§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Neubert.]
§ 5.5 pm
§ The Secretary of State for Trade and Industry (Mr. Norman Tebbit)
This debate provides an opportunity for the House to share its thoughts on developments in the wider debate on the financial services sector. We should not restrict ourselves to a narrow concept of "the City", which is an increasingly inadequate term to describe an array of services offered and sought in the wider financial markets throughout the world.
Nor should we be narrow-minded about investor protection, as though the investor's interest was in conflict with that of the market, its operators and other users. I hope to present my White Paper on the Government's policy towards these matters in the autumn, and I hope that it will be possible to bring forward a Bill in the 1985–86 Session. These issues have been widely discussed outside this House. I have given them a good deal of thought and have begun to reach some provisional conclusions, but before putting those to the House in the form of firm proposals, I think it right that I should listen to, and take account of, the views of the House, though I would be surprised if unanimity broke out on this issue today.
For many years these issues had been a rather non-controversial area, but in recent times a number of events have brought them to a greater prominence. First, there was the reference of the Stock Exchange practices to the Restrictive Practices Court; then, on 27 July last year, the announcement by my right hon. Friend the Member for Hertsmere (Mr. Parkinson) that the chairman of the Stock Exchange had put forward proposals which formed an adequate basis for legislation to withdraw the exchange from the ambit of the restrictive trade practices legislation; and then the publication, some six months later, of Professor Gower's proposals.
These events heaved a massive brick into the once tranquil waters of the City, sparking off a process of change and reform — both within the Stock Exchange and beyond it—more radical than the City has seen for many years, a long way from the so-called "sell out to the City" of which the ignorant and biased complained at the time.
For instance, the plans of the Stock Exchange for a new dealings system will demand new measures of investor protection. I have made plain the importance that I attach to this, and to meeting the December 1986 deadline. Hon. Members who follow these matters will doubtless raise them in detail during the debate. They will be aware that discussion continues about such issues as the publication of trading information.
This has been billed in some ways as a debate on Gower. It may go even wider than that. While views on Professor Gower's prescriptions may differ, I wish to pay tribute to him for providing what I think is a unique anatomy of one of the world's major financial centres.
For a while, it seemed that even informed opinion on what reforms were needed, and how they might be accomplished, was not merely divided but irretrievably fragmented. My impression is that the common ground is now reappearing.
The purpose of the debate is not for me to announce firm conclusions but to enable me to take account of the 50 views expressed, though I will indicate the direction in which my thoughts are moving. A number of important responses to the Gower report have emphasised that my Department should remain the regulatory authority, and it has certainly shown itself as a competent regulatory authority. But I see my role and that of the Department in rather broader terms—not only to regulate the industry but to foster it.
My first objective is that the financial services sector should be able to provide services to British industry and commerce, to private investors and to Government in the most efficient and economical way, and in a way that is fully competitive internationally. We start with some tremendous assets: the happy accident of a geographical situation midway between the Americas and the far east, our long-established reputation for speed and ingenuity, not to mention our freedom — one established by deliberate policy of this Government — from onerous exchange controls.
I hope the House needs no reminding of the major importance of the City to private sector industry and commerce and to Government. It is in the City that my right hon. Friend the Chancellor funds the PSBR, that industry and commerce seek capital, that individuals and institutions invest savings, and whence, in addition, we received a net contribution to our balance of payments surplus in 1983 of an estimated £2.6 billion.
My second objective is to see the maximum freedom for market forces to stimulate competition and encourage innovation. In matters such as openness to newcomers and price competition, the financial services sector — and some other parts of the services sector—still have some catching up to do.
Thirdly, I would aim for a regulatory framework which is responsive to international developments and is not merely a cover for protectionism. The best firms—big and small—in the City are well aware of the need to stay ahead of our competitors lest business moves overseas.
My fourth concern is that the British financial services sector should be both competitive and a "clean" place in which to do business, and moreover that it is seen to be so. Our regulatory framework must command the confidence of users, both here and abroad. It does not take many scandals to sully the reputation of a multitude of decent traders. There can be no conflict of interests in this matter between producer or provider on the one hand and the customer on the other. Unless the markets command the confidence of potential customers, here and abroad, they will not attract the business they need to prosper and develop.
Finally, I want to achieve a regulatory framework which is clear enough to shape, but not yet so tight as to cramp the pattern of structural change in the City, but which has the resilience not to be simply overrun by events.
One danger of Government regulation is that it can have an ossifying effect. As the House knows, it is difficult to find time to keep the law up to date with a fast developing business world. The rules, therefore, must be robust enough to cope with developments in practice and technique. They must be broadly-based, so that they are appropriate for the whole range of dealings, from professionals-only dealings to dealings more generally.
§ Mr. Tam Dalyell (Linlithgow)
On page 45, Gower recommends:Recognised self-regulatory agencies should be empowered to apply to the courts for the issue of subpoenas to compel attendance of witnesses and production of documents required in connection with their disciplinary proceedings.Does the right hon. Gentleman accept that crucial recommendation?
§ Mr. Tebbit
No; such matters will become clear in the White Paper. This is a debate in which I am seeking to set out the general thrust of my thinking. I shall listen to the views of the House before I come to firm conclusions. I am sure that that is the correct way in which to deal with the matter.
§ Mr. Tebbit
The hon. Gentleman has had more than a fair share of the time of the House. I think that I should proceed with my speech so that other hon. Members have the opportunity to catch Mr. Deputy Speaker's eye.
So much for my objectives. How might they best be secured? I see market forces as the most potent weapon available, and I propose to rely on them to the maximum extent feasible. That extent is not easy to define, but I should set out at least some of the requirements for market forces to operate effectively to that end.
First, there should always be a high standard of disclosure. There can be no effective play of market forces without good market information. All the relevant facts must be exposed in a way that enables the potential client to compare like with like and draw the appropriate conclusions. If the investor draws the wrong conclusions, on the basis of fair disclosure—venturing all or part of his savings on an avowedly speculative and high-risk venture which fails for straightforward commercial reasons — he cannot look to any regulator for compensation for losses arising from his own misjudgments.
Secondly, it means a rigorous application of competition policy, tolerating practices which inhibit competition only in so far as they are essential to provide reasonable protection against malpractice.
Thirdly, it means vigorous enforcement of the criminal law, as expressed in existing statutes such as the Theft Act 1968 and in a simplified and clearer investment law.
I was pleased that my right hon. Friend the Chancellor of the Exchequer in his recent perceptive and wide-ranging speech to the Bow Group emphasised that point. The House will be aware that my powers under section 109 of the Companies Act 1967 will support a new standing fraud investigation group, reporting to the Attorney-General, staffed by people from my Department, the office of the Director of Public Prosecutions and the police. The existing procedures for trying complicated fraud cases are under review also by the Roskill committee. I look forward to its report in due course. I firmly believe that a sharp increase in the probability of conviction of fraudsters would strengthen the hand of the overwhelming majority of honest City businesses and improve the confidence of their customers.
Those three elements will in my view go a long way towards meeting the objectives that I have outlined today, but alone they will not do enough to give investors the necessary confidence. Caveat emptor and pursuit of swindlers alone cannot suffice in this area. I am certain 52 that confidence cannot be achieved without supplementary measures aimed at making fraud and near fraud less likely to occur.
The orders signed over a year ago by my hon. Friend the Member for Reading, East (Sir G. Vaughan) to raise the standards required of licensed dealers in securities show the sort of things I have in mind by way of what I called "Supplementary Measures". For example, it is right that people in the investment business should be what are known as "fit and proper" persons. That implies, among other things, appropriate financial standing, relevant experience, and a background free from offences involving dishonesty. Similarly, we would expect to see business being conducted in a way that safeguarded the investor against malpractice. The ingredients might include separate client accounts, compensation, disclosure of interest in transactions for clients and the principle that in any conflict of interest the client's interest should be paramount.
We need to establish how best these and other appropriate conditions can be established. I should prefer the safeguards to be provided through institutions devised and largely administered by the financial services industry itself. I know that many Labour Members — who as Socialists support the centralist or corporatist approach—would no doubt rather see the Government in charge of every detail, even at the cost of a massive bureaucracy that would regulate the financial services sector to death. They should consider first the advantages of self-regulation. It means that practitioners, close to the intricacies of their various businesses, run their own affairs. Such self-regulatory agencies can enforce not just the letter, but the spirit, of their rules; and they will if we ensure that regulation is in their own best interests.
The agencies should be equipped to act quickly and flexibly and to pay for themselves, since the financial services industry and its users reap the benefits of a clean and healthy market.
§ Mr. Nicholas Budgen (Wolverhampton, South-West)
My right hon. Friend said that he thought that his Department should be the main regulatory body. What role does he assign to the Bank of England in supervising those markets?
§ Mr. Tebbit
I think that my hon. Friend slightly misheard me. I said that my Department had a good record as a regulatory authority—it is a very competent one—not that it should look for a new empire. I know that the Governor of the Bank of England has no wish to add to the bank's formal regulatory responsibilities, and I am sure that he is right. I do not believe that there is a difference between my Department and the Governor on these issues.
§ Mr. Hugh Dykes (Harrow, East)
I appreciate that this is a preliminary debate, but there is an important point in connection with the Bank of England's plans to draw up a system for gilt-edged dealing, the Stock Exchange being responsible for the other dealing systems. Is there not a danger that in so doing, and switching jobbers and brokers to primary dealers and broker-dealers, it will create a closed shop, even unwittingly? Will my right hon. Friend give a pledge that that will be deliberately avoided?
§ Mr. Tebbit
I shall wait, if I may, to see the final conclusions that are reached on that point. The Bank of England is, of course, a not inconsiderable customer in the 53 market. The fear that has been expressed is that if conclusions were reached about the way in which that market should be operated it might prejudice conclusions about the way in which other parts of the market, which might not have the same requirement, should operate. I am sure that the Stock Exchange Council is well aware of those considerations. I was much encouraged by the fact that in the last few days the council was able to make a unanimous report which bore on some of those problems.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
This is an important point. While I fully accept what the Secretary of State says about the value of self-regulating bodies, is it not essential that there should be some back-up provisions? That is the crucial aspect—whether it is the Bank of England or some other body.
§ Mr. Tebbit
The right hon. Gentleman has come to the point that I was about to make. Of course these self-regulatory arrangements need to be underpinned by statute while at the same time leaving a flexible operation that can adapt to changing business circumstances.
I believe that the institutions — the self-regulatory authorities as they have come to be known—should be relatively few in number and based on functions or types of business activity rather than on traditional patterns. They should include lay members, users as well as practitioners, to guard against the danger of them becoming closed shops or cosy clubs.
The House will be aware of the small advisory groups established with my blessing and that of my right hon. Friend the Chancellor of the Exchequer. One deals with insurance and is chaired by Mr. Fields, the chairman of the Life Offices Association, and the other is chaired by Mr. Jacomb of Kleinwort, Benson and is interested in the whole of the securities industry outside insurance. I hope that they will advise on workable systems of self-regulatory bodies for the investment and insurance industries.
While I await the advice with interest, I cannot necessarily be bound by it any more than I can be bound by that of the many other informed bodies and individuals who have been kind enough to offer advice. I hope that the Governor's group will help us to tackle some of the difficulties that a system of self-regulatory agencies would doubtless present. For example, how might such a system deal with the grey area; with overlapping functions; with diverse functions and potential conflict of interest? Who will regulate those firms or institutions—an increasing number, growing not least because of our action on the Stock Exchange—which do not fit straightforwardly into a single SRA? Should there be—this goes back to the point made by the right hon. Gentleman—as many have suggested, an intermediate or co-ordinating body to liaise between Government and the agencies?
We should need to resolve first whether such a body is neccessary and, secondly, if so, what form it should take. I am sure that hon. Members who take part in the debate will put their views on these complex matters on record.
I shall end by saying what I think about these matters at present. I have not yet come to my final conclusions, but I am inclined to the view that a number of self-regulatory authorities should be set up on a functional basis. There should be as few as possible and they should cover as much of the area as possible; and, though voluntary bodies, they should have statutory backing. If 54 there were but one SRA — clearly most unlikely — it would need no "intermediate authority". It would be all things. It would, in effect, be a voluntary Securities and Exchange Commission. If there were to be a proliferation of SRAs, a co-ordinating body—the intermediate body—will be inevitable.
I sense a degree of movement of informed opinion in recent weeks towards toning down the ideas of the enthusiasts for a Securities and Exchange Commission and an acknowledgement of a possible role for an intermediate body among those who were formerly devoted to the system of first-tier SRAs alone. However, I am still prepared to listen to the arguments and to be convinced one way or the other. However we operate the system, it is clear that the SRAs will need to be seen to be responsive to the needs of the investors., as I have said, and not just to become cosy clubs regulating their own affairs for the benefit of their own members.
§ Mr. Jonathan Aitken (Thanet, South)
I fully understand and support my right hon. Friend's enthusiasm for these self-regulatory authorities, but will he take care to ensure that they have the necessary teeth to be seen to do the job properly? Is my right hon. Friend aware that the pattern of self-regulation set by Lloyd's of London—the last legislation from his Department—has resulted in circumstances that are akin to trying to clean out the Augean stables with a toothbrush? This is woefully inadequate, and much stronger powers are necessary if this side of the City is to be regulated properly.
§ Mr. Tebbit
I cannot agree with my hon. Friend's analogy of the clean-up exercise. The form and thrust of my speech must be plain, because once again someone has asked a question about the paragraph to which I propose to come.
§ Sir Anthony Grant
—and following the intervention by my hon. Friend the Member for Thanet, South (Mr. Aitken), is my right hon. Friend aware that the criticism, if criticism there be, of the regulations flowing from the Lloyd's Act 1982 are that they are too strenuous and too detailed, not that they are too weak?
§ Mr. Tebbit
I am not going to become involved in a discussion on the size of the toothbrush or the extent of the clearing-up exercise, but the SRAs will need power to discipline members, and there will need to be an effective appeal mechanism against expulsion or exclusion from the market, and powerful incentives for would-be traders to operate within rather than outside the SRAs.
I believe that it is right at this stage for the House to give its views, which I fear may not be unanimous, but I hope that at least we shall find some degree of unanimity on the future of the financial sector and upon its vital importance to the country. I hope that we shall find a reasonable degree of unanimity on the approach of the so-called SRAs. I should be particularly grateful for the views of hon. Members on whether an intermediate authority is needed and, if so, what sort of powers it should have and how it should be operated.
I am sure that, above all, we shall agree that the financial services sector must have a proper regulatory 55 system. I hope that the debate will mark a further step towards a consensus on how the future might best be assured in relation to the regulatory systems.
§ Mr. Tebbit
I am firmly of the opinion that the deadline of December 1986, which was entered into in the agreement between my right hon. Friend the Chancellor of the Exchequer and the Stock Exchange, must be met. Sir Nicholas Goodison was kind enough to make it plain to me recently that it is the view of the Stock Exchange Council that that deadline can be met.
§ Mr. Peter Shore (Bethnal Green and Stepney)
I shall comment on the speech of the Secretary of State for Trade and Industry before putting to the House the tentative views of the Opposition.
First, I express my gratitude and, I believe, that of most hon. Members to Professor Gower for the quality of his report, the clarity of its analysis, the detail of his proposals, the methodical and comprehensive consultation with virtually all the interests involved and his remarkable industry in providing not merely a part I report, but shortly, and with the assistance of Sir Arthur Stainton, formerly the first parliamentary counsel, providing us with a part II Bill to implement his recommendations. This is a remarkable achievement and Professor Gower deserves the thanks of the House.
I make plain the great importance which the Opposition attach to the necessary protection of investors from, as Professor Gower succinctly put it,ignorant fools as well as from convicted crooks.Wealth is still unevenly shared, but there has been a rapid growth of compulsory or quasi-compulsory saving, principally in the form of pension funds and the massive growth of owner-occupation, mortgage lending and building society accounts, together with the traditional taking out of life and industrial insurance policies. There can be no doubt that that means that millions of our fellow countrymen, many with quite modest incomes and savings, have a direct interest in effective investment protection and defence against financial fraudsters.
As to the approach of the Secretary of State, I shall not cavil at his prospective offer of a White Paper later in the autumn. It is right on the Adjournment—although we have had to wait for it—to have a fairly open debate. It makes good sense to hear what the House has to say, as there are many hon. Members on both sides of the House who have a great deal to contribute from their own direct experience. However, the right hon. Gentleman has missed something of an opportunity. He has underplayed his role, perhaps uncharacteristically — he is not normally accused of lacking in self-assertion—and has not given a sufficient lead in terms of the direction of his thinking. At this stage of the debate, the House and many outside would have welcomed that.
The right hon. Gentleman should not necessarily have reached conclusions, but he should have given the House a further steer. That is my judgment on his speech, and I should be surprised if it were not shared by a substantial 56 number of people both in the House and outside. Later, I shall address two or three of the interesting and difficult questions with which the Gower report presents us.
§ Mr. Tebbit
The right hon. Gentleman must accept that if I had given anything beyond the steer that I have given, I should have specified the precise place at which I intended to arrive in my White Paper. That would have been the wrong way to approach this issue. This is a matter on which there are not partisan positions and no God-given solutions to the problems. We have to find the solutions in a constructive way.
§ Mr. Shore
This is not a matter of partisan division, but it is a matter of giving sufficient intellectual leadership and analysis to enable others more easily to formulate their views and to try to reach conclusions.
Common sense suggests, as the right hon. Gentleman suggested, that there will be sectors where the search for greater security and protection could conflict with the broad economic objective of internationally competitive and efficient markets. This conflict is more apparent than real, because nothing is more likely to damage long-term confidence in markets than situations where, through lack of regulation of investor protection, large-scale and continuing frauds are allowed to occur.
A balance has to be struck and we would be foolish if we did not recognise that the immediate reason for establishing the Gower investigation was the string of collapses of stockbrokers and investment managers, including such well-known names as Hedderwick, Sterling Gumbar Norton Warberg and Halliday Simpson, not to mention the still more serious defaults at Lloyd's that were revealed shortly afterwards. It was that that gave the impetus and occasion for this latest and most searching review of the legislation and machinery for investment protection.
The central purpose is made manifest in the terms of reference, set out in July 1981 by the right hon. Gentleman's predecessor but two, the present Leader of the House. The terms of reference were:
It is important to remind ourselves of the main thrust of the Gower report, because recent ministerial speeches have tended to give investor protection a second place in the Government's approach to the securities market.
- "(a) to consider statutory protection now required by (i) private and (ii) business investors in securities and other property …
- (b) to consider the need for statutory control of dealers in securities, investment consultants and investment managers; and
- (c) to advise on the need for new legislation."
The Secretary of State for Trade and Industry broke an almost Trappist silence on the Gower report in a speech on 26 June, which he largely repeated today in the earlier part of his speech. In it, he outlined the main objectives of the change that he was seeking and saidfirst, I am keen to see a financial services sector able to provide services to British industry and commerce, private investors and Government in the most efficient and most cost effective way and which is internationally competitive. That, beyond all else, must be our main objective.That aim is very important but "beyond all else" — particularly in the context of this speech which was the Secretary of State's first response to the Gower report—must mean, and must have been intended to mean, above consideration for investor protection. That is a mistaken judgment. Adequate investor protection is crucial to the success of our financial services sector.
57 Furthermore, I can find no evidence to support the view that those financial services that are under statutory control, for example, general and life insurance, are in any way, as a consequence of such control, lacking in efficiency and therefore in competitiveness. I see no reason to disagree with Professor Gower's conclusions when he states that unless proposals along the lines that he has advanced are implementedfurther serious scandals undermining public and international confidence are … inevitable.He goes on to say, with the common sense that distinguishes the whole report, thatif they were implemented, scandals would not be wholly prevented, but I believe that they would be fewer and that when they occurred less irremediable damage would be suffered.We have to bear those obvious caveats in mind. We are seeking, not perfection, but a substantial improvement in the present regime.
As things now stand, we have an uneven and fragmented system for investment protection. Most of our main financial institutions are regulated by specific Acts of Parliament. Insurance companies are covered by recent legislation, such as the Acts of 1974, 1976, 1980 and 1981, and companies by the 1967 Act and the more recent 1980 Acts. Building societies have not been the subject of serious legislation for many years, while banks have been the subject of more recent legislation, in the form of the Banking Act 1979.
