Examination of Witnesses(Question Number
TUESDAY 22 OCTOBER 2002
340. Can I just explore very briefly, I think
you have handled very well the allegations made by Mr Alexander,
I just want to explore a hypothetical question, which you may
be reluctant to answer, but let us suppose that you did get this
warning from the Guernsey regulator, what would you have done
(Mr Tiner) Hypothetically speaking. I am not clear
exactly what the warning was supposed to have been. I do not know
whether we were supposed to have been sent this prospectus, or
he came over and talked to us about it, I am not quite clear at
all of the form of this warning.
341. Would it not have been reckless to have
sat on it?
(Mr Tiner) I think that what we would have done, had
we, say, been given this thing, we would talk through it, and,
again, this is through the UK Listing Authority, remember, not
through the financial regulators, that we would have taken it
into consideration in judging whether the disclosures in UK prospectuses
were adequate. That is hypothetically the sort of thing we would
do, like any other information we receive, from anywhere else;
we receive information all the time, and what we want to do is
to plug that in to the people that are thinking about these prospectuses
to make sure they are covering the ground.
Mr Tyrie: You see, he has concluded that
you should not be immune from actions for gross negligence; the
immunity was granted partly because the FSA did not want to be
run around the block by very large firms, like Morgan Stanley,
every time you decided to look at their regulatory structure.
But we are finding, in this case, to our surprise, that it is
possible perhaps that your immunity may reduce the vigilance that
you may have been operating with, to protect consumers; and that,
if you had sat on this document, that could have, or whatever
came through, might have come through, from the Guernsey regulator,
that this would be considered gross negligence and that you would
be immune from it. In the light of not only that point but also
the point made that most other regulators around the world are
not immune from gross negligence, at least they are certainly
not in continental Europe, do you think this is something that
needs to be looked at? Are you happy that you should be immune,
that you can behave recklessly, as an organisation, and still
Chairman: That is a hypothetical question.
342. Well, that is the situation, that is the
law. Just to clarify this, Chairman, not with respect specifically
to this case, but in general, you are immune, you have immunity
from actions in response to reckless behaviour by the FSA?
(Mr Tiner) My understanding is that it is a fact,
within the Financial Services and Markets Act, operating from
1 December, that we have statutory immunity. I suppose that does
not cover acts of bad faith. But prior to that there was no such
immunity, and, in any case, this prospectus issue was through
the UK Listing Authority, as I have said a number of times, who
I think were subject to different types of regulations. The question
of statutory immunity is, I do not think, something for us, frankly,
I think this is something for Government and policy-makers in
Government to decide. There is a two-year review of the Financial
Services and Markets Act starting at the end of next year, I do
not know whether that will be on the agenda or not.
343. Just trying to summarise, the problem comes
down to this, that the high gearing and high level of cross holdings
substantially increased the risk of this particular type of split
capital that we are talking about; the nature of the marketing,
in some cases, appears to have been misleading in not showing
that risk, the stuff about "the babies sleeping at night",
and all that rubbish. And then there is a third point, that the
fees levied on both stocks and debt actually gave a perverse incentive
to the fund managers to increase the gearing and increase the
cross holding, and therefore increase the risk. Would you agree
(Mr Tiner) It could certainly create a self interest.
344. Do you think that in the future we should
prevent, in one form of regulation or another, this incentive
from being present, should we discourage fees being levied on
both stocks and debt?
(Mr Tiner) My feeling is, not, actually, because this
is not a question of levying fees on stocks and debt, it is a
question of levying fees on equity and debt, which equals stocks,
and that is the sort of asset and liability side of the balance
sheet. And what investment managers do, in this case, and in many
cases, not very well, is to manage those assets, and the fee that
they receive is for the management of those assets, and the assets
they are managing is the gross number. Now we could discuss whether
the level of the fee was too high, that is an issue for the market,
but levying the fee on the gross assets, i.e. the actual work
they are supposed to be doing, seems to be reasonable.
345. Do you feel that, we heard in the previous
evidence that it is difficult to imagine any sane independent
adviser actually recommending a product with an effective fee
of 10 per cent of the amount invested. If I were selling you electrical
equipment and I said, "There's a risk it might electrocute
you, I have to warn you of this, so I am putting it in bold type,
but it may work perfectly well, it may be very good," it
would actually be illegal for me to sell you that, however loudly
I warned you about the risk? Do you not feel that there is some
level of risk at which it ought not to be possible to sell financial
(Mr Tiner) Probably, on a theoretical basis, yes;
but I think that, at the very extreme of the Hedge Fund market,
where there are some horrendously complex derivative structures,
it is possible to explain them but only to very sophisticated
investors, they are quite plainly not products for normal people,
perhaps I should say, people on ordinary incomes. So I think it
is possible, but your level of understanding and knowledge has
got to be very, very significant, to begin with. I would not regard
them as being explainable at all to the vast majority of the population.
