The Financial Services Authority has released an update initial report
on its enquiry into the split capital investment trust market. On the
whole this response has been a measured and thoughtful one. In particular,
the FSA has not responded to the "knee jerk" call for immediate extension
of regulation and appears to recognise that many of the problems affecting
certain splits stem from adverse market conditions.
Nevertheless, the FSA has highlighted a number of areas where it is
undertaking further investigation and has raised a number of issues which
are pertinent to the splits industry going forward.
The FSA has indicated that it is investigating a number of individual
cases of mis-selling. Mis-selling can, in theory, arise at any point
throughout the life of a split, from initial public offering by way of
prospectus, to activities of IFAs and private client brokers at initial
public offering or thereafter, to marketing documentation produced by
investment managers. The FSA appears to be focussing its attention
primarily on the latter two situations.
Firms which are the subject of FSA investigation will need to ensure
that they are appropriately advised. Our experience suggests that it is
generally beneficial to engage with the FSA at the earliest possible time,
even prior to the commencement of a formal investigation. The FSA may use
its broad powers under FSMA 2000 to require the production of information
or documents or it may appoint persons to investigate on its behalf and
prepare a report of their findings. It will then decide whether to
instigate disciplinary proceedings. Investigations can be lengthy and
dealing with the FSA is not always straightforward. The disciplinary
measures available to the FSA include the power to publicly censure or
fine authorised or approved persons, listed companies and directors of
listed companies. Other measures available to the FSA include the
variation or cancellation of permission, the withdrawal of authorisation,
the withdrawal of an individual's status as an authorised person and, in
the case of listed companies, suspension or cancellation of listing.
Further complexity is added by the potential overlap between investigation
and enforcement by the FSA and litigation by disappointed investors.
Herbert Smith already has experience of dealing with FSA investigations
under the new regime to add to its extensive experience of handling
contentious regulatory matters.
Going forward, how can procedures be improved? Boards of investment
trust companies should be mindful that marketing...