§ 11.24 p.m.
§ The Minister of State, Board of Trade (Mr. Alan Green)
I beg to move,That the Protection of Depositors (Accounts) Regulations 1963, a draft of which was laid before this House on 11th July, be approved.The Protection of Depositors Act was passed on 10th July and will come into force on 10th October. The House will recall that an important provision of that Act is that companies which advertise for deposits from the public shall prepare 1216 special accounts which will be delivered to the Registrar of Companies and the Board of Trade, supplied to depositors on their first making deposits, and made available to existing and prospective depositors. These accounts are required on or after the appointed day, which is 10th January, 1964.
The Act lays down a number of requirements about these accounts. It states that they shall comprise a balance sheet and a profit and loss account, that they shall be of two kinds—audited accounts which will normally cover a period of twelve months, and interim accounts which need not be audited and which will normally cover a period of six months, that they shall normally be delivered within three months of the balance sheet date, and that if they are audited the auditors must be qualified under the Companies Act to audit the accounts of public and non-exempt private companies.
Section 13 of the Protection of Depositors Act gives the Board of Trade power to make regulations as to the information to be contained in or annexed to these accounts. It also states the general form that the regulations shall take. It says that they shall apply, with such exceptions, additions or other modifications as may be prescribed by the regulations, all or any of the provisions of the Companies Act with respect to the accounts required by that Act to be laid before a company in general meeting. That is, the regulations are required to be based upon the accounting provisions of the Companies Act. They may, of course, require more information to be given than is required by the Companies Act.
The regulations are also required, by Section 13(3) of the Act, to provide that a statement shall be annexed to the accounts containing information about the business carried on by the company during the period to which the accounts relate.
A draft of the regulations which, if Parliament approves, the Board of Trade intends to make, was laid before the House on 11th July. It will, I think, make the regulations easier to follow if I first remind the House that the accounting provisions of the Companies Act, which are contained in some ten Sections 1217 and in the Eighth Schedule, provide not only for the accounts a company prepares about its own affairs but also for the group accounts which, if it has subsidiaries, it prepares about the affairs of itself and its subsidiaries.
I now turn to the draft regulations. Regulation 1 applies with exceptions and modifications the accounting provisions of the Companies Act to accounts required by the Protection of Depositors Act from a company about its own affairs. The provisions which are applied, together with the exceptions and modifications, are set out in Part 1 of Schedule 1. The modifications and exceptions raise no point of principle. They merely take account of the essential differences between the accounts required by the two Acts. For example, where the Companies Act refers to the financial year of a company the regulations refer to the period to which the accounts relate.
Where the Companies Act requires for purposes of comparison figures relating to the previous financial year to be given, the regulations, which apply both to audited accounts covering twelve months and to interim accounts covering six months, permit the comparative figures in interim accounts to be either those from the last annual accounts or those from the previous interim accounts.
Regulation 4 requires a company, if it has subsidiaries, to prepare group accounts; and it applies in relation to those accounts, with exceptions and modifications, those of the Companies Act provisions concerned with group accounts. The modifications here are rather more significant than those in Regulation 1 and some appear in the Regulation itself as distinct from in the Schedule. For example, except when directors consider that the accounts of a subsidiary are of no real significance to depositors, the Board of Trade's permission is required if a subsidiary is to be omitted from group accounts.
The corresponding provision in the Companies Act permits omission without reference to the Board of Trade if the directors believe that inclusion would be impracticable or would be misleading. Those provisions of the Companies Act which are applied but are not set out in detail in the regula- 1218 tion itself are to be found in Part 2 of Schedule 1.
Regulation 2 requires the accounts to give information additional to that required by the Companies Act. The additional information required is set out in Part 1 of Schedule 2. This, I would suggest, is the most important part of these regulations. It requires a company to give information about the amount of money deposited with it, the dates when deposits become repayable, and the amount of money paid out as interest to depositors.
