HC Deb 17 November 1986 vol 105 cc410-8

Motion made, Question proposed, That this House do now adjourn.—[Mr. Neubert.]

10.2 pm

Dr. Oonagh McDonald (Thurrock)

Four of my constituents invested in McDonald Wheeler Fund Management Limited, a company which offered financial planning services and investment on behalf of private investors, companies and charities. It opened its investment centre in Canterbury.

My constituents, like many others, checked with banks and noted McDonald Wheeler's membership of the Financial Intermediaries Managers and Brokers Regulation Organisation and the fact that it was listed on the General Register of Commission Agents of the Stock Exchange. All this indicated to them that McDonald Wheeler was a reputable company, and they put in all of their savings, including their redundancy pay, totalling £150,000. They and about 2,000 other investors stand to lose everything. I am aware that the hon. Member for Canterbury (Mr. Crouch) and my hon. Friend the Member for East Kilbride (Dr. Miller) also have constituents who have suffered severely at the hands of McDonald Wheeler.

The matter is now in the hands of the official receiver, who expects to recover £3 million, at the most, of the £9 million invested. The funds were supposed to be invested in low-risk projects, but at least 47 per cent. was invested in share capital or unsecured loans. Investments included investments in VIP Airlines, which never took off, a college which did not attract one student, and a luxury yacht which was apparently solely for Mr. Wheeler's use.

In his initial report, which no doubt the Minister has studied in detail, the official receiver said that separate bank accounts were not operated for each of the nine in-house managed funds and that, before 1984, the only records kept were a cash book which simply mirrored the company's bank statement. Partly because FIMBRO carried out a spot check on only one in five accounts a year, that did not come to light until the company had been operating for some time.

I am concerned about McDonald Wheeler, in which my constituents invested their redundancy pay. However, it is not the only company which sought to attract investment of redundancy pay. On 7 October The Guardian republished an advertisement for a company called Siltala, which sought to take advantage of redundancies declared at Vauxhall. The advertisement read: Vauxhall redundancy meeting: Taking care of your money. That type of advertisement is designed to mislead and to suggest that Siltala has the stamp of approval, not only of FIMBRA, which was made clear, but of Vauxhall. That was not the case.

I understand that the official receiver expects to send papers to the Director of Public Prosecutions by the end of December. John Wheeler is at present in Ireland. I am informed by the official receiver that he is unlikely to return to the United Kingdom. I understand that the official receiver agreed to pay his travelling expenses, but John Wheeler asked for other expenses, which the official receiver could not pay.

One of the assurances that I seek from the Minister is that if there is any evidence of fraud against John Wheeler there will be speedy action, followed by prosecution by the DPP, and John Wheeler will be caused to return to the United Kingdom.

The other questions that arise concern FIMBRA. How did it find out about the state of the accounts and the way in which the business was conducted? The press has repeatedly claimed that the discovery was made as a result of one of FIMBRA's spot checks. Is it not the case that FIMBRA received many letters, including one from a disaffected consultant who was formerly employed by McDonald Wheeler, in the spring of this year, and that that caused FIMBRA to examine McDonald Wheeler's operations?

I am also informed by people who independently examined the company documents of McDonald Wheeler that it did not take them more than 45 minutes to discover that the auditor lived at the same address as the company secretary of three of the companies. The accountant was John Woodell and Mrs. Sylvia True, now Mrs. Sylvia Eileen, is the secretary of three of the companies. Mr. Woodell's one-room office was housed within McDonald Wheeler's investment centre. A large part of his business came from McDonald Wheeler. Apparently he not only audited its accounts, but prepared them. Surely FIMBRA should have discovered that at an early date, and surely that should have led it to ask questions.

A little about John Wheeler's past is relevant. Apparently in 1974 he accumulated personal debts of £20,000, which he was unable to pay, and he signed a deed of arrangement. I understand that under Scottish law that is more or less equivalent to being declared a bankrupt. Mr. Wheeler also had two other companies which went into liquidation. This was reported in the Glasgow Herald in 1979. Surely FIMBRA should have discovered more about John Wheeler's past before accepting him as a member of the National Association of Security Dealers and Investment Managers, as it then was?

It is clear that the Securities and Investments Board will appoint FIMBRA as a self-regulating organisation, because there is no one else to regulate the industry. FIMBRA will surely carry out only as much or as little regulation as its members want and are willing to pay for. Does the Minister agree that all the money invested in FIMBRA member companies is at risk so long as there is no compensation for investors? I have already described the type of advertising pressure that occurs.

