Examination of Witnesses(Questions 600-619)|
TUESDAY 29 OCTOBER 2002
600. Tell us the answeryes or no?
(Mr Fishwick) I think they have actually;
"Yes, it was warning". Should they have shouted louder?
(Mr Fishwick) Should I have shouted louder
at all those things? I do not look after the public. I look after
the trust. I have always been aware of the structure. Mr Tyrie,
one thing about this actually is that of these 78 trusts who have
told you that part of their share structure has no value, many
of them have no bank debt, nor ever have had. So it is not perfect.
602. It is not the only reason but it clearly
is a major reason and it probably is the major reason for a substantial
proportion of those that collapsed?
(Mr Fishwick) I think falling markets
is the primary reason; gearing is the next reason.
Mr Tyrie: Of course falling markets is
always the primary reason.
603. Where is your fiduciary dutyto the
banks or to the owners of the shares in those trusts?
(Mr Gilbert) To the owners of the shares.
(Mr Fishwick) To the owners of the shares in the trusts,
but as a director of a company, you have a fiduciary duty to your
604. I just want to get back to this point.
It seems to me that anybody who looks at this carefully realises
that we have two completely different types of investment trust
vehicle on offer, pre-1999 and post-1999 vehicles, that the risks
of the post-1999 bank debt laden vehicles were not flagged up
adequately, that you as an industry and as a firm did not demonstrate
to the people who were buying these things that they were buying
something new. This was not a traditional split capital trust
and that is probably why we have had such a terrible hullabaloo
in the last three years. Is that not correct?
(Mr Fishwick) I wish it was that simple.
Of the 19 trusts that failed, on your assumption, you assume that
they were all launched post1999, and that it is not true;
seven of them have been around for an awful long time.
605. Why would I assume that?
(Mr Fishwick) I think you are suggesting
that knocking them over is intrinsic in that structure. What I
am saying is that seven of them were launched way before that.
606. Let me ask just one last question. If you
are a business, any kind of business, and you are borrowing money,
and many businesses borrow money, the key issue you are looking
at the whole time is: what happens if someone calls that money
(Mr Fishwick) Yes.
607. In this sector why did you as a firm not
have that as top of your list of concerns when you were allowing
these trusts to become so indebted?
(Mr Fishwick) But we did. That is the
whole point about it. As assets fell, we repaid debt. Assets fell
forward, we repaid debt. We have repaid £1 billion in the
last 12 months and half a billion pounds the year before. The
problem is that we could not repay the debt as fast as the markets
608. The truth is, is it not, that for a large
proportion of your trusts, old-fashioned splits, this was a perfectly
reasonable vehicle. Of course they would have fallen with the
market maybe a bit more because there was some gearing but they
were a lot safer than trusts that had bank debt in them. The risk,
that huge extra risk, brought in by the fact that banks were higher
up the debt hierarchy for repayment, was not flagged up to investors
adequately and that is why these things were described as low
risk when they were not low risk.
(Mr Fishwick) Again, I come back to it;
I do not think split capitals have ever been described as low
609. You have got it in here. This is your own
(Mr Fishwick) It is a zero.
Chairman: The fact is that you have "low
risk" in there. The aspects that we are going to be looking
at as a committeeand we are going to get round the whole
industry, we are not finished here today, Mr Fishwick, because
everybody is going to get a questionnaireare the issues
of high levels of debt, cross-holding and aggressive accounting
practices. We are looking at the whole industry and perhaps we
will have you back again on that.
610. It is plain from the answers we have had
so far that the whole business was based on an assumption of an
indefinitely rising market. What steps were taken to test your
products against the possibility of a falling market?
(Mr Fishwick) What steps were taken?
I think it is worth bearing in mind the way a split trust capital
trust is launched. There seems to be a huge misconception about
how that is done. What actually happens is that you have an idea,
whichever investment house you are, or an asset skill that you
are good at; you approach the sponsoring broker or they bring
it to you. In most cases they create a model which you and the
board approve for your structure that is stress-tested. It is
then independently verified by an accountant separately to make
sure the model works. That shows what happens to the assets of
various corporates, plus or minus,¸2.5, +2.5, over a period
of life, and they are stress-tested. You might say to me, "If
your model says that the market may fall from 7,000 to 4,000,
will you survive?" The model will say, "No, it won't".
But we did not believe the market was going to fall back, neither
did the board, or whatever. I could have told you that if the
markets fall to this level we would not survive. There is nothing
clever about that. The models did not tell you that. They do work;
we just did not believe the markets were going to that level.
611. What steps were taken to assess the increased
risk on zeros that would arise from increasing borrowing?
(Mr Fishwick) In the sector as a whole
or by ourselves?
612. By you?
(Mr Fishwick) By us, that was based on
the cover and hurdle rates of the funds. There was compensation
in the amount of zeros that were in the structure with bank debt.
What actually happened was that for the trusts that had zeros
and bank debts, you may have had a trust that had 40 per cent
zeros instead of equity. When you put bank debt in there, you
may have only put 10 per cent zeros at the bottom; with the bank
debt in, that is what compensated or attempted to compensate for
some of the numbers going through. But these numbers and hurdle
rates are live daily. They are there all the way through.
613. It is clear from those answers that you
did very little to test what would be the consequence of something
other than an indefinitely rising market?
(Mr Fishwick) Oh, no, not at all, none
whatsoever. If you are saying that we did not shout loud enough
that the bank gets repaid first, then everyone else, and the shareholders
did not understand that the bank got their money before them,
614. Then what?
(Mr Fishwick) I cannot believe, or I
find it hard to believe, that anyone believes that they are going
to get repaid before the bank.
615. Mr Fishwick, you kindly this morning in
the papers that we only had five minutes to read have given us
an account of your remuneration over the last three or four years
and in 2000 and 2001 it amounted to £3.2 million, the largest
part of which was from bonuses. If remuneration is of that sort,
does it not breed a sort of "take the money and run"
attitude with no inducement to look seriously at what the future
consequence is going to be?
(Mr Fishwick) It does not. I was a personal
investor in all these trusts, as were the directors, as were my
family. Of course it does not. You do not invest in products you
think are not going to work. It is a stupid thing. You do not
launch products that you do not think will work because it damages
yourself. We are co-investors. I am an investor in every single
product we have launched and I have kept every single share to
the very end.
616. Does it not amount almost to culpable recklessness
to predicate a business like this and solicit people's savings
on the basis of an ever-rising market when bear markets are not
unknown, as has been suggested this morning?
(Mr Gilbert) I just do not agree with
that, I am sorry. It is just not the case. It just is not the
617. Quickly, here at the end, and this is on
the issue of Real Estate: when did you launch Real Estate Opportunities?
(Mr Fishwick) It was a very long launch
period actually. It actually came to market eventually in July
618. How much money did you raise for the launch?
(Mr Fishwick) There was an awful lot
of money already there, £840 million, the biggest launch.
We did not raise the money and get paid for it. UBS Warburg, that
is what they got paid a placement fee for.
619. All right, you got £120 million. How
much of that money is invested into income shares and other split
capital investment trusts?
(Mr Fishwick) Around £110 million
out of £840 million.