Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60-79)



  60. If that is the statement which has been made by the Secretary of State and if that proves to be accurate, it would give good grounds, would it not, for holding an investigation into these matters and the way in which Railtrack in particular conducted itself?
  (Sir Howard Davies) I fear I have to repeat that I would not wish to give you an off-the-cuff answer to that because I would wish to have an explanation from the company which is the entity which is responsible to me for meeting the listing authority's rules. In the absence of that, I would be rightly criticised for prejudging a case, which I think would not help anybody.

  61. May I turn then to the Government side of this? The Secretary of State went on, "Given the company's demands, we began to prepare for the possibility that we might be unable to provide additional funding and that, as a consequence, Railtrack would be insolvent". The Secretary of State went on, "As a result, preliminary contact was made with Ernst and Young on 23 August". Is it your view that if the Government concluded at that sort of stage back in August that there was a good probability that this company would have to go into liquidation and be insolvent, there is any responsibility upon government agencies to put that information into the public domain?
  (Sir Howard Davies) There is no responsibility which applies to government agencies through the listing rules.

  62. Would you consider that it would be appropriate for the Government to put such information into the public domain under those circumstances?
  (Sir Howard Davies) I would not be able to offer you a view on that.

  63. Could you tell us what resources of the FSA are presently dedicated to pursuing this inquiry in relation to Railtrack's conduct?
  (Sir Howard Davies) The listing authority function of the FSA is staffed by about 80 people who are responsible for monitoring information supplied to the market by all of the 2,000 or so listed companies. I should emphasise that what I have said very clearly is that we have written to the company to ask for its explanation and therefore that is the extent of our inquiry at the present time.

  64. So it is a letter and there are no other investigations.
  (Sir Howard Davies) There are no other investigations at present.

  65. Would you agree with the comments which are quoted in the article in the Financial Times today which the Chairman raised earlier that the Authority admits that penalties for listed companies found to have breached its listing rules are anyway as limp as a lettuce leaf? Whether you share that particular form of words, would you consider that the rules and penalties which you are able to impose are at the moment too weak in relation to these matters?
  (Sir Howard Davies) I would not use that term because I fear that the lettuce growers' association would immediately complain. It is the case that, at present, the only sanctions available to the FSA for breaches to listing rules are either a private censure or a public censure of the company. The Government have agreed that is not appropriate for the future. Therefore one part of the reform which takes effect on 1 December is that in future it will be possible for us to use our other enforcement powers in relation to the listing rules and therefore it will in future be possible, subject to all of the constraints and procedural routes we have to follow, for us to use our fining powers in relation to listed companies for serious breaches of the listing rules. That regime comes into effect on 1 December and is one reason why the issues of company disclosures have bubbled up to the surface in the City and that people are aware that in future this will be more serious. This is something which I strongly welcome, because I believe that there is evidence—and I am not talking about the Railtrack case—of sloppy practices in the City in this area and that there are not adequate disclosures and sometimes rather late disclosures. This is an area where we and our practices lag behind those of the United States and where I think it will be of benefit to our capital markets generally and to shareholders generally if we can tighten up in this area. I hope that this tightening up will occur mainly because companies are very concerned not to fall foul of the listing rules in the future in that there will not be the need for an enormous amount of enforcement action. I certainly agree that there needs to be a firmer approach to disclosure in general and that will happen from 1 December.

  66. If Railtrack were found to have been irresponsible or negligent in relation to the information it gave publicly about its position back in July or August, are there actually any measures you can take against any of the people who were directors or Railtrack and would have responsibility for that?
  (Sir Howard Davies) At the moment the powers rest in the form of censures. It is fair to say, however, that company directors are by no means relaxed about being publicly censured by the listing authority. This is regarded as a serious thing. It does not happen very often. I would not say that these powers have no impact but they are obviously not commensurate with the powers we have for other important breaches of regulatory requirements.

Mr Cousins

  67. Just to be clear about this, the enquiries you are making of Railtrack do not relate to the most immediate period of September/October but do go much further back in time. What period of time is it that your enquiries of Railtrack cover?
  (Sir Howard Davies) Our initial request to them has related to the more recent period, but were we to consider that there were issues relating to an earlier period, we could go back further. It was specifically related to the most recent period.