In addition, we have the Prevention of Fraud (Investments) Act 1958, which is of a general nature and seeks to deal with the dangers of irregularities and fraud over a wide area of financial services and markets. There are also a number of self-regulatory bodies or other agencies, with their own constitutions and rules of membership. The Stock Exchange is the most important of these, but the category also includes the take-over panel, the London Metal Exchange, the Gold Futures Exchange and the London International Financial Futures Exchange. There are also those markets—commodity markets come to mind—where self-regulation is either minimal or non-existent. There is a substantial range.
I do not think that many would be prepared to dispute Professor Gower's central conclusion—I am surprised that the right hon. Gentleman did not state this himself in fairly vigorous terms—that a new and more systematic regulatory system is now urgently required.
I mentioned earlier some of the cases which led to Professor Gower's appointment. He quotes in his report from the 1981 annual report of the Commissioner of the City of London police, who asserts that the problemstems from the inadequacy of legislation which exists for the purpose of protecting depositors and of controlling the activities of the companies in the business and handling funds on behalf of the investing public. The Acts have sought to control by registration and their failure arises from inadequacy in procedures for vetting applicants and for the lack of requirement for any controlling authority to exercise supervision over the trading of companies whose registration has been accepted. They"—the Acts—are ineffective because they cannot control the dishonest companies whose activities they were intended to curtail.The annual report of the Commissioner of the City of London police goes on:The result is that the Fraud Squad has been called upon to investigate the failure of investment companies whose financial difficulties could have been observed at a much earlier stage by a competent authority making standard supervisory checks, e.g. 58 examinations of audited accounts. The problem is likely to remain with us until legislation, regulation and control is made more effective.That has been the theme of successive annual reports of the City of London police.
The 1980 report of the City of London police described fraud as thegrowth industry of the 1970s",and noted that it increased fivefold during that decade. The returns of the City of London police show that in 1980 its fraud squad had 150 cases tinder investigation, involving £30 million; at the end of 1981 it had 90 substantial cases, involving £54 million; at the end of 1982 it had 96 substantial cases, involving £100 million; and at the end of 1983 there were no fewer than 103 cases under investigation, involving £115 million.
Therefore, Professor Gower is right to find the present statutory protection inadequate, and I certainly endorse his first and central proposal that the Prevention of Fraud (Investment) Act 1958 should now be replaced by a new and more powerful Investor Protection Act. The present system of registration must be changed, and again I agree with Professor Gower's proposal that a new Act, with minor exceptions,would make it a criminal offence to carry on any type of investment business unless registered".It is also important that registration should be with the Department of Trade and Industry or the commission, the rival merits of which I shall turn to later.
While Gower is entirely clear about the need for strengthening the basic investor protection statute, there is in his report—although, I think, not in his own mind—less clarity about the roles of self-regulation, of a Securities Commission and of the Department of Trade and Industry.
In Gower's first discussion document, published in January 1982, he made plain his preference then for a Securities Commission which would have executive, judicial and legislative powers over the whole spectrum of activities covered by the securities industry. While falling short of the scope of the American Securities and Exchange Commission — which I think, perhaps unnecessarily, strikes great terrors into many people in the City—nevertheless, it would be following down a path already well-trodden in Canada, Australia, New Zealand and Japan.
As Gower made plain in his January 1984 report—the one that we are discussing now — it was considerations of practical politics which moved him away from his own intellectual conviction and preference and to the advocacy of the Department of Trade and Industry as the principal statutory regulator. Gower discussed four possible options for undertaking that role — the Department of Trade and Industry, the Office of Fair Trading, the Bank of England, and the Securities Commission. I am sure that Gower was right not to recommend either the Office of Fair Trading or the Bank of England for the role. I think that he should have stuck to his own preference and advocated a Securities Commission. There are strong practical reasons for favouring that approach.
First, there is the usual problem—I say it with some experience of the Department concerned — of playing both a sponsoring and a regulatory role. I noted the stress which the Secretary of State put upon the sponsoring role 59 for the financial services which he foresaw for the Department of Trade and Industry. However, the two functions do not sit easily together.
Secondly, the skills needed for effective regulation of the markets are of a high order and require men and women who are accustomed to moving with the pace of market events. The Department of Trade and Industry has had many excellent people in its companies and other divisions, but it gives the impression—I think it is the reality — of lumbering behind its fast-moving adversaries.
Thirdly, there is the very practical problem that such is the difference in rewards between Civil Service jobs and equivalent jobs in the City that there is a very high turnover of top personnel in the Department of Trade and Industry. It is a real problem. On top of that, there are limitations on numbers, or tardiness in response to increased work loads, which are a clear drawback.
In his report Gower gives a rather striking illustration of the difficulties of trying to undertake the task by having a beefed-up Department of Trade and Industry, or the appropriate divisions of it. At the top of page 21, he says thatit has struck me as remarkable that in the relevant part of the Companies Legislation Division there is no post for a qualified lawyer or chartered accountant and that of 47 officials presently working in this area only four were in the division at the beginning of 1980.That is a fairly damning indictment. I am not damning the Secretary of State. I am saying that that in a sense is often how Departments work. I know that a contrary argument is put—
§ Mr. Tim Smith (Beaconsfield)
There is a simple answer. The legal advice is provided to the Department by the solicitor's branch, as the note in the report says, and the accountancy advice is provided by the accountancy services division of the Department.
§ Mr. Tebbit
I should not want to pose in the role of mediator between the right hon. Gentleman and my hon. Friend the Member for Beaconsfield (Mr. Smith), but I think the right hon. Gentleman and I would probably agree that in reality the position is somewhere between the two stark ones outlined by Gower and by my hon. Friend. We have a very good legal division and a very good accountancy services division. The turnover is lower, particularly in the legal division, as the right hon. Gentleman knows from his experience. I am glad that the right hon. Gentleman does not damn me, because in doing so he would damn himself as well, as one of my predecessors.
§ Mr. Shore
Given what has been happening in regard to company collapses and the volume of cases involving fraud, I should be amazed if the division were on top of the work load that it now has.
It is my belief that most of the difficulties—I do not say all of them—which the Department of Trade and Industry has faced, and continues to face, would be overcome with an independent Securities Commission, although it would be a body, like the ECGD, which was responsible to the Secretary of State and, in its public reports, to this House. As Gower envisages, the commission would take the initiatives in proposing new regulations—although it would be for the Department and the House of Commons to approve them—and it would certainly be its responsibility to enforce all relevant regulations.
There is, of course, the closely related but separate question to which the right hon. Gentleman referred of dealing with fraud when particular cases have been identified. The present system is woefully inadequate. In relation to the magnitude of the task that they have to undertake, our fraud squads are pitifully undermanned. The length of the investigations is such that those involved have, long before the inspectors have identified their complex misdeeds, been able to leave the country and take most of their ill-gotten gains with them. Swiss bank accounts remain virtually impenetrable. I have noted the Chancellor's announcment of a new permanent fraud investigation group to be established in the department of the Director of Public Prosecutions early next year, and what he and his right hon. Friend the Secretary of State for Trade and Industry have had to say about the committee under the chairmanship of Lord Roskill, which is examining the conduct of serious fraud trials. There is much to do in that area, and we shall look forward to opportunities of debating these matters at a later stage when the proposals have become clearer.
§ Mr. Anthony Nelson (Chichester)
I should like to refer to the right hon. Gentleman's remarks about the structure of the commission, because we must understand exactly what the Opposition propose. Does he propose that there should be a commission over and above, and in addition to, self-regulatory agencies, or just that there should be a commission like the Securities Exchange Commission in the United States, with no self-regulating agencies, all the firms being directly supervised by the commission?
§ Mr. Gerald Bermingham (St. Helens, South)
Before the right hon. Gentleman considers self-regulatory agencies, may I ask whether he agrees that the art will be in catching fraud before it commences, rather than—with Roskill—dealing with the fraud after it has been committed? That must be at the heart of the legislation.
§ Mr. Shore
I entirely agree with my hon. Friend. My remarks about the Roskill committee were in parentheses. We must address our minds to the problem of how to prevent fraud, rather than how to pursue more successfully — although that is important, too — those who have broken through the screening and the net.
61 Self-regulatory agencies are inevitable and necessary for day-to-day regulations and to shoulder a substantial part of the enormous volume of work that regulation and invigilation requires. I doubt whether four such self-regulatory bodies — or even six — will be enough. However, that is another matter for more detailed discussion.
The main problems are, first, how to ensure that self-regulatory bodies are not primarily concerned simply with looking after themselves, but are turned directly upon the task of investor protection, and, secondly, who is to regulate the self-regulators.
In this context, the most important institution that we have to discuss is the Stock Exchange. The Stock Exchange has a long history of self-regulation, yet it was the failure and malpractice of a number of stockbroking firms which immediately preceded—if it did not lead to — the setting up of the Gower committee. The other danger, that the system of self-regulation could be a cover for a linked series of restricted practices, was the reason why the Stock Exchange rule book was referred to the Restrictive Trade Practices Court some years ago.
When we debated the Stock Exchange Bill on 22 November 1983, the right hon. Gentleman the Secretary of State went out of his way to praise the changes which, in the past few months, had taken place in the organisation of the Stock Exchange. He pointed out that lay members were now being appointed to the Council of the Stock Exchange; that a new membership appeals body had been set up; that non-members of the Stock Exchange would be able to serve as non-executive directors of limited corporate members of the exchange; and that minimum commissions were to be dismantled.
I do not wish to go over that debate again, except to remind the House that, for the Opposition at any rate, the virtue of having that Restrictive Trade Practices Court inquiry was to increase understanding of the major changes taking place in the Stock Exchange and to be able to discuss, in an informed way, the implications of those changes for investor protection.
The truth is that whether or not, under scrutiny, the system would have been justified, the previously established rules of the Stock Exchange provided a threefold defence for the investor. First, there was the system of minimum commissions. Secondly, there was the single capacity system, and, above all, the rule that required a stockbroker to act as an agent, not as a principal. Thirdly, there was the rule which forbade outside interests from acquiring a dominant stake in broking firms. Those were formidable barriers to conflicts of interests, and formidable guarantees for the investors.
§ Mr. Shore
Yes, and compensation, which has been there throughout.
All that protection—except compensation—is to be swept away by 31 December 1986 and-as most of us suspect—at a substantially earlier date. However, what is to be put in its place remains obscure. What is clear, however, is that the new rules of the Stock Exchange are too important to be left entirely to the Stock Exchange Council itself. It is precisely such a function of examination and approval that an independent Securities Commission could be expected to undertake.
The task of regulating the self-regulators will be far better accomplished by a self-standing Securities 62 Commission than it would be by either the Bank of England or by an attempt to revive the near-spectral Council for the Securities Industry. There may be some who think that that council could form an alternative to an independent Securities Commission. I refer them to pages 24 and 25 of the Gower report, and I should like to quote from the report's penultimate sentence on the matter. It says thatthere is a limit beyond which the relationship between Governmental regulation and self-regulation ceases to be a partnership and becomes a takeover. For the CSI to undertake the Statutory role envisaged for a commission would exceed that limit — in effect, would be a takeover of the CSI by the Government".The case against that suggestion is cogently stated in those words.
The Governor of the Bank of England is awaiting the report of his recently-chosen 10-man council. The Stock Exchange is about to reveal the proposed rules of its new trading system. Those rules, incidentally, were not among the subjects of the discussion document put before council members in April. There are also the working groups to which the Secretary of State referred, covering insurance and the other markets. With so much going on, it is indeed right that we should wait — although, I trust, not for very much longer—for the White Paper, or perhaps the White Paper with green edges, to which the Secretary of State referred in his opening speech.
We need a White Paper which addresses itself at least to the questions that I have raised today, so that we can focus upon the proposals and problems that we have to overcome, and do so in a more concentrated way, well before the legislation is introduced.
§ Mr. Peter Tapsell (East Lindsey)
I should begin by declaring an interest as I have tried to earn my living in various sectors of the City of London for the past 30 years. I am a member of the London Stock Exchange and a shareholder in the stockbroking firm for which I work.
I speak wholly and solely for myself. I do not know whether any of the 65 partners in my firm would agree with anything that I am about to say and I certainly do not speak for any wider group. As I have some serious reservations about what has happened in the City during the past 12 months and about what is projected to happen in the next couple of years, perhaps I should begin by saying what I favour and what I believe in. What I believe in can be summarised under seven headings. Perhaps I should add that I believe in them because they are in the national interest. I believe in fixed commissions, in single capacity dealing, in self-regulation, in the maintenance of the highest standards of business ethics and investor protection, in the giving of objective and independent investment advice to clients and in the preservation of the importance of the City of London as a great international financial centre under British ownership and British control.
The events that have stemmed from the agreement between the chairman of the London Stock Exchange and my right hon. Friend the Member for Hertsmere (Mr. Parkinson) about one year ago, which led immediately to the proposed abolition of fixed commissions, put my other six priorities at risk. No one who was present when my right hon. Friend the Member for Hertsmere announced his agreement, and certainly nobody who reads the debate in Hansard, could have believed that, only 12 months 63 later, we should be discussing these matters in such a wholly transformed atmosphere. Even the Gower report now looks "old hat" as it discusses matters that would have been overtaken by events. Although the measured and reasonable presentation of my right hon. Friend the Secretary of State today would not have led one to guess it, everyone who reads a financial newspaper and anyone who enters a City luncheon room will know that the City is in a state of revolutionary flux and is deeply worried about its future.
In my speech on the Restrictive Trade Practices (Stock Exchange) Bill on 30 November last year, I said that I thought that the proposed abolition of fixed commissions would prove a great disaster for the City and Britain. That is still my view. There is not much point labouring that aspect now as it seems to be water under the bridge. I am afraid that I shall probably feel more strengthened in that view as the years go by and I shall not be surprised if it is eventually thought wise to reintroduce fixed commissions.
I do not believe that the whole of the rest of our financial system, which is well geared to the British national character, can work without some central lever on which everyone can depend. The analogies with the United States seem extremely far fetched. I have gone back and forth to Wall street for the past 25 years and I know the Japanese and German markets rather less well. They all have their strengths and weaknesses. The fact remains that the British system suits the British character and it has evolved because of that. People who think that it is possible suddenly to transform the London Stock Exchange and City institutions generally into an extension of Wall street do not understand this. It would be rather like turning the House of Commons into Congress or the Senate. Above all, anyone who claims to be a Tory should understand that a few academics, financial journalists, civil servants and politicians, who do not give the impression of having made great fortunes because of their profound feeling for financial markets, cannot suddenly reorganise an institution that has grown up over the centuries. Moreover, it has served the country extremely well and helped us to win every war from the time of Louis
§ Mr. Budgen
I am extremely attracted by my hon. Friend's argument. Will he explain why it is necessary for stockbroking firms to attract a great deal of capital to operate more efficiently? If one third of its share capital is bought for a vast sum by an outside institution, how does that add to a company's operating capital?
§ Mr. Tapsell
I do not want to give a great lecture on the workings of the City, but I shall try to answer my hon. Friend briefly. At present, stockbrokers deal as agents. Therefore, if someone telephones me and tells me to sell $100 million worth of United States bonds and invest them in yen bonds, I do not need much money to do so. I need only a telex machine or a telephone. It is the type of transaction that I or my colleagues do almost every day of the week, if not in that size. However, if we have to become principals, to run a book and to take into our own ownership that $100 million worth of bonds and perhaps hold it for a few days or weeks in the hope of finding a seller of Japanese bonds at the right price to match it, we need massive capital. The only way in which to get massive capital is from the banks which, to judge from the 64 international monetary situation, are neither overflowing with money nor terribly secure. Nevertheless, they are anxious to put money into stockbroking firms. I entirely agree that the 29.9 per cent. will provide a wholly inadequate amount of capital for that task. That is why there is pressure to go up to 49 per cent. and even to 100 per cent. Therein lies the danger, as the big money is American, German and Japanese. Many leading stockbroking firms might either pass under foreign control or find that foreigners start new stockbroking operations in London. However, I do not want to be too distracted from the main thrust of my argument.
§ Mr. Tim Renton (Mid-Sussex)
I entirely understand my hon. Friend's defence of the ancien régime in the Stock Exchange. As my brother has for many years been a partner in the same firm of stockbrokers as my hon. Friend, I am delighted to know—as I do—that it has been successful. Surely the growing dealings in leading British blue chips offshore, notably in New York in American depository receipts, is a clear sign that if nothing is done to the present system and unless more flexibility is added to it, there is a great danger of even leading British stockbroking firms such as my hon. Friend's losing out to other markets which are much more flexible.
§ Mr. Tapsell
It is my view and experience that the movement towards dealings in United Kingdom stocks on Wall street has been almost entirely due to stamp duty. The 2 per cent. stamp duty which, too late in the day, has now been reduced to 1 per cent. in the Budget made it impossible to compete in London. One therefore had to deal in New York. If we had not had to pay 2 per cent. stamp duty, the problem would not have arisen. Even 1 per cent. stamp duty makes a big difference. The price at which one deals in New York or London is almost identical but the Americans pocket the 1 per cent. difference.
The implications of the Parkinson-Goodison agreement, if I might use that colloquialism, were not understood at the time. If they had been, there would not have been this great drama of rapid change. It is astonishing that the full implications of abolishing fixed commissions were not understood at the time. When my old, dear and late friend John Davies was appointed Secretary of State for Trade and Industry in 1970 he found a group of civil servants who were keen to get rid of fixed commissions. He asked me to talk to him about it. I explained then that if fixed commissions were abolished, one would inevitably have to be abandon single-capacity dealing and everything which has flowed from it.
When Government Departments have an attractive idea on file, they try it on every Minister of any Government until they find a buyer. They eventually found a buyer in the present deputy leader of the Labour party, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). It is to be regretted that since 1974 successive Conservative Secretaries of State did not reverse his decision to put the matter to the Restrictive Trade Practices Court, which put the Stock Exchange into its unhappy position. It is to the credit of my right hon. Friend the Member for Hertsmere that he seized that nettle.
However, for the Stock Exchange and the City the damage had to a considerable extent been done. We now face a damage limitation operation. Let me spell out the knock-on effects of the abolition of fixed commissions. 65 When one gets rid of fixed commissions, the tremendous drop in the incomes of stockbroking firms makes it virtually impossible to continue with single capacity. They must become market makers to make sufficient money to continue, and to become market makers they need enormous sums of capital
Dual capacity will create all the problems, as is evident. The irony is that during the last Session, having found many scandals in Lloyd's of London and having concluded after endless debates that they stemmed primarily from dual capacity, we imposed single capacity on Lloyd's to overcome scandals and fraud. Yet in this Session, although we still have a Conservative majority and Government, we are doing the opposite with the Stock Exchange. No Minister has attempted to explain why what was right for Lloyd's is wrong for the Stock Exchange.
I realise that Lloyd's and the Stock Exchange are not exactly analogous. Their business differs greatly. Yet the basic problem of dual capacity is the built-in conflict of interest. My experience in the City is that almost everyone is honest. During 30 years of dealing, usually through dealers, often in large amounts and usually on the telephone, I have been involved in only three disputes about settlement. Two of those were with overseas institutions. It is extremely rare in the City of London to meet anyone who is not as good as his word. Some speeches today seemed to suggest that the City was infested with crooks and fraudsters, who were all out to do each other down. In any barrel of apples there will be the odd rotten one. One must guard against that and protect the public from it. One should not give the impression that that is what it is all about. The crook in the City is extremely rare. He is usually found fairly quickly and punished severely.
With the breakdown of single capacity and the movement into dual capacity — I am sorry to say this because I believe in self-regulation—we shall be driven step by step to something close to a full-blooded Securities Exchange Commission. The proliferation of self-regulation agencies sounds fine in theory, but each time there is a scandal there will be an outcry in the press and the Labour party to the effect that the SRA is not sufficiently strong, must he strengthened and that there must be appeals from it. Meanwhile the prestige of the City will be impaired, the authority of the Bank of England will be undermined and great political credit will be lost by a Conservative Government and especially Treasury Ministers.
