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Split-cap vanishing act

And so it ends, not with a bang but a whimper. Last week, the FSA finally put its split-cap investment trust investigation to bed, agreeing minor slaps on the wrists for four key players involved in the debacle.

Rolly Crawford, the former head of investment trusts at broker Collins Stewart, his former colleague Paul Glover, David Bruce, once chief executive of BC Asset Management and Anthony Reid, the former head of BFS Investments, which folded last year, are to keep away from various market-related activities for periods ranging between the end of this year and October 2009.

The penalties in and of themselves are hardly of the knee-trembling variety. All of those involved, including others not named in last week’s final statement from the FSA, have gone on to pastures new. Many have taken with them the massive sums they managed to amass at the height of the sales bonanza in split caps.

The FSA will be heaving a sigh of relief that it has managed to put this problem behind it. Its supporters will rationalise that it has managed to achieve compensation payments worth about £170m for tens of thousands of beleaguered split-cap investors. Moreover, it did so even though it was not responsible for regulating the firms and individuals involved in the first place.

However, the fact remains that the whole tawdry affair leaves no section of the industry looking good.

First of all ,there were the products themselves. When split caps were first “invented” in the 1970s, they were usually sold to sophisticated and affluent private investors. Yet during the rising stock market of the 1990s, split caps were increasingly sold to ordinary people as an ideal way to save for school fees or retirement.

The advertising was, in some cases, simply astonishing – one trust billed itself as having “more safety features than a Volvo”.

The irony is the fact that the so-called “magic circle” of split-cap trusts, whereby they each held stakes in the other. But in the event of a crash, there were bound to be serious consequences for all the trusts involved. None of that came out in the providers’ marketing campaigns.

Then there were the advisers who believed this guff. I recall speaking about this with Paul Smee, Chris Cummings’ predecessor at Aifa, a few years ago. He believed that a lot of the providers’ marketing literature was misleading and that they should shoulder a lot of the blame for the way in which these products were sold.

That is probably correct but that still does not absolve IFAs, many of whom appeared to have little understanding of the potential risks involved and did little to familiarise themselves with the products. That never prevented some of them from engaging in mass-marketing campaigns to their clients, repeating the comments from providers and raking in generous sales and trail commission.

Finally, there was the role of the FSA. To be sure, it did not have regulatory powers over investment trusts at the time. Yet, apart from one warning in 2001 that there were inherent dangers in the way split-cap investment trusts were being marketed, it did little to step in and protect policyholders.

Sir Howard Davies, then chairman of the FSA, admitted to the Treasury select committee that the regulator had carried out “some research” in the early part of 2001 into the potentially incestuous nature of the trusts. But he added that this had not substantiated concerns about the supposed “magic circle” arrangements. Subsequent analysis had caused the FSA to take a different view, he admitted.

The irony was that the FSA was then able to intervene by making “changes to the listing rules governing the interests of investors in investment companies”.

The measures, which came too late to save the 50,000-plus mostly elderly savers who invested up to £700m in split caps, included an annual election of investment managers, a limit on the percentage of total assets that could be invested in other funds, greater clarity about the investment policy to be followed and the extent of borrowings and public warnings about the likely risks and how they will be mitigated. All this should have been done two or three years earlier.

The battle to win compensation for those investors proved to be debilitating. At first, the FSA let it be known that it was seeking up to £400m from the industry. It said that its investigations, which involved 780 files of evidence detailing 27,000 taped conversations and over 70 interviews, supported claims of collusion between firms involved.

John Tiner, chief executive at the FSA, also stressed that accepting any “collective settlement” deal would not protect the companies – or individual fund managers who are being investigated for their role in the debacle – from further action.

In the end, the policy was one of “talk tough, deliver little”.

The compensation agreement has left thousands of policyholders with far less than even the regulator must have felt they were entitled to. Almost no action has been taken against the individuals involved.

This is a bleak end to a shameful episode in the industry’s history. And we wonder why consumers don’t trust advisers or providers.

Nic Cicutti is the editor of He can be contacted at


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