Big guns defy Sheriff Tiner in splits fight

JOHN Tiner is learning the hard way that aiming at a target does not always result in hitting the bullseye. The chief executive of the Financial Services Authority (FSA) summoned the bosses of 21 firms involved in the split capital trust industry two months ago and demanded that they compensate those who lost money holding these investments.

He expected them to contribute to a multi-million pound fund, pay whopping fines and agree to be publicly censured for even getting involved with splits.

Unfortunately for Tiner, 18 firms found his evidence of their wrongdoing about as worrying as a chocolate bullet. Indeed five were so underwhelmed that, with their lawyers' blessing, they have told him where to stick the gun.

These are not firms that normally rebel against authority. The five include HSBC, Switzerland's UBS - chaired by former Home Secretary Lord Brittan - and Holland's ABN Amro. They are the sort that would pay fines without a whimper for neglecting to tick the obligatory boxes that this regulator so loves, but they believe that Tiner has overstated this saga, their role and indeed his.

To put this in context, the decline in the stock market capitalisation of 3i, a stalwart of the FTSE 100 index, was greater than the money lost by split capital trust investors over the same period.

The Association of Investment Trusts says that holders of zeros, a particular form of splits, lost £550m - and that private investors accounted for £310m of the sum. It implies that holders of zeros should be repaid in full. (Incidentally the FSA has yet to calculate what it views as appropriate compensation).

Such a magnanimous gesture would suggest that every single investor in zeros was wrongly advised to buy the product. Not only is this madness, but it is particularly hard for the FSA and the Association of Investment Trusts to argue since both promoted zeros as low risk.

Indeed, Tiner actually told a Treasury Select Committee in 2001 that there was little evidence to suggest investors were mis-sold splits.

Perhaps this is why Kenneth O'Donnell, manager of Enforcement and Market Integrity, informed several firms before Easter that the authority would not proceed with its mis-selling case. It is also why chief Press officer Rob McIvor is ill-advised to baldly state to me: 'These people ripped off consumers.' Such a comment could be seen as highly prejudicial to the case.

Instead, O'Donnell has said he is keen to examine if the structure of the trusts was flawed. Leaving aside the fact that the FSA has to approve the prospectus (and hence structure) of any financial instrument, such a case will be hard to prove. It is well known that the precipitous decline in the stockmarket led many firms to restructure the splits. Just over 20 trusts collapsed and meetings were held to discuss the capital that had to be raised to prevent the demise of a further 23.

The FSA describes this as collusion. But the firms had to work together. Many split trusts were set up solely to invest in other splits. These would have collapsed like a pack of cards if the firms had not acted in tandem.

What would be the use of sticking a finger into a hole in a leaking bucket, only to ignore the other 22 holes? Their action could be likened to a rescue manoeuvre. In fact, the Bank of England used to organise similar 'lifeboats' when financial institutions ran into difficulties.

The FSA's investigation into the splits debacle is the biggest the regulator has undertaken. It says 60 staff have reviewed the transcripts of 27,000 phone calls, 51,000 records and 780 files over the past two years, but estimates that it has a further two years to go.

The obvious conclusion is that Tiner would have 'advanced straight to go' if his sleuths had uncovered compelling evidence of wrongdoing. According to the 21 firms, the transcripts of six conversations he displayed at his summit did not fall into that category. And surely he would have revealed his most impressive weapon to worry the prey?

But Tiner is lucky in that most firms want to draw a line under this saga. It is never ideal for investors to feel ripped off. And the firms want to sort that out, move on and be spared the ongoing legal bills racked up by the FSA investigation.

At most, these firms will save £5m apiece - and possibly this is the sort of sum they may each be willing to contribute to a fund for investors, but only if the regulator drops further action against them and the individuals working for them.

That would mean a total fund worth about £100m to compensate investors. The firms' action is entirely voluntary, leaving Tiner with a choice. He can accept and present himself as the champion of the consumer.

Or he can carry on firing at a target that is rapidly moving away.