Today's Financial Services Authority paper on the split capital investment trust market and the prob...
Today's Financial Services Authority paper on the split capital investment trust market and the problems associated with underperforming investments, high gearing and cross-holdings has today been commended and castigated in equal measure.
The FSA says that only a small number of split caps ran into significant problems caused by excessive gearing and cross-holdings, while the overall investment trust sector remains a good investment alternative.
It says many of the problems have been caused by falling stock markets rather than "any unusual or inappropriate investing or financing arrangements."
That said, it admits that there have been problems with the marketing of splits and the risks associated with portfolio construction that could yet lead to sanctions against industry participants.
It also says that investors could be awarded compensation where they have "not been treated fairly", but at the same time adds that the Financial Services Compensation Scheme does not cover splits and that it has limited powers of regulation compared to unit trusts which are considered Collective Investment Schemes.
Leon Kaye of Leon Kaye Solicitors, which is pursuing a course of legal action against splits providers - but not advisers - says the report is merely closing the stable door after the horse has bolted.
Kaye says the report is "disappointing" because it does not take to task the product providers that argued that high gearing could be a benefit to investors.
"That's all well and good, but what about a bear market?" he says.
The report also lacks any serious criticism of the risks associated with gearing and cross-holdings and the way many splits were marketed.
"It is obvious that it is a first stab. it is going to be a long haul as far as the FSA is concerned."
"Invstors should not expect the FSA to get their money back. They will have to try other routes."
Kaye says the situation could be more serious than the FSA believes as many IFAs may have been reluctant to complain about their clients' situations for fear of being subject to claims themselves.
"We take the view that it is not practical to sue IFAs and that most will say they relied on information given to them. We won't sue them."
The Association of Investment Trust Companies (AITC) on the other hand has welcomed the report, saying it is particularly pleased with the mention of the cooperation between the FSA and itself over the issue of disseminating more data about individual splits.
"We agree with the FSA that investment trusts remain an efficient way to invest," an AITC spokeswoman says.
"We also agree with the finding that this is not a systemic problem."
On the issue of compensation, the AITC does not disaggree with the FSA's finding that misselling may have occured, and adds that it "would like to see the situation resolved to the benefit of shareholders as soon as possible"
The association has already been working on improving the availability of data on investment trusts for investors through its website.
It is continuing to push splits to increase the level of disclosure on holdings.
And it is developing a database that will show splits data including holdings, cash, debt and other factors.
That database will provide the foundation of a risk measurement system, which should be up and running within the next couple of months to give investors a better idea of the level of risk they are taking on.
Class Law, which is pursuing action against splits providers, stockbrokers, and IFAs on behalf of investors who lost most of their investments in split caps, is due to release its response to within the next hour.
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