Examination of Witnesses (Questions 185
THURSDAY 11 JULY 2002
185. Good morning, Mr Tiner. Please would you
(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
morninga 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 firmsand
that is not a straightforward matter and I can talk about that,
if you like, Mr Chairmanand 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 yetit
is a much smaller number than thatwhich 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?
(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.
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
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 casethe 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
198. But should he, because there is a good
(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