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Friday, 14 February, 2003, 17:49 GMT
Split-cap investors 'due compensation'
A trader looking at a falling market screen
Stock market falls lie behind the split-cap crisis
A committee of MPs has called for some investors in split-capital investment trusts to receive compensation.

In a scathing report the Committee "deplored" that investors were not adequately warned of the dangers of investing in split-capital investment trusts.

We have been left in little doubt that was some form of magic circle operating in a manner harmful to shareholders

Treasury report
In addition, some firms involved in the split-capital investment trust industry were accused of "serious wrongdoing".

The powerful Treasury Select Committee recommended a radical overhaul of the industry which will see the City watchdog, the Financial Services Authority (FSA), assume a regulator role over the investment trust industry.

Split-cap closures

Split caps and zeros are complex investments, which were marketed as an ideal way to save for retirement or school fees.

But high levels of bank debt, particularly in trusts launched at the end of the dot.com boom, exposed the funds' fragility when market conditions worsened.

This has led to 19 trusts across the sector suspending their shares, going into receivership or becoming insolvent, leaving investors with nothing.

Up to 50,000 investors are believed to have lost up to 770m from the controversial trusts.

Magic circle

Firms involved in split caps have been accused of "colluding" in a so-called magic circle.

The magic circle is the term used to describe a situation in which several fund managers had substantial holdings in other managers' funds.

When markets were rising, this had a beneficial effect on fund values, but as the markets started tumbling funds which had substantial crossholdings dragged one another down.

The Committee agreed that a magic circle did exist.

"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 interests of shareholders," the statement read.

Committee chairman John McFall MP added that a number of people in the industry "may have been involved in serious wrongdoing."

Small print

Mr McFall said that the Committee wanted wronged investors to receive compensation and for the FSA to investigate what happened thoroughly and to identify individuals who were to blame.

The warnings given to investors at the time that the investments were sold were also condemned as inadequate by MPs.

"It was insufficient for the warnings to be little more than small print," the statement read.

Investigation

At present, the FSA does not have regulatory powers over investment trusts.

However, the City watchdog was criticised by the committee of having acted slowly to the developing scandal when warned by the Guernsey regulator that something was amiss with some split-caps.

Despite this the Committee has recommended that the FSA be given the job of regulating investment trusts in future.

In response Sir Howard Davies Chairman of ths FSA welcomed the report and the backing given for its continued investigation into the split-caps scandal.

"The comments on the FSA are fair and reasonable. We will respond positively to the specific proposals.

The detail will depend on the decision the government now needs to make on the recommendation that investment trusts should become regulated products under the Financial Services and Markets Act," Sir Howard said.

Have your say

Your comments

These people were conned by glorified car salesmen. the arthur daleys of the investment world. But how can they expect to make money for no risk it just dosn't happen that way. the market was bloated and was going to pop. it has happened before it will happen again. the housing market is the same in the UK. these people just wanted something for nothing the british disease. U have two choices in the UK the dole or earn a fortune so u can afford the tax. well everyone with a choice will choose the former when the recession comes i am just glad i am no longer paying for it. thanks to IR35 .
Sean Platnauer, finland ex UK

Endowments, pensions, split caps, dot com shares, property bonds... Spot the connection? All were over sold by greedy companies that over egged the returns and then left investors with big losses after they had creamed off their own profit. FSA comes in too late after the damage has been done and doesn't compensate people properly. Meanwhile sales / management teams dream up another scam to rip poeple off. Is it any wonder people tar the whole industry with the same brush and are getting sick and tired of badly promoted schemes that the FSA learns about far too late? My confidence will only be restored when the guilty are convicted and their ill gotten gains are taken from them.
Sam Peld, UK

People who have been lied to regarding the nature and security of these products deserve to be compensated, in my opinion. Those who chose the investments as an informed decision, attempting to get rich quick are perhaps less deserving. How to tell the groups apart is another matter in itself.
John B, UK

I don't have 'Splits' but I do have an endowment which is possibly going to underperform by about 40%! The FSA cannot help me because my policy was taken out before the FSA Act of 1988. Thank you for nothing.
A Drury, UK

