FSA seeks views on regulation of Split Capital Investments
17/12/2001
The Financial Services Authority is calling for views on the regulation of Split Capital Closed End Funds (SCCEFs), focusing particularly on the areas of disclosure, governance and the guidance offered to financial advisers who recommend these investments. In a Discussion Paper published today, the financial watchdog also clarifies its jurisdiction over different aspects of the sector, reports back on its recent research into the sector and sets out where it is carrying out further work.
The FSA gathered data at the end of September 2001, on 113 SCCEFs, in the light of concerns that a number were breaching asset-to-loan ratios agreed in their banking covenants due to the volatility in world-wide equity markets. The key findings were that:
- The sample had total gross assets of 13.8bn and debt of 4.8bn, giving a total gross asset to debt ratio of 2.88.
- The sample had total holdings of other SCCEFs of around 17% of gross assets.
- 20 per cent had holdings of more than 40 per cent of their gross assets in other SCCEFs.
- 10 per cent had holdings of more than 68 per cent of their gross assets in other SCCEFs.
The funds with high total holdings in other SCCEFs tend also to have high levels of gearing. There is a negative correlation between the percentage holdings of other SCCEFs and the gross assets to debt ratio. This suggests that a minority of funds within the 113 analysed are vulnerable to adverse market conditions unless their level of debt or cross-holdings is reduced.
The Discussion Paper also explains the regulation of the sector. SCCEFs are not authorised products regulated by The Financial Services and Markets Act 2000 (FSMA), unlike, for example, unit trusts or open ended investment companies. The main regulatory provisions that apply to SCCEFs are the Listing Rules, as nearly all are listed on the London Stock Exchange, and the FSAs Conduct of Business rules.
As a part of its ongoing review of the sector, the FSA is considering the role of disclosure. It supports the current AITC initiative in this area and is considering whether the Listing Rules should be amended to improve the level of disclosure for SCCEFs.
The Conduct of Business rules cover investment advice to potential investors and decisions on the discretionary management of private client portfolios. The authority has expressed concerns in the past about the level of advisers and consumers understanding of the capital structures of SCCEFs and the risks involved in investing in them. This topic is being researched further.
The paper also reports that the FSA plans further research into allegations of collusive behaviour by the authorised investment managers of a number of SCCEFs. This could be an issue covered by the The Code of Market Conduct in the Market Conduct Sourcebook or a breach of its Principles for Business.
Notes for editors
- Split Capital Closed End Funds (SCCEFs) include split capital investment companies and split capital investment trusts. An investment company can become an investment trust by complying with the requirements of section 842 of the Income and Corporation Taxes Act 1988 (ICTA).
- The discussion paper is available on the FSA website www.fsa.gov.uk and from its Publications unit, telephone: 0845 608 2372.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.