Examination of Witnesses (Questions 840-852)|
TUESDAY 29 OCTOBER 2002
840. This Committee wants to send a very clear
signal, and, Mr Townsend, you have been very quiet but I know
you sit on boards so you go back and talk to your pals and this
is the message from this Committee: the Committee wants to send
a very clear signal back that it expects fund managers and the
boards of split capital companies to pull their fingers out and
supply the information they have been asked for and if they cannot
get their act together, then as a Committee we are likely to ask
the FSA to consider making rules to bring them into line.
(Mr Townsend) Mr Chairman, I rather anticipated
that would be your response and in anticipation I said exactly
that at an investment trust conference yesterday.
841. And people are pulling their fingers out
(Mr Townsend) We will have to wait and
see on that.
842. We will watch that aspect. What about the
corporate governance aspect, because you mentioned that?
(Mr Godfrey) We have already sent out
a research paper on corporate governance to boards telling them
what the market thinks about them and the practices which are
currently there and what they would like to see. We expect boards
to respond to us on that by the end of the year and we expect
to promulgate in the first quarter of next year a corporate governance
code for investment trust companies. But we are not going to stop
there. We have to once and for all take action sufficient to put
beyond question the integrity, the ability and the independence
of boards and their competence to act at all times in the interests
of shareholders. We intend to do that.
843. We note as well from the information you
sent in that not all closed investment companies are members of
the AITC and that the ratio of membership is lowest in the split
sector. Are you concerned about this?
(Mr Godfrey) Yes. It is pretty hard for
me, I am spending a lot of money doing work in the split sector
844. Exactly, because you are not able to bring
people into line.
(Mr Godfrey) There are Competition Act
considerations here. We would like to have every investment trust
as a member.
845. Did I read in a newspaper a while ago about
some people, I think Mr Martin Gilbert and others, wanting to
pull away from the AITC and set up splits?
(Mr Godfrey) We have heard this too.
I think that has died a bit of a death at the moment but we would
like to increase our membership rather than see it fall.
846. Do you believe investors deserve compensation?
(Mr Godfrey) Yes, some do.
Chairman: Very clear.
847. Who from?
(Mr Godfrey) I think there will be a
number of people who will be liable to pay some compensation.
I think in the main it will be advisers, perhaps managers and
perhaps sponsoring brokers.
848. Earlier, when we were discussing this,
you said the advisers on the whole were in a very difficult position
because they were not supplied with adequate information, yet
now you are saying they should be paying compensation. Should
not the key compensators be the manufacturers?
(Mr Godfrey) Thank you for picking me
up on that. I also said I would not give the advisers a complete
whitewash. I think where advisers have gone beyond the very optimistic
statements even which were made to them by the managers, they
may be liable too. For instance, I have heard of instances where
some of the letters which have gone from advisers to clients clearly
went beyond the promises or the statements made.
849. Okay, in those other cases, but the primary
people who should be paying compensation or should be liable for
it are the manufacturers?
(Mr Godfrey) I think there is still a
long way to go to assess who has been either sufficiently misled
or whether impact of wrong-doing has
850. Last time you were here you told us you
were keeping your eyes and ears open for evidence of breaches
of regulations. Can you tell us if you have learned anything since
your last appearance?
(Mr Godfrey) Yes, we have. We have continued
to receive information which we have passed to the Financial Services
Authority. I would say there are probably two key areas of new,
dubious conduct that we have heard about since we were last here.
One has been a practice whereby we have been told that a manager
was selling shares in a split that had gone ex-dividend, from
one split they owned, and immediately buying them back for another
split they owned with something which is called a special cum
dividend being applied by the market maker, thereby enabling them
to effectively get two dividends for two different funds from
the same share. Therefore if the fund involved had a zero dividend
preference share which was under water at the time, it would have
involved effectively taking money from the zero dividend preference
shareholders and giving it to the income shareholders as income.
So we have reported that to the Financial Services Authority.
The second thing we have heard which has caused us some concern
has been an allegation that you heard todayI cannot remember
who from, I think it was either Mr Thomas or from Aberdeenthat
when they modelled these trusts, they had a model which the accountants
looked at and the accountants signed off independently, but that
model comes by way of a dummy portfolio and says, "These
are the sort of shares we will invest in and this is how it will
work". We have also been told there were instances towards
the end of the launch glut where trusts were beginning to run
into trouble and there was not so much cash available from the
other funds to invest in new funds but when they went out to do
the marketing, they were told, "We cannot give you cash but
we can give you these shares in other splits as a swap for your
new issue", and the broker would go back to the fund manager
and say, "Do you want these shares?" and the fund manager
would say, "Yes", and as a result of that the starting
portfolio may have looked quite different to the model on which
the sponsoring broker, the accountant and even the board had signed
off and may have been of lower quality than had initially been
Chairman: These are very serious issues.
851. Is there any indication of a broader based
uplift package? You used a term that was used this morning.
(Mr Godfrey) No, no indication whatsoever.
852. Lastly, the investment trust industry has
a long and proud record, as people say, going back decades and
decades and decades. You as an organisation, and others, will
have to do something to help recover its reputation because there
is a stain on this industry, of that there is no doubt. You have
shown today your positive response with us. I think you have got
to go back and say to others who are shy about it or who feel
that there will be no light shone on them in the next few months,
that we are shining a light on them and they had better work in
tandem with yourselves and in tandem with us to ensure that the
industry does recover because it is for the benefit of all investors
and the country as a whole. So what should you be doing and what
should the management companies be doing?
(Mr Godfrey) We should be driving through
our initiatives on transparency, we should be working with the
regulators to make sure they get a result and get to where they
are trying to get to, and we should be making sure that we bring
in changes on corporate governance that will forever ensure that
trusts are able to meet their potential, which is great.
Chairman: You have been very clear and
direct with us, in marked contrast I should say, to Aberdeen.
However, we look forward to working with yourselves in the future
to ensure that this industry does recover. Thank you very much.