Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Question Number 360-376)



  360. Now the AITC is doing quite a significant study of the risk profile of the whole sector, and presumably they are doing it in co-operation with you?
  (Mr Tiner) Yes.

  361. Did the AITC not talk to you?
  (Mr Tiner) No; not at the time.

  362. But later?
  (Mr Tiner) Just, I think around the time that this surfaced in the summer.

  363. You mentioned earlier that there was a gap in regulation, and I understood you to mean, essentially, that we have an investment product here in the form of a company; now that gap in regulation is still with us, is it not?
  (Mr Tiner) If it is a gap. I said there might be a gap; and, if there is a gap, yes, it is still with us.

  364. And that would require it to be addressed through changes in company law; that would be one route?
  (Mr Tiner) Yes; probably a change in the Regulatory Activities Order, covered by the FSMA.

  365. Right; that is helpful. So there is a possible gap in regulation here. Now the other thing you mentioned was collateral damage to the whole sector; and I do not want my remarks being misconstrued as an attack on the whole sector, they are not intended in that light at all, but there is a serious risk of collateral damage to the whole sector, and indeed beyond it. You have heard this morning that all these people are going to be sued, and all the different actions that people will take, some advisers, professional indemnity insurers will act in one way, and others will act in a different way, some will try to close it down, some will resist it; there are your own inquiries, Section 47, Insider Dealing Legislation, we will have an epidemic of early onset Alzheimer's. At a time when markets are fragile, as they are now, do you not think it is much more important that somebody binds up the wounds of all of this and settles it now, in a way that everyone sees to be fair? And all these avenues being pursued, which will run on for months, years, in some cases they may even run on for decades, now that would be intolerable. Do you not think somebody has got to show the leadership to bind up the wounds of this thing and get this thing off the park, so that the people who feel very aggrieved by this get some sort of rescue?
  (Mr Tiner) I absolutely agree with that, Mr Cousins, that the sooner this can be brought to closure the better it will be, not just for the investment trust sector as a whole but for the whole of the savings sector, at a time when, frankly, the Government are trying to do everything they can to encourage an increase in savings, and there has been a series of events which have generally had an adverse effect on confidence over the last several years. And, here, I think that, if there is willing participation to do as you have just suggested, where the people who feel that they have been in the wrong are willing to come up with the money to put those people who have been wronged right, then I think it will be possible to draw a line under it very quickly; if they are not willing to come to the table voluntarily on that basis then it will have to be achieved through enforcement or through complaints through the Ombudsman Service. I hope we can get all of those things done as quickly as we can; but there is, as I have said here before, a process we have to go through to make sure, if it is the sort of formal route, that we are able to gather the evidence to make the case, and therefore get proper recovery for the people that have been wronged.

  366. Are you aware of any such initiative on a voluntary basis?
  (Mr Tiner) I am aware that there is one firm who is trying to put together a scheme for its unit holders in one particular unit trust.

  367. That is all?
  (Mr Tiner) That is the only one I am aware of.


  368. Could I ask Mr Merricks a couple of questions, and thank you for coming along, Mr Merricks, on the issue of compensation. Class Law has stated that there could be up to 50,000 people who have lost out as a result of the problems with splits; how many inquiries, or how many live cases, do you have at the moment, on that?
  (Mr Merricks) We have 1,054, as at yesterday; we are continuing to receive a number of cases every week, probably between 50 and 100 new cases for investigation every week. Perhaps I should just say to the Committee that the cases that we investigate, or complaints that we investigate, are all complaints that have already been submitted to the firm involved, because the structure of the Ombudsman Service is that we cannot become involved in anything until the firm itself has had a chance to investigate the matter. So if an investor is then dissatisfied with the answer given by the relevant firm then the investor has the chance, as I say, if they are dissatisfied, to pass the case for investigation to us and we then proceed to investigate it ourselves. We have two capacities, in a sense, we are an investigative body and we are a quasi-judicial body, we have the power both to require documentation and information from the parties, and then the ability to make binding decisions against, if necessary, money awards, against the firms involved, up to certain financial limits.

