Lords amendment: No. 69, in page 34, line 30, at end insert
; and any such request shall not be capable of being withdrawn after rules giving effect to it have been made but wittout prejudice to the power of the Secretary of State to revoke the rules if he thinks fit.
Mr. Deputy Speaker
With this it will be convenient to take the following Lords amendments: No. 69A in page 35, line 26 leave out subsection (5).
No. 70, after clause 49, insert the following new clause—
.(1) The Secretary of State may by rules establish a scheme for compensating investors in cases where persons who are or have been authorised persons arc unable, or likely to be unable, to satisfy claims in respect of any description of civil liability incurred by them in connection with their investment businesses.
(2) Without prejudice to the generality of subsection (1) above, rules under this section may—
(3) A scheme under this section shall not be made so as to apply to persons who are members of a recognised self-regulating organisation except after consultation with that organisation or except at the request of a recognised professional body to persons who are certified by it and subject to its rules in carrying on all the investment business carried on by them; and no scheme applying to such persons shall be made unless the Secretary of State is satisfied that the rules establishing it make sufficient provision—
(4) Where a scheme applies to such persons as are mentioned in subsection (3) above the rules under this section may—
(5) A request by a recognised professional body under subsection (3) above shall not be capable of being withdrawn after rules giving effect to it have been made but without prejudice to the power of the Secretary of State to revoke the rules if he thinks fit.
(6) Rules may be made—
Amendment to the Lords amendment, in page 16, line 15, leave out 'reflect' and insert
'are fair and reasonable in all the circumstances and take into account all relevant factors including'.
No. 220, after clause 118, insert the following new clause—
§ Indemnity schemes
- (1) Any two or more registered friendly societies may, notwithstanding any provision to the contrary in their rules, enter into arrangements for the purpose of making funds available to meet losses incurred by any society which is a party to the arrangements or by the members of any such society by virtue of their membership of it.
- (2) No such arrangements shall come into force unless they have been approved by the Chief Registrar of friendly societies or, as the case may be, the Registrar of Friendly Societies for Northern Ireland."
, transferee body or body administering a scheme under section (Compensation fluid) above".No. 330, in clause 150, page 118, line 34, at end insert
or of enabling or assisting the body administrating a scheme under section (Compensation fund) above to discharge its functions under the scheme".No. 428, in schedule 1, page 154, line 25, at end insert—
(1A) The rules under that Chapter to be taken into account for the purposes of sub-paragraph (1) above include the rules made under section (Financial resources rules) and under section 49 and (Compensation fund) so far as not themselves applying to the members of the organisation.No. 441, in schedule 6, page 161, line 17, leave out
section 49" and insert
sections 49 and (Compensation fiend)".No. 442, in schedule 6, page 161, line 18, leave out "that section" and insert "those sections".
No. 445, in page 166, line 27, leave out "section 49" and insert
sections 49 and (Compensation fund)".
No. 480, in page 178, line 41, leave out
other than a member society".
No. 481, in page 178, line 42, at end insert—
() Such rules shall not apply to a member society of a recognised self-regulating organisation for friendly societies unless that organisation has requested that such rules should apply to it; and any such request shall not be capable of being withdrawn after rules giving effect to it have been made but without prejudice to the power of the Registrar to revoke the rules if he and the Secretary of State think fit.
No. 482, in page 178, line 46, at end insert—
17A. — (1) No scheme established by rules under section (Compensation fund) shall apply in cases where persons who are or have been regulated friendly societies are unable, or likely to be unable, to satisfy claims in respect of any description of civil liability incurred by them in connection with any regulated business but the Registrar may, with the consent of the Secretary of State, by rules establish a scheme for compensating investors in such cases.
(2) Subject to sub-paragraph (3) below, subsections (2) to (4) and (6) of that section shall apply in relation to such rules as they apply to rules under that section but with the substitution for the references to the Secretary of State, authorised persons, members and a recognised self-regulating organisation of references respectively to the Registrar, regulated friendly societies, member societies and a recognised self-regulating organisation for friendly societies.
(3) Subsection (3) of that section shall have effect with the substitution for the words "the Secretary of State is satisfied" of the words "the Registrar and the Secretary of State arc satisfied.
(4) The references in section 149(3)(b) and 150(1)(e) of this Act to the body administering a scheme established under section (Compensation fund) of this Act shall include the body administering a scheme established under this paragraph".
