Split Capital Investment Trusts


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...

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