Payouts over 'unethical' unit trading

THE Financial Services Authority has uncovered evidence of unethical trading in unit trusts and says compensation will be paid to some funds that have lost out.

The City regulator announced its findings after a lengthy investigation into so-called market timing - the practice of professional investors exploiting stale prices in unit trusts to the detriment of millions of unitholders and other collective investment schemes.

Michael Foot, FSA managing director, said: 'There is evidence of market timing having occurred within our authorised funds.'

But he added: 'The picture we have uncovered is generally quite an encouraging one. We can find no sign either that market timing is widespread or that it has been a major source of detriment to long-term investors.'

The FSA declined to name the small number of guilty firms that allowed market timing or to say how many small investors had been hurt. It would be up to the firms to decide how much compensation to pay to funds, it said.

The FSA said there was no evidence of so-called late trading - the more serious and illegal practice of trading in a unit trust after its valuation point.

The FSA said it had asked fund managers to calculate the effect of market timing 'and it is expected that this will form the basis for compensating payments to be made to the funds in some cases'.

There was no evidence of collusion between hedge funds and fund managers, it said. The total amounts were still being calculated but were likely to be less than £5m.

The FSA examined 9,620 trades as part of its probe, of which 118 required further inquiries with on-site visits.