Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 840-852)



  840. This Committee wants to send a very clear signal, and, Mr Townsend, you have been very quiet but I know you sit on boards so you go back and talk to your pals and this is the message from this Committee: the Committee wants to send a very clear signal back that it expects fund managers and the boards of split capital companies to pull their fingers out and supply the information they have been asked for and if they cannot get their act together, then as a Committee we are likely to ask the FSA to consider making rules to bring them into line.

  (Mr Townsend) Mr Chairman, I rather anticipated that would be your response and in anticipation I said exactly that at an investment trust conference yesterday.

  841. And people are pulling their fingers out today.

  (Mr Townsend) We will have to wait and see on that.

  842. We will watch that aspect. What about the corporate governance aspect, because you mentioned that?

  (Mr Godfrey) We have already sent out a research paper on corporate governance to boards telling them what the market thinks about them and the practices which are currently there and what they would like to see. We expect boards to respond to us on that by the end of the year and we expect to promulgate in the first quarter of next year a corporate governance code for investment trust companies. But we are not going to stop there. We have to once and for all take action sufficient to put beyond question the integrity, the ability and the independence of boards and their competence to act at all times in the interests of shareholders. We intend to do that.

  843. We note as well from the information you sent in that not all closed investment companies are members of the AITC and that the ratio of membership is lowest in the split sector. Are you concerned about this?

  (Mr Godfrey) Yes. It is pretty hard for me, I am spending a lot of money doing work in the split sector—

  844. Exactly, because you are not able to bring people into line.

  (Mr Godfrey) There are Competition Act considerations here. We would like to have every investment trust as a member.

  845. Did I read in a newspaper a while ago about some people, I think Mr Martin Gilbert and others, wanting to pull away from the AITC and set up splits?

  (Mr Godfrey) We have heard this too. I think that has died a bit of a death at the moment but we would like to increase our membership rather than see it fall.

  846. Do you believe investors deserve compensation?

  (Mr Godfrey) Yes, some do.

  Chairman: Very clear.

Mr Beard

  847. Who from?

  (Mr Godfrey) I think there will be a number of people who will be liable to pay some compensation. I think in the main it will be advisers, perhaps managers and perhaps sponsoring brokers.

Mr Tyrie

  848. Earlier, when we were discussing this, you said the advisers on the whole were in a very difficult position because they were not supplied with adequate information, yet now you are saying they should be paying compensation. Should not the key compensators be the manufacturers?

  (Mr Godfrey) Thank you for picking me up on that. I also said I would not give the advisers a complete whitewash. I think where advisers have gone beyond the very optimistic statements even which were made to them by the managers, they may be liable too. For instance, I have heard of instances where some of the letters which have gone from advisers to clients clearly went beyond the promises or the statements made.

  849. Okay, in those other cases, but the primary people who should be paying compensation or should be liable for it are the manufacturers?

  (Mr Godfrey) I think there is still a long way to go to assess who has been either sufficiently misled or whether impact of wrong-doing has—


  850. Last time you were here you told us you were keeping your eyes and ears open for evidence of breaches of regulations. Can you tell us if you have learned anything since your last appearance?

  (Mr Godfrey) Yes, we have. We have continued to receive information which we have passed to the Financial Services Authority. I would say there are probably two key areas of new, dubious conduct that we have heard about since we were last here. One has been a practice whereby we have been told that a manager was selling shares in a split that had gone ex-dividend, from one split they owned, and immediately buying them back for another split they owned with something which is called a special cum dividend being applied by the market maker, thereby enabling them to effectively get two dividends for two different funds from the same share. Therefore if the fund involved had a zero dividend preference share which was under water at the time, it would have involved effectively taking money from the zero dividend preference shareholders and giving it to the income shareholders as income. So we have reported that to the Financial Services Authority. The second thing we have heard which has caused us some concern has been an allegation that you heard today—I cannot remember who from, I think it was either Mr Thomas or from Aberdeen—that when they modelled these trusts, they had a model which the accountants looked at and the accountants signed off independently, but that model comes by way of a dummy portfolio and says, "These are the sort of shares we will invest in and this is how it will work". We have also been told there were instances towards the end of the launch glut where trusts were beginning to run into trouble and there was not so much cash available from the other funds to invest in new funds but when they went out to do the marketing, they were told, "We cannot give you cash but we can give you these shares in other splits as a swap for your new issue", and the broker would go back to the fund manager and say, "Do you want these shares?" and the fund manager would say, "Yes", and as a result of that the starting portfolio may have looked quite different to the model on which the sponsoring broker, the accountant and even the board had signed off and may have been of lower quality than had initially been—

  Chairman: These are very serious issues.

Mr Cousins

  851. Is there any indication of a broader based uplift package? You used a term that was used this morning.

  (Mr Godfrey) No, no indication whatsoever.


  852. Lastly, the investment trust industry has a long and proud record, as people say, going back decades and decades and decades. You as an organisation, and others, will have to do something to help recover its reputation because there is a stain on this industry, of that there is no doubt. You have shown today your positive response with us. I think you have got to go back and say to others who are shy about it or who feel that there will be no light shone on them in the next few months, that we are shining a light on them and they had better work in tandem with yourselves and in tandem with us to ensure that the industry does recover because it is for the benefit of all investors and the country as a whole. So what should you be doing and what should the management companies be doing?

  (Mr Godfrey) We should be driving through our initiatives on transparency, we should be working with the regulators to make sure they get a result and get to where they are trying to get to, and we should be making sure that we bring in changes on corporate governance that will forever ensure that trusts are able to meet their potential, which is great.

  Chairman: You have been very clear and direct with us, in marked contrast I should say, to Aberdeen. However, we look forward to working with yourselves in the future to ensure that this industry does recover. Thank you very much.

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