As most deposit-taking companies finance instalment credit agreements and so have assets in the form of amounts owed to them under such agreements, they are required to state the amount receivable at the balance sheet date under the agreements they have entered into or have had assigned to them. In order that the amount so shown should give as accurate an indication as possible of the position of the company, it is required to be stated after provision has been made for bad or doubtful debts; and for the same reason the company must show what part of it, if any, is revenue which, at the balance sheet date, had not yet been earned.
I said that a company might have agreements; assigned to it. It may also, under what are commonly referred to as block discounting arrangements, assign agreements; it has entered into or has previously had assigned to it. If it has assigned agreements, it may have acquired liabilities in respect of them, and if that should be the case paragraph 5 of the Schedule requires the company to state the amount of these liabilities and the fact that they arise from an assignment of agreements.
A depositor may be expected to be interested in the amount and the nature of the new instalment credit business his company has entered into in a recent period. Information of this kind is required by paragraph 4 of Part 1 of Schedule 2. He may also wish to know whether, from his point of view, a significant debt is owed to the company by a small number of persons, and, if it is, whether any of those persons are associated with the company. This point is dealt with in paragraph 7 of Part 1 of Schedule 2. Disclosure is required of the total of debts owed by persons each 1219 of whose debt exceeds 10 per cent. of the total amount owed to the company and also exceeds 10 per cent. of the total deposits made with the company. If one of the persons is an associated company, further information is required.
Regulation 3 applies only to companies a substantial part of whose activities consists of dealing in property. Such a company is required to give the information set out in Part 2 of Schedule 2. It is required to give information about its assets in the form of property and of loans secured on property, and about its income derived from property. It is also required to say whether the value it attributed to its property is based on cost or on valuation, and, if based on valuation, whether the valuation was made by an independent valuer.
Regulation 5 provides for certain statements from directors. The first two of these statements, about the main activities of the company during the period covered by the accounts, are the statements to which I have already referred as required by Section 13(3) of the Act. These statements are relevant to Section 12 of the Act which places on a company obligations towards its depositors if, after describing one activity in its advertisements for deposits, it thereafter carries on some other activity. The third statement, about the value at which the current assets shown in the balance sheet could be realisedin the ordinary course of business, is a stricter version of a similar provision in the Companies Act.
The Companies Act requires a statement if the directors are of the opinion that any of the current assets are not realisable at the value shown. The regulation requires either a statement that the directors are of the opinion that the current assets are realisable at the value shown or a note explaining why they are unable to make such a statement.
Finally, I come to Regulation 6 and Schedule 3, which are concerned with the auditing of accounts. I need say little about most of the matters on which the auditors are required to report as they are the same as the matters set out in the Companies Act, apart from the minor modifications made necessary by the differences between the two Acts. 1220 But I should briefly mention paragraph 3 of Schedule 3 as it implements an undertaking which the Economic Secretary gave in Committee.
In general, the profit and loss account in the first accounts which a company delivers under this Act will start from the date of a balance sheet, called in the Act a "relevant balance sheet", prepared in accordance with the provisions not of this Act but of the Companies Act. If, at the time of preparation of that balance sheet, the company was an exempt private company, its auditors may not have had the qualifications required of a person who audits accounts for the Protection of Depositors Act. When that is the case, this provision requires the auditor of the accounts to be delivered under this Act to satisfy himself as to his opening figures.
I apologise for the detail. I trust that it has not been too lengthy, and I commend the regulations to the House.
§ 11.35 p.m.
§ Mr. G. R. Mitchison (Kettering)
These regulations are of importance to the working of the Act. Objection was taken on Second Reading and in Committee to the reluctance of the Board of Trade to do anything but collect information to itself. Although we were told by the Economic Secretary to the Treasury that having collected the information, the trained minds of the Board of Trade would find it quite easy to evaluate it, their only remedy if they found the evaluation unsatisfactory was to get the company wound up.