No. 521, in page 188, line 18, leave out "and 17" and insert "17 and 17A".
No. 529, in page 200, line 50, at end insert—
() the body administering a scheme under section (Compensation fund) of or paragraph 17A of Schedule 9 to that Act and any officer or servant of such a body,".
§ Mr. Howard
These amendments follow a reappraisal of the way the compensation provisions in the Bill are constructed. There are two main issues. The first concerns the machinery which the Bill provides. Existing clause 49 is based on the concept of compulsory indemnity along the lines of the Solicitors Act. This certainly provides a means 553 by which investors can benefit from payments. However, on further reflection, the Government have concluded that additional powers, involving the ability to set up a compensation scheme, such as those established under the Banking and Building Societies Acts, should be taken if the objective of the January 1985 White Paper is to be realised. This envisaged arrangements to compensate investors directly when an investment business could not do so. The new clause which we have tabled therefore follows the provisions of the Banking and Building Societies Acts.
The second issue was whether businesses authorised through membership of recognised self-regulating organisations should, in some circumstances, be obliged to participate in a central scheme established under the Bill. This issue was raised during consideration of the Bill at an earlier stage, and since then the SIB has argued persuasively that a scheme which is restricted to a possibly small and variegated range of directly authorised businesses may not be able to provide the level of protection for investors which we would wish to see as the basic standard in the industry.
The SIB has argued that the larger the coverage of a central fund, the easier it will be to obtain adequate finance and thus the better will be the compensation which investors can expect and the less will be the cost of making compensation available. I have considered these arguments carefully. I acknowledge the excellent record, for instance, of the existing stock exchange compensation scheme. However, I believe that the fundamental objective is that investors generally should be protected by compensation arrangements which are the best which can be reasonably made. Our approach to this question has been based on the policy set out in the January 1985 White Paper, which stated:Compensation should be available for investors in the event of loss arising from investment businesses' fraud, negligence, or failure to comply with requirements for the protection of clients' assets — The aim should be for the private investors to receive full compensation.Hon. Members will be aware that the SIB put forward last year the idea of a scheme offering compensation of up to £30,000 to private clients of businesses in default. In a recent speech, the chairman of the SIB, welcoming the Government's proposal as one which wasessential in order to provide the level of protection which small investors have every right to expect",said that it might be possible to raise that top limit in a broadly based scheme. I am sure this will be contrasted with the higher notional limits available under, say, the existing stock exchange scheme. On that I would make three observations. First, not even the stock exchange scheme covers the range of liabilities mentioned in the White Paper. It would not, for instance, cover liabilities arising from an award of damages for negligence. Secondly, there is nothing to stop an SRO establishing a more generous scheme. The SIB proposals for a "federal" structure are designed to assist this. Thirdly, a high limit on a compensation fund operating in one area is no comfort to the investor who has lost perhaps his entire life savings in another area.
Having considered the various factors, I concluded that it would be right to provide for the rules to allow, subject to certain conditions being met, the establishment of a central compensation scheme. This will allow the creation 554 of an effective and well-funded scheme. It will not be a feather-bedding scheme — the value of investments can go down as well as up and there is no intention of relieving the investor of the responsibility to exercise judgment and care in deciding how to invest his money. Where an investment fails for straightforward commercial reasons he cannot look to any regulator to make good his losses. However, the scheme should protect the interests of small investors who lose their money through an investment business's fraud, negligence or failure to comply with the rules.
I have at the same time recognised the concern that some SROs feel at the possibility of their members paying for claims on other businesses and the loss of independence in running their own schemes. Therefore, the new clause incorporates special safeguards in respect of cross-subsidisation and requires there to be adequate representation on the body administering a central scheme of the interests of members of participating SROs. As I have already pointed out, there is nothing to prevent an SRO from making arrangements for extra compensation to be available.
I recognise that this approach has not been universally welcomed by all the self-regulating organisations. However, the issue turns on one question alone: are we to have an efficient and well-funded scheme for protecting investors generally, or are we to settle for a compensation scheme which for many investors may frankly prove to be second best and lead to a level of protection overall lower than we could otherwise achieve? My view on this is that second best is not good enough. We must provide the machinery to allow investors to enjoy, in the words used in schedule 6,the best provision which can reasonably by made".I have been persuaded that our approach provides this and that the alternatives do not.
