GFSC and Firms Announce Details of Split Capital Investment Trust Settlement
24th December 2004INTRODUCTION
The GFSC has been conducting an investigation into the activities of certain Guernsey-based fund managers and brokers within the split capital investment trust ("splits") sector between September 2000 and February 2002. The United Kingdom Financial Services Authority ("FSA") and the Jersey Financial Services Commission have also been conducting their own investigations into the splits sector. Each of the GFSC, the JFSC and the FSA have reached agreement to resolve these investigations. The names of those firms and banks that have reached agreement ("The Firms") are listed at the end of this statement.
AGREEMENT
The FSA, the GFSC, the JFSC and the Firms have agreed a package of approximately £194 million for investors. The Firms have agreed to contribute without admissions to a fund, which will be available for distribution to eligible individuals who invested in zero dividend preference shares ('Zeros') and in a number of specified unit trusts and other financial products that invested in Zeros. The fund is in addition to specific amounts paid or estimated to be paid by specific Firms to their investors including the Aberdeen Progressive Growth Unit Trust Capital Uplift Plan.
An overview of who is eligible to seek a distribution from the fund, the basis on which distributions will be considered, the process for assessing distribution and the method of payment is covered under Next Steps below.
The Firms have agreed to the publication of this statement for the purposes only of this agreement and without any admissions. The GFSC has made no determination of regulatory breaches or imposed any penalties.
The GFSC considers that this agreement is in the best interests of investors, for the following reasons:
The complexity caused by several features of this particular investigation, makes the outcome for many investors uncertain (even in the event of successful litigation): the differing capacities and involvements of the firms involved; the complexity of the matters under investigation; and the fact that investment trusts were not regulated products. This agreement brings certainty for eligible investors in Zeros.
In the event of litigation the process could take a number of years. This agreement will ensure that money is quickly available to eligible investors.
It has resulted in the agreement of the Firms based in Guernsey and Jersey, the GFSC and the JFSC to the establishment of an adjudication scheme.
Investors who are offered the opportunity to obtain a distribution will, of course, have a choice whether to accept it or not. If they accept it, it will be in full and final settlement of any claims or any remedies they may consider they would otherwise have. If they do not accept the offer, they will remain able to pursue their own claims or remedies including those arising under the adjudication scheme.
The United Kingdom's Financial Ombudsman Service provides an alternative means of dispute resolution for those investors who acquired holdings in any class of share of a split capital investment trust from or through a UK authorised entity. There is no such Ombudsman scheme currently operating in Guernsey or Jersey. Certain firms active in Guernsey, whose names are also listed at the end of this statement, have therefore agreed to the establishment of an independent adjudication scheme to provide an equivalent forum for resolving disputes over their Guernsey-based activities in the splits sector so as to mirror, as fully as practicable, the scope of the UK Financial Ombudsman Service arrangements. The adjudication scheme is designed to ensure that investors in the splits sector who were clients of the Guernsey firms identified at the end of this statement will have an alternative forum within which to pursue any complaints that they may have against the Guernsey firms in relation to their investments in the splits sector. The adjudication scheme has also been agreed by JFSC as a term of their settlement and will be operated in accordance with principles and rules agreed between GFSC, JFSC and the firms identified at the end of this statement. The scheme will be in operation by 1 May 2005. Further information relating to the operation of the scheme will be posted on the GFSC website in due course. The GFSC retains its right to seek compensation on behalf of investors who invested in split capital investment trusts through Guernsey firms not identified at the end of this statement.
SUMMARY OF MARKET ACTIVITY
During 2000 and 2001, several key events contributed to the start of the collapse of a number of splits. These events included the collapse of the value of technology stocks, a marked downturn in the FTSE 100 and a global fall in the value of shares following the events of September 11 in the United States. The impact of these events on the splits sector was affected by the existence of financial gearing and the level of cross-holdings within the sector.
The consequences of these events for the splits sector included a lack of new investor demand and a reduction in the cover available to meet the requirements under bank covenants.
Certain Firms sought to address these matters by embarking on a series of actions in what they viewed as (but which subsequently proved not to be) a short term market downturn. These included:
Undertaking new issues. It was recognised by some Firms that in view of the state of liquidity and demand in the market, the main potential purchasers of these new issues in significant amounts were splits themselves.
Several splits fund managers invested in the issues of shares by other splits resulting in cross-holdings of shares between different splits.
As a result of the lack of investor demand, the launching of new splits and the issuing of new shares by existing splits brought little new cash into the sector. The market capitalisation and gross assets of the splits sector was increased by a significantly larger amount than the amount of external cash coming into the sector.