In those circumstances, on this side of the House on Second Reading, particularly by the carefully considered speech of my hon. Friend the Member for Gloucester (Mr. Diamond), who has great experience in these matters, and again in Committee, we stressed the difficult position of the depositor, who is the person who is supposed to be protected under the Act, because the accounts would not get to him and he would never get the benefit of the evaluation by the trained minds of the Board of Trade, since there is nothing in the Act which requires the Department to do anything about the accounts when it has got them.
In the light of that, the Government's defence when it was suggested to them that something more should be done was 1221 to say that they would not put anything more into the Act, and they refused Amendments to improve directly the position of the depositor. They refused even to take other action, which was suggested to them, but they said that they would, at least, see that the accounts delivered to them were adequate.
I am not here to repeat our broad objections. All I am considering is whether, in the light of that attitude, what the Government have now done is sufficient. I say to the Minister of State that both my hon. Friend the Member for Gloucester and I, and, no doubt, other hon. Members have looked at what he said in Committee and what appears in the Regulations and we think that he has carried out exactly what he said he would do, except, possibly, on one point, and that is one concerning which I appreciate the Minister of State's difficulties.
The hon. Gentleman was asked in Committee whether, when particulars of the business were provided by the directors—this is the matter which now appears in Regulation 5(a)—the directors would give a little more than a general indication of what the company was doing. The Act will apply, so we were told, and such, too, was our own information, almost entirely to two classes of companies. One is hire-purchase companies and the other is the type of company called "certain property companies". One can get what is intended by this in Part 2 of Schedule 2 to the Regulations.
The "certain property companies" include companies which might well be of the kind which we have been discussing in a much more heated atmosphere earlier today. These are land development companies and bodies of that sort. They are not defined anywhere, but their character is clearly indicated by the terms of the Regulations. They may be some very odd bodies indeed, and bodies which require a great deal of supervision if the depositor is to have even the limited protection that is given him by the Act.
I shall not try to repeat, particularly at this hour of the night, a great deal that was said in debate today, but I feel certain that the Minister responsible and the Economic Secretary both realise that 1222 the type of activity which is being dealt with here is obviously one that is open to a certain abuse.
Indeed, if one goes to the origin of the Act and, therefore, of these regulations as a whole, one sees it arose out of some scandalous cases, or at any rate one scandalous case, three or four years ago, and there is no doubt that the thing has to be very tightly drawn. When we have Regulations of this sort we take the discretion, as I see it, very largely out of the hands of the Board of Trade. If somebody complies with the Regulations, then I cannot quite see what the Board of Trade can do to require any more from him, and if one looks through these Regulations as a whole one sees there a very great deal left to the directors.
I appreciate the point that the directors' opinion is the test in relation to group accounts, but they have not got the same object, and the opinion is not required for quite the same purpose, as in the Companies Act, as it is required here. Here again, there are various other references, in substituted paragraphs, to the directors' opinion. One of them is about a third of the way down column 2 on page 6 of the Regulations, and there is another one at the bottom of page 6, and there are a number of others. I quite appreciate that in all these respects they are following the broad lines of the Companies Act, but if that is the position, and the directors' opinion is to be the guiding matter in this case, one wonders whether the Government may have gone a little too far in leaving it to the directors.
This is particularly the case in one very important paragraph. There is to be annexed to any accounts a statement, a note, signed on behalf of the board—and this is the very first thing—of the main activities of the company and its subsidiaries if any".This point arose in Standing Committee, and towards the end of the proceedings the Government were asked whether this was going to be a general statement or not, and the answer they gave was that it was not going to be a general statement: we were to be given at any rate some detail. In these Regulations as they stand there is no qualification at all, and a director, as I see it, or a board of 1223 directors, would comply with this provision if they simply said something like, "We are a development company".