Much as I regret saying it, if we are to follow this road we should forget about the SRAs and opt for a full-blooded securities commission. Professor Gower was right in his original recommendation, given the fact that we are opting for dual capacity, which I do not advocate.
The SEC in Wall street has a staff of more than 2,000, a budget of more than $100 million a year. Enormously highly paid lawyers scramble over everything, and everybody. Practically no investment advice can be put on paper for fear of being sued. The thought of having to move into that world fills me with horror. I am astonished that a Conservative Government should take steps that will lead to the establishment of this vast new Government bureaucracy, which will greatly reduce the efficiency, earning power and competitiveness of the City of London.
The irony is that, having said that that would get rid of single capacity, all the allegedly best brains in the City have been summoned by the Government and the Bank of 66 England to a committee to advise on building what are rather oddly called Chinese walls. They want to put us back into single capacity again while we are operating dual capacity. I do not know why Chinese walls are so called, but I have visited the Great Wall of China. It has this characteristic: It has never kept anybody in or out. It is merely an immensely big and long wall and every time a wave of invaders crossed it, the wall was made longer and bigger. That is exactly what will happen to the SRAs.
When President Nixon was taken to the Great Wall, he showed great respect. When his Chinese interpreter asked him what he thought of it, he reflected long and hard, and then said, "It is a great wall". I have not the smallest doubt that my right hon. and hon. Friends on the Treasury Bench will build a succession of great walls. I went on a bitterly cold day in January when the wind was howling across the wall and I had to hang on to my fur hat. I did not dare stop because various British statesmen, including the Prime Minister, had niches marking the points that they had reached. I was determined to get as far as they had before stopping. Otherwise I would have turned back. My interpreter said to me, "Mr. Tapsell, this bitter wind is the only free gift that China has ever had from Russia". I tell my right hon. Friend that a chill wind will blow across his Chinese walls to the Treasury during the next few years. I suspect that we shall lurch from scandal to scandal as a result of moving into dual capacity, particularly as it is to be internationalised.
The British tradition has been to act solely in the interests of the client. Since the abolition of single capacity in America, the American position has been to make "real" money by dealing on own account. Anything a client earns is subsidiary to that. The top people in any of the great American finance houses will confirm that they make all their big money by dealing in huge amounts as principals. The amount they receive in commission from their clients, which has been slashed to almost nothing, is derisory by comparison. I doubt whether that system will work here because even with an infusion of foreign capital I doubt whether we shall have the money to take enormous positions in foreign bonds and 24-hour trading.
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
I sympathise with that case. My hon. Friend makes a valid point about the SEC, the huge cost and the idea of protecting the investor. Does he agree that the facts show that there are more frauds on a much bigger scale than occurs in London, despite the Chinese wall? It may be why it is called the Chinese wall because everything can get over it.
§ Mr. Tapsell
I agree with my hon. Friend, who is an experienced stockbroker from a position slightly north of where I normally sit. I do not wish to be rude to our American friends because the standard of integrity of those whom I know is as high as anybody's. However, the fact is that the general standard of commercial ethics on Wall street is lower than that in the City of London. That is precisely why they need such an enormous paraphernalia of control.
As to the technical problems that will arise, it seems to be generally agreed that the market in the shares of smaller companies will be greatly reduced. Indeed, it will be difficult to find stockbroking firms that will wish to make a book in the shares of smaller companies. One of the strengths and glories of the London Stock Exchange has 67 been the enormous range of shares in which one can deal; I am talking not about size, but about the number of companies whose shares are quoted, which is vastly greater than on Wall street or any other stock market. Since the Conservative party is supposed to believe above all in bringing forward smaller businesses, and that the economic resurgence and future of Britain depends upon the small developing business, to pursue policies that will make it much more difficult for the small business to get its shares quoted and traded on the Stock Exchange seems extraordinary. However, it is inherent in the policy.
That brings me to the wider liquidity problem of the market, and especially gilts. The gilt market is vitally important to every Government if they are to fund their debt. The general belief of the people to whom I have talked who deal in the gilt market is that dual capacity will greatly reduce the liquidity of that market. One of the biggest operators in building society gilts, who has an enormous portfolio of gilts, told me that at present he can expect to deal with absolute confidentiality and without moving the market in 25 million shorts at any time; his estimate is that when dual capacity is introduced he will be able to deal in no more than 5 million shorts in any one place. The market will be slower, less liquid and less confidential. I cannot imagine why that should be in the interests of the Government.
If I may be allowed to take a leaf out of the book of Lord Wilson of Rievaulx and quote myself for a moment—I do it simply to save time—speaking in France to the annual conference of the Association of International Bond Dealers on 17 May this year, I said this to 2,000 bond dealers from 26 countries — [Interruption.] I mention that because no one challenged what I am about to quote in the prolonged question time that followed. I said this to an audience of people who deal professionally in British bonds:To what extent will the British bond market go 'off-shore'? The proposed dismantling of the minimum commission and single capacity arrangements in Britain highlights the question. The British bond market is the third most liquid bond market in the world. It is a perfect new market for 24 hour traders. The large US and Japanese institutional bond dealers, with their massive trading resources, have the capacity to run huge 24 hour books in British bonds and to dominate the British bond market from their Tokyo and New York offices while Britain sleeps. Hitherto, they have been prevented from doing so by the minimum commission rules of the London Stock Exchange and by the fact that only the London Jobbers have access to the British 'Market', in the form of the Government Broker. No doubt the British Government has a plan ready for dealing with this new possibility, but it has yet to be revealed".It has still to be revealed.Unless there is Governmental action, the capacity of the Bank of England to influence the British bond market may be reduced. The capacity of markets in other time zones to influence the British market will grow. I do not believe that any Government will wish to have as little influence over its domestic bond market as many of them at present have over their exchange rate"—a point which has more force to it today than when I made it in May.
On technical grounds, whether one is dealing with equities or gilts, the case for dual capacity must still be made, and no one has attempted to make it. I do not say that I am necessarily right, and anyone who is dogmatic about such complex matters is a fool, but these questions must be seriously examined in public before decisions are taken that will influence the country enormously. The 68 miners' strike, which naturally dominates our thinking, will be over in a few months, one hopes, and will be forgotten; but the decisions that we take during the next year about the organisation of the City of London will influence Britain's prosperity for a generation to come. The argument has not yet been fundamental enough.
§ The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Alex Fletcher)
My hon. Friend has referred several times to the important decisions that are being made about the future of the financial services sector. Presumably the eloquent points that he is making to the House today — I am delighted to hear them—have already been made in the City and on the Stock Exchange, because he should be aware that that is where the decisions are being made.
§ Mr. Tapsell
With great respect to my hon. Friend, the decisions are not being made there. The Council of the Stock Exchange was unanimous in wishing to retain fixed commissions and single capacity dealing. It has been pushed into this position, and the Bank of England and Ministers have been leap-frogging each other since the Parkinson-Goodison agreement with public speeches announcing suddenly that dual capacity was here and here to stay. We never hear a speech that does not contain a sudden new announcement with which the Stock Exchange must live. It is untrue to say that the decisions have been taken as a result of market forces. They are being imposed upon the Stock Exchange and the City by politicians.
§ Mr. Alex Fletcher
The decision on dual capacity was essentially made by the Stock Exchange. Recently the House passed some EC orders and the Government deliberately and happily avoided making a decision on whether there should be single or dual capacity on the Stock Exchange, leaving that matter for the practitioners.
§ Mr. Tapsell
I do not wish to argue this matter with my hon. Friend, but everyone whom I know in the City believes that the changes are being imposed from outside. A specific example—I could give him many—is that the chairman of the Stock Exchange, for whom I have the highest regard and who has given magnificent leadership to the Stock Exchange, has been asked repeatedly by members of the Stock Exchange in public and in private who he does not fight harder for single capacity. Every time his answer is that the Bank of England has told him that it wanted dual capacity in the gilt market and he deduces that if there had to be dual capacity there it had to be introduced everywhere. If the chairman of the Stock Exchange continues to say that, I assume that it is true.
I do not believe that the drive for dual capacity originates in the Bank of England, which is much too wise a body to commit itself to that view. The drive for dual capacity comes from Ministers, and the Bank of England is merely passing on the view of the Department of Trade and Industry and the Treasury. I may be wrong about that, but I know that the chairman of the Stock Exchange—I am not repeating a private conversation—has said many times publicly and privately that the Bank of England wants dual capacity in the gilt market. It is no good the Minister saying that the Stock Exchange is making the running in this matter and is evolving the change; that is not the case.
I urge my right hon. and hon. Friends, when considering the future and the White Paper, not to become 69 too caught up in the fashionable nostrum of the moment. As the House knows, I was sceptical about the claim that control of the money supply could solve all our problems between 1979 and 1981. I shall not rehearse all the arguments now, but there are some extraordinary nostrums. In the 1960s the fashionable thing was the industrial conglomerate. Now no one has a good word to say about the industrial conglomerate, but in the 1960s all the experts said that we should go for that. In the 1970s everyone said that we should go for consortium banks, but every such bank has been a failure and no one now believes that consortium banks are good.
Now we have reached the stage where the fashionable thing is for everyone to do everyone else's job. Only last week a Minister, or it may have been the Governor of the Bank of England, said that building societies would be free to turn themselves into banks or even stockbrokers. Because of this feeling that everybody can do everyone else's job, I could not understand why there was such an outcry when that unfortunate vet helped with an operation. It seemed to me wholly consistent with Government economic policy. Certainly in Lincolnshire the vets are very much better qualified to perform operations on human beings than the average building society manager is to run an equity portfolio. If we are to be honest, we should at least be consistent.
There has been a great deal of talk about capital. Of course that is important, but vastly more important than that is expertise, integrity and judgment. Those are in very short supply in the City as in politics and all other occupations. They cannot suddenly be produced by the wave of a wand. Lots of new conglomorate institutions playing around with hundreds of millions of extra dollars, yen and deutschmarks on the London market will be a disaster unless we have greatly improved the amount of expertise available to them.
We need only read of what happened to the Union Bank of Switzerland in the Eurodollar bond market recently to see how unwise it would be for the Halifax building society to be urged to move into that market next month—not that I have anything against the Halifax, which owns my house, but as a mortgagee I would prefer it to stick to the job at which it is expert.
I began with a reminiscence of a conversation with John Davies, and I wish to return to that period. I have probably been in the House and the City for far too long and have seen all this happen before. I have a strong sense of déjà vu about it.
When the Bank of England produced its Green Paper on "Competition and Credit Control" in 1971, the City press said how marvellous it all was, as did all my Right-wing friends who are now running the show. I was the only person who attacked the Green Paper publicly, which I did within three weeks of its publication. I received a letter from a very senior member of the Bank of England shortly afterwards expressing astonishment that someone with a City background and my experience should attack it. He said that the Green Paper was the thing that he was most honoured to have been connected with in his 40 years as a central banker, and he claimed that it would do wonderful things for Britain.
What I predicted in my speech on the Green Paper in 1971 is exactly what happened. It led to a massive increase in the money supply before anyone had heard of such a thing and before the statistics were much recorded. Ironically, the only three hon. Members who protested 70 about the rising money supply in 1973 were the present Leader of the House, the present Lord Bruce-Gardyne and me.
§ Mr. Tapsell
My hon. Friend is post-dating his remarks. If he looks at the speeches that I made in January and February 1973, of which I shall send him copies, he will see that I pointed to the dangerous rise in the money supply. But in 1973 Treasury Ministers were only just beginning to have the money supply figures put before them.
That is what was started by "Competition and Credit Control". It was followed by the property boom and the secondary banking crisis. That contributed as much as anything else to the destruction of that Conservative Administration.
I predict that if we now go forward with these policies, it will all end in tears—not only tears for the investor but tears for Ministers also.
§ Mr. Doug Hoyle (Warrington, North)
I start from a different standpoint from the hon. Member for East Lindsey (Mr. Tapsell), to whom I listened with rapt attention. As vice-president of ASTMS it is obvious that I am interested in those who work in the financial institutions and in those with small savings.
The hon. Member for East Lindsey said that the Government were moving the Stock Exchange into an extraordinary world, but to many ordinary people with whom I deal the Stock Exchange is an extraordinary world.
We talk of protection for the ordinary person and protection for the investor, but the two are now synonymous because many ordinary people now have savings that require protection. That is one of the reasons why I and many of my Labour colleagues welcome the Gower report. It is long overdue, because many ordinary people and trade unionists seek to protect their future by the purchase of life and endowment policies.
One of the difficulties about such schemes is that at present they do not extend to offshore contracts. The recent collapse of Signal caused panic among brokers because it left people unprotected. Many large brokers have been prepared to pay out. Indeed, I understand that the British Insurance Brokers Association is now advising brokers that if they intend to participate in unprotected investments they must draw that fact to the attention of those on whose behalf they make such investments. That should have been done a long time ago.
§ Mr. Bermingham
Does my hon. Friend agree that it would be even better if BIBA went further and made the broker responsible for the bad advice that he gives, in that if a broker advises on the validity of a policy, especially one with an offhsore base, he should be liable to damages if the policy goes down?
§ Mr. Hoyle
I could not agree more. My hon. Friend makes an extremely good point with which I entirely agree. In certain cases brokers have met such a commitment, but on a purely voluntary basis. I agree that they ought to be responsible for bad investment, and the risk that they take with small investors' money.
71 Unfortunately, because of the Government's policies, many workers are now becoming redundant. At the time it may seem as if they receive a large amount of redundancy, although to me it seems like a meagre amount. Many such people are now being advised on how to invest that money. In many cases such advice is sound, but in many other instances the advice is given by cheapskates and crooks or people who are running close to the wind. Consequently, some redundant workers have seen their redundancy pay vanish like snow overnight because of the bad investment advice that they have received. That in itself proves the need for protection.
Pension protection is also long overdue. That has been made even more urgent by today's disgraceful statement by the Secretary of State for Social Services that people will be able to make their own pension provision. Apparently they can remove their present pension and make their own provision. Unless protection is given to such people, when they reach retirement age they may find that they have no pension because they have made bad investments and have been taken like lambs to the slaughter by people against whom they have no protection.
For all these and other reasons I welcome the Gower proposals, with their emphasis on control, regulation and consumer protection. However, I part company from Gower when he suggests self-regulation because in my view, that is not good enough; indeed, in part of his analysis Professor Gower stresses the need for stronger and more powerful measures than self-regulation. In the kind of ocean in which people will be investing, which is infested by sharks and other predators, self-regulation on its own will not be effective.
The Government's agreement with Gower about self-regulation contrasts sharply with their attitude towards trade unions. They have brought in legislation to regulate the trade unions. That is another instance of the way in which the Government treat the interests of unions, which are there to protect workers, in one way, and take a different attitude towards the privileged and wealthy and their vested City interests.
If these institutions are left with a system of self-regulation, to whom will they be accountable? In my view that is not the way forward. The proper way forward is to establish a standing commission on a statutory basis which is responsible to Parliament. Its prime function should be that of consumer protection.
I instance as an example the legislation introduced by a Labour Government when they set up the Insurance Brokers Registration Council. It was done following the pressure of unions in the industry, such as my own. It was welcomed at the time, but it was not adequate to provide the necessary protection. It was found lacking because its powers were too few, its resources were insufficient and there were too many loopholes. People discovered that they could set themselves up as advisers and consultants and thus avoid the regulation that this body sought to impose. This has happened even in cases where the Insurance Brokers Registration Council has refused registration. The companies involved are still active. They have simply dropped the description "insurance broker" and they have become consultants and advisers. But whatever the nomenclature, if registration has been 72 refused their operations should be stopped. I point that out to show how, although the council was a good idea, it lacked power.
In his original discussion document, Professor Gower talked of the lack of an appropriate framework for pension schemes, and this needs urgent consideration. A new pensions Act is required to replace our ancient trust laws. It is on those laws that our present pension scheme edifice rests. We need a new Act, and it ought to provide a stronger role for the Occupational Pensions Board. That board ought to register each scheme, and investment managers and others involved in pension schemes should be brought within a regulatory framework.
Finally, there has to be some form of statutory control over the investment industry. I think that this theme will run through the speeches of others of my hon. Friends. Protection must be given to the public in this way. It must be provided by a statutory commission which is responsible to Parliament.
The commission needs to be charged with the task of administering a new investors' Act. That is the way forward. If we go down that path intermediaries of all kinds, regardless of the views of the City, must be subject to licensing and control. What is more, if the intermediaries are the agents of companies, proper training must be provided in the future.
I do not believe that self-regulating professional agencies can provide the protection that is needed for the ordinary investor against the frauds, rogues and cheats who operate in this area. Protection is essential because investment is now envisaged over a wider area. Being drawn into the investment net, ordinary people will now be providing their own pension funds, which in my view is a very dangerous path to follow. Only Government control can provide adequate protection for the investor.
This is a very important debate and it is one which will show the contrast between the approaches of the two sides of the House. Looking across to the Government Benches, I see many hon. Members with interests which they admit freely. They will be arguing the case for the City, as the hon. Member for East Lindsey did so eloquently, although I notice that some of his hon. Friends dissented from his views. But the Government are now sailing the ship in a way which sooner or later will lead to statutory control rather than self-regulation. They may start with a form of self-regulation, but it will be found that it is not enough and that sooner rather than later statutory controls will have to be introduced. As my hon. Friend the Member for St. Helens, South (Mr. Bermingham) said, the real danger is that often it is too late: if possible, we want to try to protect the consumer against the fraud and not allow him to lose his money and look for some way of protecting him after the horse has left the stable.
There is only one way that we can go forward, in my view, and here I move away from the Gower report. We must have statutory control, regulated by Parliament. Only in that way can the small investor be adequately protected. We should not be overawed by City interests.
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
This is a most interesting debate. I was fascinated by the contribution of my hon. Friend the Member for East Lindsey (Mr. Tapsell) who, like me, is a stockbroker, but 73 who, unlike me, represents the very largest in the City, whereas I am by nature and size of much more modest means.
The problem that the City faces was shown, in a way, by an intervention by the Parliamentary Under-Secretary of State during my hon. Friend's speech. The Under-Secretary seems to think that the Stock Exchange is putting forward all these ideas because it believes that they are in the best interests of the City. But the Stock Exchange is as free in its negotiations as Czechoslovakia was in its negotiations with Germany in 1936. It has to accept the inevitable. If only Ministers would not think that when they become Ministers they must be seen to be doing something and that all change is for the good.
Investment protection should be meant to protect not stockbrokers and institutions, which are well able to look after themselves, but investors. Under the existing system, there is overriding protection for investors. Before pressure was put on the Stock Exchange it went further than any other institution that I know of to protect investors and to make sure that brokers are honest and that the compensation fund; even in the dreadful days of 1973–74, protected every investor. I know of no other institution whose members have to let their regulatory body walk through their doors, at a moment's notice, and examine any piece of paper in their offices. I believe that that is right, and the Stock Exchange implemented that system, not because it was forced to do so, but because it realised that it was the only way to retain the confidence of investors.
It has been said that we must compete, but I have never seen London have any problems in competing with other countries. In Japan, America, South Africa, South America and elsewhere the reputation of the British investment world is higher than that of the investment business of any other country.
There are problems with free commission. Big grocers, such as Sainsbury's, can get the biggest discounts, and the biggest investors will make sure that they are charged much less commission and get a better price for their shares. The small investor will get a worse price and will almost undoubtedly pay a higher commission. I do not call that good Conservative change.
The Secretary of State and his cohorts talk as if the end of 1986 is a sacrosanct date—like looking forward to the end of a great war—but I beg them not to hang the small and medium-sized investor on the great urgency that 1986 must be the date. The changes that must be made if the small and medium-sized investor is to be protected are so profound that the Government should perhaps aim for 1986, but they should not put a set date ahead of the protection and the needs of the small investor.
It is said that the changes will help competition. I have never heard such nonsense. We shall have ever bigger conglomerates swallowing up ever more people and we shall be left, not with a freer marker, but with a much narrower market. We will have six to eight people deciding, like great mandarins, what prices are, where shares are dealt, what they are worth, and so on. Companies will be owned, not by individual investors, but by a few huge conglomerates, most of which will be Japanese or American.
