Financial Services (Hansard, 29 January 1985)

§ The Secretary of State for Trade and Industry (Mr. Norman Tebbit)
With permission, Mr. Speaker, I wish to make a statement about the Government's proposals to establish a new regulatory framework for the financial services industry. These proposals are published in a White Paper which I have today laid before the House. Subject to the parliamentary timetable, I plan to introduce a Bill in the next Session for their implementation.
Modern technology and intense international competition are bringing about rapid changes in the financial services industry. The responsibility for responding effectively to these changes lies principally with the industry. The Government's task—in this sector as in others—is to create an environment in which it can do so. This is best done by allowing market forces to operate responsibly but without unnecessary constraints, in a way which promotes efficient and competitive business.
A prerequisite for an internationally competitive industry is a clear regulatory framework within which practitioners and customers can deal with confidence, and which safeguards the interests of investors. This regulatory framework must be capable of adjusting to changes in the shape of the markets, and of accommodating rather than stifling innovation.
This the proposals set out in the White Paper are designed to achieve. They will assist enforcement, deter fraud and malpractice, improve disclosure and lay down the principles on which business should be conducted. The proposals cover both a new regulatory framework and a new institutional structure through which it will work.
First, the regulatory framework will be based on new and comprehensive definitions of investment and of investment business. It will be an offence to carry on an investment business in the United Kingdom without authorisation. To obtain such authorisation, an investment business will have to show that it is fit and proper, and will be required to observe detailed rules for the conduct of business based on principles to be set out in the legislation. Breach of those rules will be subject to sanctions up to and including the withdrawal of the authorisation to trade.
There will be a number of important further changes. I intend to rationalise and update the legal provisions dealing with offer documents and the advertising of investments, first to make it clear what must be disclosed, and second to establish standard provisions on civil and criminal liability for omissions and mistakes. I also propose to liberalise some restrictions on the unit trust industry and to enable it, subject to appropriate safeguards, to offer a greater variety of schemes to the public. Commissions and other payments to intermediaries will be disclosed. As far as possible, the marketing of life assurance contracts will be treated in a manner similar to the marketing of other investments.
The institutional structure is designed to implement the new regulatory framework. It is based on my belief that the crucial tasks of authorising investment businesses and keeping high standards of business conduct among those so authorised can be discharged much more effectively by those closest to the market — practitioners and their customers—than by Government. Malpractices can be identified and dealt with more quickly by those people than by Government regulators.
158 I therefore intend to build upon what is best in self-regulation. I shall propose legislation to confer on the Secretary of State the necessary powers to grant authorisation to investment businesses and to enable him to delegate regulatory responsibility, including the power of authorisation, to one or more bodies composed both of those who provide and those who use financial services. Before doing so, I shall require to be satisfied about the composition, constitution and proposed rules of these bodies, and I shall have power to withdraw delegated powers if such a body fails to continue to meet the criteria. Steps are already in train to set up the bodies. I hope that those concerned in the financial services industry will press ahead so that the structure is in place by the time the legislation is on the statute book.
The Government see great advantages in the system of self-regulation within a statutory framework. At the same time, we recognise that self-regulation should receive statutory backing only if there is proper accountability. The White Paper sets out the detailed means by which accountability of these bodies to Government and Parliament will be achieved. I shall highlight three particular statutory safeguards. First, there will be a right of appeal on authorisation and on penalties for breach of the rules to an independent tribunal to be appointed by the Secretary of State. Secondly, the Secretary of State will have the power, to be exercised on the advice of the Director General of Fair Trading, to revoke or amend rules which have anti-competitive effects. Thirdly, the Secretary of State will have various powers of appointment. I believe that our proposals combine the advantages of self-regulation within a statutory framework and proper accountability to Parliament.
I have today set out the Government's aims; our proposals for a new regulatory framework; and our proposals for a new institutional structure. The White Paper contains many details which the House will no doubt wish to study and then debate. I look forward to the contribution to be made by people both within and without the House, especially those with knowledge and experience in these matters. We have much benefited already from the advice of Professor Gower, of the Governor of the Bank of England, and of the groups chaired by Mr. Jacomb and Mr. Field.
The Government's proposals offer advantages to investors, industry and commerce, and the financial services industry itself. To the investor, our proposals offer more comprehensive protection against fraud or negligence, and better and fuller information on which to make investment decisions. To industry and commerce, they offer the prospect of keener and more innovative financial services and, therefore, of finance at cheaper rates. To the financial services industry, they offer a system administered by those familiar with the markets without unnecessary Government involvement. The high standards which we seek to promote will be in the interests of all.

