Examination of Witnesses (Questions 40-59)|
TUESDAY 16 OCTOBER 2001
40. Turning to the general issue of timely corporate
disclosure, you took over responsibility as the listing authority
to see that investors have the right information back in May 2000.
That is right, is it not?
(Sir Howard Davies) Yes.
41. It was not until July this year that you
made a speech saying that the information which is price sensitive
must be announced to the market as a whole without delay. It was
two and a half months after that, this September, that you then
wrote to everybody reminding them of the importance of the listing
rules. That is right, is it not?
(Sir Howard Davies) That is a partial description
of what I did. The rules we took over from the Stock Exchange
are generally well understood in the market. They were not changed
at the point at which we inherited them. We propose to review
those rules after N2, but so far we have taken over the regime
as it existed before. They are well known to advisers and well
known to companies. However, over the course of last summer we
came to the conclusion that there was some misunderstanding in
the market about our rules and this in fact arose because of the
SEC's proposal for something called regulation FD, fair disclosure,
where there was quite a bit of commentary in the UK to the effect
that this was a new burden on companies or a new requirement on
companies which was not in operation here. In fact our rules are
the equivalent of regulation FD in that they do require timely
disclosure on a continuous basis. I then made a speech on that
subject specifically in October of 2000 when I explained to peopleand
that got quite a lot of coverage at the timethat our rules
were broadly the equivalent of regulation FD. That was actually
regarded generally in the market as a helpful intervention because
people had not quite understood that. I then made the further
statements as you suggest, although the last one was a specific
reminder to companies in relation to the post 11 September issue.
We had noticed, slightly to our surprise, that the number of profit
warnings emerging in the third quarter was actually lower than
in the second quarter, which seemed in a way odd to us, given
the amount of economic news there had been and also the overall
economic impact of 11 September. We therefore felt in those particular
circumstances that it was justifiable to remind people of their
obligations and indeed since then we have seen a large increase
in the number of statements being made to the market. That was
also a helpful reminder.
42. Your evidence to us says that the rate of
company announcements has increased significantly.
(Sir Howard Davies) Yes.
43. That implies therefore that either there
was misunderstanding or that you were neglecting your duty to
investors before that, does it not?
(Sir Howard Davies) I do not believe that we were
neglecting our duty to investors. The obligation rests firmly
on companies to make these disclosures. We are not inside companies
knowing what the information is. We have no visibility of that.
The obligation is on companies. If there was any neglect under
way it was in the corporate sector, but we felt it was appropriate
to remind people of their responsibilities and that appears to
have had a positive impact.
44. The criticism is as much sometimes of the
advisers as it is of the companies. Did your letter of 28 September
go to all the advisers?
(Sir Howard Davies) Our direct relationship is often
with the advisers in fact, so yes, I am sure they saw it.
45. So it would have gone to Schroeders who
advise the Department of Transport.
(Sir Howard Davies) Yes.
46. It would have gone to Crédit Suisse
who advised Railtrack.
(Sir Howard Davies) Yes.
47. It would have gone to Government departments
(Sir Howard Davies) I am not sure why it would have
gone to Government departments since the listing rules do not
bite on them.
48. So it does not apply to the Treasury.
(Sir Howard Davies) No, because the Treasury is not
a listed company. I wonder whether anyone would buy shares in
49. In terms of market behaviour would you not
expect Government departments to comply with the spirit of the
(Sir Howard Davies) The listing rules apply to listed
companies and the rules which might apply to other people in relation
to what they say about a listed company would not be in the listing
rules, they would be really in the Financial Services Act where
there are general requirements on people not to mislead the market.
The listing rules apply only to listed companies.
50. But Railtrack was a listed company, was
(Sir Howard Davies) Yes, indeed.
51. Do you think people complied with the rules
(Sir Howard Davies) I am not certain about that and
we have written to Railtrack to ask them to explain what they
knew and when they knew it and to give us a chronology of what
they received and whether they had at all times kept the market
fully informed. I have made that request to Railtrack. I have
not yet received a response.
52. So you are investigating Railtrack.
(Sir Howard Davies) No, that is not technically speaking
an investigation, that is an enquiry.
53. I am sure investors will be consoled by
that difference. Had a £1.5 billion private company disappeared
in smoke over a weekend, you would be launching a full investigation,
would you not? If it had been a company which was not dependant
on Government income or regulation, you would be investigating.
(Sir Howard Davies) Not necessarily. We would do exactly
as we have done now, which is to ask the company what it knew
and when and what disclosures it made and whether it had at all
times therefore met our requirements. If we then felt that there
was a suggestion that it had not done so, or other people drew
to our attention issues that they felt the company was aware of
and did not disclose, then we would launch an investigation. We
are operating in this case exactly as we would do if it were any
other sort of company.
54. Are any of these enquiries directed to Government
(Sir Howard Davies) No, they are directed to the company
because the company is responsible for the listing rules. I have
explained these obligations do not apply to the Government.