The Government will have to decide what they mean by "competition" and what they mean by "British". To say that we live in a free market and that anything goes, which is what the Secretary of State said—as though we were 74 talking about a rummage sale at Marks and Spencer's—ignores the fact that the future of the City cannot be decided on the basis that everything is up for sale. We must have a British market and ensure that not everything is controlled from overseas. If we allow the City and our institutions and banks to come under foreign influence, who runs whom? It is important that much of the City and this country remains under British ownership.
§ Mr. Renton
My hon. Friend referred to the role of the small or private investor after the great changes have come about. Is it not at least noteworthy that in recent years the number of small and private investors has been falling in this country, but that between 1975, when minimum commission was abolished in New York, and 1981 the number of brokers diminished, but 28 per cent. more investors owned shares? The analogy with New York is not perfect, but surely that example shows that the changes will not necessarily be the death knell for the private investor, and may even be exactly the opposite.
§ Mr. Beaumont-Dark
I did not say that they would be the death knell, but I believe that they will be damaging. One of the differences between the Americans and us is that they have grown more prosperous since 1971, and the same cannot be said of this country.
If one believes that smaller companies have a big part to play—about 12,000 companies can be dealt with in this country—we must remember that if the market is closed into a few hands we shall be able to deal in fewer companies and that fewer companies are likely to get quotations for their shares. We shall head—some will approve of the move—towards banks and conglomerates controlling nearly every other company.
We shall not be allowed to turn back the clock. Anyone who thinks that we are talking about investment protection should ensure that the changes proposed are for the better. I do not believe that having a person acting for a buyer and a seller and acting as a principal will benefit the investor. He will be able to fix his price.
In spite of all the activities of the 2,000 people on the American Securities Exchange Commission, who crawl over everybody—the SEC costs $280 million a year to run—there are more frauds in America than there are on our Stock Exchange, which is run on a self-regulatory basis.
I wish to leave two thoughts with Ministers. First, are we really concerned about the small and medium-sized investor? If so, let us not look on 1986 as a set date. I hope that, instead of putting the date first, the Government will put the interests of investors first.
Secondly, I repeat the plea that I made in November. Will the Government give at least some thought to how the City is to be controlled? Does the Secretary of State think it a good idea that nearly all banks, insurance companies and brokers should be owned by the Japanese and the Americans? Does he care whether this country is controlled by overseas interests? If not, that is fair enough, but many hon. Members do care.
We do not want to resist change, but we do want to resist changes that will end up being a disaster for this country. If we are not careful, the events outlined by my hon. Friend the Member for East Lindsey could come about. People look at all the new ideas and say, "Aren't they marvellous?" Nearly every idea has been put forward as an improvement, but nearly every one has turned out 75 to be highly dangerous. We all know what happened with the secondary banking crisis and with the consortium banks. It was thought to be a good idea to own something overseas, but I bet that the Midland bank wishes that it had never heard of Crocker. What good did that do? It only took money away from this country. I hope that my hon. Friend the Under-Secretary of State will not be too glib or laid back, because if he is, what will be left of the City and the small and medium-sized investors?
§ 7 pm
§ Mr. Ian Wrigglesworth (Stockton, South)
This debate has been something of a rerun of our previous debate on the agreement between the chairman of the Stock Exchange and the former Secretary of State for Trade and Industry, and so far we have not concentrated sufficiently on the proposals contained in the Gower report. The agreement reached between those two inevitably has a profound impact on the City and has implications for the report's recommendations, but it is not central to that report, as it deals with many other parts of the City that are important but are not necessarily directly affected by the changes to the Stock Exchange.
I believe that the hon. Members for East Lindsey (Mr. Tapsell) and for Birmingham, Selly Oak (Mr. Beaumont-Dark) are misleading the House and the country in their rather reactionary approach to the reforms that are being introduced in the City. What has happened in the United States is not half as bleak and bad as they have made out. In The Economist of 14 July there is a very good report that demonstrates how in many respect, the market has flourished, consumers are better off and there are more investors on the Stock Exchange. Some of us happen to believe that it is time that the City, which has preached to the rest of the country about the need for competition, initiative and hard work, should undertake a little bit of that itself. I believe that the consumer will benefit from the increased competition that will result from these reforms.
However, as I believe the hon. Member for East Lindsey said, the agreement between the former Secretary of State and the chairman of the Stock Exchange was reached not to bring about the massive reforms now under way but to prevent them from taking place. I do not think that either he or the chairman of the Stock Exchange foresaw what would happen. I do not want to come between the hon. Member for East Lindsey and the Government Front Bench, but he should not blame the former Secretary of State for the agreement that he came to. He was probably trying to pursue the course that the hon. Gentleman wanted.
I echo the tribute paid to Professor Gower by the right hon. Member for Bethnal Green and Stepney (Mr. Shore). It is one of the best reports that I have seen for a long time. I say that not only because of its thoroughness and the wisdom of many of its recommendations, but because, as we have often found, such reports are of no use unless they take account of the politics of the subject matter. I believe that Professor Gower has taken into account the politics of the City, the House and the country generally. He has produced a masterly compromise between self-regulation and the role of Government. I endorse that compromise, because unlike some, I believe that the issue is not just about investor protection.
76 I join with those who have said that the City has a very good record of service to this country. Before the debate began, I checked on the way in which the City has developed over the past few years in terms of employment. Unlike many sectors of our economy, employment is a growth area in the City. I am sure that that will continue and, indeed, I hope that the City will continue to increase the employment opportunities that it offers for people in London and the south-east, with the spin-off that it has for other parts of the country. Thus, I do not want the City's operations to be damaged unnecessarily by new regulations.
The hon. Member for East Lindsey seemed almost to be against self-regulation, let alone state regulation. However, I should point out that Conservative Members sometimes hold up other countries as being great examples of free enterprise at work in all its glory, but they are much more regulated than the City will ever be under legislation at present on the statute book and under that proposed in the Gower report. I can think of two countries that are probably an archetypal example of that. The first is Hong Kong where, for much longer than in this country, there has been considerable legislation to control the operation of the Stock Exchange and to control the banking sphere. The second is the United States, where there has been much more regulation and, I think, too much. It is much too legalistic in its approach to these matters and gets tied up in hopeless knots, not only in this area, but in many others as well. It relies far too much on the law. There has been much more regulation in the United States than we have ever seen in this country, yet it has not prevented enterprise from flourishing, markets from developing or the economy from growing. Thus, although I do not want to go as far as the Americans have, Conservative Members should not suggest that legislation will necessarily gum up the works and stop the City developing.
I support the general thrust of the Gower report and should like to see the combined system of self-regulation under a statutory umbrella introduced. It is a right that we should have self-regulation, because it is much better to have the minimum regulation necessary to ensure that markets operate competitively and effectively, and that the interests of investors are assured. There are examples of that in certain parts of the City, but self-regulation should be extended to those areas in which it does not already exist.
With the provision for the appointment to self-regulatory agencies of representatives who are independent of the industry and representative of investors, we can ensure that that job is being done properly and adequately. I think it necessary that self-regulatory agencies should operate under an umbrella. The intermediary or co-ordinating body should not be the Department of Trade and Industry. Although some complimentary things have been said about that Department, I do not regard its history in these matters as being unstained. It has often not been as effective in policing our companies legislation as it might have been. In addition, given the constraints that exist on civil servants and Ministers, a Government Department is not the right sort of body to get its sticky fingers involved in supervising the City or, for that matter, very many other institutions. I should much prefer to see the commission suggested by Professor Gower being established independently of the Department and consisting of professionally qualified people who have experience, who 77 can do the job effectively on behalf of the public and investors, and can report to the Government, acting as a check on the work of the self-regulatory agencies.
§ Mr. Bermingham
How could a self-regulatory agency possibly regulate, for example, the doorstep sale of small insurance policies? Gower envisages much more than merely the movement of stocks and shares on the Stock Exchange. Does not the hon. Gentleman agree that the solution may lie not in one answer but in a combination of self and statutory regulation?
§ Mr. Wrigglesworth
I agree with the hon. Gentleman. It is not adequate just to set up new machinery. Indeed, the report recommends several legislative changes relating to the insurance sector which that sector does not oppose. They are overdue, and the law needs clarification. I am not sure that the distinction between investment insurance and protection insurance is as clear as it should be.
There is a case for clarification in new legislation. We certainly need the new legislation suggested in the report, as well as the institutional framework to police it. I accept that whatever regulatory framework one sets up someone will always attempt to get round it. There is always one bad apple in the barrel. We must ensure that as far as possible we protect investors by establishing the legal, institutional and regulatory framework necessary.
I am pleased that we are not proposing that the Bank of England should take greater responsibilities in these spheres than it already has. The bank has not asked for that. It has been said that it is difficult for a sponsoring body to act as a regulatory body. I believe that the bank is already too heavily involved in regulating the City. I have resisted extending that over many years. It is just about possible to justify the bank supervising the banking sphere because of its close connections, but I even have doubts about that. The bank has a specific role, central to the City's affairs, which makes it a customer, sponsor and spokesman for the City. That is inappropriate to the role of protecting the investor. I endorse the view that the Bank of England should not be given greater responsibilities in these spheres.
It is necessary for the City to accept the changes that are taking place. I have found in conversations with people involved in different industries in the City that there is a marked divide between the younger and newer people, and the longer established institutions and individuals in the City.
I am pleased that the hon. Member for East Lindsey was here to put the view of those who are resisting change, but I do not think that he claimed to speak for the whole of the City. I am sorry that we are not hearing the views of those on the Opposition side of the House who want to abolish the City.—[HON. MEMBERS: "Where are they?"] That is a good question. The only Opposition Members here are Labour's friends of the City rather than Labour's opponents of the City. I regret that. I can see that we shall not be given the views of hon. Members who represent Liverpool, Coventry or some parts of London who take a different view.
The report is a good compromise between self-regulation, voluntarism and a statutory framework. I hope that the Government will accept the recommendations and will not seek to give the Department of Trade and Industry statutory responsibility for supervising the self-regulatory agencies, but that they will give the responsibility to a 78 commission which is at arms length from the Department and which can perform the job for investors more effectively than civil servants in a Government Department.
§ Mr. Peter Hordern (Horsham)
I declare an interest. I was a member of the Stock Exchange for many years and I am now a member of Lloyd's and a director of investment trust companies. I have been interested in the City all my working life.
I enjoyed enormously the speech by my hon. Friend the Member for East Lindsey (Mr. Tapsell). It was most entertaining, but it sounded like a long lament for lost, or perhaps losing, days. Profound changes have taken place perhaps rather too quickly. It is most unlikely that they will be reversed. We have to think in terms of the present position and what might be done. I agree that Gower, who reported in January this year, is already out of date. If Gower knew the present position, he would have overcome his doubts about having a supervisory authority such as a Securities and Exchange Commission.
At the beginning of the report Gower states that regulation in the interests of investor protectionshould be no greater than is necessary to protect reasonable people from being made fools of.That is as far as one can reasonably go. Every investor should be able to deal with the City without the risk of falling foul of people who are more anxious to get business done than to give good advice. That is an important consideration.
Gower also said that self-regulating agencies would not secure freedom from the competition provisions in the treaty of Rome. Perhaps the Minister will tell us the exact position under the treaty of Rome and whether self-regulatory agencies will be sufficient. Will self-regulation be sufficient to give the investor the protection that he deserves? The changes have come about because of the change from agent to principal. It is a most important distinction. When a stockbroker acts for his client, he does so as an agent. His client knows that he is solely responsible for him. The stockbroker will give advice to his client, undeterred by any other considerations. It is beyond unerstanding to believe that the quality of advice which will in future be given by financial advisers will not be rather different from that which has obtained for many years.
If one is part of a large financial conglomerate, however well-intentioned one might be, one is bound to be influenced by the scale of wares that one has to sell in that financial conglomerate. The nature of the distinction between agents and principal is important to grasp. The responsibility of an agent is plain and well understood. It has worked well for many years.
I agree that the passing of the agent is to be lamented. We must now address our attention to what might take its place in the future. It has gone, not because of the abolition of minimum commissions, as so many people say, but because of the Government's need to sell their gilt-edged securities more efficiently. The reason for that is that the sale of Government securities and the transaction of business in Government securities is handled by two firms of jobbers. I have the greatest respect for both the firms. I have no doubt that they can carry on the business of selling Government stocks for a long time.
79 But the whole weight of placing Government funds on the market presently rests on a rather narrow base. It does not surprise me that the handling of Government debt will now be carried out by principals acting as they do on Wall street and forming a much wider and more broadly-based market. It is logical that if that happens in the gilt-edged market it should also happen in equities. However much we may object to the process, that will happen.
§ Mr. Alan Howarth
Does my hon. Friend agree that, if that is the reason, it is a rather odd reason, coming at a time when the Government's intention is to reduce the public sector borrowing requirement or even, over the horizon, to dispose of it? Therefore, if their requirements in funding diminish, why should they want a completely different system?
§ Mr. Hordern
I only wish that my hon. Friend were right, but I fear that such prognostications have been made before. Whoever handles Government debt will be as busily employed in future as he has been in the past. I like to think that he will be no more busily employed, and those of us who believe in the importance of Government debt and monetary control—and have done for much longer than my hon. Friend the Member for East Lindsey—hope that the new arrangements will be more than adequate and will not be too sorely tested.
There are practical questions involved. Because of the change from agent to principal, the client's interest will not be uppermost—it will be the success of the financial organisation and anyone who works within it. It is easy to observe the enormous rewards that are being offered in the City for responsible jobs — yet those jobs are no different in scope from being a bookie on a racecourse.
For every foreign exchange dealer who succeeds, because of the operation of the markets there is certain to be someone who fails. Substantial sums are being offered to foreign exchange dealers, a great deal of blood will be spilt over unsuccessful deals and many people will be dismissed. That is entirely a matter for them, but the increased investment in the financial institutions means that large results will be expected and short cuts will be taken. I am concerned that the investor should not be the victim of those short cuts.
We must consider whether the self-regulatory agencies are sufficient protection for the outside investor. My right hon. Friend the Secretary of State said that he was thinking about four or five such agencies to cover most of the aspects of the City. It would be a good idea if lay people were appointed to those bodies. I understand that the insurance body will have an ombudsman to whom those feeling aggrieved about their treatment can apply for redress. Even so, the self-regulatory bodies will be composed of people who know the business well and work in it.
Anyone who has looked at and experienced the operation of the Law Society and the protection of solicitors will know that that body is not always anxious to deal quickly with complaints about solicitors. I do not think that the primary objective of the self-regulatory agencies will be the protection of the client—it will be to promote the objectives of its industry and to ensure that the market operates properly.
Those are desirable objectives, but it is important in legislation to have primarily in mind the protection of the 80 investor. I doubt whether the forming of self-regulatory agencies will be sufficient to guarantee the proper protection of the investor.
Should the Department act as guardian of the investor? For all the reasons expressed by the right hon. Member for Bethnal Green and Stepney (Mr. Shore), I do not think that the Department is the right instrument. It does excellent work, but it cannot keep up with the fast and fleet footwork in the City. Therefore, I have reached the reluctant conclusion that we need an umbrella organisation. It does not matter what that is called — whether the SEC or anything else. I do not wish it to be as cumbersome an instrument as the SEC in the United States. I am sure that an umbrella organisation is required to which an aggrieved investor can appeal if he feels that the self-regulatory agencies have not given him sufficient protection.
What would be the nature of the task of such an organisation? It must have rights that are set out in legislation. For example, it should have the right to investigate any complaint, and have sufficient powers to do so. I also believe that the self-regulatory agencies should have the right to examine members' accounts whenever they wish to do so. It is not sufficient to say that, because members of the Council of the Stock Exchange have never had the right to examine members' accounts, lay members should not have that right if they so wish. The changes that have taken place have been rapid and important, and we must keep in mind the protection of the investor.
An umbrella organisation should have the power not only to investigate complaints but to pass on to the Director of Public Prosecutions any case that it believes has transgressed the law. I was attracted by the suggestion in the Gower report of composing a new form of commercial court. The treatment of fraud, the length of time taken to bring prosecutions to court and the number of frauds that take place are a disgrace. A special court could deal with commercial wrong-doers. The judge could be assisted by two lay people with commercial backgrounds and expertise to deal summarily with those who have broken the law. What is currently happening is a disgrace, especially the number of cases that are dropped because of the difficulty of persuading a jury of intricate financial frauds. I hope that when my hon. Friend the Under-Secretary replies he will consider—
§ Mr. Bermingham
I listened with interest to what the hon. Gentleman said about fraud trials. I appreciate that Roskill has not yet reported. Does he agree that the fundamental basis of any fraud is that it is a criminal offence and should be prosecuted as a criminal offence in a criminal court? If we accept that, the fastest way to obtain a prosecution is to give the supervisory board the right to prosecute.
§ Mr. Budgen
It might be better to have a specially qualified jury rather than a special court. There is a danger that if someone were acquitted by a special court the public would not have confidence in that court.
§ Mr. Hordern
I am grateful to my hon. Friend for that suggestion. It was one that I had not considered. I was discussing the recommendations in the Gower report. No doubt my hon. Friend will enlarge on his suggestion in his contribution.
81 Self-regulating agencies and some form of umbrella organisation are not the only forms of protection that are needed. There should be transparency in dealings, and interest should always be declared at every stage. It might be worth considering going beyond that, with the publication and registration of member firms' assets. Some banks do it automatically, with advertisements showing the size of their assets compared with the deposits that they have. The public has a right to know the net worth of any financial organisation with which it is dealing. The compensation fund should continue to exist in each of the different markets An ombudsman should be appointed to each of the self-regulating agencies and those SRAs should have lay members.
The publication of the White Paper will be an important event in the control of investment in the City in a fast-moving situation. Though many of my friends in the City do not believe it necessary, I believe that, on balance, there should be an umbrella organisation to supervise all the operations in the different markets of the City, and I hope that my right hon. Friend will take note of what is being said in this debate.
§ Mr. Stuart Bell (Middlesbrough)
It is a pleasure to speak following the hon. Member for Horsham (Mr. Hordern). I listened with interest to his objective view about the need for an umbrella organisation.
The hon. Member for Stockton, South (Mr. Wrigglesworth) said that no hon. Member was present from the Labour party who wished to abolish the City. That subject can perhaps be left for another debate on another occasion. While I have no pecuniary interest in what we are discussing, I should put on record the fact that I am a member of Lloyd's.
I have been reading a book about the City of London in the late 1950s and 1960s. The book, by Charles Gordon, is being serialised in The Sunday Times. That takes me back to a world I knew when a young man working in the City. I worked there as a typist, not as an employee of the distinguished firm which is represented by the hon. Member for East Lindsey (Mr. Tapsell). I worked in the City in the days of the bank rate trauma of 1957 and the inquiry that followed. I recall the stock market falling like a stone, waiting on the likes of Charles Clore to pick it up from the floor. I saw it picked up at later times by the British Motor Corporation and by Peninsular and Oriental.
Those days have a bearing on this debate because the world I then knew in the City was a world of bowler hats and rolled umbrellas. In that world, jobs went to placemen by appointment under the old boys' network. That world did not recognise merit other than the merit of selling short or quietly buying shares in a company, and then announcing a takeover bid and selling the shares as the price soared. I recollect one transaction involving a company owned by Charles Clore in which Mr. Clore justified the sale of shares in a rising market by saying that he wished to keep the price down.
To be sure, that world existed prior to the introduction of capital gains tax. Indeed, the transactions to which I have referred brought that tax about. It was a world, however, which the hon. Members for East Lindsey and for Birmingham, Selly Oak (Mr. Beaumont-Dark) will remember because it was a world of "My word is my bond".
82 When the bowler hats and umbrellas went, so, too, did the philosophy of one's word being one's bond. The pirates turned professional. Even the professionals now accept the need for regulation. There was a touch of inevitability in the remarks of the hon. Member for East Lindsey; the day had to come when we should end up with a full-blooded securities commission.
The question which preoccupies hon. Members in all parts of the House is whether there is self-regulation or regulation by Government fiat, edict or legislation. We welcome the open approach of the Secretary of State in stating his intention to publish a White Paper in the autumn, followed by legislation in the 1986–87 Session.
