Examination of Witnesses(Question Number
TUESDAY 22 OCTOBER 2002
299. Good morning, Mr Tiner, welcome, and Mr
Merricks. For the shorthand-writer, could you formally introduce
(Mr Tiner) Yes. John Tiner, Managing Director, Financial
(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
(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.
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
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
(Mr Tiner) What has happened is, quite severe detriment
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.
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
(Mr Tiner) And I am looking forward to receiving a
letter from Mr Alexander so we can explain to him exactly what
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
(Mr Tiner) The UK Listing Authority