Members present:

Mr John McFall, in the Chair
Mr Nigel Beard
Mr Jim Cousins
Mr Michael Fallon
Mr David Laws
Mr George Mudie
Dr Nick Palmer
Mr James Plaskitt
Mr David Ruffley
Mr Andrew Tyrie


Memorandum submitted by Aberdeen Asset Management

Examination of Witnesses

MR MARTIN GILBERT, Chief Executive, MR CHRISTOPHER FISHWICK, Formerly Head of Global Closed End Funds, MR PIERS CURRIE, Marketing Director, Investment Trusts, Aberdeen Asset Managers, and MR GARY MARSHALL, Managing Director, Aberdeen Unit Trust Managers, Aberdeen Asset Management, examined.


  1. Good morning, Mr Gilbert and your colleagues. For the sake of the shorthand writer, would you please identify yourselves.
  2. (Mr Gilbert) Good morning, Chairman. I am Martin Gilbert, Chief Executive of Aberdeen Asset Management.

    (Mr Fishwick) Good morning, Chairman. My name is Chris Fishwick. I was previously Head of Closed End Funds at Aberdeen, responsible for the offices in London, Jersey and Dublin. I would just like to say at this point in time, Chairman, that I apologise for my non-appearance at the last meeting. It certainly was not intended as a snub to the Committee. I was not specifically asked to have been here and I would have been very happy to have changed my meeting and have attended, so I would just like to apologise for that misunderstanding.

  3. I do not want to interrupt you too much in that, but you know Ms Sarah Mansell, your Customer Enquiries Support Manager?
  4. (Mr Fishwick) I do not know her personally, no.

  5. Well, she wrote to Mr D Scott of Findhorn, Forres, Morayshire and said that it was the view of Aberdeen Asset Management that with Chris's attendance - that is yourself - the Committee would invite disproportionate attention to be paid to previous commentary regarding remuneration, so it seems there is a communication problem within your organisation.
  6. (Mr Fishwick) Sorry, I was not aware of that at all, Chairman.

    (Mr Marshall) My name is Gary Marshall and I am the Managing Director of Aberdeen Unit Trust Managers, the Group's retail division.

    (Mr Currie) I am Piers Currie, Marketing Director, Investment Trusts, Aberdeen Asset Managers.

  7. Mr Gilbert, in your evidence to us on 11 July in response to a question from my colleague Mr Plaskitt, and I refer to paragraph 20, evidence 19, you told us that the only fund you retailed directly to the public was a unit trust. Is that correct?
  8. (Mr Gilbert) That is correct, Chairman.

  9. Did you operate regular saving schemes and ISAs which were regulated by the FSA and were available to the public?
  10. (Mr Gilbert) Yes, we did, Chairman, but ----

  11. Did these schemes allow the public and advisers to purchase the individual shares, including zero dividend preference shares, in each split capital investment trust managed by yourselves?
  12. (Mr Gilbert) Yes, they did, Chairman.

  13. And did these schemes carry features documents as required by the FSA?
  14. (Mr Gilbert) Yes, they did, Chairman.

  15. And if they did, in a risk section required by the FSA, did you make it clear that these shares described and promoted by yourselves as low risk carried the possibility of total loss?
  16. (Mr Gilbert) Chairman, I defer to my colleague Mr Currie on that point.

  17. Well, we have a lot to do this morning, Mr Gilbert, so I have asked my colleagues to be sharp with their questions and if you could be sharp with your answers, we would be delighted.
  18. (Mr Currie) Yes, referring to the wrapper products which cover Share Plans which `are a low-cost way for people to buy securities and individual shares, the 42 shares were trusts managed by Aberdeen. The risk document in the back complies with all the standards set out in compliance departments about outlining the risks attached to each security.

  19. Okay, so I will ask the question again. Did you make it clear that these shares described and promoted by yourselves as low risk carried the possibility of total loss?
  20. (Mr Currie) Well, there are two answers to that. We did not describe it as low risk exclusively in that documentation and, no, the documentation did not say that total loss was an expected element of that.

  21. Well, I think you did describe it as low risk.. However, the fact is that you did not describe it as carrying the possibility of total loss. Do you not accept then that the zeros of each of your split trusts were in fact made available and retailed by yourselves direct to the public through share schemes and ISAs using promises of low-risk characteristics and lacking any warning that investors could lose all their money, as has happened in some cases?
  22. (Mr Currie) I think there are two points in this, Chairman, which I would like to point out. One is that investment performance itself is something which is independent of the literature and the second one is that the risk warnings that were in the literature at the time described the risks that were identified.

  23. I will tell you what I am trying to get at. I went to your website and on your website you have ISAs and PEPs and you have your split trusts there. Under where you can purchase ISAs and PEPs, your answers regarding Aberdeen development capital, European Growth and Income Trust, Jersey Phoenix Trust, et cetera are yes, so the public could buy zeros from your split trusts because it is on your website and you are telling people that?
  24. (Mr Currie) That is correct.

  25. So, therefore, the answer to the question to Mr Plaskitt, when you said you only did it through your unit trusts, is not the case, Mr Gilbert?
  26. (Mr Gilbert) I do not accept that. There is a big difference between retailing a product, which we did, and being a unit trust and an execution-only type wrapper product which was to allow people to buy shares on a cheaper basis than they could themselves.

  27. I do not understand, Mr Gilbert, because the fact is that people can go to your website and buy zeros through that. Really the question I am getting to is this: there are a number of people who have been on to us regarding compensation and you are looking, you say, at a compensation for your unit trust. Is that correct?
  28. (Mr Gilbert) That is correct, Chairman.

  29. So if it is good enough for those buying direct through AAM for your compensation scheme, why should not others who have bought direct, through a stock broker or in another way, why should they not be compensated? Why is it then down to an accident of where people bought the shares?
  30. (Mr Currie) I think the answer is that there is a difference between an equity and a collective investment scheme and what you are buying is a share, an individual share, and the information on that share describes what the characteristics are of that share and the risks within it. Otherwise, the alternative to this is that every equity investment in the land that is available through any type of wrapper vehicle has fundamentally got to be underwritten by either the companies or by the management.

  31. But you offered it through your website.
  32. (Mr Currie) No, you can actually get the information through the website and ----

  33. On your website it says yes, yes, that people can buy it.
  34. (Mr Currie) I am afraid they cannot buy through our website, Chairman, but if you look at our website, you will find you can get the literature in which you will read the risk documentation and you cannot buy ----

  35. Well, I am going to subject this to further investigations through other people because what you are doing then is you are misleading people. If you put on your website that you can buy it through ISAs and PEPs ----
  36. (Mr Currie) You cannot buy through the website ISAs and PEPs.

  37. Exactly, so you are promoting zeros, therefore, why are you just concentrating on the unit trusts and not on the whole splitting?
  38. (Mr Gilbert) The answer, Chairman, as to why we are concentrating on the unit trust is that we marketed that as a low-risk product, Chairman, and whilst we can look at the marketing literature we produced for the unit trust and legally it stands up and everyone at the time thought they were low risk, we have taken the view that we are not happy with the performance of that fund. Therefore, we are proposing and are still committed to an uplift package for all the people who have bought our unit trusts, not just those who have bought directly from us, but everyone who has bought, taking your point, regardless of how they bought it, either through an IFA, direct or off the page.

  39. So you did not promote your splits as low risk?
  40. (Mr Gilbert) We did not put ----

  41. Let me tell you, you have an advert here and I was surfing the Net the other night, or last week actually because I put it to Mr Tiner, and we have Weekend Money in The Times of Saturday 11 September1999 where you say, "Zeros offer investors steady, quasi-guaranteed annual growth. Zeros are low-risk investments similar to bonds. Now you are able to invest in a portfolio of zeros with the new enhanced zero trust", and the enhanced zero trust is a split, so you have marketed as low risk your splits.
  42. (Mr Currie) It is the Share Plan actually that has been marketed, Chairman. I very much doubt you saw that on the Internet and if it is on the Internet, I would like to be notified because it should not be and an advertisement appearing one-off in The Times in 1999 ----

  43. Sorry, this is The Times. It is not on the Internet, but a copy of The Times.
  44. (Mr Currie) Sorry, you said that in surfing the Internet, you saw this advertisement ----

  45. Well, this was in a copy of The Times. Mr Gilbert, I think you can correct him on that.
  46. (Mr Currie) Well, one insertion in The Times in September 1999 at the time when the zero market was deemed to be low risk by all measures of standard deviation used ----

  47. But the question I am asking is quite a simple question, Mr Currie. Did you market some of your splits as low risk?
  48. (Mr Currie) We marketed ----

  49. Exactly, which you said you did not do before.
  50. (Mr Currie) We marketed the share plan in which all participating shares of closed end funds managed by Aberdeen are there. We have never hidden that. That is not undisclosed.

  51. Mr Fishwick, did you jump or were you pushed? And it is lovely to see you!
  52. (Mr Fishwick) I am delighted to be here actually, to be honest with you. Did I jump or was I pushed? It became quite clear to me that it was not benefiting Aberdeen Asset Management being there any longer with the constant press scrutiny, looking for a scapegoat to be driven out. Actually I went to Martin and said to him, "This is not in our shareholders' interest, it is not in my colleagues' interest and it is not in mine or my family's interest. Let's come to some kind of compromise agreement to part ways". Martin tried to persuade me to stay and I said, "Look, at the end of the day I just do not think it is right for the company or my family. The press will hound us until they get a result, rather like they hound ministers", and I said, "We might as well give them what they want. I want to get on with my life. I am very happy to stay and help out" -----

  53. So you resigned?
  54. (Mr Fishwick) It was a compromise agreement between us both, yes.

  55. So if you resigned, why did you get 350,000?
  56. (Mr Gilbert) No, Chris did not resign. He approached us. I tried to persuade him to stay and he said, "Look, it's really the best thing for the company if I go", and the Board agreed with that assessment and reached ----

  57. So he resigned?
  58. (Mr Gilbert) No, he did not resign.

  59. So he was pushed?
  60. (Mr Fishwick) A bit of both.

    (Mr Gilbert) He resigned and he was pushed, a mutual agreement.

  61. Okay. You went with 350,000, but you also went with 1.4 million, did you not, because if you stayed on until 30th September, you would get that extra 1.4 million, so why did you not go at the 30th August and put that 1 million back into Aberdeen and help the people who have lost their money?
  62. (Mr Fishwick) Why did I not go on the 30th August?

  63. And save the 1.4 million.
  64. (Mr Fishwick) It is no different from why I did not go at Christmas last year. It makes no difference. At the end of the day when you have got TV cameras flying over your house, and I did not seek public office, and cameras sticking through your doors, eventually it just became unbearable.

  65. Well, do you think the catastrophic performance of the funds you managed justified your level of pay?
  66. (Mr Fishwick) Well, my level of pay, as you are aware, is not set by myself. It is set by the independent directors of our company who meet every year. They decide what my remuneration is and they then put it to all our shareholders who vote on it every year, and I abide by that decision of what is paid. I would love to be able to pay myself, but unfortunately that is not the way it is.

  67. So we ought to be having one of your directors here to give us a glowing report on Chris Fishwick which said, "Look, we think he is worth several million pounds over two years"? We will maybe do that.
  68. (Mr Fishwick) I think they would do. They awarded me my remuneration and they voted in favour of it. In fact I checked this out the other day because I thought you would ask me that question and the vote in favour of our remuneration last year was 95.6 per cent in favour.

  69. This is better than Saddam Hussein!
  70. (Mr Fishwick) Well, some did vote against.

    Mr Plaskitt

  71. Just as a quick supplementary to Mr Fishwick on whether it was push or resign, do we take it that you are getting out of the split capital business?
  72. (Mr Fishwick) I am getting out of the City, quite frankly, but I am prepared to work and answer questions for yourselves and the FSA for the next 18 months or as long as it is necessary. I am at the beck and call of Aberdeen to answer any questions, but yes, I am having a career direction change.

  73. Are you still on the Board of Treasury Holdings?
  74. (Mr Fishwick) Yes, I am on the Board of Treasury Holdings.

  75. Is it correct that Treasury Holdings is bidding to take control of Real Estate Opportunities?
  76. (Mr Fishwick) No, it is not correct. They are not bidding to take control of Real Estate Opportunities, no.

  77. Is it trying to get any stake in it at all?
  78. (Mr Fishwick) No. Treasury Holdings has a stake in the company, as it has had from launch, which it is not allowed to add to under listing rules and what has actually happened is that the press have misinterpreted the story and not checked the facts. Each time the company buys in its own shares, its percentage of the company goes up because that is what is left. It is simple mathematics. It is just scaremongering. If Treasury Holdings was intending to bid for REO, it is a public company, it would have to announce it, and it has made no intentions to do so. It has always been an investor in the company from the very beginning, eight years in total.

  79. Has Treasury Holdings got any interest in split capital trusts?
  80. (Mr Fishwick) As a company, only its holding in REO. It has no other investments in split capital trusts.

  81. So it is true to say that through your involvement in Treasury Holdings, you will still be involved in the split capital business?
  82. (Mr Fishwick) Yes, I am a non-executive director of Treasury Holdings, not a shareholder, so in effect quasi, yes.

  83. Like a quasi-guarantee?
  84. (Mr Fishwick) No.

  85. Incidentally, what does 'quasi-guarantee' mean?
  86. (Mr Fishwick) To me or to you?

  87. What does it mean to you?
  88. (Mr Currie) A zero has a pre-determined redemption price.

  89. Either something is guaranteed or it is not, is it not?
  90. (Mr Currie) Well, it is a bit like a gilt. It is meant to be guaranteed, but if governments go under, it is not paid out, is it? What we are saying is that the zero as a share class is the lowest risk share class of any capital within split capital trusts and the guarantee was that the expected element of the returns would be that here we have the pre-determined price for which that zero has the first call on all the capital on a certain date at a certain time. If you look back over the history of split capital investment trusts and zeros from 1987 to 1999, the document that we are saying quasi-guaranteed was actually factually correct. What we are now looking at is, with retrospect, what happens when markets fall and what we are saying is that the characteristics of the zero has now changed as a result of falling markets.

  91. It is just that this quasi-guarantee concept keeps appearing in your publicity material and I do not actually understand what quasi-guarantee means and I wonder if people who have bought the split capitals understood what it meant and I wonder if you understand what it means.
  92. (Mr Fishwick) I would like to try and answer that question because you asked me actually. You have asked, "What does 'quasi-guarantee' mean?" We, together with the whole industry, including the AITC, reading their campaign, let's say, on zeros, their words are, "If, for example, you are prepared to take only a minimal amount of risk, then zero preference shares might prove to be the best choice. As their name suggests, they offer no income at all, but do provide a low-risk opportunity for a pre-determined amount of capital growth", and that is what I perceived, together with them and I endorse what they were saying, as a quasi-guarantee.


  93. Mr Fishwick, did you ever visit JP Morgan Fleming or any other fund management houses and suggest that they might consider launching a split trust which invested in other splits and tell them that it would be good for the investment trust industry as a whole?
  94. (Mr Fishwick) I do not believe so.

  95. You never did?
  96. (Mr Fishwick) I do not believe so.

  97. So you are sure of that?
  98. (Mr Fishwick) The reason I do not believe so is because they have had split capital trusts for years and years and years.

  99. So why do you think some blue-chip houses like Fleming, F&C, Henderson and Baillie Gifford have sat by and passed up the opportunity to make a lot of money by launching a split of splits?
  100. (Mr Fishwick) I think that is a question you have got to ask them. I do not speak for firms like F&C and I have no idea why.

  101. What reasons would they give, do you think, for sitting back and passing up that opportunity?
  102. (Mr Fishwick) I think that is a question you have got to ask them.

  103. Well, do you know the firm of BFS Investments plc based in Surrey?
  104. (Mr Fishwick) Yes, I do.

  105. What individuals do you know there personally?
  106. (Mr Fishwick) I know Tony Reid, I know Nigel Sidebottom, I know William Van Hesewick, I know John Holder, I know ----

  107. Thinking of Tony Reid because he earned 3.5 million in the year to September 2001, 2.5 million in the previous year and 1 million in 1999, a level of remuneration similar to your own, how often did you meet with Mr Reid in the calendar year, say, 2000/01?
  108. (Mr Fishwick) Probably ten or 15 times, probably the same as I met with the people of all the investment houses in London or less actually with Tony because his business is based down in Guildford. I have actually only been to that office three times.

  109. How often did you ask your subordinates in Aberdeen to contact BFS in those two years?
  110. (Mr Fishwick) I would guess that we were in constant contact with them, asking them for various information about their trusts, as everyone is.

  111. Are Aberdeen and BFS competitors in the same field of investment trust management?
  112. (Mr Fishwick) I believe so, very much so, yes.

  113. Is it normal for competitors in the investment management business to speak to each other with real frequency?
  114. (Mr Fishwick) Yes.

  115. It is?
  116. (Mr Fishwick) Yes, very much so.

  117. So are you aware that, according to its last annual report dated July 2001 of funds managed by Aberdeen Asset Management, they owned approximately 22 per cent of the voting share capital of BFS Income and Growth Trust plc?
  118. (Mr Fishwick) We own 25 per cent of probably 50 split capital trust shares.

  119. And these shares have declined from 100 pence, the issue price, to 0.5 pence, have they not?
  120. (Mr Fishwick) I think there is an interesting point in that because ----

  121. Well, can I have an answer first on that, yes or no?
  122. (Mr Fishwick) The answer is yes. Seventy-eight of the 135 splits, one of the classes of shares has a value of nil, so you pick one, but you can have any of the other 78. Half of them, 56 per cent of them have no value, irrespective of debt.

  123. Are you aware then that the same trust, BFS Income and Growth Trust plc, had an income share portfolio at the end of 2001 of which 23 per cent was itself cross-invested in Aberdeen's split capital investment trust?
  124. (Mr Fishwick) I would have been aware at the time of what it would have been, yes, but that is not unusual. I can give you 50 other cases of that from ourselves and 30 cases of the ----

  125. Well, we will come back to that.
  126. (Mr Fishwick) It is not unusual.

    Chairman: Okay.

    Dr Palmer

  127. You have referred to the Board. How did the Board feel about these developments? Did you get any warning or instructions through Aberdeen as the share prices and the level of zero cover plummeted?
  128. (Mr Fishwick) Do you mean the Board of Aberdeen plc?

  129. Yes.
  130. (Mr Fishwick) Were there any concerns as they plummeted? I think we all started to get concerned 18 months ago as markets continued to fall because the Board of Aberdeen are intelligent people, as are most people in the City, and quite clearly if you borrow money and assets go down, you start to get in trouble. It is straightforward mathematics. Anyone who thinks any different must be crazy.

  131. What about the Board of Aberdeen Preferred Income Trust, to be a bit more specific? Did they express concern at any point?
  132. (Mr Fishwick) We and the Board of Aberdeen Preferred - it is interesting because it is a very old fund, a fund which was launched just before I arrived back in 1991, so it is a twelve-year-old fund which met between six and twelve times a year, full of some pretty clever, sophisticated people. They completely understood the portfolio evolving.

  133. So they were relaxed about the development?
  134. (Mr Fishwick) No, I think when assets start to fall, you are not relaxed and that is why they took the action, as we did, to try and repay the debt, significant amounts of debt. We have repaid 100 million of debt in the last twelve months in conditions that were very, very difficult, so we have been attempting to de-gear these assets. We have not just borrowed a lot of money, sat there, let the markets fall and do nothing, as people believe. We have repaid over 1 billion in the last twelve months against hostile conditions. The thing is that we actually should have sold all our stock when the Index was at 7,000 and re-paid all our debt, but we actually have been working tirelessly, 18 hours a day, and the Board were meeting every two or three days over the last two months, so yes, they are working.

