Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Question Number 340-359)



  340. Can I just explore very briefly, I think you have handled very well the allegations made by Mr Alexander, I just want to explore a hypothetical question, which you may be reluctant to answer, but let us suppose that you did get this warning from the Guernsey regulator, what would you have done with it?
  (Mr Tiner) Hypothetically speaking. I am not clear exactly what the warning was supposed to have been. I do not know whether we were supposed to have been sent this prospectus, or he came over and talked to us about it, I am not quite clear at all of the form of this warning.

  341. Would it not have been reckless to have sat on it?
  (Mr Tiner) I think that what we would have done, had we, say, been given this thing, we would talk through it, and, again, this is through the UK Listing Authority, remember, not through the financial regulators, that we would have taken it into consideration in judging whether the disclosures in UK prospectuses were adequate. That is hypothetically the sort of thing we would do, like any other information we receive, from anywhere else; we receive information all the time, and what we want to do is to plug that in to the people that are thinking about these prospectuses to make sure they are covering the ground.

  Mr Tyrie: You see, he has concluded that you should not be immune from actions for gross negligence; the immunity was granted partly because the FSA did not want to be run around the block by very large firms, like Morgan Stanley, every time you decided to look at their regulatory structure. But we are finding, in this case, to our surprise, that it is possible perhaps that your immunity may reduce the vigilance that you may have been operating with, to protect consumers; and that, if you had sat on this document, that could have, or whatever came through, might have come through, from the Guernsey regulator, that this would be considered gross negligence and that you would be immune from it. In the light of not only that point but also the point made that most other regulators around the world are not immune from gross negligence, at least they are certainly not in continental Europe, do you think this is something that needs to be looked at? Are you happy that you should be immune, that you can behave recklessly, as an organisation, and still be immune?[9]

  Chairman: That is a hypothetical question.

Mr Tyrie

  342. Well, that is the situation, that is the law. Just to clarify this, Chairman, not with respect specifically to this case, but in general, you are immune, you have immunity from actions in response to reckless behaviour by the FSA?
  (Mr Tiner) My understanding is that it is a fact, within the Financial Services and Markets Act, operating from 1 December, that we have statutory immunity. I suppose that does not cover acts of bad faith. But prior to that there was no such immunity, and, in any case, this prospectus issue was through the UK Listing Authority, as I have said a number of times, who I think were subject to different types of regulations. The question of statutory immunity is, I do not think, something for us, frankly, I think this is something for Government and policy-makers in Government to decide. There is a two-year review of the Financial Services and Markets Act starting at the end of next year, I do not know whether that will be on the agenda or not.

Dr Palmer

  343. Just trying to summarise, the problem comes down to this, that the high gearing and high level of cross holdings substantially increased the risk of this particular type of split capital that we are talking about; the nature of the marketing, in some cases, appears to have been misleading in not showing that risk, the stuff about "the babies sleeping at night", and all that rubbish. And then there is a third point, that the fees levied on both stocks and debt actually gave a perverse incentive to the fund managers to increase the gearing and increase the cross holding, and therefore increase the risk. Would you agree with that?
  (Mr Tiner) It could certainly create a self interest.

  344. Do you think that in the future we should prevent, in one form of regulation or another, this incentive from being present, should we discourage fees being levied on both stocks and debt?
  (Mr Tiner) My feeling is, not, actually, because this is not a question of levying fees on stocks and debt, it is a question of levying fees on equity and debt, which equals stocks, and that is the sort of asset and liability side of the balance sheet. And what investment managers do, in this case, and in many cases, not very well, is to manage those assets, and the fee that they receive is for the management of those assets, and the assets they are managing is the gross number. Now we could discuss whether the level of the fee was too high, that is an issue for the market, but levying the fee on the gross assets, i.e. the actual work they are supposed to be doing, seems to be reasonable.

  345. Do you feel that, we heard in the previous evidence that it is difficult to imagine any sane independent adviser actually recommending a product with an effective fee of 10 per cent of the amount invested. If I were selling you electrical equipment and I said, "There's a risk it might electrocute you, I have to warn you of this, so I am putting it in bold type, but it may work perfectly well, it may be very good," it would actually be illegal for me to sell you that, however loudly I warned you about the risk? Do you not feel that there is some level of risk at which it ought not to be possible to sell financial products?
  (Mr Tiner) Probably, on a theoretical basis, yes; but I think that, at the very extreme of the Hedge Fund market, where there are some horrendously complex derivative structures, it is possible to explain them but only to very sophisticated investors, they are quite plainly not products for normal people, perhaps I should say, people on ordinary incomes. So I think it is possible, but your level of understanding and knowledge has got to be very, very significant, to begin with. I would not regard them as being explainable at all to the vast majority of the population.

