Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Question Number 320-339)



  320. Which you were not, at the time?
  (Mr Tiner) Which we were not at the time.

  321. But did you have any overarching responsibility, not directly as a Listing Authority, because you were not until this year, but in your general remit as the regulator for financial services? I just want to understand this, because a lot turns on it. We are going to go after you, as a result of this, and I do not know how strong this is, I am less convinced by the minute?
  (Mr Tiner) My understanding is that only from 1 December last year were the UK Listing Authority, the UK Listing Authority became part of the Financial Services and Markets Act, and therefore the responsibility of the FSA; before that, I am not aware that there was a contracting out kind of obligation from the previous regime to the FSA, there might have been, I will have to check it and come back to you, I am afraid.

  322. Could you check and write to us on that, for clarification. Because I have to say that, the Financial Services Authority, it is important that the whole of the country has confidence in it, and I do not think it helps anyone if some pretty serious charges are levelled against your organisation without you having the opportunity to clarify it, because the whole sector, financial services, suffer, beyond the split capital trusts, if your integrity and competence is impugned. So I thank you for your answers, but if you could put in writing, specifically, on further consideration, answers to the questions that I posed about what you knew, when you knew it, and also what responsibilities, if any, you had, because I think this is quite a serious matter to clear up?
  (Mr Tiner) Indeed. I will do that very quickly.[7]

Mr Beard

  323. Mr Tiner, where do you see the risk arising in these split capital trusts; is it because there is something inherent in the concept of the trust, or is it because of the conduct of certain people in the way they run them?
  (Mr Tiner) I think that the sort of, as has been described previously, old-style, split capital investment trusts, where there were three classes of shares, and they sort of came in order, in terms of getting their money out and getting their return out, so there was a lower risk element, a medium risk element and a higher risk element, if you like, were a part of the investment landscape for some time, and they performed over many years, over decades. This evolution of cross holdings, and particularly to a very high degree, some of them over 70 per cent of the portfolio invested on the splits, together with gearing, has meant that, if these were created during the bull markets of the late nineties, if the markets went up very sharply the investors stood to make an awful lot of money, and if the markets fell sharply the investors stood to lose an awful lot of money, and that is what has happened. And, as the markets have weakened, I am afraid that the loss of the investors has become exponential, and in some cases people who might have invested £50,000 are now left with a few hundred.

  324. Which of your predecessor voluntary regulating bodies was responsible for supervising this, or regulating it?
  (Mr Tiner) It was split in different places. IMRO, the Investment Management Regulatory Organisation, were responsible for regulating the fund managers; the PIA, Personal Investment Authority, were responsible for regulating the advisers; the Securities and Futures Authority were responsible for regulating the brokers; investment trusts were not regulated at all, other than at the point of the prospectus, which was the UK Listing Authority. Of course, that has now all come together, since 1 December, into the FSA.

  325. And what did any of those bodies, or you, when you took your powers, on 1 December, if it is appropriate, what did you do to warn consumers of the inherent risk that you foresaw, you or your predecessors?
  (Mr Tiner) Certainly from the time that we got our full powers, in N2, on 1 December last year, we have been fairly constantly warning consumers, through our website and through speeches and through any other mechanism that gets through to the media, about the risk of these.

  326. But the horse had bolted by then; so what happened?
  (Mr Tiner) Prior to that, I think the first public statement that we made about it, as I am aware, was February, March 2001, where we warned advisers to make sure they properly disclosed the risk to their clients.

  327. You mention, in the supplementary note that you gave us, you say here, that "the investment trust company was not required to obtain authorisation . . . and because the prospectus and listing particulars for the trust were excluded from the investment advertising regime which operated under the previous legislation—as they continue to be under the new financial promotion regime." In other words, you are not able to inspect the prospectus before any of these trusts are formed; is that the case?
  (Mr Tiner) Not as a financial promotion, we are not, but as a prospectus, under the Listing Rules, like any other prospectus, whether it is issued by British Airways, or Vodaphone, whoever, then we are; but it does not constitute a financial promotion.

  328. So what does paragraph 19 of your note[8] mean then, in that case?

  (Mr Tiner) What it means is that, at the point of the prospectus, the prospectus effectively stands on its own; if there is any subsequent marketing material published by any authorised firm then that is subject to the Financial Promotions Order and subject to regulation, but the prospectus itself is not.

  329. So that they can put out whatever they please, in the prospectus, and no-one could adjudicate it?
  (Mr Tiner) No; no, they have to comply with the Listing Rules, in other words, the rules that govern what listed companies need to say about inviting applications for buying their shares. There are certain requirements and there are things like, in this area, describe the investment policy, the investment strategy, of the trust, and they do that, and that is where, in some cases, this cross holdings thing has been revealed. But they are not looked at as financial promotions, in the sense that they are sort of sales documents, if you like.

  330. There has been a lot of criticism about the marketing material issued by both brokers and managers; do you look at this before it has actually been widely available to the public, or do you only react to complaints when it has been published?
  (Mr Tiner) A bit of both. We cannot, obviously, look at every single piece of financial marketing literature that is out there in the market-place, we would have a multiple of the people we have now if we were to look at, pre-clear, every single advert or promotional literature, marketing document, or whatever, and we do not do that. What we do do is, we look at a sample of financial promotions before they are launched, and we discuss with firms about how they need to improve them, if we think they are potentially misleading. We then review marketing literature that is out there in the market-place and sometimes we ask for that to be withdrawn, if we think it is misleading. But what we cannot do is look at every single piece of marketing literature.