The other amendments in this group are consequential to the policy that I have outlined. Hon. Members will note that the existing clause 49 has been retained, since I believe there may still be scope for compulsory insurance arrangements to play a part in this area. However, the clause has been amended to deal with the point on precipitate withdrawal of SROs or RPBs raised by the hon. Member for Dagenham (Mr. Gould) in Standing Committee. We have also altered the way the clause is applied to persons authorised under clause 30 in order that we may have more flexibility on how we meet our Community obligations.
§ Mr. Gould
I find myself in the somewhat unusual position of enthusiastically endorsing almost every word that the Parliamentary Under-Secretary uttered on this group of amendments. He will recognise that his persuasive and forceful argument is a skilled elaboration of a case that I attempted to make in the Standing Committee. If I recall correctly, there was support for that case elsewhere. I particularly endorse the Parliamentary Under-Secretary's remarks—despite the reservations of the stock exchange, which I fully understand—about the importance of there being a comprehensive and guaranteed scheme so that the investor does not find different standards applying according to whichever part of the investment industry he happens to be dealing with.
A recent example which shows exactly why these provisions are necessary involves the collapse of a firm called McDonald Wheeler. The firm was a member of 555 FIMBRA, formerly NASDIM. It would thus have been authorised under this legislation. The investor will have adequate protection under the new regime. Unfortunately, McDonald Wheeler collapsed. It seems inevitable, I am sorry to say, that a number of investors will lose a good deal of money—certainly a good deal to them, at any rate. It also emerges that Mr. Wheeler, the man concerned in setting up the firm, had, to say the least, somewhat doubtful antecedents. FIMBRA, formerly NASDIM, was unable, for reasons one can understand, to check him out in an adequate fashion.
This gives rise to a range of other concerns about the readiness of SROs to take on what will clearly be an onerous responsibility. IfFIMBRA, for which I have good regard — I certainly do not intend to attack it — has difficulties in fulfilling its potential responsibilities when the Bill becomes an Act, one can imagine that other SROs with even shorter histories than FIMBRA's will have equal or greater difficulties.
The point of recounting that story is to emphasise, as I am sure the Parliamentary Under-Secretary immediately recognises, that if such a situation were to arise under the legislation, the investors concerned would rightly expect, given these circumstances, to be compensated for at least part of their loss. They would turn to an adequate compensation fund which properly protected them. I pay tribute to the Government. Their proposals ought to put such a mechanism in place. I also pay tribute to the SIB which has campaigned long and hard for this outcome.
I was interested to hear the comments of the Parliamentary Under-Secretary on the maximum limit of any individual payment. I take the view—I am sure that my hon. Friends will share it — that any maximum payment of £30,000 or £35,000 would be far too low. In regard to the instance that I described—McDonald Wheeler — I am already in touch with investors who have lost substantially in excess of that sum. In today's values, particularly in terms of redundancy payments and the prices that can be obtained for residential property, £30,000 is pitifully small. An amount of £100,000 is more appropriate. The Parliamentary Under-Secretary, if not directly involved in setting the limit, might at least use all his influence to ensure that a more sensible limit eventually finds its way into the scheme.
I welcome the provision as a very important step towards the objective of proper investment protection.
§ Mr. Nelson
I welcome the amendments, with the reservation that the hon. Member for Dagenham (Mr. Gould) mentioned about the limit that should be set. The losses that can be incurred as a result of fraud and the uncertainty and devastating impact on individual lives should not be ignored in the consideration of a Bill whose principal objective is investor protection. We should, above all, be concerned to ensure that ordinary, legitimate members of the public who engage not in bad investment judgment but in reasonable judgment about with whom they place their moneys in certain markets are protected and compensated if, for a variety of reasons, whether due to fraud or whatever, a firm subsequently collapses.
