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Splits personality

Like Channel Islands&#39 detective Jim Bergerac, it looks like director of investment business for the Guernsey regulator Peter Moffat was always ahead of the game, raising the alarm on split caps almost two years ago.

The Guernsey Financial Services Commission regulator was arguably faster than the FSA to spot the potential for a split-cap crisis by insisting that split-cap funds registered on the island included more specific risk warnings in their prospectuses.

Two issues are up for debate. First, whether talks between Guernsey and the FSA constituted a warning and second, whether the FSA has any power to act anyway.

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

It is included in prospectuses seen by Money Marketing dated between March and September 2001 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 launch dates of a number of the funds coincide with a sea-change in the risk warnings appearing in the prospectuses.

BC Asset management senior fund manager Michael Yeo says: “Prospectuses are not pieces of marketing material but because the fund was being registered in Guernsey, they were vetted by the GFSC and the risk warnings included as a legal requirement.”

Yeo, like many of the split-capital trust advocates, shifts blame towards brokers which sold BC products to retail customers and should have warned potential clients that the funds were not low-risk investments.

Morley Asset Management head of corporate communications Fiona Baker says: “As far as we are concerned, there is no London-Guernsey divide. A split-capital investment fund with similar assets registered offshore is not any riskier than one registered in London.

“The Morley fund was registered in Guernsey, not because of the income portfolio but because it included a hedge fund component which at the time meant it could not be registered on the London Stock Exchange.”

Requirements for pros-pectuses for onshore funds currently come under section 80 of the Financial Services and Markets Act which does not insist that different levels of risk in different funds are specified.

In August this year, the Exeter enhanced income fund told its shareholders they would probably not get their money back. The Exeter fund chairman in Guernsey was former GFSC director general John Roper.

Asked whether the FSA should have picked up on the investigative work of the Guernsey regulator, Roper says: “It is all very well being wise after the event To a certain extent, it no longer matters.

“Everyone has to remember that the history of splitcap trusts goes back a long way. They are quite simply trusts with capital split into two areas so I do not think they are about to disappear overnight.”

Roper says if confidence in the market returns, then the split-cap sector will bounce back through gearing. “We have to remember that gearing was always used as an attempt to spread risk, not increase it,” he says.

Class Law founder Stephen Alexander, who is leading the class action for split-cap investors, accused the FSA at a recent Treasury select committee meeting of recklessness over ignoring the Guernsey regulator&#39s action. This has sparked criticism that the FSA should have acted sooner.

Amid squabbles over who said what to whom, 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.”

Many in the investment trust sector think the Guernsey regulator should be congratulated on a “quick spot” but Moffat is a reluctant hero. One industry insider says Moffat was particularly worried about the crossinvesting between trusts because he had “seen it before”. Earlier this year, he denied that the commission had criticised the FSA. Second time round, the above statement by the regulator was issued through Neville.

A history of offshore investing in the Channel Islands means it has a tighter investment regulatory system than the City, incorporating more involvement from boards of nonexecutive directors when funds are launched. Both Aberdeen and BFS had company representatives on these offshore boards.

Meanwhile, Class Law has issued 150 writs against brokers, fund managers and IFAs.

At a recent Treasury select committee meeting, chairman John McFall had stockbrokers Brewin Dolphin in contortions over how they had explained split-capital investments.

The firm was unable to give figures for the number of investors they had “put into splits” but some of these clients would und-oubtedly be investing in Channel Island-registered funds. McFall asked them whether they had made the distinction clear between what he and David Roughley, a select committee member, called two different breeds of splitcapital investments, preand post-1999.

A protection of investment law is used in Guern-sey to increase regulation and to monitor offshore funds although this does not strictly apply to closedend trusts.

Neville says the Guernsey regulator has called for a debate between international regulators on the subject but added that it could take some time to set the ball rolling.

A senior investment figure believes the FSA should have been more alert. He says: “Regulation of the funds&#39 marketing literature would come under UK Listings Authority legislation which as of December 1 came under FSA control.

“And what is the essential difference between the prospectuses and the marketing material anyway? If these were so radically different, it would constitute misselling, a duping of investors. It should have set alarm bells ringing”

Chelsea Financial services managing director Darius McDermott says: “The FSA has an undertaking to protect clients, a code of conduct. I would have thought that they would have had the jurisdiction to intervene.”


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