Some of the Firms continued actively to promote the shares in splits during the relevant period. The problems of the Split Capital Investment Trust sector adversely affected investor confidence in investor funds and had a significant negative impact on the investment trust sector, in particular.
LESSONS LEARNED
The GFSC, FSA and JFSC have identified several areas where the investment industry must learn lessons, if investors are to renew their confidence in the investment sector and investment trusts in particular:
Practices which create misleading market information and impressions or conceal information, are not acceptable.
The rights of different classes of shareholders must be clearly presented. Regard must be had to the suitability of investments for a specific fund.
Firms must properly manage conflicts of interests. Where a firm manages or advises more than one investment fund, it must ensure that any transactions between such funds are conducted transparently, at arms-length and in the best interests of the investors in the funds affected.
Material promoting investment products must properly disclose the specific and significant risks relevant to the product and/or the market at the time it is being promoted. Where the risk characteristics have changed markedly over time it is the responsibility of firms to reflect these changes in promoting the product.
Investment decisions made by fund managers and advice given by brokers, should be motivated by proper consideration of the best interests of the investment fund they advise and their investors.
NEXT STEPS
A company, Fund Distribution Limited ("FDL"), has been set up to make distributions from the fund to eligible investors who invested in certain Zeros and in a number of specified unit trusts and other financial products that invested heavily in Zeros. Distributions will be focussed upon private investors and their small investment vehicles that held the specified financial products at any time between July 2000 and June 2002. An eligible investor will only be entitled to receive a distribution if the amount assessed by FDL in relation to them is at least £250 across all of their specified financial products. Further information about the criteria to qualify for the fund, including the list of specified financial products, is posted on the FDL website referred to below.
FDL will publish further details in the first quarter of 2005, including the application deadline. Investors will then have to apply for a distribution from the fund by that deadline. FDL will then inform applicants of their possible distribution. Applicants will have the opportunity to accept or reject this offer.
The current intention is that applicants who accept the offer will receive an initial distribution from FDL in the fourth quarter of 2005. If there are still monies available, subsequent distributions may be made with an intention to complete the distribution by the end of 2005.
Investors who do not accept an offer from FDL will retain their rights to take alternative action, including making a referral to the Financial Ombudsman Service or to the adjudication scheme referred to above, as appropriate, if they have jurisdiction.
Details of the adjudication scheme will be made available in due course.
FDL can be contacted by investors on any of the following:
Telephone: From UK: 0845 606 6389
From Overseas: +44 1224 857555
Website: www.funddistribution.org
Eligible investors in Aberdeen Progressive Growth Unit Trust ("Progressive") should shortly receive a letter from Aberdeen Unit Trust Managers Limited giving details of the Capital Uplift Plan. Investors in Progressive with any factual queries about the Capital Uplift Plan should call 0845 300 2890 between 9.00 am and 5.00 pm, Monday to Friday.
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Notes to Editors
1. The Firms are:
Aberdeen Asset Managers Limited
Aberdeen Asset Managers Jersey Limited
Aberdeen Private Wealth Management Limited
ABN AMRO Equities (UK) Limited
Brewin Dolphin Securities Ltd
Britannic Investment Managers Limited
Collins Stewart (CI) Limited
Collins Stewart Limited
Edinburgh Fund Managers Plc
F&C Asset Management plc (formerly ISIS Asset Management Plc)
Framlington Investment Management Limited
Gartmore Investment Limited
Govett Investment Management Limited (now called AIB Investment Management Limited)
HSBC Investment Management (International) Limited (the continuing company post merger of Le Masurier James & Chinn Limited)
HSBC Investment Residuary Limited (formerly HSBC Investment Bank plc)
Insinger de Beaufort (International) Limited
Jupiter Asset Management Limited
LeggMason Investments (Europe) Limited
Morley Fund Management Limited
New Star Asset Management Limited
Premier Fund Managers Ltd
Royal London Asset Management Limited
UBS AG (formerly trading as UBS Warburg)
The total package of approximately £194 million comprises the fund to be distributed by FDL of £143.03 million, the estimated cost of £43.30 million for the Capital Uplift Plan which Aberdeen Unit Trust Managers Limited has agreed to implement for investors in Aberdeen Progressive Growth Unit Trust who may otherwise have been eligible for a distribution from the fund and the estimated cost of £7.67 million in respect of payments that have been or are estimated to be made by the Firms to investors who may otherwise have been eligible for a distribution from the fund. The estimates are based on certain assumptions including that all offers made to eligible investors are accepted.