We should bring these matters to a personal level and demonstrate their importance. I should like to read to the House an extract from a letter from one of my constituents, which clearly shows the need for a central 556 compensation fund and adequate compensation for people who lose out in situations of this kind. My constituent, whose name I shall not mention, wrote:I am writing to you in sheer despair concerning funds which myself, my wife and my daughter have invested in the above firm"—McDonald Wheeler Fund Management. He continued:Over the last two years myself and members of my family have invested over £25,000 with McDonald Wheeler, at the end of July 1986, the Department of Trade stepped in, Wheelers went into liquidation, with the firm of Grant Thornton under Mr. Nick Lyle, being appointed by the Receiver to investigate.We the clients were informed that it would take a fortnight to sort matters out, then later we were told it would take a while longer. Three months have now passed and what few reports we have received leave us in despair and feeling helpless and hopeless. The only information that can be collected, or heard, is from the newspapers, financial reports and T.V. and Radio Money Programmes, all of which continuously harp on about — McDONALD WHEELER THE CRASHED INVESTMENT FIRM — CLIENTS HAVE LOST ALL OF THEIR MONEY.In view of our despair, I have tried in all directions to obtain correct information, but no one will help. FIMBRA utterly refused to step in and assist on behalf of clients, they in fact don't wish to know, in spite of McDonald Wheeler being a member and fully vouched and investigated by them.Grant Thornton tell me they are completely unable to help, or offer information as they forward facts on]) to the Official Receiver, he in turn says he can do nothing, as he is required to supply all findings to the Courts. We the clients and investors, the real people who matter are simply left high and dry.I feel so sick about this matter, particularly so as the bulk of our investments are owned by my wife and were providing her with a necessary monthly income, from which she has been completely cut off and lived in a most restricted situation, all through no fault of her own making and sheer default on Wheeler's part.Unfortunately, we in common with all Wheeler's clients and incidentally as thousands of other investors also feel, invest funds in an investment firm that is a member of FIMBRA. How wrong we all were and are!!! FIMBRA is utterly useless, it is thoroughly unable to do anything, the same organisation investigated McDonald Wheeler when he first applied for membership in the early 1980s, they did not discover that Wheeler had twice previously been bankrupt … a compensation fund must be set up to protect investors, it will take a year to come into force.—So much for that—Now, twelve years later 1986, they are saying the same old thing over again, namely a compensation fund will start next year. I can foresee any such compensation remaining well clear of the McDonald Wheeler case, involving sonic £15,000,000 of clients' investments.I consider it a disgrace on the part of Parliament, after all this time—12 years and still having done nothing to protect investors and people such as my wife, whose particular funds were hard saved life earnings on her own efforts, also including her only legacy, from her father, who served for 30 years in the British Army through two wars as an RSM, Military Medal and Bar … We do so desperately wish to know if our money will he recovered and when, the facts must be known somewhere.In a situation such as this, surely the government cart take some action to assist us, the investors who placed funds in an accepted responsible organisation, namely FIMBRA.I apologise to the House for the length of my quotation from that letter, but I hope that all hon. Members will understand that when it comes down to an individual level it is a real tragedy and disaster for those concerned. We have a responsibility to protect those people. Another thing that comes out of that letter is the desperate lack of information for people in such a situation, with the worry and loneliness that they experience. Any funds or regulatory systems that we set up should provide not only funds to compensate but much more and immediate 557 information to those who lose out. As for the amount of compensation that should be provided, I feel that it is not adequate to replace an open-ended limitless compensation figure before with a £30,000 figure now. At the very least, it should be a six-figure sum.
It is very important to recognise that the obligation of members of self regulation organisations to contribute toward a compensation fund, either within the SRO or centrally, imposes a discipline on those members to report suspect cases in the market in which they are operating. If members have to contribute to a central fund or an SRO fund, they will be watching much more carefully the activities, risk and vulnerability of other firms operating in the same market, and will have the incentive and initiative to report to the SRO that a firm in their market place is suspect because they know that if that firm goes to the wall, they may be on line to pay compensation funds. I therefore take with a pinch of salt some of the whinnying and carping of individual firms about the contribution that they will have to pay because it will be a good discipline for them to report to the SRO situations in which a risk is involved. It will also enhance the authority and right of the SRO to intervene and check out at an early stage cases that are suspect and thus to act in the interests of the protection of investors and of the market as a whole.
I do not believe that the debate can be seen in isolation from the subject of separation of clients' money. I think that it is fair to say that if the rest of the provisions are complied with and adequately enforced, particularly with regard to the separation of clients' funds, there will be less need for the compensation funds to be claimed upon by individuals who have lost out. All the provisions must therefore hang together.
