UK's HM Treasury Regulation Of Investment Trust Companies

The Treasury is today launching a consultation on the regulation of investment trust companies.

Consultation fulfils a Government undertaking to consider and consult fully on the regulation of investment trust companies following a recommendation by the Treasury Select Committee. In its report into split capital investment trusts the Committee recommended that investment trust companies should be brought within the scope of investment product regulation by the Financial Services Authority (FSA).

The consultation aims to stimulate discussion about whether there is a need for additional regulation and, if so, possible options for doing so.

Background

1. Investment trust companies are pooled, risk-spreading investment vehicles constituted as limited liability listed public companies. In order to enjoy special tax treatment, they must meet certain criteria and be approved by the Inland Revenue.
2. Split capital investment trust companies (splits) are a sub-sector of the investment trust company industry. They have, as the name implies, more than one class of share with different classes being entitled to payments in a set order of priority. The order of priority influences the level of risk attached to each class.
3. The Treasury Select Committee announced its inquiry into splits in 2002 in response to public concern that arose following a major down turn in the market value of shares in certain splits, which caused heavy loss to some investors.
4. The TSC Report ‘Split Capital Investment Trusts’ was published on 13 February 2003 (Third Report of Session 2002-03, HC 418-I; PN No. 19). This can be accessed from www.parliament.uk/parliamentary_committees/treasury_committee.cfm. The Government response was published by the Committee on 30 April 2003 (Fourth Special Report of Session 2002-03, HC 651; PN No. 26). This can also be accessed from the above web address.
5. The Committee concluded that the high gearing (borrowing) of many splits and substantial cross-holdings among them increased the level of risk of a particular share class (zeros), beyond the level at which they were marketed. Neither the creators nor marketers of the splits in question properly understood the increased risk, leading to some investors being mis-sold. The Committee was also concerned that there was evidence of collusion among some players in the splits sector.
6. The FSA and the Financial Ombudsman Service are taking appropriate action in relation to possible cases of mis-selling and the allegations of collusion suggested by the Committee.
7. The consultation paper ‘The Regulation of Investment Trust Companies’ can be accessed on the Treasury website. Printed copies may be obtained free of charge from 020 7270 5474.
8. Responses to the consultation should be sent by Friday 25 February 2005 to:

   Regulation of Investment Trust Companies Consultation Savings and Investment Products Team
   HM Treasury
   1 Horse Guards Road
   London SW1A 2HQ
   Fax: 020 7451 7642
   E-mail: ITC.Consultation@hm-treasury.gov.uk