Enquiries to: Peter Neville, Director General
Tel: (01481) 712801
Fax: (01481) 712010
International Dialling Code: 44 1481
Email: [email protected]
Internet: http://www.gfsc.gg
The GFSC has been conducting an investigation into the activities of certain Guernsey-based fund managers and brokers within the split capital investment trust ("splits") sector between September 2000 and February 2002. The United Kingdom Financial Services Authority ("FSA") and the Jersey Financial Services Commission have also been conducting their own investigations into the splits sector. Each of the GFSC, the JFSC and the FSA have reached agreement to resolve these investigations. The names of those firms and banks that have reached agreement ("The Firms") are listed at the end of this statement.
AGREEMENT
The FSA, the GFSC, the JFSC and the Firms have agreed a package of approximately £194 million for investors. The Firms have agreed to contribute without admissions to a fund, which will be available for distribution to eligible individuals who invested in zero dividend preference shares ('Zeros') and in a number of specified unit trusts and other financial products that invested in Zeros. The fund is in addition to specific amounts paid or estimated to be paid by specific Firms to their investors including the Aberdeen Progressive Growth Unit Trust Capital Uplift Plan.
An overview of who is eligible to seek a distribution from the fund, the basis on which distributions will be considered, the process for assessing distribution and the method of payment is covered under Next Steps below.
The Firms have agreed to the publication of this statement for the purposes only of this agreement and without any admissions. The GFSC has made no determination of regulatory breaches or imposed any penalties.
The GFSC considers that this agreement is in the best interests of investors, for the following reasons:
The complexity caused by several features of this particular investigation, makes the outcome for many investors uncertain (even in the event of successful litigation): the differing capacities and involvements of the firms involved; the complexity of the matters under investigation; and the fact that investment trusts were not regulated products. This agreement brings certainty for eligible investors in Zeros.
In the event of litigation the process could take a number of years. This agreement will ensure that money is quickly available to eligible investors.
It has resulted in the agreement of the Firms based in Guernsey and Jersey, the GFSC and the JFSC to the establishment of an adjudication scheme.
Investors who are offered the opportunity to obtain a distribution will, of course, have a choice whether to accept it or not. If they accept it, it will be in full and final settlement of any claims or any remedies they may consider they would otherwise have. If they do not accept the offer, they will remain able to pursue their own claims or remedies including those arising under the adjudication scheme.
The United Kingdom's Financial Ombudsman Service provides an alternative means of dispute resolution for those investors who acquired holdings in any class of share of a split capital investment trust from or through a UK authorised entity. There is no such Ombudsman scheme currently operating in Guernsey or Jersey. Certain firms active in Guernsey, whose names are also listed at the end of this statement, have therefore agreed to the establishment of an independent adjudication scheme to provide an equivalent forum for resolving disputes over their Guernsey-based activities in the splits sector so as to mirror, as fully as practicable, the scope of the UK Financial Ombudsman Service arrangements. The adjudication scheme is designed to ensure that investors in the splits sector who were clients of the Guernsey firms identified at the end of this statement will have an alternative forum within which to pursue any complaints that they may have against the Guernsey firms in relation to their investments in the splits sector. The adjudication scheme has also been agreed by JFSC as a term of their settlement and will be operated in accordance with principles and rules agreed between GFSC, JFSC and the firms identified at the end of this statement. The scheme will be in operation by 1 May 2005. Further information relating to the operation of the scheme will be posted on the GFSC website in due course. The GFSC retains its right to seek compensation on behalf of investors who invested in split capital investment trusts through Guernsey firms not identified at the end of this statement.
SUMMARY OF MARKET ACTIVITY
During 2000 and 2001, several key events contributed to the start of the collapse of a number of splits. These events included the collapse of the value of technology stocks, a marked downturn in the FTSE 100 and a global fall in the value of shares following the events of September 11 in the United States. The impact of these events on the splits sector was affected by the existence of financial gearing and the level of cross-holdings within the sector.
The consequences of these events for the splits sector included a lack of new investor demand and a reduction in the cover available to meet the requirements under bank covenants.
Certain Firms sought to address these matters by embarking on a series of actions in what they viewed as (but which subsequently proved not to be) a short term market downturn. These included:
Undertaking new issues. It was recognised by some Firms that in view of the state of liquidity and demand in the market, the main potential purchasers of these new issues in significant amounts were splits themselves.
Several splits fund managers invested in the issues of shares by other splits resulting in cross-holdings of shares between different splits.
As a result of the lack of investor demand, the launching of new splits and the issuing of new shares by existing splits brought little new cash into the sector. The market capitalisation and gross assets of the splits sector was increased by a significantly larger amount than the amount of external cash coming into the sector.
Some of the Firms continued actively to promote the shares in splits during the relevant period. The problems of the Split Capital Investment Trust sector adversely affected investor confidence in investor funds and had a significant negative impact on the investment trust sector, in particular.
