Select Committee on Treasury Minutes of Evidence

Further memorandum submitted by Brewin Dolphin Securities

  1.  Following our appearance before the Treasury Select Committee on 29 October, we undertook to provide the Committee with further information on the investments of our clients in zero dividend preference shares. We have now completed our review and are able to provide detailed responses to the outstanding questions, in the order they were posed.

  2.  We would also like to take this opportunity to clarify some of the issues that arose from our oral evidence and hope this may also be of assistance.


  3.  The number of Brewin Dolphin clients who participated in zero dividend preference share issues sponsored by Brewin Dolphin at the time of the placings was 577. These clients invested £11.9 million. Brewin Dolphin had approximately 75,000 clients at September 2001 with total funds of £16,500 million of which £4,600 million were on a fully discretionary basis.

  4.  Of these 577 clients, 134 were advisory and invested £5.1 million and the remaining 443 were discretionary clients who invested £6.8 million in zero preference shares. In total Brewin Dolphin raised £180 million between 1996 and 2001 through the placement of zero dividend preference shares, of which 6.6 per cent was placed with Brewin Dolphin private clients. This represents 0.04 per cent of all Brewin Dolphin advisory funds and 0.15 per cent of its discretionary funds under management, or 0.07 per cent of total funds.

  5.  328 clients are still holding these zeros at a loss of £6.6 million, while 118 clients are showing unrealised gains of £0.3 million. 24 clients have realised losses of 0.7 million compared to 133 clients who took profits of some £0.3 million. [30]


  6.  To clarify the points made in our oral evidence we would like to emphasise that Mr. David Thomas was leader of the Investment Trust Team within our Corporate Finance Division. He reports to the Head of Corporate Finance, who sits on Brewin Dolphin's main board and reports monthly on corporate finance matters.

  7.  The Corporate Finance team only prepared research material for the use of institutional investors and market professionals. The number of copies of its research material was limited, although it varied from time to time. Under normal circumstances no more than 40 copies of each research paper were ever printed.

  8.  There is a clear segregation between the Corporate Finance Division and the Private Client Division of Brewin Dolphin. Strict rules apply regarding confidentiality of information relating to companies being advised by the corporate finance teams (particularly where it is "inside information" or "price-sensitive information" under the terms of the relevant legislation). Such information must be kept confidential from staff outside the corporate finance team, including those who advise private clients, and no one in possession of inside information is permitted to advise on or deal in the securities concerned.


  9.  Following on from our oral evidence we have re-examined our research of the Split Capital Trust sector. It was suggested that the nature of Split Trusts altered materially in 1999, particularly in respect of the use of bank borrowing, and that we should have notified investors of a change in risk profile. We do not believe that such a change occurred and would like to take this opportunity to explain this in more detail.

  10.  There is a fundamental point to address when considering bank borrowing and gearing. The gearing within a Trust is arrived at after taking into account all prior charges, which means that bank borrowings are only part of a Trust's gearing. Bank borrowings, debentures and other types of borrowings (together debt) take priority for repayment over all shareholders, and had been a feature of Split Capital Trusts for over 20 years. The first geared Trust, Triplevest was launched in 1966, whilst the large issue of zeros from Scottish National in 1987, ranked below both a debenture and a preference share. More than half of the Split Trusts that were in existence in September 1999 had such debt. The gearing effects of loans and other prior charges are identical, but lending banks generally offer greater flexibility than debenture Trustees. This is demonstrated by the recent co-operation of the banks with certain troubled Trusts.

  11.  At 30 September 1999 there were some 77 Split Capital Trusts. 61 trusts had issued zeros and of these 31 had debt, with a further eight trusts with debt only. In September 1999 bank borrowings averaged 23 per cent of the total assets for the 39 trusts with debt. From September 1999 to July 2001 the number of split trusts in existence with zeros in issue doubled and bank loans were being used more extensively, with average borrowing increasing from 23 per cent to 26 per cent. This was not a marked increase. It should be remembered that it was not possible for any Trust to increase its bank borrowings significantly from that incorporated in its prospectus, without first reverting to shareholders for approval.

  12.  This demonstrates that zeros partly geared by bank borrowings and other debt were not a new product launched in 1999, or subsequently.

  13.  Borrowings at inception were at levels generally accepted as reasonable. It was not unreasonable for those involved, including corporate advisers, to believe that the structures should be relatively stable, provided that investment portfolios were prudently managed.

  14.  Increased gearing post launch was caused by sharp reductions in the asset values of the underlying portfolios. It was this and not the levels of bank borrowings at inception, which led to the failure of a number of Split Trusts. Several Trusts continue to exist today, which have similar bank borrowings to many of those that have failed.

13 November 2002

Further memorandum submitted by Collins Stewart

  Mr Rolly Crawford agreed to write providing additional information to the Treasury Select Committee at the meeting on 29 October 2002. I am now writing to provide this information.

  The Chairman asked what the connection is between Collins Stewart Limited and Collins Stewart Fund Mangement Limited. To clarify the reply, Collins Stewart Fund Management Limited is a wholly owned subsidiary of Collins Stewart (CI) Limited which is in turn owned by Collins Stewart Limited and is a member of the Collins Stewart group. The ultimate holding company of the group is Collins Stewart Holdings plc which is a listed company.

  The Chairman also asked whether any Collins Stewart clients were advised to invest in the CI Income Fund Limited. Collins Stewart Limited was the sponsor to CI Income Fund Limited and arranged the intial placing. I enclose a copy of the prospectus for information. I can confirm that only regulated institutional clients were allocated shares in the placing and no advice was given to any of those clients about investment in CI Income Fund Limited.

  I can confirm that no private clients of Collins Stewart Limited invested in the shares of CI Income Fund Limited, either in the placing or subsequently. In the firm's earlier submission we stated that Collins Stewart Limited acquired a number of private clients from NatWest Stockbrokers Limited in December 2001 and I confirm that none of the clients transferring to Collins Stewart Limited received any advice concerning investment in CI Income Fund Limited.

  It might assist the Committee for me to point out that Collins Stewart Fund Management Limited was the manager of CI Income Fund Limited and they delegated responsibility for investment advice to Collins Stewart Asset Management Limited. These roles and the relationship between the two companies are set out in the enclosed prospectus.

  Whilst writing I would like to take the opportunity to comment on a letter sent to the Committee by Limbort Limited dated 25 October 2002. The Committee will note that the letter, but not all the enclosures, was copied to my colleague Terry Smith.

  In the letter, Limbort Limited raises issues as to the suitability of advice which they say was given to them by Collins Stewart (CI) Limited in Guernsey. I note that no details of the advice they claim to have received are provided, the dates that the alleged advice was given are not specified and details of the specific investments and money that may have been lost have not been offered. From their letter one could assume it relates to split capital investment trusts but this is by no means clear. It may also be relevant that Limbort Limited is a Bahamian registered company administered from Guernsey.

  Senior management of Collins Stewart (CI) Limited are investigating the allegations made in the letter and I am told they have made their file available to the Guernsey Financial Services Commission. As part of this exercise I understand that Limbort Limited have been invited to specify their complaint but to date, this has not been forthcoming.

6 November 2002

30   This total of 603 clients is different from the 577 clients mentioned in paragraph 4, due to some clients investing in more than one zero. Back

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