I wish also to draw attention to FIMBRA's attitude to the problems of McDonald Wheeler and the way in which investors suffered. I shall quote from John Grant's interview on 28 September in "The Money Programme", which seems to have carried out a very thorough investigation of the matter. Asked about the significance that people attached to the use of the FIMBRA initials on the letterheads of member companies and what guarantee the logo was supposed to give, Mr. Grant replied: It was not supposed to give any guarantee at all. There are very few guarantees in this business, Mr. Burden. When Mr. Burden asked, No guarantees at all? Mr. Grant replied: The statement is that they belong to an organisation which is setting high standards and attempting to see that their members comply with those standards, but guarantee —no, Sir. Mr. Burden went on to raise questions about a man who had been involved in personal insolvency.

The Securities and Investments Board has said that it is drawing up a detailed rule book and wishes to satisfy itself about the nature of the rules. I believe that a number of considerations should be involved. As I wish to give the hon. Member for Canterbury a little time in the debate, I shall write to the Minister about them rather than detailing all of them now. They should certainly include the positive vetting of all applicants, frequent checks on the operation of their businesses and a proper compensation fund. It would cost FIMBRA members — of which there are currently about 1,200 — around £5,000 each to repay these unfortunate investors. I appreciate that there is no obligation upon them, but it would surely help FIMBRA's reputation if they did so.

Finally, if the Government wish to encourage small investors they must ensure that small investors are properly protected and compensated for any losses. Unlike those who engage in insider dealing to make a bit more money on the side, small investors cannot afford to lose every penny that they possess. At present, the Government seem to take a cavalier attitude to what happens to small investors. I trust that the Government will respond as quickly to McDonald Wheeler's difficulties as they did in the Morgan Grenfell affair, because small investors should not be allowed to suffer in this way.

10.12 pm
Mr. David Crouch (Canterbury)

I am grateful to the hon. Member for Thurrock (Dr. McDonald) for allowing me to participate in the debate, as McDonald Wheeler Fund Management Limited had its offices in my constituency. One of my constituents, a retired head teacher, put all his savings— some £70,000 —into this fund and it may all be gone. Another constituent persuaded his family to remove all their money—nearly £500,000 — from trusts with a major clearing bank to put it into the McDonald Wheeler fund.

The House can imagine how those constituents feel. Both were impressed by the businesslike look of the offices and by the people managing the company. They also felt that supporting local business was better than dealing with a remote City of London business. They felt that they could be more in touch if they dealt with a local firm. They also wished to back local enterprise. Above all, however, they were impressed by the company's membership of NASDIM — the National Association of Security Dealers and Investment Managers — now called FIMBRA. They were persuaded that the company was sound because it was a member of that trade association.

The brochure from the association said that it was a body recognised by the Secretary of State under Section 15 of the Prevention of Fraud (Investment) Act 1958 … In granting recognition, the Secretary of State delegated to NASDIM certain powers held by his own Department". Over and over again my constituents found that this brochure on NASDIM was persuasive. It suggested—it almost conveyed a promise — to the reader that there was a safeguard for investors. It spoke of investor protection and said that membership was regularly vetted. it said: Only those firms which can demonstrate high professional standards of conduct…are admitted". It fooled my constituents, and they are suffering bitterly. It would have fooled me. Did it fool the Department?

10.15 pm
The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Michael Howard)

I congratulate the hon. Member for Thurrock (Dr. McDonald) on securing the debate tonight and on the way in which she has used it to raise a matter of considerable importance to a large number of people. I acknowledge the contribution of my hon. Friend and neighbour, the Member for Canterbury (Mr. Crouch). I am only too aware from my postbag of the devastating effect of what has happened on the clients of McDonald Wheeler, some of whom are pensioners who depend on investment income to maintain their standard of living. I, too, have constituents who have suffered in this way. I sympathise greatly with them in view of the worry and distress that they are suffering.

An event of this sort naturally generates a great deal of feeling. Sympathy with the victims is merged with a sense of outrage that innocent people have suffered through no fault of their own, and there is an understandable tendency to blame the regulator, for not having prevented the losses, almost as much as the perpetrator. In this case, as has been pointed out, the regulatory body involved is FIMBRA, the self-regulating organisation to which McDonald Wheeler belonged. FIMBRA is, in terms of the present law, a recognised association of dealers in securities". This means that admission to membership bestows the right to carry on the business of dealing in securities, in the same way as does a licence granted by the Secretary of State. The Secretary of State is responsible for recognising the association initially, but the regulation of its members thereafter is a matter for the association itself.

