A staggering two years on and the Financial Services Authority (FSA) is still fighting to resolve the UK’s split-capital investment-trust scandal.
Already mired in delay and confusion, the FSA suffered yet another setback last week when the 21 companies – alleged to be at the centre of a scandal that has left investors out of pocket to the tune of £650m after 26 split-cap trusts collapsed – pulled out of a crucial meeting.
This now-postponed get-together, scheduled for 5 April, was the latest in a long line of attempts that the City watchdog has come up with to hurry along a resolution. However, the idea of mediation to hammer out a compensation plan for the hard-done-by investors as well as agree on a fine, headed by the former chairman of NatWest Lord Alexander, proved so unpopular that most of the 21 fund groups refused to attend.
It appears that the companies’ objections are based around concerns that the FSA and the industry did not jointly appoint Lord Alexander, leaving the regulator struggling against an ever-growing tide of hold-ups.
The very fact that the FSA has mooted the idea of mediation is a surprising turn of events, certainly compared to the FSA of a month ago, which appeared to be dealing with the scandal in a distinctly more robust fashion.
One of the claims at the heart of the scandal is that ‘split’ companies, known as such because they offer different classes of shares, are involved in the so-called magic circle, colluding by buying shares in each others’ funds to artificially increase their value.
Another allegation, linked to but separate from the current entanglement, is that the companies failed to properly advise investors of the risks involved in buying their zero-dividend preference shares.
This is undoubtedly one of the largest investigations the FSA has ever handled. Half of its 120-strong investigation team has been involved, listening to 27,000 taped conversations and examining 780 files of evidence.
With this amount of data, it is small wonder that the FSA felt rather more bullish about its chances of resolving the mess when it convened a meeting with the 21 companies on 2 March.
Armed with all this hard work, the FSA sought to show the companies that it had a watertight case against them. In fact, so convinced was the FSA of the strength of its case that it offered the directors a deal – to confess to the criminal offence of collusion and pay a penalty. Refusal meant facing an immediate FSA enforcement action. The 21 funds had until 16 March to provide their responses.
However, that deal fell flat on its face and, with the idea of mediation now delayed, optimism has also disappeared. The FSA is left talking of gathering even more evidence, at the end of which could be a tough court battle, the very thing the regulator sought to avoid.
So what exactly went wrong? Clearly the FSA’s strong-arm tactics did not have the desired effect.
According to reports, only three of the 21 companies agreed to take part in the FSA’s compensation scheme by the 16 March deadline. The other companies expressed deep concern that if they admitted guilt as the FSA wanted, then their insurers would not cover their losses. It would also leave them open to civil claims from investors who had lost out from buying the companies’ zero-dividend preference shares.
The FSA had neither formally charged the directors nor informed them about exactly what they were accused of. Instead, it had simply sent them a ‘warning notice’ that an investigation was taking place which outlined the sections of the Financial Services and Markets Act that they may have breached. Yet they were being asked to admit guilt, pay out a vast fine and then potentially face further liabilities from third parties.
And there is another bizarre twist to the saga. The companies’ lawyers were barred by the FSA from taking part in the 2 March meeting, apparently because the City watchdog wanted to speak directly to the directors without lawyers intervening on unimportant technicalities.
What the FSA seemed to ignore was that lawyers would inevitably be involved in the directors’ decision-making, and therefore being a part of
the meeting would have enabled them to understand what the FSA was saying. In the long run, lawyers’ involvement would have sped up the process of reaching an agreement.
Faced with an impasse, the FSA altered its tactics. On 16 March , the same date the FSA had given the companies to respond to its 2 March demands, the regulator announced that it intended to resolve the issue of compensation by way of mediation. But even with this softly, softly approach there were problems.
However, so far this has also not had much success and is further evidence of poor decision-making by the FSA. It broke the golden rule of mediation that all parties should agree jointly who the mediators should be. Instead, the FSA appointed three mediators, including Lord Alexander, a tenant at 3-4 South Square, without consulting the companies. The spirit of a mediation in which all parties involved agree on the basic framework was effectively compromised.
At this stage in the game no date for the mediation has been formally announced.
In fairness, the FSA is in a difficult position because the 21 companies seem unwilling to come to the table to thrash out a solution. Taking a softer approach and offering mediation may have been the more sensible thing to do, but this has now been bungled.
How the FSA moves forward on this is anyone’s guess. The ‘bad cop’ approach it used in March did not work, and because of delays, we are yet to see the ‘good cop’ in action.
The possibility of an imminent solution now seems to be edging further and further away.