I hope that my hon. and learned Friend the Minister, in replying to the debate, will go further than he went earlier. It is not enough to hope that an adequate limit will be agreed at some stage in future. Under these provisions, the Secretary of State may make rules, so he can establish within the scheme a limit considerably higher than £30,000 or ensure that in the administration of the scheme by the SIB there is a limit substantially higher than £30,000. It is not an adequate answer to say, "Before we delegate the running of the compensation fund to the SIB, we would have to be assured that it would be adequate and that the limit set for compensation was sufficiently high". My hon. and learned Friend can ensure that now. He can provide a much more generous and appropriate limit before he hands down the administration of the compensation fund to the SIB. We look to him to do that. The public and investors such as my constituents look to him. I hope that in winding up the debate he will be able to provide some much-needed assurance to past and potential investors.
§ Mr. Ashdown
I associate myself strongly with what the hon. Member for Chichester (Mr. Nelson) has said, particularly his last words.
I welcome the Minister's change of mind on this occasion. I ask him, gently, to contrast that welcome with his sharp, caustic, uncalled-for and unpleasant comments when I sought to exercise the same judgment earlier in the debate. A change of view caused him to say that my party was an expert on changing its mind. That comes strangely from the mouth of a Minister who has brought before the 558 House a Bill that is widely regarded as disorganised and a dog's breakfast, as well as having close to 1,000 amendments, 20 new clauses and four new schedules. In its present form the Bill commands the confidence of only some 20 per cent. of the City, so it is said. It is regarded by myself and many others—I suspect on Conservative Benches, too—as a Bill that will have to return for amendment within the next few years, probably two or three, which is the figure that I have heard. If the Minister had any self-respect he would not mention other people's change of mind, bearing in mind that the Bill stands as an appalling indictment, if not on his judgment, on the judgment of the Government. I shall come to happier matters — that is, the amendment before us. If the Minister had been wiser, kept his mouth shut and had more self-restraint, those matters might not have been thrown at him in that fashion, for that has not been the tone of the debate that we have been conducting.
The comments which have been made about limitation are important and the Minister has it in his power to make it clear that the limit of £30,000 is inadequate. If he cannot set a precise sum, let him make it clear that he regards the limit of £30,000 as inadequate. He need not necessarily set a figure if he finds that too difficult a task. This matter was raised in another place and in discussing a probing amendment Lord Ezra said that perhaps there was not a case for an industry-wide compensation fund. I believe that such a fund is extremely important, and I subscribe to what has been said by the Minister, the hon. Member for Dagenham (Mr. Gould) and others. There is a case for an industry-wide compensation fund and that case becomes stronger when surveillance and monitoring services are federated. That means a unified compensation fund along with surveillance and monitoring services operating between SROs and the SIB.
That argument has been advanced in a number of letters whcih the Minister has recieved and which I have seen, and I am sorry that he has set his face against a federated structure for surveillance and monitoring. I think that such a system would have offered an advantage. We have an industry-like unified compensation fund, which is a good thing, but a fragmented surveillance service.
One of the bases upon which the Bill is founded is the need for effective rules, effective surveillance and effective compensation. When these three elements are together in the same body, they provide what might be described as an incentive. It is one which works in a virtuous circle. Effective rules and effective surveillance will mean that it is likely at the end of the day that less will be paid out in compensation, but if responsibility for compensation lies with someone else, there will be no incentive. In some circumstances — this is not inevitable — the incentive could operate the other way round. If those who have lower costs because of less adequate surveillance and easier rules receive an advantage if the cost of compensation is shared equally with those who have fewer claims because of more stringent rules and better surveillance, that could lead to a vicious circle instead of a virtuous one. In other words, the rain raineth on the just and the unjust, but chiefly on the just because the unjust have stolen the umbrellas. In this instance the unjust will have to pay less for umbrellas.
559 The Minister has said that there are provisions in the Bill which prevent this cross-subsidisation. I presume that he is referring to subsection (3)(b) of the new clause, which states:for securing that the amounts which they are liable to contribute reflect, so far as practicable, the amount of claims made, or likely to be made, in respect of those persons.I would welcome an arrangement where the premiums to the compensation fund were related directly to the sums paid out in respect of each SRO. That would be possible within the terms of the Bill, and certainly the concept of variable premiums for different SROs is possible. Why should that correlation between premiums and the compensation that is paid out not be precise mathematically and why should the arrangement not be conducted in that fashion? Why do we have to use the term "so far as practicable"? I shall be grateful if the Minister explains to us precisely how the brake on cross-subsidisation will be put into effect so as not to build in the vicious circle that will tend to drag standards down.