  68. This is an important point. You are saying that the enquiries you are making of Railtrack at the moment refer entirely to the most recent period, the end of September, the beginning of October, and not to the earlier period from July when, as we know, there were intense negotiations between Railtrack and the Government.
  (Sir Howard Davies) I do not have the terms of the letter in front of me but we have asked them for an explanation of the disclosures they have made to investors and their compatibility with the listing rules. As I say, this is not an enquiry which should be thought to presuppose that there has been any breach. It is something I imagine you and other investors would hope that we would do where there has been public concern. I do not know whether you are a shareholder.

  69. I have a great many difficulties in my life but I am not actually a shareholder in Railtrack. Let us be clear about this. Do the enquiries you are making of Railtrack about whether their behaviour has been consistent with proper disclosure to the markets cover the period from July or are your enquiries confined solely to the events at the end of September and the beginning of October? Which is it?
  (Sir Howard Davies) We have asked them for a chronology of events leading up to the putting of the subsidiary into administration. If it is necessary to go further back, then we shall do so.

  70. A colleague has asked you about the events of August specifically. Do you regard the enquiries you are making of Railtrack about proper disclosure to the markets to cover the events of August and July or not?
  (Sir Howard Davies) At this point we have asked them for the events leading up to the closure. If it were necessary, in the light of further revelations—and what Mr Laws read to me was from yesterday's Hansard and the Committee has an advantage on me and I do not have that, I have not read that yet—to ask questions about a further period, then we shall do so.

  71. You do not need yesterday's Hansard to be aware that there is an issue about proper disclosure to the markets from July, do you?
  (Sir Howard Davies) I am not sure we are really differing here in that it is quite clear to me that if there are issues relating to July, then we shall ask.

  72. As of now, in front of this Committee now, do your enquiries cover the period from July or not?
  (Sir Howard Davies) We have asked about the events leading up to. I do not think we specified a beginning date for that point. If we need to go back, we can go back.

  73. Do you not think that is an important point to clarify?
  (Sir Howard Davies) Yes, it is and I shall certainly clarify it.

Mr Ruffley

  74. You, the FSA, have a responsibility, do you not, for censuring those parties, whether listed companies or not, who help contribute to creating a false market in shares? You do, do you not?
  (Sir Howard Davies) For censuring them? I am not sure I follow your question.

  75. Let me make it easier. If a party—not a listed company, so do not talk to me about listing rules, that is not relevant here—is found to have helped create a false market in shares, you have powers in relation to such an action, or do you not?
  (Sir Howard Davies) In the case of an authorised firm, yes, but not in relation to an unauthorised firm and if it were a case of market abuse, then at the moment the reference is put to the DTI who decide whether they wish to prosecute. To correct that slight curiosity is one of the purposes of the new legislation in that the new legislation allows us both to take a decision ourselves as to whether we seek a prosecution for offences under the code of market conduct. It also gives us reach beyond the authorised community in that at the moment our reach is only on those firms who are authorised by the FSA and those approved individuals, if it is an individual, who are within those firms. Our reach does not stretch to anybody outside. At present we have no purchase at all on any individual outside the regime who is making misleading statements about a company.

  76. Because part of your job is to ensure the integrity of UK equity markets among many other things, you would have a view on a party, non corporate for the sake of argument, which contributed to a false market in shares, would you not?
  (Sir Howard Davies) I would not have any statutory basis for such a view.

  77. I did not say that. That is not the question.
  (Sir Howard Davies) I have views on many things but I have to be clear about what my responsibilities are and my responsibilities do not stretch outside the authorised community.

  78. So you are confirming to us now that there are no legal courses of action, no regulatory claims against any government department which could exist in relation to the creation of a market in shares in Railtrack before the administration order.
  (Sir Howard Davies) None that would be for us to pursue.

  79. Have you taken legal advice on that?
  (Sir Howard Davies) Yes, internally. The reason I have done so is because I have been specifically asked by Michael Howard in a letter to me yesterday.

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