Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Question Number 299-319)




  299. Good morning, Mr Tiner, welcome, and Mr Merricks. For the shorthand-writer, could you formally introduce yourselves, please?
  (Mr Tiner) Yes. John Tiner, Managing Director, Financial Services Authority.
  (Mr Merricks) Walter Merricks. Chief Ombudsman of the Financial Ombudsman Service.

  300. Mr Tiner, you were given an unexpected prominence in the evidence of the former witness, so I will probably start on that particular issue. First of all though could I thank you and Sir Howard for your response to my letter of 26 September, with your letter of 10 October, enclosing a memorandum, which we hope to make public, on your inquiries. On receiving information regarding the Guernsey regulator, we did surf the web, and I have got a copy of a letter to the Guernsey Press and Star, from Peter Moffatt, where he states specifically that it would not be right to portray the discussions which took place with the FSA, as the Commission's own views were developing, as a warning. So could you give us an insight into that particular aspect?
  (Mr Tiner) We have seen that letter as well, Chairman, and it seems to us that there has been some confusion here, firstly on behalf of The Independent, which first ran this story some months ago, and secondly by the previous witness at this hearing. It seems that the Guernsey authority has been in discussions with a Mr Hugh Aldous, of the AITC, concerning his concerns about cross holdings and the systemic implications of that, and that he does not recall specific conversations with the FSA, but we had a range of conversations, as we normally do, with other regulators. So it seems to me that his letter to the Guernsey Press and Star seems to suggest, from his point of view, that there was no such warning, of any kind.

  301. On this issue, you have launched a formal enforcement, and I know, from the letter you sent me, that you cannot give us precise details of who is involved in that, but I would like to ask a number of general questions relating to that. First of all, how many authorised investment managers are under investigation on the grounds of alleged collusion?
  (Mr Tiner) Well, Chairman, what I would like to say there is that we have a small number under investigation. I think, in my last appearance here, I responded to a question from Mr Ruffley about how many might be subject, at that point, when we were discussing that in July, to possible collusion investigations, and I think I need to point out to the Committee, there is a difference in the status of our investigations we were conducting in July, when I came here, and the status of the investigations we are carrying out today, which is under our formal enforcement powers, and I think I referred then to it being perhaps a handful. And what I would like to do today is suggest that it is a handful, the number of firms that are subject to enforcement investigation. But I think I should also say that our strategy here for the collusion investigation will most likely develop as we learn more, as we dig deeper into the transactions and as we take evidence from the witnesses. So I would not like to put a precise number on it today, because I would anticipate that during the course of the investigation it might change.

  302. Could you give us an indication of the classes of authorised investment managers under investigation?
  (Mr Tiner) They are fund managers.

  303. In my letter to you, I did mention that to find concrete proof of misselling or collusive behaviour could be very difficult, and Sir Howard replied in the same terms, and did add that you may find enforcement cases being heavily contested, and that could affect the timescale of your inquiry. Could you give us a flavour of how you see an inquiry progressing, in terms of timescale?
  (Mr Tiner) Of course, the investigation has not just kicked off, as I say, our enforcement people have been involved with our investment firms' supervisors for some months already, and we have a chart, which has got the visual impact of this one on the wall but has got rather more on it; and, I am afraid, as a regulator, as an investigator, it is not good enough for us just to say it will be too complex, we have got to look at all angles, and it is much more complex than that. I would say therefore that there is an awful lot of data, thousands of transactions to get through. The process is that we will analyse all of that, we will interview witnesses, we will take evidence, and then we will form judgements, preliminary judgements, which we will put to the firms, and then, following their response, prepare, if we think it is appropriate, a submission to our independent Regulatory Decisions Committee. The firms concerned, or the individuals concerned, then have rights to appeal to the Financial Services Tribunal, and the latter part of that process could take many months.

  304. Okay; well, if you can keep us informed as it goes along, we will be quite happy. As I mentioned earlier in our proceedings, we are looking at this both from the consumer and the entire industry-wide element.
  (Mr Tiner) Yes.

Mr Plaskitt

  305. When you were before us back in July, Mr Tiner, you, in evidence, referred to splits, certain types of splits, as, and you described them, a contagious cocktail of high gearing and high cross holdings. When did splits of that nature first begin to appear in the market?
  (Mr Tiner) I think that there was a flurry of issues during the late nineties and the early part of this century, and that most of these splits that had those characteristics were probably being launched around that time, but there were a few that were earlier than that.

  306. So late nineties and into 2000?
  (Mr Tiner) Yes.

  307. And the FSA was fully aware of the existence of these products?
  (Mr Tiner) Well, of course, the FSA does not regulate investment trusts; we do not regulate investment trusts, and therefore we do not regulate split capital investment trusts. Our responsibility is towards the activities of fund managers, and they saw as their clients the investment trusts themselves, as institutional clients, and not the clients of the investment trusts. So what we did do, however, in February 2001, was issue a warning to advisers, to make sure that they were properly explaining the risks of split capital investment trusts to their clients.

