Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



  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.[14]

   Chairman: Then maybe we will have you and others back at a later time so we can go over it at leisure.

Mr Cousins

  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 issues—we are looking to waive fees in order to allow those funds the opportunity to recover—and 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 exposure—this is your assessment of the situation—and 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 population—about 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 listed companies.

  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 share—it 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 clear—that 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 about—not 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 their responsibility.

  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.[15] 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 zeros—and we have to keep this to zeros rather than shares, if I might say so, because the zeros are the low risk shares—and 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 zeros—we 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.[16]

  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 value.
  (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 now—
  (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 nervous—everyone more nervous.

  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.

Mr Laws

  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 through you?
  (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.

Mr Laws

  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 reassurances—I 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

15   Note by Witness: Part 16 of FSMA 2000 and DISP fig. 2 from FSA Handbook. Back

16   Ev 69. Back

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