Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)



  160. Who should be stopping it?
  (Mr Godfrey) I am not sure that someone should be stopping it; I think it is probably the other way round. I think people should have sufficient information that they do not buy it if it is not for them.

  161. Well, "increasing premium . . . that may prove unsustainable". You think there are people who feel that is a good thing and want to do it?
  (Mr Godfrey) Yes, absolutely. I think some people might say, "This has a three year timeframe; there is a risk that these premiums may prove unsustainable but if markets go up by 6 per cent a year it will shoot the lights out and I will have some of that- not all my money but some of it". I think it is dangerous territory to start saying, "Let's stop it happening". What we have to be absolutely sure about is that people understand what they are getting and what the risks are so they can take an informed decision for themselves, or their advisers can, about whether it is the right thing to buy.

  162. For legal reasons it is obviously of interest to people whether they were incorrectly advised when they bought the investment. Do you consider that people who bought zeros were adequately advised that their security might be compromised by new debt?
  (Mr Godfrey) Although we have had letters directly from people who have invested directly, we have not had letters of complaint against advisers and we have not seen what advisers were saying to them so I can only give you a hypothetical response. If an adviser was simply following the information that they received from the promoters of the product in the first place, personally I do not think I would hold them to blame. They are reasonably entitled to expect that the information they get is accurate and sufficient. If, however, they go further than they have been told by the promoter, if for instance they were to write to a client and say, "You should buy these; they are as safe as gilts", then I think they might be held up to have gone too far in their communication with their client.

  163. Finally, in paragraph 4.13 you make a distinction between your statement recommending practice for United Kingdom based funds and for offshore funds which are more free to do as they like. Do you not feel that offshore funds operating out of the United Kingdom should also follow the guidelines you outline here?
  (Mr Godfrey) Given that it is our statement of recommended practice I could hardly do otherwise than say I would like everyone to follow it, absolutely.

Mr Cousins

  164. Do they do so?
  (Mr Godfrey) No, they do not all do so, but they do follow the international generally accepted accounting principles.

  165. Could you identify, not now but at a later date, for the Committee those that do and those that do not?
  (Mr Godfrey) Yes.

  166. Are any of those that do not follow that good practice your members?
  (Mr Godfrey) It is our recommended practice. I do not know whether any of the offshore funds that have not followed that practice are our members but we will include that in our additional information for you.

  167. Are all your members co-operating in the information gathering exercise that you have just set out to the Committee?
  (Mr Godfrey) We have two exercises, one of which is to supply data to the website of holdings in other splits, and we have probably about 80 per cent co-operation with that. We have not aggressively pursued that over the last couple of months because of the second exercise we are engaged in which is to collect the full portfolio for the data exercise that we have, and that we have had complete co-operation on, or virtually. The reason why we have not pursued the former is that my feeling is that once we have gone through that data exercise we will establish probably a new way forward for what would be the optimum form and frequency of disclosure of holdings, so there is not much point in going back and asking people to co-operate with something which was likely to become redundant fairly quickly.

  168. You say that 80 per cent of your members co-operated with that first exercise and 20 per cent failed to provide information.
  (Mr Godfrey) 80 per cent of the universe. As I said, we regard this as such a significant problem for the industry as a whole that we have opened our doors, if you like, even to those who are not members offering to put their information up on our website, and I do not have a breakdown of the 20 per cent that has failed to co-operate between members and non members, but I can include that in the data as well. I do not regard this as just a problem for my members if people are losing money in investment trusts but a problem for the whole industry, and we have to tackle it as such.

  169. But generally you are getting co-operation from people who are not your members in these exercises?
  (Mr Godfrey) Generally, yes.

  170. That is 80 per cent. What sort of fund value is that?
  (Mr Godfrey) I am sorry, I could not break it down by value, but I would imagine it is fairly representative of the sector as a whole.

  171. You told us in your memorandum what you would like split fund managers to do in terms of presenting the assumptions they are making about the value of their portfolio and breaking it down to the different components. How many of them do that?
  (Mr Godfrey) I think in the format we have presented here that is not being done at the moment but to be fair to—

  172. Not being done by anybody?
  (Mr Godfrey) Not in this format, no, but to be fair to the managers—

  173. So no one is doing it?
  (Mr Townsend) To be fair, there are no new issues taking place in the current market so the opportunity just has not arisen.

  174. I had not understood paragraph 5.8 of your evidence to apply solely to new issues.
  (Mr Godfrey) I think it is a very good point you are making: that the recommendations we are making there are something that we would like to see appearing in prospecti of new issues, but certainly the projections we refer to could be put out on a regular basis by managers. There is no reason why they could not be.

  175. And how many do?
  (Mr Godfrey) No one is doing it to this extent; it is something we would like to see. This is something we have only recently proposed, however, and in fact it is fleshed out in more detail in this document than we have yet been able to do elsewhere. It was first mentioned in our submission to the Financial Services Authority's consultation document that was due in at the beginning of this year. Of course one spends a good deal of time racking one's brains to think about what one can do to improve disclosure and information for shareholders going forward, so I would say this is a new idea and therefore we have not had the chance to get it adopted by people as yet.

  176. In paragraph 5.4 of your evidence to the Committee you set out four categories of split capital trust. How many of the trusts are in each category, do you think?
  (Mr Godfrey) This is a matter of judgment but I will give you my opinion. We have about 136 trusts in this universe altogether. My guess is that the number of trusts who are unlikely ever to return anything to shareholders, even zero dividend preference shareholders, is probably in the order of just below ten. Depending on what happens to the market, it may rise to as many as twenty. The group which in the previous session was referred to as possibly working themselves out if markets go up in the sense that they may return monies to zero dividend preference shareholders, and may even return some to shareholders but probably significantly less for the shareholders than they invested in the first place, probably numbers up to in total 40 between those two categories. Then we have perhaps another twenty who have had to take some action to avoid getting into further difficulties such as cutting bank debt, and then we have about half the sector which I believe will recover given any reasonable market returns over the next few years.

  177. That is quite important, is it not? We are dealing here with a significant category of investments and you are saying that half of it is sustainable on any basis that anyone investing in it might consider to be even halfway reasonable, and half is not?
  (Mr Godfrey) No. I think probably more than half is sustainable. The last twenty who have had to take some action I think are not in deep difficulties and may well recover. I think we probably have about forty, or about a third, which stand either to lose everything or a very significant proportion of their assets.

  178. So a third of the investments in this particular range of investment products, split capital investment trusts, are unlikely to get any of their money back or, if they do, it will only be a small proportion?
  (Mr Godfrey) Up to a third or it could be as little as, say, a sixth. As I said, it is very much dependent on what happens in the future, but it could be up to a third or it could be as little as a sixth.

  179. How would people know in which category of split capital trust their money was?
  (Mr Godfrey) It would be difficult for a private shareholder unless they did a lot of research work and educated themselves as to how they work, but there are advisers and analysts, the same as those who analyse any plc, who are making judgments about what category these trusts are in and giving ratings to them as such. One of the outcomes we hope to achieve from the data exercise that we are undergoing is to be able to develop a more robust system—not saying, "This is good", "This is bad", "This is risky", "This is low risk" but giving people a measure of to what extent this particular trust is exposed to bank debt or is exposed to other splits and also some measure potentially of the quality of the exposure to other splits.

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