Examination of Witnesses (Questions 800-819)|
TUESDAY 29 OCTOBER 2002
800. Therefore it would be unfair to blame the
(Mr Godfrey) I cannot give a blanket
whitewash to the advisers but in general terms I think it would
be somewhat unfair.
801. In which case, I come back to my point
about the manufacturers. I read out an investment trust research
note earlier which was going to these very specialists. Do you
think it is reasonable for the manufacturers to put out notes
which are so blatantly misleading as to say that this is the one
example where this cannot be done; that you should not equate
gearing with greater volatility and therefore risk; that all,
in this case, the gearing does is produce a faster rise in the
value in the equity?
(Mr Godfrey) Firstly, this was put out,
he said I think, to his institutional clients rather than advisers;
institutional shareholders, big pension funds or big fund managers.
Be that as it may, they believed what they put out but if they
get it wrong they have to take the consequences of that potentially.
If it is shown they did not take reasonable care or they did not
understand what they were doing, there may be consequences for
getting that wrong.
802. You mentioned to us your Data Project,
your gathering of information, why is it taking you so long to
complete that Data Project?
(Mr Godfrey) I say it has been a disappointment
to me it has taken as long as it has. It has taken a long time
because it has taken us longer to get the data
803. In other words, there are foot-draggers
(Mr Godfrey) I think some of them have
found it difficult to get the information and there may have been
804. Following on Andrew's questions to you,
why do you feel you should not be regulated?
(Mr Godfrey) We are regulated. Where
we are not regulated is in the same way as other collective investment
schemes. We are regulated by the FSA with regard to the issuing
of prospectuses and the continuing obligations of directors under
the listing rules. The way in which the fund managers manage investment
trusts is regulated by the Financial Services Authority; the ISA
schemes and the savings schemes operated by the fund managers
and the marketing of those products is regulated by the Financial
Services Authority, and so is any advice given to customers by
805. That is not John Tiner's view. He is a
leading light in the FSA and he feels there is a regulatory gap.
(Mr Godfrey) What I would say is that
investment trusts are clearly not regulated as financial products
in the way others are.
806. Answer this: after people losing their
savings, after this nonsense, do you still say you should not
(Mr Godfrey) I have never should we should
807. You did in the document you gave us. You
said that you thought that improvements could be brought about
by market pressure.
(Mr Godfrey) That does not mean
808. Do you think the investors who have lost
their money and face uncertain futures with school fees, retirement
fees, think it should be left to the market to bring about improvement?
(Mr Godfrey) I do not think that constitutes
saying we should not be regulated. We would be very happy to participate
in any review of the regulation of investment trusts and we certainly
would not close our minds
809. Mr Godfrey, earlier when I raised the question
about accountancy practices which are very important, every answer
you gave me indicated that your members make great play of the
fact these are recommendations, so the absence of a regulator
means they can please themselves what they follow and what they
do not follow on the most important matter of accountancy practices.
(Mr Godfrey) Actually it would make no
difference if that were regulated because there is a statement
of recommended practice for unit trusts and OEICs as well, and
that is just a statement of recommended practice too. So on that
point there would be no difference anyway. What I am saying about
regulation is that we would happily participate in any review
on regulation. We would not close our minds to investment trusts
becoming regulated products in the same way as open ended funds,
but in the meantime, because this will take quite a long time,
we are not going to sit on our hands and we are going to move
forward with initiatives on corporate governance and initiatives
on disclosure because we believe that with the right pressure,
I would accept not just from the market but perhaps from this
Committee and perhaps from the SFA as well, we can achieve change
that will make a big difference.
810. I heard Chris Fishwick from Aberdeen Assets
saying how important confidence was for the sector. Do you think
out there now investors will have the confidence in your sector
in the knowledge that it is not covered by the regulators as others
areas of investment are?
(Mr Godfrey) I think that very many investors
have benefited very greatly from investments in investment trusts
over a very long period of time.
811. And very many have lost.
(Mr Godfrey) One would be too many to
have lost in the way they have, and clearly a number have lost.
I do not believe that the structure of investment trusts or the
integrity of the concept as a whole has been destroyed. Clearly
the perception has been badly damaged and we need to make real
change. We cannot just do it through spin or PR; we need to make
real changes to restore confidence in the sector and it is important.
812. With the FSA review in two years' time
you would be quite happy to look at the regulation of investment
trusts if the industry as a whole was not moving together? In
other words, if the foot-draggers were still there in two years'
time you would look at that again?
(Mr Godfrey) Absolutely, yes.
813. Mr Godfrey, you said earlier in response
to the questioningI made a note of itthat in 1998-99
you saw a difference between the trusts that were highly geared
and the others in the sector.
(Mr Godfrey) I said I saw differences
and if you want to know what the particular difference was it
was that we began to become aware of managers of splits buying
shares in new split launches and that gave me some concerns.
814. You seem to be adopting the attitude of
a neutral observer of the scene. Is that how you would describe
(Mr Godfrey) No, I do not think so. We
did not see ourselves as neutral observers of the scene. We went
over this to some extent last time I was here and what we did
was we tried to investigate as to whether we could find evidence
of any ringing, if you like, of the market at that stage, and
we could not find any evidence of it. We also, as I said last
time, observed that the flotations were taking place by way of
placing rather than public issue and so we took the view that
the shares were going out to professionals rather than to retail
investors. Remember, the new launches are not actually members
of AITC and very many of these did not become our members even
after their launch, so the information that we had available to
us was by no means complete and, as I said, we did gradually move
from a state of relaxation about the industry before that period
to a concern by the third quarter of 2000.
815. But in May 2000, which is a year or two
after you first became sensitive to these matters, you wrote in
the Bloomberg Money Guide to Split Capital Investment Trusts
the following: "It is likely that the popularity of the split
capital sector will continue. More and more investors are realising
how useful they can be in financial planning. In addition, splits
currently look good value and are likely to remain good value
in the future. This is because most splits invest in UK FTSE All-Share
100 type companies which have been undervalued as investors have
favoured technology stocks." There is no question there about
distinguishing between splits. It is a pretty fulsome endorsement
(Mr Godfrey) I think there is a distinction.
816. Just to finish the question, do you realise
that coming from a source such as yourself the impact that has
on people's confidence? Plainly a statement like that induces
confidence in this whole sector?
(Mr Godfrey) I am not going to sit here
and say I have not made any mistakes over the last four years.
I think you are ignoring in that the use of the word "most"
and most splits, as you have heard today, are not in the dire
straits that some are, although too large a number, and the fact
is that I did use the word "most" and that does imply
817. Can we move on to 2001 because that is
the time that you were then starting to talk to the FSA about
your anxieties on this scene. We have got a letter from an investor
which it is claimed the AITC was sending out in August 2001, containing
this statement: "If you would prefer to take only a minimal
amount of risk, then zero dividend preference shares might prove
to be the best choice . . ." You were not a neutral observer,
you were a cheerleader.
(Mr Godfrey) Zero dividend preference
shares "might" prove to be the best choice, and many
of them would have been and many of them still will return their
pre-determined entitlement because, as I have said, they have
no back debt, no cross holdings, no exposures to technology and
no exposures to high-yielding bonds.
818. But do you think someone receiving that
letter would have read that into the letter?
(Mr Godfrey) I said a moment ago that
I am not going to stand here and say we made no mistakes. I wish
by then we had changed our wording about zeros, but I have said
to you that it was not until after September 2001 that we began
to begin to think that zeros would go belly up.
819. Someone would need a degree in English
grammar to understand the nuances of these points. That is what
we are trying to get at.
(Mr Godfrey) That is why I say I think
we also made mistakes in this.