The real dilemma for the Government is whether they go the whole hog with a securities commission or let the City get on with it by way of self-regulating bodies. II is a genuine dilemma, well recognised by the City, which acts in some ways as though it were a race against both time and the Government. That view is justified by some of the remarks that have been made in this debate and by some comments in the weekend press.
My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) referred to the fact that 10 wise men had been appointed by the Governor of the Bank of England, and they would suggest an overall regulatory structure for the City of London and that they would have their plans ready by the end of the month. We note that the top insurance bodies met for the second time last Thursday to try to find a way of policing insurance salesmen and intermediaries. We all also note that tomorrow the Stock Exchange will describe in detail its plans to replace jobbers and brokers with competing market makers.
All of that suggests to me that it is being done to show the Government that the City is prepared to have some kind of self-regulation, but that it should be what it says and does not require outside interference. That reminds me of the Council for the Securities Industry, which was set up in 1978 as part of the City's defensive response to the Labour proposals of 1974 for greater statutory regulation. The City is now seeking, through its institutions, to preempt Government action by its own measures.
Much depends on the reasoning behind the self-regulation. The Labour party has long taken the view—it did so in a statement at the first party conference which I attended in 1975 — that industrial and economic planning must be supported by a coherent framework of financial planning. We have long been interested in—and we are not entirely satisfied that we have achieved it. despite many statements to the contrary, including one made by the Financial Secretary to the Treasury last week during the Report stage of the Finance Bill—increasing industrial investment.
We do not believe that economic equality is likely to be brought about by our becoming a share-owning democracy. We believe in a fundamental and irreversible shift in the balance of wealth and power to workers and their families, but that will hardly come about through the Stock Exchange.
We must also take into account the fact that share ownership is heavily concentrated in the hands of a few. Some years ago the Stock Exchange admitted that fewer than 5 per cent. of the adult population invested their money in shares. I doubt whether the position has changed dramatically since then. The market is in the hands of institutions, with market analysts and people who work 83 with computers and international telephones having open lines to other markets of the world. As often as not, the little investor is the last one on to a rising share and the last one out when it falls.
In the view of my hon. Friends and I, it is hardly likely that self-regulation will help that investor. Indeed, there is running through the Gower report a thread which is as much a part of England as rain is to cricket. It is that a fool and his money are soon parted and that there should be no investor protection for that sort of person. Gower said that the degree of regulation should be no greater than is necessary to protect reasonable people from being made fools of. That sentiment was echoed more strongly by the Secretary of State when he said that in a speculative high risk venture, which fails for straightforward commercial reasons, an investor cannot look to any recovery of losses arising from his own misjudgments. In short, if the private investor is fool enough to buy when the market value is high and sell when it is low, so be it. That principle would hardly merit much worth in what the Prime Minister would like to see—a share-owning democracy.
With interest rates increasing by two percentage points in a day and shares falling like a stone, it is not surprising that the instinct of the working man is to move away from rather than towards the stock market. Those working for ICI in the Teesside area — the hon. Member for Stockton, South knows of this—who participate in its shares schemes take the first available opportunity to sell their shares, regardless of the Prime Minister's exhortations. They are living proof that the country as a whole is not particularly worried about the concept of a share-owning democracy. It hardly augurs well for those who believe in a share-owning democracy to let it be too widely known that such a democracy is built on the premise that a fool and his money are soon parted, but that amateur investors are welcome and, indeed, invited so long as they leave their money behind when they go.
Self-regulation may provide a framework for the professionals in the City, who will always do well from their dealings. The Gower report will assist them in their professionalism, but an inter-related structure of self-regulatory agencies, backed by statute and supervised by the Department of Trade and Industry or a standing commission, will hardly assist the amateur punter. I am reminded of the Punch cartoon in which a man wishing to commit suicide will do so if it kills him. Similarly, if some people insist on pitting their money against the skill and expertise of professionals, all their savings in the bank will not help them.
We have not finished with the dilemma in which the Government find themselves — whether to have a securities commission or self-regulating bodies. A securities commission would have to deal with the mystique of the City, which has its own way of doing things. The hon. Member for East Lindsey said that the financial centre of the City is typically English and cannot be compared with the stock exchanges of Wall street and Japan. The City has habits and customs which go back hundreds of years and cannot be easily regulated by outside bodies. Those customs include the concept of fiduciary relationships, of agent and principal, and of gentlemen's agreements, which might not raise conflicts of interest between gentlemen but might well raise the eyebrow of a judge in a court of law. The Secretary of 84 State referred to the concept of caveat emptor, and made a salutary statement when he said that in a conflict of interest the clients' interest should be paramount.
Regularisation and regulation of such complexities in the City might kill the very markets that the Government are seeking to protect, making the investor feel less rather more secure, so that no move is made but that it has with it an accompanying writ. Hon. Members have referred to the possible benefits to solicitors, barristers and others in the legal profession from any additional complexities in the City. Lawyers rather than investors might benefit from a securities commission that does not know what it is about. We have heard a great deal of the securities commission set up in the United States in 1934 by President Roosevelt when there was no self-regulation. We have heard about its cost and how bureaucratic it was. The Gower report suggested a securities commission along the lines not of the one in the United States but of those in Canada and Australia. Professor Gower sought to point out the dangers to which I have referred and how to avoid the complexities and difficulties that any self-regulating body would discover.
The dangers and avoidance measures associated with a securities commission might apply equally to a self-standing commission, but its rules would not impose restrictions on competition greater than would be necessary for the protection of investors and the orderly conduct of the business or market. The Secretary of State said that the regulations could have an ossifying effect on the City.
My hon. Friend the Member for Warrington, North (Mr. Hoyle) referred to "predators". I believe that the world is full of predators and that, sooner or later, all good things must come to an end. Just as the bowler hat and umbrella and the concept of "my word is my bond" have gone from the City so, too, have the standards of integrity which the nation has a right to expect from its financial market place—not in all cases, but in sufficient cases for the Government to have inspired this report.
§ Mr. Bermingham
Does my hon. Friend not agree with me that there is a distinction between discipline and a code of conduct, which would be self-regulation, and the legality and illegality of the deed carried out, which could be regulated by statute? The distinction between the two should be made clear. That distinction has been and still is important in the City.
§ Mr. Bell
I agree with my hon. Friend's concept of a self-regulating body, the courts and certain criminal aspects. We are dealing with a structure, which the Labour party would like to see, within which the Department of Trade and Industry eventually has full responsibility with a self-standing commission. Below that level there is a series of self-regulating bodies.
Financial collapse always accompanies economic collapse, as we have seen from 1929 in the United States, through to the collapse of the second mortgage specialists and the secondary banks in 1974–75, to which the hon. Member for Selly Oak referred. The hon. Member for East Lindsey made an excellent dissertation on how that collapse occurred because of the Government's legislation and documentation in 1971 on competition and credit control. That led to a massive increase in the money supply and, therefore, to the bust of 1973.
Those of us with knowledge of the City will recall 17 December 1973 when credit controls were ruthlessly 85 imposed by the Chancellor of the Exchequer, leading to the collapse of the second mortgage specialists and the secondary banks. In 1981 a series of City brokerage firms collapsed. Those collapses led to the Secretary of State for Trade and Industry undertaking the review that we are debating.
The Opposition have no interest in financial, let alone economic, collapse. What has happened before can happen again — to an even greater extent if the Government persist in believing that the market is a law unto itself and does not need to be overviewed in the national interest. That market does not operate on what is real; it operates on what it perceives to be real, and because of the power of the market, such perceptions become self-fulfilling prophecies.
The fact that the Government are seeking at present to talk themselves out of a financial crisis will be of no consolation to people who see the markets talking themselves into one, and coming pretty close to demanding by their actions a series of public expenditure cuts, beginning with local authority capital spending cuts, to satisfy the markets' version of reality.
The Labour Opposition have not entirely abandoned hope of ever seizing again the commanding heights of the economy and requiring for that purpose an appropriately regulated City of London. We believe, therefore, in a securities commission with executive, judicial and delegated legislative powers, as described by my right hon. Friend the Member for Bethnal Green and Stepney. Those executive, judicial and delegated legislative powers would cover the whole of the securities industry.
Professor Gower has rightly pointed out that we would not be alone in that. I have already referred to the United States securities commission and similar institutions which have been set up in Canada and Australia. There are, of course, similar institutions in France and Belgium, our Common Market partners. That does not mean that we should abandon the present self-regulatory bodies—the Stock Exchange Council, the Panel on Take-Overs and Mergers or the Council for the Securities Industry. We recognise that there are enormous practical difficulties in bringing the diverse investing institutions and markets under direct statutory regulation.
The Labour party has accepted—its own report of the financial institutions study group says so—that it would be exceedingly difficult to define different activities tightly enough to ensure that those activities were separated to eliminate conflict of interest, and that the interpretation of the statutes and their application in particular cases would be constantly open to challenge in the courts.
My impression, as I read the Gower report, was that Professor Gower was dying to say that there should be a self-standing commission. In his recommendation, he consistently holds back from saying so forthrightly, contenting himself with a wink and a nod, possibly because he was not clear what the Government wanted. The Secretary of State was sufficiently opaque as to what the Government want. We hope that if there is opaqueness in relation to what the Secretary of State is thinking, he will rely upon the House to assist him in that thinking, and that this debate will be a constructive and worthwhile contribution to what happens to the securities industry of the City of London.
86 If Professor Gower were bold enough to widen his remit, not just to advise on the need for new legislation, but to prepare it, he should also have been more forthright in saying that he wished to have a securities commission.
It is difficult to see how the Council for the Securities Industry could retain its role as an umbrella and co-ordinating body of self-regulating agencies if a self-standing commission with a responsibility to the Department of Trade and Industry is to be set up.
Should the CSI be expanded along the lines recommended by Professor Gower, there may never be a self-standing commission. That would be detrimental to the City as a whole and detrimental to those markets which are not covered by the CSI and which may not have any satisfactory self-regulating bodies of their own. We know that at present the CSI is made up of users and practitioners of the securities industry. The professor has perceived that danger because he has declared that all the rules would be less vital if it were decided to establish a self-standing commission.
§ Mr. Shore
There is an ambiguity in what Gower says on that point. It is important to be clear that he is not recommending that the CSI should be revived and strengthened as a substitute for what was clearly his preference — a securities commission. He should be acquitted of that charge, although, in a curious way—because he is also thinking of what is acceptable to the Government as distinct from what is desirable—he refers to it again later.
§ Mr. Bell
I am grateful to my right hon. Friend for that intervention. I was seeking to say that should the CSI be expanded along the lines that Professor Gower recommends, there might never be a self-standing commission. Those were, my views of the likely consequences of strengthening the CSI rather than going whole hog for a securities commission. While I acquit Professor Gower, I take upon myself the responsibility of saying that I fear that that might be an unforeseen consequence of his recommendations.
In his report Professor Gower has drawn attention to the Wilson committee's criticism of the CSI, that it should strengthen its administrative infrastructure. Gower has described its principal organisational handicaps. He surmises that those handicaps will become more severe under the new regulatory structure. We therefore come to the point that my right hon. Friend assisted me with: whether by strengthening the CSI we somehow interpolate that as a new type of securities commission—a self-standing commission. I believe that that would be second best. If I may change metaphors, should the Government put the cart before the horse, we may end up with a strengthened CSI falling short of the full self-standing commission and, consequently, we would never have the self-standing commission for which I believe Professor Gower yearns and which has the support of the Opposition.
It is important that a Labour view on Labour documentation and thoroughness of investigation into the workings of the City should be put on record with the remarks that we have heard from my right hon. Friend. I wish that I could believe that the Secretary of State will pay more than lip service to the Gower report and not leave the City of London to regulate itself. I hope that he will grasp the nettle of a thorough, tough-minded securities 87 commission; that he will not leave the City of London in the hands of the professionals—the old boys on the same old-boy network, where scandals, when they arise, can be hushed up; where the losses can be swept under the carpet or into a Bank of England lifeboat; where money will continue to make money at the ultimate expense of the nation in increased bank rates, mortgage rates, reduced investment in manufacturing industry, losing rather than creating jobs, a world of money not a world of industry; and where, if there are fingers to be burnt, they will be those of the investing public. I am sure that Professor Gower did not have that in mind. It is not what the Opposition have in mind and I hope that it is not what the Secretary of State has in mind.
§ Mr. Anthony Nelson (Chichester)
I regret that, unlike some of my colleagues, I cannot start my speech with a declaration of some enormous shareholding in a profitable firm of stockbrokers I rise with some temerity as one of the first non-stockbrokers to speak from the Conservative Benches. However, I take no little interest in investor protection, and as one who submitted evidence to Professor Gower I hope that I may have something to contribute.
I listened with interest to the speech of the hon. Member for Middlesbrough (Mr. Bell), who seemed to exemplify the ideals about which he was preaching. He engaged in the familiar rhetoric of demanding an irreversible shift in wealth towards the working people, and reminded us that he started as a typist and is now a member of Lloyd's. If that is what he means by such a shift, that is the sort of property and asset-owning democracy which I, too, would like to encourage.
As the hon. Gentleman's speech progressed, he appeared to fall more between the views of his right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) and those of his hon. Friend the Member for Warrington, North (Mr. Hoyle) than he was prepared to admit. There appears to be a difference of opinion between Labour Members, which it is important to recognise and clarify. Some, like the right hon. Member for Bethnal Green and Stepney, believe, as I do, in a supervisory commission, with continued existence of self-regulating agencies under it. There are others—I do not know whether this was the body of the representation made by the Labour party in its document to Professor Gower—such as the hon. Member for Warrington, North who believe in all the paraphernalia of a full statutory commission, an abandonment of self-regulatory agencies interposed between the two, and full legalistic control.
I was surprised that the hon. Member for Warrington, North stopped there. I thought that he would go on to suggest the nationalisation of stockbrokers, but as so many banks seem to be taking over stockbrokers, and as the Labour party is still committed to the nationalisation of banks, he may regard that as a fait accompli.
The speech of the hon. Member for Warrington, North and that of my hon. Friend the Member for East Lindsey (Mr. Tapsell) marked the extreme parameters of this debate. My hon. Friend engaged in a valiant rearguard action for the City, but times have changed, and it behoves 88 us to consider much more carefully the need for greater protection of investors, a phrase which barely passed his lips in a speech of not inconsiderable length.
It is important to use this opportuntiy of debate to impress on my right hon. and hon. Friends on the Front Bench that there is a case, as my hon. Friend the Member for Horsham (Mr. Hordern) has made out, for some umbrella or supervisory body between the Department and the market with the self-regulating agencies. I should like to nudge my right hon. Friend the Secretary of State a little further down the line than I sensed his draft blueprint for the future regulation of investment would take him. He seemed to feel that at this stage he had to be persuaded that there was a case for such an intermediary body and that his judgment on whether to introduce it or propose it would depend on the number of self-regulatory agencies in existence. This was not the main criterion which Professor Gower intended in chapter 3 of his report when deciding whether there should be an intermediary commission or whether these powers should be invested in the Department of Trade and Industry.
If we are not to introduce such an intermediary body and are to rely on self-regulatory agencies, which are not themselves uncharted territory, for the Council of the Stock Exchange already exists, we are dealing with little more than the status quo. There will be no change in the present circumstances. We already have such self-regulatory agencies, and, apart from a securities Act which will update and amend the worst provisions of the prevention of fraud legislation, in all other respects the City will be broadly left as it is in terms of self-regulatory and investment markets. That will not be adequate.
This debate provides an important opportunity for the House to influence the future framework and regulation of the securities market. It is more essential that we do so today, when so many changes are taking place in the market, than when Professor Gower's review was commissioned back in 1981 following scandals involving Norton Warberg and other licensed security dealers, in which many people lost a large part of their savings.
The report is a valuable contribution to this debate, and I agree with much of the analysis and many of the detailed recommendations in it. However, it is not a Green Paper and I do not agree with the proposed advisory framework of relying on self-regulatory agencies, with a large gap between them and the supervisory powers of the Department of Trade and Industry. That is a minimalist approach, and the thrust of my right hon. Friend's speech was also minimalist, in terms of reform of the present system of self-regulation.
We need a new framework which, in striking the balance between the need for more adequate regulation and the need to preserve a significant amount of caveat emptor, will improve significantly the protection of investors and deter some of the worst malpractices which we have seen recently, and may see at an even worse level in the years to come.
In political terms, I sense that Parliament will not be satisfied with a framework of legislation which is minimalist and which, to all intents and purposes, preserves the existing system. Already we have seen, apart from the extremes of opinion to which I referred earlier, something which I hope will not be regarded as the politics of consent. That is some sort of middle consensus on both sides of the House—certainly from the hon. Member for Stockton, South (Mr. Wrigglesworth) representing the 89 SDP and my hon. Friend the Member for Horsham—concerned with the need for such greater regulation and a supervisory body. The arrival of financial supermarkets, the growing incidence and complexity of fraud cases, the consequences of uncovered positions in a bear market and the impact of current amalgamations on the interest of small investors will all require a more comprehensive and formal system of registration than we have now.
My right hon. Friend the Secretary of State also said that he felt that a supervisory body such as that which I would favour would not be necessary if the number of self-regulatory agencies was relatively small. I put it to him that in the evolution of the City it will not be possible to rely on a small or large number of self-regulatory agencies alone to police and to ensure common standards of propriety in the organisation of these financial and capital markets.
I can give an example. It is now current practice for major merchant banks to have, not only a dealing room which engages direct in the stock market through passing instructions to brokers, not only a dealing room which engages direct with other dealing rooms in other banks in the passing of instructions between principles, and so provide their own market, and not only an investment division which looks after advisory and non-discretionary portfolios on behalf of other people, but an underwriting department and a corporate finance department and, increasingly, shareholdings — minority and possibly majority in the course of time—in stockbroker and stock jobbing firms.
It is not enough to say and to hope that each of those aspects of one bank will be treated at arm's length and that each of those aspects, whether it is the dealing room, the corporate room or something else, can be channelled into different self-regulatory agencies, such as the Acceptance Houses Committee in the case of the merchant bank, or the Council of the Stock Exchange in the case of the investment dealing activities.
I can tell the House what the reality is from my experience. Everyone in the City knows that, despite the formal attempt to treat these activities at arm's length, the underwriting stock gets shoved on to the investment department, to be placed among the shareholders there. There is principal dealing by the dealers in the dealing room and by the managers in the investment division as well. All these divisions are mixed up together, and the same standards of propriety should apply to them all.
It is essential that, even if there are self-regulatory agencies which represent all these divisions, there is a supervisory body which can insist on the highest standards of behaviour and ensure that the interests of investors are more adequately protected. Therefore, a securities Act is needed which, as well as amending many unsatisfactory provisions of the Prevention of Fraud (Investments) Act, will recognise the supervisory commission. I do not care if that is a beefed-up CSI or a new statutory body, because the difference is purely one of nomenclature.
It is also essential that such a commission be recognised in law and made responsible for overseeing and co-ordinating the activities of the self-regulating agencies beneath it. The chairman of the commission—this is an important point—would be appointed by the Secretary of State for Trade and Industry and not by the Governor of the Bank of England. The chairman of the Council for the Securities Industry—the record of incisiveness and 90 leadership of the present chairman in the City leaves a great deal to be desired—is appointed by the Governor of the Bank of England.
My right hon. and hon. Friends will be aware that there is increasing suspicion in all parts of the House as to the involvement of the Bank of-England not in matters which are purely monetary or to do with placing the Government's debt, but in making qualitative judgments about the equity markets in which they should not be involved. Even though such an appointment as chairman would be made by the Secretary of State, he would be required to liaise and consult very closely with the Governor of the Bank of England on matters of mutual concern, such as, most obviously, the gilts market. They would have a common interest in policing that market and ensuring its efficiency.
It should be an offence to carry on business in securities unless registered with a self-regulatory agency which is represented on the supervisory commission. There should be no option, as Professor Gower recommends, for individual firms or SRAs to register direct with the Department of Trade and Industry. They should register with and be part of a self-regulatory agency and subscribe to its standards, or they should not be in the business at all.
