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split capital investment trusts

During the early to mid 2000s, following problems in the "splits" market, we received large numbers of complaints involving split capital investment trusts. This note is based on our experience in dealing with those complaints. We do still receive complaints about these trusts, but the number has gone down significantly over the last few years.


"Investment trusts" are companies which invest in the stock market and issue their own shares, as investments in their own right, to the public. The idea is that investors' money is pooled and invested. Shares in investment trusts can then be freely bought and sold.

the difference between an investment trust, a unit trust and an open ended investment company

The big difference between investment trusts and unit trusts is that investment trusts are "closed" funds:

  • With an investment trust there is a set investment date/amount and after that no more shares are created.
  • With a unit trust new money can come in and new units can be created or money can go out and units can be cancelled.

An open-ended investment company (OEIC) works in a similar way to a unit trust except that it is constituted as a limited company and issues its own shares. It is open-ended which means that when the demand for the shares rises the manager(s) can simply issue more shares.

The perceived advantage with an investment trust is that the manager(s) know the amount they have to invest and can work out the best strategy for that sum.

Another important difference is that unit trusts and OEICs are "collective investment schemes" and as such are regulated under The Financial Services Act 1986 and the Financial Services and Markets Act 2000.

Investment trusts are not deemed to be collective investments but are companies regulated by the Companies Act. This means that, whilst the Financial Ombudsman Service has jurisdiction over unit trust and OEIC managers, we do not have jurisdiction over investment trust managers or over the investment trust itself. See below for further information.

how does a split capital investment trust operate?

During an investment trust's life investors can sell shares via the market to others. Some investment trusts are set to be wound up on a pre-determined date and the monies divided up between the shareholders of the trust. The aim of all investment trusts is good returns for shareholders - as the market goes up.

In a normal or "conventional" investment trust, there is usually only one share class, called "ordinary shares". Split capital investment trusts - or "splits" as they are sometimes called - have more than one share class. There are variations, but the main options are:

  • "Zero dividend preference shares" (zeros)
    These don't receive any interest or dividend but promise to pay out a certain amount on the day the trust is wound up. When the trust is wound up, these shares have first call on any monies produced, after the repayment of any bank debt. Some trusts that wish to continue and not close down after paying out on zeros put these shares into a subsidiary company that closes on a set date whilst the main trust continues, taking the profit or loss from the subsidiary.
  • "Income shares"
    These receive an income whilst the trust is in operation. They also aim to return the investors' capital at the end of the trust, although their claim on the trust's money comes after the "zeros".
  • "Capital shares"
    These participate in both growth and income, or growth only. They usually pay a lower income than income shares or no income at all but do not have any restriction on the capital return. They usually get paid out last when a trust is wound up.

the "splits" market

In a rising market the fund pays out income on income shares. When it is wound up after a fixed period, depending on what type of shares they had, investors get fixed returns, return of capital or the rest of the value divided up.

In a falling market problems can occur. The most significant is that the trust may be due to end at a market low and there may not be enough value left to pay some or all of the shareholders.

Other problems we have seen involve "splits" deciding that as well as investing the funds subscribed to them, they would also take out loans to provide more working capital - so they could buy more investments. These loans were often tied to a default value - so if the overall value of the investments dropped below a certain level, the loans must be repaid or renegotiated.

Some "splits" invested heavily in other investment trusts. This led to a situation where the fall in value of one "split's" investments reduced the value of another's, and so on. Sometimes the other investment trusts had also borrowed to invest.

our approach to "splits" complaints

In the cases we see, consumers often say that:

  • certain zeros, which were recommended as low risk investments, were higher than low risk; and/or
  • certain income or capital shares which were recommended as medium risk investments, were in fact high risk.

"Splits" are not regulated by the FSA and the "splits" themselves are outside our jurisdiction. So we could not deal with a complaint about, for example, the management of a "split". But complaints that we can consider include those where regulated financial firms, such as advisers and investment managers, have advised on investments in "splits" or in products including "splits".

If the complaint is one that we can consider we will examine how much knowledge the financial business had about the risks associated with investments in "splits". This helps us to decide whether its advice was suitable - the more knowledge the financial business had, the more likely we are to think its advice should have taken account of the real risks of the particular investment in "splits" which it was recommending.

We would expect the level of knowledge to vary between financial businesses. For example, we would expect the financial business that promoted and managed the "split" to have more knowledge than an independent financial adviser. We would also expect a financial business's knowledge to vary over time, as the real risks of investing in "splits" became better known. For example, we would expect an independent financial adviser to have more knowledge about "splits" in, say, 2001 compared with in 1997.

We will also examine the exact structure of the "split" and how it evolved to decide whether it properly reflected the investor's attitude to risk.

In June 2007 we issued a number of ombudsman final decisions on "splits" cases: final decision A, final decision B, final decision C and final decision D

help for businesses and consumer advisers

contact our technical advice desk on 020 7964 1400

This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.

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  • The law requires us to decide each case on the basis of our existing powers and what is fair in the circumstances of that particular case.
    We take into account the law, regulators' rules and guidance, relevant codes and good industry practice at the relevant time.
    We do not have power to make rules for financial businesses.
    Our current approach may develop in the light of circumstances disclosed by further cases we receive.
    We may decide that fairness requires a different approach in a particular case.