The FSA has widened its investigation from about four to at least 10 fund manager and broker firms o...
The FSA has widened its investigation from about four to at least 10 fund manager and broker firms over allegations of colluding to support the price of each other's split-cap trusts.
Speaking at the AITC's annual director conference, John Tiner, managing director of the FSA, said that in terms of resources, the investigation is its largest current operation.
He added that the FSA's approach has been very focused, starting small and growing bigger. It began when a number of firms were formally referred to the FSA's enforcement division for investigation last autumn. In January, the scale of this investigation was increased to encompass many more firms, covering managers and brokers.
In addition, the FSA has been investigating allegations of misleading marketing material from providers and intermediaries since May 2002. Tiner said more than 2,000 investors have now complained to the Financial Ombudsman Service and between 50 and 100 cases are coming in each week.
While the FSA and the Ombudsman can make firms pay investors compensation for their loses, Tiner said, it is open to firms to compensate investors without waiting to be ordered to and this is something the FSA would encourage. Such an act of faith, he added, would go some way to restoring the sector's tarnished image.
Since Tiner's speech at the same conference last year, when it was announced the FSA was to investigate collusion and the mis-selling of splits, 19 splits have been suspended and 50 have either suspended or cut their dividends. Since 31 March 2002, the market cap of the investment trust sector has fallen 47% to just £7bn.
Tiner said: 'Many of the investment managers with whom we have discussed the problem have attributed the collapse of the splits market to market conditions following 11 September. However, few suggested that perhaps the collapse was due to the weak structure of certain trusts, including the high levels of gearing and cross-holding.'
This, he said, strikes him as a state of denial. While it is fair no one anticipated the speed with which the weaker trusts fell, he added, to blame these events purely on the market 'is to bury one's head in the sand about the real problem and the real causes.'
'The inflated levels of gearing and cross-holding in the sector created a dangerous cocktail, which the falling market exposed,' Tiner said. 'To use an analogy from Warren Buffet, all the falling markets did was draw out the tide and expose those who have apparently been swimming without any shorts on.'
Tiner noted the FSA is not proposing changes only to rules affecting splits in a simplistic response to the apparent behaviour of a few players in that sub-sector but is instead proposing changes to the rules affecting the investment trust sector as a whole.
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