Memorandum submitted by the Financial
In the light of the Committee's continuing interest
in split capital investment trusts, and in response to their letter
of 26 September,
outlines the investigations which
the FSA has now begun into various aspects of firms' conduct in
summarises possible redress arising
from FSA enforcement action;
describes other work in hand; and
describes the arrangements operated
by the Financial Ombudsman into handling complaints by investors
1. In his evidence on 11 July, John Tiner
reported to the Committee that the FSA had already begun enforcement
investigations into promotional and marketing material issued
by authorised firms in respect of split capital investment trusts.
These investigations are continuing.
2. He also told the Committee that we were
conducting enquiries into alleged collusive behaviour among authorised
investment managers of a number of splits and that those enquiries
might also lead to a formal enforcement investigation.
3. Following the conclusion of those enquiries,
we have now launched a formal enforcement investigation into the
issue of collusion in the Splits market consistent with the provisions
of the Financial Services and Markets Act. The FSA will not name
the firms concerned or comment further on the subject matter of
the investigations at this stage. Nor can we speculate on possible
outcomes or on the possible culpability of particular firms and/or
individuals, as any such speculation could prejudice our investigations.
4. These types of investigations are, by
their nature, complex and time consuming, and we would not expect
the outcomes to be known for some time. As John Tiner noted in
his oral evidence last July, the enforcement investigation could
take at least 12 months to reach a conclusion, and longer in the
event of a referral to the independent Financial Services and
Markets Tribunal. The Financial Services and Markets Act 2000
requires the FSA to follow due process in such proceedings; details
are set out in the FSA's Enforcement Manual.
5. We would confirm to the Committee that
we are dedicating significant resources to our investigations
and also to our consideration of the wider issues, as discussed
below, and that progressing and finalising our work in this way
remains a high priority for the FSA. We are very conscious of
the concerns of a large number of investors who have lost, or
are at risk of losing, a substantial sum of money.
FROM FSA ENFORCEMENT
6. The investigation may, of course, conclude
that there is no evidence of any contravention or misconduct,
in which case no further action would be taken. Even if there
is evidence of a contravention or misconduct, the FSA may still
conclude that no action is appropriate having regard to the circumstances
and its policy on the exercise of its powers. However, there is
a range of possible disciplinary and other enforcement actions
that could result. These could include criminal prosecution under
section 397 FSMA
(pre-N2 section 47 FSA), imposition of penalties for market abuse,
rule breaches and breaches of high level principles. FSMA penalties
include public censure, fines, and, if appropriate, the withdrawal
of authorisation or approval. If there are fitness and propriety
issues in relation to key individuals, the making of prohibition
orders might also be a consideration.
7. The FSA also has a power under section
384 FSMA to make restitution orders against a firm if it is satisfied
that it has contravened rules, principles or that it has engaged
in market abuse or committed an offence under FSMA. This power
is exercisable if it can be shown that profits have accrued to
the firm as a result of the contravention or that one or more
persons have suffered loss or otherwise been adversely affected
as a result of the contravention. The power is a power to require
the firm, in accordance with such arrangements as the FSA considers
appropriate, to pay to the appropriate person or distribute among
the appropriate persons such amount as appears to the FSA to be
just in the circumstances. The FSA's decision to exercise this
power can be referred to the Financial Services and Markets Tribunal.
8. The FSA Enforcement manual sets out guidance
on the FSA's criteria for determining whether to exercise its
powers to obtain restitution (Chapter 9.6). These include the
number of persons who have suffered loss and the extent of those
losses, the cost to the FSA of seeking redress, the solvency of
the firm and the availability of redress to the consumers by other
means, eg the Financial Ombudsman Service (FOS). The FSA's power
to obtain restitution is not intended to duplicate the functions
of the FOS, but in certain cases it may be more appropriate for
the FSA to pursue restitution. Generally the FSA anticipates that
many individual losses may be more efficiently and effectively
redressed by consumers pursuing their claims directly with the
firm concerned or through the FOS. However, where a large number
of persons have been affected or the losses are substantial, it
may be more appropriate for the FSA to seek restitution.
9. There is also a power under section 404
FSMA for the Treasury to authorise the FSA to establish a scheme
for reviewing past business if it is satisfied that there is evidence
suggesting that there has been widespread or regular failure on
the part of authorised firms to comply with rules relating to
a particular kind of activity and that as a result private persons
have suffered loss in respect of which authorised firms are liable
to make payments. Firms are required to comply with such a scheme
in order to establish the nature and extent of the failure, the
liability of the firms, and the amounts payable by way of compensation.