  135. That is the last two months, but you will agree, I think, that the roots of the problem are quite some time ago. Do you, in retrospect, feel that the Board took action early enough?
  136. (Mr Fishwick) I think at the end of the day on the basis that the shares have now become of no value, did they take action early enough? One would have loved to have taken action before. I will repeat it again: that we should have sold every single share at the very top, but I think the best way of answering that question would be for you to read the minutes of every Board meeting of Aberdeen Preferred and you can then see totally, just like the FSA, how they were aware of what was going on.

  137. How independent in practice was the Board of Aberdeen Preferred Income Trust of its managers? How many Aberdeen directors and employees formed the Board?
  138. (Mr Fishwick) I was the only Aberdeen representative on the Board.

  139. Were there any employees or ex-directors or ex-employees on the Board, apart from yourself?
  140. (Mr Fishwick) No.

  141. None at all?
  142. (Mr Fishwick) No.

  143. So everybody else, apart from you, had no connection with Aberdeen on the Board?
  144. (Mr Fishwick) Well, certainly one member of the Board was on some other trust.

  145. An Aberdeen trust?
  146. (Mr Fishwick) Yes, and, to be fair, he was a director of a company because Aberdeen bought its business before I came. He sold the business to Aberdeen in 1988.

  147. So that is two of the members.
  148. (Mr Fishwick) No, it is the same man.

  149. Sorry, that is you and him.
  150. (Mr Fishwick) Yes.

  151. And everybody else on the Board had no involvement in any other Aberdeen trust?
  152. (Mr Fishwick) The Chairman was not on any other boards, Neil Osborn was on some of our other boards, Harry Hyman joined the Board, Robert Wild never was, Ian Marks never was.

  153. So about three out of seven?
  154. (Mr Fishwick) There were six members of the Board. Two of them has past connections to Aberdeen in different guises, ie, selling your business to them, et cetera.

  155. What about non-Aberdeen trusts? Were they involved in other split trusts?
  156. (Mr Fishwick) Well, as you know, because we sent you a piece of paper yesterday, they were involved in other people's trusts, yes.

  157. So just to conclude my section of the questioning here, do you not feel that the Board in practice was very deeply involved in this whole operation both directly and through interests in other trusts in which Aberdeen were investing?
  158. (Mr Fishwick) No, I do not because I think again there is a huge misunderstanding in this sector. The UK Listing Authority wanted directors with the relevant experience. They welcomed and wanted people to be on more than one board. That is exactly what they were looking for. They were looking for people who had the appropriate experience to help direct these trusts. That is exactly what they wanted.

  159. But what people see is a cross-network of cross-investment and of personal relationships across the companies which we associate more with the Japanese financial landscape than with the British landscape, do you not agree?
  160. (Mr Fishwick) I do not agree and let me answer you with what my colleague Mr Currie was saying to me this morning. He was reading something at breakfast actually which I did not know because it was some time ago and I think this puts it in context. Piers, do you want to read what you read to me this morning?

    (Mr Currie) Well, it is not found from the Internet, but a friend from Scotland has just passed me a copy of The Economist describing, "There seems to be a ring of trust directors where we find certain names, such as those of Lord Cecil, Sir C E Lewis, Sir P F Rose, Major General McLan and Messrs Clark, Trotter, Monkton appearing and reappearing on the boards of a great number of trust companies while the brokers who act for them and advise them are also naturally confined to a few well-known and old-established investment firms." This is The Economist, but it is from 113 years ago in 1889 regarding the foundation of the investment trust movement. I think all we are arguing there is that the same issues----


  161. What does that prove then?
  162. (Mr Currie) Well, it proves, regarding directors -----

  163. It proves that you are stuck in the past!
  164. (Mr Currie) Well, it is possible, but 113 years ----

  165. This information that you mentioned to Mr Fishwick and Mr Gilbert that you sent to us, the clerks to my Committee left at seven o'clock last night and it was not delivered at that time, so we have not had time to read it this morning, so this is another example of information coming to us at the last minute, and maybe it will result in your having to come back again when we read this and find there is something we do not like. That is just unacceptable.
  166. (Mr Gilbert) Apologies, Chairman.

    Mr Cousins

  167. Just to check back on something you have just said in passing, as I think it may be of some significance, you have referred, Mr Fishwick, that is, to the de-gearing operation of the last 18 months to two years and the fact that the main Board of Aberdeen was very much driving this de-gearing operation.
  168. (Mr Gilbert) No, that is not true. That is a misunderstanding, Chairman.

    (Mr Fishwick) We, as asset managers, together with our clients, the investment trust, were de-gearing the trust. It was not a request from the main Board of Aberdeen plc, but it is totally separate.

    (Mr Gilbert) Each individual trust has its own board which makes its own decision on de-gearing.

    (Mr Fishwick) And they are all different.

  169. Did I understand Mr Fishwick to say that the FSA was aware of the totality of the de-gearing operation?
  170. (Mr Fishwick) I do not believe I said that.

  171. I think you may have said that it approved of the de-gearing operation.
  172. (Mr Fishwick) No, I did not.

    (Mr Gilbert) No.

  173. That would not be right?
  174. (Mr Fishwick) What I think I said that the FSA actually approved of by the Listing Authority was having directors with the relevant experience, but everyone has been aware of the de-gearing in the sectors.

  175. I see, so everyone is aware of it.
  176. (Mr Fishwick) You are making announcements every day on the screen.

  177. So your reference to the FSA was simply that the FSA presumably reads the newspapers and follows these things?
  178. (Mr Fishwick) If you repay a bank debt, even if you repay a penny or 100 million, it is a disclosable event and you have to make a Stock Exchange announcement immediately, so you see on the screen that there have been hundreds and hundreds of announcements of debt repayments by many of these 130 companies, and it happens every day.

  179. Well, I am glad we have clarified that. Mr Marshall, is Aberdeen getting out of the retail sector?
  180. (Mr Marshall) No.

  181. No?
  182. (Mr Marshall) No.

  183. Has the main Board taken that as a formal decision?
  184. (Mr Marshall) I think you are probably referring to the newspaper reports of the potential asset sale of unit trusts and alike business. I would say that there are no plans to do that. I am not sure where the reports in the papers have come from.

  185. You see, when I wrote to Aberdeen in August on behalf of a constituent of mine, this was about the Aberdeen High Income Trust which I do want to talk to you about, I was simply referred to the receivers and Ernst & Young. There was not any recognition of a continuing role.
  186. (Mr Marshall) I think that is a legal requirement once the trust has moved into receivership, that all correspondence regarding that trust falls with the receivers and we are not in a position to correspond with clients at that point. We will of course attempt to answer any questions which are relevant to the period for which we were involved.

  187. Why did the Aberdeen High Income Trust fail?
  188. (Mr Fishwick) Can I take that because it is an investment trust rather than for Gary. The reason that the Aberdeen High Income Trust failed is very, very simple. At the end of the day we had less assets than we owed the bank and the debenture holders.

  189. What was the purpose of the attempted reconstruction of the High Income Trust in September 2001?
  190. (Mr Fishwick) In September 2001 Aberdeen acquired another investment trust which had got itself in trouble, a trust called HL Income & Growth. They were in trouble and they actually approached us and said, "Look, why don't we get together and try and strengthen the balance sheets of both companies because both are having difficulties?" It made sense to make a merger and at that period of time, in that three or four-month period, a number of trusts were in trouble, their assets were starting to fall, so the sector generally, the brokers said, "Look, let's make an attempt to try and rescue these trusts" rather than go bust earlier, and the one thing that I am disappointed about is that we and the sector generally have been heavily criticised for attempting to rescue and save funds from going bust. Quite frankly, you wonder why we bothered trying.

  191. Well, could I just press you on that. You say that in September 2001 the High Income Trust was facing some problems and what you did then was that you merged it with another entity that was in even bigger trouble. That is what you have just said. It does seem a slightly odd strategy.
  192. (Mr Fishwick) Well, no, because what it allowed us to do is that it allowed both companies to de-gear and to take on the most attractive form of debt and we raised some new money which left the companies, both of them, in much better shape than either one was in before it occurred. However, it was not enough and I think the point I am trying to get across here now is that one of the problems that people have been saying is, "Oh, everyone in the City just blames September 11 for the problems", and this occurred at that time, but one of the consequences of September 11, forgetting the fact that stock markets fell, which has never been relayed, is that interest rates collapsed around the world to what is now deemed to be emergency levels, and interest rates falling means that it costs you more to repair your bank debt. If you borrowed 100 million, to repay it two years later would have cost you a further 15 million, so that is 15 million of assets that disappear to the bank. It is just like breaking a fixed-rate mortgage. I do not believe before September 11 that anyone was forecasting US interest rates at 1.75 per cent.

  193. Well, I have in front of me here a letter that was sent to one of my constituents on 19 October 2001 and this is how it begins, and it begins with the very point you have just made: "I enclose a copy of your six-monthly statement", and then the next paragraph: "The tragic events in the United States on 11 September not only caused an unnecessary loss of human life, but also impacted on the major economies of the world. I understand you may be concerned about the ramifications of the terrorist attacks to your investments". As one might say in retrospect, the terrorist attacks and the investments were coming from a slightly different direction. Do you think that was a slightly misleading introduction to the situation of the High Income Trust, as it then was?
  194. (Mr Fishwick) I do not think that markets or any investments are better off than they were before 11 September. I do not think that is particularly misleading. I think that was an appropriate thing to say in October, five weeks after 11 September. The whole world was pretty shook up.

  195. And do you think, in the context of a reconstruction which had occurred in the company a month earlier after 11 September, that the merger with the trust that was in trouble, do you think that was a sensible way of informing investors?
  196. (Mr Fishwick) I think part of this attempt, and they had full documentation about the merger going forward, yes, I think it was a reasonable attempt to ----

  197. Did the merger documents explain that it was a merger with another investment trust that was in trouble?
  198. (Mr Fishwick) Of course it did.

  199. Of course it did?
  200. (Mr Fishwick) Yes.

  201. Well, let me read to you, "The Board and the manager believe that the merger will have a number of benefits to the company's shareholders, in particular the strengthening of the balance sheet and the provision of a significant improvement in the asset cover level".
  202. (Mr Fishwick) That is exactly what it did do. Just on that point, I think it is quite useful that you make it and you can press me further actually because it is easier, but the Chairman of the AITC, Tony Townsend, was on the Board of that fund that was merged, so ask him whether he felt it made sense at the time rather than just myself because you obviously cannot believe that it is the case. What we did, and it was not enough, I admit that, and I am very, very sorry, this is not very nice, people losing money, but we did attempt to try and save the money of both classes of shares. It was not enough, we failed, but I do not apologise for trying.

  203. Mr Marshall, what is the policy of Aberdeen now towards its retail investors because your earlier statement really was, "Well, the people who invested in Aberdeen High Income Trust and other trusts, well, tough really. It is not our problem any more"?
  204. (Mr Marshall) No, I do not think we took that attitude. I think what we have tried to do is to ensure that we give as much information to people as possible because they are asking lots of questions. The correspondence you are referring to would be precisely the type of question which was being asked at the time, which was, "What does this mean for me?" and once people had got over, if you like, the initial shock of the September events, they were looking to see the implications, seeing stock markets fall. Now, on an ongoing basis what we are trying to do is to communicate as much as possible with the information that is provided out there. Some of that information regrettably is very unpleasant and we are having to tell some people some very bad news in terms of their investments and it is not very pleasant.

  205. What do you think is the right strategy for the retail investor in a period of stock market volatility?
  206. (Mr Marshall) I think there are probably two aspects to that. In terms of existing investors, and I think you have to look at each individual in terms of their own risk profile and appetite for risk of the holdings they are referring to in terms of their overall portfolio and see where that stands, but the one thing we would certainly encourage people not to do is to take a knee-jerk, panic reaction and the mistakes of the past, particularly in the retail market, are that people do sell out at the bottom and buy at the top. It is unfortunate and it happens, so what we are trying to do is to give people as much information as possible so that they can make a reasoned decision. You try and put that in the context of historical events and allow people to weigh that up and hopefully in conjunction with their own advisers. We at the end of the day do not give financial advice and it is up to people like us to supply as much information as possible.

  207. What this investor in the Aberdeen High Income Trust was told at the end of this letter telling them about the terrorist attacks on their investments was, "History has generally shown that the best policy is to sit tight and await an improvement in market conditions". In that context, do you think there is an inference of advice there?
  208. (Mr Marshall) No, I think that is an objective piece of information. That is true. It is undoubtedly true that history has shown that over the long term investments tend to improve and the situation, as Chris was outlining, at the time, post the re-organisation, investors were in an improved situation from where they were before and had conditions improved from that or had conditions even remained stable from there, then I think that information would have been borne out. In practice, clearly that trust has failed and, as Chris has said, the reconstruction failed, but what we were giving was a piece of information which was valid and remains valid, that in the long term investments do tend to go up. What we are actually experiencing at the moment is the longest downturn since the 1930s. It may not be the deepest, but it is the longest downturn and that is patently very unusual circumstances.

  209. Mr Gilbert, do you feel you have any obligations to the people who lost money in the Aberdeen High Income Trust?
  210. (Mr Gilbert) I just repeat what Chris said which is that we are desperately sorry that people have lost money. It is awful as far as we are concerned because this was one of the most successful funds we have ever had. It has won so many awards during the 1990s, it has a string of awards. It is tragic that it has gone the way it has and circumstances have just been against it. I was going to make one point, that it is not just us that decided that the merger between the two funds is good for the shareholders, but the advisers to both funds, the advisers to both trusts have to sign off on a document and it goes through the UKLA, so I think to suggest that Aberdeen is totally at fault for this is wrong. We tried our best here, we really did try to save this.

    (Mr Fishwick) I do not think there is one analyst in the City who would say that the merger of the two funds and the attempted rescue was not in the interests of shareholders. It failed and I apologise for that and I apologise to the investors. We know these people. They are not faceless people. They come to our meetings and I know them personally, but attempting and trying to do it was the right thing. I still believe it was the right thing. All that would happen instead is that people would have lost their money earlier and we would have been sat around this table earlier.

    Mr Fallon

  211. Perhaps we could come back to the other trust, the Enhanced Zero Trust, which was launched in February 1999. Mr Currie, you were quoted on the day as saying, "It is a no-brainer. It is a banking decision really. You are able to borrow cheap, invest high". Is that incompetent or dishonest?
  212. (Mr Currie) I think it is retrospect.

  213. This is what you said then.
  214. (Mr Currie) Yes, it is trying to explain how the mechanics of the trust work and it is enhanced zero because it uses bank gearing, typically borrowings at 6 per cent, to try to return at 9 per cent and that was a clear description of what the policy of the trust was at the time, but in 1999 we were in very different circumstances from now and it is very easy to issue little soundbites, to cherry-pick information to suggest that somehow now -----

  215. This was your soundbite.
  216. (Mr Currie) In 1999, and in 1999 the zero market was vibrant, it was growing, everyone had rosy views of where markets were going and that was then and now is now.

  217. But if you describe it as a banking decision really, you cannot be describing something that is high risk?
  218. (Mr Currie) I think I was trying to describe, and you are using reported speech as well, how the operation of the company works. The company borrowed money to invest into the zeros market. It was borrowing lower and trying to invest higher. That is what it was there to do.

  219. I am using your reported speech and you are the no-brainer here, are you not?
  220. (Mr Currie) Well, with many thousands of words written on this subject over the last five years ----

  221. But you are the Head of Marketing and you were the Head of Marketing when this trust was launched and you said, "It is a no-brainer. It is a banking decision really".
  222. (Mr Currie) What is the source of your information. I cannot remember every ----

  223. This is the Glasgow Herald on 11 February 1999.
  224. (Mr Currie) So the Herald has reported me as saying it.

  225. Are you denying you said it?
  226. (Mr Currie) No, I am saying that all I was trying to do was explain how the functioning of the trust worked and that is what it was.

  227. Well, let's turn to Mr Fishwick. On the same day you said, "Zeros represent a relatively low-risk investment and can be relied upon to produce almost unfettered growth even in the most volatile of equity markets. Their prices do not fall back sharply even when equities are in decline". Perhaps you could elucidate.
  228. (Mr Fishwick) Well, I do not think that is a correct quote of mine because I do not believe, or no one who knows me will, that I have ever said the word "unfettered". I find it quite hard to say, but yes, I believe that though I did not say that, and I say the same and I come back to what everyone says ----

  229. This is a statement by you reported by Reuters News Service. Are you denying this?
  230. (Mr Fishwick) I certainly deny that I have actually physically said the word "unfettered".

  231. You said "almost unfettered growth", but let's look at the second sentence. You said, "Their prices do not fall back sharply even when equities are in decline".
  232. (Mr Fishwick) They had not at that time. If you look at the chart and the AITC and every single person in the sector, if you look at the chart and look at the movement, and if you remember the LTCM crisis when the stock market fell dramatically and the Russian debt crisis at the same time in 1998 when the stock market fell from 6,000 to 4,800, the zero market hardly moved. It did not fall 10 per cent, it did not fall 5 per cent. There was hardly a blip and the zero line went up pretty much like that (indicating). The markets went up and down throughout the 1990s at various levels and it had not been. At that time that was very much what people believed, what we believed, what the AITC believed, what every broker believed and every journalist believed. There was no one saying any different at that time. Now, it has been proved to be wrong, but that is what everyone believed to be the truth at the time and that is what the history of the past was. They had ridden out volatile markets, as also did income shares. Income shares hardly dropped during the Russian debt crisis and the LTCM crisis when stock markets fell dramatically because it was a very sharp fall and a very quick rebound, a bit like 1987 was. What we are experiencing now is a falling market and a continued fall. We have had three years of markets going down which we have not seen for an awful long time. It is a different type of fall and it is a question of how long it lasts.

  233. Why did this particular trust do so conspicuously badly?
  234. (Mr Fishwick) I think it did badly at the time because what it actually was, it was funding zeros and zeros have gone down dramatically, the sector has fallen. It had 100 million of assets where 40 million of that was bank debts and banks do not lend money if they do not think they can get it back. The bank was convinced that it was a very safe bet for them. The bank itself is now losing substantial money on that.

  235. You are blaming the bank now, are you?
  236. (Mr Fishwick) No, I am not blaming the bank. I am just saying that the bank believed, as we believed, that this was a fair proposition and in the early parts of its life it performed exactly as it did, but at the end of the day if you borrow money and assets go down, you end up losing money. The more borrowing you have, the more the assets fall, the more you lose. It is simple mathematics.

  237. But was it not also because its largest holdings were in fact in zeros issued by highly-geared trusts with substantial cross-shareholdings? Did this fund invest in Aberdeen zeros?
  238. (Mr Fishwick) Well, let's knock this one on the head once and for all. All Aberdeen zeros are not highly geared and they are not all invested in cross-holdings.

  239. Some of them are.
  240. (Mr Fishwick) Some are and some are of every single person in the industry. This is not an Aberdeen issue, but an industry issue. Many, many zeros have bank debt and have investments in other trusts. This is not uncommon. It may have proved to have not worked, but it is not uncommon.

  241. There seems to be a substantial amount of pyramid investing by your trusts in each other.
  242. (Mr Fishwick) The Enhanced Zero Trust was a trust to invest only in other zeros, so, by nature, is a fund of funds. That is what its name is and that is what it does. It only invests in trusts with zeros.

  243. So this was a pyramid investment, was it not?
  244. (Mr Fishwick) Not necessarily because some of the trusts - well, I will try again to get this through, this "pyramid investing". Everyone assumes that because a fund of fund owns lots of other trusts that they necessarily owe the bank and that is not true.

    (Mr Gilbert) Fund of funds are not illegal. They have been around for as long as the City has been around.

  245. They have not done quite as badly as this one, have they?
  246. (Mr Gilbert) Fund of funds generally? Fund of funds in the split capital sector have ----

    (Mr Fishwick) There is not one single fund of funds which has survived.