§ Mr. Alan Howarth
I wish to ask my hon. and learned Friend the Minister two questions. Under the scheme of compensation which he and the SIB envisage, will it be necessary for fraud or negligence to be proved before compensation is activated? If that is necessary, it could be some years before the defrauded investor received compensation. Secondly, if an investment business were to lose authorisation — for example, as a result of being expelled from an SRO — would compensation be available subsequently to an investor who, it later transpired, had lost money because of the practices of the firm before it lost membership?
§ Mr. Bermingham
The next time the Minister cares to attack me personally—I am grateful to my hon. Friend the Member for Dagenham (Mr. Gould) for coming to my defence — I ask him to check his facts. As a good, cautious and learned lawyer of the past, he should know that the first thing to do before launching out is to check one's facts. Long before the Minister was appointed, when he was a Back Bencher, he will recall that the House debated the Gower report and stock exchange arrangements with a view to a cessation of the various actions which were then current in the courts. If the Minister reads the record of our proceedings, he will find that on each and every occasion I took part in those debates. I invite him at an appropriate stage to withdraw his remark about my interests in this subject.
I may, for once, get an apology, if the Minister's shoulders are broad enough, when he discovers that I agree with him about the compensation provisions, save for the reservation that the hon. Member for Chichester (Mr. Nelson) entered with regard to the £30,000. I do so on the basis of my experience as a former member of the Law Society. The Law Society has a limitless compensation scheme, and rightly so. It is not the client's fault that the broker or dealer is crooked or that the solicitor is crooked. There is no way in which to foresee that a solicitor will, in middle life, run off with the funds. One can sometimes get a warning sign.
§ Mr. Bermingham
We will ignore my hon. Friend's ignorant comment.
560 There are warning signs which can be seen in the everyday way in which they deal with their practice. Warning signs could be seen in the City with certain types of transaction occurring or shares being unloaded.
If every member in an SRO knows that, if somebody were to make off with the funds, they would have to contribute towards the compensation fund, they would be put on guard. I am sure that hon. Members who are members of the Law Society will confirm that that society's experience is that one of the best forms of watchdog is fellow members who see things happening. They are put on notice because they have a personal interest in the integrity, honour and good practice of their fellow members.
If the City believes that it consists of people of the highest calibre and personal integrity, what does it have o fear from a compensation fund that is 100 per cent. safe for its investors? If they cry, "The sums are so great, we cannot meet them" they are saying that there are people in the City who will make away with millions of pounds which the City cannot afford to meet. If we maintain that our City is equal in integrity to anything in the world, what better way is there to demonstrate that fact than to have a compensation fund which meets every claim in full? That has the advantage of policing and of demonstrating belief in the City's integrity.
The Bill would empower the Minister to intervene and make the necessary regulations. If he believes that the investor has rights and ought to be protected, what better way is there to fulfil that belief than to ensure that when an investor is faced with fraud or negligence he is protected 100 per cent? It is not too much to leave as the hallmark of the Bill a compensation scheme which embraces full protection. That is within the Minister's power. I challenge him to cover the client in full, bearing in mind the fact that the law and accountancy, for example, have such indemnity schemes.
If the Minister believes that the Bill exists to protect the City because it is a City of integrity, he will act and the compensation level will be 100 per cent.
§ Mr. Tim Smith
I warmly welcome this group of amendments on the compensation fund. Like my hon. Friend the Member for Chichester (Mr. Nelson) and the hon. Member for Dagenham (Mr. Gould), I should like to refer to the case of McDonald Wheeler as it highlights the need for a compensation fund.
If there had been positive vetting of Mr. Wheeler's application, it would have been discovered that he had previously made an arrangement with his creditors, but it is estimated that it would cost between £1,000 and £1,500 to vet each application. As a result, the process is a negative one—the applicant fills in the form and, if he tells lies, that is merely the beginning of the fraud. There are also demands for references, and Mr. Wheeler would' have supplied those.
§ Mr. Nelson
I apologise for interrupting my hon. Friend at this stage. Will he confirm that, if the legislation goes through, such a situation should not and would not recur, because to carry on business as an authorised person one would expect a self-regulating organisation to make reasonable inquiries? I do not know whether the cost is £1,000. There must be some criterion attached to authorisation and the sort of questions supplied by my hon. Friend should be basic to such a process.
