Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  200. So you are not going to take their recommendations?
  (Mr Tiner) We will have a think about it further—we have only just got the letter—but my initial reaction is it could be quite difficult. What we are trying to do is to encourage, through the offices of the AITC, the industry itself to get much better quality information to consumers.
  (Mr Rushton) Can I add a comment? Back in April, on this question of disclosure, I wrote to all the sponsors of investment companies and investment trusts reminding them, first of all, of their obligations under the listings rules to ensure that any price-sensitive information is communicated in a timely way but, more importantly, I asked them if they would advise their clients to co-operate with the AITC in their disclosure initiative which you heard about. I then called a meeting of some of those sponsors who are particularly representative in this sector and suggested to them that this would be a good thing in terms of restoring and protecting the reputation of the sector and I believe, although you did not go into this with the AITC, that the figures show that there has been pretty good co-operation on that. If there is not good co-operation with an AITC voluntary initiative, then I think it is reasonable for us to consider whether the disclosure rules we have for investment entities should be reconsidered.


  201. But there is an issue of a lack of formal advice from professional advisers, and a lot of people are relying on the press to inform them so I think there is a big issue here, is there not, Mr Tiner?
  (Mr Tiner) I accept that. I think there is an issue and people are confused about whether they have a bad or good one—people are confused about quite what these instruments mean, quite frankly. We did put a consumer information bulletin on our website some months ago to help consumers try and work through what kind of trust they are in, and we provided advice in terms of who to talk to about their own particular position.

Mr Plaskitt

  202. Following on on the issue of marketing, we heard Aberdeen Asset Management trying to plead that it is all the fault of the tumbling stockmarket and everything would have been all right were it not for that, and to some extent the Association has taken the same line, but interestingly you quote in your policy statement in the section on marketing, paragraph 3.5, and this is where the "safe as houses" phrase is used and the famous "more safety features than a Volvo" phrase is used, but more significantly you go on to say they have also been marketed as products that "tend to come into their own when stockmarkets are flat or falling". You do not attribute that and I think we would be interested to know who it was that made that claim. How widely was that claim made do you think in the marketing material for these kinds of products?
  (Mr Tiner) I cannot tell you who made it although I can find out and let the Committee know,[27] and I cannot tell you how widely that term was used. We put these in to give a flavour, quite frankly, of the sort of material that we have observed as being out there, or which has been.

  203. But the whole notion that we have been hearing this morning that everything would have been all right if only the stock markets had not fallen crumbles if these products were promoted on the basis that they give you protection when the markets have fallen, because it is patently untrue.
  (Mr Tiner) Well, particularly where you have this combination of gearing and cross-holding. That is what makes that statement particularly unreliable.

  204. Misleading?
  (Mr Tiner) If you like, yes.

Mr Ruffley

  205. Mr Tiner, can I thank you for your analysis in the report, particularly of the shortcomings of the cross-holding structure. On that we have heard a bit about the possible existence of a magic circle and possible collusive behaviour. How many managers and split capital trusts are you looking at in relation to possible collusive behaviour? How many investigations are you undertaking in the Financial Services Authority?
  (Mr Tiner) As we have said in the section of the report that deals with what we will be doing in the future, we have said that we have found enough data to cause us to go on and investigate this issue of collusive behaviour but without at that point progressing with enforcement proceedings against any particular firm. We have collected a lot of data about what is referred to as stock swaps, where one trust will swap stocks with another, and a lot of analysis of I cannot tell you right now how many trusts but quite a number and quite a number of managers—

  206. I do not want to interrupt unnecessarily but you say "quite a number". Indicatively are we talking about half a dozen, or three dozen or what?
  (Mr Tiner) We are talking probably more about a handful than three dozen.

  207. A dozen?
  (Mr Tiner) No, a handful. One hand!

  208. I thought you meant a handful of dozens.
  (Mr Tiner) No, because it is a relatively concentrated industry and there are a small number of firms who have quite a big market share.

  209. Can you tell us what powers you have to compel the disclosure of information from these companies in the context of possible collusive behaviour? Let us just stick with that.
  (Mr Tiner) As a regulator, under our normal rights we can call for information we require for the purposes of fulfilling our regulatory responsibilities. When we commence an enforcement investigation then we have rights to call for information which is relevant to that particular investigation, and so I think we do have the necessary powers to pursue this if we think we have a case to pursue.