    (Mr Gilbert) So they have equally all done badly.

    (Mr Fishwick) None of them has survived.

    (Mr Gilbert) Three of the seven zeros that Cazenove's are recommending today are Aberdeen zeros, so I refute your point that all Aberdeen zeros are highly geared and pyramid, and I forget your exact word.

  247. Some of them are, are they not?
  248. (Mr Gilbert) No, the ones that own other split capital investment trusts or zeros are fund of funds. Enhanced Zeros was a fund of funds.

    Mr Ruffley

  249. Could I ask Mr Fishwick about the rescue operations you referred to when various of the trusts that you managed got into difficulty. What was the date and what was the name of the trust which first got into difficulty?
  250. (Mr Fishwick) There are two parts to that question and I will answer the second part at the end. A number of trusts got into difficulty, some of which were Aberdeen, some were others in the sector. The first trust that got into difficulty actually was the most successful trust launch of all time. It was the European Technology Income Trust which was launched by UBS Warburg. It was a placing of 400 million ----

  251. I am asking about the ones that you managed.
  252. (Mr Fishwick) We managed this one.

  253. You personally were involved in the management of that?
  254. (Mr Fishwick) As Head of Closed End Funds, I helped set that up. This fund had no cross-holdings. It was the biggest launch. It raised 400 million. We sent 80 million back to shareholders because we raised so much money. At the end of the day, it got into trouble for two reasons: technology shares collapsed, as we know; and the other side of the portfolio which provided income from high yield bonds and high yield telecom bonds had also been a disaster. So you put together two assets with massive demand and both failed. It had no cross-holdings, and that was the first of the trusts to get into trouble. It was acquired by another technology trust.

  255. Can I ask the same question for Aberdeen Preferred Income and the Enhanced Zero. When did you first think you were in difficulty and that action may be necessary - dates for those two?
  256. (Mr Fishwick) Aberdeen Preferred started to get into difficulty in, and I am trying to remember the year -

  257. The months would be nicer rather than the year?
  258. (Mr Fishwick) September of 2001.

  259. That is Preferred; what about the other one, Enhanced?
  260. (Mr Fishwick) Enhanced Zero started to get into serious trouble in October/January the following year.

  261. The reason I ask this is because I want to know what discussions you, or any of those under your control, had with the regulator? Which regulator were you talking to when you were first aware of these difficulties in those two trusts?
  262. (Mr Fishwick) None of these trusts, as Mr Tiner said to you, are regulated.

  263. I know what Mr Tiner said. I want an answer to the question about their relationship.
  264. (Mr Fishwick) We never spoke to the regulator, nor did they ever ask us about it. They do now but they did not then, and I am not aware of them asking about the trust being in trouble at all, nor the trade body.

    (Mr Gilbert) The proposals would go to the UKLA if we were doing a reconstruction.

  265. For clarification, who was it at the material times that Mr Fishwick has just listed? For the particular months he listed, who was the UK Listing Authority and who were you speaking to?
  266. (Mr Fishwick) Our regulator at that time would have been IMRO.

  267. No, they are separate things. There are different regulators. You raised listing authority. Let us deal with that first, then deal with IMRO next.
  268. (Mr Gilbert) The UKLA is dealt with by the broker.

    (Mr Fishwick) Can I take this question because we are getting into trouble here. What you are asking me is when did we first think that we were -

  269. I am not getting into trouble. You are the one in trouble. Now answer the question.
  270. (Mr Fishwick) I will answer the question, if you will let me. The question you asked me is: when did I think they were getting into trouble?

  271. You have given me two answers. I want to know -
  272. (Mr Fishwick) When did the rescue operation go through? February. When were the authorities aware of it? The document goes to the Listing Authority in January.

  273. January of which year and which trust? You are getting very confused here. Come on. Get serious. Be specific.
  274. (Mr Fishwick) Mr Ruffley, you are getting confused and if you let me answer, I will.

  275. Can you tell me which trusts you are talking about and which year you are talking about?
  276. (Mr Fishwick) Aberdeen Preferred: in September of last year, the trust started getting into trouble. You meet with the board and its advisers and try come up with a plan to rescue it or decide not to. Right? That is an option you have. Once you decide a plan, you see if you can implement it. You take the documentation to the UK Listing Authority to be approved, but that is three or four months later. The UK Listing Authority approves your documentation; the plan then gets put to shareholders; it is voted on. If they vote in favour of it, the plan goes ahead, because it is their company. If they do not like it, they vote it down. The shareholders voted it through and accepted it.

  277. We know all that. What I want to know is when you were aware of difficulties. Forget the Listing Authority element. We have dealt with that.
  278. (Mr Fishwick) September -

  279. What about IMRO?
  280. (Mr Fishwick) A company like Aberdeen Preferred was not regulated by IMRO and therefore did not need to go to IMRO for approval.

  281. What about any other regulator?
  282. (Mr Fishwick) I do not believe there are any other regulators for it.

  283. So far as you are concerned you do not have to talk to anyone when these difficulties were manifesting themselves?
  284. (Mr Fishwick) The board have a duty, as directors of a public company, to look after shareholders' funds.

  285. What is the answer: that there was no one at the FSA you felt beholden to, or indeed any other authority when you were first aware of the difficulties? What is the answer to that question?
  286. (Mr Fishwick) There is no one directors of a company can turn to. If the directors of an investment trust are perceived to get into trouble, they cannot just pick up the phone and say, "FSA, I think I am in trouble". He would say, "Look, you are not in my jurisdiction".

  287. So you do not think you are under any duty to any regulator, whomsoever that may have been; you did not think there was any necessity to advise anyone of the difficulties that you had identified?
  288. (Mr Fishwick) I think it was very important to advise the people who matter, the people who own the company, the shareholders, which we did.

  289. Can I finally ask: when you did not grace us with your charming presence, Mr Fishwick, on 11 July, Mr Gilbert had to stand in for you. One of the questions that was asked by the Chairman of this Committee was to the effect: Has not the behaviour of some of the trusts you manage tarnished the whole sector, the split capital trust sector? Mr Gilbert said "no". Then when he was asked "Why not?" his answer was: " This has happened before. This happened in the 30s and in the 70, so this is history repeating itself. I know that causes general mirth, etc", and a few tears I fancy as well, Mr Gilbert, but then you went on to say: "But that is the case: this is caused by a prolonged bear market". Let me return to a question my colleagues have asked: why did you bog it up so much more than other split capital trusts? Why have the trusts you have ben associated with lost more money than others in this sector? I am asking you that.
  290. (Mr Fishwick) We have not bogged it up any more than other people in the sector.

  291. I am sorry, will you say that again? For the record, can you repeat that?
  292. (Mr Fishwick) I do not believe that we have bogged it up any more than anyone else in the sector. Let us get the facts straight. There are 19 trusts that have been suspended or are in administration. I think seven of the 19 are in administration or liquidation. The rest of them will go there. Let us not try and con people, they will. There are still four or five trusts whose assets are now currently below their debt and markets need to rise for shareholders of any class to get anything back.

  293. Mr Fishwick, you are trashing the whole of the sector. That is not true, is it?
  294. (Mr Fishwick) There are 10 to 15 that will get into further trouble if markets fall. I am not trashing the whole sector. I am saying that we -

  295. You seem to be doing a good impression of it.
  296. (Mr Fishwick) There are 40 trusts in trouble. When you borrow money and assets fall, you get into trouble. As I said, there are 78 of the 135 ordinary shares that have a value of nothing, and the markets will have to perform well to become something. I am not trashing the sector, Mr Ruffley. I am just telling you the facts.

  297. How many trusts are not going to be in difficulty, in your estimation?
  298. (Mr Fishwick) How many are not going to be in difficulty? It depends on what circumstances you are referring to. If medium-term interest rates keep falling and people do not manage to repay their debt more and more, if assets fall, depending on what asset class you are -

  299. Status quo, as we speak at the moment?
  300. (Mr Fishwick) As we speak at this moment in time, I do not believe that five trusts will make it, and I would suspect that of the following 15, half will have to work very hard.

  301. Leaving how many not going under like your outfits?
  302. (Mr Fishwick) Like some of ours. It would leave about 90 to 100 out of the 135.

    (Mr Gilbert) Mr Ruffley, we have the top performing split capital investment trusts.

  303. You also have some of the duds, do you not, Mr Gilbert?
  304. (Mr Gilbert) Yes, we have the whole range. We are bound to have.

  305. You certainly have the full set. Can I ask you one final question and then I will wrap it up, Chairman. How does it feel to be the unacceptable face of the City, Mr Fishwick?
  306. (Mr Fishwick) Actually, I do not believe that I am the unacceptable face of the City, quite frankly.

    Mr Laws

  307. Mr Gilbert, when we met back in July, I was asking you then about the compensation schemes that you envisage potentially for investors. I said, "Can I ask you what proportion of the retail investors who bought the zero dividend preference shares will receive compensation from you?" Your answer was, "One hundred per cent, if they bought through us or bought our unit trust." Is that still the situation and when will the investors in those areas get compensation from you?
  308. (Mr Gilbert) It is still the case. As I said earlier, we are still committed to the uplift package. The Aberdeen Asset Management Board have specifically stated that they are committed to the uplift package going forward.

  309. Will that uplift package give people all of their money back, as you said in July?
  310. (Mr Gilbert) Yes, it will give them their money back. The delay in getting the details out actually is not to the disadvantage of people because the uplift package we are proposing is a certain time period out. What we are trying to do, and my colleague Gary Marshall probably would be better able to pick this up, is work our way through what is a very complex scheme.

    (Mr Marshall) I think I clarified the point the last time that when we are talking about compensation to all investors in zeros, we are saying basically that where a zero has been mis-sold, anyone who has been mis-sold a zero, we will compensate. As far as the unit trust is concerned, we remain entirely committed to the uplift package we have proposed. As Martin was saying, the reality is that this is the first time that anything like this has ever been attempted and we are having to go through really a large number of advisers and deal with issues which have never surfaced before. It is not just a regulatory issue. There are trustees to consider. We have to consider legal advice, tax advice, the financial implications, audit and so on.

  311. When do you think people will get their money back?
  312. (Mr Marshall) We are currently proposing that the plan will come into effect in August 2005.

  313. August 2005? Why is it going to take that long?
  314. (Mr Marshall) Because what we are looking at here is this. The proposal was always framed around the proposition that any stock exchange investment should be for the medium term. If you make any venture into the stock exchange, however, whatever the risk profile is, we would make it clear that people should be looking for an investment over the medium term. In that case, 2005 would be five years from the launch of the fund.

  315. Can you just be very clear about which individuals are going to get their money back and precisely how much they will get back in relation to the amount that they put in?
  316. (Mr Marshall) I am talking purely about our unit trust, which is the Progressive Growth Unit Trust, and I am talking about all investors in that fund. I cannot go into the details at this point about how people will be treated as existing investors compared to people who have sold out and so forth. I do not have that information.

  317. When we had the discussion in July, we were told that your uplift package would mean that investors would receive back their original investment.
  318. (Mr Gilbert) That is correct.

  319. So they will receive back all of the money they initially put in, plus an uplift for any other aspect?
  320. (Mr Gilbert) We cannot go into too much detail here. Suffice to say, Mr Laws, that they will get their money back. We are still working on the scheme but the key thing as far as people are concerned is that Aberdeen are still committed to the uplift package.

  321. Can I just ask you, in that case, Mr Gilbert, about this, and you will be aware why I am asking these questions. The investment editor of The Observer this weekend wrote an article entitled "Aberdeen U-Turn on Rescue Deal", which said that you had abandoned a rescue package for the Progressive Growth Unit Trust because of concerns over the package.
  322. (Mr Gilbert) We have no idea where that story came from, absolutely none. It is absolutely untrue.


  323. May I say, Mr Gilbert, we asked them and they agreed.
  324. (Mr Gilbert) It is absolutely untrue. There is constant speculation every day in the press and we see stories like that.

    Mr Laws

  325. Following the questions from the Chairman at the beginning of the session about some of the other split capital trusts and the way in which people purchase those, is there any possibility of you extending your own compensation package to include other investors who may have been mis-sold these products?
  326. (Mr Gilbert) What I can say, and this is not answering your question -

  327. I would rather you did answer it.
  328. (Mr Gilbert) If we are found, as the Chairman suggested, to have mis-sold zeros to anyone, we will compensate.

  329. But you are saying that you do not believe that you have mis-sold any zeros, other than the ones -
  330. (Mr Gilbert) I think there is a big distinction between the wrapper products that we have. You could take a PEP or an ISA as a good example, as Piers suggested. It is a similar situation if your stockbroker sold you a PEP and advised you to buy Marconi and you lost all your money. What you were saying, or what the Chairman was saying, was that he should be compensated for the loss in Marconi. What I am actually saying is that we advertised Progressive Growth and put a low risk warning on it. We badged it as low risk, and that is where we feel a certain obligation to the unit holders. At the time it was low risk. We can produce reams and reams of evidence showing that it was low risk at the time. It is an unfortunate set of events and we are very sorry that people have lost money in this product but that is why we are going for this uplift package, and we are the only people so far that are prepared to step forward and do that.

  331. Mr Fishwick, if you, instead of retiring from this sector, were obliged for some reason to stay on to serve out time, what lessons that you might have learnt over the last couple of years would you draw attention to, and how would your behaviour in managing some of these trusts and dealing with retail investors differ from that over the last couple of years?
  332. (Mr Fishwick) I think quite clearly we have all learnt lessons, and if we have not, then we should have done. One thing that has come across to me more than I perceived at the time is that investment trusts are all about confidence and I am surprised how the confidence in the sector has been damaged so much and therefore made many investments trade below their assets and caused them to have difficulties with their banks. I have learnt a lot about the crisis of confidence which I did not see before and should probably have seen coming earlier. I just did not believe you could have a situation where no investor will now almost buy any split capital trust. So by nature their prices are falling because everyone is a seller. Everyone wants to have a AAA rating and not own any other split capital trust.

  333. Do you believe there are any lessons to be learnt in terms of the marketing of these products to less sophisticated retail investors?
  334. (Mr Fishwick) I think the lesson that has been learnt by the City is very simple, that we seem to be in a situation where we are championing the consumer, and rightly so, and the truth of the matter is that you probably ought to put no risk warning. Every fund manager in the City wants his marketing department now to put on "high risk" because he does not want to get caught from them all. I think the lesson I have learnt is that there needs to be a mass educational programme for investors on all kinds of products. I am staggered how little people understand about their money, be it their pension, their endowments or their investments. I thought we knew a bit more. I think a huge educational programme needs to be done. I do not know how it is going to be done or who will do it, but it is very sad. It is awful when people lose money without understanding why they have lost it.

  335. Do you not think, as a final question, that there is something that you lot could learn in terms of the way in which you market these items to investors, not least because you are now paying compensation as a consequence?
  336. (Mr Gilbert) We are not paying compensation, Mr Laws. We are voluntarily coming forward with an uplift package on a product that we marketed as low risk.

  337. Because you got it wrong in terms of the marketing?
  338. (Mr Gilbert) Not only did we get it wrong, and there seems to be some sort of - Everyone got it wrong.

  339. I am trying to find out what lessons you have learnt, Mr Gilbert. That is what I am asking you.
  340. (Mr Gilbert) I suppose, if we got something wrong, we would not badge it low risk again.


  341. Really what you are saying to us is that it is the punters' fault.
  342. (Mr Fishwick) No, not at all.

    Mr Plaskitt

  343. Mr Gilbert, if you hear an advert on the radio for a financial product, a savings or investment product, there is a pretty standard disclaimer at the end of the advert, is there not, which goes something like, "Past performance is no guidance to the future"?
  344. (Mr Gilbert) Yes.

  345. Is that the maxim that Aberdeen has always held to?
  346. (Mr Gilbert) The disclaimers were on every product we produced, but the problem is that you can argue that the disclaimer is there, and legally our adverts stand up, which is why we have come up with the voluntary package. As I say, if we are found to have mis-sold a product, we will compensate people.

  347. But in your own management decisions in running these funds, have you always held to that maxim?
  348. (Mr Gilbert) That markets can go down as well as up? Yes.

  349. No, that the past performance is no guidance to the future? Have you held to that maxim in the way that you have operated?
  350. (Mr Gilbert) I do not understand the question.

  351. Really? It is fairly straightforward I think. As I say, I think it is a requirement when you are promoting a financial product that there is that disclaimer on the advertising material - past performance is no guide to the future".
  352. (Mr Gilbert) To future performance.

  353. To future performance. What I am asking is whether you have operated consistently with that maxim in decisions you have made in running Aberdeen?
  354. (Mr Gilbert) Yes, I think so. Past performance is no indicator of what is going to happen in the future.

  355. So you have acted consistently with that maxim, and yet when you submitted a memorandum to us in July of this year, you said under the paragraph headed "Risk Profile": Fund managers, investment bankers, lawyers, advisers, etc., all worked to a common assumption that some form of equity market growth could be expected from equity markets in each succeeding year. Is that consistent with the maxim about "the past is no guide to the future"?
  356. (Mr Gilbert) Yes, it is.

    (Mr Fishwick) Can I take that one because it is interesting. I think if you believe that you learn nothing from history, then maybe that is the case. What you have to remember is that when you look at, let us say, your pension scheme, which is a perfect example, it is the biggest investment for the majority of people. If they have a money purchase scheme rather than a company scheme, they get a statement probably once a year, probably six months after the year-end date, and it says this very simply: "On our current growth assumptions", which are way higher than any splits ever use, "you will receive 27 per cent of your current salary entitlement". They do not say to you, "If these assumptions are not made and if we put in an assumption of -2.5 per cent per annum, you will probably end up with your pension being worth one week's salary"?

  357. I am looking for operating principles here and you are very specific in the memorandum you give to us: "Some form of equity market growth could be expected in each succeeding year". Is that not an amazingly rash assumption to work on? It is a very specific statement. You made it to this Committee.
  358. (Mr Gilbert) There have not been three down years in the stock market for 80 years.

  359. Let us explore this a bit further. You submitted this memorandum to us on 1 July 2002. Let us look at your website which was up also for July 2002, exactly the same time. You are submitting that memorandum to us saying that that is your operating principle and on your own website at exactly the same time - and you can look at it - you posed this question: "Was there overconfidence in the sectors that splits were invested in? Answer: The rise of equity values during the 1990s may well have led to sector overconfidence about continuing growth rates going forward". Is that not totally contradictory to what you told us was the working assumption and the memorandum supplied at the same time?
  360. (Mr Gilbert) I do not believe so.

  361. I do not understand how the two statements are compatible.
  362. (Mr Currie) Looking at the same time period and with the benefit of hindsight, what you saw was double digit equity market returns happening to the Nineties, which, to a whole generation of fund manages and analysts and others, led to the belief that equity markets would continue to rise. I am not alone in this. Governments believed equity markets would rise during the period. With hindsight, looking at ratings now, it appeared that that assumption that it would continue at that rate of growth was wrong.

  363. Hindsight is always helpful, but you are investing other people's money and you are trying to act responsibly with it and behave responsibly to them. It appears that your operating principle was, and it is in your memorandum, that you were working on the assumption of equity market returns year-on-year-on-year.
  364. (Mr Gilbert) Are we not speaking about the models being based on that assumption?

  365. I am sorry?
  366. (Mr Gilbert) I am trying to find the part of our submission where this point is.

  367. In the submission you made to us, it is dated 11 July 2002, it is on the first page of your minutes of evidence, the paragraph sub-headed "Risk Profile" on the first page of the book. I cannot help you with the pagination because mine may be different. You have been handed it now. "Some form of equity market growth could be expected from equity markets in each succeeding year, as had been the case in preceding decades"?
  368. (Mr Gilbert) That is correct, as had been the case for the preceding decades. That puts it into context.