The sort of instance I suggested in Committee is the case of a depositor being asked to put up money for land development perhaps in his own town. That, of course, is land development, but the directors might intend to develop somewhere quite different, and yet the depositor has no means of judging, and the risks of land development in one place and in another might be substantially different, and the wishes of the depositor might be different. Therefore, if he is to be properly protected, I would have expected something more than this very general statement of what, after all, is perhaps the most important point in the whole Regulations—that is, to say what the activities of the company really are to be.
Having said that to the Minister I must say, in fairness, one more thing to him. I quite appreciate that the—let us call it a promise; I think that it was a promise—statement made in Committee was perhaps a rather difficult one to carry out. I quite appreciate the difficulties in saying any more, but I must say I would have hoped that the hon. Gentleman could have got a little bit further than appears here, and that he would have reserved something or another by way of an approval or disapproval by the Board of Trade, which would have given him an opportunity of saying, "This statement is far too general. There ought to be more than that in it". I would have thought he would have considered the possibility of supplementing these Regulations, as I think he could do, or replacing them at an early date by something which, if only in the light of experience, would show a little more of what the activities of the company were.
I have said what I intended to say, and it seems to me to be a point of real substance. It was mentioned very many times in the Committee, and I hope that we shall have an answer on it. I hope even more that the Board of Trade will be prepared to say that if, in the light of experience, it finds that these statements are insufficient, and that they tend to be particularly insufficient in the case of companies whose accounts are open 1224 to a certain amount of criticism on other grounds, then it will get them supplemented.
I see the hon. Gentleman looking at the Regulations. There are, of course, other statements in it, but I do not think they cover this point, and I have looked at them very carefully. They go round it. What is really required is a statement of the main activities of the company in some detail. I gave just now the instance of locality and the type of property, because it is land development companies about which I am thinking. It is not a question of freehold or leasehold. It is the kind of bricks and mortar that are to be developed or the kind of land that is going to be developed. That is the point, and it is not properly covered in the regulation.
It is late at night, and I do not think that it is a point upon which one would divide anyhow, but I hope that the hon. Gentleman will consider it not merely in the present but in the future and just let us know quite shortly what the views of the Board of Trade are and what the reason is for this very wide form of regulation on that point.
§ 11.47 p.m.
§ Mr. Green
If I may briefly reply to that, I took the hon. and learned Gentleman's point in Committee, as I think he realises. He has been extremely fair in what he has said about it. Clearly, there are difficulties of definition and about knowing just how far one can go. We ask in the fifth Regulation for a statement of the main activities of the company and subsidiaries, if any, and a statement of any change, since the commencement of the period in which the accounts were laid, in the main activities of the company. This is as far as we thought we could properly go at this stage.
None the less, I promise that what the hon. and learned Gentleman has said will be borne in mind. I believe that on Third Reading I used the phrase, which I hope was not inappropriate, that, this being a new area of legislation, experience in the application of the legislation was required. This is certainly a point on which we will use experience. It is a very appropriate thought to put across the Floor of the House to me. At this moment in time perhaps I should content myself by saying that I take the hon. and learned Gentleman's point, and if I or my successors can improve on this, they will seek to do it.
§ Mr. Mitchison
If I may remind the hon. Gentleman before he sits down, he will find it most clearly put in the Committee proceedings. I said:May I ask the Economic Secretary to confirm that when he refers to a general description "—that was, of the business—it will not, in the light of our discussions, be too general in relation to the company's business?The reply was:I absolutely take that point. The description must not be too general."—[OFFICIAL REPORT. Standing Committee A, 19th February, 1963; c. 488.]Well, it is quite general. I quite sincerely appreciate the difficulty of making it any more particular, but there was an undertaking that it must not be too general, and I hope that the matter will be considered if experience shows it to be necessary.
§ Question put and agreed to.
That the Protection of Depositors (Accounts) Regulations, 1963, a draft of which was laid before this House on 11th July, be approved.