The Financial Services Authority has extended an investigation into the way unit trusts are traded in Britain to establish whether specialist market traders and speculators might be abusing privateinvestors in a similar fashion to the so-called “market timing” scandal in the US.
The American mutual fund industry has been hit by an attack from the New York attorney general, Eliot Spitzer, who discovered that a number of mutuals were allowing hedge funds to trade in and out of their investment funds at advantageous prices. The effect was to skim profits from ordinary members of the public, who in America use mutual funds as a popular way to save.
In Britain, the unit trust sector carries out a similar function to mutuals in the US, but until this weekend financial regulators in London had played down suggestions that the industry might be similarly affected by market abuse.
However, in an interview with the Financial Times, Callum McCarthy, the new chairman of the Financial Services Authority, confirmed that an inquiry was under way.
“We’re investigating to see whether there have been problems of [market] timing,” he said, adding: “We have done a first cut and that first cut has emphatically not given us the answer that there is ‘no prospect of this happening in the London markets’. We’re therefore doing a second cut to try to clarify the position.”
The regulator is thought to have sent questionnaires about a month ago to all the main financial firms which sell unit trusts, collecting data about the way they are priced. Buy and sell prices for units are set once each day, after a calculation of the value of the underlying assets in the trust, but there have been questions over whether these end-of-day valuations properly take account of all underlying price moves.
Mr Spitzer’s clampdown in the US, which has led to a wave of sackings and resignations at affected firms, has already begun to affect British firms.
Two executives formerly working for Old Mutual, the South African insurer listed in London, recently became the first to be charged with fraud over the affair, while Amvescap, the British fund management arm with a large American business, has admitted that it is cooperating with Mr Spitzer as he continues with his investigation.
Mr Spitzer’s investigation into Wall Street’s activities during the dotcom boom forced several big firms to agree to multi-million dollar settlements. With the market timing affair he has promised that some target firms “will cease to exist” by the time inquiries are finished.
