Introduction
The FSA has been conducting an investigation into the activities of certain fund managers and brokers detailed below ("the Firms") within the split capital investment trust ("splits") sector between September 2000 and February 2002. The FSA has reached agreement with the Firms to resolve this investigation. The Firms are listed at the end of this statement.
Agreement
The FSA and the Firms have agreed a package of approximately £194 million for investors. The Firms have agreed to contribute without admissions to a fund, which will be available for distribution to eligible individuals who invested in zero dividend preference shares ("Zeros") and in a number of specified unit trusts and other financial products that invested in Zeros. The fund is in addition to specific amounts paid or estimated to be paid by specific Firms to investors including the Aberdeen Progressive Growth Unit Trust Capital Uplift Plan.
An overview of who is eligible to seek a distribution from the fund, the basis on which distributions will be considered, the process for assessing distribution and the method of payment is covered under Next Steps below.
The Firms have agreed to the publication of this statement for the purposes only of this agreement and without any admissions. The FSA has made no determination of regulatory breaches or imposed any penalties.
The FSA considers that this agreement is in the best interests of investors, for the following reasons:
- The complexity caused by several features of this particular investigation, makes the outcome for many investors uncertain (even in the event of successful enforcement actions): the number of firms involved and their differing capacities and involvements; the complexity of the matters under investigation; the fact that investment trusts were not regulated products; and, the fact that the period under investigation straddles the introduction of the Financial Services and Markets Act 2000. This agreement brings certainty for eligible investors in Zeros.
- In the event of enforcement proceedings the decision making process could take a number of years. This agreement will ensure that money is quickly available to eligible investors.
- It is consistent with the FSA's obligation to use its resources efficiently and effectively.
Investors who are offered the opportunity to obtain a distribution will, of course, have a choice whether to accept it or not. If they accept it will be in full and final settlement of any claims or any remedies they may consider they would otherwise have. If they do not accept the offer, they will remain able to pursue their own claims or remedies.
The FSA has also been investigating the role of a number of individuals employed or formerly employed by the Firms. The FSA has made no determination of regulatory breaches by these individuals. The FSA has issued private warnings to certain individuals. Those individuals have agreed to undertake remedial measures including: redeployment/removal of supervision responsibilities; refresher training; increased supervision; and/or undertakings not to perform particular controlled functions/work in the financial services industry for specified periods.
One individual has given an undertaking not to apply for any controlled functions in the future. Agreement has also been reached with certain other individuals. These individuals will be the subject of separate press releases.
The following individual has given an undertaking not to apply for any controlled function for the period specified below:
- Christopher Fishwick – 7 years from the date of this statement
The FSA's investigations into 4 firms and 8 individuals continue in order to determine whether it is appropriate to take enforcement action including the possibility of the imposition of financial penalties and/or restitution orders on these firms and prohibition or financial penalties on these individuals. The FSA anticipates that any such proceedings will be likely to commence in March 2005.
Summary of market activity
During 2000 and 2001, several key events contributed to the start of the collapse of a number of splits. These events included the collapse of the value of technology stocks, a marked downturn in the FTSE 100 and a global fall in the value of shares following the events of September 11 in the United States. The impact of these events on the splits sector was affected by the existence of financial gearing and the level of cross-holdings within the sector.
The consequences of these events for the splits sector included a lack of new investor demand and a reduction in the cover available to meet the requirements under bank covenants.
Certain Firms sought to address these matters by embarking on a series of actions in what they viewed as (but which subsequently proved not to be) a short term market downturn. These included:
- Undertaking new issues. It was recognised by some Firms that in view of the state of liquidity and demand in the market, the main potential purchasers of these new issues in significant amounts were splits themselves.
- Several splits fund managers invested in the issues of shares by other splits resulting in cross-holdings of shares between different splits.
As a result of the lack of investor demand, the launching of new splits and the issuing of new shares by existing splits brought little new cash into the sector. The market capitalisation and gross assets of the splits sector was increased by a significantly larger amount than the amount of external cash coming into the sector.
Some of the Firms continued to actively promote the shares in splits during the relevant period. The problems of the Split Capital Investment Trust sector affected adversely investor confidence in the UK financial services industry as a whole and had a significant negative impact on investor confidence in the investment trust sector, in particular.
