CLAUSE 31.—(Power of Trustees, etc., to Borrow and Invest in War Securities.) (Hansard, 3 July 1917)

§ The CHAIRMAN
The Amendments in the name of the hon. Member for the Bodmin Division (Mr. Hanson) are, I think, met by the second of the two Amendments on this Clause, of which the Chancellor of the Exchequer has given notice—[At the end add the words "the powers conferred by the said Sub-section shall include, and shall be deemed as from the commencement of the War to have included, a power on the part of a company or body of persons and of persons responsible for the direction or management of 1058 the company or body, to borrow, notwithstanding any such limitations as are mentioned in that Sub-section, for the purpose of investing in or purchasing Government securities in accordance with that Sub-section"]. That seems to deal with exactly the same point, but I wish to be quite clear before I pass on.

§ Mr. HANSON
I think so, and I desire to express our gratitude to the Chancellor of the Exchequer for the readiness and courtesy with which he has met the point involved.

§ Sir F. BANBURY
I beg to move, in Sub-section (1), to leave out the words "or investing in."
This Clause gives power to trustees to speculate with other people's money. That seems to me to be an extremely bad Clause. Not only does it give power to do so, but it gives power to do that without informing the beneficiaries that they have done so. What might happen under this Clause if there was a sole trustee, and if the words "or investing in" were left in? The trustee might go and purchase £20,000 worth of Government securities. If those securities in the course of the next two or three days went up he would resell them, take the profit, and say nothing whatever about it. If, on the other hand, the securities went down, he would have to inform the beneficiary that, acting under this Clause, he had made the purchase, and had borrowed the money to pay for them. I have had a few words privately with the right hon. Gentleman the Chancellor of the Exchequer upon this question, and he considered that action of that kind would be fraud, and thought it unlikely to occur. But it would be extraordinarily difficult to find out such a case, because no one would have information that that particular trustee had done this except the bank or the stockbroker, the latter of whom would not have been informed that the transaction was not on behalf of the beneficiary or trust; he would merely have had to execute the order. I am not arguing from the standpoint of something that may not occur. It actually has occurred to me as a stockbroker. I was instructed to buy certain securities for a certain person, the manager of a bank, on a certain date. I did so, and sent in the contract in the name of the person. He asked me to alter the contract. I declined. Meanwhile, the stocks had gone up, and if I had altered the contract he would have 1059 taken the profit, instead of it being credited to the shareholders of the bank. He informed me that if I did not alter the contract I would have no more business from him. I refused to do so: consequently I never had any more business from him. This incident is by no means an isolated one. I hope the Chancellor of the Exchequer will accept the Amendment, and that between now and the Report stage, he will put in words—I cannot do so at the moment; I ought to have thought of this before, but I have been very busy— which will compel the trustees to inform the beneficiary what he intends to do. If something of the sort were done it would, I think, mitigate the extraordinary proposal that the trustee should speculate with other people's money, because that is what it amounts to.
It must be remembered that trusts are in many cases, created by people who have worked hard all their lives to save a little money in order that their wives or children may, after their death, live in comfort, and the idea that people who have done that are to be subjected to a trustee speculating, even for such a good object as buying Government securities, with borrowed money, where the man would risk no pecuniary loss whatever in so doing, is, to my mind, such a very extraordinary proposal that I think adequate safeguards should be put in, so that by no possible means shall a trustee commit any fraud, which, as I think I have shown, is possible if the Clause is left in the form in which it is at present.

§ Mr. BONAR LAW
As I indicated to my right hon. Friend when he spoke to me, it is not possible for the Government to accept this Amendment, because the whole reason which made us put it in in connection with the War is that in the crisis in which the country stands money in the hands of trustees should not be prevented from being used for the purposes of the War in the form of Government loan. What my right hon. Friend suggests is only to prevent them from investing in loan. But surely that would be a great disadvantage. The main objection of my right hon. Friend is that advantage might be taken of this in the way of fraud. If trustees are going to commit fraud of this kind, surely they would find some other way of doing it. The case in his own experience to which my right hon. Friend referred occurred 1060 before there was any arrangement of tins kind. It might be that if a trustee wanted to commit a fraud on beneficiaries it would take a cleverer man than the Chancellor of the Exchequer to prevent it.

§ Mr. McKENNA
I agree with what the right hon. Gentleman has said, except on one point. Is it proper that a trustee should borrow for the purpose of investment? That he should have the right to sell any stocks he has got, and to invest the proceeds in Government stock, or that he should be allowed to borrow for the purpose of subscribing for a loan, I can understand; but is it right that a trustee should borrow for the purpose of an investment? It is giving, as my right hon. Friend has said, to the trustee an enormous power of speculating at the expense of the beneficiary. I can well understand that the trustee, having securities, should be empowered to sell those securities in order to invest the money in Government stock, or that the trustee should be empowered to borrow for the purpose of subscribing to Government stock, but it is going a long way further to enable a trustee to borrow for the purpose of investing in Government stock. Perhaps the right hon. Gentleman will reconsider the point before the Report stage.

§ Colonel Sir R. WILLIAMS
In all these cases the bank has the security of the stock. The trustee borrows on the security of the stock he buys, and therefore the fraud cannot be committed in the way suggested.

§ Mr. McKENNA
It has nothing to do with banks; it is another point.

§ Sir R. WILLIAMS
He must borrow from somebody, and the person from whom he borrows has the security of the stock, and he has to hold the stock for the benefit of the beneficiary.

§ Mr. BONAR LAW
I will do what my right hon. Friend suggests. I will consider it before Report. It strikes me, on the face of it, that there is a stronger reason from this point of view, that if a trustee had made up his mind to sell particular securities in order to invest in War Loan, it might be necessary to borrow before he proceeded to take up the stock itself. I will have it looked into.

§ Sir F. BANBURY
I am much obliged, because the borrowing is really the point. It is not a question of selling the security 1061 or of investing if he has the money, but that he should borrow for the purpose of investing. With regard to what my right hon. Friend said as to the case to which I referred, that case arose because the particular person had the power to do the very thing which the right hon. Gentleman is going to enable a trustee to do here. This Clause is going to give to a trustee the power to borrow money and buy stock for somebody else without informing that person. It has nothing whatever to do with banks. A trustee can give an order to a stockbroker to buy £20,000 worth of Five per Cent. War Loan without informing the beneficiary, and the price goes up and he sells it, putting the profit in his own pocket, but if it goes down he tells the beneficiary.

§ Sir R. WILLIAMS
But he has not borrowed the money.

§ Sir F. BANBURY
It has nothing to do with the borrowing of the money. This Clause as it stands puts it in the power of the trustee to take advantage of the beneficiary and speculate on his own account. It is not an uncommon thing. I could give one or two instances in private. I beg leave to withdraw the Amendment.