'£196m for split scandal victims'

THE Financial Services Authority is on the verge of wresting £196m from City firms to compensate thousands of people who lost money in the split-capital investment trusts scandal.

The settlement will follow months of wrangling with companies desperate to avoid being held liable for fear of being pursued further by investors.

In what is the first time the FSA has taken on a whole industry, the outcome will be seen as a qualified success as the settlement was far lower than the regulator's target of £350m. About 20,000 investors are estimated to have lost £600m when the trusts collapsed.

The long drawn-out process stalled time and again as companies battled hard to avoid stumping up compensation. Now, after some last-minute wrangling over logistical details, the deal could be unveiled today.

The FSA is said to be still waiting for one signature on the settlement which involves some 18 firms, a new body administering the fund, the establishment of some 21 websites, a customer helpline and a 10-point question-and-answer document for consumers.

Splits were sold from the late 1990s as safe investments, carrying little risk of heavy losses. One offered by Aberdeen Asset Management even described itself as 'the one-year-old who lets you sleep at night'.

But the products collapsed in value after the stock market plummeted in 2000. It later emerged splits had been investing in each other, creating a so-called 'magic circle'. When one went down, they all did.

Aberdeen last week postponed its results, saying an FSA settlement was imminent. Since then, speculation has been rife that the parties would fall into line before Christmas.

{1}But earlier this week, Exeter Fund Management's owner Iimia said it could not contribute as it had inadequate funds. Several brokers and asset management firms are in similar situations. Exeter's departure followed that of BFS and BC, two asset managers which had been at the forefront of selling splits to an unsuspecting public.

FSA chairman John Tiner is likely to be breathing a sigh of relief. His predecessor, Sir Howard Davies, was pilloried by MPs on the Treasury Select Committee for being 'asleep on the job' at the time of the scandal.

A breach of trust

Split-capital investment trusts are investment companies with two classes of shares - one offering capital growth, the other high income. They were sold, in many cases, as low-risk investments and about 20,000 customers bought them.

However, while claiming to offer peaceful nights to their customers, the trusts were, in fact, highly geared with debt and risky. When markets collapsed in 2000, they stacked up enormous losses. The situation was made exponentially worse by the fact they were investing in each other, so when one split fell, they all did.

Allegations were later made that the trust managers colluded in a 'magic circle' to prop up each other's valuations.

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