10. All the above relates to our investigations
into the issues relating to the current situation in the Splits
sector and how it arose. As reported in the Update document we
issued in May, we are also reviewing the regulatory regime that
encompasses Splits and the extent to which the detail of the underlying
portfolios of Splits might be disclosed.
11. We have met Derek Higgs to examine any
common interests between his review of the role of non-executive
directors of companies in general and the review of the Listing
Rule requirements in respect of independent directors of Splits.
Our review of the Listing Rules in their entirety is a longer
term activity, heavily influenced by proposed European Directives,
where terms have not yet been finalised, but consideration is
being given to the specific rules applicable to investment companies
and trusts as a whole and to Splits in particular.
12. The Association of Investment Trust
Companies is still working to increase the level of voluntary
disclosure made by Splits and we have continued to support this
move. We have not yet been able to assess the effectiveness or
value to consumers of their initiative. If it is found to be valuable
and comprehensive we will probably see no need for further action
by the FSA. However, if the AITC's initiative does not achieve
all that is hoped we will look further at the benefits of making
an appropriate amendment to the Listing Rules.
13. Separate from the ongoing investigations,
we have alerted investors, through our website, the media and
indeed our appearance before the Committee in July, to their rights
to complain if they feel they were misled at the time they acquired
14. The complaints process has two stages.
Investors must in the first instance raise their complaint with
the firm concerned. If they are dissatisfied with the outcome,
they have the right to refer the case to the FOS. Any award made
by FOS is binding on the firmbut not on the investor, who
may take the matter to court.
15. Generally, the FOS has power to deal
with complaints relating to regulated activities carried on by
authorised firms. In the case of complaints relating to the marketing
of investment trust shares which took place prior to the Financial
Services and Markets Act coming into force (1 December 2000),
the FOS must decide whether a complaint is one which could have
been dealt with under one of the former complaints schemes, particularly
those established by IMRO and the PIA. The FSA's Consumer Help
what split capital investment trusts are and sets out the circumstances
in which investors may be able to complain.
16. Investment trust shares are sold in
a variety of ways and, if consumers claim to have bought on the
strength of something which was misrepresented or mis-described,
whether the claim falls within the jurisdiction of the FOS will
depend upon the particular circumstances of the case. That said,
there are some generic approaches, which are likely to be applicable
in a significant number of cases. As a matter of principle, neither
the FOS nor the regulatory system generally will compensate the
consumer merely for poor investment performance. A complaint should
only be upheld where a firm has not complied with a duty owed
to the consumer.
17. The broad categories through which consumers
may have acquired their interests are as follows:
Execution only and prospectus sales
18. Consumers who purchased investment trust
shares without having seen or relied on a prospectus or marketing
brochure and who may simply have instructed a stockbroker to purchase
shares will not have grounds to complain about mis-descriptions
in any marketing literature.
19. Similarly, those who may have acquired
shares solely on the strength of the information contained in
a trust prospectus will not have a right to complain to the FOS
about the prospectus and the investment trust company which issued
it. This is because the investment trust company was not required
to obtain authorisation (this continues to be the case under FSMA)
and because the prospectus and listing particulars for the trust
were excluded from the investment advertising regime which operated
under the previous legislationas they continue to be under
the new financial promotion regime.
20. Where consumers invested as a result
of advice given to them by an authorised firm (for example an
IFA, a stockbroker or a portfolio manager), FOS will be able to
consider complaints from consumers about the quality of the advice
which they have received. The Ombudsman, in considering any such
complaint, will do so against the standards expected of advisers
at the time the advice was given.
Marketing by the manager
21. In many cases the trust shares will
have been promoted by the investment management firm responsible
for managing the trust assets (or by a marketing associate of
such a firm).
22. In doing so the manager may have designed
and issued brochures, leaflets and other sales literature which
were intended to encourage potential consumers to buy trust shares
and which may, for example, have described trust shares as "low
risk" or as being comparable to deposits.
