Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 220 - 239)



  220. So you are going to give them a few months and your expectation was that, if there were cases that you were going to bring against particular individuals—who knows, that might take anything up to about a year?
  (Mr Tiner) Yes.

  221. How long do you think it is going to take the Financial Services Ombudsman to deal with the issues that may be put to him?
  (Mr Tiner) The Ombudsman has a service standard which we have set for him which is to hear all cases within six months, but in fact the average period by which he has judged a case is rather less than that. It is about four months.

  222. In a paper to the Committee you describe the market capitalisation of the split capital investment trust sector as being £13.2 billion as at 31 March 2002. What value would you put on it now?
  (Mr Tiner) You need to do a daily evaluation of this given that the market is down sharply overnight. This was in May—

  223. No. March.
  (Mr Tiner) I am sorry. I suppose the stock markets have probably fallen 10 per cent since then. I have not done an up-to-date valuation but my guess would be that it has probably fallen by more than 10 per cent because of the collateral damage that has been done throughout the whole sector from the bad splits, if I can put it that way, but the work would need to be done.
  (Mr Rushton) Regrettably some of those splits are no longer in existence, of course. They have gone into liquidation since March. It is a small number, but—

  224. So what value would you put on the sector?
  (Mr Rushton) I have not got a figure either. As John Tiner says, you would have to calculate that day-to-day with the market moving as it is.

  225. Clearly something which had a value of £13.2 billion at 31 March is at least worth talking about. I was very concerned by your statement that there could be £3.5-4 billion of exposure to banks within that sector. Do you think, quite apart from the considerable sums of money that clearly investors are losing, there is any issue of systemic risk here?
  (Mr Tiner) No. I do not think there is a systemic risk here through the contagion that might take place within the investment trust sector itself because, as has been discussed several times this morning, the problem is restricted to a minority of trusts, albeit quite a significant minority. On the banking issues, not all of the debt—whatever the right number today is in terms of the level, £3.5 billion or whatever—is at risk because much of it is in trusts which are not on the hospital list. Some of it is, of course, but also the banks get paid out first. This is the problem for the investor—the banks get their money first—so I think it is not right to assume that the banks are going to pick up a hit of that sort, or anywhere near it.

  226. In a context where we are talking about a value of over £13 billion, which if we are going to use a unit of measurement roughly equates to what the pensions mis-selling issue cost the insurance industry so it is a big ticket item, £13.2 billion, and that value is eroding, you yourself said that upwards of 10 per cent of that value may have gone in the month since then, and your own activities are projected, waiting to evaluate actions by others which may lie 6-12 months in the future. Do you think that is an appropriate response to this situation? Do you think it is good enough?
  (Mr Tiner) Yes, and I think the reason that they have fallen in value further since the report in March is because the stock market has gone down, not because new structures have been created that have created some new dangerous financial scenario. What is happening now is market-related, not structure-related. The structure bit happened before because there is no new gearing or anything like that coming into this sector.

  227. But this sector was almost—well, substantially—created within the bull market of the 1990s.
  (Mr Tiner) No. There has been quite a lot of trusts issued since 1999. I think we have said in our paper that there were about fifty.

  228. Your own figures to the Committee were that 89 of the 134 splits that at that time you drew our attention to had been created since 1990. Those are your figures.
  (Mr Tiner) Yes, but I have also said there has been an acceleration in the last three years which is the period during which we have had the bear market, so I do not think all of these have been just launched in an upward only market. They have been launched since the market has started to turn, as these figures suggest.

  229. So from your own point of view as a regulator you do not regard this situation as producing any major issues of prudential regulation for you?
  (Mr Tiner) I would not say that. I think there is a difference between concerns about prudential regulation and systemic concerns. I think there is a difference there and it is an important difference to point out. There are issues here that are concerned, of course, with consumers, as we discussed, and there are issues here relating to whether firms are able to deal with the consequences of any redress that may be due to those consumers. They will have to be dealt with and we are monitoring that and watching that very closely indeed. I do not believe, however, that that will then become a systemic crisis for the sector or for the financial services industry.