  369. To what do you attribute the discrepancy between these figures, as 50,000, on the one hand, just over 1,000, yourself?
  (Mr Merricks) Mr Alexander said he had about a thousand clients, I think, and it is interesting that we have a similar number. It has surprised me, actually, given the amount of concern that there has been, in the press and elsewhere, and the number of people who are known to have lost money, that we have had a relatively small number, and indeed a relatively slow take-up; most of the complaints that we have received we have received in the past, say, two, two and a half months, and we had a small trickle before that.

  370. Could it be a factor that people do not know how to complain, and maybe this public campaign helps?
  (Mr Merricks) I would be very surprised, because there is a great deal of publicity about how to complain. But I think that perhaps there are some people, and we have certainly seen evidence of this, who are not entirely clear who they should complain about; some people who have been advised by an adviser, that advice may or may not have been very good advice, but they are not necessarily keen to level a complaint against that adviser, because the adviser blames the fund management group, and it may be that that is where the blame should be directed. And we are certainly having to assist complainants, in explaining to them against whom it is possible for them sensibly to make a complaint, if that is what they want to do.

  371. So it is complex then, that is what you are saying?
  (Mr Merricks) I am afraid so.

  372. When was the first complaint about splits received, and have you disposed of any complaints?
  (Mr Merricks) We have not disposed of any yet; we received the first ones earlier this year, and we made a statement in our May edition of our Ombudsman News, and which goes on our website. We have not yet disposed of any complaints, either in favour of investors or in favour of firms.

  373. One of the factors that the Ombudsman may take into account, where appropriate, is, and I quote, "what he considers good industry practice at the relevant time." What does that mean?
  (Mr Merricks) We take into account both the legal situation, what obligations the advisers may have had, or under Regulatory Rules, but we are also able to look at what we think of as, what we believe to have been, good practice at the time; that is absolutely right.

  374. Does it mean, for example, that, if the zero dividend preference shares were generally considered "safe", this will prejudice investors' compensation claims?
  (Mr Merricks) Not necessarily; we have to look at what advice, if we are talking about advice, what advice was given, whether it was suitable, what level of analysis and research the adviser undertook, and those are all matters we are looking at in relation to each of the complaints we receive. And, of course, for many of the investors, zeros, if they were zeros that they had, were only part of the portfolio, and so we have to look at the suitability of the whole advice that the investor received, and what component the zeros may have been within the portfolio that they were advised to take.

  375. Maybe I could ask Mr Tiner to answer this question, along with yourself. Mr Tiner stated in the earlier evidence that you would be looking at promises that look too good on the surface, and that innovative products need to be properly described. Yesterday, again, I was surfing the net and I picked up, in one of the major papers in the UK, of September 1999, an advert for zeros, for companies, and it stated at the top, it was a "Stop, Ready, Go", "9 per cent estimated annual growth." "Zeros are one class of share within the Split Capital investment trust sector, and offer investors steady quasi-guaranteed annual growth." "Zeros are lower risk investments similar to bonds. They are less volatile than conventional shares or other investment trusts. Analysts believe that not one has ever defaulted." "This trust aims to deliver 9 per cent annual growth to you, so get ready, go and contact us." How do you view that promotional literature?
  (Mr Tiner) I would say that, if it is a trust without any cross holdings or gearing, there are aspects of that which would be correct.

  376. Can you possibly prove that to be the case?
  (Mr Tiner) If it is of that kind then, plainly, it is misleading.
  (Mr Merricks) We look both at the circumstances of the investor and of the claims that were both being made and the totality of the situation. But we do not judge solely on advertising material, we look at the individual circumstances which led to a sale; and if the advertising was the sole issue then, clearly, what you have read out, with the benefit of hindsight, looks much less attractive.

  Chairman: Fine; thank you very much. Can I thank you for your attendance this morning. As I mentioned earlier on, we are looking at this both from the consumer and the industry, and we wish to see the whole industry reputation being repaired in it; so our inquiry is a very constructive inquiry, and we are very pleased that you have come along to give us your contribution. And at some stage in the next few months we will wrap that up and provide you with our evidence. Thank you very much.

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