  331. So, in summary, Mr Tiner, out of this episode of the split capital trusts and all that is going on, what have you learned that has changed your practices in the FSA?
  (Mr Tiner) I think that we have learned that, firstly, complexity often results in risk; however the analysts might tell you about it being a low risk, complexity often equals higher risk. So I think that in our surveillance now of financial promotions we are increasingly concerned about complexity. Secondly, we are increasingly concerned to look at promises that look just too good on the surface, and we have a number of current inquiries, rather than enforcement investigations, undergoing there about some high risk products which just look too good to be true. And so I think that, out of this affair and out of generally what we have learned from what we have seen in financial marketing literature, we have just increased our resources dedicated to this particular activity.

Mr Mudie

  332. The way I see what you say though is, investment trusts were not regulated so you cannot be blamed, but you are now looking at fund managers. I presume you were responsible for fund managers before?
  (Mr Tiner) Yes, IMRO were responsible for fund managers.

  333. So, the fund managers, you are now saying you are looking at fund managers; it was your job to look at fund managers before. So, whether investment trusts were regulated or unregulated, you had a responsibility for fund managers, which you do not seem to have picked up; now you seem to have only picked this up when a lot of people have lost money. Is that going to be a pattern of behaviour for the FSA; quite seriously? You have just said something which I think is good advice when it is showing returns too good to be true, it deserves looking at, does it not, not from an investment point of view, from a regulatory point of view? Now why was this not picked up before?
  (Mr Tiner) I cannot tell you exactly why it was not picked up before; this is going back some years.

  334. Are you looking into why it was not picked up before?
  (Mr Tiner) No. I think we are looking at what lessons we learn from this recent debacle in the split capital investment trust sector, and making sure that, given the powers we have today, which are greater than the powers that existed then, particularly in relation to financial promotions, we have got our resources doing the right thing. And so, for example, looking at products like precipice bonds, and so on, that appear to just make promises which look too good, that we are on the case. And I think that, going forward, and I hope that, going back over the last year or so, since the FSA has had its own personality, if you like, legal personality, we have been doing that.

  335. You sound like Mr Alexander there, if you will excuse me. I just asked a very quiet thing and you seemed to be confirming it, but you deny it. If you are going to learn the lessons, you have to look at why it was not picked up, and I just ask you, are you looking to why this was not picked up by the organisation sooner?
  (Mr Tiner) I think the problem is that the regime was so totally different then to now. It is like comparing apples and pears, in a way; we could look at it but I am not sure it would actually help us inform our sort of activities in the future, because the regime is so totally different.

  336. But, Mr Tiner, just looking at it from the investors' point of view, who have lost a lot of money, some in desperate circumstances, they look to you; now the way the situation is moving is you are now acting when they have lost their money. They look to you, as a regulator, to ensure that they are investing that money in a relatively safe, transparent situation; now clearly that was not so. And so I would be angry, if I was an investor, looking at you, as a regulator?
  (Mr Tiner) Again, I am sort of here focused more on making sure that we do do our job today; and what you say is absolutely correct, that our job is to make sure that consumers, who are the significantly weaker party in any buy/sell situation between an adviser or a fund manager and themselves, are given the proper warnings, and that is what we are trying to achieve today. I think your point about can we look back and, quote, "learn the lessons" and make sure we have not missed anything, is a fair point; and, as I say, I think the regime is very, very different today, so we need to treat that with caution, but perhaps we should do it.

  337. But you can understand why we are looking at you, because we are your regulator, if you wish. But just on the paper we have been given, I take it that there is going to be a delay, understandable, in the second part of your investigation, but where are you with the first part, because, whatever Mr Alexander said, that was one that actually touched nerves, the promotional and marketing, and that seems to me to be an easier one to bottom? When do you anticipate bringing something on that first part of your investigation?
  (Mr Tiner) It should be easier to bottom, it is a more self-contained kind of investigation than the very widespread kind of collusion investigation; and we are progressing very well since we began this formal process in May, and I would hope that we will bring a case before our Regulatory Decisions Committee around the turn of the year.

Mr Tyrie

  338. I think most of us are agreed that splits were a good idea in their original form but that they ended up abused through high gearing and cross holdings. Do you happen to know what has happened to the good end of the splits market, as a consequence of the bad end of the market being exposed?
  (Mr Tiner) Yes. I think the market values of the so-called good end of the market have suffered collateral damage from the bad end of the market, but the structures of these trusts at the good end of the market are such that, if people are holding them to maturity, which most people do, because they are saving for a particularly defined outgoing, the good ones should be expected to deliver on what they said they would do.

  339. I ask this because you, as an institution, published a very important document, called `A Risk-Based Approach to Regulation' about two years ago, which lies at the heart of the way you approach these problems. This said, that there should not be zero risk, that risk is an inevitable part of a successful and flourishing financial services industry. What steps do you think you can take to rebuild confidence in the market, to the point where people will be prepared to carry on innovating to provide good products, not only in splits but more generally, because this is going to infect the whole market?
  (Mr Tiner) Clearly, product innovation is important, and it is important to give consumers a range of choices about what type of investment they would like to hold. Our objective here is not in any way to stifle innovation but to ensure that innovative products are properly described to the customers who want to buy them, and that does not seem to me to be an impossible mission, at all, and that is what is at the heart of risk-based regulation.

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