FSA 'freezes' funds in splits clash

THE funds of some of the 21 firms at the heart of the split-capital trusts scandal have effectively been frozen by the City regulator.

The Financial Services Authority has written to 'many' of the companies and warned that if they sell assets, the money should be retained in case a major compensation award is made against them, Financial Mail understands.

The FSA is negotiating with companies that sold the trusts to consumers who thought the products were lowrisk. Thousands of investors are estimated to have lost up to £600 million amid allegations of collusion and misselling by the firms.

Exeter Fund Managers has already disclosed that it has been told to hold back the £310 million it raised from the sale of its unit trust business to rival New Star. But only now has it emerged that many other firms are under similar restrictions. A number of companies that sold split-capital trusts have ceased paying dividends, including BFS and BC Asset Management. BFS results contain a caveat from auditors that there is a 'fundamental uncertainty' over the future of the firm because of the potential impact of the splits inquiry on the company.

The FSA does not have a strict power to control dividend policy at companies, but it has reminded the smaller firms that their licence conditions could be varied on the grounds that there is a risk that assets could be dissipated.

The disclosure comes as the FSA enters the final stages of negotiation with firms. One industry source said: 'The companies all know the evidence against them. Those that cooperate will be able to settle fast and will be treated correspondingly. The FSA is hoping that when customers of recalcitrant firms see other people receiving cheques, greater pressure will come to bear.'

The strategy was part of a plan to isolate the companies and break down resistance. 'In the past, people have talked about a magic circle of fund managers doing secret deals,' the source added. 'A better way of looking at it might be concentric circles - it is quite clear that some firms are more guilty than others.'

He insisted that firms had been shown 'smoking gun e-mails' apparently revealing collusion between fund managers over cross-investment. However, some lawyers were advising clients that they could be defended in court as 'banter'.

Regulators have warned firms that if such 'banter' was followed by any kind of action, public confidence in them would be destroyed.