§ Mr. John Smith (Monklands, East)
First, may I tell the Secretary of State about the areas in which there will be less controversy than others? Following the scandals of recent years in the City which led to the Gower investigation, it was clear that some action had to be taken to improve the inadequate protection offered by existing legislation, and we welcome the intention to strengthen legislation in respect of fraud and malpractice and to 159 require greater disclosure and, I hope, higher standards. We also accept the desirability of a scheme of authorisation whereby there is control over those allowed to offer advice and services in investment. We shall study the White Paper and subsequent legislation with care to ensure that they reflect properly those widely shared aspirations.
Is the Secretary of State aware that the real concern in recent years has been about not only inadequate legislative provision but about the capacity for its enforcement? Too many scandals have occurred not just because the law has been weak but because there was neither the will nor the mechanism to ensure that it was properly enforced. Is the Secretary of State aware that, in succumbing so easily to the pressure for self-regulation from interested parties, he has missed a great opportunity to set up an independent and expert standing commission to supervise and enforce the new laws?
Is the Secretary of State aware that when such major new developments are afoot in the City, which may lead to enormous changes in practices, habits and business techniques and may affect standards unpredictably, it is an ideal time to make the running on behalf of the public interest, and the City's future, by appointing an independent and effective commission to supervise and enforce the new rules? Is he aware that such a commission would be able to enforce the law more expertly, effectively and independently than would the confused jumble of provisions that he has just announced, and that, as Professor Gower said, it could easily be designed to avoid the complexities of the United States model?
After one year's deliberation, can the Secretary of State explain more clearly the nature of the bodies to which he is delegating so much public responsibility? Why has he not yet decided whether there will be one body or two? Is it not true that he appears to be delegating not only enforcement but the initiative to set up and organise the new bodies? Is it not surprising that he says that he hopes the new structure will be in place in time for the legislation? Why does he not ensure that it is in place in time for the new legislation?
Despite the padding, circumlocution and waffling of the right hon. Gentleman's statement, is it not clear that, instead of seizing the opportunity to act boldly and decisively by supporting the new legislation with an independent commission at a crucial time in the City's development, he has ducked the issue by making no substantially effective change in enforcement? Is he aware that the impact of his retreat from public responsibility will be not only less effective protection for the public, but the possible weakening of the potential business effectiveness of the City in the climate of fierce international competition that lies ahead?

§ Mr. Tebbit
I thank the right hon. and learned Gentleman for emphasising those parts of the White Paper and the aims on which we generally agree. I agree that there have been major difficulties with law enforcement against fraud in the City. That is why we formed the permanent fraud investigation group, which reports to my right hon. and learned Friend the Attorney-General, on 1 January. That is also why we have asked Lord Roskill's 160 committee to consider the way in which fraud trials should be conducted, and especially to consider the role of juries or assessors in such trials.
The major step forward that we have taken is to ensure that no one can trade in an investment business without authorisation. That is a step towards the prevention of fraud rather than the prosecution of fraud, and I am sure that we are as one in saying that we must prevent rather than prosecute.
The right hon. and learned Gentleman has a contempt for the City and its practitioners—

§ Mr. Smith
I did not say that.

§ Mr. Tebbit
That may be so, but the solution which he proposed is strongly opposed in the City, whereas my solution has wide support in the City among practitioners and users.
As to why the Government propose two bodies instead of one—

§ Mr. Smith
They do not.

§ Mr. Tebbit
The White Paper proposes two bodies. I have said that if it is decided that it would be better to operate with one body I should be happy seriously to consider that proposal.
However, the right hon. and learned Gentleman may well be aware that there is a historical difference between the way in which activities in the City have been regulated and the role of the Department of Trade and Industry on the one hand in relation to the insurance industry and unit trusts and on the other hand of the banks and other organisations in relation to other securities. If he thinks about it for a little longer, he may well conclude that it may be right to start off along the lines which the City itself has proposed.

