Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40-59)



Mr Fallon

  40. Turning to the general issue of timely corporate disclosure, you took over responsibility as the listing authority to see that investors have the right information back in May 2000. That is right, is it not?
  (Sir Howard Davies) Yes.

  41. It was not until July this year that you made a speech saying that the information which is price sensitive must be announced to the market as a whole without delay. It was two and a half months after that, this September, that you then wrote to everybody reminding them of the importance of the listing rules. That is right, is it not?
  (Sir Howard Davies) That is a partial description of what I did. The rules we took over from the Stock Exchange are generally well understood in the market. They were not changed at the point at which we inherited them. We propose to review those rules after N2, but so far we have taken over the regime as it existed before. They are well known to advisers and well known to companies. However, over the course of last summer we came to the conclusion that there was some misunderstanding in the market about our rules and this in fact arose because of the SEC's proposal for something called regulation FD, fair disclosure, where there was quite a bit of commentary in the UK to the effect that this was a new burden on companies or a new requirement on companies which was not in operation here. In fact our rules are the equivalent of regulation FD in that they do require timely disclosure on a continuous basis. I then made a speech on that subject specifically in October of 2000 when I explained to people—and that got quite a lot of coverage at the time—that our rules were broadly the equivalent of regulation FD. That was actually regarded generally in the market as a helpful intervention because people had not quite understood that. I then made the further statements as you suggest, although the last one was a specific reminder to companies in relation to the post 11 September issue. We had noticed, slightly to our surprise, that the number of profit warnings emerging in the third quarter was actually lower than in the second quarter, which seemed in a way odd to us, given the amount of economic news there had been and also the overall economic impact of 11 September. We therefore felt in those particular circumstances that it was justifiable to remind people of their obligations and indeed since then we have seen a large increase in the number of statements being made to the market. That was also a helpful reminder.

  42. Your evidence to us says that the rate of company announcements has increased significantly.
  (Sir Howard Davies) Yes.

  43. That implies therefore that either there was misunderstanding or that you were neglecting your duty to investors before that, does it not?
  (Sir Howard Davies) I do not believe that we were neglecting our duty to investors. The obligation rests firmly on companies to make these disclosures. We are not inside companies knowing what the information is. We have no visibility of that. The obligation is on companies. If there was any neglect under way it was in the corporate sector, but we felt it was appropriate to remind people of their responsibilities and that appears to have had a positive impact.

  44. The criticism is as much sometimes of the advisers as it is of the companies. Did your letter of 28 September go to all the advisers?
  (Sir Howard Davies) Our direct relationship is often with the advisers in fact, so yes, I am sure they saw it.[1]

  45. So it would have gone to Schroeders who advise the Department of Transport.
  (Sir Howard Davies) Yes.

  46. It would have gone to Crédit Suisse who advised Railtrack.
  (Sir Howard Davies) Yes.

  47. It would have gone to Government departments themselves.
  (Sir Howard Davies) I am not sure why it would have gone to Government departments since the listing rules do not bite on them.

  48. So it does not apply to the Treasury.
  (Sir Howard Davies) No, because the Treasury is not a listed company. I wonder whether anyone would buy shares in the Treasury.

  49. In terms of market behaviour would you not expect Government departments to comply with the spirit of the guidance?
  (Sir Howard Davies) The listing rules apply to listed companies and the rules which might apply to other people in relation to what they say about a listed company would not be in the listing rules, they would be really in the Financial Services Act where there are general requirements on people not to mislead the market. The listing rules apply only to listed companies.

  50. But Railtrack was a listed company, was it not?
  (Sir Howard Davies) Yes, indeed.

  51. Do you think people complied with the rules there?
  (Sir Howard Davies) I am not certain about that and we have written to Railtrack to ask them to explain what they knew and when they knew it and to give us a chronology of what they received and whether they had at all times kept the market fully informed. I have made that request to Railtrack. I have not yet received a response.

  52. So you are investigating Railtrack.
  (Sir Howard Davies) No, that is not technically speaking an investigation, that is an enquiry.

  53. I am sure investors will be consoled by that difference. Had a £1.5 billion private company disappeared in smoke over a weekend, you would be launching a full investigation, would you not? If it had been a company which was not dependant on Government income or regulation, you would be investigating.
  (Sir Howard Davies) Not necessarily. We would do exactly as we have done now, which is to ask the company what it knew and when and what disclosures it made and whether it had at all times therefore met our requirements. If we then felt that there was a suggestion that it had not done so, or other people drew to our attention issues that they felt the company was aware of and did not disclose, then we would launch an investigation. We are operating in this case exactly as we would do if it were any other sort of company.

  54. Are any of these enquiries directed to Government departments?
  (Sir Howard Davies) No, they are directed to the company because the company is responsible for the listing rules. I have explained these obligations do not apply to the Government.[2] Any issue about whether the Government has committed an offence under the Financial Services Act, which is to do with making false or misleading statements, would be a Financial Services Act issue, but that, until 1 December, is a matter for the DTI to investigate and not for us.