  210. In how many cases do you anticipate utilising such powers to pursue the case to the bitter end?
  (Mr Tiner) I really would not want to speculate on that now. I think we have to look at the evidence we have gathered: we have said here that we have commenced enforcement proceedings in a number of cases in relation to misleading marketing information—

  211. I am talking about collusion.
  (Mr Tiner) On the collusive side we are still gathering data, and I would not want to be drawn on how many cases we will then pursue.

  212. Finally, and I know you will say this is an open-ended process but could you give this Committee some indication very briefly of what the penalties are if a case of collusion is proved to your satisfaction in the course of your inquiries? Secondly, when might you expect the first cases to be wrapped up? In other words, what are the penalties and when do you think the first penalties might be implemented? What is the earliest date or are you going to say to us, "Look, this could be several years down the road"? Could you give us a flavour of the timescale that the Financial Services Authority might be working to—and we would not expect you to give us firm deadlines but a clue would be helpful.
  (Mr Tiner) Do you mean just on the collusion issue?

  213. Yes. I am only talking about collusion.
  (Mr Tiner) The first point I should make is that we do not know when we will commence any action because we will not do that until we decide we have the evidence, so I cannot tell you whether we will at all if we do not get sufficient evidence to suggest that we should pursue a formal enforcement investigation. If we then do commence an enforcement investigation against any firm, under the enforcement procedures established in the Financial Services and Markets Act it could be a matter of possibly twelve months from the time at which that investigation commences to the time at which a decision would be taken. It could stretch even longer than that if the firm concerned, if there is such a case, then takes the issue to the Financial Services Tribunal.

  214. What is the ultimate sanction that you as regulator can impose?
  (Mr Tiner) It is quite wide: it is a range of fines. We can change firms' permissions to do business in particular sectors and we are able to ban individuals.

  215. Can you put them out of business?
  (Mr Tiner) Yes, we can.

Dr Palmer

  216. Picking up on two small points: the AITC evidence included a suggestion that certain recommended practices on the home market were not being generally followed in off-shore investments, even for United Kingdom owned companies, and I think you probably have heard a specific example of how funds were charged against income and capital. Do you think it would be helpful if the Channel Islands were to review their regulations and codes of conduct for split capital trusts?
  (Mr Tiner) Of course, the entire system here is a voluntary system, even in the United Kingdom, because investment trusts are not regulated. They are regulated through the United Kingdom Listing Authority but not as investment products by the Financial Services Authority. I would suggest, therefore, certainly in the light of what has emerged in this sector that it would be in the interests of all jurisdictions that have these products which have been sponsored from those jurisdictions to adopt a code of best practice.

  217. Should it be made mandatory?
  (Mr Tiner) I would like to see if the market, through the work of the AITC, could deliver the necessary standards themselves first without necessarily making it mandatory.

  218. You mentioned earlier the problem of getting compensation that arises if I had gone to an IFA who relied upon the propaganda of a company to make a recommendation, because it is not quite clear against whom I might have a claim. Does the buck stop anywhere, or can the company say, "Hey, it is the IFA" and the IFA say "No, it is the company"?
  (Mr Tiner) No. In that case, if there was that kind of dispute between the adviser and the promoter, in essence the complaint would not have been dealt with to the customer's satisfaction and the customer would go to the Ombudsman and the Ombudsman would decide who is at fault.

Mr Cousins

  219. How long are you going to give the AITC, the trade association body that covers this investment sector, to clean up?
  (Mr Tiner) We are in quite close touch to see how their information-gathering efforts have been progressing. I think they had one go at this at the end of last year which was, as I reported in a speech at the beginning of February, relatively unsuccessful but I think since then the determination of the sector to clean this up has been much greater and they have been much more successful more recently, so I am minded to give the AITC the time, perhaps a few months, to see if they can get the information they need and put it in a format which is of use to the market, advisers and consumers and to be able to put more relevant, more timely information out there into the market place.

27   Note added by witness: The comments were made by the following firms. I have also stated which publication they were printed in: "Safe as Houses"-Bloomberg Money Guide Supplement sponsored by Aberdeen, BFS, Jupiter, Govett, Gartmore, Leggmason & Exeter Investment Group. The actual article was attributed to Hargreaves Lansdown; "Volvo"-Exeter Investment Group (Split Definitives-Exeter's definitive guide to split capital investment trusts); "Come into their own"-BFS (Zeros-Why Risk it? Guide to cautious investment strategies from BFS, the investment trust specialist). Back

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