Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 820-839)



Mr Cousins

  820. Were you ever aware of a new issue prospectus that was misleading as to risk?

  (Mr Godfrey) I cannot think of one off the top of my head. Prospectuses normally do not leave many hostages to fortune, they are written by lawyers.

  821. Were you ever aware of a new issue that could not reasonably be expected to strengthen the balance sheet?

  (Mr Godfrey) Do you mean a rescue issue or a flotation of a new company?

  822. A rescue issue.

  (Mr Godfrey) I think we were concerned about some of the rescue issues, but there were none that could not possibly strengthen the balance sheet. In our letter we said that the strengthening could be fairly temporary if markets did not improve.

  823. In your letter to the Chairman of the Split Trusts in November 2001 you said, "We are already seeing examples of trusts which have been to the well . . .", by which I presume you mean that—

  (Mr Godfrey) Gone and tried to get more money.

  824. Yes, from investors. That is "the well"?

  (Mr Godfrey) Yes.

  825. ". . . only a few months ago approaching a point where they need to do so again. Although this is better than nothing it is a long way from being as good as raising hard cash." You go on to say, "These corporate actions . . .", which of course include going to the well, ". . . are under way in many cases but they are necessarily conducted behind closed doors." Do you think that is right?

  (Mr Godfrey) Could you read the whole sentence?

  826. "These corporate actions . . ." and you have identified three different methods which people can use to restore the position, ". . . are under way in many cases but they are necessarily conducted behind closed doors."

  (Mr Godfrey) What do I say next? Sorry. At the moment I cannot remember why I said that. I need a little more context.

  827. Then you go on to talk about publishing the data on holdings as outlined, would enable the AITC to "move on to the front foot"—that is spin doctor's language.

  (Mr Godfrey) I think the reason I said they were conducted behind closed doors is because these corporate actions are price sensitive, and therefore you are never told about them whilst they are being put together. We knew in general that these types of fund raisings were being put together and this letter was by way of trying to give a steer to boards and to give them information which we hoped would enable them to make sure there was not further diminution of value for the zero dividend preference shareholders by way of rescue issues which just kept the whole thing spinning for longer whilst their value ebbed away. That is what that was about.

  828. This letter nowhere refers to the fiduciary duty of these individuals to their investors, who of course were shareholders.

  (Mr Godfrey) We do not need to remind a board they have a fiduciary responsibility towards their shareholders. What we were trying to do was to discuss the application of what was fairly uncharted territory at the time, and we could see developments in the market which we were concerned might not have over the longer term the intended effect. We were therefore I think doing our duty to the shareholders of our member companies by writing to boards and suggesting a number of things, whether it be a new look at the accounting policy, or suggesting that having a rescue rights issue where no real cash came in, but what came in was a group of stock swaps of other splits in exchange for your new rescue rights issue, might not prove to be the best thing. Had markets turned up, we would have been wrong, but as it happened we have turned out to be entirely correct.

  829. Mr Tiner told us when he was here, and of course you went first so you were not on that occasion able to come back to this point, that in fact the Guernsey regulator had approached your organisation and he did mention the name of the individual—Hugh Aldous?

  (Mr Godfrey) Yes.

  830. He said, "It seems that the Guernsey authority has been in discussions with a Mr Hugh Aldous . . .", that is not me being unpleasant, that is the way he put it, ". . . concerning his concerns about cross holdings and the systemic implications of that." Is that right?

  (Mr Godfrey) I think this has become a bit of a red herring because the Guernsey regulator did not have any contact with the AITC at any stage. It appears he did have an exchange of correspondence with a gentleman called Hugh Aldous. Hugh Aldous is someone who is known to us, he is a director of an investment trust, he is a member of our representative committee, he is not an officer of the Association, and that correspondence was never reported in any way, shape or form to me or any other member of my staff. Why I say it is a red herring is because the Guernsey regulator was not the only person who had concerns about cross holdings, so whilst I do not think that that story hangs us or anybody else, neither do I think it gets us off the hook.

  831. Are you not a bit disappointed that this guy, Hugh Aldous, did not share these discussions with you?

  (Mr Godfrey) No, I am not, because, as I say, the Guernsey regulator is not the only person who ever had concerns about the cross holdings. As I said, I myself was concerned about the fact that managers were investing in new launches of other splits before that.

  832. How are you going to retrieve the reputation of the sector?

  (Mr Godfrey) We are going to improve transparency and we are going to undertake some very big initiatives on corporate governance.


  833. Mr Godfrey, I meant to put this question at the beginning. Can I take you back to the questions I asked Mr Gilbert. This was their enhanced zero trust which was advertised in The Times two years ago which, by the way, John Tiner again thinks is misleading where it said that "zeros are low-risk investments similar to bonds and there is a quasi guaranteed annual growth". Would you say that was misleading?

  (Mr Godfrey) It certainly turned out to be wrong.

  834. Misleading?

  (Mr Godfrey) If you believed it, you were misled. So please can I stand on that. I am glad you asked this because there is a very, very important point.

  835. It is under ISAs off their web site. It was a bit of semantics for Mr Currie to say you cannot buy anything off a web site, I know you cannot, but it is promoted on the web site and that is the issue because this will affect compensation, so I would like your view.

  (Mr Godfrey) There are a couple of very important things here. Firstly, we have been told by Aberdeen that they are going to offer an uplift package on their unit trust because they advertised it and marketed it direct to the retail investor. They said that it is not the same for the individual shares of the zeros because they are not funds, they are equities. Well, excuse me, but I believe when somebody buys a share in an investment trust they believe they are buying a collective investment. If you say what is an investment trust, there are three things: it pools your money, you get professional management; it is low cost and it can gear. One of the key features of an investment trust is it pools your money with other people's so it is viewed as a collective investment. It may be convenient to say it is only an equity just like Marconi and you do not get compensation if shares in Marconi go down, but it is bought by the consumer as a collective investment and it was made available as that. Also they said that that advert does not count because it was not advertiseing the share, it was advertising the savings schemes. I think that is the point you were trying to make.

  836. Exactly.

  (Mr Godfrey) The savings scheme was made available and marketed to retail investors and ISAs were made available and marketed to the retail market. I fail to see what the difference is between a consumer—

  837. It is very hard for us to get a clear answer on anything from them. They came with their minds on the defensive, it was quite obvious, but you are giving us a very clear answer here. What I said to Mr Gilbert is this: if this is good enough for those buying direct, why should others not be compensated? Why is it just down to an accident where they bought the shares?

  (Mr Godfrey) The key point is what difference is there between somebody who goes to Aberdeen direct and buys a unit in their unit trust and somebody who goes to Aberdeen direct and buys a share in a zero through their ISA product? None that I can see.

Mr Cousins

  838. You are sharing your thoughts about this with the Committee. Is this a point that you have already taken up with Aberdeen?

  (Mr Godfrey) Not formally.

  Chairman: We will leave that one with you. It is a good point.

  Mr Cousins: It is a pretty formal way of communicating with Aberdeen.


  839. There are people and an industry that will not talk to the public. The only way we can get them to talk is to come before our Committee, so we will maybe keep that practice up! Okay, you said there are details of your initiative to improve information on the sector and we are delighted that you suggest it is vital to provide investors with that information. Do you think you are going to be faced with similar hold-ups to those you have been facing with the data project?

  (Mr Godfrey) We are looking for support from this Committee and the FSA to ensure we do not get hold-ups.

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