Such a framework would be a considerable advance on the minimalist option put forward by Professor Gower and, I fear, currently being entertained by the Department of Trade and Industry. On the other hand, it would not amount to setting up a Securities and Exchange Commission such as has been established in the United States, as much of the supervisory and regulatory work would continue to be conducted through the SRAs.
It is a matter for the House and the Committee which considers any securities Bill to judge — it is a very important judgment — the balance of responsibilities between the supervisory commission and the SRAs. I am sure that there will be differences of view across the Floor of the House on that matter, but I believe that if we fail to institute such a commission we shall hasten the day when the full paraphernalia of a legal Securities and Exchange Commission will be demanded. I hope that my right hon. and hon. Friends have not set their minds against independent supervision and tougher regulation.
It would be an error of judgment to underestimate the scandals that may occur in the future. It would also be a mistake to assume that continuation of the status quo will be acceptable to this House, to investors or the public, or that total self-regulation is in some sense inherently desirable. Lest it be thought — I refer these remarks particularly to my right hon. Friend the Secretary of State — that greater regulation offends the free market philosopher, it is worth pointing out that the whole purpose of such a framework would be to ensure that the investment markets are, indeed, free and fair.
The worst sorts of activity in recent years, such as dawn raids mounted at short notice, and covert build-ups of shareholdings, have acted to the detriment of a free and fair market, because they have denied many people the opportunity to sell their stock at a certain price, and have sought to use the market mechanisms for wholly improper purposes. If we can regulate that sort of activity we may end up with a freer and fairer market — the sort of market to which my right hon. Friend ought to aspire and to which, if his words this afternoon are to be taken literally, he does indeed aspire.
91 The danger of limited reform is that insufficient account will be taken of the protection of investors. Too often the existing self-regulatory bodies are concerned with establishing working arrangements between investment firms which will avoid criticism, fraud or pecuniary loss. What is needed is a new commission which will orient its objectives and policies more overtly towards the interests of investors whom the market is there to serve. The danger of inadequate reform is that it will hasten the imposition of the full legal paraphernalia of an SEC, which would not be in the interests of the City of London or of investors.
The City and the Government should draw lessons from the Lloyd's Act and recognise that the writing is on the wall for the present system of unfettered self-regulation and that, if a full Securities and Exchange Commission is to be averted, a comprehensive and more adequate framework of supervision will need to replace the existing system.
§ Mr. Gerald Bermingham (St. Helens, South)
I agree with much of what has been said in the debate, from whichever side of the House it has come, but I am worried that the debate has tended to become too concentrated on the stock market, the Stock Exchange and the dealing in securities on that Stock Exchange. I would not diminish in any way the role which the stock market has to play in our financial institutions, but it is not the only field in which investment and investment securities are dealt with. Indeed, the Gower report ranged over a far wider and broader scope than the stock market.
There has been the odd scandal on the Stock Exchange, but in the past 100 years or so the rule of "My word is my bond" has been the rule of the Stock Exchange. In my dealings with many people in the market over many years I have always found that to be the case. Indeed, the House should recognise that the Stock Exchange has kept to that principle for a long time. Let us not begin by rushing in and assuming that all is wrong. Let us for once start at the other end and ask ourselves what is the objective that we seek to achieve.
During the speech of my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) I suggested to him that the object must surely be to prevent fraud rather than, through Roskill and others, to seek to cope with fraud once it has occurred. How do we prevent fraud? How do we prevent ordinary people from being taken for a ride? It is not often that an institution is taken for a ride. It is usually Mrs. Smith, with her £500 life savings, or Mr. Brown, with his redundancy money, as my hon. Friend the Member for Warrington, North (Mr. Hoyle) rightly said. Who takes them for a ride? It is not a stockbroker, but invariably a door-to-door salesman who comes along with the Bernie Cornfield type of insurance policy and tells the householder how to get rich quickly—"Pay £1,000 a year and in 20 years you will have £300,000 back." Unfortunately, people fall for it.
The lure of fool's gold is as old as time. Mr. Smith puts down his £1,000 and in the third year he finds that the offshore fund has decamped from one offshore site to another offshore site. I was about to say, Mr. Deputy Speaker, that the poor man has not a hope in hell. Certainly that is often where the door-to-door salesmen deserve to be sent in such cases, because the householder 92 has not a hope of getting back a penny of his investment. We have seen such frauds on many occasions in the past 20 years, and Gower was equally aiming at that sort of mischief.
If we start with the question, "How do we protect the man in the street?", we have to ask ourselves whether the ways in which certain of our institutions—not the large national ones, but those on the fringe—are currently constructed, controlled and regulated are satisfactory. The answer, regrettably, must be no.
The forms of investment range from buying shares through a stockbroker to trading in options, the metal markets, the gold market, various other forms of insurance market, option contracts, and so on. I agree with what the hon. Member for Chichester (Mr. Nelson) said about large trading houses. The reality is that there is no way in which we can persuade a company that part of the building should be regulated by one division and part of it by another. That just will not happen. The reality is that the people whom we permit to deal, trade, sell or advise in respect of various different types of investment contract have themselves to be regulated by some appropriate body.
That regulatory body must supervise—in much the same way as the British Medical Association, the Law. Society and the Bar Council—the terms and conditions on which people can enter the profession, for want of a better word. We must begin with the regulation of the conduct of persons who trade or deal in these matters. We must get the regulations right. We must ensure that the regulatory bodies have teeth to enforce the rules. That is where the crunch comes. We must, for example, make it a criminal offence to deal in any security without the appropriate licence.
Having reached that point, we have to ask ourselves the next question: how do we control the bodies that regulate? Regulation is concerned with discipline and codes of conduct. It does not necessarily involve itself with the law, or the question of what is or is not legal. Those two concepts are very different, but in discussing the Stock Exchange today there has been a tendency for hon. Members to mix them up. The idea of a Stock Exchange with its disciplinary body and its own code of conduct is fine, but some of us are talking about the legality or illegality of acts which can or cannot be carried out. There is a distinction, and we must not allow future legislation to blur that distinction.
I believe that the question of what should or should not be legal should be laid down by Parliament, and that there should be a separate commission whose duty it is to look after the regulatory bodies as they deal with each separate field of investment. At the end of the day, I do not necessarily want to see a large, octupus-like creature with tentacles everywhere. I want to see a clearly defined form of criminal law—an amendment of the Prevention of Frauds (Investment) Act, which is long overdue. We need to enable unlicensed dealers who deal in certain set ways to be prosecuted, and we need to ensure that the prosecution is speedy. If there were a Securities Commission—whatever it was called—with power to initiate prosecution, just as the police force can initiate prosecution, there would be speedy prosecutions and that would be a good thing.
The basic problem would, however, remain. I have already referred to it, with reference to Lord Roskill. We would be dealing with the result of the fraud. The way to avoid fraud is to ensure that those who deal in these 93 matters are properly regulated and supervised. 'There should be proper training and grounds for admission. People should know what they are doing, and the public should be able to trust them.
I should like to utter a cri de coeur on the question of advisers. It is an open secret that a lawyer who gives one the wrong advice can be sued. A stockbroker who gives the wrong advice can also be sued, as the Nicholson case showed many years ago. It should also be possible to sue an insurance broker or agent who gives one rotten advice. I see the Parliamentary Under-Secretary nodding in agreement. The key lies in training and in the supervision of the way in which the particular interest groups conduct and control the affairs of their members. The ultimate sanction should be the liability to answer for one's mistakes.
The Gower committee was formed in 1981 and reported in 1983. The world has moved on a long way between 1981 and 1983. We should approach the question of investor protection with the aim of ensuring that those who deal in the various investment markets are rightly trained, rightly controlled, and ultimately answerable personally for their mistakes. If we balance that objective with a commission to supervise the bodies which control the various groups, and give that commission the right to prosecute people for stepping outside the rules, we might give greater protection to those who seek to invest their savings in our own country. If this House could achieve that, we would make a great contribution to people's security.
§ Sir Anthony Grant (Cambridgeshire, South-West)
The hon. Member for St. Helens, South (Mr. Bermingham) has made an interesting speech. I shall not follow it, except in pointing out that, as a lawyer, the hon. Gentleman must know that it is possible to sue in negligence anyone who owes the duty of care, including stockbrokers and insurance brokers as well as lawyers and accountants. I have myself known such cases. We want to achieve a state of affairs where that does not need to be done, and people do not have to engage in the complexities of litigation.
I agreed with the right hon. Member for Bethnal Green and Stepney (Mr. Shore) that the Gower report is a remarkably able document. It is one of the best reports that we have seen. Professor Gower is to be congratulated. I do not, however, agree that the Government should commit themselves more firmly at this stage. This is not the right moment for commitment. I do not expect my hon. Friend to give any Government commitment today, other than to say that the Government have listened to the debate and will produce a White Paper—and that they will heed my remarks and those of hon. Members with whom I agree, and will disregard the remarks with which I do not agree.
The debate must be seen against a background of three factors. First, the City of London and its great institutions are vital to our economy. They have kept our economic ship afloat by their contribution to our invisible earnings for many years. Secondly, wider share ownership throughout the community is vital. Many years ago, I was a member of the wider share ownership council, with my late and much lamented colleague, Viscount Macmillan. We believed that it was in the public interest that the ownership of shares should be spread more widely.
94 The Opposition prattle about the need for a redistribution of wealth. The spread of the ownership of shares is one of the most important features of such a redistribution, and should be achieved not just indirectly through insurance polices, pension funds or trade unions but directly by participation through investment in the private sector. That is—or should be—in accordance with the Government's philosophy. In addition to spreading home ownership more widely, we should spread the ownership of British and other industries. I hope that the Government will seek to turn more earners into owners.
Thirdly, although the overwhelming majority of people operating in the City are honest and honourable men, there are opportunities for large-scale fraud of which a minority can take advantage. I agree with the hon. Member for St. Helens, South that for the vast majority of brokers and others operating in the City, the slogan "my word is my bond" applies, as it always has. However, there are scandals, and those who suffer by them may be tempted to comment "When a man says 'my word is my bond', one would be well advised to ask for his bond." It is essential that the City should have a good reputation. The City and the Government have an obligation to ensure that confidence exists, at home and abroad, in our institutions.
I am in the presence of many distinguished stockbrokers. There is my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark), my hon. Friend the Member for East Lindsey (Mr. Tapsell) and my hon. Friend the Member for Horsham (Mr. Hordern). In such company, I must tiptoe delicately when discussing Stock Exchange matters.
There seemed to be rather higher hopes for abolition of fixed commission than were justified. Some time ago I used to belong to the legal profession in which there was a tremendous hullabaloo about abolition of scale fees, such as for conveyancing. We were told that everything would be marvellous and that the customer and the consumer would benefit when scale fees were abolished. I do not think that there was any noticeable reduction in fees—indeed, they probably increased—but there was a great deal of uncertainty. There is an enormous advantage in having certainty, in knowing where one stands, what the commission will be and what the fee will be. I do not know whether abolition of fixed commission forced the need for dual capacity.
I was responsible for taking the Lloyd's Bill through the House. I recall that one major feature that was called for in the reform of Lloyd's was divestment, to separate the underwriting capacity from the brokering capacity. That was regarded as essential to fair dealing and the need for it to be seen that dealing was fair. I remember some distinguished stockbrokers saying, or writing in the press, that it was right to separate underwriting from brokering. We did so with loud approval from the public and, as far as I am aware, stockbrokers. Now the move is in another direction. Events have overtaken us and we are told that dual capacity is to come in.
Whatever decision the Government take, they should not neglect the interests of smaller brokers. When he agreed to the original deal, the smaller broker did not understand that dual capacity was to emerge. He is embarrassed about that and fears that he will be squeezed out by the great monoliths—the Bank of England, the big institutions and foreign companies. I make that plea to my hon. Friend the Minister as the smaller broker is 95 synonymous with the smaller investor. The Stock Exchange has today sent me a simple booklet entitled "An Introduction to the Buying and Selling of Shares." It is written in such simple language as to be offensive to some of my hon. Friends, but even I can understand it. It is clear that the Stock Exchange has in mind the need to encourage small private investors. I congratulate it on that.
§ Mr. Tom Sackville (Bolton, West)
Does my hon. Friend agree that the over-the-counter houses need some encouragement especially as, for example, shares quoted on the OTC are not allowed as collateral by banks and because we have the new threat of cowboy stockbrokers cold calling from Holland much the same market of private investors that the OTC is trying to appeal to?
§ Sir Anthony Grant
I do not pretend to be an expert on this matter. No doubt my hon. Friend is right. He has made his point.
I was pleased to see in the Gower report a reference to investment clubs. They are not to come within the purview of regulations, except in so far as they have a professional adviser. It is sad that investment clubs have fallen a little by the wayside. They started in the 1960s amid great enthusiasm and excitement. They were social and educational just as much as they were about making money. Indeed, they sometimes lost money but they provided knowledge of what was going on. I know that one such club comprised shop floor workers. They looked at the Financial Times each day even more avidly than they looked at the Daily Mirror. If they did that now, they would probably have a better idea of what is going on from the financial point of view. It is unfortunate that successive Governments, through their financial policies, have worked against investment clubs.
As to insurance, I declare an interest in Bowrings, which is a large firm of brokers, and it should be remembered that I took the Lloyd's Bill through the House. That Bill was concerned with Lloyd's internal matters. No outside policy holder suffered the loss of 1p as a result of the scandals that emerged in Lloyd's. The swindle was entirely internal. When I took that Bill through, some of my hon. Friends told me that it was too draconian. I am now told that it is only a toothbrush to clear out a stable. I have heard from Lloyd's that the measures that the new council is taking and the new powers that it is putting through have gone a long way to regulate the market and to restore confidence in Lloyd's, especially overseas and, in particular, in America. Rivals are only too keen to seize on a scandal to use it to their own advantage. I am told that the new regime is having a valuable effect and that Lloyd's is regaining its international reputation.
The Gower report refers to insurance, which should be studied carefully. I am aware that the British Insurance Association is conscious of the need for the highest possible standards if insurance is to be developed. As the hon. Member for St. Helens, South said, it is possible for fast-talking people to persuade rather simple and naive people to take out policies that they do not want. In general, however, the United Kingdom is under-insured as compared with many other western countries. Nothing should be done to inhibit the extension of proper and responsible insurance, which is a valuable bulwark against misfortune.
96 I saw in The Times a reference to the need for some control over clients' money. It is now 18 years since I introduced a private Member's Bill which dealt with clients' money accounts. It never got past Second Reading but there was widespread support for it. I could never understand why lawyers who held clients' money had to put it in a separate account and to account for the interest whereas estate agents, stockbrokers and others did not. I hope that that might be included in any legislation that the Government introduce.
As to how we might achieve what we want, by instinct I prefer self-regulation to Government regulation. It has proved much more sensible and effective. I was interested in the possibility of self-regulating agencies but I have listened carefully to what my hon. Friends the Members for Chichester (Mr. Nelson) and for Horsham have said about there being a danger of a self-regulation agency becoming no more than a trade association which looks after the interests only of its members. I should like some form of self-standing commission, but I am sure that the Department of Trade and Industry is not the right body to do the regulation. I served for four years in that Department—before the time of my right hon. Friend the present Secretary of State and the right hon. Member for Bethnal Green and Stepney.
The civil servants in the Department of Trade and Industry were the finest, most dedicated, most honourable and most intelligent in the world, let alone Britain. The system, however, is not geared to policing so dynamic and varied an activity as private investment. The hard work of the lawyers in that Department has been referred to. The hard work is not on advising on or dealing with frauds and scandals but with advising on the mass of legislation that successive Governments have put through. The Department is too slow and ponderous, and tends to shut the stable door after the horse has bolted. When it moves into action, it is rather like a steamroller being used to crush the ants in the strawberry bed. What we really need in the City garden is a swift, efficient and selective weedkiller that will not inhibit the principal dynamic growth. I shall not pursue these analogies further because I might get into grave difficulties. I am against the Department being involved. There should be some form of self-standing commission with statutory backing. It might be necessary for the Government to find out how Lloyd's has worked and where it has gone wrong.
Professor Gower and the House throw the ball back into the Government's court. We look forward with interest to the White Paper and ultimately to the legislation. I only hope that Ministers will have in the forefront of their minds the need to maintain the City and its institutions as the leading body in the financial world in Britain's interest, and at the same time the need not to neglect to spread share ownership widely throughout the community and to recognise the needs of the small man. Without that wider share ownership, the foundations of free enterprise and a free society will fail.
§ Mr. Tam Dalyell (Linlithgow)
The hon. Member for Cambridgeshire, South-West (Sir A. Grant) told us that we would learn more about the happenings in the Daily Mirror from the Financial Times than from the Daily Mirror. I spent the weekend in Scotland defending Bob Maxwell in relation to the Sunday Mail and the Daily Record, and, 97 whatever view one takes about that, the power of the City institutions cannot be in doubt. The Maxwell-Mirror episode underlines that.
I hope that I can be forgiven for saying that life in the House has been less picturesque than it was when Bob Maxwell was the Member for Buckingham. Hon. Members who remember that time will recall how he entertained us. There is more good in him than bad. He is one of the few men to have created an industry for the development of scientific literature, which has given wealth and jobs to his fellow countrymen.
I received at three days' notice an invitation to friends in the City to meet Professor Gower, and so had to read his report quickly before going to Sheppards and Chase. It revealed how well written it was. I congratulate Professor Gower on his clarity and on the extremely good English in which he presents this complex document. The Minister has worked hard on the subject and will appreciate, as much as other hon. Members, Professor Gower's work.
There is a delicate balance between self-regulation and statutory control. Like other hon. Members, I tiptoe with trepidation into the affairs of the City of London, but my view is that the protection of investors should be a matter for a commission. The running of the markets—I do not mind which of my colleagues hears this—is best left to the professionals who make the day-to-day judgments. I am not sure that tampering with the running of the markets will do us much good in the medium or long term.
However, the trouble is that there is a new type of integrated financial service group, which combines functions that used to be separate. There are potential conflicts of interest within the new institutions where there were few conflicts of interest before. I agree strongly with the hon. Member for Chichester (Mr. Nelson) and my hon. Friend the Member for St. Helens, South (Mr. Bermingham) that there are conflicts of interest which cannot be resolved by different departments of one company.
Some hours ago I interrupted the Secretary of Slate to ask a question. I repeat it now. On page 45, paragraph 5, recommendation (b) of the Gower report states:Recognised self-regulatory agencies should be empowered to apply to the courts for the issue of subpoenas to compel attendance of witnesses and production of documents required in connection with their disciplinary proceedings.The Government may not have made up their mind, but there are crucial questions, and this is one, about which we are entitled to know their thinking. If they do not accept that recommendation, it will lead to all sorts of other problems.
The financial markets are becoming increasingly fragmented. Ten years ago private investors would seldom get involved, for example, in commodity markets or financial futures, but now it is different. The business of investment is no longer confined to City banks and to a comparatively few brokers. For that and other reasons, we need some sort of commission. On top of that we have increasingly international markets. Self-regulation may be all right when it applies to a small group of firms with similar interests and a major commitment to the activity being regulated, but it is far less satisfactory if it attempts to cover diversified giants with customers and shareholders in other markets and other countries.
98 When the Minister replies—he has applied his mind in great detail to the subject—I hope that he will tell us about the new developments which can come under the generic heading of,the internationalising of the markets.I wonder whether it is possible to draft rules that are tight enough to protect investors, and flexible enough to encourage desirable competition? I listened carefully to the opening statement of the Secretary of State and I think that he said that it was a question of how the back-up to such rules would be provided.
On the question of whether there should be an overall supervisory function within the Board of Trade—I do not mind saying this as a Socialist because I believe it to be true—there should be constraints from politicians. Inevitably the function cannot be detached from Government Departments, and, therefore, political decision making. That subject may not lend itself to what will inevitably be seen, justifiably or unjustifiably, as direct political control.
On the Prevention of Fraud (Investments) Act 1958, which should be brought up to date — whether there should be an intermediary authority is another matter—I come down strongly on the side of a securities commission. The American securities commission does not seem to be the bee's knees. Nevertheless, I am on the side of a securities commission rather than of the Department of Trade and Industry. I am not criticising Department of Trade and Industry civil servants, but a sponsoring role does not go easily with the regulatory role. As my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) said, the two formulas do not sit easily together. I do not think that it is a question of slavishness in the DTI but of whether or not it is a job for civil servants. I do not believe that it is.
