Examination of Witnesses (Questions 180-199)
MR MARK
HORSFIELD, MR
CHRIS ANTHONY
AND MR
DAVID WHELAN
26 JANUARY 2009
Q180 Mr Betts: How do you do that?
Do you simply pass them on in your regular notes and hope somebody—well,
maybe you did not hope because it was not your responsibility,
was it, but for someone to have a look at it, or come across it,
or do something with it if it happened to catch their eye, or
did you ever draw particular attention to the problems of the
Icelandic banks to the notice of the local authorities? Did you
ever pick the phone up or did one of your colleagues pick the
phone up and say to a particular treasury, "You really ought
to have a look at these credit ratings and the change"?
Mr Whelan: As I said, we passed
the information through. There is a monthly report which goes
out which looks at what the credit ratings are.
Q181 Chair: Can we try and get you
to answer the questions? It is becoming a bit like a record! Can
you just straight answer the questions Mr Betts is asking? Did
you pick up the phone to any of these customers, in particular
district councils where, as we heard in the first set of evidence,
district councils are quite small councils? They have small budgets
but they may actually be carrying quite large sums of money and
therefore you would think they ought to be more risk-averse, not
more risky, and yet you knew that at least one of your clients,
the district councils, had a load of money—not a lot of
money maybe to the City but a lot of money to them and their taxpayers—in
an Icelandic bank. Did you pick up the phone and say, "Have
you read the credit ratings?"
Mr Whelan: I am trying to help
the Committee by explaining the process we go through and that
would answer that question. Actually, we do not know where the
local authorities placed their funds. We are not at the heart
of their decision-making process.
Q182 Andrew George: You were saying
that you send out routinely monthly information?
Mr Whelan: If I can start again,
just for the Committee's assistance, at the start of the process
so that there is complete clarity as to what we do. As the rating
changes come through—and there are many these days every
day—they are dispatched to the local authorities instantly.
Q183 Andrew George: Daily?
Mr Whelan: As and when they happen.
There are notes coming through daily, as you can appreciate.
Q184 Andrew George: I just need to
understand the distinction between routine, just some minor changes—
Mr Whelan: No, these are real-time.
Q185 Andrew George: But how do you
ensure that where the alarm bell needs to sound that there is
a real red light, not just an amber light but a red light that
you really need to shout this information out to local authorities?
How do you do that? Does it simply go out in the same routine
format as all the other information?
Mr Whelan: Sorry, at the risk
of repeating myself, the email communication goes out as and when
the ratings change, as the ratings change.
Q186 Chair: I really do not understand
why you cannot answer the question, Mr Whelan. We have got the
point that you send these things out. All Mr George is asking
is if the Icelandic bank is going through the floor, is it just
there in the long list in ordinary small type like it was before
or do you highlight it?
Mr Whelan: If the ratings have
been downgraded significantly, to use that illustration, that
will come through in a rating downgrade, which is sent to the
local authority as and when it happens.
Chair: So I think the answer is, no,
it is not highlighted.
Andrew George: No, it is not highlighted.
That is what I thought.
Mr Betts: First of all, could we have
a copy of your standard contract with the local authority?
Chair: Yes, absolutely, in fact each
of you. I was going to ask the three of you, would you—not
now, obviously, but would you provide to the clerks afterwards
the generic contracts which you give out to local councils, each
of you. That would be very helpful. Thank you.
Q187 Anne Main: Mr Anthony and Mr
Horsfield—I know Mr Horsfield gives a different sort of
service, but do you flag up things such as, "This has zoomed
down," or, "Big dive"? Do any of you flag this
up in any way, shape or form so that it is picked out for the
poor person who has got this long list potentially?
Mr Horsfield: Yes, we do, and
I think if you are looking for distinctions again—and I
would like to demonstrate a distinction here—we do not just
rely on an automated email bulletin, we actually speak to the
client to make sure they understand the seriousness of what has
been happening in the financial markets over the last 24 months.
Q188 Anne Main: I think that is what
we wanted to know. Has Mr Anthony told us that yet? Do you phone
up? We understand that Mr Whelan sends it out by email or similar
and Mr Horsfield picks up the phone. What do you do, Mr Anthony?
Mr Anthony: Ours is an information
pass through service, so we do not pick up the telephone and tell
people.
Q189 Mr Betts: So given, Mr Anthony,
your councils that you were advising or passing info to lost £469.5
million and, Mr Whelan, you managed to lose £313.5 million,
or your clients did, probably not you personally, do you think,
either of you, that you could have done anything better or would
you want to change the sort of service you offer in the future
to make sure that local authorities do not get in the same problems
again, or that you help them more not to get in the same problems
again?
Mr Anthony: Well, with the benefit
of hindsight, we have all got 20/20 hindsight, we still believe
in fact that the credit rating agencies should be the cornerstone
of any way of assessing where you should be putting your investments.
After all, they do provide impartial advice. It is objective.
