Examination of Witnesses (Questions 80
THURSDAY 11 JULY 2002
80. Forgive us but we feel as a Committee that,
on this issue of cross-holdings you have been vague and selective
to us, and we therefore ask for you to write formally into this
Committee about the whole issue of your cross-holdings, and we
need figures on that issue.
(Mr Gilbert) We would be delighted to do so, Chairman.
Chairman: Then maybe we will have you
and others back at a later time so we can go over it at leisure.
81. You have referred, Mr Gilbert, to measures
you are taking to restore confidence in the market in general
and measures you are taking with regard to your own particular
trusts. I wonder if it would be helpful for you just to explain
that in rather more detail? What are these repayment mechanisms?
(Mr Marshall) If I could start, there are basically
three broad initiatives we have been looking at. As far as the
retail investors are concerned there is the Progressive Growth
Unit Trust which has the widest retail exposure and there, as
I mentioned previously, what we are aiming to do is put an uplift
package together which will ensure that investors receive their
original investment back at a future date. Some of the details
of that are still in the course of being finalised and we will
be discussing those with the regulators and others. I am not in
a position to give you all the details right now but that is the
broad thrust of it. Elsewhere we have mentioned the fact that
we are waiving fees on a number of the distressed investment trusts
that are having specific issueswe are looking to waive
fees in order to allow those funds the opportunity to recoverand
in a particular instance we have also invested in a particular
fund which has been in trouble in order to try and secure that
fund's future; we will perhaps be a participant in the recovery
of that fund. So there are a number of things we are doing there,
plus I think the document you have in front of you, the monthly
monitor document which we produced, is really all about trying
to give as much information and be as open to the market as we
possibly can so that the issues are understood, because there
clearly is evidence in the marketplace of misperception, of generalisations
going out, whereas when you draw down to the detail the problem
is much more localised and much more specific and we have tried
to be clear on that. I think there are various initiatives we
are trying to do there.
82. I wonder if I could just try and clarify
some of the points you have been making to us there. There are
19 of these split capital trusts. I do not know, and perhaps you
could tell us, how many of those split capital trusts you regard
as being trusts with the greatest exposure on the retail market,
because in your own mind you are separating your trusts into two
categories: one category has a high retail exposurethis
is your assessment of the situationand one does not. Could
you just tell me how many of these 19 trusts you regard as being
in each group?
(Mr Currie) I think why we are putting this into two
different boxes is because the ownership pattern of split capital
investment trusts is different from the ownership of unit trusts.
Investment trusts generally have an ownership of about 1 per cent
of the adult populationabout 600,000. On split capital
investment trusts as a universe, as far as we can calculate it,
there may be about 50,000 owners. A lot of conventional trusts
became split capital trusts in the early 1990s. But drilling down
into the type of trusts we have, as far as we can tell, of the
trusts launched in the last three or four years there may be about
10,000 or so private investors, many of them direct investors
who know what they are doing, DIY investors, but we cannot keep
track of the registers because quite a lot of names are buying
through nominee accounts. We know more about the unit trust ones
because the names are all coming through the unit trust on which
Aberdeen itself maintains the register. With an investment trust,
in terms of the buying and selling of nominee accounts, it is
really very difficult to keep track of who owns it, so the 19
that are managed are all very different with different histories.
Three or four of them came with the acquisition of Murray Johnstone
in Glasgow so they arrived with their own shareholders and their
own history. Two or three others came from a Jersey-based company,
Graham Investment Managers, acquired by Aberdeen, so trying to
know the shape and the structure is quite difficult but we monitor
the registers as best we can. Zero holders typically are more
owned by the private investors than geared, ordinary or capital
shares, and therefore to generalise with the 19 it is quite difficult
to say which is more retail than the other. What I can tell you
is that a unit trust is a retail-focussed vehicle and generally
split capitals and the higher risk share classes are owned by
less people but generally wealthier people with bigger sums, who
are using them as part of an overall portfolio.
