Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 380-399)



  380. Mr Gilbert, in your evidence to us on 11 July in response to a question from my colleague Mr Plaskitt, and I refer to Question 26, evidence page 19, you told us that the only fund you retailed directly to the public was a unit trust. Is that correct?

  (Mr Gilbert) That is correct, Chairman.

  381. Did you operate regular saving schemes and ISAs which were regulated by the FSA and were available to the public?

  (Mr Gilbert) Yes, we did, Chairman, but—

  382. Did these schemes allow the public and advisers to purchase the individual shares, including zero dividend preference shares, in each split capital investment trust managed by yourselves?

  (Mr Gilbert) Yes, they did, Chairman.

  383. And did these schemes carry features documents as required by the FSA?

  (Mr Gilbert) Yes, they did, Chairman.

  384. And if they did, in a risk section required by the FSA, did you make it clear that these shares described and promoted by yourselves as low risk carried the possibility of total loss?

  (Mr Gilbert) Chairman, I defer to my colleague Mr Currie on that point.

  385. Well, we have a lot to do this morning, Mr Gilbert, so I have asked my colleagues to be sharp with their questions and if you could be sharp with your answers, we would be delighted.

  (Mr Currie) Yes, referring to the wrapper products which cover Share Plans which are a low-cost way for people to buy securities and individual shares, the 42 shares were trusts managed by Aberdeen. The risk document in the back complies with all the standards set out in compliance departments about outlining the risks attached to each security.

  386. Okay, so I will ask the question again. Did you make it clear that these shares described and promoted by yourselves as low risk carried the possibility of total loss?

  (Mr Currie) Well, there are two answers to that. We did not describe it as low risk exclusively in that documentation and, no, the documentation did not say that total loss was an expected element of that.[1]

  387. Well, I think you did describe it as low risk. However, the fact is that you did not describe it as carrying the possibility of total loss. Do you not accept then that the zeros of each of your split trusts were in fact made available and retailed by yourselves direct to the public through share schemes and ISAs using promises of low-risk characteristics and lacking any warning that investors could lose all their money, as has happened in some cases?

  (Mr Currie) I think there are two points in this, Chairman, which I would like to point out. One is that investment performance itself is something which is independent of the literature and the second one is that the risk warnings that were in the literature at the time described the risks that were identified.

  388. I will tell you what I am trying to get at. I went to your website and on your website you have ISAs and PEPs and you have your split trusts there. Under where you can purchase ISAs and PEPs, your answers regarding Aberdeen development capital, European Growth and Income Trust, Jersey Phoenix Trust, et cetera are yes, so the public could buy zeros from your split trusts because it is on your website and you are telling people that?

  (Mr Currie) That is correct.[2]

  389. So, therefore, the answer to the question to Mr Plaskitt, when you said you only did it through your unit trusts, is not the case, Mr Gilbert?

  (Mr Gilbert) I do not accept that. There is a big difference between retailing a product, which we did, and being a unit trust and an execution-only type wrapper product which was to allow people to buy shares on a cheaper basis than they could themselves.[3]

  390. I do not understand, Mr Gilbert, because the fact is that people can go to your website and buy zeros through that. Really the question I am getting to is this: there are a number of people who have been on to us regarding compensation and you are looking, you say, at a compensation for your unit trust. Is that correct?

  (Mr Gilbert) That is correct, Chairman.

  391. So if it is good enough for those buying direct through AAM for your compensation scheme, why should not others who have bought direct, through a stock broker or in another way, why should they not be compensated? Why is it then down to an accident of where people bought the shares?

  (Mr Currie) I think the answer is that there is a difference between an equity and a collective investment scheme and what you are buying is a share, an individual share, and the information on that share describes what the characteristics are of that share and the risks within it. Otherwise, the alternative to this is that every equity investment in the land that is available through any type of wrapper vehicle has fundamentally got to be underwritten by either the companies or by the management.[4]

  392. But you offered it through your website.

  (Mr Currie) No, you can actually get the information through the website and—

  393. On your website it says yes, yes, that people can buy it.

  (Mr Currie) I am afraid they cannot buy through our website, Chairman, but if you look at our website, you will find you can get the literature in which you will read the risk documentation[5] and you cannot buy—

  394. Well, I am going to subject this to further investigations through other people because what you are doing then is you are misleading people. If you put on your website that you can buy it through ISAs and PEPs—

  (Mr Currie) You cannot buy through the website ISAs and PEPs.