FIMBRA has rules and admission procedures intended to give at least as much protection for investors as the Secretary of State's statutory rules and procedures—for example, on keeping clients' money in a separate account and notifying clients of conflicts of interest. FIMBRA's rules are in some respects more demanding than the statutory rules. As a voluntary body which nobody has to join, the scope of its rules is not constrained by the statute. For example, FIMBRA's rules require members to have professional indemnity insurance. In the future, if FIMBRA is recognised as a self-regulating organisation under the Financial Services Act, it will be required to meet the standards laid down by the Securities and Investments Board, subject to Parliament agreeing in due course that the SIB should be the designated agency under the new legislation. FIMBRA has already taken steps to change its rules in preparation for this. For example, its rules were recently amended to restrict the ability of its members to avoid investigation by FIMBRA by resigning from the association.

I hope that the hon. Lady and my hon. Friend will understand if I do not respond in detail tonight to all the points that they have raised about the conduct of business at McDonald Wheeler. There are various reasons for this. First, section 449 of the Companies Act restricts the disclosure of information obtained in the course of investigations under section 447, which was used to investigate McDonald Wheeler. Secondly, inquiries by the police and the official receiver are still at the stage at which it would be against the public interest for me to be too forthcoming.

A number of general points arise. Apart from the personal distress suffered by clients, it is a serious setback to investor confidence generally when a firm such as McDonald Wheeler manages to slip through the regulatory net. FIMBRA is reviewing its procedures and controls to see what lessons should be learnt from this episode and will be seeking by all feasible means to minimise the risks of any repetition.

I use the word "minimise" advisedly. It is a fact of life that no regulatory system can eliminate fraud entirely. To pretend otherwise would be completely unrealistic. There can be no certainty that an applicant will not lie to the regulator about his past. It is, of course, possible to check some answers, but not every personal detail is recorded in central records, or at all. For example, bankruptcies can be checked fairly easily, but it is not feasible to check whether an applicant has entered into a voluntary arrangement with his creditors, as no central records exist. A system of positive vetting in which applicants' answers were all positively checked for truthfulness would not only be vastly more expensive but would also build huge delay into the authorisation of dealers in securities. I would remind the House that this is also a matter which hon. Members sometimes raise with me on behalf of constituents; and it is worth mentioning, in passing, that there are important markets where such delays are a significant barrier to British providers of financial services. I am not suggesting that the convenience of financial businesses in speedy authorisation procedures, either in this country or abroad, should take precedence over the interests of investors in having thorough checks made into applicants' competence and probity, far from it, but there is a limit to what is feasible and reasonable.

FIMBRA has inevitably been criticised for not checking more carefully before admitting Mr. Wheeler. There have been press reports, for example, that Mr. Wheeler is an ex-bankrupt. It is not for me to account for the actions of FIMBRA in this matter. As I have said, it is a self-regulating organisation and is itself responsible for regulating its members. It is, however, important not to suppose that everything now known about Mr. Wheeler could have been known, and reports of his past so-called bankruptcies have exaggerated both the significance and discoverability of episodes of his past career. Mr. Wheeler has been involved in voluntary arrangements with his creditors and in voluntary liquidations, but these are much less serious matters than bankruptcies and would not necessarily be deemed to disqualify a person from being authorised to deal in securities. Many people whose probity is beyond question have some voluntary liquidations in their background—through, for example, involvement in venture capital operations which did not succeed. Certainly these are matters which should prompt the regulator to ask questions.

The circumstances could have been such as to lead to the conclusion that the applicant was not a fit and proper person, but this conclusion will not necessarily follow and, as I said a few minutes ago, the regulator's ability to probe depends very much upon the applicant disclosing the matter in the first place, or upon there being records which can be checked. Criticisms of FIMBRA based on Mr. Wheeler having been bankrupt are thus somewhat wide of the mark. FIMBRA's procedures involve checks on financial resources and the arrangements for keeping clients' money by auditors and the taking up of references. I understand that all these checks were carried out on McDonald Wheeler, but gave no cause for concern.

In any case, entry controls are only part of the picture. It is also necessary to monitor how businesses are run after they are admitted. Monitoring and frequent spot checks require substantial resources and manpower. There is a limit to how much of either a self-regulating organisation can reasonably be expected to have. FIMBRA requires members to provide annual financial resources certificates from their auditors. These cover the arrangements for safeguarding clients' money. I understand that McDonald Wheeler's auditor gave the company a completely clean sheet.