  230. The creation of the Financial Services Authority brought together prudential regulation and conduct of business regulation. You seem to be taking the view that the conduct of business issues here involved in this, despite the large sums of money, is not urgent and can wait for some months or years to go by before you look at it?
  (Mr Tiner) I do not think I would agree with that. I think that we have been working very hard to identify the breaches of conduct of business rules—the mis-selling and the misleading information that has been given to the consumers—and that is why we have started to pursue enforcement proceedings. Unfortunately, because of the provisions of the Act, we cannot wrap up those proceedings very quickly. We have to go through quite a lengthy process, which is not one that has been determined by us but is determined in the Act, which can delay the outcome for quite some months, but we are moving as fast as we can.

  231. When do you expect the first action on your part to initiate proceedings to be, because the impression you gave in answer to questions from my colleagues earlier was that twelve months was your expectation?
  (Mr Tiner) It could be that, yes. The process could take that long.

  232. Do you think against the background of this situation that is an appropriately urgent response to what is a critical conduct of business issue?
  (Mr Tiner) We have to follow due process. We cannot and should not cut due process. I would hope that we can get it done, frankly speaking, quicker than twelve months but I would not be able to promise that. In the meantime what is important for consumers is that they do have a right of access to the Ombudsman so that this process that we might take against firms does not slow up consumers getting redress, because it is the Ombudsman who will hear their complaint and who is able to deal with those complaints while those enforcement investigations continue.

  233. But the cases that will go to the Ombudsman, given the rather peculiar hybrid regulatory situation of this particular sort of investment trust, are going to be very difficult for the Ombudsman to deal with, are they not? These cases are not going to be easy.
  (Mr Tiner) The Ombudsman incidentally at the moment has not got very many complaints, which is an interesting statistic. He only has 280 at the moment out of 50,000 people investing in this sector, but my belief is that quite a number of those will be relatively straightforward because people will have bought them through advisers or off promotional material. There will be some where it is a little bit unclear and it may take the Ombudsman a little bit longer, but he still has to deal with it within six months.
  (Mr Rushton) A number of investors will be claiming redress against their independent advisers before going to the Ombudsman.

  234. So that is all right then.
  (Mr Rushton) It is all right if they get compensation.

  235. That is your view? You are happy with the situation in which the adviser sector, the intermediary, will bear the brunt of this?
  (Mr Rushton) If the intermediary is at fault, he should.

  236. Do you think you have bottomed out your approach to this as a conduct of business issue? Are you bringing to this issue the urgency that seems to be required?
  (Mr Tiner) I think we are. I think we are pursuing the cases with real vigour and, if we can get these cases completed within the process established within the Act, then we will do that. We have made this a clear priority within the Financial Services Authority and we are progressing as fast as we possibly can. That is the only assurance I can give you—we are literally pursuing it as hard as we can.

  237. Perhaps you would care to clarify the prudential regulatory issues that you see being involved in this, because your documentation is mostly going down a conduct of business track and mostly going down as being not issues for you but for advisers, the Ombudsman, and the AITC. The conduct of business issues in this you see as not being in front of you, so let us look at the prudential issues and tease out what prudential regulatory issues you can find in this because I do not see it clearly in the documentation you have given to this Committee.
  (Mr Tiner) I think the prudential issues emerge if and when firms are required to pay redress to the consumers, and the issue for those firms is whether they can afford to pay that redress, either because they choose of their own will to make those payments to consumers or because they are instructed to do so by the Ombudsman.

  238. So we will not know what the prudential issues are until we have been through the conduct of business issues, and the conduct of business issues you see as largely being issues for people other than yourself?
  (Mr Tiner) That is the system that has been set up. The way in which investors get compensation for breaches of conduct of business is through the Ombudsman—that is the system. We have put the system in place and we will make sure that firms deal with the complaints according to our rules, but the backstop is the Ombudsman.


  239. Just to take up the point you made there about the exposure of the banks and the fact that the banks will be paid out first, to the ordinary investor that seems unfair but you have to allow for that ignorance. Let me put a question for the banks, though. Do you feel that the banks have been unwise in lending in this way? Do you feel that they have been cavalier and they have fuelled the bubble, because at the end of the day the big boys are the first in the queue?
  (Mr Tiner) I am afraid that where there is secure bank debt they are always first in the queue—that is the nature of a lot of bank lending.

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