Regulator claims marketing material may have led to investors being sold inappropriate shares
The marketing material for split capital trusts given to investors and advisers did not adequately disclose or explain the risks of investing in certain splits, according to the FSA's report on the sector.
This, said the FSA, suggests that some consumers who invested in splits on the basis of disclosures by product providers, have inadvertently acquired an unsuitable product due to the inadequate disclosure of the risks involved.
Where the FSA said there had been breaches of its rules or principles it would take action and said that it will now begin formal investigations into alleged collusive behaviour, promotions that may have been misleading and possible mis-selling.
If it does find any evidence of breaches the FSA will recommend enforcement action, which could result in fund management houses being fined and, in some cases, they may be ordered to compensate affected customers.
John Tiner, FSA managing director, said: 'Consumers who believe they have been mis-sold should seek redress by complaining to the firms responsible. Our work will now focus on identifying and taking appropriate regulatory action against anyone found responsible for failing to meet regulatory standards.'
Overall the FSA concluded that the problems within the splits sector were confined to a minority of trusts and that risks were not an endemic feature of the sector as a whole.
It said that the value of many splits had fallen during the past two years due to a decline in underlying stock markets, rather than any unusual or inappropriate investing or financial arrangements.
Daniel Godfrey, director general of the AITC, said the association is grateful that the FSA made it clear that splits as a whole are a good vehicle to get exposure to the equity market and that the problems do not apply to the entire sector.
Going forward from here, the FSA will also investigate specific cases relating to alleged collusive behaviour within or between managers of splits and investigate possible mis-selling from advisers, both of which may result in enforcement proceedings.
The FSA is also to consider its fundamental review of the listing rules and if there needs to be any tightening in definition of 'independent' for the purposes of establishing a majority of independent directors of investment trust companies.
This follows on from its findings that 16 people are on the board of more than one split, with one individual on the board of 15 different splits, managed by a number of different firms.
Godfrey said the report is still a depressing read for those involved in the splits sector and that all the AITC and investment groups can do now is try to achieve the best outcome for shareholders. He added that those investors who were mislead about the safety of the split they were sold should be compensated.
Since February 2002, the FSA has visited 20 authorised firms in its analysis of the sector and it has a further 14 visits planned.
Overall the FSA concluded that the problems within the splits sector were confined to a minority of trusts. That, it said, indicated the problem was trust-specific and not an endemic feature of the sector as a whole.
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