  369. How is that statement compatible with what was up on your website at the same time where you were freely admitting the sector over-confidence, that you will not have the growth rates -
  370. (Mr Gilbert) I am afraid, we will have to come back to you on this. I really cannot answer, it, I am sorry.

  371. Can I ask you one more question about your website in that case? This is the July 2002 website. "Question: Does this mean the splits' geared structure is flawed? Answer: No, despite their recent poor performance, the inherent structure of splits cannot be considered inadequate. The ability to gear has historically been one of the main advantages." The next question: " Why did you not foresee t
  372. Investment professionals over the 1999-2002 period did not in the main anticipate the sustained nature of what has now become the longest bear market in equities since World War Two. he potential problems splits have encountered? Answer: Gearing in falling markets has proved to be the greatest single factor contributing to loss of value in the sector." Are not those two answers flatly contradictory? First of all, you say gearing is the advantage and a couple of lines later that gearing is why they have crashed?

    (Mr Fishwick) No. I think it is very easy to explain. The truth of the matter is that if you think markets are going up and you get it right, you want to borrow money. It is like buying a house. If you think markets are going down, and you get it right, you want to have no borrowings. It is a question of when you use the gearing. That is the advantage. You borrow money when assets are rising and you try and get rid of your debt and really to catch up when assets are falling. It is no different from housing. So gearing is the advantage. The question is: do you use it properly or correctly at a given moment in time? That is the issue. In the last three years, whether you had 5 per cent gearing or 50 per cent gearing, you wanted none because things have gone down.

  373. If I am an investor who has lost a lot of money and I am checking this website, I think I am not going to be able to reconcile these two statements. You are telling them gearing was a great advantage and "Oh, sorry, because of the gearing you have lost your money".
  374. (Mr Fishwick) I think gearing is the greatest advantage for investment trusts. If investment trusts have no gearing, I believe they have no reason to exist.

  375. How are the folk who have invested in your trusts, who have now lost their money, going to understand what you have just said about the advantages of gearing? It is gearing that has killed them, is it not?
  376. (Mr Fishwick) Gearing is the biggest single factor.. The companies happened to have large borrowings, or any kind of borrowing, and assets fell and that has hit them. In the previous ten years, they borrowed money when assets were rising, and that benefited them. I cannot understand that you do not understand that.

  377. I do understand it. So the risk inherent in gearing was always there?
  378. (Mr Fishwick) Of course it was always there.

  379. The risk was always there.
  380. (Mr Fishwick) If you borrow money -

  381. Can I stop you there because that is a helpful comment. You said, "The risk of gearing was always there". Yet, further on in the website: "Question: Are zeros a low-risk investment? Answer: Zeros do not appear to be as safe an investment as they had been". If the risk was always there, you should never have promoted them as low risk, should you?
  382. (Mr Fishwick) I think that is a question you have to ask the whole industry.

  383. What about you? You have just said the risk was always there, but you promoted these as low risk?
  384. (Mr Fishwick) We believed it to be low and minimal risk. We got it wrong. We as the sector, including our trade body, did not believe that markets were falling to the levels we had. If you had said to me, "If the market falls to 4000 when it was at 7000, and you believed that case, would you remove all your debts?" "Yes." Did the AITC believe, did every other manager believe, did ever broker believe three years ago that zeros were low risk? The answer is: "Yes, they did".

  385. I think it is interesting that you have said the risk was always there because -
  386. (Mr Fishwick) If you borrow money and you cannot pay it back, of course it is a risk.

  387. That is a change of -
  388. (Mr Fishwick) No, it is not a change.

    (Mr Gilbert) Gearing is always a risk. If you have a mortgage on your house, it is always a risk

  389. I accept that you are now saying that but you say it in relation to products that you marketed as low risk?
  390. (Mr Gilbert) You are speaking about two different things. We are speaking about zero dividend preference shares and you are speaking about investment trusts.


  391. You have given us a submission on it. We understand that if you gear, you go to the bank and the bank is first in the queue to get its money back. Is that correct?
  392. (Mr Gilbert) That is correct.

    Mr Mudie

  393. Mr Fishwick, you said here just latterly that investment trusts are all about confidence. That is this exercise. Mr Fallon would say that is what he means by pyramid selling, that as long as I believe I am going to make money; I will buy it and then somebody else will buy it and somebody else and, as long as we all have confidence and it keeps going up and keeps selling, that is what pyramid selling is all about.
  394. (Mr Fishwick) I do not accept that argument whatsoever. I think investment trusts are like markets that are based around confidence. Financials systems are around confidence. It is no different from you saying about a small bank that if you take your money out and you have a run on the bank, it disappears. It is about confidence. I will give you an example of that. You can have an investment trust, for example, that is on a discount of 2 per cent. Confidence goes; the assets do not change, so that it is a discount of 40 per cent. That is what we are seeing in the sector, discounts widening. People would have lost 38 per cent of their money and the assets would not have moved. People say, "Well, don't worry, you can wait to get them back", but you could wait for 100 years if discounts did not narrow. Investment trusts are all about confidence and there has been a huge crisis of confidence in the sector, which has added to the problems and made them worse.

  395. Investment trusts have a long history and your memorandum spells out the history. It started in Scotland, etc. There have been a lot of companies doing them. Do you not have any shame that the recent developments, the way you have developed investment trusts, have damaged the investment trust industry?
  396. (Mr Fishwick) I do not have shame. I am very, very sorry that people have lost money.

  397. I am not trying to pillory you. If you will bear with me -
  398. (Mr Fishwick) I did not design the sector.

  399. I would like to take you on to something constructive because I worry that you threw away some figures to Mr Laws that could damage the industry further. You said, "Nineteen trusts, the rest will go broke". Can we just settle down and will you tell us which, not individual trusts, type of trusts you were talking about when you said, "All 35 will go"?
  400. (Mr Fishwick) I said, "All 35 might go". Let us not complicate it. Nineteen have gone already. Four further ones have assets substantially below what they owe the bank, so that is 23. The rest of them, and it is very simple, and I do not want to name them, you can work out from the guide. It is those which, for example, maybe owe the bank 90p and have got 95p of assets. It does not take much of a fall to go down. That is the point I am making. If they cannot get asset growth from markets or if the cost of that debt goes up, the mathematics say that they will not survive. Those who have got the least amount of assets against their debt are the ones that are likely to fall.

  401. You are saying in public that you think all 35 will go?
  402. (Mr Fishwick) No. I am saying that I think -

  403. That is what you did say. Can you clarify it? There are people over there who have money in those and who will be distressed to hear that half of the sector will go.
  404. (Mr Fishwick) If markets do not recover or if they fall further, the mathematics are simple: they will not survive. If markets rise, they will survive.

  405. What is peculiar about those 35 as regards the rest of the investment trust industry, which is being damaged by these 35 that we are referring to?
  406. (Mr Fishwick) They have more bank debt in proportion to their assets.

    (Mr Gilbert) And repaying bank debt is not just as simple as writing out a cheque to them because the break costs are the things that have come out so dramatically.

  407. They also have another two things, or some of them have another two things. Some of them have cross-funding and a lot of them have had assets in the information technology field, which -
  408. (Mr Fishwick) Can I just take that?

  409. Mr Gilbert nods and you disagree?
  410. (Mr Gilbert) No, I defer to my colleague. He is more expert.

    (Mr Fishwick) I would like to answer the question. I was pilloried for not answering questions last time. Very few of the split capital investment trusts were ever invested in technology. There were only four or five of that 135. I do not know where this misconception has come from on technology. Technology could halve again and it would make no difference to the split capital sector. It is not an issue. Cross-holdings or investment in other split capital trusts is not an issue either. All that damage has been done; that has occurred in those 19. That is finished. The problems going forward are different problems. The problems are in equities and if European equities do not rise, the trusts will get into trouble. They will not get into trouble because of cross-holdings because they are down to nil virtually. They will not get into trouble because of technology because there is none. Other things will get them into trouble. I think it is naive to say that if stock markets fall and you have got a lot of debt, you will survive. It is just common sense that you will not.

  411. So it is down to borrowing against market conditions.
  412. (Mr Fishwick) Yes.

  413. Mr Fishwick, why does that not then apply to the rest of the investment trust sector?
  414. (Mr Fishwick) It is very, very simple. It is about the amount of borrowing you have. If you have 100 ----

  415. Go on, Mr Fishwick. You are answering my question.
  416. (Mr Fishwick) Obviously everyone else understands the answer. If you have 100 of assets and 50 of bank debt now and the market falls by 25 per cent, you will survive.

  417. Mr Fishwick, the point I am trying to make is about confidence. You have highlighted confidence.
  418. (Mr Fishwick) Yes.

  419. When I take you through what has caused the 35 to be candidates for death, you say there is nothing different about their borrowings. Why are you so confident that none of the rest of the investments trusts have borrowings that will lead to the same fate? Why only these 35? You are so confident about these 35 but not about the rest?
  420. (Mr Fishwick) Because I have got the data.

  421. The data you gave us five minutes before the meeting?
  422. (Mr Fishwick) Yes, and we apologised for that because it is not our data.

  423. So in your data that you have had time to analyse none of the rest of the investment trusts have borrowings that would lead to them coming into this dangerous category?
  424. (Mr Gilbert) Unless markets fall.

    (Mr Fishwick) Or unless something hits you left field that you do not see.

  425. It falls further?
  426. (Mr Fishwick) Yes. There could be something that comes left field. It might be a fund that is invested in Europe and Europe halves again, completely collapses, the currency falls into disarray and it could hit you left field. What is interesting is that the ones which are most geared are not necessarily the ones that get knocked over because if the assets fall faster in another sector that you have, you are in trouble.

    Mr Cousins

  427. Mr Fishwick, did the bankers or the auditors of any of your trusts that you were involved with that have now collapsed ever approach you with that very simple point you have now put to the Committee?
  428. (Mr Fishwick) Oh, very much so. We were in constant dialogue on a weekly basis with the bank - auditors, no. I do not know if you have ever borrowed money from banks seriously. They spend an awful lot of time looking after it. What you do with the bank is provide to them a daily covenant. You tell them every day how much assets you have against debt and they are aware of it and there are levels. The minute you get to those levels, they are on the phone. One of the reasons I did not attend last time was because I was in a difficult syndicate meeting with the banks, trying to repay money for one of our funds. The banks are completely on top of it. They do not lend you money without taking care. So these trusts are actually supervised and watched by more than any other investment medium anywhere.

    Mr Tyrie

  429. I want to ask one or two simple questions. First of all, roughly when did splits get into borrowing heavily from banks?
  430. (Mr Fishwick) They started to borrow heavily when there was a huge differential in the cost of borrowing and the cost of zeros, roughly when interest rates got down to about 6 per cent and zeros were still costing you about 8.5 to 9 per cent. That is when it began.

  431. Which is roughly when? I do not need exact dates. I am not going to bring you back next week and say you told me a year out.
  432. (Mr Fishwick) I think early 1999.

  433. About 1999?
  434. (Mr Fishwick) Yes.

  435. Am I right in thinking that because banks are higher up the debt hierarchy, it was the calling in of the money from the banks that led to the collapse of many of these splits and that therefore effectively it is that new aspect of splits which is the chief single ingredient in the collapse?
  436. (Mr Fishwick) I think it is one of the ingredients. I would not like to sit down here and try and attempt to put the blame on anyone else or on the banks but banks, when they perceive that their loans may not get repaid, it is their job -

  437. In am talking about the design. I am not talking about apportioning blame.
  438. (Mr Fishwick) You have got a falling asset. If the assets did not fall, it did not matter if -

  439. We have been through all that endlessly. If you buy something and the price goes up, then it is a great buy. I am only interested in the structure. If it is the case that when you started borrowing from banks you had created what was really quite a different form of financial vehicle from the one that split trusts with zeros had always been historically, to what extent did you alert people that there had been this change in character of the vehicle?
  440. (Mr Fishwick) If you read every prospectus that has ever been published, the situation with regard to the banks' position is very clearly stated; it has to be.

  441. In retrospect, do you think that it was legitimate to have carried on describing splits with high levels of bank borrowing as low risk?
  442. (Mr Fishwick) I do not believe anyone that I am aware of described splits as low risk. They described portions of them, slices of them maybe, but they never described the whole company as that.

  443. Are we not dealing with two quite different animals here? We are dealing with traditional splits which were much lower risk, which historically had been low risk, which had not borrowed from banks, which could not be brought down by banks calling in their money on the one hand, pre-'99, and post-'99 a completely different animal, an animal that looked outwardly like a split but actually had a key, fundamental potential weakness in the event of a downturn in the market which the pre-'99 splits did not have, which was that they were borrowing from banks which could call the money in and effectively, as you put it, the break costs virtually destroyed these trusts. Is that not the case?
  444. (Mr Fishwick) It is part right actually, but not totally because -

  445. I will accept "part right".
  446. (Mr Fishwick) Can I try and help you with the answer because I think it is a very, very good question. I think it is one of the key question I have heard in the last year. It is right at the heart of the matter, quite frankly: should the sector have said that it has changed dramatically with the introduction of bank debt? It is a very, very good question. It is directed at me but it could be directed at anyone in the sector, the listing authorities. Should we have said it has changed? It is a problem. However, all the trusts ----


  447. Tell us the answer - yes or no?
  448. (Mr Fishwick) I think they have actually; "Yes, it was warning". Should they have shouted louder? Probably.

  449. You?
  450. (Mr Fishwick) Should I have shouted louder at all those things? I do not look after the public. I look after the trust. I have always been aware of the structure. Mr Tyrie, one thing about this actually is that of these 78 trusts who have told you that part of their share structure has no value, many of them have no bank debt, nor ever have had. So it is not perfect.

    Mr Tyrie

  451. It is not the only reason but it clearly is a major reason and it probably is the major reason for a substantial proportion of those that collapsed?
  452. (Mr Fishwick) I think falling markets is the primary reason; gearing is the next reason.

    Mr Tyrie: Of course falling markets is always the primary reason.

    Mr Laws

  453. Where is your fiduciary duty -- to the banks or to the owners of the shares in those trusts?
  454. (Mr Gilbert) To the owners of the shares.

    (Mr Fishwick) To the owners of the shares in the trusts, but as a director of a company, you have a fiduciary duty to your lending bank.

    Mr Tyrie

  455. I just want to get back to this point. It seems to me that anybody who looks at this carefully realises that we have two completely different types of investment trust vehicle on offer, pre-'99 and post-'99 vehicles, that the risks of the post-'99 bank debt laden vehicles were not flagged up adequately, that you as an industry and as a firm did not demonstrate to the people who were buying these things that they were buying something new. This was not a traditional split capital trust and that is probably why we have had such a terrible hullabaloo in the last three years. Is that not correct?
  456. (Mr Fishwick) I wish it was that simple. Of the 19 trusts that failed, on your assumption, you assume that they were all launched post -'99, and that it is not true; seven of them have been around for an awful long time.

  457. Why would I assume that?
  458. (Mr Fishwick) I think you are suggesting that knocking them over is intrinsic in that structure. What I am saying is that seven of them were launched way before that.

  459. Let me ask just one last question. If you are a business, any kind of business, and you are borrowing money, and many businesses borrow money, the key issue you are looking at the whole time is: what happens if someone calls that money in?
  460. (Mr Fishwick) Yes.

  461. In this sector why did you as a firm not have that as top of your list of concerns when you were allowing these trusts to become so indebted?
  462. (Mr Fishwick) But we did. That is the whole point about it. As assets fell, we repaid debt. Assets fell forward, we repaid debt. We have repaid 1 billion in the last 12 months and half a billion pounds the year before. The problem is that we could not repay the debt as fast as the markets were falling.

  463. The truth is, is it not, that for a large proportion of your trusts, old-fashioned splits, this was a perfectly reasonable vehicle. Of course they would have fallen with the market maybe a bit more because there was some gearing but they were a lot safer than trusts that had bank debt in them. The risk, that huge extra risk, brought in by the fact that banks were higher up the debt hierarchy for repayment, was not flagged up to investors adequately and that is why these things were described as low risk when they were not low risk.
  464. (Mr Fishwick) Again, I come back to it; I do not think split capitals have ever been described as low risk



  465. You have got it in here. This is your own literature.
  466. (Mr Fishwick) It is a zero.

    Chairman: The fact is that you have "low risk" in there. The aspects that we are going to be looking at as a committee - and we are going to get round the whole industry, we are not finished here today, Mr Fishwick, because everybody is going to get a questionnaire - are the issues of high levels of debt, cross-holding and aggressive accounting practices. We are looking at the whole industry and perhaps we will have you back again on that.

    Mr Beard

  467. It is plain from the answers we have had so far that the whole business was based on an assumption of an indefinitely rising market. What steps were taken to test your products against the possibility of a falling market?
  468. (Mr Fishwick) What steps were taken? I think it is worth bearing in mind the way a split trust capital trust is launched. There seems to be a huge misconception about how that is done. What actually happens is that you have an idea, whichever investment house you are, or an asset skill that you are good at; you approach the sponsoring broker or they bring it to you. In most cases they create a model which you and the board approve for your structure that is stress-tested. It is then independently verified by an accountant separately to make sure the model works. That shows what happens to the assets of various corporates, plus or minus, -2.5, +2.5, over a period of life, and they are stress-tested. You might say to me, "If your model says that the market may fall from 7000 to 4000, will you survive?" The model will say, "No, it won't". But we did not believe the market was going to fall back, neither did the board, or whatever. I could have told you that if the markets fall to this level we would not survive. There is nothing clever about that. The models did not tell you that. They do work; we just did not believe the markets were going to that level.

  469. What steps were taken to assess the increased risk on zeros that would arise from increasing borrowing?
  470. (Mr Fishwick) In the sector as a whole or by ourselves?

  471. By you?
  472. (Mr Fishwick) By us, that was based on the covered and hurdle rates of the funds. There was compensation in the amount of zeros that were in the structure with bank debt. What actually happened was that for the trusts that had zeros and bank debts, you may have had a trust that had 40 per cent zeros instead of equity. When you put bank debt in there, you may have only put 10 per cent zeros at the bottom; with the bank debt in, that is what compensated or attempted to compensate for some of the numbers going through. But these numbers and hurdle rates are live daily. They are there all the way through.

  473. It is clear from those answers that you did very little to test what would be the consequence of something other than an indefinitely rising market?
  474. (Mr Fishwick) Oh, no, not at all, none whatsoever. If you are saying that we did not shout loud enough that the bank gets repaid first, then everyone else, and the shareholders did not understand that the bank got their money before them, then -

  475. Then what?
  476. (Mr Fishwick) I cannot believe, or I find it hard to believe, that anyone believes that they are going to get repaid before the bank.

  477. Mr Fishwick, you kindly this morning in the papers that we only had five minutes to read have given us an account of your remuneration over the last three or four years and in 2000 and 2001 it amounted to 3.2 million, the largest part of which was from bonuses. If remuneration is of that sort, does it not breed a sort of "take the money and run" attitude with no inducement to look seriously at what the future consequence is going to be?
  478. (Mr Fishwick) It does not. I was a personal investor in all these trusts, as were the directors, as were my family. Of course it does not. You do not invest in products you think are not going to work. It is a stupid thing. You do not launch products that you do not think will work because it damages yourself. We are co-investors. I am an investor in every single product we have launched and I have kept every single share to the very end.

  479. Does it not amount almost to culpable recklessness to predicate a business like this and solicit people's savings on the basis of an ever-rising market when bear markets are not unknown, as has been suggested this morning?
  480. (Mr Gilbert) I just do not agree with that, I am sorry. It is just not the case. It just is not the case.


  481. Quickly, here at the end, and this is on the issue of real estate: when did you launch real estate opportunities?
  482. (Mr Fishwick) It was a very long launch period actually. It actually came to market eventually in July 2001.

