Examination of Witnesses(Question Number
TUESDAY 22 OCTOBER 2002
360. Now the AITC is doing quite a significant
study of the risk profile of the whole sector, and presumably
they are doing it in co-operation with you?
(Mr Tiner) Yes.
361. Did the AITC not talk to you?
(Mr Tiner) No; not at the time.
362. But later?
(Mr Tiner) Just, I think around the time that this
surfaced in the summer.
363. You mentioned earlier that there was a
gap in regulation, and I understood you to mean, essentially,
that we have an investment product here in the form of a company;
now that gap in regulation is still with us, is it not?
(Mr Tiner) If it is a gap. I said there might be a
gap; and, if there is a gap, yes, it is still with us.
364. And that would require it to be addressed
through changes in company law; that would be one route?
(Mr Tiner) Yes; probably a change in the Regulatory
Activities Order, covered by the FSMA.
365. Right; that is helpful. So there is a possible
gap in regulation here. Now the other thing you mentioned was
collateral damage to the whole sector; and I do not want my remarks
being misconstrued as an attack on the whole sector, they are
not intended in that light at all, but there is a serious risk
of collateral damage to the whole sector, and indeed beyond it.
You have heard this morning that all these people are going to
be sued, and all the different actions that people will take,
some advisers, professional indemnity insurers will act in one
way, and others will act in a different way, some will try to
close it down, some will resist it; there are your own inquiries,
Section 47, Insider Dealing Legislation, we will have an epidemic
of early onset Alzheimer's. At a time when markets are fragile,
as they are now, do you not think it is much more important that
somebody binds up the wounds of all of this and settles it now,
in a way that everyone sees to be fair? And all these avenues
being pursued, which will run on for months, years, in some cases
they may even run on for decades, now that would be intolerable.
Do you not think somebody has got to show the leadership to bind
up the wounds of this thing and get this thing off the park, so
that the people who feel very aggrieved by this get some sort
(Mr Tiner) I absolutely agree with that, Mr Cousins,
that the sooner this can be brought to closure the better it will
be, not just for the investment trust sector as a whole but for
the whole of the savings sector, at a time when, frankly, the
Government are trying to do everything they can to encourage an
increase in savings, and there has been a series of events which
have generally had an adverse effect on confidence over the last
several years. And, here, I think that, if there is willing participation
to do as you have just suggested, where the people who feel that
they have been in the wrong are willing to come up with the money
to put those people who have been wronged right, then I think
it will be possible to draw a line under it very quickly; if they
are not willing to come to the table voluntarily on that basis
then it will have to be achieved through enforcement or through
complaints through the Ombudsman Service. I hope we can get all
of those things done as quickly as we can; but there is, as I
have said here before, a process we have to go through to make
sure, if it is the sort of formal route, that we are able to gather
the evidence to make the case, and therefore get proper recovery
for the people that have been wronged.
366. Are you aware of any such initiative on
a voluntary basis?
(Mr Tiner) I am aware that there is one firm who is
trying to put together a scheme for its unit holders in one particular
367. That is all?
(Mr Tiner) That is the only one I am aware of.
368. Could I ask Mr Merricks a couple of questions,
and thank you for coming along, Mr Merricks, on the issue of compensation.
Class Law has stated that there could be up to 50,000 people who
have lost out as a result of the problems with splits; how many
inquiries, or how many live cases, do you have at the moment,
(Mr Merricks) We have 1,054, as at yesterday; we are
continuing to receive a number of cases every week, probably between
50 and 100 new cases for investigation every week. Perhaps I should
just say to the Committee that the cases that we investigate,
or complaints that we investigate, are all complaints that have
already been submitted to the firm involved, because the structure
of the Ombudsman Service is that we cannot become involved in
anything until the firm itself has had a chance to investigate
the matter. So if an investor is then dissatisfied with the answer
given by the relevant firm then the investor has the chance, as
I say, if they are dissatisfied, to pass the case for investigation
to us and we then proceed to investigate it ourselves. We have
two capacities, in a sense, we are an investigative body and we
are a quasi-judicial body, we have the power both to require documentation
and information from the parties, and then the ability to make
binding decisions against, if necessary, money awards, against
the firms involved, up to certain financial limits.
