Splits gap not too big to bridge

THE odd thing about the collapse of negotiations between the Financial Services Authority and the split-capital investment trusts industry was that it was in everyone's interests to get a deal. The FSA would have been able to close off its biggest and most costly investigation, the industry would have got closure and been able to move on, the investers would have got some compensation and the insurers would have paid a little out now but been relieved of the danger of paying much more later on. Normally when a deal is in everyone's interest, it gets done.

It has been suggested that the FSA approached the talks not so much as a mediation but as an accelerated disciplinary process, which put a few backs up. But the industry gave as good as it got. Regulators are accustomed to people kowtowing when they appear before it. New Star's John Duffield, and Collins Stewart's Terry Smith, negotiating for the industry, could not be accused of that.

But for all that, the FSA decision to pull the plug on the talks seems more political then economic. While the talks were generally cordial, reports of the negotiations spun out of control in the newspapers and left the FSA on the defensive.

Given the political interest in this issue and the looming prospect of another meeting of its top people with the Commons Treasury Select Committee, it may be that the FSA decided to break off talks now rather than agree to a deal which might risk it looking weak later on. The gap between the two sides meant it would have had to concede too much to get a deal and that would have meant a public loss of face - which was too high a price to pay.

It was easier in the old days. The Bank of England would have got everyone in a room, told them what they were going to pay and not let them out until they agreed. And no one would have been any the wiser until the completed package was unveiled.

The FSA talks could not even include everybody. The two organisations with the deepest pockets, HSBC and UBS, refused to get involved because they could see themselves footing the bulk of the bill. But small organisations at the bottom end, like Exeter, were willing to chip in what they could afford - about £8m.

Nor was the gap as wide as might have been thought or the raw numbers suggest, but it was rooted in a difference of principle. Both sides agreed the total losses were between £650m and £700m. The £350m the FSA demanded would have allowed all investers - professional and retail - to get back half of what they lost. The industry reckoned, in contrast, that only the retail sector should be compensated, and that it was not the job of the FSA to save the wholesale professional investers from their mistakes. The £140m the splits side offered would still have given the retail investers half their money back.

Officially, the FSA's legal and disciplinary process will not be set in motion. But having gone once for a settlement like those negotiated with Wall Street transgressors by New York's crusading Attorney General Eliot Spitzer, it is hard to believe the desire for a deal has been extinguished.

Perhaps in high summer when Parliament is in recess and the Press is looking the other way, they might get back round the table and try again. It would certainly make sense.

Boots' strange pension decision

BOOTS' decision to move part of its its pension fund out of bonds must count as one of the more bizarre financial decisions of recent times.

Everyone knows moving into equities from bonds increases the risk in the pension fund, and that Boots is under the financial cosh as it scrapes to find the £700m it has promised to return to shareholders and meet huge capital commitments for store refurbishment. Yet it voluntarily makes a move that can only damage its credit rating.

The debt rating agencies duly cut Boots' rating by two notches - thereby significantly increasing the company's financing costs. Thus the board appears to have shot itself in the foot in quite spectacular fashion.

One might also ask what game the pension fund trustees are playing. They had a fund that was uniquely secure among big companies because its liabilities were perfectly matched with bonds.

For trustees to agree to take on the added risk, there ought to be some offsetting reward, and one which would also take account of the diminished creditworthiness of the sponsoring company, and the additional costs of non-bond fund management. One wonders what reward this might have be. Were I a Boots pensioner, I would hope I would soon be told.

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