§ Mr. Peter Hordern (Horsham)
Will my right hon. Friend confirm that the Government's major priority in all this is the protection of the public? Can he confirm that the self-regulating agency which he proposes to put forward will give adequate protection to the public either by the direct representation on that self-regulating agency of outside members, say, non-executives, or a supervisory body which may investigate faults or other matters brought to it by members of the public about practices in the City?

§ Mr. Tebbit
I agree entirely with my hon. Friend that the key in all this is the protection of the public. If the City is not seen to be a clean place in which to operate it will lose business. Thereby, gradually those who are practitioners will be losers as well. We look for efficiency, competitiveness, confidence by the investor and flexibility and vigorous enforcement against wrongdoers in the proposals which I put before the House.
In regard to the membership of the bodies, it is the intention that the members of the SIB and the MIB, the two bodies proposed, should include lay people and users of the services, as well as practitioners

§ Mr. Ian Wrigglesworth (Stockton, South)
Is the Minister aware that the development of a statutory framework for self-regulation in the City is to be welcomed? Can he explain why it has taken him so long to come to the conclusion that it should be one or two bodies? Why has he not accepted the representations of quite a broad spectrum of people, including the Financial Times, that there should be one statutory independent body regulating the City? At a time of the creation of more and 161 more financial conglomerates, would not this make greater sense? Will he not, therefore, reconsider his decision and move in that direction, otherwise his proposals look very much like a limp hand in a velvet glove?

§ Mr. Tebbit
Perhaps the hon. Gentleman was not listening when I explained to the right hon. and learned Member for Monklands, East (Mr. Smith) the reasons which led to the interests in the City, practitioners and their customers and users proposing that there should be two bodies rather than one. It may well be that as time goes on there will be a change of view about this and that the two bodies might be merged. If that was the view which emerged, I would not oppose it. Equally, I do not think it would be appropriate at this stage for me to try to force down the necks of those who provide and use the services a solution which they do not want.

§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
Is my right hon. Friend aware that we hope that the Bill will be given proper and mature consideration and will not be enforced before the changes come about? Is he aware that the Stock Exchange arrangement, which has led to rather a shambolic position, should not be repeated on the City as a whole? Will he agree that, wonderful and proper though the Bank of England is in the influence it should have on the City, not every institution should be subject only to its wishes? I hope that Parliament will reserve the right to the nomination of people and will not always have to accept what the Bank of England wishes because it has often been proved wrong on many things.

§ Mr. Tebbit
There will be proper and mature consideration of the Bill when it comes before the House. That is the way of the House on all occasions, as we all know so well from our experience in Committee—well, most of the time. When my hon. Friend reads the White Paper he will find that the chairman of the Securities and Investments Board will be appointed by the Secretary of State for Trade and Industry with the approval of the Governor of the Bank of England and the members will be appointed conversely by the Governor with the approval of the Secretary of State. It will be a joint operation. The Secretary of State will appoint the chairman and all the members of the Marketing of Investments Board.

§ Mr, John Ryman (Blyth Valley)
I accept, of course, that the prime consideration is the protection of the investor, and I welcome the appointment of Lord Roskill and his committee to investigate fraud case trials, but is it not a scandal that for years crooks in the City of London have been getting away with it, although evidence has been forthcoming, because there has been a refusal to prosecute in cases which cry out for prosecution? Has this not given rise to great strength of feeling that the Government should act much more urgently? Is not the difficulty that the Minister finds himself in that the machinery he proposes must necessarily take a long time to set up and in the meantime many further serious criminal offences will be committed in the City of London without fear of prosecution, if the examples of recent years are followed?

