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Legal threat from class actions on split-caps

A thirst among investors for class actions in the wake of the controversy surrounding split-capital trusts could cost the industry dear, warns City law firm Eversheds.

The warning comes as some law firms have been soliciting groups of people with similar claims to take action against fund managers and IFAs over claims of high gearing, cross-investments among funds and misleading marketing material.

Eversheds believes the FSA will not welcome a move towards increased use of class actions to resolve issues under its area of regulation.

However, it believes that in appropriate cases, the courts will not shy away from awarding compensation.

The FSA&#39s recent report on the split-capital trust sector could strengthen the arm of some investors looking to resort to litigation over their split investments.

The FSA said most problems with splits were related to poor performance of equity markets but the report noted “a contagious cocktail of cross-investment and high borrowing” and that in many cases, marketing materials had not adequately disclosed or explained the risks of inv-esting in certain splits.

Eversheds partner Jona-than Crook says: “The FSA will not want the courts to become arbiters of disputes between the industry and consumers. It has emphas-ised to investors that they cannot claim compensation if their losses are simply due to falling markets and at the same time it expects institutions to investigate complaints promptly and fairly. Legal proceedings should be a last resort.

“The courts will be concerned to avoid situations where people claim compensation unreasonable and will bear in mind the potential knock-on effect which would drive up costs in the sector. The FSA&#39s message will need to be one of reassurance as to its role of preventing a consumer claim culture taking hold in the sector.”

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