Other hon. Members wish to speak, but we would fail in our duty if we did not ask about commodity markets. That is an important part of the Gower report. Page 38, recommendation (c), is crucial. It states:Contracts for commodity or financial futures or options and life insurance contracts should be included within the definition of investments.The Government must have a view on that recommendation, and I ask whether they accept it.
I entered the House of Commons at a time when an influential Back-Bench Member of the Macmillan Government was the late Sir Henry d'Avigdor-Goldsmid. He was a bullion broker and I used to listen to him talking about the bullion markets. What is the attitude of the Government in the 1980s to the role of the bullion and metal markets in relation to what we should be doing for developing countries?
This is neither the time nor the place to go into detail, but that point brings me to what I regard as an important question, although it may be one for the Leader of the House rather than for the Minister. We shall have a Bill in 1986. May I make a constructive suggestion: that the Standing Committee on that Bill be appointed at the beginning of the Session and that in November and December it should have the opportunity to operate, as it is empowered to do, like a Select Committee and should hear witnesses not only from the City but from elsewhere. Although the hon. Member for East Lindsey and several other hon. Members obviously know a great deal about the subject, most hon. Members are untutored in such matters. If hon. Members are to do a serious job—it is important 99 that they do—there should be an opportunity in the early autumn to ask questions of those in the City and outside it who can answer on such matters.
Then I suggest a respite and that the Bill goes into normal Standing Committee in March, April or May. I emphasise the importance of the suggestion and I ask the Minister whether he is sympathetic to the idea of a Scrutiny Committee considering the issues as soon as Parliament returns after the summer recess in 1985 and then returning to the subject when its members are better informed.
The hon. Member for Stockton, South (Mr. Wrigglesworth) jibed that the Labour party was represented this evening by what he called the Labour friends of the City. I have never indulged in blanket attacks on the City of London and I am not greatly impressed by them, but, having said that, as a Labour Member of Parliament I wish to make a plea to the City in general. I represent an area which the Minister knows well and which has tremendous industrial problems at Bathgate. Some of those problems are questions of bridging finance and tiding over finance for the heart of British manufacturing industry. If companies such as the North British Steel Company are not helped to tide over what many of us believe are their temporary problems—they have reinvested in the foundry industry — on fairly favourable terms, firms are bound to go under. It will mean the deindustrialisation of the country, because if Britain is to be an industrial country it needs a foundry industry.
I say to the City: for goodness sake, look at what is happening in the north and do what you can, if only in your own medium and long-term interests, to make it possible for firms such as the North British Steel Company to carry on their technical expertise and to continue in the casting industry. I am talking about one of the three or four most modern foundries in Europe being in difficulty. The City has responsibilities. Some of us will not jibe or sneer at City institutions or attack them in general terms, but the condition for that is that the City must help industry in these difficult times to ensure that we have a manufacturing base, which is to our mutual advantage.
§ Mr. Hoyle
Pleas to the City are no good when trying to obtain finance for industry, and City institutions have been reluctant to invest in industry, especially if the investment must be long term. Britain has slipped behind in new technology. Some of it is now coming forward, but it has taken a long time and we have succeeded only where the Government have invested money. If the City was acting in the national interest, it would have invested in such industries.
§ Mr. Dalyell
I promised to sit down at 8.55 pm, so I simply register the fact that, as always, my hon. Friend has made an important point.
§ Mr. Tim Renton (Mid-Sussex)
I agree with the suggestion of the hon. Member for Linlithgow (Mr. Dalyell) about how the Financial Services Bill might be tackled in the 1985–86 Session, and it would be helpful if my hon. Friend the Minister would take that suggestion on board. Like other hon. Members from both sides of the House, I declare an interest in this matter. I started work 100 in the City exactly 30 years ago in the shipping department of a firm of international merchants and commodity brokers. Despite being a graduate, my starting salary was the princely sum of £300 a year—a sum that many foreign exchange dealers or stockbrokers now earn in a day. I spent a pleasant 20 years with that firm and in the 10 years since I have beeen a member of Parliament I have been fortunate to maintain a working connection with the City as a name at Lloyd's and as a consultant to a firm of stockbrokers. I say "fortunate" purposely because we have every reason to be proud of the City. Despite the occasional scandals, which we all deeply regret, the City is one of the most successful parts of "GB Ltd.", and it is worth remembering that during the past year net private sector invisible earnings were more than £4 billion, compared with £1 billion 10 years ago.
But, as the hon. Member for Linlithgow said, Parliament is untutored in City matters. That does not apply to my expert colleagues who have spoken this evening and who are clearly very knowledgeable, but it applies to the vast majority of our colleagues. Although it is only four stops on the tube from Mansion House to Westminster, there is an ocean of ignorance between those four stops.
In The Economist an inset to the article that has already been mentioned in the debate was headed,To some, the City will always be a mystery.That is certainly true of Parliament and of civil servants, the most recent example being the affair of Enterprise Oil and RTZ. RTZ saw an opportunity fairly and legally within the terms of the prospectus, and it tried to take advantage of that opportunity. It did so with about £200 million of its shareholders' money at a time when stock markets were falling and there was an oil glut. However, it believed that the assets of Enterprise Oil were worth more than the investors and their professional advisers believed at the time. That is not much of a crime, yet from some of the comments made one would have thought that it came into the category of at least a misdemeanour.
RTZ was advised in this matter by the house of Rothschild. Lord Rothschild repeated on radio last week the famous story of his ancestor Nathan Rothschild who, by virtue of having special couriers and his own ships, received advice of the British success at Waterloo 24 hours before anyone else did. According to Lord Rothschild, Nathan first went to No. 10 Downing Street to tell the Prime Minister, Lord Liverpool, of this success but was told by the butler that his Lordship was asleep and could not be woken up. So he went on to the Stock Exchange, bought all the Government consols that he could find and made a very handsome profit.
The difference between Rothschilds two weeks ago and Nathan in 1815 was simply that on this occasion they did not bother to warn the Department of Energy in advance about what they intended to do, but in each case what they did emphasised the remarks by Keynes about the animal spirits of business men. Apart from being a leading economist, Keynes was pretty good as a business man, as the present wealth of Kings College, Cambridge, bears witness.
§ Mr. Renton
I hope that my hon. Friend will forgive me if I do not give way, but one of my hon. Friends wishes to speak after me and I want to allow him time to do so.
101 Keynes had animal spirits himself. In fact, the animal spirits of business men are more easily indulged when dealing with money—be it investment advice, insurance policies, life insurance, pension schemes and so on—than when dealing with drop forgings or printed textiles. It is precisely because of those animal spirits and the speed and vivacity with which the City moves that it is totally impossible for any Minister of the Crown of any party, or for his civil servants, to be responsible for the day-to-day policing of the City. They will always be left behind, and left gasping.
I regret to say that insider trading is the most blatant recent example. I worked a good deal with my right hon. Friend the Member for Hertsmere (Mr. Parkinson), both in opposition and immediately when we were in government, on trying to find a definition of insider trading which would be declared a criminal offence, and would be workable. The Labour Government were working on that in 1978–79, but their suggestion was dropped in the 1979 election. We further amended it and it was incorporated in the Companies Act 1980.
Insider trading was then a defined criminal offence. But I am told that, as a result, far less is now being done to chase up insider trading and to bring those who indulge in it to book than happened previously when it was not a criminal offence and was policed simply by the Stock Exchange. That is a clear example of where self-regulation is often more effective in practice than statutory law.
In saying that, I have absolutely no doubt that regulation is needed, and must govern the largest and most successful firms as well as the smallest and most insignificant. If the City has had a fault in recent years it has been that the successful giants have got away with things that it was impossible for the minnows to get away with.
On balance—and picking up the phrase of one of my hon. Friends that the Gower report was masterly in compromise — I go along with the suggestion that a number of self-regulatory agencies should report to an umbrella organisation. Whether that umbrella organization should be a commission or intermediate body or son of CSI remains to be revealed, but it will be needed.
Who precisely will man this umbrella organisation? Clearly it must do a lot better and be more effective than the CSI. That point was well made in The Economist last week, when it said:In an increasingly competitive environment, the City can ill afford to second its best brains to police the City … Good financiers are good at making money, not poring over appeals from hapless licensed dealers. Bad financiers are likely to be bad at both.That point must be taken on board by the Government in considering the framework of future legislation.
It is clear that before the Government decide on their legislation the committees appointed by the Governor of the bank will report back to the Bank of England. I am sure that the thrust of their suggestions will centre around what is practicable and workable within the City. Clearly the self-regulatory agencies must not just be trade associations. If they are, they will very quickly become cartels again. They must be genuine policemen and innovators and therefore must embrace users and consumers and lay people as well as the professionals. Apart from that I urge my hon. Friend not to think of creating a massive quango with too many powers that will not be effective at the end of the day.
102 My hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) asked whether these changes were likely to lead to a diminution of private and small investors in the stock market. I hope very much that they do not, and I am encouraged to see that another part of the article in The Economist takes as its title the theme "Personal investors might stage a come-back". It emphasises that private investment has flourished in Wall street since minimum commissions were abolished and since all the changes of 1975.
We are all agreed about the vital need for protection for the investor. I am much less worried about the large investor. I am sure that he is capable of taking care of himself. If he is done once, he will not trade with that primary dealer or investment bank again. He will move his business. But the small investor must worry us all. In future years I can see the small investor going into Barclays bank, being able to get Stock Exchange prices on a VDU screen over the counter and immediately deciding, on the bank manager's recommendation, to buy 100 ICI. He may not even have to go to his bank. He may do it on a VDU screen in his own home. All that is potentially exciting, but the man has to be able to ascertain that the price quoted by his bank manager and at which he deals is a fair and decent one at the time. For that reason I support the view that there will have to be a last trade tape showing both the volume and time of dealing. In that way anyone who wants to bother to check back will be able to discover what was the going rate at the time of his deal.
That takes up the point made by other hon. Members that there must be full transparency of interest and prices at a time when we move into dual or even triple capacity within the City financial institutions.
I greatly enjoyed the speech by my hon. Friend the Member for East Lindsey (Mr. Tapsell), even if I did not agree with all of it. He asked whether these changes were necessary. I have the feeling that if the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) had not originally referred the Stock Exchange to the Restrictive Practices Court five years ago it is possible that over the intervening five years the Stock Exchange would have changed itself slowly, step by step, and we would not have this great revolution which is upon us now.
The effect of that case being referred to the court was that nothing happened on the Stock Exchange for five years. Then my right hon. Friend the Member for Hertsmere in effect pulled the stopper out of the bottle in July last year. The genie came out and thereafter no one knew precisely where it would go or how fast. The genie is now firmly out of the bottle. It cannot be put back, even by the Labour party. That being so, I end on two cautionary notes in which I give some support to my hon. Friend the Member for East Lindsey.
Size really is not everything. Looking back over the history of the past 20 years, we see that from textiles and breweries to the steel industries disasters have flowed from mergers. It has been the disappearance of small specialist firms in all those industries that we now come greatly to regret. The Schumacher view that small is beautiful can apply just as much to the financial services industry as we now realise it does to manufacturing industry generally. We must not forget that.
Secondly, there is a great danger of foreign domination because of the vast capital size of some of those who will be allowed in as primary dealers. It is worth remembering that American Express has a market capitalisation of four 103 times that of the United Kingdom's six biggest quoted merchant banks put together. Salomon Brothers reported in its most recent annual report open positions amounting to $20 billion—the approximate equivalent of our public sector borrowing requirement for two whole years.
When the Americans and Japanese are allowed in as primary dealers it is essential that the capital requirements should be adequate, but they should be limited to what is necessary, there must be limits on trading ratios to capital and there should be not only a Chinese wall, but a positive iron curtain to prevent capital from being moved from the parent company to the trading subsidiary. That will ensure that everyone who starts as a primary dealer is on genuinely equal terms.
I am not a protectionist — if London is to be an international financial centre it must indeed be international—but I do not want the market dominated by Americans and Japanese in 10 years' time, as has happened with silicon chips and video recorders. We have to think through very carefully what is happening and get it right rather than wonder in 10 years' time why we did it at all.
§ Mr. Tom Sackville (Bolton, West)
I have about three and a half minutes to remind the House of one strong sector of the City which has not been mentioned, but which may be affected by the proposed measure. It is the Eurobond market, of which London is clearly the centre.
May I quote some figures to demonstrate the importance of that market? Last year about $48 billion of new bonds were issued, and $28 billion of Eurobonds were issued in the first five months of this year. Likewise, in the traded secondary market, over $30 billion passed through the clearing system last week alone. About three quarters of that involved London-based houses.
We are discussing, not necessarily protection for the sake of the investor, but rather the protection of the investor to maintain confidence in a sector which is extremely important to London. Its earnings run into hundreds of millions of pounds, it provides much employment and it attracts enormous investment from overseas.
The Eurobond market illustrates the fact that self-regulation must be the way forward. The famous fraud of only a couple of weeks ago, which was perpetrated by one trade selling bonds to a dummy company at the other end of the world at or near the lower end of the daily trading spread and later selling at the higher end to an accomplice in another house, could not have been investigated effectively by anyone except the professionals in the industry. Outside bodies would not know where to start.
On the other hand, there are considerable dangers of over-regulation in the Eurobond market. The most that is needed is an expert body which can investigate quickly and cleanly and act quickly to bar or suspend individuals or firms and arbitrate in any disputes. In the current scandal the two institutions have agreed to arbitration, but they might not have done.
Whatever body is set up, I ask Ministers to remember that it must not frighten the Eurobond market away from London. The important thing to remember is that New York has failed to replace London as the centre of the Eurobond market, not just because of the United States' 104 withholding tax, but mainly because of the fear of over-regulation and of interference by the Securities and Exchange Commission. Even if the United States' withholding tax was removed, as threatened, there is no reason to suppose that New York would attract a great volume of that market unless we failed to heed the lessons and made the mistake of going for a full-blooded SEC, which would then do great damage to the market.
Therefore, I believe that London can, and will, remain the clear centre of the Eurobond market, with all the benefits that accrue to this country as a result.
§ Mr. Bryan Gould (Dagenham)
At the beginning of what already promises to be another bad week for the Government, it is a pleasure to commend them on something for a change. They are to be congratulated on having arranged this debate before decisions have been made and minds have been made up. As a result, we have been rewarded with a very useful debate. A wide range of opinions have been expressed by Back Benchers, and that range has been perhaps a little surprisingly wide on the part of Conservative Members. An even more surprising fact is that the debate outside this House, as represented by participants on the Government Front Bench, has expressed an even wider range of views. On the one hand, the Chancellor—no doubt on the prompting of the Bank of England—has clearly said that he favours a self-standing commission, and, on the other, the Under-Secretary of State has gone on record equally clearly—and perhaps even more clearly—as saying that he is not in favour of a self-standing commission, and that his Department should do the job. The Secretary of State has neatly straddled the two by saying nothing.
§ Mr. Tebbit
Will the hon. Gentleman quote the section of the speech by my right hon. Friend the Chancellor of the Exchequer in which there is such a firm diversion from the views of my hon. Friend the Under-Secretary of State? We are all looking at shades of opinion, and sooner or later we shall come up with consensus.
§ Mr. Gould
We are all accustomed to leading politicians expressing themselves in somewhat veiled terms, but in his speech to the Bow Group just a fortnight ago the Chancellor of the Exchequer said:If anything, developments in the markets since Gower have perhaps strengthened the case for some kind of umbrella body.That is very much in contrast to the remarks of the Under-Secretary of State. In interviews with Financial Weekly, he has gone on record as saying that he is firmly opposed to umbrella bodies, and sees no case for anything other than four self-regulatory agencies and the Department of Trade and Industry. However, the Secretary of State is tempting me to anticipate a later part of my speech.
This debate takes place against a background of substantial change in the City. But we must be careful to ensure that those changes are not allowed to overshadow the original purpose of the Gower report. In essence, it is about investor protection. It was prompted by a series of scandals in the City, such as the collapse of Norton Warburg, where many savers lost their savings. It arose because the City failed first to regulate efficiently, and secondly to punish efficiently when the regulation failed.
§ Mr. Tapsell
The hon. Gentleman must exclude the Stock Exchange from his censures. Neither a lack of regulation nor a lack of punishment existed there.
§ Mr. Gould
One of the weaknesses of this debate has been that it has concentrated almost exclusively on the Stock Exchange. The Gower report, of course, deals with many other institutions. Indeed, the problems thrown up by lack of effective regulation and enforcement in many of them prompted the setting up of the Gower committee. Of course, those failures not only damaged the interests of investors but, as many hon. Members have pointed out, they damaged the City's reputation. Unfortunately, as the hon. Member for Bolton, West (Mr. Sackville) mentioned, those days are far from behind us. Even now, we are in the midst of a new rash of frauds in the Eurobond market.
In his report, Professor Gower set out to put the City's house in order. It is essential that that should be done if the City is to prosper. We must not forget that fundamental issue. I join others who have paid tribute to Professor Gower for the tremendous job that he has done. We accept his fundamental and central recommendation that a new investor protection Act should regulate these matters.
Professor Gower's general case for regulation by statute is accepted by Ministers. Apparently even they now recognise that competition alone cannot be the answer to all the problems. That is a welcome recognition—one might even call it a conversion. We wait with interest to see how far it is extended to other spheres.
Competition and regulation should not be regarded as being mutually exclusive. Some unease is felt at the prospect of competition being excluded because of regulations, if that means that restrictive practices are allowed to flourish. If there is to be some restriction of competition, it is even more important to have clear, statutory safeguards for the investor and consumer.
The fundamental concern of the Gower report is overshadowed by the tremendous pace of change which has begun in the City. The change is astonishing. It was unleashed, I believe unwittingly, by exempting the Stock Exchange from restrictive practices litigation. It is ironic that that decision — which I believe was designed to forestall and inhibit change—has allowed that change to roar ahead. The hole in the dyke has become a total breach in the wall. I know that the Secretary of State argues otherwise. There is no harm if he wishes to keep peddling an improbable story, but no one in the City believes what he has to say.
The problems which Professor Gower addressed take place in a context in which minimum competition is to go, at least by the end of 1986, when single capacity is to go and the 29.9 per cent. rule about outside ownership is to go. We are now in the era of comprehensive financial institutions, offering the full range of financial services. Many people call them financial supermarkets. That means that the old institutional safeguards have gone. The City is now to be peopled—one might say invaded—by brash newcomers and outsiders. The old conventions will go. The old cosy, clubby atmosphere will go. The City is now freewheeling. It is spinning in a maelstrom of change and is in many senses out of control.
At this time, when the City needs the maximum certainty, assurance and guidance from the Secretary of State and his colleagues to meet the challenge from foreign institutions, the Secretary of State is failing the City. The institutions themselves are simply not capable of working out the right answers. The Stock Exchange Green Paper is a witness to the mess into which it can put itself. I see 106 no prospect of all the conflicting interests in the various parts of the City being able to work their own way through this difficult and changing situation.
What structure should we aim at? It is almost universally agreed that a major role can be played by self-regulation. No one wants detailed, day-to-day administration by bureaucrats. However, we should not lose sight of the fact that self-regulation is a privilege to be earned and justified. The trouble with self-regulation—I am not alone in believing this—is that it is fatally easy for it to be regarded as a means of identifying, perhaps unwittingly, the wider public interest with the promotion of one's own self-interest. We cannot allow that to develop because the record of self-regulation inspires little confidence. If the Secretary of State would like to tell me whether he is satisfied with the record of the City's scandals and frauds during the past three years, I shall gladly give way.
§ Mr. Tebbit
I shall be happy to do so. Of course I am not satisfied—if I were, I would not be proposing any changes. I shall draw the hon. Gentleman's remarks to the attention of my right hon. Friend the Secretary of State for Employment.
§ Mr. Gould
The Secretary of State's remarks are so opaque and subtle that their true significance escapes me.