83. I am grateful to you for that but the answer
would seem to be that, of the 19 split capital trusts, in fact
you are not offering a guarantee repayment on any of them?
(Mr Currie) Correct. These are independently quoted
84. I am glad I worked that out and that I was
not, and I am not suggesting it for one moment, intentionally
misled but I am glad we have clarified this point: that you are
saying you are offering a repayment mechanism to protect people
from losses in the case of unit trusts but in fact that does not
apply to any of the split capital trusts that we are more particularly
talking about today?
(Mr Marshall) The split capital funds, the zeros we
are referring to, are individual shares. The Progressive Growth
unit trust is a managed fund of zeros.
(Mr Gilbert) Marketed as low risk. It is the marketing
aspect that is the important aspect on a split capital investment
trust and it is wrong to talk of the split capital as one class
of shareit has very different classes of shares and the
low risk class of share is the zeros. If someone bought a geared
ordinary income share that tells you that there is gearing in
that, and that it is not a low risk product.
(Mr Currie) The FSA have given guidance on this area
and from the individual investor's perspective it is, "How
is it you came to acquire either your share or investment? What
happened in the process? How were you advised to make an investment
in this case? If you were advised and came in and were misled
saying `Buy this share and it is going to be as safe as gold bars'
or whatever, you go to the person who told you that and raise
your issue with them for the complaints procedure", because
we are all regulated firms and by going through the authorised
procedures it means that we are able to identify how somebody
came to buy something. If I want to go off and buy Japanese warrants
because I have a dead cert belief that the market is going to
go up and gamble my way to whatever it is and they go down, I
did it, if I did it through my own execution-only broker saying
that that was a great thing for me to invest in, on my own cognisance
and if I come back afterwards and the Japanese market underperforms,
the position on that if I have made my own decision is pretty
clearthat was done on my own expectation and my own cognisance.
So we are turning back to talk about how things were perceived
because what we have with the issue of the zero funds in particular
is that private investors saw this as an asset classed as low
risk and that is the one which we have the most concerns aboutnot
the capital shareholders. I myself invested in a technology capital
share which was a bit of a gamble and it did not work, but I am
not writing to the FSA or yourselves to say I have lost my money
on it. Do you understand why I am trying to differentiate?
85. Yes, I do.
(Mr Currie) The Ombudsman has looked at some of these
cases and has pretty clear guidance on his website.
86. Yes. To be fair I would need to know a little
bit more about your financial affairs than I either need to know
for the purpose of this occasion or wish to know to form a judgment
of that, but let us be clear about how we are teasing out your
own attitudes to this. You are saying that people who acquired
these shares in these split capital trusts through execution-only
brokers is a sign that they ought to wash their own face, and
really "Tough" is your response to that, is it?
(Mr Currie) No. What I am saying is look at the sales
process because there is an issue to do with how people bought
and sold things, and if people made their own decisions and they
elected to buy an equity or a share or whatever it is, then I
think you would find they made their own decision and that is
87. But I am just trying to clarify your attitude
to this. If they bought these shares through execution-only brokers"Tough".
If they brought them through advisers, then your advice is to
track back to the adviser and see if the adviser was to blame.
(Mr Currie) I think that is FSA's guidance on that
and that is quite right.
If they are a customer of ours, they should come back to us.
(Mr Gilbert) It is more complex than
that. I think that is over-simplifying it. We have examples of
people who have read in the newspaper that zeros were a good thing
and they went and bought through an execution-only stockbroker
and now they are reading that zeros are not such a good thing,
and it is very difficult to say to that person "Well, look
. . .". And then there are clear examples where people have
bought zerosand we have to keep this to zeros rather than
shares, if I might say so, because the zeros are the low risk
sharesand where they have been advised to buy it by advisers,
obviously the first stage to go back to is the person who advised
them to buy the share.