  346. So what you are saying is that you put the entire weight on the type of explanation given to different types of investors. It is very difficult, as MPs, to legislate on this, to ensure that 86-year-old Mrs Smith does not somehow get her hands on this totally inappropriate product?
  (Mr Tiner) Yes; there is one core principle within the requirements for the selling process, which is called `suitability', and it is absolutely central to every piece of advice or sales decision, it is that the product which the consumer is buying is suitable, or being sold is suitable, to their particular circumstances, and that is the core part of the regulation. And, of course, Ron Sanders got into this by designing some really quite simple products, or coming up with a suggestion that there be some quite simple products which would be readily available to the population at large, because of this complexity issue, I think, and I would agree.

  Chairman: We will resist the temptation to ask you to define "normal".

Mr Laws

  347. Mr Tiner, I am sorry to take you back to Guernsey one last time, but I am still slightly uncertain about some of the details behind the answers you gave us earlier. The BBC's claims, in relation to warnings that were given by the Director of Investment Business on Guernsey, their claims, on this "Money Box" programme, were basically that early in 2001 this individual, Peter Moffatt, conveyed his views about his concerns in relation to these products to his opposite number at the UK's Financial Services Authority. Can you tell us who his opposite number was, and what he actually conveyed?
  (Mr Tiner) I am sorry, I did not hear the "Money Box" programme on Saturday, but was that the Guernsey regulator speaking himself?

  348. These were the claims that were in the programme. I assume that you have seen a transcript of the programme, or the programme itself?
  (Mr Tiner) I have not, I tried to get one yesterday and I could not get one; but I think that this goes back to the article in The Independent on Sunday, on 30 June, where it was suggested that the Guernsey regulator, Mr Moffatt, did contact his opposite number at the FSA about this.

  349. Who is his opposite number?
  (Mr Tiner) I think it would have been a Mr Aitken.

  350. And what did he say to Mr Aitken?
  (Mr Tiner) I do not know.


  351. I think, Mr Tiner, we have gone over this quite a bit. I think what we can do, we can clarify this by an exchange of letters, if you wish to do so, because a lot of the answers you have given us are based on information which is not available to you at the moment; am I correct in saying that?
  (Mr Tiner) Yes.

  Chairman: So we will have a final point and then there will be an exchange of letters.

Mr Laws

  352. Can I say that I find it absolutely astonishing that if you are saying that this dates back to an article in a newspaper some months ago, it has been broadcast on BBC television, that, given you knew you were going to come to see us today, it is astonishing that you are so badly briefed on this. I find that absolutely amazing. And this is a very substantive allegation, this; how come you have not checked it out?
  (Mr Tiner) The letter from Mr Moffatt, dated 9 July 2002, as far as I am concerned, puts a line under it.

  353. It puts nothing at all under it. What it says is three things. The Commission has not criticised the FSA, we know that; it says that it regularly exchanges views with the FSA, that is frankly meaningless. It says it would not be right to portray the discussions as a warning; what would it be right to portray them as, that does not mean anything, it is open to all sorts of portrayal? And you are telling me you have not checked up with the individual who is concerned in this, you have not looked back at the correspondence. I find that absolutely astonishing.
  (Mr Tiner) There was not any correspondence.

  354. There was no correspondence at all?
  (Mr Tiner) Not that I am aware of, no.

  355. There is no correspondence between this individual and the FSA on this subject?
  (Mr Tiner) Not that I am aware of, no.

  356. Either at the end of 2000 or the first quarter of 2001?
  (Mr Tiner) Not that I am aware of.

  357. Can you confirm that for us and send us a note?
  (Mr Tiner) Certainly.[10]

  358. And have you not spoken to this Mr Aitken at all to find out what his discussions were?
  (Mr Tiner) I have spoken to him, and he knows Peter Moffatt quite well, because they have worked on investment fund business together for many years and they have many conversations. He has no explicit recollection that there was a particular warning in this case. But I will talk to him again, in the light of this, and check it.

  Chairman: If you could write to us on that, that would be fine.

Mr Cousins

  359. Just to tidy that up, you did say much earlier that the Guernsey regulator had spoken to the AITC about this issue?
  (Mr Tiner) That is my understanding, yes.

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