The record of the City inspires little confidence. No other institution with a record as bad as the City's—which we could detail if we so wished — would be accorded further latitude. The changes put a premium on the clearest and most effective regulation. That is in the interests of the City, as well as in the interests of everyone else.
Professor Gower says that the fault has been not that of self-regulation, but self-regulation not subject to effective surveillance. The central question—accepting that self-regulation will be given a further trial—is who should monitor and supervise that? Gower identifies two major options. He dismissed the Office of Fair Trading and the Bank of England. The two major options are the Department of Trade and Industry and a self-standing commission. Clearly, the professor preferred a self-standing commission. For practical and political considerations, he suggests in his report a supervisory role for the DTI.
There is little doubt that subsequent events—even subsequent to the publication of the report — have immensely strengthened the case for a self-standing commission. We do not need to speculate too outrageously to conclude that Professor Gower, if given the opportunity to write another report — and and we look forward to the second volume—would strengthen his preference for a self-standing commission. The Director General of Fair Trading has reached a similar view.
Even more surprising is the shift of view in the Conservative party, and also within the City. The Chancellor of the Exchequer has said that he is in favour of a commission. Virtually all Conservative hon. Members have accepted the case for such a commission—
§ Mr. Gould
No, I shall not give way. I invite the right hon. Gentleman to read Hansard to confirm what I have said.
What is surprising is the shift of opinion in the City. Many of those to whom I have spoken have reached the view that there is an increasingly strong case for a commission. The more intelligent people in the City recognise that, in this new position, there is a major job to be done. There is a crying need for proper regulation if investor protection is to be properly established and if confidence in the City is to be maintained and promoted. It is doubful whether the DTI could do the job—not because of the abilities of those who staff the Department, but because it is inappropriate to the role of civil servants. They lack the necessary expertise; there is too rapid a turnover of staff at senior level; it is difficult for one Department both to sponsor and to regulate; there is evidence that sponsoring Departments are too easily colonised by those whom they try to regulate, and the supervision that might be expected from a Government Department might on the one hand be too remote and on the other too heavy—it would be applied at the wrong time, in the wrong way and on the wrong issues.
§ Mr. Nicholas Baker (Dorset, North)
The hon. Gentleman starts from the premise that self-regulation is a privilege, as he said a short while ago. I suggest that he is wrong about that because self-regulation can be justified only in the public interest. If he thinks that it is a privilege, he may come to the wrong conclusion.
§ Mr. Gould
When we consider that in the past year or two scandals have cost investors tens of millions of pounds, yet those concerned have still gone unpunished, it is clear that continuing self-regulation, though desirable, has to be regarded as a privilege which must be justified. However, the hon. Gentleman intervened some minutes after I had dealt with that point, and I do not wish to retrace my steps.
I now come to the case for a self-standing commission. In addition to having the great merit of being in line with the Labour party's long-held view on these matters, a self-standing commission would offer a body with which the City could identify, could develop a relationship, in which it would have confidence and which would be staffed by people who knew and understood the City.
It has always seemed to me remarkable—at least initially, when this debate began some months ago—that so many of those who, generally speaking, opposed central bureaucratic control wanted supervision by the DTI, whereas the Labour party, which is often accused of having exactly that desire, was the party propounding the idea of a self-standing commission.
Such a commission would deal far more easily than would a Government Department with comparable bodies in other countries. It is not insignificant that many other countries have taken that course. The commission would also be the most obvious, certainly the best fitted, body to undertake the pre-vetting of prospectuses, one of the important tasks identified by Professor Gower.
§ Mr. Nelson
The hon. Gentleman appears to be trying to persuade the House that everybody is coming round to a position long held by the Labour party. The position put earlier by his right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) was a marked departure from the line held traditionally by the Labour party and 108 expounded earlier in the debate by the hon. Member for Warrington, North (Mr. Hoyle). That was that there should be only an SEC with full legal powers and many firms controlled by it. The right hon. Member for Bethnal Green and Stepney—in a significant departure which the hon. Gentleman should endorse, if he believes it—said that not only should there be that commission, but that there should be self-regulating agencies with considerable autonomy of control over the firms represented on it.
§ Mr. Gould
I am glad that I allowed the hon. Gentleman to intervene because obviously I failed to make clear what I said earlier, which was that, like my right hon. Friend the Member for Bethnal Green and Stepney, and like the Labour party for a considerable time—perhaps the hon. Member for Chichester (Mr. Nelson) has been reading outdated documents—I am in favour of a role for self-regulatory agencies. We think it essential, however, that there should be adequate monitoring and supervision and that that can be done effectively only by a self-standing commission. We go further and say that that commission must have adequate powers not just to monitor but to investigate and, in the end, to enforce. Rather like the SEC, it should have the power to ask for injunctions and to compel disgorgement.
Much of the opposition which initially arose to the concept of a self-standing commission was based on horror stories about the American SEC. It was regarded as a highly bureaucratic, lawyer-ridden body. There are now many other models, perhaps more congenial ones, and the Ontario Securities Commission is one. We have become, as it were, sufficiently mature not to be mesmerised by stories about an SEC which has, no doubt, in any case, improved its procedures.
We need clear guidance from Ministers about the way in which they are thinking. At least the Chancellor, though not as clearly or in as much detail as one might have wished, gave an inkling of the way in which his mind is moving. We did not get that from the Secretary of State today.
In the end, it does not much matter in which way a commission is set up; if it does, it is premature to consider that question now. I do not mind if it is the son of CSI or something else, provided that it has a statutory framework in which to operate. The decision on the nature of the commission will determine other major questions, such as the number, nature and powers of the self-regulatory agencies. Without a commission, there is a case for a small number of self-regulatory agencies because they would need to have substantial powers and great responsibilities. It would be wrong to load those powers and responsibilities on to such voluntary bodies.
With so few self-regulatory agencies there would be too great a degree of compression. Too many smaller interests in the City would feel that their interests would be submerged. It should be possible to have sufficient self-regulating agencies so that virtually every firm in the City can register through one of them. Ideally, we should try to avoid direct registration and supervision of individual firms.
We do not, however, want too many self-regulatory agencies, for the reasons given by some Conservative Members. If there were too many, they would become simple trade associations. There is a powerful case for identifying and organising self-regulatory agencies on a 109 functional rather than institutional basis, because the dividing lines between City institutions are becoming increasingly blurred.
My preference is for between four and a dozen self-regulatory agencies. The more there are, the greater the need for a commission to supervise them.
Major practical problems still remain to be addressed. Only two or three of the self-regulatory agencies which are likely to be recommended currently exist. Great problems lie ahead in establishing such agencies and getting them functioning in the time available. We cannot expect City institutions with their clear sectional interests to arrive at the right solutions to those questions.
There are other uncertainties, some of which might be partly resolved by the Stock Exchange paper, which is to be published tomorrow. I quickly enter one caveat—I am disturbed at the apparent resistance which will be expressed in that paper to the principle of transparency. I agree with the hon. Member for Mid-Sussex (Mr. Renton) that we want the greatest possible disclosure which modern technology offers. That is the essence of clear and effective regulation. We need also a mechanism for ensuring that the City will not be completely dominated by huge institutions. The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) made that point, and a recent opinion poll conducted in the City bears him out. About 62 per cent. of all brokers in the City believe that private investors will pay more and receive less protection because of these changes. About 52 per cent. of them—this bears out what the hon. Member for East Lindsey (Mr. Tapsell) said — are opposed to the abolition of single capacity.
That leads me to a substantial point. One of the great dangers facing us in this rapidly changing city is the foreign domination of our major financial institutions. One of the major objectives of this enormous change is to produce vast international financial conglomerates. I am afraid that, unless we have talked about this issue in advance and have mechanisms in place to deal with it, we shall one day wake up too late and find not only that the foreign earnings and all the other advantages brought to us by the City have gone, because they have been repatriated elsewhere, but that the extremely delicate relationship of the Bank of England with the mechanisms that enable it to fund the borrowing requirement to sell the goods have suddenly passed under the control of institutions that have no relationship with the Bank of England.
A Labour Government would refuse to follow the present Government's sorry example during the past week or two and would seek to follow an independent fiscal and interest rate policy. We would not wish that objective to be jeopardised by allowing our financial institutions to be part of a vast international money market in which the interests of the British Government were of no concern.
We have had a useful debate, but we have reached the point when we need clear guidance from Ministers. The stakes are enormous, as the hon. Member for East Lindsey said. We all have a substantial interest in an efficient, profitable and competitive City. The pace of change and the forces which are now ranged against the City in terms of international competition mean that, even if we take all the right decisions, the odds are not as high as they should be in favour of the City maintaining its pre-eminent position. We cannot afford to be complacent. We need to make the right decisions. They are a precondition to ensure that the City continues to survive and prosper. We needed 110 clear intellectual analysis and guidance from the Secretary of State as to where his political mind was leading him. We did not receive it. We now look to the Under-Secretary to remedy that omission.
§ The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Alex Fletcher)
This has been an interesting and worthwhile debate, and I believe that the House has agreed that it is taking place at the right time in view of the changes that are occurring in the City of London and elsewhere. My right hon. Friend and I are glad to have had the opportunity to consult the House.
The speech of the hon. Member for Dagenham (Mr. Gould) was remarkable. At a time of radical change in the City, he was extremely conservative. At a time of need for radical change in the trade union movement, he was silent, like the rest of his colleagues.
We are talking about the need for investor and consumer protection in the City and in financial services, but I am bound to say that it is high time that we had protection for the members of trade unions, let alone those who have suffered from the breakdown of services, which happens all too frequently.
In thanking the House for its contribution to the debate, I should like to add my thanks to Professor Jim Gower for the excellent report that he has presented to the House and the country, and for the stimulus that it has given to this debate and to the wider ranging debate that is taking place in the City and elsewhere.
The next step in the development of the Government's proposals will be the advice of the Governor of the Bank of England's advisory group, which we expect to be available within a few weeks. That should show how far the securities industry can deliver the kind of institutional structure for which we are looking to provide what my right hon. Friend called supplementary measures to maintain appropriate conduct of business rules and thereby ensure that the system is equipped with preventive as well as retributive teeth.
Unless the system includes arrangements designed to nip fraud in the bud, if it does no more than punish the malefactor after the event, it will not command the confidence of the investor at home or overseas. Unless the financial services sector is clean, and is seen to be clean, it will find itself short of customers. There is sufficient and growing international competition to ensure that that is the case.
The Governor's group will also influence our thinking on whether some kind of intermediary body is necessary and, if so, what form it might take. At the same time, we expect to be receiving and considering the life insurance industry's response to my invitation to put forward by the end of August proposals for a possible self-regulatory body to cover the selling of life insurance and related products, such as unit trusts, by intermediaries and other salesmen. Although a feature of today's debate has been that not a great deal has been said about the insurance sector, I am sure the House will agree that the arrangements made there are equally important in the reorganisation that is taking place. We shall consider the proposals of the insurance group against the views that have been outlined today.
We want to see what the industry can agree to deliver before settling the Government's plans. I remind the House that our intention is to publish a White Paper in the autumn.
§ Mr. Bermingham
Will the Minister confirm that in those reviews the Government will impress upon the insurance industry the need for full disclosure and liability?
§ Mr. Fletcher
I agree with what the hon. Gentleman says, and with what the hon. Member for Dagenham said on the same subject. Disclosure is a fundamental part of investor protection.
Before responding to particular points, I shall briefly recapitulate the approach set out by my right hon. Friend the Secretary of State. The extent to which we envisage relying on market forces has been variously criticised as naive, a fraudster's charter and an inadequate response to mischiefs of the sort that brought about Professor Gower's report. To some extent, we have asked for this by sharing our ideas with the House while they are still at the formative stage. I think that the House has, however, accepted that this debate has been worth while, so that the Government can benefit from the views that have been expressed today.
Our plans are still incomplete, and deliberately so, for the reasons that we have given. However, I put it to hon. Gentlemen who have questioned our general approach that there are few forces as powerful as market forces. The rider that we attach to this — disclosure — and the vigorous enforcement of the criminal law and the availability of instruments of competition policy will, in combination, give market forces a firm push in the right direction. I doubt whether a bureaucratic straitjacket can achieve any set of objectives more efficiently and effectively than market forces properly channelled. Market forces are the most powerful weapon for the protection of the investor, but they are not our only one. We recognise the need for conduct of business rules to make it more difficult for malpractices to occur in the first place.
We would prefer such measures to be administered largely by the financial sector itself, but with statutory backing. We believe that this will be the most efficient and cost effective approach. Some hon. Members, such as my hon. Friends the Members for Chichester (Mr. Nelson) and for Mid-Sussex (Mr. Renton), have asked what my right hon. Friend and I envisage when we speak of self-regulation. Let me try to explain briefly what it does not mean. It does not mean amateur arrangements in the City. It does not mean, with respect, the Salvation Army in the City, or some group of self-appointed City vigilantes. Nor does it mean the present system of SRAs, some of which operate effectively in the City. Self-regulatory agencies must not be cosy clubs operating simply for the benefit of their members. They should be bodies underpinned by statute, with their fundamental rules of conduct set by the Government. That is the basis on which we consider self-regulatory agencies in the various discussions and debates that are taking place.
§ Mr. Renton
When my hon. Friend uses the words "underpinned by statute", will he consider the suggestion that self-regulatory agencies, either individually or through the organisation if there is to be one, should report annually to the Secretary of State on how they have discharged their duties, and such reports should be laid before Parliament and debated briefly, if necessary?
§ Mr. Fletcher
That may be. We wish to underpin by statute because, in operating in a particular sector or in the 112 City generally, the SRAs would require authority from a statute to make sure that the business of the financial sector was conducted responsibly. In return for that authority, the House may look for some annual report or some other such action.
The right hon. Member for Bethnal Green and Stepney (Mr. Shore) criticised my right hon. Friend the Secretary of State for insufficient steer, but having promised to steer himself said only that we should have a commission. That was all, apart from an interesting resume of the Gower report. I was surprised that he ignored the importance of competition in protecting the interests of the investor. I was also surprised that he supported the separation of sponsorship of the financial sector and its regulation, because the two are not incompatible.
§ Mr. Shore
The hon. Gentleman has explained his position on SRAs. What does he think about having an independent Securities Commission? Does he think that there should be such a body? If not, why not? Who is to regulate the self-regulators? Does he think that it can be done by the Department of Trade and Industry, or does he think that it requires an expert commission with statutory powers?
§ Mr. Fletcher
Those are matters which my right hon. Friend will decide in preparing the White Paper. We want an effective regulatory body with the minimum of bureaucracy. I do not believe that it has to come directly from Government. I hope that the benefit of the experience of the City and City practitioners will be evident in such a body. If it were underpinned by statute, it might work very effectively. We are not choosing between, on the one hand, some amateur body and, on the other, a Government quango. We might find, in the typically British way, some method whereby voluntary arrangements, as I have said several times, can be underpinned by statute.
My hon. Friend the Member for East Lindsey (Mr. Tapsell) made an important and lively contribution to the debate. I think that the House generally enjoyed it, respecting his experience in these matters. In an intervention, I tried to point out to my hon. Friend that it was the Stock Exchange, and not the Government, that ruled on the question of single capacity. Despite the fears which my hon. Friend properly expressed in an earlier debate concerning foreign takeovers and foreign companies, they are not ruling today in the City. City firms themselves decided the extent of foreign ownership.
The Government's interests are largely confined to the efficiency of the market, to fair competition and to investor protection. I was a little surprised—perhaps I should not have been — that my hon. Friend, as a practitioner in the City, was so strongly critical of so many of the decisions made by his colleagues and contemporaries in the City with regard to the changes that are taking place. I am sure that my hon. Friend has deployed his arguments equally forcefully in the City. He drew a comparison with Lloyd's but he agreed that there was only a superficial resemblance between the activities and business taking place in Lloyd's and those taking place on the floor of the Stock Exchange. I think that the House generally appreciates and understands that.
I was glad to hear my hon. Friend's outspoken criticism of an SEC. He seems to feel that it is inevitable, given the course that we are at present treading. I would encourage him not to be so fearful and to think that it is not 113 necessarily inevitable. There are ways and means — which I hope the House will support later—whereby, as I said to the right hon. Member for Bethnal Green and Stepney, practitioners can still manage their own affairs in the City in a responsible way with the necessary backing and support of the Government.
I agree with my hon. Friend's fears about bureaucracy and constant legal wrangles, and the fact that business cannot be conducted in some parts of the world—not least in the United States—without a team of lawyers representing each side of the negotiations. It is important, in designing a new system for the City, to maintain the informal and reputable way in which business is conducted and the good reputation of the City as a whole.
My hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) was rightly concerned about the small and medium investor, but, as was pointed out to him, the present system has not exactly increased the number of small private investors. I believe that increased competition among brokers themselves is the way to ensure that the poor performance is reversed. As my hon. Friend the Member for Mid-Sussex said in an intervention, brokers will respond positively to the new competitive conditions that are being brought about. He mentioned December 1986. We believe that that date can be met without any penalty being imposed on investors or anyone else in the City.
The answer to the point about foreign takeovers is that the City remains essentially British, without any special Government protection. My hon. Friend the Member for Mid-Sussex expressed fears about this some months ago. He will agree that, in that respect at least, things have gone well since then. He and my hon. Friend the Member for East Lindsey seemed to suggest that the Stock Exchange was being dragged screaming into the changes that are taking place. The Stock Exchange was anxious to make changes in the London market, but was becoming increasingly inhibited by the fact that the case was before the Restrictive Practices Court. The Stock Exchange accepted the Government's proposals for abandoning fixed commissions and introducing competition into its own affairs and the affairs of the City in general. Thai was what sparked off the changes.
§ Mr. Fletcher
I understand the right hon. Gentleman's allusion. The Stock Exchange was glad to be released from the restrictive trade practices case so that it could undertake the changes that have now taken place in the City.
In answer to my hon. Friend the Member for Selly Oak, I say that I cannot believe that the City, which thrives on competition and is enthusiastic about competition for 114 everyone else, does not believe that competition is to its own advantage too. Competition is good for the financial services industry and for the investor.
§ Mr. Beaumont-Dark
Is my hon. Friend saying that the City is afraid of competition? He has deliberately missed my point, which is that the great financial conglomerates will lessen competition rather than widen it. How can it be good for competition that fewer people should be doing business?
§ Mr. Fletcher
I believe that there will be more business to be done, and that many alert stockbrokers will take advantage of the greater degree of competition open to them.
The hon. Member for Stockton, South (Mr. Wrigglesworth) criticised the DTI. He seemed to forget that the Department is bound by the Prevention of Fraud (Investment) Act 1958, which we all agree needs to be thoroughly revised. I hope that that revision will be an important part of the financial services Bill which we hope to introduce in the 1985–86 Session. The hon. Gentleman, too, called for a commission. It is odd that those who are most critical of the Government are usually the first to demand more government every time a new problem arises.
I am sorry that I did not hear much of the speech of my hon. Friend the Member for Horsham (Mr. Hordern). He referred to the position of self-regulatory bodies under the Treaty of Rome. There is not much reference in EEC documents to transactions such as this. However, in terms of competition policy, we would be subject to Brussels. The position would resemble that of domestic competition policy. I agree with my hon. Friend the Member for Horsham that, when the Government have to depend on only two firms of jobbers, the base is too narrow. That is an area in which we are likely to see a change.
My hon. Friend asked whether self-regulatory agencies would be sufficient to protect investors. My view is that there is no point in having self-regulatory agencies unless they can—and are seen to—protect the interests of the investor. That is the main feature of their task. My hon. Friend is thinking of an independent agency operating at arm's lengh. He did not ask for a commission as such. There is a difference between an independent agency managed by practitioners and a bureaucratic quango.
§ Mr. Hordern
If the Secretary of State does not set up some umbrella organisations as well as the self-regulating agencies, there will be some ugly problems on his desk.
§ Mr. Fletcher
I think my hon. Friend will agree that, from time to time, we have sufficient problems without inviting more. I am sure that his advice is given with much experience and wisdom and, if it is right, my hon. Friend the Secretary of State will pay a great deal of attention to it, as I shall. I am grateful to my hon. Friend for his contribution to the debate.
§ It being Ten o'clock the motion for the Adjournment of the House lapsed, without Question put.