Examination of Witnesses (Questions 220
THURSDAY 11 JULY 2002
220. So you are going to give them a few months
and your expectation was that, if there were cases that you were
going to bring against particular individualswho knows,
that might take anything up to about a year?
(Mr Tiner) Yes.
221. How long do you think it is going to take
the Financial Services Ombudsman to deal with the issues that
may be put to him?
(Mr Tiner) The Ombudsman has a service standard which
we have set for him which is to hear all cases within six months,
but in fact the average period by which he has judged a case is
rather less than that. It is about four months.
222. In a paper to the Committee you describe
the market capitalisation of the split capital investment trust
sector as being £13.2 billion as at 31 March 2002. What value
would you put on it now?
(Mr Tiner) You need to do a daily evaluation of this
given that the market is down sharply overnight. This was in May
223. No. March.
(Mr Tiner) I am sorry. I suppose the stock markets
have probably fallen 10 per cent since then. I have not done an
up-to-date valuation but my guess would be that it has probably
fallen by more than 10 per cent because of the collateral damage
that has been done throughout the whole sector from the bad splits,
if I can put it that way, but the work would need to be done.
(Mr Rushton) Regrettably some of those splits are
no longer in existence, of course. They have gone into liquidation
since March. It is a small number, but
224. So what value would you put on the sector?
(Mr Rushton) I have not got a figure either. As John
Tiner says, you would have to calculate that day-to-day with the
market moving as it is.
225. Clearly something which had a value of
£13.2 billion at 31 March is at least worth talking about.
I was very concerned by your statement that there could be £3.5-4
billion of exposure to banks within that sector. Do you think,
quite apart from the considerable sums of money that clearly investors
are losing, there is any issue of systemic risk here?
(Mr Tiner) No. I do not think there is a systemic
risk here through the contagion that might take place within the
investment trust sector itself because, as has been discussed
several times this morning, the problem is restricted to a minority
of trusts, albeit quite a significant minority. On the banking
issues, not all of the debtwhatever the right number today
is in terms of the level, £3.5 billion or whateveris
at risk because much of it is in trusts which are not on the hospital
list. Some of it is, of course, but also the banks get paid out
first. This is the problem for the investorthe banks get
their money firstso I think it is not right to assume that
the banks are going to pick up a hit of that sort, or anywhere
226. In a context where we are talking about
a value of over £13 billion, which if we are going to use
a unit of measurement roughly equates to what the pensions mis-selling
issue cost the insurance industry so it is a big ticket item,
£13.2 billion, and that value is eroding, you yourself said
that upwards of 10 per cent of that value may have gone in the
month since then, and your own activities are projected, waiting
to evaluate actions by others which may lie 6-12 months in the
future. Do you think that is an appropriate response to this situation?
Do you think it is good enough?
(Mr Tiner) Yes, and I think the reason that they have
fallen in value further since the report in March is because the
stock market has gone down, not because new structures have been
created that have created some new dangerous financial scenario.
What is happening now is market-related, not structure-related.
The structure bit happened before because there is no new gearing
or anything like that coming into this sector.
227. But this sector was almostwell,
substantiallycreated within the bull market of the 1990s.
(Mr Tiner) No. There has been quite a lot of trusts
issued since 1999. I think we have said in our paper that there
were about fifty.
228. Your own figures to the Committee were
that 89 of the 134 splits that at that time you drew our attention
to had been created since 1990. Those are your figures.
(Mr Tiner) Yes, but I have also said there has been
an acceleration in the last three years which is the period during
which we have had the bear market, so I do not think all of these
have been just launched in an upward only market. They have been
launched since the market has started to turn, as these figures
229. So from your own point of view as a regulator
you do not regard this situation as producing any major issues
of prudential regulation for you?
(Mr Tiner) I would not say that. I think there is
a difference between concerns about prudential regulation and
systemic concerns. I think there is a difference there and it
is an important difference to point out. There are issues here
that are concerned, of course, with consumers, as we discussed,
and there are issues here relating to whether firms are able to
deal with the consequences of any redress that may be due to those
consumers. They will have to be dealt with and we are monitoring
that and watching that very closely indeed. I do not believe,
however, that that will then become a systemic crisis for the
sector or for the financial services industry.
230. The creation of the Financial Services
Authority brought together prudential regulation and conduct of
business regulation. You seem to be taking the view that the conduct
of business issues here involved in this, despite the large sums
of money, is not urgent and can wait for some months or years
to go by before you look at it?
