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Honesty is best policy

The split-capital investment trust industry is in crisis. The reputation of what was once a growing and successful sector has been battered by the behaviour of some of its leading firms which has led to the impoverishment of up to 50,000 investors.

The familiar refrain that markets can go down as well as up does not offer absolution to those who sold investments on the basis of safety and then stood back and watched their clients lose everything.

People were told that these investments had “more safety features than a Volvo”, that they were the “one-year-old that let you sleep at night”. They were not told of the risks. At the moment, the architects of this disaster still stubbornly refuse to acknowledge the crucial role played by them.

When Chris Fishwick and his former employers at Aberdeen Asset Management appeared before my committee, they displayed an attitude adopted by most of the managers involved in this debacle. They are very sorry but it was not their fault.

They may be paid telephone-number salaries and be acknowledged experts on the products they managed but in their opinion this does not mean they can in any way be held respon-sible. They plead that they could not have known that the market would fall in the way it did. Yet, in front of the committee, David Thomas, the originator of these splits, admitted that he did not understand the products he created.

This is simply not acceptable. These were the people who changed the nature of splits, increasing bank debt to gain greater growth and consequently greater pay cheques. In doing so, they made these new splits a high-risk product, not low-risk, which is what they were sold as. It boggles the mind to hear them say that they did not feel they created anything that was any riskier than earlier products.

Many observers did know and said so but those who created this Frankenstein&#39s monster wanted to profit from it, no matter the dangers for other people&#39s money. Products that would once have weathered market downturns were turned into ticking time bombs which would collapse with even a small fall in the market.

All this was made worse by fund managers crossinvesting – buying stakes in each other&#39s funds. This activity made these products even more volatile, producing a downwards spiral in value once a downturn did occur. In the words of Alistair Mundy, one of the few managers who took action, the authors of this tragedy produced a “lethal cocktail” which blew up in other people&#39s faces while they walked away with their millions in bonuses earned on the back of a disastrous performance.

The fund managers involved in this fiasco must come clean about their actions If the split-capital investment trust industry is to move forward. Until then, there is little chance that the negative image the industry now has will imp-rove. Only then will the creation of a new framework of corporate governance have a chance of providing the conditions for the industry to move on and become successful again.

The victims of this trag-edy certainly want an apology but, even more, they want compensation. We simply do not know how many lost their money.

As long as this situation remains, the industry will be subject to a great many claims and this will help maintain the air of crisis which threatens its future. Confidence can only be restored when we know the extent of the problem.

There is a long road to travel before the industry can regain the reputation it once had. A first step on that journey must be to ensure that, in future, marketing material is truthful about the risk involved in the products on offer. Accurate and accessible risk assessments must be given both to advisers and investors. Many have lost money because their IFAs were unaware of the risks involved. Literature must be produced with the aim of ensuring that risk is easily assessed. The performance of products must be assessed across the spectrum of market performance, including both the terrible lows and the wonderful highs. Transparency must be paramount.

A review of practices in the industry is urgently needed and the best way of producing new and better practice is for the industry to do so itself. If the industry does not introduce measures to clean up its act, legislation or some kind of FSA regulation might be necessary. It is of critical importance that the need for swift and effective action is imp-ressed upon the industry.

Public confidence in the industry is on the point of collapse. Time is short for these measures to be introduced and to be shown to work.

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