Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 600-619)




  600. Tell us the answer—yes or no?

  (Mr Fishwick) I think they have actually; "Yes, it was warning". Should they have shouted louder? Probably.

  601. You?

  (Mr Fishwick) Should I have shouted louder at all those things? I do not look after the public. I look after the trust. I have always been aware of the structure. Mr Tyrie, one thing about this actually is that of these 78 trusts who have told you that part of their share structure has no value, many of them have no bank debt, nor ever have had. So it is not perfect.

Mr Tyrie

  602. It is not the only reason but it clearly is a major reason and it probably is the major reason for a substantial proportion of those that collapsed?

  (Mr Fishwick) I think falling markets is the primary reason; gearing is the next reason.

  Mr Tyrie: Of course falling markets is always the primary reason.

Mr Laws

  603. Where is your fiduciary duty—to the banks or to the owners of the shares in those trusts?

  (Mr Gilbert) To the owners of the shares.
  (Mr Fishwick) To the owners of the shares in the trusts, but as a director of a company, you have a fiduciary duty to your lending bank.

Mr Tyrie

  604. I just want to get back to this point. It seems to me that anybody who looks at this carefully realises that we have two completely different types of investment trust vehicle on offer, pre-1999 and post-1999 vehicles, that the risks of the post-1999 bank debt laden vehicles were not flagged up adequately, that you as an industry and as a firm did not demonstrate to the people who were buying these things that they were buying something new. This was not a traditional split capital trust and that is probably why we have had such a terrible hullabaloo in the last three years. Is that not correct?

  (Mr Fishwick) I wish it was that simple. Of the 19 trusts that failed, on your assumption, you assume that they were all launched post—1999, and that it is not true; seven of them have been around for an awful long time.

  605. Why would I assume that?

  (Mr Fishwick) I think you are suggesting that knocking them over is intrinsic in that structure. What I am saying is that seven of them were launched way before that.

  606. Let me ask just one last question. If you are a business, any kind of business, and you are borrowing money, and many businesses borrow money, the key issue you are looking at the whole time is: what happens if someone calls that money in?

  (Mr Fishwick) Yes.

  607. In this sector why did you as a firm not have that as top of your list of concerns when you were allowing these trusts to become so indebted?

  (Mr Fishwick) But we did. That is the whole point about it. As assets fell, we repaid debt. Assets fell forward, we repaid debt. We have repaid £1 billion in the last 12 months and half a billion pounds the year before. The problem is that we could not repay the debt as fast as the markets were falling.

  608. The truth is, is it not, that for a large proportion of your trusts, old-fashioned splits, this was a perfectly reasonable vehicle. Of course they would have fallen with the market maybe a bit more because there was some gearing but they were a lot safer than trusts that had bank debt in them. The risk, that huge extra risk, brought in by the fact that banks were higher up the debt hierarchy for repayment, was not flagged up to investors adequately and that is why these things were described as low risk when they were not low risk.

  (Mr Fishwick) Again, I come back to it; I do not think split capitals have ever been described as low risk


  609. You have got it in here. This is your own literature.

  (Mr Fishwick) It is a zero.

  Chairman: The fact is that you have "low risk" in there. The aspects that we are going to be looking at as a committee—and we are going to get round the whole industry, we are not finished here today, Mr Fishwick, because everybody is going to get a questionnaire—are the issues of high levels of debt, cross-holding and aggressive accounting practices. We are looking at the whole industry and perhaps we will have you back again on that.

Mr Beard

  610. It is plain from the answers we have had so far that the whole business was based on an assumption of an indefinitely rising market. What steps were taken to test your products against the possibility of a falling market?

  (Mr Fishwick) What steps were taken? I think it is worth bearing in mind the way a split trust capital trust is launched. There seems to be a huge misconception about how that is done. What actually happens is that you have an idea, whichever investment house you are, or an asset skill that you are good at; you approach the sponsoring broker or they bring it to you. In most cases they create a model which you and the board approve for your structure that is stress-tested. It is then independently verified by an accountant separately to make sure the model works. That shows what happens to the assets of various corporates, plus or minus,¸2.5, +2.5, over a period of life, and they are stress-tested. You might say to me, "If your model says that the market may fall from 7,000 to 4,000, will you survive?" The model will say, "No, it won't". But we did not believe the market was going to fall back, neither did the board, or whatever. I could have told you that if the markets fall to this level we would not survive. There is nothing clever about that. The models did not tell you that. They do work; we just did not believe the markets were going to that level.

  611. What steps were taken to assess the increased risk on zeros that would arise from increasing borrowing?

  (Mr Fishwick) In the sector as a whole or by ourselves?

  612. By you?

  (Mr Fishwick) By us, that was based on the cover and hurdle rates of the funds. There was compensation in the amount of zeros that were in the structure with bank debt. What actually happened was that for the trusts that had zeros and bank debts, you may have had a trust that had 40 per cent zeros instead of equity. When you put bank debt in there, you may have only put 10 per cent zeros at the bottom; with the bank debt in, that is what compensated or attempted to compensate for some of the numbers going through. But these numbers and hurdle rates are live daily. They are there all the way through.

  613. It is clear from those answers that you did very little to test what would be the consequence of something other than an indefinitely rising market?

  (Mr Fishwick) Oh, no, not at all, none whatsoever. If you are saying that we did not shout loud enough that the bank gets repaid first, then everyone else, and the shareholders did not understand that the bank got their money before them, then—

  614. Then what?

  (Mr Fishwick) I cannot believe, or I find it hard to believe, that anyone believes that they are going to get repaid before the bank.

  615. Mr Fishwick, you kindly this morning in the papers that we only had five minutes to read have given us an account of your remuneration over the last three or four years and in 2000 and 2001 it amounted to £3.2 million, the largest part of which was from bonuses. If remuneration is of that sort, does it not breed a sort of "take the money and run" attitude with no inducement to look seriously at what the future consequence is going to be?

  (Mr Fishwick) It does not. I was a personal investor in all these trusts, as were the directors, as were my family. Of course it does not. You do not invest in products you think are not going to work. It is a stupid thing. You do not launch products that you do not think will work because it damages yourself. We are co-investors. I am an investor in every single product we have launched and I have kept every single share to the very end.

  616. Does it not amount almost to culpable recklessness to predicate a business like this and solicit people's savings on the basis of an ever-rising market when bear markets are not unknown, as has been suggested this morning?

  (Mr Gilbert) I just do not agree with that, I am sorry. It is just not the case. It just is not the case.


  617. Quickly, here at the end, and this is on the issue of Real Estate: when did you launch Real Estate Opportunities?

  (Mr Fishwick) It was a very long launch period actually. It actually came to market eventually in July 2001.

  618. How much money did you raise for the launch?

  (Mr Fishwick) There was an awful lot of money already there, £840 million, the biggest launch. We did not raise the money and get paid for it. UBS Warburg, that is what they got paid a placement fee for.

  619. All right, you got £120 million. How much of that money is invested into income shares and other split capital investment trusts?

  (Mr Fishwick) Around £110 million out of £840 million.

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