Further memorandum submitted by Brewin
1. Following our appearance before the Treasury
Select Committee on 29 October, we undertook to provide the Committee
with further information on the investments of our clients in
zero dividend preference shares. We have now completed our review
and are able to provide detailed responses to the outstanding
questions, in the order they were posed.
2. We would also like to take this opportunity
to clarify some of the issues that arose from our oral evidence
and hope this may also be of assistance.
3. The number of Brewin Dolphin clients
who participated in zero dividend preference share issues sponsored
by Brewin Dolphin at the time of the placings was 577. These clients
invested £11.9 million. Brewin Dolphin had approximately
75,000 clients at September 2001 with total funds of £16,500
million of which £4,600 million were on a fully discretionary
4. Of these 577 clients, 134 were advisory
and invested £5.1 million and the remaining 443 were discretionary
clients who invested £6.8 million in zero preference shares.
In total Brewin Dolphin raised £180 million between 1996
and 2001 through the placement of zero dividend preference shares,
of which 6.6 per cent was placed with Brewin Dolphin private clients.
This represents 0.04 per cent of all Brewin Dolphin advisory funds
and 0.15 per cent of its discretionary funds under management,
or 0.07 per cent of total funds.
5. 328 clients are still holding these zeros
at a loss of £6.6 million, while 118 clients are showing
unrealised gains of £0.3 million. 24 clients have realised
losses of 0.7 million compared to 133 clients who took profits
of some £0.3 million. 
6. To clarify the points made in our oral
evidence we would like to emphasise that Mr. David Thomas was
leader of the Investment Trust Team within our Corporate Finance
Division. He reports to the Head of Corporate Finance, who sits
on Brewin Dolphin's main board and reports monthly on corporate
7. The Corporate Finance team only prepared
research material for the use of institutional investors and market
professionals. The number of copies of its research material was
limited, although it varied from time to time. Under normal circumstances
no more than 40 copies of each research paper were ever printed.
8. There is a clear segregation between
the Corporate Finance Division and the Private Client Division
of Brewin Dolphin. Strict rules apply regarding confidentiality
of information relating to companies being advised by the corporate
finance teams (particularly where it is "inside information"
or "price-sensitive information" under the terms of
the relevant legislation). Such information must be kept confidential
from staff outside the corporate finance team, including those
who advise private clients, and no one in possession of inside
information is permitted to advise on or deal in the securities
9. Following on from our oral evidence we
have re-examined our research of the Split Capital Trust sector.
It was suggested that the nature of Split Trusts altered materially
in 1999, particularly in respect of the use of bank borrowing,
and that we should have notified investors of a change in risk
profile. We do not believe that such a change occurred and would
like to take this opportunity to explain this in more detail.
10. There is a fundamental point to address
when considering bank borrowing and gearing. The gearing within
a Trust is arrived at after taking into account all prior charges,
which means that bank borrowings are only part of a Trust's gearing.
Bank borrowings, debentures and other types of borrowings (together
debt) take priority for repayment over all shareholders, and had
been a feature of Split Capital Trusts for over 20 years. The
first geared Trust, Triplevest was launched in 1966, whilst the
large issue of zeros from Scottish National in 1987, ranked below
both a debenture and a preference share. More than half of the
Split Trusts that were in existence in September 1999 had such
debt. The gearing effects of loans and other prior charges are
identical, but lending banks generally offer greater flexibility
than debenture Trustees. This is demonstrated by the recent co-operation
of the banks with certain troubled Trusts.
11. At 30 September 1999 there were some
77 Split Capital Trusts. 61 trusts had issued zeros and of these
31 had debt, with a further eight trusts with debt only. In September
1999 bank borrowings averaged 23 per cent of the total assets
for the 39 trusts with debt. From September 1999 to July 2001
the number of split trusts in existence with zeros in issue doubled
and bank loans were being used more extensively, with average
borrowing increasing from 23 per cent to 26 per cent. This was
not a marked increase. It should be remembered that it was not
possible for any Trust to increase its bank borrowings significantly
from that incorporated in its prospectus, without first reverting
to shareholders for approval.
12. This demonstrates that zeros partly
geared by bank borrowings and other debt were not a new product
launched in 1999, or subsequently.
13. Borrowings at inception were at levels
generally accepted as reasonable. It was not unreasonable for
those involved, including corporate advisers, to believe that
the structures should be relatively stable, provided that investment
portfolios were prudently managed.
14. Increased gearing post launch was caused
by sharp reductions in the asset values of the underlying portfolios.
It was this and not the levels of bank borrowings at inception,
which led to the failure of a number of Split Trusts. Several
Trusts continue to exist today, which have similar bank borrowings
to many of those that have failed.
13 November 2002
Further memorandum submitted by Collins
Mr Rolly Crawford agreed to write providing
additional information to the Treasury Select Committee at the
meeting on 29 October 2002. I am now writing to provide this information.
The Chairman asked what the connection is between
Collins Stewart Limited and Collins Stewart Fund Mangement Limited.
To clarify the reply, Collins Stewart Fund Management Limited
is a wholly owned subsidiary of Collins Stewart (CI) Limited which
is in turn owned by Collins Stewart Limited and is a member of
the Collins Stewart group. The ultimate holding company of the
group is Collins Stewart Holdings plc which is a listed company.
The Chairman also asked whether any Collins
Stewart clients were advised to invest in the CI Income Fund Limited.
Collins Stewart Limited was the sponsor to CI Income Fund Limited
and arranged the intial placing. I enclose a copy of the prospectus
for information. I can confirm that only regulated institutional
clients were allocated shares in the placing and no advice was
given to any of those clients about investment in CI Income Fund
I can confirm that no private clients of Collins
Stewart Limited invested in the shares of CI Income Fund Limited,
either in the placing or subsequently. In the firm's earlier submission
we stated that Collins Stewart Limited acquired a number of private
clients from NatWest Stockbrokers Limited in December 2001 and
I confirm that none of the clients transferring to Collins Stewart
Limited received any advice concerning investment in CI Income
It might assist the Committee for me to point
out that Collins Stewart Fund Management Limited was the manager
of CI Income Fund Limited and they delegated responsibility for
investment advice to Collins Stewart Asset Management Limited.
These roles and the relationship between the two companies are
set out in the enclosed prospectus.
Whilst writing I would like to take the opportunity
to comment on a letter sent to the Committee by Limbort Limited
dated 25 October 2002. The Committee will note that the letter,
but not all the enclosures, was copied to my colleague Terry Smith.
In the letter, Limbort Limited raises issues
as to the suitability of advice which they say was given to them
by Collins Stewart (CI) Limited in Guernsey. I note that no details
of the advice they claim to have received are provided, the dates
that the alleged advice was given are not specified and details
of the specific investments and money that may have been lost
have not been offered. From their letter one could assume it relates
to split capital investment trusts but this is by no means clear.
It may also be relevant that Limbort Limited is a Bahamian registered
company administered from Guernsey.
Senior management of Collins Stewart (CI) Limited
are investigating the allegations made in the letter and I am
told they have made their file available to the Guernsey Financial
Services Commission. As part of this exercise I understand that
Limbort Limited have been invited to specify their complaint but
to date, this has not been forthcoming.
6 November 2002
30 This total of 603 clients is different from the
577 clients mentioned in paragraph 4, due to some clients investing
in more than one zero. Back