88. Do you think that the attitude you have
just expressed towards the people who have acquired these investments,
which is in the one case "Well, tough"
(Mr Gilbert) I do not think that is correct. I think
those are words that have been put in our mouth.
89. In that case could you explain to me what
measures you are taking to restore the confidence of those investors
in those products?
(Mr Gilbert) We are doing all we can to restore confidence
in the zero share market. As I said, we are planning a guaranteed
uplift on the unit trust: we have injected cash into one of our
investment trusts that invests in zeroswe are doing all
we can to restore confidence in that sector of the market because
that sector underpins the rest of it.
90. Would you be happy to give an account to
the Committee, not now, of these 19 trusts and the various measures
you are taking with regard to each one to underpin confidence?
(Mr Gilbert) We would be delighted, yes.
91. The other point is this: in this document
which you have been kind enough to send us, essentially you are
saying that there are underlying assets that back these shares,
these investment products, which retain the possibility of considerable
(Mr Currie) Yes.
92. But your assessment varies in different
categories of this rather complex share ownership structure. It
would be nice to have that explained to the Committee either firmly
(Mr Gilbert) We would be delighted to do so, yes.
93. Do you feel, then, that basically these
trusts are going to trade out?
(Mr Currie) The vast majority.
(Mr Gilbert) As long as markets do not go down. If
markets go down further from here, others will get into difficulty.
If markets go up, a lot will recover. We are heavily dependent
on stock markets.
94. What timescale are we talking about? What
is the recovery term?
(Mr Gilbert) The problem is everyone is getting more
and more depressed on markets now. Six months ago everyone thought
markets would recover in three months; now people are speaking
about two to three years and that makes lenders nervouseveryone
95. How many of these 19 trusts could survive
a two or three year continual decline?
(Mr Gilbert) I could not say really. We would need
to do a more detailed assessment of that. I could not answer that
now. I could come back to you on that though.
96. Can I ask you what proportion of the retail
investors who bought the zero dividend preference shares will
receive compensation from you?
(Mr Gilbert) One hundred per cent, if they bought
through us or bought our unit trust.
97. One hundred per cent if they bought directly
(Mr Gilbert) Through us or bought our unit trust,
so not only are we compensating retail investors who bought the
unit trust, but anyone who bought our unit trust.
98. And what proportion of those retail investors
who have zero dividend preference shares would that cover? A large
proportion or a minority?
Chairman: I think Mr Marshall wanted
to come in on the previous point as well.
(Mr Marshall) To clarify, the package we have proposed
for the unit trust applies to all investors in the unit trust.
What I think Martin is explaining is if there were a case of a
zero dividend preference share having been mis-sold in any way
by us to a retail investor outside the unit trust then obviously
we would compensate for that, but our package applies for the
unit trust and is only for the unit trust.
99. Do you not think that the compensation that
you pay yourselves should go further than that, given that Mr
Plaskitt earlier on quoted from one of your investment trust managers
who was commenting upon the low risk characteristics of these
particular financial instruments? You yourselves at that time
said that you perceived these to be low risk, and actually you
said a second ago, Mr Gilbert, that the zeros are the low risk
shares, so is it not the case that you did get this wrong: that
your view was that these financial instruments were low risk and
then, of course, the stock market unravelled and the gearing effects
and the cross investment effects came through, so is it not the
case that all of those private investors who bought really on
the back of your perception and assurances should be compensated?
(Mr Gilbert) I do not think they bought on the back
of our reassurancesI do not believe that. There were numerous,
hundreds of articles on zeros at that time saying they were a
safe investment and they have not turned out to be as safe as
we thought. "Low risk" does not mean "no risk".
"Low risk" does not mean that you cannot lose money.
14 Ev 68. Back
Note by Witness: Part 16 of FSMA 2000 and DISP fig. 2
from FSA Handbook. Back
Ev 69. Back