Examination of Witnesses (Questions 60-79)|
TUESDAY 16 OCTOBER 2001
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
(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
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
(Sir Howard Davies) There are no other investigations
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 evidenceand I am not talking about
the Railtrack caseof 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.
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 revelationsand 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 yetto
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
(Sir Howard Davies) Yes, it is and I shall certainly
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 partynot
a listed company, so do not talk to me about listing rules, that
is not relevant hereis 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.