I would take issue with Seans' comments about 'getting something for nothing'. I invested (a small) amount in a unit trust which invested in zero-dividends, which is now worth about 25% of the amount I invested in it - luckily it was not much and I don't lose sleep over it. I invested in it as I had unit trusts in technology shares with the same unit trust managers which I knew were high risk and wanted something lower risk to balance it out. But from memory, the returns were advertised around three years ago at something in the region of 7% a year, not particularly extortionate at the time. Investing in the building society is making 'money for no risk' - does Sean suggest I keep all my money under the mattress? With hindsight putting the money in the building society would have been better but hindsight is a wonderful thing - perhaps Sven would have re-thought his England squad strategy v Australia if he had possessed it....
Helen, England

I accept that a number of people were "miss sold" splits/zeros. However Investors must accept some responsibility for how they Invest their savings. High reward equals high risk. We seem to be in a compensation culture era that, when anything goes wrong someone else must be to blame. What's going to happen if property prices colapse, and Homeowners left with negitive equity? Are they going to sue the Estate agents saying they were miss sold because they should have seen it comming?
Trevor Curties, uk

Much hyperbole has been traded by all the sides involved in this sorry tale. Some companies marketing zeros did not reveal their portfolio composition from outset, thus denying both retail clients and IFAs the opportunity to reach a full and informed decision. Indeed, many IFAs simply did not understand the mechanics of this complex area. Furthermore, a number of clients went direct, in order to avoid the cost of objective fee-based advice - a costly mistake. Finally, the FSA is not without blame, for failing to listen to warnings from other regulators and also seek to make itself look good in the eyes of consumers. Calls for compensation payments prior to confirmation of liability is sensationlist and unprofessional - the FSA must be aware that such action would invalidate the companies' professional indemnity cover. In addition, the media has done litte to clarify the reality of the matter, as illustrated by the failure to differentiate between capital shares, income! s! hares and zero shares. Apart from those investors who were truly given unsuitable advice, other victims include IFAs who gave appropriate advice at the time and the vast majority of zero funds who have actual done what they promised to do. And the catalyst for this debacle; I can only summise that it is due to the rise in compensation culture, the conflict of commission based advice and a political, self-serving regulator.
Anon, England

Sean, IR35 was introduced to stop people getting something for nothing or the British disease as you call it - ie to stop people avoiding tax. The problem with financial service advice is that even the independent advisers have more than their fair share of 'interests.' Commission, small choice of funds / products. The best bet is find someone you trust...or even better educate yourself - Then you have no one else to blame!
A W, UK

Very welcome news and long overdue. I was mis-sold "Zeros" by an independant financial advisor who assured us that the capital sum was "not at risk".It is now nearly a year since I lodged a formal complaint and the Ombudsman has been unacceptably slow in reacting. All I ever seem to get from the IFA are "holding letters" reporting that they are "still looking into it". One investment has lost 100% (24k) and another about 50% too date (12K). these are great sums when one, like Sean in his earlier comments, was forced out of work by IR35
Ricky Reid, England

Are we seriously expected to feel great remorse for people who had an average of over 15,000 spare to place in such an evidently speculative investment? Well they'll get none from me & I don't see why the government (i.e the tax payer) needs to get involved - these people are merely victims of the very same "free market" philosophy that probably got them their "surplus" cash in the first place...
Paul Scott, UK

Investment trusts were marketted as a better alternative to unit trusts. Why have cross holdings - surely incestuous probably used to boost the income of "friendly" other trust managers. The whole investment trust industry should pay up to remove this blot on their landscape
Tim Moores, Uk

You should never invest in something you dont understand! I looked at these splits and decided that the returns were only there if the market carried on rising. These returns were only a few percent over the buiding society rate at the time. Clearly therefore the risks were not priced into the product. Ask yourself a simple question, why am I being offered more than the bank rate? If you cannot answer this question you are probably being conned!
Mike Carroll, UK

Its not clear who is going to pay compensation to the investors. Is it the colluding managers or is it the colluding managers and the salespeople (Brokers IFAs etc)? The managers seem to be clearly at fault for product misrepresentation and collusion. But are regulated salespeople guilty of mis-selling? or were they hoodwinked by the money managers as well? If so should they be selling stuff they don't understand?
Stephen Cooper, UK

Have you lost out as a result of the split-cap scandal, do you welcome the committee report? Please send us your comments

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Treasury Select Committee chair John McFall MP
"People's confidence in saving is dented"

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