Investors who lost money should be compensated, parliamentary select committee says
The Parliamentary Select Committee looking into the collapse of the split-capital trust sector has called for the investment trust industry to compensate investors who lost money on zeros or related products.
It also said there is little doubt there was some form of 'magic circle' of professionals who had colluded for their own gain at the expense of split-cap investors and pushed for 'very severe penalties' for individual firms or practitioners found guilty of significant misconduct.
In the third report issued since hearings on the sector began in early 2002, the committee called for the creation of an industry-funded compensation scheme to expedite redress for investors mis-sold splits that then lost money.
'It may be in the interests of the investment trust industry to go beyond what they might regard as their legal obligations,' the report said.
'One possibility would be for the investment trust industry to speedily establish a compensation fund for small investors who have suffered losses from zeros. Sums paid from the fund could in part be recovered from the firms responsible if and when a compensation liability is established.'
Committee chairman, Labour MP John McFall, said even investment trust managers uninvolved in splits stand to benefit from an industry-funded scheme.
'This scandal has resulted from the actions of a sub-set of the industry but the whole industry has been affected,' he said. 'To restore its reputation, the industry should be having this compensation fund up front.'
The committee also called on the FSA to hasten its investigation into split-caps and release a timetable for its completion.
The Treasury committee has no power to force the adoption of its recommendations but McFall expects it to have some influence over the conduct of the FSA investigation.
The committee proposed a list of questions for the regulator to put before investment trust boards, fund managers and sponsoring brokers, aimed at probing the way in which splits were established and managed.
'We have been left in little doubt there is substance in the suggestions there was a form of 'magic circle' operating in a manner harmful to the interests of shareholders,' the report said. 'It may be that only a relatively small number of people in a small number of companies were actively involved.'
The committee added that investment trusts, currently subject only to the listing rules that apply to all companies, should be regulated by the FSA in the same way as other investment products.
'The fact investment trusts are not themselves regulated products represents a gap in the regulatory system,' the report said.
However, the committee said the FSA's general remit over proper conduct in financial markets meant it should have been quicker to identify growing problems in the sector.
'The FSA was not as pro-active as it might have been in identifying and responding to the developing dangers,' it added. 'This was partly because it was not responsible for looking at direct investment in new issues in investment trusts.
'This may have led to it being less alert than it might have been to those problems associated with investments that did fall within its remit.'
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation