Examination of Witnesses (Questions 80-99)|
TUESDAY 16 OCTOBER 2001
80. Do you think that it might have been reasonable
for the Government to have consulted the FSA prior to the decisions
it took on 7 October? Were you surprised not to be consulted?
(Sir Howard Davies) We were asked late on Friday afternoon,
which was 5 October, for our advice on the listing implications
of the decision the Government was contemplating making. It was
very clearly put to us that the decision had not been made. We
were asked the one question which it was right for us to be asked
and on which I would have expected to be asked, which was what
the consequences would be for the listing of Railtrack shares
of such a decision. We offered our advice on that point. That
is the one area where I would expect the FSA to be asked and that
81. Do you think it might have been reasonable
for you to have been consulted earlier than the Friday before
the Sunday it was wound up?
(Sir Howard Davies) No, I do not think so because,
as I understand it, the decision had not been made. It was put
to us very clearly that a decision had not been made, and we were
asked about the possibility and what we would do. We were able
to give a quick view. Frankly in these kinds of markets, that
is pretty decent notice by the standards we normally get.
82. You have made a distinction between where
you will be under the new rules and where you are at the moment
under the old rules and this of course is governed by the old
rules. I have here the consultative document you put out, number
ten on market abuse, which says on the question of the duty of
disclosure and I more or less quote that there is a duty to disclose
any information which concerns impending developments or matters
in the course of negotiation which if they came to fruition would
be required to be disseminated or in relation to a designated
market or which is to be the subject of an official announcement
by Government's central, monetary or fiscal authorities or regulatory
authorities. Does this mean that under the new rules, after N2
you would have had a major role to play in establishing whether
there had been any market abuse?
(Sir Howard Davies) Once again the listing rules will
apply to the company and therefore in that respect the position
will not change. What will change is that we shall be responsible
for considering broader issues of market manipulation and misleading
statements to the market which are currently now a matter for
83. So the answer is broadly yes, you will have
a locus and it would be reasonable for you to comment on areas
on which at the moment you feel unable to comment.
(Sir Howard Davies) I will follow you only with care
on the issue of commenting because there are serious confidentiality
constraints on the FSA in commenting on any investigation which
may lead to any disciplinary issues. This is why Mr Fallon may
have thought I was engaging in high pedantry, but investigation
is a big word and if we launch an investigation it is clear to
me that the constraints on us under the Financial Services Markets
Act as such, that we may say nothing about that investigation
until it is concluded; indeed in most cases we may not say that
such an investigation is under way because it was felt in Parliament
that for us to be able to comment on investigations when they
are merely a gleam in our eye is prejudicial to natural justice.
Therefore when you say "comment", it may still be frustrating
to the Committee because the constraints on me in terms of offering
views on what has happened are quite serious until such point
as it has gone through the full disciplinary process and come
out the other end.
84. You sound as though you are disappointed
that you are constrained. What I perhaps ought just to clarify
is whether that is the case.
(Sir Howard Davies) In the particular case of listing
issues it is a matter of some frustration, I would accept that,
that on occasions we are put in a position where we cannot say
that we are carrying out an investigation into a company. Occasionally
a company itself says that we are and we are put in the slightly
daft position of not being able to confirm or deny whether we
are or we are not. Frequently there is strong public interest
in knowing whether or not we are picking this issue up. Therefore
it is somewhat frustrating. What we may wish to do is to consult,
as we consult on the listing rules in future, on the circumstances
in which it is appropriate for the FSA to say that it is investigating
a matter, what constrained circumstances there might be in which
it was generally in the interests of everybody and in the interests
of market integrity for us to be able to say that an investigation
was under way. That is an issue we propose to raise for consultation
in relation to our review of the listing rules. You can see that
there are serious issues here in that you would not wish to prejudice
an inquiry by announcing things. On the other hand there are some
circumstances in which companies themselves say yes, we are being
investigated by the FSA and we are co-operating with the investigations
and they prefer to say that than to have nobody know whether it
is happening or not. At the moment the rules I inherited constrain
me in this way.
85. I think you do have a statutory responsibility
to offer opinions on whether a false market has been created.
Am I not right?
(Sir Howard Davies) Yes. The way that works in relation
86. I am talking about existing rules.
(Sir Howard Davies) Yes, that is right.
87. I am not talking about where you will be
(Sir Howard Davies) I understand fully, but in this
respect probably the position is not so different in any case.
We are able to say whether or not we think that there is a risk
of a disorderly market and therefore that we believe that a suspension
of company shares is appropriate because we do not believe that
there is appropriate information in the market on which investors
may make a reasonable decision for themselves about what these
shares are worth. Essentially the suspension of Railtrack shares
is in this category. This was not a point of controversy between
us and the Government and the company. We all reached the same
view that in the circumstances of the announcement such a degree
of uncertainty was created by that in terms of the value of the
shares that a suspension was entirely appropriate. That was our
view, but it was also the view of those who were advising the
company so there was no issue about it. Certainly there are circumstances
in which we may say, we can say, that we believe that the lack
of information is such that there is a risk of a false market
and therefore suspension of the shares is a better course.
88. The issue is not whether suspension was
the right action on 7 October. The issue is whether you should
have had the information available to you to make an assessment
of whether there was a false market prior to 7 October. In an
earlier response to me you said that you did not think the Government
should have consulted you in the weeks prior to 7 October. How
can you form that judgement if you are not given the information
on which to base it?
(Sir Howard Davies) Once again I say that the obligation
is on the company itself to conclude whether it is issuing the
right information into the market. The company did not come to
us with that question beforehand. Clearly something we may want
to look at is whether there is an argument for saying a company
should have come to us at an earlier point but that obligation
would have been on the company.
89. I understand that you also have the power
to launch indemnity proceedings for shareholders who have suffered
a loss as a result of buying shares on the basis of misleading
information. Are these powers which you may consider using in
the light of the inquiryif I may use that word rather than
investigationwhich you are now apparently undertaking?
(Sir Howard Davies) I would not wish to comment on
that possibility at this point. We are a long way from my having
to address that point.
90. Shareholders will be listening very carefully
to that reply, as you can imagine. My last point is the issue
of market confidence. You have a statutory duty, indeed two of
your four key tasks which are laid down in the legislation which
creates the FSA are to maintain market confidence and to protect
consumers. Do you think that what has transpired over Railtrack
has long-term implications for market confidence and the need
to protect consumers in respect of other public/private partnerships?
(Sir Howard Davies) It is very hard to answer that
question. Obviously the question of public/private partnerships
would go much more broadly than listed companies. We have looked
at whether the announcements have had any discernible impact on
the prices and yields of other regulated utilities or perhaps
former utilities and we have found no evidence of that at this
91. It has been rather obvious in recent days
that some of the questions with which you have been bombarded
by shareholders and politicians and members of the Committee are
motivated either by the wish to increase the value of the shareholding
or by political considerations. I just wonder in more general
terms whether you are not worried that you will often in the future,
especially after N2, become a proxy for anyone aggrieved with
the Government or indeed with the workings of the stock market.
Are you not going to be bombarded with pseudo complaints of that
(Sir Howard Davies) You are kind to raise the point
and there probably is a risk of that which is why we have to remain
very tightly focused on what is our responsibility and what is
not. I believe that the regime we have is a perfectly manageable
regime as long as we interpret our responsibilities within it
with care. It does mean that we are unlikely to be all-purpose
commentators on passing market events. We have to be very clearly
focused on our responsibilities and on whom they bite and on whom
they do not bite.
92. Some of the shareholders out there might
be unable to understand the difference between an enquiry from
you and an investigation. In layman's terms can we just confirm
from what has been said today that even if you found there had
not been full disclosure, there are no financial penalties you
can exercise upon the directors of that company? Secondly, is
there anything you can do which would bring any financial comfort
to the shareholders? I think the answer is probably no. From reading
the papers there is clearly information I should have liked to
have had, had I been a Railtrack shareholder, which was floating
about. Have you and the appropriate authority had a look at the
sales of Railtrack shares in the last few months and are you intending
to do so?
(Sir Howard Davies) Embedded in your questions were
the answers to the first two questions which I would confirm.
As far as the last one is concerned, it is something we have had
a quick look at and at this point we have not identified any suspicious
93. Do you have any plans in the light of the
discussion today to speed up the enquiries or investigations taking
place into this issue so far, because they seem a little bit leisurely
at this point? You did mention earlier that you did not have access
to Hansard, but I was only quoting the Secretary of State's comments
yesterday from the statement which he made, which presumably has
been supplied to you already. There was some uncertainty in respect
of your answers to Mr Cousins about how far back you are investigating.
Do you think it would be reassuring to Railtrack investors if
you were able to speed up these enquiries? When do you think you
will be able to conclude your enquiries into this specific area
of whether or not Railtrack notified investors early enough?
(Sir Howard Davies) I agree that following Mr Cousins'
questions I will immediately clarify the timing of our request
or the time period which that covers. Mr Cousins makes some good
points about that which I shall certainly follow up on instantly.
As far as the rest is concerned, it would be implausible for me
to give you an answer about timing because I depend at this point
on receiving a reply from the company. In the light of that we
shall consider whether there is a case for an investigation or
94. Could we move on now to the question of
split investment trusts into which there has been some inquiry
recently and some concern expressed in terms in particular of
cross holdings and cross investment. I do not want to plug the
Financial Times too often in this particular hearing but there
was a report in the Financial Times recently which said that between
25 and 30 of these trusts, in a sector after all which only has
125 of these, are in danger of breaching the ratio of assets to
loans covenant agreed with their banks. Is that true? Do you have
concerns about this particular area as well?
(Sir Howard Davies) It is important to note that investment
trusts are not authorised firms, they are listed companies. So
we approve their listing prospectus through our listing authority
function, but they are not financial firms and they do not have
prudential requirements on them in the same way as a unit trust
does, where we do have a responsibility for monitoring the prudential
soundness. These are just listed companies and therefore our interest
in them is in whether the prospectus is accurate, whether the
disclosure to investors is accurate about what kind of trust they
are going to be and what kind of risks they are going to take
on. It may be, in relation to advisers, whether advisers are advising
people sensibly within our suitability requirements, that we might
possibly have a systemic interest in them if there is a risk of
some kind of major market problem. They are not authorised firms
in the way that a bank or a broker or a unit trust is.
(Mr Tiner) Because of that our interest is perhaps
more limited than it would have been had they been regulated entities.
Having said that we have been watching the split capital trust
investment market for some time for three reasons really. One
is the one to which Howard referred. We want to be concerned about
the selling process, making sure that there are adequate disclosures
about the risks of these vehicles and that there is the right
disclosure and suitability test for the people who are buying
them. Secondly, we wanted to be sure that there would not be a
systemic issue within the investment trust sector arising from
the leverage, the gearing in which many of these investment trusts
engage. Additionally, the fact is that there is quite a high level
of cross holdings within the sector, so that the impact of those
two, both the gearing and the cross holdings, could create quite
a rapid spiral in the event of sharply falling markets, which
of course is what we have had of late. We have taken quite an
interest in the systemic implications. We have had a number of
discussions with the Bank of England about that. We are now looking
at what we should do about that because we do not have a direct
interest in this. We do not have a locus over the investment trust
community and we really are therefore doing analyses ourselves
to see at what point the stock market would need to be at for
there to be a systemic risk to this sector. We have discussions
with the Bank of England about that. Beyond that it is really
down to the companies and their bankers.
95. Have you investigated whether any of these
trusts are in danger of breaching their banking covenants or have
any so far done that for any period of time? As a consequence
of these concerns in relation both to investors and to sustaining
risk, have you so far taken any action which would deal with those
particular concerns, or has most of what you have been doing been
investigated at this stage?
(Mr Tiner) On the first point, we do not have a vires
over whether the companies have breached their covenants or not;
that is a matter for the company and their bankers to deal with.
96. Does it not concern you for systemic reasons?
(Mr Tiner) Then we look at the overall picture to
see whether we should be concerned about the systemic area. At
a stock market level of 4,500 we did have some concerns about
that and we have had some discussions with the Association of
Investment Trust Companies. At the moment I would say that our
general posture is a watching brief over it rather than any direct
97. It would be fair to say therefore that you
do not know whether they are close to breaching their banking
(Mr Tiner) No, not on a real time basis; no, we do
(Sir Howard Davies) We have done a survey of the position
as now. This is primarily an issue for the managers of those trusts
and their bankers. They have chosen to construct leveraged vehicles
in search of, and to structure them in such a way that they aim
to deliver, high returns by taking on market risk. That is the
deliberate intention. What they have done is not illegal, but
it is risky and it is structured in such a way as not to be within
our regulatory regime and not to be therefore subject to compensation
schemes or prudential capital requirements or authorisation requirements.
They have chosen to structure themselves in that way. Therefore
primarily this is a matter for the investors and the bankers of
those companies to come together to decide how they propose to
proceed in the event of market circumstances which trigger these
covenants, whether it would be sensible for the banks to pull
the rug at that point or whether it would be sensible to seek
some kind of reconstruction as you might with another company.
98. You do not think that you have a duty to
oversee or take an interest in that process for systemic reasons?
(Sir Howard Davies) Systemic is a high hurdle I would
say and I think I would speak for the Governor on this. One must
be very, very clear why one should wish to step in as the public
authorities. One would want to be very clear that there was a
major systemic issue and there was a risk of collateral damage
to others other than the investors who went in with a view to
looking for high returns. Unless one takes a rigorous view of
what is systemic, there is a risk of being dragged into providing
support and comfort to high risk vehicles which have been structured
to be outside our regulatory regimes. This would be a very high
hurdle before one would wish the public authorities to step into
99. Do you believe that it is not past that
(Sir Howard Davies) Certainly no, I do not believe