Lessons learned
The FSA has identified several areas where the financial services industry must learn lessons, if investors are to renew their confidence in the investment sector and investment trusts in particular:- Practices which create misleading market information and impressions or conceal information, are not acceptable.
- The rights of different classes of shareholders must be clearly presented. Regard must be had to the suitability of investments for a specific fund.
- Firms must properly manage conflicts of interests. Where a firm manages or advises more than one investment fund, it must ensure that any transactions between such funds are conducted transparently, at arms-length and in the best interests of the investors in the funds affected.
- Material promoting investment products must properly disclose the specific and significant risks relevant to the product and/or the market at the time it is being promoted. Where the risk characteristics have changed markedly over time it is the responsibility of firms to reflect these changes in promoting the product.
- Investment decisions made by fund managers and advice given by brokers, should be motivated by proper consideration of the best interests of the investment fund they advise and their investors.
Next Steps
A company, Fund Distribution Limited ("FDL"), has been set up to make distributions from the fund to eligible investors who invested in certain Zeros and in a number of specified unit trusts and other financial products that invested heavily in Zeros. Distributions will be focussed upon private investors and their small investment vehicles that held the specified financial products at any time between July 2000 and June 2002. An eligible investor will only be entitled to receive a distribution if the amount assessed by FDL in relation to them is at least £250 across all of their specified financial products. Further information about the criteria to qualify for the fund, including the list of specified financial products, is posted on the FDL website referred to below.
FDL will publish further details in the first quarter of 2005, including the application deadline. Investors will then have to apply for a distribution from the fund by that deadline. FDL will then inform applicants of their possible distribution. Applicants will have the opportunity to accept or reject this offer.
The current intention is that applicants who accept the offer will receive an initial distribution from FDL in the fourth quarter of 2005. If there are still monies available, subsequent distributions may be made with an intention to complete the distribution by the end of 2005.
Investors who do not accept an offer from FDL will retain their rights to take alternative action, including making a referral to the Financial Ombudsman Service if the Financial Ombudsman Service has jurisdiction. FDL can be contacted by investors on any of the following:
Telephone:From UK: 0845 606 6389
From Overseas: +44 1224 857555
Website: www.funddistribution.org
Eligible investors in Aberdeen Progressive Growth Unit Trust ("Progressive") should shortly receive a letter from Aberdeen Unit Trust Managers Limited giving details of the Capital Uplift Plan. Investors in Progressive with any factual queries about the Capital Uplift Plan should call 0845 300 2890 between 9.00 am and 5.00 pm, Monday to Friday.
Background
- The Firms are:
Aberdeen Asset Managers Limited
ABN AMRO Equities (UK) Limited
Brewin Dolphin Securities Ltd
Britannic Investment Managers Limited
Collins Stewart Limited
Edinburgh Fund Managers Plc
F&C Asset Management plc (formerly ISIS Asset Management Plc)
Framlington Investment Management Limited
Gartmore Investment Ltd
Govett Investment Management Limited (now called AIB Investment Management Limited)
HSBC Investment Residuary Limited (formerly HSBC Investment Bank plc)
Jupiter Asset Management Limited
Legg Mason Investments (Europe) Limited
Morley Fund Management Limited
New Star Asset Management Limited
Premier Fund Managers Ltd
Royal London Asset Management Limited
UBS AG (formerly trading as UBS Warburg)
- The total package of approximately £194 million comprises the fund to be distributed by FDL of £143.03 million, the estimated cost of £43.30 million for the Capital Uplift Plan which Aberdeen Unit Trust Managers Limited has agreed to implement for investors in Aberdeen Progressive Growth Unit Trust who may otherwise have been eligible for a distribution from the fund and the estimated cost of £7.67 million in respect of payments that have been or are estimated to be made by the Firms to investors who may otherwise have been eligible for a distribution from the fund. The estimates are based on certain assumptions including that all offers made to eligible investors are accepted.
- Christopher Fishwick was formerly employed by Aberdeen Asset Managers Limited and ceased working in the financial services industry at the end of 2002.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
