Watchdog savages 'safe' splits
MISLEADING adverts, cross-shareholdings of questionable benefit and an over-cosy network of directors have come under attack in a report published today into split capital investment trusts.
Improper marketing of 'splits' attracted most criticism. The £13 billion industry 'habitually' described the products as low risk, the Financial Services Authority said.
Zero-coupon preference shares, frequently sold to people wanting to save for school fees, were compared to ultra-safe investments such as building society accounts, gilts and National Savings.
Some splits were described as 'safe as houses' or having 'more safety features than a Volvo'. One ad said they 'come into their own when stock markets are flat or falling'.
Such statements were contained in marketing literature sent direct to potential investors and in documents sent to professional financial advisers, including solicitors and accountants. Some relied wholly on this material when advising clients, the FSA said.
In many cases marketing material 'has not adequately disclosed or explained the risks of investing in certain splits'. Advisers in turn 'have not always given their clients a detailed explanation of the risks'.
John Tiner, managing director of the FSA, said: 'Some funds and advisers have been deluding their customers or deluding themselves. Neither is acceptable.'
The management of splits also came under fire in the report from the Sir Howard Davies-led FSA, especially the arrangement of cross-shareholdings. The benefit to the investor of stock swaps was 'difficult to establish,' the regulator concluded.
It found that the most interconnected splits - those with more than 70% of assets in other splits - had collapsed in value by 98% since March 1999. Those with no cross-shareholdings had fallen 39%.
Splits which indulged in cross-shareholdings and took on lots of debt had exposed their investors to 'exponential risk', the report said.
The FSA also questioned the independence of some non- executive directors. Referring to people who sat on the board of more than one connected split, it said: 'It must be difficult for those concerned to manage conflicts of interest'.
Sixteen people have been identified as sitting on the board of more than one split. One unnamed director is on the board of 15 splits. Another juggles 10 directorships.
The report identifies 11 splits that have suspended dividend payments, seven that have cut the dividend, five that have begun restructurings or placings, 12 now repaying debt, one converting bank debt and one that has resorted to insolvency.
The FSA now plans to investigate those producing and distributing the misleading marketing material and to start 'enforcement proceedings' which can lead to companies or individuals being fined and ordered to pay compensation to investors who have lost money.
It is also probing specific allegations of collusion between different splits and possible mis-selling by Independent Financial Advisers (IFAs). Again, this could lead to fines and compensation orders.
The City regulator came to its conclusions after interviewing big-name fund managers including Martin Gilbert's Aberdeen Asset Management, CGNU, Edinburgh Fund Managers, Framlington, Friends Ivory & Sime and a string of IFAs.
About 50,000 people invested in splits. Some have lost 90% or more of their money.