(Mr Tiner) I do not think I would agree with that.
I think that we have been working very hard to identify the breaches
of conduct of business rulesthe mis-selling and the misleading
information that has been given to the consumersand that
is why we have started to pursue enforcement proceedings. Unfortunately,
because of the provisions of the Act, we cannot wrap up those
proceedings very quickly. We have to go through quite a lengthy
process, which is not one that has been determined by us but is
determined in the Act, which can delay the outcome for quite some
months, but we are moving as fast as we can.
231. When do you expect the first action on
your part to initiate proceedings to be, because the impression
you gave in answer to questions from my colleagues earlier was
that twelve months was your expectation?
(Mr Tiner) It could be that, yes. The process could
take that long.
232. Do you think against the background of
this situation that is an appropriately urgent response to what
is a critical conduct of business issue?
(Mr Tiner) We have to follow due process. We cannot
and should not cut due process. I would hope that we can get it
done, frankly speaking, quicker than twelve months but I would
not be able to promise that. In the meantime what is important
for consumers is that they do have a right of access to the Ombudsman
so that this process that we might take against firms does not
slow up consumers getting redress, because it is the Ombudsman
who will hear their complaint and who is able to deal with those
complaints while those enforcement investigations continue.
233. But the cases that will go to the Ombudsman,
given the rather peculiar hybrid regulatory situation of this
particular sort of investment trust, are going to be very difficult
for the Ombudsman to deal with, are they not? These cases are
not going to be easy.
(Mr Tiner) The Ombudsman incidentally at the moment
has not got very many complaints, which is an interesting statistic.
He only has 280 at the moment out of 50,000 people investing in
this sector, but my belief is that quite a number of those will
be relatively straightforward because people will have bought
them through advisers or off promotional material. There will
be some where it is a little bit unclear and it may take the Ombudsman
a little bit longer, but he still has to deal with it within six
(Mr Rushton) A number of investors will be claiming
redress against their independent advisers before going to the
234. So that is all right then.
(Mr Rushton) It is all right if they get compensation.
235. That is your view? You are happy with the
situation in which the adviser sector, the intermediary, will
bear the brunt of this?
(Mr Rushton) If the intermediary is at fault, he should.
236. Do you think you have bottomed out your
approach to this as a conduct of business issue? Are you bringing
to this issue the urgency that seems to be required?
(Mr Tiner) I think we are. I think we are pursuing
the cases with real vigour and, if we can get these cases completed
within the process established within the Act, then we will do
that. We have made this a clear priority within the Financial
Services Authority and we are progressing as fast as we possibly
can. That is the only assurance I can give youwe are literally
pursuing it as hard as we can.
237. Perhaps you would care to clarify the prudential
regulatory issues that you see being involved in this, because
your documentation is mostly going down a conduct of business
track and mostly going down as being not issues for you but for
advisers, the Ombudsman, and the AITC. The conduct of business
issues in this you see as not being in front of you, so let us
look at the prudential issues and tease out what prudential regulatory
issues you can find in this because I do not see it clearly in
the documentation you have given to this Committee.
(Mr Tiner) I think the prudential issues emerge if
and when firms are required to pay redress to the consumers, and
the issue for those firms is whether they can afford to pay that
redress, either because they choose of their own will to make
those payments to consumers or because they are instructed to
do so by the Ombudsman.
238. So we will not know what the prudential
issues are until we have been through the conduct of business
issues, and the conduct of business issues you see as largely
being issues for people other than yourself?
(Mr Tiner) That is the system that has been set up.
The way in which investors get compensation for breaches of conduct
of business is through the Ombudsmanthat is the system.
We have put the system in place and we will make sure that firms
deal with the complaints according to our rules, but the backstop
is the Ombudsman.
239. Just to take up the point you made there
about the exposure of the banks and the fact that the banks will
be paid out first, to the ordinary investor that seems unfair
but you have to allow for that ignorance. Let me put a question
for the banks, though. Do you feel that the banks have been unwise
in lending in this way? Do you feel that they have been cavalier
and they have fuelled the bubble, because at the end of the day
the big boys are the first in the queue?
(Mr Tiner) I am afraid that where there is secure
bank debt they are always first in the queuethat is the
nature of a lot of bank lending.