Next week, the FSA will find out whether its strong-arm tactics against the 21 providers in the split-capital investment trust debacle have worked. Threatening them with enforcement proceedings unless they contribute to collective settlement negotiations was a high-risk strategy and the FSA will want to see how many capitulate to its demands.
It is expected that providers will only be able to thrash out a response immediately before the March 16 deadline. But some industry commentators, including AITC director general Daniel Godfrey, believe many will defy the FSA.
How much of a regulatory risk they would be taking is open to question but the FSA's uncharacteristic hard-line stance is a bad omen for those which refuse to take part.
FSA chief executive John Tiner is clearly keen to stamp his authority. By publicly carpeting so many chief executives and chairmen, he is simultaneously throwing down a marker for future scandals while trying to resolve the splits debacle in a single move.
Will his strategy succeed? The 21 companies range from broker firms with huge corporate backing to tiny fund managers in charge of one or two splits. A collective compensation scheme may make sense for the former as their parent organisations will view a contribution as a drop in the ocean. But compensation could be crippling for the smaller providers, especially as the splits they manage – the bulk of their businesses – will eventually wind up, with the money going back to shareholders.
According to some, however, the fund managers are not necessarily in a position to make a decision, anyway.
Iimia head of investment trusts Nick Greenwood says: “It is down to the PI insurers. I suspect fund managers are not going to be allowed to offer compensation because it is essentially not their money they are using. I cannot see it being workable. To sort it all out in 14 days is unrealistic.”
Greenwood says PI insurers are likely to want to fight against paying compensation unless legally obliged to do so. But the bigger fund managers could conceivably overrule them and pay the compensation themselves which, as an option unavailable to their smaller counterparts, negates the possibility of a common response to the FSA's demands.
Assuming that some providers agree to co-operate, how could such a scheme work? It was suggested immediately following the FSA's imposition of the deadline that the AITC's charitable foundation – set up to provide financial relief to those hit hardest by collapsed splits – could provide the platform from which compensation could be paid. But Godfrey says this is a non-starter as the fund exists purely to ease proven hardship, not to offer financial redress. Despite these differences, he does acknowledge that the fund could be a starting point for the FSA.
Godfrey says: “What would be needed is a way to estimate how much has been lost, how it was lost and what compensation investors deserve. That is not to say it is not possible for an organisation like ours to be involved. We have a model. But there have been no discussions with the FSA.”
Given Godfrey's experiences with the hardship fund – which failed to attract as much money as hoped after fund managers argued that contributing would be an admission of guilt – he says it is unlikely that all groups will bow to the FSA's demands. But he admits that the collective compensation scheme would be very different from the AITC's hardship fund, which simply sought to garner donations as a goodwill gesture on behalf of fund managers. Whatever excuses were used for not contributing to the hardship fund, donations were never seen as proof of guilt, unlike the FSA's scheme.
There is little doubt of fund managers' reluctance to dip into their own pockets. Nevertheless, if they believe – and can persuade their insurers – that paying up now is likely to be cheaper than battling on for another couple of years, investors could see redress sooner than they might have hoped.
This would be the ideal outcome for Tiner, who decided early on in his tenure to draw a line in the sand. His reputation will take a knock if his high-risk strategy fails and, judging by the lengths the FSA went to in the meeting it convened – including the presentation of reams of incriminating evidence of poor practice – Tiner is doing everything in his power to ensure it does not.
Success would not only show the regulator in a good light but it would also bring to a close its biggest-ever investigation, which has long been a major drain on its resources.
But providers are traditionally loath to act in clients' best interests unless forced to and the FSA's position is far from clear. It obviously has enough evidence to threaten groups but cannot legally force them to comply with its demands.
The FSA refuses to comment and has requested that providers do the same so it is impossible to say how many will co-operate. But few believe the regulator's success rate will be high, which is likely to spark another wave of bad publicity the industry could do without.