  483. How much money did you raise for the launch?
  484. (Mr Fishwick) There was an awful lot of money already there, 840 million, the biggest launch. We did not raise the money and get paid for it. UBS Warburg, that is what they got paid a placement fee for.

  485. All right, you got 120 million. How much of that money is invested into income shares and other split capital investment trusts?
  486. (Mr Fishwick) Around 110 million out of 840 million.

  487. Just less than 25 per cent.
  488. (Mr Fishwick) It is a lot less than 25 per cent.

  489. There have been conflicting figures.
  490. (Mr Gilbert) 110 million -

    (Mr Fishwick) Out of 840 million.

  491. How much is that portfolio of splits worth today?
  492. (Mr Fishwick) It is a very small book because we sold it down. It is worth about 15 million. We have sold quite a number of investment trusts in recent months.

  493. 15 million! Why is that?
  494. (Mr Fishwick) The sector has fallen 80 per cent, Mr McFall.

  495. This is a disastrous performance and much worse in the general performance of income shares. Did you use that money to support a crumbling edifice of other income shares rather than investing in higher quality funds that have performed far less badly?
  496. (Mr Fishwick) We did not.

  497. Okay. So over the two years to 1 October, your Progressive Growth Unit Trust managed to turn 1,000 into 240 while the Investec Capital Accumulator Fund, which also invested in a basket of zeros, was returned 820. Was this bad luck in picking zeros?
  498. (Mr Gilbert) It does not invest in a basket of zeros. It invests in -

  499. It does and we will challenge that in later evidence. Was this just bad luck in picking zeros or was it incompetence?
  500. (Mr Fishwick) Our fund performed -

  501. 820 and 240: was it bad luck or was it incompetence?
  502. (Mr Fishwick) No, I think Alastair Mundy did a fantastic job of running that fund.

  503. Or were you deliberately buying the lower quality zeros, firstly to ensure successful launches of other funds that in turn would invest in your next launch and latterly to buy into the rescue issues of failing funds, thus throwing good money after bad?
  504. (Mr Fishwick) Categorically, no.

  505. Mr Gilbert, again I surf the net and I get a quote from you in The Financial Times of 23 April this year. It says: "We did actively encourage other fund managers to launch funds in other areas of investments and we sent them support funds with different investment briefs". Is that correct?
  506. (Mr Gilbert) Yes and no, Chairman.

  507. So The Financial Times, The Glasgow Herald and Reuters are all wrong?
  508. (Mr Gilbert) It is a bit unfair -

  509. This is from The Financial Times.
  510. (Mr Gilbert) It is a very good newspaper but -

  511. The reporter is sitting here.
  512. (Mr Gilbert) I see the reporter and it was to that very same reporter I think what I said was -

  513. You do not want a headline saying, "Martin Gilbert disowns his quote", do you?
  514. (Mr Gilbert) I am quite happy to have that headline. What I actually said was that we encouraged diversification of the portfolio, and that was what that quote was about.

  515. That is the quote and that is what the whole world thinks Martin Gilbert said because it was in The Financial Times and it is a pukka newspaper and it would not quote you if you had not said it. That is how I feel. When you launched these new splits, did you take much higher stakes in the funds that would themselves invest in other splits than those which stated they would stay clean of all cross-investments?*
  516. (Mr Fishwick) No. We had as big a stake in funds that had no cross-investments as we had in cross-investments.

  517. Was this not just a way of ensuring the merry-go-round kept on spinning, with each new launch creating guaranteed demand for the next one with management charges, which were very hefty?
  518. (Mr Gilbert) No, it was not created that way. The reason that these funds were created was because we were trying to diversify away from having investment in one very, very small sector.

  519. Did you tell another fund manager that they would be rewarded for taking a stake in a fund that you were launching and that Aberdeen was taking a very significant stake in their next launch?
  520. (Mr Fishwick) You are putting that to me? The answer is "no".

  521. You never have done that? We will go round to the whole industry and we are going to ask questions like that, so we just want you to be very sure of your answers.
  522. (Mr Fishwick) I am very sure of my answers.

  523. That is fine, but it certainly looks like it by the stakes that you are taking. Were you ever involved in corrupt buying practices?
  524. (Mr Fishwick) I do not think I have been involved in anything corrupt but I am not quite sure what you mean by that.

  525. Do you know what corrupt means?
  526. (Mr Fishwick) No.

  527. Do you know what unfettered means?
  528. (Mr Fishwick) I do now.

  529. Mr Gilbert, I will ask you this. To me at the last hearing you said, and I quote from evidence 23: "We stress-tested these products to a 30 per cent fall in the market; we did not expect the falls to be greater than that. Now, you might say, "You should have known the market was going to fall to the extent that it did", but either I was not clever enough or did not know enough to foresee that the market was going to fall to those levels." Could you explain then how St David's Fund radically reconstructed and changed investment policy, appointing Aberdeen as managers, which included investment into income shares of other splits, and no prizes for guessing which ones. It was predominantly UK-invested and the reconstruction took place on 25 February 2000. The company, as you know, first breached its banking covenant on 1 August 2001, although the bank decided to raise its covenants in response. Between those two dates, the FTSE-100 had fallen from 6230 to 5530, which is roughly 11 per cent, not 30 per cent." So did you not just stress-test the underlying assets; it was not the market itself?
  530. (Mr Gilbert) I will answer it quickly and then pass on to Chris. I think that on the stress-testing the brokers that issued them would have as good an understanding of that as I have. But on specifically, St David's, Chris, do you want to pick that up?

    (Mr Fishwick) Unfortunately, what happened with St David's is that the previous manager passed away. Therefore the board had a beauty parade and we attended the beauty parade with, I believe, six or seven other managers, to put forward proposals for a company which we believed at the time was in difficulties and needed a radical restructuring. It already was a significant investor in Income Shares; we did not introduce Income Shares into the structure. They were already there.

    (Mr Gilbert) This is a contract we won in a beauty parade.

  531. Exactly, but what you said to me is that you stress-tested to 30 per cent, but in this case with St David breaching its banking covenant, the FTSE only fell 11 per cent.
  532. (Mr Fishwick) Breaching your banking covenant does not mean you are bust because your banking covenant might mean that you have to have two times the debt; you might need to have 200 of assets to cover 100. It does not make you bust. If you fall down to 190, you still have 90 left, which belongs to the shareholders.

  533. One of my favourite novels is Bonfire of the Vanities where Sherman McCoy, Wall Street bond-dealer, master of the universe, billion-footed beast who has booked himself a life of luxury and has a telephone number salary, just like yourself, Mr Fishwick, but for others he has booked them into a one-way ticket to disaster. Do you recognise yourself as Sherman McCoy?
  534. (Mr Fishwick) Coming from Wigan, of course not, no, I do not.

  535. You have a big salary number. You are going to live in luxury.
  536. (Mr Fishwick) Yes, and I have lost a lot. Just like the shareholders that co-invested, I have lost a lot of money too, and I apologise to these people. I feel sorry. I do know them. These are not faceless individuals.

  537. But apologies are not enough. We have got to get compensation and that is the issue in this Committee today and this is the issue that we are going to be looking at. Can I say in finishing that I thank you for your attendance. I am sorry it has gone on so long but is was a discourtesy that you performed to the Committee by giving us this information this morning, which we could not digest. Please, please, if you come before this Committee again, cease the discourtesies.
  538. (Mr Gilbert) I apologise again profusely, Chairman. I am very, very sorry for that. Thank you very much.

    MR JOHN HALL, Chief Executive of Brewin Dolphin Holdings PLC and Brewin Dolphin Securities, MR DAVID THOMAS, Head of Investment Trust Corporate Finance, Brewin Dolphin, MRS LEANNE BOWDEN, Compliance Director of Brewin Dolphin Securities Ltd., and MR ROLLY CRAWFORD, Head of Investment Trust Division, Collins Stewart Ltd, examined.


  539. Welcome to the Committee. I apologise for the last session running on but it was very important and we had precise questions to put to the witnesses. I am looking at the sponsoring role and we will see who wishes to answer the question. In your role as sponsor to proposed new investment trusts, what assessment would you make of the underlying soundness of the proposal? What input would you expect to make to the proposed board of directors of the trust to satisfy them that they are taking on a sound proposition?
  540. (Mr Hall) I will pass this one to Mr Thomas because that is his role.

    (Mr Thomas) That is indeed my role, Chairman. I use modelling, very extensive spreadsheet modelling, to work out the alternatives in front of me as a designer, if you like. I have to work out the set of proposals which is put in front of an existing board. Our aim is to have a prospectus which is gradually written by a team of people, which enshrines those proposals. There is a very considerable amount of discussion about the content which sometimes takes three or four months to settle. Our work ends when the prospectus is agreed by the Listing Authority, when the prospectus is handed over to the managers and the board and when the money has been raised in a placing. That is the end of my real involvement.

  541. How do you set about seeking support from institutional investors for new issues for placing your sponsoring? Would you routinely seek support from other splits for a new issue of the split capital trust?
  542. (Mr Thomas) I have been in this sector for more than 30 years, so I know all the likely people who will want to buy high-yielding stocks of this kind. I deal only with institutional, professional people who can understand the rather difficult descriptions that I write.

  543. Does that mean that none of us can understand them then?
  544. (Mr Thomas) One person around, not you, sir, wrote on Sunday that they could not understand David Thomas.

  545. You are referred to in the Sundays as "Dotty". That is your affectionate name, is it not?
  546. (Mr Thomas) I hope so, sir.

  547. "Dotty, the champion of splits". You are the Mohammed Ali of splits, they tell you, you have been around for so long. As the champion, the Mohammed Ali, why did it all go wrong Why did it all end in tears?
  548. (Mr Thomas) I am not the Mohammed Ali; I am not the architect; I am not the father. There were people long before me who started the modern split trust companies. I started in 1969, about five years after these people were working. I can give you their names. I just happen to have been around a bit longer than my competitors who have obviously started to die off.

  549. You come here this morning blameless and pure?
  550. (Mr Thomas) I have a job to do, Sir. I am very sorry that people have lost money which you are associating with the job I do. I am prepared to defend myself and say I do the job properly.

    Mr Plaskitt

  551. I want to look at the memorandum you have submitted to us in which you go to some lengths to explain which things you are responsible for and which things you are not. When you turn to the things which Brewin Dolphin does do, you say specific roles include advising on corporate capital structure. Mr Hall, could you expand a little on that and tell us what that means?
  552. (Mr Hall) That is directly, Sir, the area that our corporate finance department does - that David Thomas does - in relation to investment trusts. It is obviously a small, and kept very separate, segment of our overall business.

  553. So you are advising on the structure of these capital trusts?
  554. (Mr Hall) Yes. David advises and is part of the team that structures the trusts for the companies, and with other advisers.

  555. So Brewin Dolphin has some hand in the structure of these split capital trusts?
  556. (Mr Hall) Yes.

  557. That is useful. You go on to say that you have indeed recommended investments in zeros, income shares and split capital investment trusts to investors. You have recommended them? That is correct?
  558. (Mr Hall) Yes.

  559. You then tell us that you deal with individual investors, and everyone's investment needs are different, and in paragraph 11 you say you work with investors depending on what their time horizon is that they set and what their risk profile is which you agree with them. Right?
  560. (Mr Hall) Absolutely correct, Sir.

  561. Is it the case that you have ever recommended investment in a split capital trust to a client who specified they wanted a low risk profile?
  562. (Mr Hall) Are we talking about a zero here or an income share, or a zero preferred stock?

  563. Let me refer you back to your memorandum. In paragraph 10 you say you have recommended investments in split capital investment trusts.
  564. (Mr Hall) Yes, the answer would be yes so far as zero preference shares are concerned.

  565. Some of your clients will have specified in their risk profile they wanted low risk, I assume?
  566. (Mr Hall) Yes, and it is zero preference shares.

  567. I am asking if you recommended to any of them they should invest in split capital investment trusts?
  568. (Mr Hall) The answer is yes.

  569. You will have done. You go on to say, in paragraph 12, that through your complaints procedure you are now examining whether individuals should have been advised to invest in splits in the first place. So by implication are you accepting that some of the advice you gave to the low risk investors may not have been correct?
  570. (Mr Hall) In certain instances, a minority, the answer is in the affirmative, yes.

  571. You will have given incorrect advice?
  572. (Mr Hall) In some cases we have. In the vast majority of cases I do not believe we did but we have an on-going process where we look at every individual case very carefully indeed.

  573. Do you think you are always operating completely objectively in recommending some of your clients to make these investments when you are paying Mr Thomas over 1 million a year to advise, or be with Brewin Dolphin, when he by his own admission is an architect of these split capital investment trusts?
  574. (Mr Hall) Yes, totally objectively. I have absolutely no qualms on that matter whatsoever. The two arms or divisions of the business are kept totally separate. Mr Thomas only markets his (insofar as he markets at all) to institutional investors. These investments were made with the intention that they were suitable investments for the clients. Suitability is the key issue. Whether or not we were brokers or it was declared, it has never been an issue and frankly has no particular relevance.

  575. You are personally satisfied you are not at risk of a perception of anything inappropriate when your company is paying over 1 million to Mr Thomas who is, by admission, an expert, a long advocate, of these split capital trusts which you are then recommending to your investors and which by your own admission you may have inappropriately recommended to some of your investors? Does that not look a bit odd?
  576. (Mr Hall) It certainly should not look a bit odd, Sir. I am aware of the nuance drawn in a particular television programme which was, in my view, both biased and definitely inaccurate in many matters, because we gave them the information and they drew a line through a number of clients who had invested in some of these funds before we bought that particular partnership even, so there was no question of it - it would not have occurred anyway but there was no question. So I am very confident on this particular line, those two businesses are kept separate.


  577. You mentioned the television programme, was that Moneybox on the BBC?
  578. (Mr Hall) The Money Programme.

    Chairman: There seemed to be pretty compelling personal evidence from, was it, Ronnie Morrison, Sue Kennedy and others in that programme about losing money. So I think you have a perception problem there.

    Mr Tyrie

  579. I would like to ask some factual questions first of all. How many clients have you got in splits? How many private investors did you put into splits?
  580. (Mr Hall) The total number invested in splits - because we have been investing using this medium since the 1960s and we bought and sold them ----

  581. The average life is seven years.
  582. (Mr Hall) I have not concentrated on that figure but naturally I have got figures for all those who have not performed as we would have wished in recent times. Perhaps I can throw that one over to Mrs Bowden who is heading the team investigating this so far as we are concerned?

    (Mrs Bowden) I do not have a figure which I am comfortable with of the total number of investors. We do know, for example, by looking at individual trusts how many we have in certain trusts but we do not have an overall figure.

  583. So you do not know how many people you have put in so far, even though this crisis broke a long while ago?
  584. (Mr Hall) What we are saying is that we have not brought here or got a figure for the ones which are in the trusts which are not at risk, which have performed up to expectations, many of which will have taken profits along the way for many years. As we all know they were a very useful, successful investment medium which lived up to expectations.

  585. I thought this was going to be a very easy question, I thought I was going to go bang, bang, bang with some factual questions and get some answers, but you are not giving them to me. You do not know how many people you have got in splits at the moment?
  586. (Mrs Bowden) Overall, no.

    (Mr Hall) We can give the figure of the ones which have not been successful.

  587. I am just asking how many are in splits and you do not know the answer. You have 80,000 private clients and you do not know what proportion are in splits?
  588. (Mrs Bowden) From the information I do have I know it will be a few thousand.

  589. How much do you think they have got invested? Do you know, roughly?
  590. (Mrs Bowden) If we look at the zero shares, they had invested around 200 million out of funds under management at the time of 16.8 billion.

  591. How many complaints have you had?
  592. (Mrs Bowden) 600-ish.

  593. I want to ask about the relationship between your corporate finance arm and the marketing of these. How many people are in the corporate finance department working on this with you, Mr Thomas?
  594. (Mr Thomas) Until recently I had about five. I have two less now. It is a very small team and I do not take any part in the marketing-to-retail investors at all.

  595. Who writes the research notes?
  596. (Mr Thomas) When I write them I write "David Thomas" underneath and I write, very seldom, quite long pieces. There are other people who can set themselves up as experts on certain areas, I do not have anything to do with what they write for their retail clients.

    (Mrs Bowden) David Thomas's research notes which he has referred to are not commonly used by the private client executives, so the people making those investment decisions are not reading the research he is producing for institutional purposes.

  597. So you can assure me categorically that the information being passed to private investors suggesting they invest in these products did not originate with, nor was it vetted by, any of the five, now three, staff in your corporate finance department?
  598. (Mr Hall) It certainly should not have been.

  599. My question was, can you assure me it did not?
  600. (Mr Hall) I do not believe it did, no. I do not know if any did but it certainly should not have done.

  601. If I may say so, you will say, "as far as I can recall" in a moment.
  602. (Mr Hall) I believe it did not.

    (Mrs Bowden) The responsibility for the documentation going out to private clients is with the private client team. The individual who looks after each private client has full responsibility for what goes to them and, frankly, if his views are diametrically opposed to David Thomas's or anybody else's in the firm, that is absolutely fine, he will do what he thinks is right for his clients.

  603. I would like to go back to the point I was making with Aberdeen a moment ago but with respect to what Brewin Dolphin have been up to. As far as I can understand it, we did have an old, relatively safe product until 1999 or thereabouts, but with the introduction of bank lending a different form of product was in practice created, one which had much riskier properties because banks could withdraw their lending. Am I correct as far as I have gone so far?
  604. (Mr Thomas) Yes, Sir. I listened with great care to that discussion ---

  605. "Yes, Sir" will do for me just for the moment because I want to move on, unless you think it needs major qualification?
  606. (Mr Thomas) Qualifications later.

  607. Okay, no major qualifications. When you started marketing these new products to private clients, were they marketed in a fundamentally different way, flagging up the fact we had a different type of product from the pre-1999 product?
  608. (Mr Hall) First of all, there is a slight misconception in that there is no marketing in Brewin Dolphin, we are not salesmen, we are investment advisers to individual investors.

  609. I will take the word "marketing" out and replace it with "advice".
  610. (Mr Hall) Yes.

  611. Was the advice being given to private investors in some way fundamentally different, reflecting the fact a tranche of bank debt had been brought into splits which hitherto had not been included?
  612. (Mr Hall) No.

  613. Why not?
  614. (Mr Thomas) Because I have studied the subject quite a long time, would you mind if I answered your question? We come down to the qualifications. I think I am right in saying that your concept is there was a sort of additive, a lump of extra borrowing, stuck on top of existing zeros. Yes? So your conception then would be that you had gearing either in the form of borrowings or in the form of zeros or in a combination of the two?

  615. Correct.
  616. (Mr Thomas) I would suggest to you that because of the coverage of this subject you are differentiating very strongly between a geared zero and a non-geared zero. Am I right?

  617. I am doing the questioning here! I would be grateful if you tried to answer my question, which was, why were post-99 clients not advised of the fundamental change in the structure of the product it was being suggested they invested in?
  618. (Mr Thomas) To begin with, if I am answering that question, I was not responsible ---

  619. It is moving along the row now, four to the right and now it is moving back to the left, I am happy to take an answer from anyone.
  620. (Mrs Bowden) I can give you a fairly simple answer, from the point of view of the private client executive I do not think there was a huge shift in perception at that time.

  621. What does that mean? That you did not notice?
  622. (Mrs Bowden) Across the industry I think the market professionals as a whole did not see a huge shift in the way perhaps you are suggesting.

