Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 800-819)



  800. Therefore it would be unfair to blame the specialist advisers?

  (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 out there?

  (Mr Godfrey) I think some of them have found it difficult to get the information and there may have been some foot-dragging.

Mr Mudie

  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 financial advisers.

  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 be regulated?

  (Mr Godfrey) I have never should we should not.

  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.

Mr Beard

  813. Mr Godfrey, you said earlier in response to the questioning—I made a note of it—that 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 your role?

  (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 of them.

  (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 some differentiation.

  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.

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