  55. So you are expecting us to believe that the DTI ought to investigate the Department of Transport.
  (Sir Howard Davies) I am not expecting you to believe anything. I am just telling you what the position is.

  56. The position is that the regulatory authority for the conduct of the Department of Transport is the Department of Trade and Industry.
  (Sir Howard Davies) On this sort of issue as to whether the Government have made any misleading statements in relation to a listed company which could amount to market manipulation. This is highly speculative. I hope you will understand that I am answering strictly speaking on the legal position. At the moment, just as in the case of any other issue of market abuse or market manipulation, the authority is the DTI. As of 1 December it will be the FSA.

  57. Will the papers as far as your inquiry into Railtrack is concerned be copied to the DTI in the meantime?
  (Sir Howard Davies) We do not have any papers on an inquiry into Railtrack at the moment and I am not sure we would have a gateway to do that even if we did have an inquiry into Railtrack. Our issue is whether Railtrack itself has met the listing requirements. I have no reason at this point to believe that they have not, but there is sufficient public concern about it, I felt, to justify our asking the company for its explanation of the chronology and I am quite sure that they will be willing to provide that to me.


  58. Concerns have been expressed by members of the Committee this morning regarding a story in the Financial Times on Railtrack in which it says that today you will dismiss Conservative demands at the Treasury Select Committee for immediate investigation. I would remind you—perhaps you do not need reminding—that this is an all-party Committee charged with securing the interest of the House rather than any party interest. It also goes on to say what you will tell MPs on the Treasury Committee. I think we would like to think that any evidence you have will be virgin evidence and you will share it with ourselves here rather than with the Financial Times. A last comment in that particular article says that the Authority admits that penalties for listed companies found to have breached its listing rules are anyway as "limp as a lettuce leaf". It seems a rather gratuitous remark. I just put that to you and ask you for your comments on it and, following up Mr Fallon's comments, I presume you would be happy to keep us informed of any investigation into Railtrack.
  (Sir Howard Davies) I apologise if the Committee has felt that there has been any discourtesy here. I can only say that we did not say anything about what we were going to say or not going to say to the Select Committee. I do not regulate the Financial Times—I sometimes wish it were otherwise. The position is that we received yesterday a letter from the Shadow Chancellor which in fact was in the newspapers at the weekend, but I received the letter yesterday, which asked certain specific questions in relation to the Railtrack issue. Because it had already been reported in the Financial Times at the weekend we were asked what our responses were to those questions. We answered factual questions on the nature of our responsibilities. It certainly was not our intention to say anything about what we would or would not say today, but I apologise if that has been the impression that has been conveyed. I shall be writing back to Michael Howard today and the substance of what I shall say to him has been encapsulated in the replies to Mr Fallon.

  Chairman: Thank you very much. It is important that we keep that good relationship.

Mr Laws

  59. The FT report nevertheless is accurate in summing up your views on this matter, is it not? It says that the Authority insists there is nothing for it to investigate on the information it has at present, that it does not regulate the Government, applying its rules only to listed companies. The rules only demand disclosure by the listed company as soon as it finds out about the problem. That seems to be the view that the Secretary of State for Transport had when he was asked in the House about this matter yesterday.[3] He said to the Member for Banbury, "As one who follows such matters, the hon. Gentleman knows where the responsibility to inform shareholders lies if a company is in particular difficulties; he knows that it is not for the Secretary of State for Transport to do that". However, at the beginning of his statement yesterday in the House the Secretary of State for Transport recounted the events which led up to the collapse of Railtrack and he reported this. "However in May, June and July", of this year, "the company's position worsened dramatically. On 25 July, at a meeting in my office", the Secretary of State's, "the chairman said that the position was far worse than he had thought in April. Unless extra financial assistance from the Government was provided, it was clear that on 8 November, when Railtrack was due to give its interim results, it would be unable to make the critical statement that it was `a going concern'". It is extremely clear from this evidence from the Secretary of State yesterday that there is good reason for you to hold an investigation into Railtrack and the way in which they conducted themselves in the run up to the collapse of the company a couple of weeks ago.

  (Sir Howard Davies) I had not heard that statement before, so I shall certainly reflect on it. I would not wish to prejudge the issue. We must behave in this matter as we would in any other, which is initially to invite the company to give an account of itself in terms of its obligations and the extent to which it disclosed things to the market and whether that meets our standards. In advance of receiving that, I feel I would not wish to follow you down any speculative routes.

1   Note by Witness: The letter was put out on the Regulatory News Service which is monitored by advisers. Back

2   Note by Witness: Section 47 of the Financial Services Act 1986 (and the relevant section of the Financial Services and Markets Act 2000 when it comes into force) do not bind the Crown.


3   HC Deb, 15 Oct 01, cc 954-973. Back

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