FSA moves to ban leading player in split caps scandal

The Financial Services Authority, the City's regulator, has moved to block one of the key architects of the split-caps debacle from ever working in the industry again.

The Financial Services Authority, the City's regulator, has moved to block one of the key architects of the split-caps debacle from ever working in the industry again.

The FSA wanted BFS Investments, one of the largest providers of split-capital investment trusts, to contribute as much as £10m to £15m to the compensation fund it has set up to compensate investors. However, the company, which is still run by its founder and principal shareholder Tony Reid, no longer has any significant assets on its balance sheet, after he paid himself dividends of more than £7.5m between 2000 and 2002.

Consequently BFS has been thrown out of the Financial Services Authority's settlement talks by the 20 other companies involved, after they lost patience with its claims that it was unable to contribute anymore than a seven-figure sum to the compensation pot. The firms are being led by John Duffield's New Star Asset Management.

BFS now faces a potential battle against the regulator in the Financial Services & Markets Tribunal, unless Mr Reid, agrees to demands that he pay up more money and quit the industry.

In his first interview since the FSA's split-cap investigation began, Mr Reid maintained that he had made the best possible offer, admitting he was frustrated by the decision of the other groups to eject him from the talks.

"What we offered to pay, as a percentage of our balance sheet, was probably higher than anyone else," he said. "We are very supportive of the settlement. We think it is very unfortunate that we were thrown out of it. But we can't force people to take our contribution. We are in a difficult position because the groups that are settling and threw us out, threw us out for commercial reasons, but we are still an ongoing group in the sector."

Mr Reid said he could understand that investors may feel aggrieved by the fact that he had paid himself so well while the sector was in decline, but added that the generous payments had stopped by the time the FSA's investigation began. "Obviously, ours is a private company," he continued. "There were a very large number of years when we put money into the company, so when it started making profits, we got dividends back out of it.

"If we had known what was coming round the corner, maybe there are lots of things we would have done differently. But if someone asks you to repay your salary of two or three years ago, you might find that quite hard, because you would have spent it.

"I feel sympathy for anyone who lost any money, and we have done everything we can do to ensure that our funds have performed as well as they could." He added that he did not believe any of BFS's funds were bought by private investors after the sector's troubles had begun. As a result, he said, all of them had had the opportunity to sell out of the funds at a profit.

The FSA is believed to have asked Mr Reid to leave the industry. While he would not confirm or deny whether this was the case, he said: "Even if they did ask me to do that, you could understand that it would be pretty difficult for BFS - because myself and the small team that run it are an integral part of BFS.

"I feel committed to see it through one way or another. I would do whatever I thought was in the best interests of the company and myself. I think [my leaving the industry] is extremely unlikely to be in the best interests of all parties."

BC Asset Management, a small player in the split-cap sector, was also ejected from the talks. The remaining 20 firms are set to complete their settlement as soon as today, with an agreed compensation package of about £200m.

The individuals that the FSA is pursuing have been split into three categories. The majority of those in the FSA's most serious category have agreed to stop working in the industry. A second group of individuals have agreed to accept private warnings which will go on their record. While a third group will be sent on retraining courses.

Meanwhile, Mike Ellis, the former group finance director of HBOS, has been appointed as commissioner of the split-capital settlement fund, and will be in charge of handing out the compensation to those that lost money from the split-capital debacle. To qualify for the compensation, investors will have had to have owned a zero dividend preference share between the middle of 2000, and the middle of 2002. They will then have to submit a claim for their losses by a defined closing date which has yet to be decided.