Robert Budden: A pill for the splits headache

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It looks like the final chapter in the long-running split capital investment trust saga is drawing to a close.

As our front page story on FT Money reveals, the vast majority of investors who lost money and who applied for compensation under the industry-funded scheme have decided to take what they have already been offered. A small number – around 4 per cent – failed to respond to FDL. Under the rules of the scheme, these investors will not receive any compensation.

Of the remaining 96 per cent, Fund Distribution Limited, which is administering the scheme, will only say that “the overwhelming majority” have accepted the compensation being offered.

Using simple maths, it looks likely therefore that investors will eventually receive compensation equalling a little over half of their total losses. Back in March FDL announced that it was offering a first payment equal to around 40 per cent of investors’ losses. Additional cash totalling almost £30m was being kept back just in case there any compensation miscalcuations occurred. Assuming there are no nasty surprises, investors should therefore see a further payment equivalent to just under 10 per cent of their losses. This likely extra cash, when added to any money which will be put back in the pot from those who have declined compensation, should mean investors get a little over 50 per cent back.

This is clearly better than nothing, although I’m sure many investors still feel they are getting a raw deal.

Zero dividend preference shares, the lowest risk share class of split capital investment trusts, were widely touted as low-risk investments, despite the fact that the risk profile of these shares varied enormously. In some cases, a lethal cocktail of high bank borrowings and cross shareholdings in other split capital investment trusts, meant some zero divdend preference shares went into freefall as soon as market sentiment turned. It is not surprising therefore, as my e-mail inbox will testify, that some investors have accepted any compensation money rather reluctantly.

It would have been helpful if the Financial Ombudsman Service publicised before the FDL acceptance date, the numbers of people to whom it had offered misselling redress. Remember, under the ombudsman scheme, if it finds in your favour, any redress is paid out in full.

Before the deal was finalised, the FOS refused to disclose details of how it dealt with splits cases. Its argument was that it did not want any of its information to be interpreted as advice by investors.

I still contend that this was the wrong approach. When weighing up whether to accept the FDL money, investors had to take a view on whether they had a chance at winning compensation from the FOS.

But now that the FDL deadline has gone, the ombudsman has confirmed that it has come down in favour of the consumer for between 30 and 40 per cent of splits cases – in line with other financial services disputes.

This information is of little use to zero investors who have already accepted the FDL deal. But for income share investors (income shares are not covered by the FDL scheme) these revelations indicate they stand a chance of recouping some of their losses by taking their case to the ombudsman.

Investor confusion

Depolarisation. There’s a word that still confuses me. Every time I read it, my brain for some reason needs a few seconds to get into action. It appears I am not alone.

The depolarisation regime celebrated its second anniversary this week. Yet most people still don’t seem to know what it is or what it really means.

It’s supposed to have ushered in a regime of different layers of financial advisers – some offering advice related to all products in the market, some tied to just one provider and some in between. These various levels of advisers are supposed to explain clearly to individuals which camp they fall into.

If they are, it’s not working. Research conducted on behalf of IFA Promotion found that 84 per cent of adults don’t understand the different types of financial advice available and almost three quarters who had seen an adviser thought he or she was independent when the reality is likely to be far less. Is it time for another mystery shopping exercise by the regulator?

rob.budden@ft.com

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