Any issue about whether the Government has committed an offence
under the Financial Services Act, which is to do with making false
or misleading statements, would be a Financial Services Act issue,
but that, until 1 December, is a matter for the DTI to investigate
and not for us.
55. So you are expecting us to believe that
the DTI ought to investigate the Department of Transport.
(Sir Howard Davies) I am not expecting you to believe
anything. I am just telling you what the position is.
56. The position is that the regulatory authority
for the conduct of the Department of Transport is the Department
of Trade and Industry.
(Sir Howard Davies) On this sort of issue as to whether
the Government have made any misleading statements in relation
to a listed company which could amount to market manipulation.
This is highly speculative. I hope you will understand that I
am answering strictly speaking on the legal position. At the moment,
just as in the case of any other issue of market abuse or market
manipulation, the authority is the DTI. As of 1 December it will
be the FSA.
57. Will the papers as far as your inquiry into
Railtrack is concerned be copied to the DTI in the meantime?
(Sir Howard Davies) We do not have any papers on an
inquiry into Railtrack at the moment and I am not sure we would
have a gateway to do that even if we did have an inquiry into
Railtrack. Our issue is whether Railtrack itself has met the listing
requirements. I have no reason at this point to believe that they
have not, but there is sufficient public concern about it, I felt,
to justify our asking the company for its explanation of the chronology
and I am quite sure that they will be willing to provide that
58. Concerns have been expressed by members
of the Committee this morning regarding a story in the Financial
Times on Railtrack in which it says that today you will dismiss
Conservative demands at the Treasury Select Committee for immediate
investigation. I would remind youperhaps you do not need
remindingthat this is an all-party Committee charged with
securing the interest of the House rather than any party interest.
It also goes on to say what you will tell MPs on the Treasury
Committee. I think we would like to think that any evidence you
have will be virgin evidence and you will share it with ourselves
here rather than with the Financial Times. A last comment in that
particular article says that the Authority admits that penalties
for listed companies found to have breached its listing rules
are anyway as "limp as a lettuce leaf". It seems a rather
gratuitous remark. I just put that to you and ask you for your
comments on it and, following up Mr Fallon's comments, I presume
you would be happy to keep us informed of any investigation into
(Sir Howard Davies) I apologise if the Committee has
felt that there has been any discourtesy here. I can only say
that we did not say anything about what we were going to say or
not going to say to the Select Committee. I do not regulate the
Financial TimesI sometimes wish it were otherwise. The
position is that we received yesterday a letter from the Shadow
Chancellor which in fact was in the newspapers at the weekend,
but I received the letter yesterday, which asked certain specific
questions in relation to the Railtrack issue. Because it had already
been reported in the Financial Times at the weekend we were asked
what our responses were to those questions. We answered factual
questions on the nature of our responsibilities. It certainly
was not our intention to say anything about what we would or would
not say today, but I apologise if that has been the impression
that has been conveyed. I shall be writing back to Michael Howard
today and the substance of what I shall say to him has been encapsulated
in the replies to Mr Fallon.
Chairman: Thank you very much. It is
important that we keep that good relationship.
59. The FT report nevertheless is accurate in
summing up your views on this matter, is it not? It says that
the Authority insists there is nothing for it to investigate on
the information it has at present, that it does not regulate the
Government, applying its rules only to listed companies. The rules
only demand disclosure by the listed company as soon as it finds
out about the problem. That seems to be the view that the Secretary
of State for Transport had when he was asked in the House about
this matter yesterday.
He said to the Member for Banbury, "As one who follows such
matters, the hon. Gentleman knows where the responsibility to
inform shareholders lies if a company is in particular difficulties;
he knows that it is not for the Secretary of State for Transport
to do that". However, at the beginning of his statement yesterday
in the House the Secretary of State for Transport recounted the
events which led up to the collapse of Railtrack and he reported
this. "However in May, June and July", of this year,
"the company's position worsened dramatically. On 25 July,
at a meeting in my office", the Secretary of State's, "the
chairman said that the position was far worse than he had thought
in April. Unless extra financial assistance from the Government
was provided, it was clear that on 8 November, when Railtrack
was due to give its interim results, it would be unable to make
the critical statement that it was `a going concern'". It
is extremely clear from this evidence from the Secretary of State
yesterday that there is good reason for you to hold an investigation
into Railtrack and the way in which they conducted themselves
in the run up to the collapse of the company a couple of weeks
(Sir Howard Davies) I had not heard that
statement before, so I shall certainly reflect on it. I would
not wish to prejudge the issue. We must behave in this matter
as we would in any other, which is initially to invite the company
to give an account of itself in terms of its obligations and the
extent to which it disclosed things to the market and whether
that meets our standards. In advance of receiving that, I feel
I would not wish to follow you down any speculative routes.
1 Note by Witness: The letter was put out on
the Regulatory News Service which is monitored by advisers. Back
Note by Witness: Section 47 of the Financial Services Act
1986 (and the relevant section of the Financial Services and Markets
Act 2000 when it comes into force) do not bind the Crown.
HC Deb, 15 Oct 01, cc 954-973. Back