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Thursday, 16 May, 2002, 16:30 GMT 17:30 UK
Split caps 'mis-sold'
City of London skyline
The report will make uncomfortable reading in the City
A formal investigation is being launched by the Financial Services Authority into alleged mis-selling and 'collusive behaviour' between a number of split capital investment trusts.

Around 40 of the 120 trusts ran into severe difficulties due mostly to stock market falls, as well as high levels of cross holdings and high borrowing to invest in other companies.

In its initial review on Thursday, the financial regulator revealed it will be looking at the possibility that the trusts were mis-sold and that promotions were misleading.

Practices such as buying shares in each other will also be checked for regulatory breaches.

The FSA stressed however, that only a minority of firms were involved and that the investment trust sector as a whole did not pose particular risks or problems.

The investigation could lead to enforcement action by the FSA, resulting in companies or individuals being fined and, in some cases ordered to compensate customers.

The trusts are popular with people saving for retirement or school fees. But investors have lost hundreds of thousands of pounds as the value of some trusts plummeted by more than 90% in three years.

In March 2001, the FSA reminded advisers to give clear risk warnings about making such investments. The rules apply both to advice and sales material.

But FSA Managing Director John Tiner is concerned that investors were given undue assurances about the level of risk: "Seeing these investments promoted as 'safe as houses', or having 'more safety features than a Volvo' suggests to me that some funds and advisers have been either deluding their customers or deluding themselves.

Neither is acceptable when dealing with people's savings and security" he said.

The Liberal Democrat's Treasury spokesman Lord Newby spoke to Radio 4's Money Box on 13 April, after meeting the FSA to discuss the problem.

Lord Newby told the BBC he believed improper advice was handed out to investors: "They have been mis-sold... I've seen a number of brochures put out which explicitly say that these investments were low risk. Now they were never low risk"

The FSA is advising consumers who feel they were mis-sold to complain to the firm responsible adding: "Our work now will focus on identifying and taking appropriate regulatory action against anyone found responsible for failing to meet regulatory standards" .

But speaking on 13 April Lord Newby said the FSA should begin enforcement procedures as soon as possible, in order to send a clear signal to the market "that it will not tolerate sharp practice" and warned "there is a real danger that unless they act quickly some of these funds will no longer be there with assets that can be handed back to the investors".

Money Box broadcasts on Saturday at 1200hrs on BBC Radio 4.

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22 Oct 01 | Business
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