It is extremely well researched. We do not have a bank of researchers
working with us to provide the credit research, so it has got
to be the centre there. I think the rating agencies have a fair
amount to answer for and I think they have got to do quite a lot
to restore people's confidence in that. There are other areas
one can look at, but they are quite subjective. They are subject
to market movements and, dare I say it, manipulation, and they
therefore are not entirely reliable as indicators as to where
one should be directing one's investments to.
Q190 Mr Betts: I cannot work out
whether that was yes or no to either of the questions. Do you
think that you, as opposed to the credit rating agencies, got
anything wrong that you could have done better? Would you like
to try and improve the service you offer in the future to try
and make sure there is less chance of something like this happening
again?
Mr Anthony: We think the service
we provide is very good in what we are contracted to do.
Q191 Mr Betts: Okay. Mr Whelan?
Mr Whelan: We provide a good quality
service which is reinforced by the client base we have had for
over 20 years and has continued to be renewed. I think we have
to reflect on these market conditions as being very exceptional
and we have great sympathy with and are working with our clients—the
18% of our client base that got caught up in these investments—to
call for the credit rating agencies to provide better quality
information going forward in these exceptional circumstances.
Q192 Mr Betts: So the credit rating
agencies ought to do better, but you could not do any better and
you will not do any better in the future?
Mr Whelan: It comes back to this
part of our service. We only provide the information which the
credit rating agencies provide to us to supply to the clients.
Q193 Mr Betts: So basically people
are paying for a passport to the information which they could
read off the Internet?
Mr Whelan: On this particular
aspect of our service they will need to subscribe to rating agencies,
but this is a "passport" as you call it, yes.
Q194 Mr Betts: Basically, instead
of wasting money on the fee for that, you would say they might
as well put their money on the 2.30 at Newmarket, had they not,
because at least they might have had a chance of winning?
Mr Whelan: I think this conversation
perhaps needs to be more reflective of the rating agencies and
the quality of the information they provide, because that is their
role in the market, as to how the market performs.
Anne Main: Listening to the three sets
of evidence, I would say it begs the question: should there be
guidance given to local authorities to have a slightly better,
more Rolls-Royce service, maybe along the lines that Mr Horsfield
has decided, where it is more proactive, so that there is a degree
of actual advice going in to local authorities rather than just
giving them the information and they are expected to make up their
own minds and therefore then you are only acting as middlemen,
passing on what the credit rating agencies are doing? I actually
do not see, since you cannot see that you can improve at all and
there has been this catastrophic loss, that there is a huge amount
of value in having this particular type of information service,
and an advice service seems to be what people need. Would you
agree?
Chair: I think we will just leave that
one hanging there, because I think we have adequately exposed
that, and move on.
Q195 Mr Betts: There is another area
of difficulty which some of us have been struggling with and that
is the idea that an advice service could be provided by one part
of an organisation and the other part of the organisation could
actually be carrying out the investments for local authorities
and making commission. Do you think there is a conflict of interest
there?
Mr Anthony: I think that is probably
directed directly at me! ICAP, our parent company, is very aware
that there are potential conflicts of interest in any area of
investment and because of that they very strictly adhere to a
conflict of interest policy, which is set out by the FSA, and
we operate all the potentially interrelated areas the company
operate behind strict Chinese walls.
Q196 Mr Betts: But you are part of
the same company?
Mr Anthony: We are, yes.
Q197 Mr Betts: Do you think, again,
that could lead to the perception of a conflict of interest if
nothing else?
Mr Anthony: Yes, but the company
makes absolutely certain that those conflicts of interest are
not breached and we do operate the Chinese walls. We have absolutely
no idea what the other side of the business gets up to. They do
not know what we get up to. We do not know what our clients are
doing with respect to their dealings with ICAP at all.
Q198 Mr Betts: Do you think it might
have been better if there was a rule introduced whereby authorities,
if they used a company for one function for giving advice, should
not use it for another function of actually carrying out the investments
and gaining commission, that that would offer a greater degree
of security or surety to both the local authorities and probably
the public in general?
Mr Anthony: Clients, when they
interview us and sign us up, are fully aware of the situation
with regard to us and our parent company. I think they are well-equipped
to make up their own minds as to whether in fact they want to
make a rule of not dealing with ICAP or will decide to carry on
regardless.
Mr Horsfield: We do think that
is important. We think it is important to be demonstrably independent
and we took the decision at a very early stage to demonstrate
that independence, not through numerous approaches from intermediaries
to have access to our clients. It is not something we do now or
will do in the future.
Mr Whelan: We would share the
same view. We do not have a conflict of interest, we do not receive
commission on any time deposits for any financial institution,
local government or any other type of body at all.
Q199 Chair: Okay. Can I just ask
one final question. I am not sure if you were here when we had
the first set of witnesses in, but we asked, I think the gentleman
from Worcestershire Council, how much he paid the accountant within
his council who was likely to be giving the advice within the
council and it was £40,000 a year. Can I ask each of you
how much you pay the individuals within your organisations who
are responsible for giving the advice, strategic advice or whatever,
to councils? Mr Anthony?
Mr Anthony: I think that is confidential
information and not relevant to today's inquiry.
Mr Horsfield: I think it is confidential,
but I am prepared to say it is more than the sum quoted earlier.
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