§ Mr. Tebbit
I share the hon. Gentleman's concern about offences which are committed but where prosecution is not carried through to conviction. As the hon. Gentleman knows, many such frauds involve persons 162 overseas who, as foreign nationals, are not unduly anxious to come to the Old Bailey to offer evidence. As he also knows, in many cases there have been difficulties about setting out extremely complicated facts in a way which juries can fully understand and the case goes on for a long time. I am sure that under the new system, where the rules for the conduct of business will be much cleaner, clearer and consistent across the whole market, it will not only be easier to see those who have offended, but also at a much earlier stage to prohibit from trading those whose practices, even if not regarded as criminal at the moment, are in contradiction to the code under which business should be carried out in the City.

Several Hon. Members
rose—

§ Mr. Speaker
Order. I must have regard to the fact that there is to be another statement, a Standing Order No. 10 application, a ten-minute Bill and further business. I shall allow questions on this statement to go on for another 10 minutes. I hope in that time to be able to call everyone who wishes to ask a question.

§ Mr. Robert McCrindle (Brentwood and Ongar)
In welcoming the White Paper proposals as a good balance between the protection of the consumer and the encouragement of innovative forces in the City, may I express to my right hon. Friend one disappointment? If it is felt appropriate that the purchaser of a life assurance or investment contract should be protected, why should the protection not be extended to those who purchase motor car insurance, household insurance or insurance covering valuables, because the mis-arranging of such insurances can bring just as much hardship as the mis-arranging of life assurance or investment contracts?

§ Mr. Tebbit
I share entirely my hon. Friend's concern about the damage which can be done if such matters are badly or incompetently arranged. However, the Gower report and the White Paper relate to the investment and securities industry. The non-life aspects of insurance are not normally regarded as investments. Therefore, they are not covered in the White Paper.

§ Mr. Dennis Skinner (Bolsover)
May we be told how the Bank of England could act as an independent adviser in the case, say, of Johnson Matthey when the bank has already offered £75 million in the rescue programme? Is the right hon. Gentleman aware that, in the light of the fraud that is occurring, the bank will be placed in an invidious position?
Why have the Government decided to allow a self-regulatory system to the casino economy—the City—but are insisting on trade unions being subjected to a legal straitjacket? Is it not a fact that, although the Conservatives came to power claiming that they would reduce the number of quangos, the Government are now setting up another one, to be headed by the right hon. Gentleman and to be overlorded by the iron lady with the plastic pound?

§ Mr. Tebbit
I should, first, inform the hon. Gentleman that I have not asked, and do not intend to ask, the bank for advice on the matter to which he has referred. Secondly, I am extremely grateful to him for raising the question of what one might call parallel treatment between the City and the trade union movement. Has he considered what would happen if the Secretary of State for Employment took him seriously? The Secretary of State 163 would lay down the rules under which the trade union movement operated and would appoint the members of the TUC and the executives of the trade unions, and when trade unionists transgressed against the rules they would be prohibited from carrying on work as trade unionists, and if they did so despite that prohibition they would be sent to prison.

§ Mr. Michael Grylls (Surrey, North-West)
Is my right hon. Friend aware that most people who wish the City well and wish to see it continuing to be a successful part of the British economy will welcome the fact that in the regulation there is a minimum of Government involvement? As the power of the new City bodies will come from Parliament, through my right hon. Friend, how will Parliament be able to judge their success or failure? Will there be an annual report to Parliament from those bodies, for example?

§ Mr. Tebbit
The answer to the latter part of my hon. Friend's supplementary question is yes, the boards will report annually to the Secretary of State and those reports will be laid before Parliament. There will be accountability in other ways, as the Secretary of State will have power to require the amendment or withdrawal of the rules of the boards under certain circumstances, principally if they conflict with international obligations or if they are judged to be detrimental to competition and not justified in the interests of investor protection. Thus, there will be considerable parliamentary accountability.
I share my hon. Friend's view, as expressed earlier in his supplementary question, that it is better to have rather less Government involvement in the day-to-day regulation of these matters. The experience of most of us is that those in the City, the practitioners, are far quicker to detect the black sheep among their colleagues than perhaps are the Government.

§ Mr. Skinner
Black sheep indeed!

§ Mr. Tebbit
The hon. Member for Bolsover (Mr. Skinner) tempts me again. Trade unionists detect black sheep among their members, and that is why the NUM and many of its senior members are being sued in the courts by members of the NUM.

