timing to include brokers and insurance companies in a bid to establish whether the practice - which is harmful to private investors - is prevalent in the UK.

The City watchdog last month called Britain's 25 largest fund management companies to a meeting to tell them it was opening an investigation into whether the controversial form of trading, which has forced the resignation of a series of executives at US investment firms, is also a British problem.

The FSA is currently visiting the offices of fund managers to see what processes they have in place to identify cases of market timing. It will complete the process by the end of next week.

Those visits have alerted the FSA to the need to widen its investigation beyond the fund management industry. It has realised it will also have to probe parties which act as intermediaries in trades in order to establish the extent of the market timing problem in the UK and what regulatory reforms will be necessary to mitigate its effects.

Market timing, whereby investors can take advantage of the difference between the price of unit trusts and the underlying value of the shares in the trust, is not illegal.

However, the practice, often used by professional investors such as hedge funds, can have a detrimental effect on long-term investors in the funds, usually private individuals.

The FSA therefore wants fund managers either to ban hedge funds from moving in and out of their funds, or to mitigate the effect of market timing by imposing a levy on top of the normal dealing fee on those wishing to pursue it.

However, both moves would be difficult for fund managers to enforce when the trade is coming through an intermediary such as a broker or an insurance company, because they often use nominee accounts and trade in bulk numbers of shares.

In light of the FSA investigation, many fund managers have privately said intermediaries will have to hand over information about whose money is in the nominee accounts. Alternatively, intermediaries will have to take on more of the burden for establishing whether their clients are engaging in market timing.