369. To what do you attribute the discrepancy
between these figures, as 50,000, on the one hand, just over 1,000,
(Mr Merricks) Mr Alexander said he had about a thousand
clients, I think, and it is interesting that we have a similar
number. It has surprised me, actually, given the amount of concern
that there has been, in the press and elsewhere, and the number
of people who are known to have lost money, that we have had a
relatively small number, and indeed a relatively slow take-up;
most of the complaints that we have received we have received
in the past, say, two, two and a half months, and we had a small
trickle before that.
370. Could it be a factor that people do not
know how to complain, and maybe this public campaign helps?
(Mr Merricks) I would be very surprised, because there
is a great deal of publicity about how to complain. But I think
that perhaps there are some people, and we have certainly seen
evidence of this, who are not entirely clear who they should complain
about; some people who have been advised by an adviser, that advice
may or may not have been very good advice, but they are not necessarily
keen to level a complaint against that adviser, because the adviser
blames the fund management group, and it may be that that is where
the blame should be directed. And we are certainly having to assist
complainants, in explaining to them against whom it is possible
for them sensibly to make a complaint, if that is what they want
371. So it is complex then, that is what you
(Mr Merricks) I am afraid so.
372. When was the first complaint about splits
received, and have you disposed of any complaints?
(Mr Merricks) We have not disposed of any yet; we
received the first ones earlier this year, and we made a statement
in our May edition of our Ombudsman News, and which goes on our
website. We have not yet disposed of any complaints, either in
favour of investors or in favour of firms.
373. One of the factors that the Ombudsman may
take into account, where appropriate, is, and I quote, "what
he considers good industry practice at the relevant time."
What does that mean?
(Mr Merricks) We take into account both the legal
situation, what obligations the advisers may have had, or under
Regulatory Rules, but we are also able to look at what we think
of as, what we believe to have been, good practice at the time;
that is absolutely right.
374. Does it mean, for example, that, if the
zero dividend preference shares were generally considered "safe",
this will prejudice investors' compensation claims?
(Mr Merricks) Not necessarily; we have to look at
what advice, if we are talking about advice, what advice was given,
whether it was suitable, what level of analysis and research the
adviser undertook, and those are all matters we are looking at
in relation to each of the complaints we receive. And, of course,
for many of the investors, zeros, if they were zeros that they
had, were only part of the portfolio, and so we have to look at
the suitability of the whole advice that the investor received,
and what component the zeros may have been within the portfolio
that they were advised to take.
375. Maybe I could ask Mr Tiner to answer this
question, along with yourself. Mr Tiner stated in the earlier
evidence that you would be looking at promises that look too good
on the surface, and that innovative products need to be properly
described. Yesterday, again, I was surfing the net and I picked
up, in one of the major papers in the UK, of September 1999, an
advert for zeros, for companies, and it stated at the top, it
was a "Stop, Ready, Go", "9 per cent estimated
annual growth." "Zeros are one class of share within
the Split Capital investment trust sector, and offer investors
steady quasi-guaranteed annual growth." "Zeros are lower
risk investments similar to bonds. They are less volatile than
conventional shares or other investment trusts. Analysts believe
that not one has ever defaulted." "This trust aims to
deliver 9 per cent annual growth to you, so get ready, go and
contact us." How do you view that promotional literature?
(Mr Tiner) I would say that, if it is a trust without
any cross holdings or gearing, there are aspects of that which
would be correct.
376. Can you possibly prove that to be the case?
(Mr Tiner) If it is of that kind then, plainly, it
(Mr Merricks) We look both at the circumstances of
the investor and of the claims that were both being made and the
totality of the situation. But we do not judge solely on advertising
material, we look at the individual circumstances which led to
a sale; and if the advertising was the sole issue then, clearly,
what you have read out, with the benefit of hindsight, looks much
Chairman: Fine; thank you very much.
Can I thank you for your attendance this morning. As I mentioned
earlier on, we are looking at this both from the consumer and
the industry, and we wish to see the whole industry reputation
being repaired in it; so our inquiry is a very constructive inquiry,
and we are very pleased that you have come along to give us your
contribution. And at some stage in the next few months we will
wrap that up and provide you with our evidence. Thank you very