Examination of Witnesses(Question Number
TUESDAY 22 OCTOBER 2002
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.
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
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
(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 legislationas 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
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
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
(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.
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
(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
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
(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.
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
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