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Guernsey regulator ordered warnings on split-cap risks

The Guernsey regulator for-ced split-cap investment trusts to include warnings in pros-pectuses about the dangers of cross-holdings and systemic risk as early as March 2001, a protection denied to UK investors.

At last week&#39s Treasury select committee hearing into split caps, FSA managing director John Tiner denied accusations by Class Law partner Stephen Alexander that the FSA had not heeded warnings from Guernsey.

The Guernsey Financial Services Commission says it held discussions with the FSA nearly two years ago which included its concerns about incestuous dangers of split-cap trusts although it says this did not constitute a “warning”.

Prospectuses dated bet-ween March and September 2001 included warnings from BC income and growth, BFS managed properties, Exeter financials, Framlington global financial income securities, Govett Asian income and growth and Morley absolute growth investment.

The warning said: “Investors should be aware that many of the split-capital or high-income investment trusts and companies in which the company invests may themselves have cross-holding in the same split-capital or high-income investment trusts and companies. This may be considered to give rise to a systemic risk should there be failures within the sector.”

In a statement last week, Guernsey FSC director general Peter Neville said: “Discussions with the FSA in early 2001 covered a wide range of subjects, including split-capital investment trusts. Although those discussions did refer to the potentially incestuous nature of some investment strategies, it would be wrong to say that the GFSC issued a &#39warning&#39 to the FSA about the systemic risk to the UK finance sector.”

Exeter Asset Management spokesman Roland Cross says: “None of the Exeter managed investment trusts were promoted as low-risk and have not been risk rated. The Guernsey regulator was merely ahead of the game in the UK.”

Alexander, who represents victims of the split-cap crisis, says: “The FSA has either been incompetent or reckless – it has a lot of explaining to do.”

FSA spokesman Rob McIvor: “This is an academic question. There was nothing we could have done. We do not regulate investment trusts in the UK or prospectuses.”

•Profile, p37


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