  623. So is this the heart of the matter really? We can well understand that sophisticated people to whom you say you are marketing the product might have been expected to read the small print. What seems unacceptable to a large number of us around the table was that huge numbers of these products were being sold to people who could not reasonably be expected to know and who were relying on your advice. They were being given advice that the pre-1999 and post-1999 product were the same, indeed they were not even being allowed to consider the possibility that the product had changed. I am asking why you did not tell them the products were different and you are saying there was a difference in perception. You are saying there was not perceived to be a risk. What you are saying is that even though in-house you had probably the world's leading expert on these things, so we are told in the Sunday newspapers, Mr Thomas somehow or other failed to notify anybody else in the firm that he was now producing a fundamentally different product. Correct?
  624. (Mr Thomas) I did not think they were fundamentally different.

  625. But they have turned out to be, have they not?
  626. (Mr Thomas) There are people who say so.

  627. What about you, Mr Thomas?
  628. (Mr Thomas) I would say that the cover for the bank borrowings was there in ample quantity. The cover for the zeros was there in ample quantity. I do not think the level of gearing was unsafe. What has happened is that people have pointed after the event, when the markets have fallen and when the assets were no longer covering these things, to the fact that the zero which is geared by a bank loan is now is very dangerous thing.

  629. Your last remark was that a zero covered by a bank loan is "now a very dangerous thing".
  630. (Mr Thomas) Any level of gearing like 90 per cent on a stub-equity is dangerous.

  631. Did you not spot that when you created these things in 1999?
  632. (Mr Thomas) But the gearing was not like that.

  633. So how did this gearing come about? Where did this borrowing come from? Did it seep in by accident? What happened, was it not, was that you realised you could borrow more cheaply from banks than you could in traditional methods. Then you used to be able to borrow at eight or nine per cent and now you found yourself able to borrow at six but you did not recognise the price that was attached to that change in method of borrowing, the price being that the banks could call the money in. Correct?
  634. (Mr Thomas) I do not think it ever worried any board or any accountant ---

  635. Was that a yes or a no to that question? I am not saying did other people get it wrong; I am saying did you get it wrong?
  636. (Mr Thomas) I am saying, in common with everybody else round the table in each one of those design sessions, nobody noticed that.

  637. Including you?
  638. (Mr Thomas) Including me.

  639. So you made a fundamental mistake. Not only did you misunderstand the product that you had created but you did not notify all the people in the same firm you were working with when they were selling this to private investors. Correct?
  640. (Mr Thomas) With the numbers at that time it did not show up at all.

  641. So we have now really got to the nub of this disaster, have we not?
  642. (Mr Thomas) I do not think so, sir.

  643. Where is the nub of this disaster? Somewhere else?
  644. (Mr Hall) There was a huge increase in gearing when the assets fell, was that not correct?

    (Mr Thomas) Yes.

    Mr Tyrie: I have not got any further questions.

    Mr Mudie: Stick with the question you asked.


  645. We want to find out why after 1999 it became Frankenstein's monster.
  646. (Mr Thomas) I think they were using bank gearing long before that. I do not think there is a watershed like that.

    Mr Mudie: It was the extent of bank gearing.

    Chairman: Exactly.

    Mr Mudie

  647. They got greedy. The cost of bank borrowing had come down and assets were going up at a greater rate so they borrowed more and more. They were literally thinking they could print money but then asset prices went down and they were stuck because they had borrowed to buy and they were finished because the banks called them in. It is the extent - even their Association accept it - and you missed it?
  648. (Mr Thomas) I will give you an example, sir, of something which other people did quite easily. One of the failed ones had only bank borrowings and yes, if they had had zeros underneath those bank borrowings they would not have been in such trouble, that is a good example of it.

    Mr Tyrie

  649. I want clarify what I think we have discovered here. We have discovered two crucial things, and Brewin Dolphin are at the heart of both. The first is that you did not understand the product that you had created and were marketing. You thought you did but you did not. Your only defence on that, as far as I can tell, is you are saying other people did not understand it either.
  650. (Mr Thomas) Our stress testing was very, very extensive; I did understand it.

  651. The second point I think we have uncovered, and I do not seem to be getting any correction or even qualification on this point, is that there was no communication going on in this firm at all and that you created a fundamentally new product which was being sold as if it were a traditional product to several thousands of private investors, many of whom have now lost their money. Correct?
  652. (Mr Hall) It is absolutely correct that Mr Thomas did not ---

  653. It is an appalling state of affairs, is it not?
  654. (Mr Hall) He did not feel that he had created anything that was any riskier than earlier. Is that correct?

    (Mr Thomas) That is right.


  655. Your answers have been direct, more so than the obfuscation from previous witnesses on that, so that is very helpful. But in the article on yourself, Mr Thomas, on Sunday it said that senior industry figures said "... greed is the bottom line of this. The brokers have made huge amounts of money." This is the merry-go-round. This is what it is all about and people who were sold zeros were not told about the effect that gearing would have. They were not told, unlike in the promotion when they thought they were first in the queue, that as soon as you get a bank they were second in the queue and the bank was safe but the ordinary investor was not, he was washed up, and that is the issue we are looking at and we want honest answers to that.
  656. (Mr Thomas) I can throw some more light on it, if you like, sir. I can remember only one case of one potential placee saying, "You have created a zero with a gearing of its own and we do not want to take the placing." That was another large stockbroker who specialised in private clients who bought zeros. He differentiated between that kind of geared zero and the earlier kinds.

    Mr Tyrie: When was that, Mr Thomas?

    Mr Mudie

  657. Who was he and when?
  658. (Mr Thomas) In about 1998-99.

    Mr Tyrie

  659. So in 1999 somebody came to you and said,"Hey, you may not understand your product but I do; it is a lethal product, it is a nasty cocktail with double gearing on the zero.
  660. (Mr Thomas) Only one man of all the others I was talking to.

    Mr Tyrie: But somebody was coming to you and saying, "You may not fully understand your product but I do"?

    Chairman: Who was this honest man?

    Mr Tyrie

  661. Who was against this gearing? "This gearing is doubled geared" is what he was saying to you.
  662. (Mr Thomas) It was one case, one opinion, one telephone call.

    Mr Mudie

  663. This man drew to your attention what could happen within the structure. He showed you what could happen and what was happening and you dismissed it because it was only one person.
  664. (Mr Thomas) We did not talk in great detail. Nobody had reconstructed what might happen. All he said was, "I do not like geared zeros", and I did not place anything with him.

    Mr Tyrie

  665. He said he did not like it for a specific reason, a correct reason, which was that it was gearing on gearing and you took no notice of it. It did not cross your mind that your product that you thought was okay might have some flaw, that the guy might have a point?
  666. (Mr Thomas) No, I did not.

    Mr Palmer

  667. Who was the gentleman?
  668. (Mr Thomas) I do not think I am giving away any information which would hurt him in any way, sir. There was a father and son relationship I had known in Henderson Crossthwaite for years and years and years. The father is called Pickford and so is the son. That is the only criticism I have ever had of any of my designs.

    Mr Ruffley

  669. Could I ask Mr Hall when exactly were the first signs evident to you of a zero being unlikely to pay its full value on maturity?
  670. (Mr Hall) September 2001.

  671. September 2001. Not before then? Bells were not ringing before then at all?
  672. (Mr Hall) No.

  673. Is that a straight no or "to the best of your knowledge and belief" that nothing before September 2001 at all occurred to you or any of those who worked for you? We are talking about the private client side.
  674. (Mr Hall) Absolutely. To the best of my knowledge and belief, 2001, September thereof.

  675. Right. So far as you are aware, were other brokers' financial advisers in relation to their private clients changing their advice in relation to zeros before September 2001?
  676. (Mr Hall) So far as I am aware, there was one.

  677. There was one?
  678. (Mr Hall) I may have got it in retrospect.

  679. So it was out there in the market that this was a bit dodgy?
  680. (Mr Hall) No, I do not think it was that far and I am not sure of what period I personally would have been aware of the fact that there was one who had thought that there might be a problem earlier.

  681. When you discovered there was a problem - in relation to private clients I am talking about here - how did your advice change?
  682. (Mr Hall) Our advice changed particularly insofar as the risk assessment was concerned. Very sadly, one of the things that became apparent at once was the fact that the marketability of the stocks in this sector dried up, as did confidence. With no confidence it went out like a light, so one became unable to sell any quantity of stock and the prices fell rather rapidly and the best advice I was getting was that although the sector was under pressure, there were problems, certainly if one had bought a zero and advised a client to buy a zero for a particular purpose, it was highly likely that they were looking over the whole of the period when it was likely to be repaid and around September 2001 it became apparent that there were pressures and that it was possible that they were going not to be repaid in amounts that had been expected. It was not suggested to me at that stage that what has happened would happen, in other words, they went bust.

  683. Could I turn to Collins Stewart. In the memorandum they sent - in good time unlike Aberdeen - you specifically refer to the difficulties caused for splits in the recession of the early 1990s. What I do not quite get here is given that that history was very much on the record and should have been at the forefront of your minds, why the levels of gearing were allowed to get to the levels they got to, ending quite disastrously for investors. Why, with all that history, was it ignored?
  684. (Mr Crawford) I do not think it was ignored. I think just to go back ---

  685. Sorry, we are talking and we have been talking for about half an hour or longer about the critical importance of very, very high gearing which has ended in disaster for investors, many of them people who cannot afford to lose any money. You followed the arguments, it is not a new point. This very high level of gearing should have been very much to the fore of the minds of Collins Stewart and others. You admit to that in your memorandum. These were high levels of gearing; why did they get so high?
  686. (Mr Crawford) As I was about to say, I think the lessons of the 1990s were not ignored. If you look back at the 1990s, some of the split structures which came out of there were very simple structures inasmuch as they had maybe half of their capital in ordinary shares and half of them in zeros, so with regard to the ordinary shares, the cost of the ordinary shares was quite high because the zeros were compounding at quite a large number and they represented a large proportion of the structure. It is also fair to say at that time the first zero which nearly did not work was the zero in Olim Convertible, and that was in the early 1990s, so the experience of zeros almost not working had been realised in the early 1990s as well. However, when bank debt did come to the fore, as we said in the late 1990s, bank debt was considerably cheaper and people saw the benefits that would accrue to the ordinary shareholders as well. What you ended up with were structures where typically the gearing was not necessarily the same level as the zeros were in the previous years, so the bank debt was seldom as high as 50 per cent and normally ranged between 25 and 40 per cent, so the gearing was lower in terms of the bank debt but clearly it was a different structure altogether from the early 1990s.

  687. So far as the high gearing is concerned, at what stage did you recognise it was a problem?
  688. (Mr Crawford) In terms of recognition of it being a problem, it was clearly when assets started falling quite dramatically in equity markets. That is not to say people are not putting out geared structures at the moment. For example, I think it was Cazenove who launched a product for Aberforth recently which was 50 per cent geared, so the concept of gearing is not necessarily negated, it just depends when you take it out, when it is appropriate to take it out in terms of where equity markets are going. I think it is worth pointing out the large investment banks, to whom we all defer in terms of equity market forecasts, were predicting equity markets to continue to grow throughout the late 1990s and the early part of this century. So we cannot say that we were not surprised by falling equity markets, because we were clearly, and we were caught out.

    Mr Beard

  689. There is a general understanding that the risk associated with zeros depends on the quality of the underlying investment. Have you in your advice distinguished between different types of zeros on those grounds? Particularly, have you distinguished those which involved a substantial cross-investment in other splits?
  690. (Mr Hall) The answer is, we certainly were not doing that. Early on, it was certainly felt that the fund of fund approach in fact gave more reassurance rather than less and that it was spreading the risk. Of course, we all can see with the benefit of hindsight where it led. The truth of the matter is, and experience has shown us, that it all depended on the quality of management and how those funds were invested.

  691. So you saw no risks involved in the cobweb of cross-investment between these various splits?
  692. (Mr Hall) The prospectus of these splits sets out quite clearly how much they intend investing. Of course, how they were actually invested one did not know, but the structure clearly sets out how much they intended investing and of itself the fund of fund principle should not have caused the problem it has.

  693. Mr Thomas, you seem to have been fingered as the brains behind the split capital trusts. Have you read Professor J K Galbraith's book, The Great Crash?
  694. (Mr Thomas) No, I have not, Sir.

  695. If you had, you would have seen he says that in those times all that was required to be dubbed a financial genius was borrowed money and a rising market, but the disillusionment came when the market fell. Would that be an adequate description of the circumstances now and should it not have been foreseen?
  696. (Mr Thomas) No, Sir, I do not think so. I see the crash we have suffered slightly differently. I do not think anybody in any of the discussion I have watched so far has pointed out that the geared nature of the equity, that is the geared ordinary income share at the bottom of the capital structure, was the first thing to crack. They lost their assets fastest. Their prices after 9/11 fell like a stone. Because those prices fell and because of the cross-holdings, you found assets fell and the cover of the zeros then started to decrease, and then people started to realise. It is only when you have nothing left for the ordinary share, something but not much left for the zero, and a socking great bank borrowing which you cannot repay that you are suddenly starting to look at this peculiar structure of a bank loan over a zero. A lot of the work which has been done very, very recently has been to try to explain things as they are now, after the event.

  697. Are you not really just elaborating Professor Galbraith's phrase?
  698. (Mr Thomas) I am aware of one other fact which is related to Galbraith and America. They have a phobia for pyramiding and cross-holding and they prevent one fund of funds owing too much of another fund of funds. As I understand it, there is no such legal prevention in this country.

  699. Do you think there should be?
  700. (Mr Thomas) I would not dream of suggesting things to politicians, Sir.


  701. We are trying to encourage you out of your shyness here. Give us an opinion. Come on, you are here before the Committee, you are the master of the splits, but you cannot give us an opinion. Come on!
  702. (Mr Thomas) I have been taught not to talk too much, Sir.

  703. As the Chairman, I am giving you latitude.
  704. (Mr Thomas) Thank you, Sir, that is very kind of you. I suspect that is one of the possible changes in the legal structure which obviously you are going to have to be thinking about.

  705. So you say yes?
  706. (Mr Thomas) Yes.

    Chairman: That is fine. Good.

    Mr Tyrie

  707. I wanted to come back on one point. I have in front of me here, Mr Thomas, a note you wrote called Enhanced Zero Trust Exploits An Anomaly, written in February 1999. I wonder whom this was aimed at. This was extolling the advantages of the Enhanced Zero Trust plc managed by Aberdeen Asset Management, the launch of which was sponsored by Brewin Dolphin. Who was that aimed at, would you know?
  708. (Mr Thomas) I cannot place that document, Sir. Is this the one published by Aberdeen?

  709. I do not know whether they published it. It says here, "Further information is available from Brewin Dolphin" so it looks as though it came from you and it has your name at the bottom. It says, "A quick NB for readers ...", and this is a bit that is in bold, "... who equate gearing with greater volatility and therefore risk. This [trust] is the one example where this cannot be done! The gearing's effect on volatility is almost non-existent. All the gearing does is to produce a faster rise in value in the equity." To whom were you targeting these comments?
  710. (Mr Thomas) I was talking only to my institutional holders. I suppose we might have printed 30 copies of that bit of paper.

  711. Do you think that even an expert might have been slightly misled by that?
  712. (Mr Thomas) I think not, Sir, because at that time if you had looked at the performance of all sorts of zeros - I have an index which started at an index level of 100 in 1991 - and if you drew that graph of the zero index between 1991 and the year 2000, all it did was to go up and up and up and up; there was no interruption. You have heard this said by other people. I think somebody standing in the year 2000 saying, "Zeros are safe" was quite within his rights to say that for that reason. What I was doing was gearing apparently certain growth.

  713. How many stock market crashes have you seen in your time?
  714. (Mr Thomas) I lived through 1974, Sir.

  715. That is the only one you can remember?
  716. (Mr Thomas) The others were small in comparison. I looked into that kind of thing very carefully when we were judging the life of a zero, for instance, and how quickly would the market recover.

  717. It seems to me, Mr Thomas, that not only were Brewin Dolphin's private investors likely to be seriously misled, because you had not advised them of the change in character of these trusts, and because this information was not passed on, not only that, but even the institutional investors were getting notes which were nothing more than advertising hype that were not serious analysis at all. Do you really think that that description of a highly geared structure is valid, given the possibility that markets can fall as well as rise or, to put it another way, past performance is not a guide to performance in the future?
  718. (Mr Thomas) As you say. That is hindsight, sir. Nobody thought those zeros were going to come undone like that.

  719. But you would not write a note again like that, would you?
  720. (Mr Thomas) I have been working on some completely new way of explaining how to analyse zeros but I have not had time to finish it yet.


  721. I will finish up if any of my colleagues do not want to add anything else. Could I ask Mr Crawford a few questions. What connections are there between Collins Stewart Limited and Collins Stewart Fund Manager?
  722. (Mr Crawford) Collins Stewart Asset Management, and Collins Stewart Limited are part of the group.

  723. Can I ask whether Collins Stewart clients were advised to invest in CI Income Fund Limited shares?
  724. (Mr Crawford) Without seeming obstructive, that is not my area of expertise. I am afraid I can only talk about the institutional business at Collins Stewart.

  725. You know those shares are currently suspended?
  726. (Mr Crawford) Indeed they are.

  727. Could you write back to us on that particular point?
  728. (Mr Crawford) Certainly I will get the relevant person to write.

  729. A couple of questions to both and then I will finish with Brewin Dolphin. Did you ever intimate to a fund manager that there would be some reciprocation if they were to support a fundraising exercise that you were involved in?
  730. (Mr Crawford) No.

  731. Never ever. It never crossed your mind?
  732. (Mr Thomas) In fact, sir, the incentives for institutional investment into new trusts used to be one per cent. The IFAs used to want 3.5 per cent. We have actually been placing stock with no placing commission for quite some time.

  733. Okay, this is a silly question and I know what the answer is going to be but I will ask it nevertheless. Was there a magic circle where a group of brokers and fund mangers agreed who was going to launch what fund, in what order and who was going to support it and to what extent?
  734. (Mr Hall) Shall I answer that one, Mr Chairman. So far as I am concerned, there is no magic circle. We are not, of course, investment managers so we would not know what arrangements if they had made any, and this is a matter that is being investigated of course by the FSA.

  735. Sure, but you would go to the stake saying that there was no magic circle?
  736. (Mr Hall) I would go to the stake saying if there was one we did not know of it.

  737. If there was one?
  738. (Mr Hall) I would not be in a position to know. None of us here would.

  739. But your colleagues (?) would never entertain it, would they?
  740. (Mr Hall) No.

  741. What about you, Mr Crawford?
  742. (Mr Crawford) If you are talking about a magic circle to refer to a small number of fund managers who ran funds of funds then clearly that was the case. There was a small number of fund managers, particularly in the early 1990s, and that group of fund managers who ran fund of funds vehicles did grow towards the latter part of that decade, indeed.

  743. Okay, within that magic circle, or whatever you like to call it, there would be this group of brokers and fund managers who agreed who was going to launch what fund in what order and who was going to support it and to what extent.
  744. (Mr Crawford) Let's break that down a little bit. We, along with other brokers in the sector like UBS Warburgs, HSBC and ABN AMRO, would have a number of institutional clients who would come to us and ask us to sponsor vehicles, and it may be that we would have more than one institutional client who would come to us and ask us to sponsor a vehicle round about the same time so clearly we would say to them, "There has to be an order because this client came first and you came second", or, "We are aware in the market that there are other issues that might be going around so maybe we would be better to delay that a little bit", as we are doing at the moment where there are a number of property funds coming into the market and we have to decide whether we want to compete head on with them or do we want to try and go before them or after them.

  745. Your answer seems a bit different from Mr Hall's because you would never entertain it but Mr Crawford is saying that he knows of situations where you would sponsor a vehicle, or am I just getting it wrong and the two of you have got exactly the same answers?
  746. (Mr Crawford) What I am saying is if people commonly believe the term "magic circle" to refer to a small number of fund of managers, and I believe that is what is commonly referred to as the magic circle, then yes.