  308. But you were aware of the marketing material being used to promote these contagious cocktails, were you not?
  (Mr Tiner) I would say that, prior to that, we were aware that we were not as deeply interested, I would say, in this particular activity, because they were unregulated products, as we might have been had they been a packaged unit trust product, which clearly falls within the direct scope of product regulation.

  309. But you use strong language to describe these things, contagious cocktails, was how you described them, and now you are saying that they were not of significant interest to you to do anything about them; is that right?
  (Mr Tiner) What I am saying is that we did not regulate them, we did not regulate the structure of these trusts; and what has emerged is that they have, over time, built up gearing, built up cross holdings, some of this was quite recent activity during the middle and end of 2001, as a number of trusts were restructured, and it is mainly from that point onwards that we have become particularly concerned. The earlier trusts, clearly, we are interested to know how they were marketed and how they were described, and I think some of our work has suggested that a number of advisers did do their homework and did see them as being, at times, too risky, because they understood this contagious cocktail that I described last time.

  310. Something has happened to make it important enough for you now to be heading up this really big inquiry, and yet, when we go back to the earlier stage, when it started to emerge, you seem to be rather standing back from it all. So what has happened to take you from sort of observer, because you said you were not the regulator, to now being intimately involved in investigations; something has happened along the line, and what was that?
  (Mr Tiner) What has happened is, quite severe detriment to consumers.

  311. I am sorry to interrupt, but, exactly, severe detriment to consumers, but surely that would have been apparent as soon as products emerged which you were able to describe as a contagious cocktail, yet in the early stages you were not doing anything about it?
  (Mr Tiner) No, but we did not regulate the products, and we still do not regulate the products.

  312. And you still do not, but now you are really involved with this?
  (Mr Tiner) But we do regulate the activities of the fund managers, and therefore it is the activities of the fund managers and of the advisers and of the stockbrokers here that is of interest to us, because of the detriment that has been created for their clients.

  313. Does not that leave the consumer rather unprotected, if it has to evolve to that stage before you are going to get involved?
  (Mr Tiner) No, I do not think so. I think that, since then, since, whenever it was, the late nineties, when a number of these were launched, the powers of the FSA have changed quite a bit, and we now have a much more, for example, active team looking at financial promotions. So I think that regulation has sort of helped resolve some of the issues that might have been around at that time.

  314. It seems to me that there was no-one around to jump on this when they first emerged and clearly were a problem, and you yourself identified they had a problem, nobody seemed to be getting stuck in to protect consumers; is that correct?
  (Mr Tiner) There may have been a gap in regulation.

Mr Ruffley

  315. Could I just pursue this, because I think you should have the opportunity to respond to some pretty serious charges made by Mr Alexander. He seems to think that these draft wordings that were put in by the Guernsey regulator into the two draft prospectuses I referred to earlier, he seems to make out they were a kind of smoking gun, that the Guernsey regulator kind of put you on notice, in some sense, and that you should have done something about it. Could you just explain to me what your response is to that charge, because from what he said, in those months in 2001, going up as far as September 2001, there was no warning in prospectuses about gearing or about cross shareholding, indeed about both, and the systemic risk; where does the FSA fit in, in terms of ensuring that kind of wording is in prospectuses, or procuring that that is done? What I want to try to understand is, did you do anything wrong, is his charge valid?
  (Mr Tiner) Yes; well, I think it is all very well for the sort of ambulance-chasing lawyers to come to these occasions and make these sorts of allegations, frankly.

  316. It is why I want to give you the opportunity to reply.
  (Mr Tiner) And I am looking forward to receiving a letter from Mr Alexander so we can explain to him exactly what did happen.

  317. But what about the smoking gun, because he was getting very excited . . .
  (Mr Tiner) I was slightly confused by what he said, actually, because he said that the prospectuses were fine but the promotional material was not, and then he said the prospectuses were not fine. So I am confused. I am not quite sure what he was quite trying to get over to you. All I would say is that the so-called warnings, as he described them, were not regarded as warnings by the Guernsey authorities, they were not, whatever was received, and I am afraid it was before I arrived and I have not looked into what was received, if anything, regarded as warnings by us. However, through the UK Listing Authority, which was not part of the FSA at the time, we have to approve all prospectuses, and we have done a trawl of past prospectuses and we think the disclosures about cross holdings, or the ability, within the investment mandate given to the managers, to invest in other trusts was clearly disclosed.

  318. And systemic risk, because cross shareholding in and of itself is not something that needs to be talked about, it is cross shareholding leading to systemic risk?
  (Mr Tiner) Not all cross holdings lead to systemic risk, and fund of funds have been around for a very long time, and they have not always created a sort of market contagion. And so I think our view has been that those disclosures, according to those individual investment mandates, were satisfactory; but we do not, I think, regard that whatever the Guernsey regulator said to us, and, as I say, he denies actually having given anything to us, as he says to the press in Guernsey, as a warning.

  319. I tend to share your view about Mr Alexander; he may be Class Law but he has not been a class act, because I think he has confused the issue. If I could just finally ask, on this prospectus point, the FSA had what responsibility in relation to prospectuses?
  (Mr Tiner) The UK Listing Authority—

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 6 December 2002