§ Mr. Dave Nellist (Coventry, South-East)
Is the right hon. Gentleman aware that every cloud has a silver lining and that the investment by the NUM of its funds in a bank in Liechtenstein has resulted in the union getting almost £1 million in profit, because the money was invested in dollar bonds rather than in sterling?
While that may have occurred by way of an historical accident, may we be told what effect the right hon. Gentleman's statement today will have on the activities of those companies in "the square mile" for which that is a daily occurrence and for which speculation against the pound is a way of life? I refer to ICI and the other multinationals, whose profits are paid for by ordinary working people. What effect will the right hon. Gentleman's statement have on that state of affairs?

§ Mr. Tebbit
It will not have much effect; and it is difficult to answer questions which are inspired by paranoia rather than by experience. I hope the hon. Gentleman can assure us that the NUM, which is so 164 against speculation and windfall profits, will be donating the profit which it may have made, and to which the hon. Gentleman referred, to some worthy cause.

§ Mr. Richard Hickmet (Glanford and Scunthorpe)
Will my right hon. Friend confirm that, inasmuch as the day-to-day regulation will not affect the ability of the City to respond to innovation, competition and development, he will still retain powers in exceptional circumstances to appoint inspectors to investigate certain scandals which may take place in the City?

§ Mr. Tebbit
Yes, indeed; those powers will be unaffected.

§ Mr. Nigel Spearing (Newham, South)
In view of the acknowledged technical nature of the prospective legislation, the need for confidence in the machinery and the fact that the Secretary of State said that it will require mature consideration, will the right hon. Gentleman consider the new public Bill procedure for the legislation?

§ Mr. Tebbit
I am not sure that I should do that on my feet. I hope that we shall have adequate debating time for the matter, and although, as I said, I am wedded to the basic structure—and, indeed, to much of the detail of the White Paper—equally, during the progress of the legislation through the House, and with the advice of many people outside it, we may discover better ways of doing some of what we propose to do than we see at present. I hope that the House will look at the legislation in that spirit. Certainly I shall.

§ Mr. Anthony Nelson (Chichester)
I join in giving a general welcome to the White Paper and to the thought which my right hon. Friend and his colleagues have clearly given to it. Is my right hon. Friend aware that there is a rich opportunity, before legislation is introduced, to gain some consensus on an all-party basis? If my right hon. Friend re-reads the report of the debate on the Gower report, he will find that a clear consensus emerged from that debate, a consensus which, on the basis of his statement, does not seem to be reflected in the decision to have two supervisory bodies rather than one. I welcome the fact that my right hon. Friend is open to suggestions on that. Will he bear in mind that the City institutions and interests which suggested that there should be two bodies rather than one do not necessarily have the protection of the investor but, rather, the protection of their own interests at heart?

§ Mr. Tebbit
I note carefully what my hon Friend says. It will be better if we can establish as much consensus as possible in this area, but it is not just consensus in the House that is needed. It is also consensus among the users and suppliers of the services. The principal area where the official Opposition and the Government may pull apart on these matters is on the question whether there should be a Government-operated statutory Stock Exchange Council-type of operation or whether it should be based principally on self-regulation within a statutory regulatory framework.

§ Mr. Hugh Dykes (Harrow, East)
I assure my right hon. Friend that the proposals will be widely welcomed, subject to further study of the White Paper. Is he confident, however, that the Stock Exchange, preoccupied with its own internal deregulation at the same time as the new regulatory structure is being established, will be able to do it in time and meet its target date, which has been 165 agreed with the Government? Is he confident that the cost of the new structure will not be oppressive, either on practitioners or customers? Does he expect the Bill in the autumn of 1985 to include elements of the EEC's proposals on securities control?

§ Mr. Tebbit
I have not fully considered the matter to which my hon. Friend refers in the last part of his supplementary question, but I shall do so. As for the cost, it is certain that, whatever structure we have, the practitioners and users in the City will bear that cost, so they will have a strong interest in making sure that it is done as economically as possible.
The answer to my hon. Friend's point about the Stock Exchange is that I am still confident that it will meet the deadline. Indeed, it undertook to do so in the compact with my right hon. Friend the Member for Hertsmere (Mr. Parkinson).