Examination of Witnesses (Questions 200
THURSDAY 11 JULY 2002
200. So you are not going to take their recommendations?
(Mr Tiner) We will have a think about it furtherwe
have only just got the letterbut 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
onepeople 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.
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,
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.
(Mr Tiner) If you like, yes.
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
(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
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 toand 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.
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.
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