This does not mean that the checks and procedures operated by regulators are ineffective. That would be a false impression. The great majority of financial businesses are honest and competent. It is the fraudsters who grab the headlines, not the 99 per cent. of honest practitioners. Undesirables are weeded out, either when they first apply or before significant harm is done. For example, since January 1985 the Department has refused or revoked, or given notice of intention to refuse or revoke, about 30 licences to deal in securities. Even in those few cases when matters go further and there are significant losses, the losses may be less as a consequence than they would otherwise have been. But the fact remains that F1MBRA did act and that its doing so was instrumental in bringing the situation to light and to the business being closed down. I would make one further point in this context. One's sympathies are, of course, entirely with the victims, but it should be remembered that any regulator is under an obligation to those regulated to act fairly and reasonably. That means that action has to be based on adequate evidence.

The Financial Services Act will help the regulatory authorities by equipping them with a variety of weapons to protect investors. For example, they will be able to restrict the type of investment business carried on by a person, seek court orders to restrain breaches of rules or restitution orders for the disgorgement of profits unjustly earned and insist on a second audit. However, as I said a few moments ago, it is unrealistic to expect fraud to be eliminated entirely. Therefore, the Financial Services Act 1986 also provides for far more widespread and effective compensation arrangements than are possible under the present law.

Section 4 of the Prevention of Fraud (Investments) Act 1958, which actually goes back to 1939, requires licensed dealers to pay a £500 deposit to the accountant general of the Supreme Court, which is payable if the licensee becomes bankrupt or is wound up by or under the supervision of the court. Clearly such an arrangement is completely inadequate today. Indeed, £500 would probably he insufficient to compensate even a single investor nowadays, but this sum is enshrined in primary legislation and could not be amended except by further primary legislation.

A comprehensive and adequate compensation scheme is a vital safety net for the smaller, non-professional investor. The Government's approach to compensation was set out in the January 1985 White Paper on financial services. This stated: Compensation should be available for investors in the event of loss arising from investment business' fraud, negligence, or failure to comply with requirements for the protection of clients' assets…The aim should he for the private investor to receive full compensation. The Financial Services Act 1986, accordingly provides for the establishment of an effective and well-funded central compensation scheme. The chairman of the SIB has welcomed the relevant provisions of the Act as essential in order to provide the level of protection which small investors have every right to expect". Our objective is to provide the best protection for investors which can reasonably be made.

The SIB put forward last year its proposals for a compensation scheme which would offer compensation up to £30,000 to private clients of businesses in default. I am aware that not everyone considers this figure adequate and that some have compared it unfavourably with the existing stock exchange scheme. I am sure that the SIB will take full account of the views that have been expressed about its proposals. The chairman has already indicated that it might be possible to raise the top limit in a broadly-based scheme. This is a matter for the SIB in the first instance, but I would observe that critics of the SIB proposals should bear in mind that the notional maximum compensation payable is not the only factor to be taken into account in comparing different schemes.

Coverage is also important. Not even the stock exchange scheme covers the full range of liabilities mentioned in the January 1985 White Paper. It does not, for example, cover liabilities arising from an award of damages for negligence. In any case, there is nothing to prevent a recognised self-regulating organisation from establishing a more generous scheme of compensation. Under the new regime I might also add that a high limit on compensation in one area is scant comfort to an investor who has lost his life savings in a completely different type of investment business.

It is extremely unfortunate that the new provisions will come too late to help clients of McDonald Wheeler. The Act does not provide for the compensation arrangements to be brought into effect retrospectively. Quite apart from the natural presumption against retrospective legislation, it is difficult to see how compensation could equitably be arranged retrospectively. Furthermore, the compensation arrangements depend on other parts of the regulatory framework which are not yet in place. The Act does not provide directly for compensation, but for rules to be made regarding compensation. I have also received requests that the Government should themselves compensate clients of McDonald Wheeler. I am afraid that I cannot agree to those requests. It is central to the Act that the costs of enforcement and compensation should fall on the financial services industry and those who use those servides, not on the general taxpayer. I see no reason to depart from this principle in the present case.

Investigations into McDonald Wheeler are continuing. It would assist the police in their inquiries if clients of the firm would contact the Kent constabulary fraud squad. Meanwhile, I am afraid there is little information I can give about how much clients might recover of their investment. The winding-up is a complex process and it is not possible yet to assess exactly what dividend may be paid. The present best estimate is that the assets of the company may realise about half of the £9 million or so invested in McDonald Wheeler's in-house funds. The official receiver will continue to keep investors informed of progress.

I repeat that, in common with the hon. Member for Thurrock and my hon. Friend the Member for Canterbury, I have very considerable sympathy with those caught up in the McDonald Wheeler affair. I appreciate that much of what I have said tonight will be rather cold comfort for them, but I hope I have made it clear that investors will be much better protected against financial loss in such circumstances when the Financial Services Act comes into effect.

Question put and agreed to.

Adjourned accordingly at hall-past Ten o'clock.