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ombudsman news

issue 16

May 2002

split capital investment trusts

These forms of investment, issued and promoted by investment trust companies, have underlying portfolios with differing levels of risk and return and varying objectives. The objective of zero dividend preference shares ("zeros") is to provide a low-risk return, while income shares and capital shares generally offer a higher level of return, with greater risk.

The Financial Services Authority issued an update on 16 May 2002 and outlined areas it is considering further. These include concerns that some investors may have cause for complaint, particularly if they were not properly informed about the degree of risk involved.

These products are complex and it is important to note that the regulator's powers in relation to investment trust companies are not the same as they are for other types of investment firms. This in turn limits the extent of our own jurisdiction in relation to complaints about these products. At the time of writing, we have received only a relatively small number of splits complaints, and of these - only about half have been about matters that are within our jurisdiction.

Investment trust companies are not regulated firms and their directors do not need the regulator's permission or authorisation to carry out their business. So complaints that are purely about the way these companies carry out their day-to-day business are not within our jurisdiction.

A fall in the value of an investment does not, in itself, constitute valid grounds for complaint. And the value of many splits has fallen during the past couple of years because of the decline in the underlying stock market, rather than as a result of any unusual or inappropriate investment or financing arrangements.

We expect that many of the complaints that reach us and do fall within our jurisdiction will come from investors who sought the services of an adviser and invested in a split capital investment trust on the adviser's recommendation. Where investors did not seek advice but acted on an "execution-only" basis when they bought their shares, their complaints will often not fall within our jurisdiction. Investment within "collective vehicles", such as unit trusts and OEICs, is likely to be within our jurisdiction.

None of the cases we are currently investigating has yet reached the decision stage. The following example is typical of many of the complaints we have so far received where we have concluded that the matter falls outside our jurisdiction.

case study - split capital investment trusts


Mr R had invested in a split capital investment trust without first taking any investment advice. He later discovered that the trust held shares in other split capital investment trusts, forming a so-called "magic circle" of cross-holdings. Mr R disapproved of this practice and complained to us that it had not been made clear to him that his investment would be managed on this basis.

We explained to Mr R that we have no authority to investigate these cross-holdings. Investment trusts are quoted companies (PLCs). Their business is the management of investments and their share price fluctuates in line with supply and demand, rather than according to the value of the underlying investments. Cross-holdings are, effectively, a commercial decision taken by the investment trust company. Firms' commercial decisions are not within our jurisdiction.

Even if such matters were within our jurisdiction, we would not have been able to look into this particular case. This is because Mr R had not taken investment advice but had relied solely on his own judgement in deciding that the investment was suitable for him.

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.