Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 185 - 199)

THURSDAY 11 JULY 2002

MR JOHN TINER AND MR KEN RUSHTON

Chairman

  185. Good morning, Mr Tiner. Please would you identify yourselves?
  (Mr Tiner) I am the managing director of the Financial Services Authority and on my right I have Mr Rushton, director of the United Kingdom Listing Authority.

  186. You have heard the previous evidence this morning—a bit of a mess with lots of unanswered questions, a route map non-existent. What are your comments?
  (Mr Tiner) Chairman, I think this sector has got itself into a mess. I think that is self-evident not just from the evidence we have heard this morning but from what we have learnt from the work that we have been doing over the last several months. Our concern now is to determine firstly whether there have been breaches of regulatory rules and, if there are, to investigate those and pursue enforcement proceedings but at the same time, and not waiting for those proceedings to come to a conclusion, to make sure that arrangements are put in place to enable consumers to get redress where that is warranted.

  187. The AITC say that there are up to 10-20 splits who stand next to no chance of repaying anything to shareholders, even zero dividend preference holders, and that they are only solvent because the bank has not yet recalled their loan. They also say there could be a similar number that return less than shareholder due entitlement. Do you share that assessment and, if you do, what can the Financial Services Authority do to help?
  (Mr Tiner) I would not disagree with that assessment overall. From the update report in May that we published, you can infer that there are those kinds of numbers of trusts which are facing more severe difficulty and will probably for their investors result in very significant write-offs of their investments. What we are doing about that is to make sure that investors are fully apprised of their rights to complain to the relevant firms—and that is not a straightforward matter and I can talk about that, if you like, Mr Chairman—and if those firms do not deal satisfactorily with those complaints they will go to the ombudsman who will hear those complaints in the proper course.

  188. Has all the bad news come out?
  (Mr Tiner) As has been said this morning, we do live in very volatile stock markets and the state of a number of those trusts is clearly stock market sensitive and, whilst we read overnight that there has been another one that has got into difficulty, if we have markets sliding further we could see more trusts getting into difficulty. Mr Godfrey suggests that there are 10-20 in the category where there may be almost a total loss to all classes of shareholder but we have not got 10-20 reported yet—it is a much smaller number than that—which suggests that, if markets go lower, there could be more coming into the pipeline.

  189. I mentioned to Aberdeen Asset Management, and they were not forthcoming to us, that Aberdeen's Media and Income has gone and it is estimated that the Bank of Scotland and the Royal Bank of Scotland joint liabilities from split capital trusts could be running as high as £2 billion. Could you give an indication of what other banks' liabilities could be?
  (Mr Tiner) As I understand it, the debt side of these trusts is fairly concentrated into a small number of banks. The two you have mentioned are significant lenders and there are I think, as I understand it, a small number of other banks who are lenders, but their actions and when they decide to call in their debt or push for reconstructions or whatever of course is a judgment call for them.

  190. Can you give us a ballpark figure in terms of the amount of money?
  (Mr Tiner) On the debt side?

  191. Yes.
  (Mr Tiner) I suppose it could be something like £4 billion in total, perhaps £3.5 billion. I think that is what we said in our report.

Mr Laws

  192. Just to clarify this issue of compensation, the recourse that private investors have in terms of compensation is either to the sellers originally of these particular assets or through the Ombudsman, is that right?
  (Mr Tiner) Yes. Perhaps I should explain that. The source of recourse initially is always to the firm. The question is which firm, and there are a number of ways in which investors have been put into these split capital investment trusts. In some cases the investors have bought on the basis of marketing material promoting these trusts that has been sent to them, and they have been persuaded by that information to buy on the basis that there were comments such as some of those that were raised this morning about their very low risk characteristics—

Chairman

  193. I think you mentioned more safety features than the Volvo?
  (Mr Tiner) That has been mentioned in a newspaper article, and the baby that sleeps at night has been mentioned in marketing material more specifically, so those investors who have bought on the basis of that promotional material that promoted the trust would have recourse to that firm to complain. Investors that have bought on the basis of advice from a financial adviser would also have recourse to complain to that adviser if they felt they had been given misleading advice. Now, the advisers may be relying on that promotional material themselves in giving that advice to the customer, so there is an issue there about against which firm does the client have a case—the adviser or the fund manager, the promoter. The third area is where stockbroking firms have run discretionary portfolios for clients which have certain risk mandates/limitations on them, and they have been put into instruments which do not follow those mandates. Again, they would have a case. But in all those situations the investors' first port of call is the firm. If the firm do not deal with that adequately within eight weeks, then they go to the Ombudsman.

  194. What do you think is the Financial Services Authority's role in determining whether there has been mis-selling and facilitating compensation if that has been the case? Do you see it to be very limited, or central, or what?
  (Mr Tiner) What the Financial Services Authority did when it was set up was to put in place a structural arrangement to cope with mis-selling of this kind and that is the Ombudsman service, so the important thing from the Financial Services Authority's point of view here is that we are able to give consumers enough information to make sure they know what they can do and what their rights are, and then it is for the complaints system we have set up to deal with this.

  195. We heard earlier from the witnesses from Aberdeen Asset Management that they considered some of these assets, particularly the zeros to be low risk investments, and that basically the only thing that went wrong was that the stock market took a big dive, but we heard from Mr Godfrey that the nature of some of these assets changed over time to become more risky as the gearing effect came into play and the cross-investment. Do you believe it was reasonable to regard these assets as being low risk and market them on that basis over the last few years?
  (Mr Tiner) No, I do not. It is important to draw a distinction here between those trusts that have got what I called in my report a contagious cocktail of high gearing and high cross-holdings. It seems quite self-evident to me that those kinds of arrangements cannot be low risk to the investor because, as I explained in the report, they have an exponential kind of risk profile so when markets are going up they do terribly well and, when they go down, they do badly indeed. That is not a low risk product, to my mind.

  196. Do you think there is a good case for compensation for many private investors going beyond those that have been identified so far by Aberdeen?
  (Mr Tiner) I think that has to be an issue for the Ombudsman to consider.

  197. Do you think there is a good case for him to consider it?
  (Mr Tiner) I think the Ombudsman will consider them properly—

  198. But should he, because there is a good case?
  (Mr Tiner) Absolutely, yes.

  199. Finally, we have had a note from the Financial Services Authority consumer panel that basically they are concerned that consumers are not getting enough information about what is going on, and they are suggesting you should take a more proactive approach in getting individual firms to get that information out. Have you taken up those proposals?
  (Mr Tiner) No, not yet. The letter from the consumer panel makes a comparison to the information we have asked firms in the mortgage endowments market to give to the policy holders in those firms, and we think this is quite different. The only way you can get information on mortgage endowments at all is from the firm. Here there is a lot of information in the public domain; these investment trusts are quoted shares; you can look them up in the newspaper; and there is quite a lot of information that is out there. You have to remember these shares are listed companies and I am not sure that it would be right for us just to take a selection of the listed Stock Exchange market and put those on our website.


 
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