Treasury Committee

Session 2002-03 No. 19                                          13 February 2003


Report published

The Treasury Committee today published its Third report of the 2003-03 session Split Capital Investment Trusts (HC 481-I).  (Volume II, containing the evidence, will be published shortly.  The oral evidence has already been published as HC 1089-i, -ii and -iii of session 2001-02.)

Note for Editors

A summary of the report appears at the front of the published volume.  An abbreviated version is overleaf.

The Chairman of the Committee, Mr John McFall MP (Labour, Dumbarton) said:

"We were highly disturbed by some of the evidence we received about what has gone on in the world of 'splits'.  People seeking a safe investment were misled into putting their money into investments which were anything but.  They have lost much more money than the falls in the markets generally.  A number of people in a number of firms may have been involved in serious wrongdoing.  We call for compensation and for the Financial Services Authority to investigate what happened thoroughly and to identify those who were to blame.  This will help to restore the reputation of the wider investment industry,  which was undeservedly blackened by the splits fiasco."

He is available for comment today: mobile: 07730987802  pager: 07644 004586

The Treasury Committee is a Select Committee of the House of Commons, appointed to examine the expenditure, administration and policy of the Treasury, the Inland Revenue, Customs and Excise and associated public bodies.

Split Capital Investment Trusts: Treasury Committee Report

Abbreviated Report Summary

'Splits', zero shares and risk

Split capital investment trusts are investment trusts with different classes of share, including >zero= shares designed to be low risk compared to the other shares. There has been a major expansion in splits since the mid-1990s.  The last two years  have seen major losses: many splits with zeros are in significant trouble, with an estimated loss for the zero holders of ,667m.

The Committee concludes that many zeros launched in the late 1990s were not, in adverse market conditions, low risk  Even their designers appear not to have fully understood how they would react to falling markets. The fact that the market conditions at which they would be at risk were not in historical terms likely did not justify them being sold as low risk.


The Committee deplores the inadequate warnings given about risk.  In looking at  possible compensation, the statements of risk in the promotional material must be assessed in the context of the way in which clients were led to believe that zeros were a safe investment. It was insufficient for the warnings to be little more than small print.  We suggest it may be in the interests of the investment trust industry to go beyond what they might regard as their legal obligations as regards compensation.

 Collusion and a 'magic circle'

Beyond questions of risk and mis-selling alone, there are suggestions of a network of improper conduct, with professionals in the splits sector working with each other in some form of >magic circle= at the expense of the investor.  There have been particular allegations about mutual share support operations to shore up the position of funds facing difficulties.  We have been left in little doubt that there is substance in the suggestions that there was some form of >magic circle= operating in a manner harmful to the interests of shareholders. The investigations currently being undertaken by the FSA should cover the full range of issues, with the results published.  If there are findings of significant misconduct, then very severe penalties would be appropriate and there should be wider redress for investors who have suffered losses.

Corporate governance, regulation and the FSA

We welcome the swift issue of a consultation paper by the FSA on improvements to the corporate governance of investment companies.  We recommend bringing investment trusts directly within the scope of regulation by the FSA. Against the background of the FSA=s overarching responsibility for the proper conduct of the financial world, it was not as pro-active as it might have been in responding to the developing dangers (partly because it was not directly responsible for investment trusts).