  747. So there is no magic circle?
  748. (Mr Crawford) I am not saying that. That is a description being put out by the newspapers.

  749. I am asking you, that is why you are here; is there a magic circle?
  750. (Mr Crawford) There is a magic circle if that is what is referred to by the newspapers as a small number of fund managers who run funds of funds.

  751. This is interesting. We have got them ratcheting up and investing in each other and getting gearing.
  752. (Mr Crawford) It is all about descriptions. It true to say that the term "magic circle" also refers to the small number of leading legal firms in the United Kingdom.

  753. Mr Hall, would you go as far as Mr Crawford?
  754. (Mr Hall) My understanding of what is being suggested by a magic circle is not just the element of a fund of fund, which is what is published in the prospectus, it was going further than that. The suggestion appeared to me to be that the magic circle is one fund manager investing in another's to support them and "if you give me something back ...", and if that is what you are referring to go as a magic circle, so far as I am concerned I have got no evidence of it.

  755. How many Brewin Dolphin clients participated in zero dividend preference share issues which were sponsored by Brewin Dolphin?
  756. (Mrs Bowden) I do not know.

  757. You do not know. It is important you write back to us on this because I want to know how many of those were discretionary clients and how many were advisory clients. Give us a rough percentage breakdown, discretionary and advisory.
  758. (Mrs Bowden) That is at the time of placing you are interested in?

  759. Yes.
  760. (Mr Hall) We will write to you with those figures, sir.

  761. You can take this question down as well - what percentage of your total advisory clients did that represent, because if your discretionary clients are a higher percentage, then is that not because they could not ask any questions so, in effect, they got stuffed with these shares? That is my line of thinking.
  762. (Mr Hall) Mr Chairman, I can answer that terribly straightforwardly. We certainly were not supporting issues at the time. They may have bought shares that we are brokers to in the after market or shares that we were not brokers to in an after market, and I am totally clear in my own mind that whether or not we were brokers to those companies had no effect on the decision.

  763. But it is important that you give us the percentage of advisory and discretionary clients in writing.
  764. (Mr Hall) We will.

  765. For your clients sitting on losses due to zeros that you sold, what is the sum total of those losses at current market prices?
  766. (Mr Hall) Again Mrs Bowden will answer because she is heading this team that is investigating.

    (Mrs Bowden) The trouble is I have not got an analysis which separates those holdings which were taken in placings compared to those which were purchased thereafter.

  767. I have to say, though, following up the question of my colleague Andrew Tyrie, you have come along here badly briefed. Surely you expected simple questions like this from us?
  768. (Mr Hall) We can give you figures for what we know our clients have lost overall but we, frankly, do not think in terms of whether or not we were the sponsoring broker because we do not have any reason to, but I will give you those figures.

  769. Okay and have you yet paid any compensation to any client regarding investment in splits?
  770. (Mr Hall) Yes we have.

  771. If so, are all the cases related to new issues where you were the sponsoring broker?
  772. (Mrs Bowden) It is a fairly small number we have paid compensation on, but from memory I do not think any of those were actually taken up in new issues. I think every one of the stocks was purchased in the market.

  773. Okay. Can I thank you for your attendance. We are looking forward to your memorandum. As I mentioned to previous witnesses, we are taking this issue forward because it is the whole industry we are interested in and we look forward to maintaining this dialogue.
  774. (Mr Hall) Thank you very much. May I just say, because I did not have a chance at the beginning, how extremely upset and sorry we are that clients lost money in this and we are extremely keen to help yourself and your Committee and the regulators and the industry to try and get to a quick conclusion on this matter because we do feel an awful lot of damage is still being done to the shares and we have a lot of investors in shares that are still quoted who are, frankly, dependent now on the winding up value because they are not able to trade in them.

  775. Exactly. And from our Committee' perspective we are interested in ensuring that the whole industry is cleaned up because there is a stain on the industry as a result of this and it is fostering a lack of confidence of people in the savings industry, so it is very important that we do this. What we are looking for is co-operation and honest answers from people on this.
  776. (Mr Hall) You will get that from us.

    Memorandum submitted by Association of Investment Trust Companies

    Examination of Witnesses

    MR ANTHONY TOWNSEND, Chairman and MR DANIEL GODFREY, Director General, Association of Investment Trust Companies, examined.


  777. Welcome to the Committee and apologies for keeping you behind but as you can see we are asking some interesting questions and we have a long road to travel in getting the answers. Could I ask you to identify yourselves for the shorthand writers please?
  778. (Mr Godfrey) My name is Daniel Godfrey, Director General of the Association of Investment Trust Companies.

  779. A common question to you. Is there anything in Aberdeen's evidence with which you fundamentally disagree?
  780. (Mr Godfrey) I think there were some aspects of what was said which could have led to some misconceptions today. Since we want to get to the end of this road as quickly as possible, I would like to try and make a few things clearer if I may. One of the first is that one of the areas where I think the Committee has really been virtually hitting the nail on the head but where perhaps some of the responses could have made you wonder if you were getting confused, is this distinction between what we might call traditional zeros, where the companies had no bank debt, and the way in which these companies, sometimes subtly, sometimes very obviously, changed over time. The fact is there were a number of different ways in which the structure became, as I would describe it, stretched. It is stretched because interest rates were falling, manufacturers were keen to deliver products to the market which had very high yields, obviously as interest rates fall it is easier to market and bring in new money which offers a very high differential between the rate you can get from a gilt or the rate you can get from a building society. The fact there were a number of different ways of stretching the product I think has confused the issue. The ways were, introduction of bank debt, introduction of more aggressive accounting policies, introduction of investment in very high yielding instruments, whether that be technology share bonds or telecoms bonds as we have heard today, or whether that be investment in other income shares. Some of these factors, sometimes all of them, sometimes some of them, are evident in all the trusts which have got into trouble. So whilst you can, it is true, have a trust which has no bank debt which has got into trouble, and you can have a trust which has no cross-investment in other income shares which has got into trouble, there are these factors. If you will forgive me for making an assumption, what you have been trying to get at is ----

  781. Keep it simple.
  782. (Mr Godfrey) --- the fact that the manufacturers, the sponsors of these products, are clearly telling us that they were not aware that these types of stretching made the zero dividend preference shares more likely to go belly-up. I think that does open a question as to whether they should have known, but the fact they are telling us they did not meant they were not in a position to warn their customers. That is what has led to the disastrous consequences.

  783. There was so much obfuscation this morning on that particular aspect but we are determined to get to the bottom of this. You have helped us an awful lot on that aspect. Really what you are saying, and you have put it in simple language for the consumers who are confused by the whole situation, is that gearing and other changes changed the product so markedly that we have ended up in dire situations in some cases?
  784. (Mr Godfrey) Yes.

    Chairman: Exactly.

    Mr Plaskitt

  785. That is indeed very helpful to us but what about you as an association? When did you spot this change in the nature of the product?
  786. (Mr Godfrey) We have to separate the product from the zeros, because there are two elements to this. We began to spot changes in the product really quite early, probably in 1998/99, but that did not lead us, wrongly as it turned out, to consider the possibility that zero dividend preference shares would go belly-up. It did lead us to start having concerns that income shares were more likely than they had been before to pay out less than their initial subscription price, and we started writing to companies in about September 2000 asking them to provide details of all their holdings in other splits as we became more aware not just of the bank debt but also the extent of cross-holdings. I would say it was only really after September last year we began to become concerned that zero dividend preference shares might lose all their value.

  787. When that concern struck you, what did you do?
  788. (Mr Godfrey) We started writing to the boards of split capital investment trust companies trying to draw their attention to the sort of actions they could take which we felt would help to preserve capital for zero dividend preference shareholders, such as changing their accounting policy perhaps to more conservative practices, and also to look very carefully at the rescue rights issues which were taking place to ask themselves whether this could end up in destroying further value for the zero dividend preference shares.

  789. As those concerns grew in your mind and you started to take that action, did you contact any regulator to express to them your concerns?
  790. (Mr Godfrey) By that stage we were in contact with regulators. I have to confess ---

  791. Which regulator?
  792. (Mr Godfrey) With the Financial Services Authority.

  793. When did you first notify them of your concerns?
  794. (Mr Godfrey) I think it would be contemporaneous, that they began to take an interest in the sector when funds started breaching their banking covenants, and we started talking to them probably in the summer of 2001. I would have to confess that by that stage it was too late, and I regret the fact that we became aware of the problems developing for zeros at a point at which it was actually too late to save them.

  795. So you are accepting you were too slow off the mark? You were aware of the structural problems here but you now, in retrospect, looking back think you took too long to take action on it? Is that what you are saying?
  796. (Mr Godfrey) When you say "took action", we have to remember we are not a regulator. I look back to ask myself what we could have done and I wish we had done something which would have stopped people losing a lot of money. Actually at that stage I had not worked out that bank debt was potentially dangerous because, as we have been told today, the cover was there and to somebody who is not a rocket scientist like myself I do not actually blame myself for not working out that the bank debt was as dangerous as it was. Perhaps the manufacturers should have realised this, perhaps not. That will be a matter for the FSA and perhaps the law courts and yourselves to pass judgment on. Had we had said publicly that this cross-investment could make these shares much less likely to return their initial subscription price, would it have made a difference? I am not convinced it would have done. We would have been two years too early, the market carried on going up, people would have been saying, "You said this and the market has gone up, you have really just stopped people making money by stopping them", so I do not think it would have made a great deal of difference. But I do, with the benefit of hindsight, wish there was something we had done which would have stopped it.

  797. Such as?
  798. (Mr Godfrey) Such as being able to predict that the markets would not enable the funds to deliver on what they were promising to do for people in a way which would have been believable at the time. I think we would have been ignored, in other words.

    Mr Ruffley

  799. Mr Godfrey, you have been commendably clear in your analysis. Tell me this: where on earth was the regulator when all this was going on? I ask you as a trade association, where was the regulator? What were they doing?
  800. (Mr Godfrey) There are a number of aspects that the regulator has control over, they have control now through the listing authority ----

    Mr Ruffley: No, I do not want any retrospection. At the time this was going pear-shaped and just before it went pear-shaped, when people should have known but did not, what I want from you is a very simple account of what the regulator was doing, whether or not indeed they had the powers. We have just heard from witness after witness that the regulator did not have the powers, nothing could have been done. I want your version of what the regulator or regulators could and should have been doing at the material time, not after the event, when it should have been reasonably foreseeable.

    Chairman: Stick to the material time, and we can come back to the issue of regulation later because we have not got time now.

    Mr Ruffley

  801. When it should have been foreseen. Tell me where the regulator fits in on that.
  802. (Mr Godfrey) As I say, I think by the time it became clear that the problems were intense, which was after September last year, there was very little the Regulator could do to prevent it and I think the Regulator before that point in the early part of 2001 issued guidance to advisers to ensure that they understood the risks. They issued new guidance on the way in which the risks should be described and I believe - I cannot remember verbatim - they said if you were selling income shares (none of this applied to zeros, it applied to income shares and splits) that you had to bring the small print warning which says you may not get back the amount invested from the small print into the main body copy either of the advertisement or the sales letter. That applied both to investment managers and to advisers.

  803. What about zeros?
  804. (Mr Godfrey) It did not apply to zeros. As I said, given that the manufacturers of these products clearly had not understood the impact of what they were doing to the structure, it is not surprising that neither the trade association nor the Regulator worked that out for themselves given that the so-called rocket scientists did not.

    Mr Mudie

  805. You stated you had asked them to change accounting practices. What did you mean by that?
  806. (Mr Godfrey) We did not ask them to; we asked them to consider whether the accounting practices they started off with were still appropriate, and the sort of things we were talking about in general were the amount of the expenses that were being charged against capital. This is quite an esoteric accounting point but I think you understand my angle.

  807. What else?
  808. (Mr Godfrey) That is the key thing.

  809. But I read in your statement you gave the Committee last time that that is actually a recommended practice. Were they not carrying out recommended practice?
  810. (Mr Godfrey) We felt that some of the interpretation of recommended practice was rather aggressive.

  811. Did they change?
  812. (Mr Godfrey) Some of them did.

  813. So some of them did not?
  814. (Mr Godfrey) Some of them did change their accounting practice.

  815. If some of them did, it means some of them did not.
  816. (Mr Godfrey) Some did not, yes.

  817. And did the Regulator show any interest?
  818. (Mr Godfrey) The accounting policy of the board would not be a matter for the Regulator.

  819. On the circumstances that you have outlined, charging the expenses to capital just adds to the debt and as debt is one of the things that pulled them down, it has that effect, so it was not esoterical or anything, it was important. It is in your recommended practice, and yet how strongly is this recommended practice? Is it just recommended so you please yourselves?
  820. (Mr Godfrey) No, generally UK listed investment trusts will follow the statements of recommended practice.

  821. Again I note the word "generally".
  822. (Mr Godfrey) We are not a regulator and a statement of recommended practice is, as you say, just that, but auditors, to my knowledge, do not like to sign off accounts which do not comply with the SORP and we are going through the final stages of issuing a new SORP, but the point on here is that under our statement of recommended practice, it says either you charge all your expenses to income or you split them by giving thought to the way in which you expect the total returns to be delivered. So if you expect half your total returns to come from income and half from capital you can split 50/50.

  823. I can read.
  824. (Mr Godfrey) We felt that some of the assumptions being made were overly aggressive. Of course, the perceived benefit from the fund's perspective of doing this is that they think the zeros are covered, so it is not hurting the zeros and by charging expenses to capital you are enabling a higher level of income to be paid out. That is all very well when the zero is covered because although you may be robbing Peter to pay Paul, at that moment in time Peter and Paul are one person.

  825. It is also a way of disguising the fact that you have not got the cover. If you have invested in technology shares and they are going down and your other main investment is other companies who have themselves invested in technology shares, you are desperate for income, so if you charge your expenses across the capital you can disguise this for a bit, but not forever.
  826. (Mr Godfrey) This is why we wrote the letter.

    Mr Tyrie

  827. I think you have described very accurately the lethal cocktail of gearing and risk which was introduced into this sector which was new - aggressive accounting, investment in high tech stocks, high yielding stocks and cross investments - but you have said that it was very difficult for anybody to spot this. I am asking a very straight question. On the basis of the information available, although you did not spot it, do you think it was reasonable for professional investment advisers to have spotted it?
  828. (Mr Godfrey) I doubt that most professional investment advisers would have had the competence or experience or level of knowledge to have dug into this and found that which the product manufacturers themselves did not find.


  829. We have a quote here from Alistair Mundy, the Manager of Invested Capital Accumulater, the fund I compared with Aberdeen earlier. When he was asked, " Can you explain why your fund has managed to avoid the crisis?" he said, "Back in February we made the decision to switch a large part of the portfolio into lower risk zeros. We felt there were three main elements that made a split level trust low quality: a) a high (above 15 per cent) level across shareholdings; b) aggressive accounting policies; and c) a high level of bank debt. On their own each element was highly toxic. Together they formed a lethal cocktail." That was February 2001, so here we have an investment manager making the very point, so that point has been made, Mr Godfrey.
  830. (Mr Godfrey) Clearly Alistair Munday was somewhat ahead of the curve. All credit to him and his performance, which you quoted earlier, bears that out. By that point in 2001 we had already initiated the process to get all fund managers to disclose (which we would then do through our monthly figures) the extent to which they were investing in other split capital investment trusts. That was in September 2000. You do not suddenly go from a point of being absolutely relaxed to absolutely terrified; there is a process, and we moved from a state of some nervousness to sheer terror. That happened over a period of years. By the point that you mention, February 2001, we had already started undertaking initiatives which reflected a sense of unease. Had I been managing money perhaps I would have arrived at the same conclusion, that it just was not worth taking the risk, but we certainly at that stage had not come to the view that there was a likelihood that the zeros which had been sold as low risk would not perform. Although we hear a lot of "well, low risk means lower risk than the other shares in the portfolio", I can tell you that is not what the consumers understand by that.

    Mr Tyrie

  831. So your considered view is that it would have been unreasonable for most of the specialists to have spotted this?
  832. (Mr Godfrey) You asked about financial advisers. To expect advisers to have spotted it, I would not have expected them to, given what I know.

  833. Therefore it was clearly totally impossible for private investors.
  834. (Mr Godfrey) For the vast majority, yes.

  835. That brings us back to my first question, that brings us back to the manufacturers. We have had before us in David Thomas the Henry Ford of split capital trust manufacturing, have we not, the brains behind the whole thing, and he said that he did notice the increased risks even though he was inventing them and designing them. Do you think it was reasonable that he should have known what he was designing?
  836. (Mr Godfrey) Well, I wish he had.

  837. Could you try and have a go at answering the question.
  838. (Mr Godfrey) It is a very difficult question which is why I pause and the reason is that I do not have his knowledge. I did not design them and it is very, very difficult for me to put myself in that position and look back and say should I have known because I wish I had known and I am sure he wishes he had, but we have heard he and others today saying that they did not and I can only echo that; they say they did not know.

  839. But we have had someone create something who thought it would be some useful chemical product and in fact he has created this lethal cocktail which has blown us all up.
  840. (Mr Godfrey) That is the point. The point is not whether they should have known or not. The point is ---

  841. It is a "Professor Brainstorm" job, somebody sitting in his laboratory twiddling dials and doing various tests and ending up blowing us all up. Two questions. What are the obligations towards their clients from not having known and the results that have transpired from that?
  842. It seems to me the key question, which is my second question, is, of course we cannot eliminate this ever happening again, we want innovation in the market, we want all people after having listened to advice to buy products, we do not want to start forbidding people from buying products, we want to be in a free and flexible market, but at the same time we want to think about what we can do to restrict this happening again, to limit the scope for such a crisis happening again. What kind of transparency, what kind of rules, what kind of systems, can we put in place which can make it more difficult for manufacturers to engage in these back room Professor Brainstorm activities?
  843. (Mr Godfrey) We have two areas of activity which we think will prevent this happening again and indeed strengthen the industry going forward, because we very much appreciate the Committee's approach to this in wanting to help the industry and restore its good name. On the one side there is transparency and disclosure, and we have written to the boards of all split capital trusts - and you have a copy of that letter - setting out our proposals on this. They are, to disclose very clearly the full list of investments in other split capital trusts, the full details of their borrowings and the banking covenants attached to that, and also to provide investors with a tool that they can use to plug in potential returns from different aspects of the portfolio and see what would happen in those circumstances. So investors and their advisers would be able to, if they want to buy shares, go into them with an intelligent understanding of what the risk/reward trade-offs are and how sensitive that share might be to a relatively small movement in the value of the underlying portfolio, effectively the effect of the gearing and the underlying portfolio. If they see that, they can either say, "I like the idea of that reward but the risk is not for me" or "I do not like the idea of it, I am not buying that one". So I think it would give them the information they require between themselves and their advisers to understand whether something is appropriate for them. The other element is corporate governance which perhaps we will come on to later.

  844. What you said is, we need to provide the specialist advisers with far more information than they at present have because at the moment they cannot do their job because the manufacturers are not giving them what is required; that there was a veil between this product and even the specialist advisers which prevented them from understanding it.
  845. (Mr Godfrey) There has certainly been a period of time during which advisers did not have sufficient information to make intelligent decisions.

  846. Therefore it would be unfair to blame the specialist advisers?
  847. (Mr Godfrey) I cannot give a blanket whitewash to the advisers but in general terms I think it would be somewhat unfair.

  848. In which case, I come back to my point about the manufacturers. I read out an investment trust research note earlier which was going to these very specialists. Do you think it is reasonable for the manufacturers to put out notes which are so blatantly misleading as to say that this is the one example where this cannot be done; that you should not equate gearing with greater volatility and therefore risk; that all, in this case, the gearing does is produce a faster rise in the value in the equity?
  849. (Mr Godfrey) Firstly, this was put out, he said I think, to his institutional clients rather than advisers; institutional shareholders, big pension funds or big fund managers. Be that as it may, they believed what they put out but if they get it wrong they have to take the consequences of that potentially. If it is shown they did not take reasonable care or they did not understand what they were doing, there may be consequences for getting that wrong.