23. It is expected that the FOS will have
jurisdiction to consider complaints about marketing material in
a number of cases, for example where:
the brochure or literature did not
merely contain information but recommended that consumers should
buy particular investment trust shares; or
a brochure included a reply slip
or application form by which the investor could apply to the manager
for shares; or
the manager directed those responding
to an advert to another person who would be able to fulfil an
order for shares; or
wherever the manager has maintained
arrangements to facilitate deals by consumers in investment trust
24. The Ombudsman will consider whether
complaints fall within the FOS jurisdiction in the circumstances
of each case. As at 4 October, the Financial Ombudsman Service
had 950 live cases relating to splits, against a total of 147
25. We are also aware that some firms may
be considering offering investors such redress for the losses
they have sustained in the splits market. We will discuss with
the firms concerned how such offers should be described to investors
and, together with the FOS, assess their impact, if any, on redress
that may otherwise be awarded.
11 October 2002
Note on the Financial Ombudsman Service
1. The Committee agreed that it would be
helpful if the Financial Ombudsman Service attended the evidence
session on Split Capital Investment Trusts on Tuesday 22 October.
2. This note explains the role of the Financial
Ombudsman Service and the legislative background and sets out
our powers. This note also provides some key statistics, and describes
our process in general terms.
3. The arrangements for handling complaints
by investors in Split Capital Investment Trusts is set out in
the FSA's memorandum (paragraphs 13 to 25) accompanying FSA's
letter to the committee of 10 October 2002.
4. The Financial Ombudsman Service is established
under the Financial Services and Markets Act 2000 (FSMA) which
provides for a scheme "under which certain disputes may be
resolved quickly and with minimum formality by an independent
5. The scheme is funded entirely by compulsory
levies and fees on firms in the financial services industry.
6. Access for retail consumers to an independent
mechanism for dealing with complaints about financial services
firms is a key part of the financial services regulatory regime.
7. The Financial Ombudsman Service took
on its full powers on 1 December 2001 when FSMA came into force,
having replaced the eight complaint handling bodies that existed
8. Under FSMA, the compulsory jurisdiction
of the Financial Ombudsman Service covers FSA authorised firms
in respect of regulated activities and some specified unregulated
financial services activities. Transitional arrangements enable
disputes arising from events that occurred before 1 December 2001
to be handled by the service. The scheme covers all types of regulated
investment business (endowments, unit trusts, income bonds, life
assurance, investment advice, share dealing, personal pension
plans), banking services (mortgages, savings and current accounts,
bank loans), and insurance policies (motor, household, travel,
9. In determining disputes the ombudsman
service performs a quasi-judicial function. FSMA provides that
a complaint is to be determined by reference to what is, in the
opinion of the Ombudsman, fair and reasonable in all the circumstances
of the case. In considering what is fair and reasonable, the Ombudsman
will take into account the relevant law, regulators' rules and
guidance and standards, relevant codes of practice and, where
appropriate what he considers to have been good industry practice
at the relevant time.
10. The Ombudsman's decision is binding
on the firm if the complainant accepts it; there is no route of
appeal for the firm. If the complainant rejects the decision,
the complainant remains free to go to court.
11. An Ombudsman's decision can include
a money award which is binding on the firm up to £100,000.
12. Our key statistics reveal:
388,239 phone and written enquiries
received last year;
43,330 complaints requiring investigation
a budget of million; and
a current staff complement of 500
including, 15 ombudsmen and 250 adjudicating staff.
12.1. About a third of all complaints currently
relate to mortgage endowments. After that, complaints about personal
pensions and mortgage loans represent the next two largest areas
12.2. Complaints are investigated by examining
documentation submitted by both parties, contacting one or both
parties for clarification where relevant. The ombudsman has power
to require information or documents. It is rare for hearings to
12.3. In a case of any complexity it is
usual to for the party likely to "lose" to receive an
initial view letter setting out the reasons why that view is taken.
This provides the opportunity for further representations to be
made before an adjudication is issued to both parties. Either
party can then ask for a review and final decision by an Ombudsman.
12.4. On average 45 per cent of investigations
are concluded within three months and 75 per cent within six months,
96 per cent within 12 months but these figures of course include
some quite wide variations.
18 October 2002
3 Not printed. Back
HC 1089-i, Session 2001-02. Back
Financial Services and Markets Act 2000. Back
Insurance Ombudsman Bureau; Office of the Banking Ombudsman;
Office of the Building Societies Ombudsman; Personal Investment
Authority Ombudsman Bureau; Office of the Investment Ombudsman;
Securities and Futures Authority Complaints Bureau; FSA Complaints
Unit and Personal Insurance Arbitration Service. Back