LESSONS LEARNED
The GFSC, FSA and JFSC have identified several areas where the investment industry must learn lessons, if investors are to renew their confidence in the investment sector and investment trusts in particular:
Practices which create misleading market information and impressions or conceal information, are not acceptable.
The rights of different classes of shareholders must be clearly presented. Regard must be had to the suitability of investments for a specific fund.
Firms must properly manage conflicts of interests. Where a firm manages or advises more than one investment fund, it must ensure that any transactions between such funds are conducted transparently, at arms-length and in the best interests of the investors in the funds affected.
Material promoting investment products must properly disclose the specific and significant risks relevant to the product and/or the market at the time it is being promoted. Where the risk characteristics have changed markedly over time it is the responsibility of firms to reflect these changes in promoting the product.
Investment decisions made by fund managers and advice given by brokers, should be motivated by proper consideration of the best interests of the investment fund they advise and their investors.
NEXT STEPS
A company, Fund Distribution Limited ("FDL"), has been set up to make distributions from the fund to eligible investors who invested in certain Zeros and in a number of specified unit trusts and other financial products that invested heavily in Zeros. Distributions will be focussed upon private investors and their small investment vehicles that held the specified financial products at any time between July 2000 and June 2002. An eligible investor will only be entitled to receive a distribution if the amount assessed by FDL in relation to them is at least £250 across all of their specified financial products. Further information about the criteria to qualify for the fund, including the list of specified financial products, is posted on the FDL website referred to below.
FDL will publish further details in the first quarter of 2005, including the application deadline. Investors will then have to apply for a distribution from the fund by that deadline. FDL will then inform applicants of their possible distribution. Applicants will have the opportunity to accept or reject this offer.
The current intention is that applicants who accept the offer will receive an initial distribution from FDL in the fourth quarter of 2005. If there are still monies available, subsequent distributions may be made with an intention to complete the distribution by the end of 2005.
Investors who do not accept an offer from FDL will retain their rights to take alternative action, including making a referral to the Financial Ombudsman Service or to the adjudication scheme referred to above, as appropriate, if they have jurisdiction.
Details of the adjudication scheme will be made available in due course.
FDL can be contacted by investors on any of the following:
Telephone: From UK: 0845 606 6389
From Overseas: +44 1224 857555
Website: www.funddistribution.org
Eligible investors in Aberdeen Progressive Growth Unit Trust ("Progressive") should shortly receive a letter from Aberdeen Unit Trust Managers Limited giving details of the Capital Uplift Plan. Investors in Progressive with any factual queries about the Capital Uplift Plan should call 0845 300 2890 between 9.00 am and 5.00 pm, Monday to Friday.
--------------------------------------------------------------------------------
Notes to Editors
1. The Firms are:
Aberdeen Asset Managers Limited
Aberdeen Asset Managers Jersey Limited
Aberdeen Private Wealth Management Limited
ABN AMRO Equities (UK) Limited
Brewin Dolphin Securities Ltd
Britannic Investment Managers Limited
Collins Stewart (CI) Limited
Collins Stewart Limited
Edinburgh Fund Managers Plc
F&C Asset Management plc (formerly ISIS Asset Management Plc)
Framlington Investment Management Limited
Gartmore Investment Limited
Govett Investment Management Limited (now called AIB Investment Management Limited)
HSBC Investment Management (International) Limited (the continuing company post merger of Le Masurier James & Chinn Limited)
HSBC Investment Residuary Limited (formerly HSBC Investment Bank plc)
Insinger de Beaufort (International) Limited
Jupiter Asset Management Limited
LeggMason Investments (Europe) Limited
Morley Fund Management Limited
New Star Asset Management Limited
Premier Fund Managers Ltd
Royal London Asset Management Limited
UBS AG (formerly trading as UBS Warburg)
The total package of approximately £194 million comprises the fund to be distributed by FDL of £143.03 million, the estimated cost of £43.30 million for the Capital Uplift Plan which Aberdeen Unit Trust Managers Limited has agreed to implement for investors in Aberdeen Progressive Growth Unit Trust who may otherwise have been eligible for a distribution from the fund and the estimated cost of £7.67 million in respect of payments that have been or are estimated to be made by the Firms to investors who may otherwise have been eligible for a distribution from the fund. The estimates are based on certain assumptions including that all offers made to eligible investors are accepted.
Enquiries to: Peter Neville, Director General
Tel: (01481) 712801
Fax: (01481) 712010
International Dialling Code: 44 1481
Email: [email protected]
Internet: http://www.gfsc.gg