  395. Exactly, so you are promoting zeros, therefore, why are you just concentrating on the unit trusts and not on the whole splitting?

  (Mr Gilbert) The answer, Chairman, as to why we are concentrating on the unit trust is that we marketed that as a low-risk product, Chairman, and whilst we can look at the marketing literature we produced for the unit trust and legally it stands up and everyone at the time thought they were low risk, we have taken the view that we are not happy with the performance of that fund. Therefore, we are proposing and are still committed to an uplift package for all the people who have bought our unit trusts, not just those who have bought directly from us, but everyone who has bought, taking your point, regardless of how they bought it, either through an IFA, direct or off the page.

  396. So you did not promote your splits as low risk?

  (Mr Gilbert) We did not put—

  397. Let me tell you, you have an advert here and I was surfing the Net the other night, or last week actually because I put it to Mr Tiner, and we have Weekend Money in The Times of Saturday 11 September 1999 where you say, "Zeros offer investors steady, quasi-guaranteed annual growth. Zeros are low-risk investments similar to bonds. Now you are able to invest in a portfolio of zeros with the new enhanced zero trust", and the enhanced zero trust is a split, so you have marketed as low risk your splits.

  (Mr Currie) It is the Share Plan actually that has been marketed, Chairman.[6] I very much doubt you saw that on the Internet and if it is on the Internet, I would like to be notified because it should not be and an advertisement appearing one-off in The Times in 1999—

  398. Sorry, this is The Times. It is not on the Internet, but a copy of The Times.

  (Mr Currie) Sorry, you said that in surfing the Internet, you saw this advertisement—

  399. Well, this was in a copy of The Times. Mr Gilbert, I think you can correct him on that.

  (Mr Currie) Well, one insertion in The Times in September 1999 at the time when the zero market was deemed to be low risk by all measures of standard deviation used.

1   Note by Witness: The characteristics of each zero dividend preference share is described in the Share Plan documentation as well as Risk Factors in Key Features documents (requirements as per PIA Rules Part L:V), which have to be read before investing. Back

2   Note by Witness: Extract, AITC Fact Sheet on Savings and Investment Schemes: "Buying through a Savings Scheme does not imply that the investment is suitable for everyone. The usual principles of risk/reward apply to investment trust shares bought through Saving Schemes. Some investment trust shares will be riskier or more volatile than others . . . whether you use a Savings Scheme, or any other method to invest in investment trusts, remember you are buying shares." (Source: Back

3   Note by Witness: AITC Fact Sheet on Savings and Investment Schemes: "The majority of investment trusts are included in such schemes . . . known generically as Savings Schemes, they may also be called "share plans" or "investment schemes" to indicate they are not solely for regular savings. Saving Schemes are low-cost, easy to use, and flexible." Back

4   Note by Witness: Investment trusts are public investment companies whose shares are listed and traded on exchanges. Back

5   Note by Witness: There is no direct dealing or buying facility for investment trusts through the Aberdeen Asset Management website. Prospective investors looking to invest through the Aberdeen Plans have to read the Share Plan literature and Key features, sign declarations and return the completed application form in hard copy form to the plan manager. Back

6   Note by Witness: EZT plc is not a split capital trust but a conventional investment trust that is geared and invests in zeros. "Because investment trusts are not authorised businesses under the Financial Services Act, these advertisements will be placed by the management companies rather than the trusts and will promote the wrapper products," Section 7, Chapter 11, AITC Handbook for Directors. Investors receive the full Share Plan documentation on responding to the advertisement. In this advertisement, zeros are generically described as "lower risk investments similar to bonds". The coupon on the advertisement in question states "Please send me the Aberdeen Investment Trust Share Plan and Zeros Fact Sheet". The body copy states that the trust "is available through the Aberdeen Investment Trust Share Plan." The health warning explains that investors may not get back the amount originally invested. Back

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