346. So what you are saying is that you put
the entire weight on the type of explanation given to different
types of investors. It is very difficult, as MPs, to legislate
on this, to ensure that 86-year-old Mrs Smith does not somehow
get her hands on this totally inappropriate product?
(Mr Tiner) Yes; there is one core principle within
the requirements for the selling process, which is called `suitability',
and it is absolutely central to every piece of advice or sales
decision, it is that the product which the consumer is buying
is suitable, or being sold is suitable, to their particular circumstances,
and that is the core part of the regulation. And, of course, Ron
Sanders got into this by designing some really quite simple products,
or coming up with a suggestion that there be some quite simple
products which would be readily available to the population at
large, because of this complexity issue, I think, and I would
Chairman: We will resist the temptation
to ask you to define "normal".
347. Mr Tiner, I am sorry to take you back to
Guernsey one last time, but I am still slightly uncertain about
some of the details behind the answers you gave us earlier. The
BBC's claims, in relation to warnings that were given by the Director
of Investment Business on Guernsey, their claims, on this "Money
Box" programme, were basically that early in 2001 this individual,
Peter Moffatt, conveyed his views about his concerns in relation
to these products to his opposite number at the UK's Financial
Services Authority. Can you tell us who his opposite number was,
and what he actually conveyed?
(Mr Tiner) I am sorry, I did not hear the "Money
Box" programme on Saturday, but was that the Guernsey regulator
348. These were the claims that were in the
programme. I assume that you have seen a transcript of the programme,
or the programme itself?
(Mr Tiner) I have not, I tried to get one yesterday
and I could not get one; but I think that this goes back to the
article in The Independent on Sunday, on 30 June, where it was
suggested that the Guernsey regulator, Mr Moffatt, did contact
his opposite number at the FSA about this.
349. Who is his opposite number?
(Mr Tiner) I think it would have been a Mr Aitken.
350. And what did he say to Mr Aitken?
(Mr Tiner) I do not know.
351. I think, Mr Tiner, we have gone over this
quite a bit. I think what we can do, we can clarify this by an
exchange of letters, if you wish to do so, because a lot of the
answers you have given us are based on information which is not
available to you at the moment; am I correct in saying that?
(Mr Tiner) Yes.
Chairman: So we will have a final point
and then there will be an exchange of letters.
352. Can I say that I find it absolutely astonishing
that if you are saying that this dates back to an article in a
newspaper some months ago, it has been broadcast on BBC television,
that, given you knew you were going to come to see us today, it
is astonishing that you are so badly briefed on this. I find that
absolutely amazing. And this is a very substantive allegation,
this; how come you have not checked it out?
(Mr Tiner) The letter from Mr Moffatt, dated 9 July
2002, as far as I am concerned, puts a line under it.
353. It puts nothing at all under it. What it
says is three things. The Commission has not criticised the FSA,
we know that; it says that it regularly exchanges views with the
FSA, that is frankly meaningless. It says it would not be right
to portray the discussions as a warning; what would it be right
to portray them as, that does not mean anything, it is open to
all sorts of portrayal? And you are telling me you have not checked
up with the individual who is concerned in this, you have not
looked back at the correspondence. I find that absolutely astonishing.
(Mr Tiner) There was not any correspondence.
354. There was no correspondence at all?
(Mr Tiner) Not that I am aware of, no.
355. There is no correspondence between this
individual and the FSA on this subject?
(Mr Tiner) Not that I am aware of, no.
356. Either at the end of 2000 or the first
quarter of 2001?
(Mr Tiner) Not that I am aware of.
357. Can you confirm that for us and send us
(Mr Tiner) Certainly.
358. And have you not spoken to this Mr Aitken
at all to find out what his discussions were?
(Mr Tiner) I have spoken to him, and he knows Peter
Moffatt quite well, because they have worked on investment fund
business together for many years and they have many conversations.
He has no explicit recollection that there was a particular warning
in this case. But I will talk to him again, in the light of this,
and check it.
Chairman: If you could write to us on
that, that would be fine.
359. Just to tidy that up, you did say much
earlier that the Guernsey regulator had spoken to the AITC about
(Mr Tiner) That is my understanding, yes.
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