  850. You mentioned to us your Data Project, your gathering of information, why is it taking you so long to complete that Data Project?
  851. (Mr Godfrey) I say it has been a disappointment to me it has taken as long as it has. It has taken a long time because it has taken us longer to get the data ---

  852. In other words, there are foot-draggers out there?
  853. (Mr Godfrey) I think some of them have found it difficult to get the information and there may have been some foot-dragging.

    Mr Mudie

  854. Following on Andrew's questions to you, why do you feel you should not be regulated?
  855. (Mr Godfrey) We are regulated. Where we are not regulated is in the same way as other collective investment schemes. We are regulated by the FSA with regard to the issuing of prospectuses and the continuing obligations of directors under the listing rules. The way in which the fund managers manage investment trusts is regulated by the Financial Services Authority; the ISA schemes and the savings schemes operated by the fund managers and the marketing of those products is regulated by the Financial Services Authority, and so is any advice given to customers by financial advisers.

  856. That is not John Tiner's view. He is a leading light in the FSA and he feels there is a regulatory gap.
  857. (Mr Godfrey) What I would say is that investment trusts are clearly not regulated as financial products in the way others are.

  858. Answer this: after people losing their savings, after this nonsense, do you still say you should not be regulated?
  859. (Mr Godfrey) I have never should we should not.

  860. You did in the document you gave us. You said that you thought that improvements could be brought about by market pressure.
  861. (Mr Godfrey) That does not mean ----

  862. Do you think the investors who have lost their money and face uncertain futures with school fees, retirement fees, think it should be left to the market to bring about improvement?
  863. (Mr Godfrey) I do not think that constitutes saying we should not be regulated. We would be very happy to participate in any review of the regulation of investment trusts and we certainly would not close our minds ----

  864. Mr Godfrey, earlier when I raised the question about accountancy practices which are very important, every answer you gave me indicated that your members make great play of the fact these are recommendations, so the absence of a regulator means they can please themselves what they follow and what they do not follow on the most important matter of accountancy practices.
  865. (Mr Godfrey) Actually it would make no difference if that were regulated because there is a statement of recommended practice for unit trusts and OICs as well, and that is just a statement of recommended practice too. So on that point there would be no difference anyway. What I am saying about regulation is that we would happily participate in any review on regulation. We would not close our minds to investment trusts becoming regulated products in the same way as open ended funds, but in the meantime, because this will take quite a long time, we are not going to sit on our hands and we are going to move forward with initiatives on corporate governance and initiatives on disclosure because we believe that with the right pressure, I would accept not just from the market but perhaps from this Committee and perhaps from the SFA as well, we can achieve change that will make a big difference.

  866. I heard Chris Fishwick from Aberdeen Assets saying how important confidence was for the sector. Do you think out there now investors will have the confidence in your sector in the knowledge that it is not covered by the regulators as others areas of investment are?
  867. (Mr Godfrey) I think that very many investors have benefited very greatly from investments in investment trusts over a very long period of time.

  868. And very many have lost.
  869. (Mr Godfrey) One would be too many to have lost in the way they have, and clearly a number have lost. I do not believe that the structure of investment trusts or the integrity of the concept as a whole has been destroyed. Clearly the perception has been badly damaged and we need to make real change. We cannot just do it through spin or PR; we need to make real changes to restore confidence in the sector and it is important.


  870. With the FSA review in two years' time you would be quite happy to look at the regulation of investment trusts if the industry as a whole was not moving together? In other words, if the foot-draggers were still there in two years' time you would look at that again?
  871. (Mr Godfrey) Absolutely, yes.

    Mr Beard

  872. Mr Godfrey, you said earlier in response to the questioning - I made a note of it - that in 1998-99 you saw a difference between the trusts that were highly geared and the others in the sector.
  873. (Mr Godfrey) I said I saw differences and if you want to know what the particular difference was it was that we began to become aware of managers of splits buying shares in new split launches and that gave me some concerns.

  874. You seem to be adopting the attitude of a neutral observer of the scene. Is that how you would describe your role?
  875. (Mr Godfrey) No, I do not think so. We did not see ourselves as neutral observers of the scene. We went over this to some extent last time I was here and what we did was we tried to investigate as to whether we could find evidence of any ringing, if you like, of the market at that stage, and we could not find any evidence of it. We also, as I said last time, observed that the flotations were taking place by way of placing rather than public issue and so we took the view that the shares were going out to professionals rather than to retail investors. Remember, the new launches are not actually members of ICC and very many of these did not become our members even after their launch, so the information that we had available to us was by no means complete and, as I said, we did gradually move from a state of relaxation about the industry before that period to a concern by the third quarter of 2000.

  876. But in May 2000, which is a year or two after you first became sensitive to these matters, you wrote in the Bloomberg Money Guide to Split Capital Investment Trusts the following: "It is likely that the popularity of the split capital sector will continue. More and more investors are realising how useful they can be in financial planning. In addition, splits currently look good value and are likely to remain good value in the future. This is because most splits invest in UK FTSE All-Share 100 type companies which have been undervalued as investors have favoured technology stocks." There is no question there about distinguishing between splits. It is a pretty fulsome endorsement of them.
  877. (Mr Godfrey) I think there is a distinction.

  878. Just to finish the question, do you realise that coming from a source such as yourself the impact that has on people's confidence? Plainly a statement like that induces confidence in this whole sector?
  879. (Mr Godfrey) I am not going to sit here and say I have not made any mistakes over the last four years. I think you are ignoring in that the use of the word "most" and most splits, as you have heard today, are not in the dire straits that some are, although too large a number, and the fact is that I did use the word "most" and that does imply some differentiation.

  880. Can we move on to 2001 because that is the time that you were then starting to talk to the FSA about your anxieties on this scene. We have got a letter from an investor which it is claimed the AITC was sending out in August 2001, containing this statement: "If you would prefer to take only a minimal amount of risk, then zero dividend preference shares might prove to be the best choice ..." You were not a neutral observer, you were a cheerleader.
  881. (Mr Godfrey) Zero dividend preference shares "might" prove to be the best choice, and many of them would have been and many of them still will return their pre-determined entitlement because, as I have said, they have no back debt, no cross holdings, no exposures to technology and no exposures to high-yielding bonds.

  882. But do you think someone receiving that letter would have read that into the letter?
  883. (Mr Godfrey) I said a moment ago that I am not going to stand here and say we made no mistakes. I wish by then we had changed our wording about zeros, but I have said to you that it was not until after September 2001 that we began to begin to think that zeros would go belly up.


  884. Someone would need a degree in English grammar to understand the nuances of these points. That is what we are trying to get at.
  885. (Mr Godfrey) That is why I say I think we also made mistakes in this.

    Mr Cousins

  886. Were you ever aware of a new issue prospectus that was misleading as to risk?
  887. (Mr Godfrey) I cannot think of one off the top of my head. Prospectuses normally do not leave many hostages to fortune, they are written by lawyers.

  888. Were you ever aware of a new issue that could not reasonably be expected to strengthen the balance sheet?
  889. (Mr Godfrey) Do you mean a rescue issue or a flotation of a new company?

  890. A rescue issue.
  891. (Mr Godfrey) I think we were concerned about some of the rescue issues, but there were none that could not possibly strengthen the balance sheet. In our letter we said that the strengthening could be fairly temporary if markets did not improve.

  892. In your letter to the Chairman of the Split Trusts in November 2001 you said, "We are already seeing examples of trusts which have been to the well ...", by which I presume you mean that ----
  893. (Mr Godfrey) Gone and tried to get more money.

  894. Yes, from investors. That is "the well"?
  895. (Mr Godfrey) Yes.

  896. "... only a few months ago approaching a point where they need to do so again. Although this is better than nothing it is a long way from being as good as raising hard cash." You go on to say, "These corporate actions ...", which of course include going to the well, "... are under way in many cases but they are necessarily conducted behind closed doors." Do you think that is right?
  897. (Mr Godfrey) Could you read the whole sentence?

  898. "These corporate actions ..." and you have identified three different methods which people can use to restore the position, "... are under way in many cases but they are necessarily conducted behind closed doors."
  899. (Mr Godfrey) What do I say next? Sorry. At the moment I cannot remember why I said that. I need a little more context.

  900. Then you go on to talk about publishing the data on holdings as outlined, would enable the AITC to "move on to the front foot" - that is spin doctor's language.
  901. (Mr Godfrey) I think the reason I said they were conducted behind closed doors is because these corporate actions are price sensitive, and therefore you are never told about them whilst they are being put together. We knew in general that these types of fund raisings were being put together and this letter was by way of trying to give a steer to boards and to give them information which we hoped would enable them to make sure there was not further diminution of value for the zero dividend preference shareholders by way of rescue issues which just kept the whole thing spinning for longer whilst their value ebbed away. That is what that was about.

  902. This letter nowhere refers to the fiduciary duty of these individuals to their investors, who of course were shareholders.
  903. (Mr Godfrey) We do not need to remind a board they have a fiduciary responsibility towards their shareholders. What we were trying to do was to discuss the application of what was fairly uncharted territory at the time, and we could see developments in the market which we were concerned might not have over the longer term the intended effect. We were therefore I think doing our duty to the shareholders of our member companies by writing to boards and suggesting a number of things, whether it be a new look at the accounting policy, or suggesting that having a rescue rights issue where no real cash came in but what came in was a group of stock swaps of other splits in exchange for your new rescue rights issue might not prove to be the best thing. Had markets turned up, we would have been wrong, but as it happened we have turned out to be entirely correct.

  904. Mr Tiner told us when he was here, and of course you went first so you were not on that occasion able to come back to this point, that in fact the Guernsey regulator had approached your organisation and he did mention the name of the individual - Hugh Aldous?
  905. (Mr Godfrey) Yes.

  906. He said, "It seems that the Guernsey authority has been in discussions with a Mr Hugh Aldous ....", that is not me being unpleasant, that is the way he put it, "... concerning his concerns about cross holdings and the systemic implications of that." Is that right?
  907. (Mr Godfrey) I think this has become a bit of a red herring because the Guernsey regulator did not have any contact with the AITC at any stage. It appears he did have an exchange of correspondence with a gentleman called Hugh Aldous. Hugh Aldous is someone who is known to us, he is a director of an investment trust, he is a member of our representative committee, he is not an officer of the Association, and that correspondence was never reported in any way, shape or form to me or any other member of my staff. Why I say it is a red herring is because the Guernsey regulator was not the only person who had concerns about cross holdings, so whilst I do not think that that story hangs us or anybody else, neither do I think it gets us off the hook.

  908. Are you not a bit disappointed that this guy, Hugh Aldous, did not share these discussions with you?
  909. (Mr Godfrey) No, I am not, because, as I say, the Guernsey regulator is not the only person who ever had concerns about the cross holdings. As I said, I myself was concerned about the fact that managers were investing in new launches of other splits before that.

  910. How are you going to retrieve the reputation of the sector?
  911. (Mr Godfrey) We are going to improve transparency and we are going to undertake some very big initiatives on corporate governance.



  912. Mr Godfrey, I meant to put this question at the beginning. Can I take you back to the questions I asked Mr Gilbert. This was their enhanced zero trust which was advertised in The Times two years ago which, by the way, John Tiner again thinks is misleading where it said that "zeros are low-risk investments similar to bonds and there is a quasi guaranteed annual growth". Would you say that was misleading?
  913. (Mr Godfrey) It certainly turned out to be wrong.

  914. Misleading?
  915. (Mr Godfrey) If you believed it, you were misled. So please can I stand on that. I am glad you asked this because there is a very, very important point.

  916. It is under ISAs off their web site. It was a bit of semantics for Mr Curry to say you can buy anything off a web site, I know you can, but it is promoted on the web site and that is the issue because this will affect compensation, so I would like your view.
  917. (Mr Godfrey) There are a couple of very important things here. Firstly, we have been told by Aberdeen that they are going to offer an uplift package on their unit trust because they advertised it and marketed it direct to the retail investor. They said that it is not the same for the invidia shares of the zeros because they are not funds, they are equities. Well, excuse me, but I believe when somebody buys a share in an investment trust they believe they are buying a collective investment. If you say what is an investment trust, there are three things: it pools your money, you get professional management; it is low cost and it can gear. One of the key features of an investment trust is it pools your money with other people's so it is viewed as a collective investment. It may be convenient to say it is only an equity just like Marconi and you do not get compensation if shares in Marconi go down, but it is bought by the consumer as a collective investment and it was made available as that. Also they said that that advert does not count because it was not advertiseing the share, it was advertising the savings schemes. I think that is the point you were trying to make.

  918. Exactly.
  919. (Mr Godfrey) The savings scheme was made available and marketed to retail investors and ISAs were made available and marketed to the retail market. I fail to see what the difference is between a consumer -

  920. It is very hard for us to get a clear answer on anything from them. They came with their minds on the defensive, it was quite obvious, but you are giving us a very clear answer here. What I said to Mr Gilbert is this: if this is good enough for those buying direct, why should others not be compensated? Why is it just down to an accident where they bought the shares?
  921. (Mr Godfrey) The key point is what difference is there between somebody who goes to Aberdeen direct and buys a unit in their unit trust and somebody who goes to Aberdeen direct and buys a share in a zero through their ISA product? None that I can see.

    Mr Cousins

  922. You are sharing your thoughts about this with the Committee. Is this a point that you have already taken up with Aberdeen?
  923. (Mr Godfrey) Not formally.

    Chairman: We will leave that one with you. It is a good point.

    Mr Cousins: It is a pretty formal way of communicating with Aberdeen.


  924. There are people and an industry that will not talk to the public. The only way we can get them to talk is to come before our Committee, so we will maybe keep that practice up! Okay, you said there are details of your initiative to improve information on the sector and we are delighted that you suggest it is vital to provide investors with that information. Do you think you are going to be faced with similar hold-ups to those you have been facing with the data project?
  925. (Mr Godfrey) We are looking for support from this Committee and the FSA to ensure we do not get hold-ups.

  926. This Committee wants to send a very clear signal, and, Mr Townsend, you have been very quiet but I know you sit on boards so you go back and talk to your pals and this is the message from this Committee: the Committee wants to send a very clear signal back that it expects fund managers and the boards of split capital companies to pull their fingers out and supply the information they have been asked for and if they cannot get their act together, then as a Committee we are likely to ask the FSA to consider making rules to bring them into line.
  927. (Mr Townsend) Mr Chairman, I rather anticipated that would be your response and in anticipation I said exactly that at an investment trust conference yesterday.

  928. And people are pulling their fingers out today.
  929. (Mr Townsend) We will have to wait and see on that.

  930. We will watch that aspect. What about the corporate governance aspect, because you mentioned that?
  931. (Mr Godfrey) We have already sent out a research paper on corporate governance to boards telling them what the market thinks about them and the practices which are currently there and what they would like to see. We expect boards to respond to us on that by the end of the year and we expect to promulgate in the first quarter of next year a corporate governance code for investment trust companies. But we are not going to stop there. We have to once and for all take action sufficient to put beyond question the integrity, the ability and the independence of boards and their competence to act at all times in the interests of shareholders. We intend to do that.

  932. We note as well from the information you sent in that not all closed investment companies are members of the AITC and that the ratio of membership is lowest in the split sector. Are you concerned about this?
  933. (Mr Godfrey) Yes. It is pretty hard for me, I am spending a lot of money doing work in the split sector ---

  934. Exactly, because you are not able to bring people into line.
  935. (Mr Godfrey) There are Competition Act considerations here. We would like to have every investment trust as a member.

  936. Did I read in a newspaper a while ago about some people, I think Mr Martin Gilbert and others, wanting to pull away from the AITC and set up splits?
  937. (Mr Godfrey) We have heard this too. I think that has died a bit of a death at the moment but we would like to increase our membership rather than see it fall.

  938. Do you believe investors deserve compensation?
  939. (Mr Godfrey) Yes, some do.

    Chairman: Very clear.

    Mr Beard

  940. Who from?
  941. (Mr Godfrey) I think there will be a number of people who will be liable to pay some compensation. I think in the main it will be advisers, perhaps managers and perhaps sponsoring brokers.

    Mr Tyrie

  942. Earlier, when we were discussing this, you said the advisers on the whole were in a very difficult position because they were not supplied with adequate information, yet now you are saying they should be paying compensation. Should not the key compensators be the manufacturers?
  943. (Mr Godfrey) Thank you for picking me up on that. I also said I would not give the advisers a complete whitewash. I think where advisers have gone beyond the very optimistic statements even which were made to them by the managers, they may be liable too. For instance, I have heard of instances where some of the letters which have gone from advisers to clients clearly went beyond the promises or the statements made.

  944. Okay, in those other cases, but the primary people who should be paying compensation or should be liable for it are the manufacturers?
  945. (Mr Godfrey) I think there is still a long way to go to assess who has been either sufficiently misled or whether impact of wrong-doing has ---


  946. Last time you were here you told us you were keeping your eyes and ears open for evidence of breaches of regulations. Can you tell us if you have learned anything since your last appearance?
  947. (Mr Godfrey) Yes, we have. We have continued to receive information which we have passed to the Financial Services Authority. I would say there are probably two key areas of new, dubious conduct that we have heard about since we were last here. One has been a practice whereby we have been told that a manager was selling shares in a split that had gone ex-dividend, from one split they owned, and immediately buying them back for another split they owned with something which is called a special cum dividend being applied by the market maker, thereby enabling them to effectively get two dividends for two different funds from the same share. Therefore if the fund involved had a zero dividend preference share which was under water at the time, it would have involved effectively taking money from the zero dividend preference shareholders and giving it to the income shareholders as income. So we have reported that to the Financial Services Authority. The second thing we have heard which has caused us some concern has been an allegation that you heard today - I cannot remember who from, I think it was either Mr Thomas or from Aberdeen - that when they modelled these trusts, they had a model which the accountants looked at and the accountants signed off independently but that model comes by way of a dummy portfolio and says, "These are the sort of shares we will invest in and this is how it will work". We have also been told there were instances towards the end of the launch glut where trusts were beginning to run into trouble and there was not so much cash available from the other funds to invest in new funds but when they went out to do the marketing, they were told, "We cannot give you cash but we can give you these shares in other splits as a swap for your new issue", and the broker would go back to the fund manager and say, "Do you want these shares?" and the fund manager would say, "Yes", and as a result of that the starting portfolio may have looked quite different to the model on which the sponsoring broker, the accountant and even the board had signed off and may have been of lower quality than had initially been ---

    Chairman: These are very serious issues.

    Mr Cousins

  948. Is there any indication of a broader based uplift package? You used a term that was used this morning.
  949. (Mr Godfrey) No, no indication whatsoever.


  950. Lastly, the investment trust industry has a long and proud record, as people say, going back decades and decades and decades. You as an organisation, and others, will have to do something to help recover its reputation because there is a stain on this industry, of that there is no doubt. You have shown today your positive response with us. I think you have got to go back and say to others who are shy about it or who feel that there will be no light shone on them in the next few months, that we are shining a light on them and they had better work in tandem with yourselves and in tandem with us to ensure that the industry does recover because it is for the benefit of all investors and the country as a whole. So what should you be doing and what should the management companies be doing?

(Mr Godfrey) We should be driving through our initiatives on transparency, we should be working with the regulators to make sure they get a result and get to where they are trying to get to, and we should be making sure that we bring in changes on corporate governance that will forever ensure that trusts are able to meet their potential, which is great.

Chairman: You have been very clear and direct with us, in marked contrast I should say, to Aberdeen. However, we look forward to working with yourselves in the future to ensure that this industry does recover. Thank you very much.