§ Mr. Smith
That is obviously a matter for the SIB. In practice, the SRO would have to monitor every court and every judgment made and keep a list of all those people who had made an arrangement with their creditors. That would be a substantial operation, so it is likely that checking would be carried out on the basis of negative vetting. Therefore, fraudsters will still get through the net. Mr. Wheeler is obviously a crook. At the end of the day, it does not matter what rules and regulations there are about the prevention of fraud, we cannot prevent everybody from committing fraud. There will always be fraudsters and people who tell lies. The case highlights the need for a compensation scheme.
§ Mr. Cash
Although we were colleagues in the Committee, I find my hon. Friend's comments startling. The whole basis of a "fit and proper person" test is that persons who become members of SROs are fit and proper. There never is, nor has been, any intention that this should be conducted on the basis of a negative clearance.
§ Mr. Smith
I am surprised at that, because it seems to me that there will always be people who are able to persuade the body in question that they are fit and proper people when they are not. There will always be crooks and there will always be people who are prepared to deceive the body in question. To pretend that we are setting up a system that will prevent all fraud is absurd. That is why it is essential to have a compensation fund.
The McDonald Wheeler case has a lot in common with the Norton-Warburg case, and is a useful reminder of why we had this legislation. It is to protect small investors. I am clear about McDonald Wheeler. The man is a crook. He told lies to the Financial Intermediaries, Managers and Brokers Regulatory Association. It has been said that FIMBRA should have conducted an earlier spot check, but it conducts spot checks on one in five members a year. Again, it is a question of resources and how much money and manpower that will be put into this. It was a spot check by FIMBRA that revealed what was going on at McDonald Wheeler. Presumably that was in response to complaints, but it is at least possible that if the spot check had not been made McDonald Wheeler would still be trading.
It is important to appreciate that FIMBRA does not have the powers it will have once the Bill becomes law. For example, it was not able simply to suspend its member from trading but had to go to the Department of Trade and Industry and get it to take the necessary action. My hon. Friend said that investors were being kept in the dark, but the official receiver appointed on 6 August wrote a three-page letter setting out the circumstances and describing the situation, and sent it on 19 September to all investors. He has done what he can to keep people informed.
§ Mr. McCrindle
Does my hon. Friend agree that some of the criticism directed at FIMBRA in relation to the McDonald Wheeler case is unfair in that it changed its name from NASDIM, which was a different operation from the future SRO that is likely to operate under the name FIMBRA? Would it not be as well to underline the fact that FIMBRA, as now constituted, is a different body to the FIMBRA, assuming that it keeps that name, that becomes an official SRO as designated under the Bill?
§ Mr. Smith
My hon. Friend is right. It is perhaps inevitable that when legislation such as this is going 562 through Parliament, some people think that, because we have discussed this in large measure, it is in operation. Unfortunately for investors in McDonald Wheeler, that is not the case. We are talking about a compensation scheme which we hope will deal with such cases in the future. That is why it is so very important. My modest amendment addresses itself to the point to which reference has already been made: the degree to which contributions relate to subsequent claims. That should not be the only consideration to be taken into account when contributions are calculated.
§ Mr. Austin Mitchell
I hesitate to intervene in this bitter internecine war. Indeed, I hesitate to speak at all, given the Minister's unkind and hostile response to my hon. Friend the Member for St. Helens, South (Mr. Bermingham). I do not want to bring similar retribution down on my head. I understand why the Minister is somewhat ratty, given this dog's breakfast of a Bill that he has to see through the House in the dying stages of the Session. However, it was unkind to speak thus to my hon. Friend.
The compensation fund casts a curious light on the Minister's approach to the Bill. I did not attend all of the Standing Committee sittings because I broke my arm, but I recollect that in Standing Committee the Opposition supported the establishment of a compensation fund. Indeed, they urged it on the Minister. However, he was full of all kinds of negative arguments about the difficulties, and why it was not possible to establish such a fund. He would not accept the idea. Now he has accepted it. He has told us what a good idea it is and why it is so marvellous.
If the Minister has had this volte face on the compensation fund, I wonder how many other amendments he should have accepted in Committee. Should he not have accepted a statutory basis for the whole system? It ought to have been accepted, and it would be accepted now, if there were time. Instead there is an impetuous rush to get the Bill on to the statute book. We ought to start all over again. The Bill will have to come back to the House, not for a respray but for complete reconstruction —and fairly soon, too. Its prospects for success look about the same as the prospects for success of the stock exchange computer. If the compensation fund is such a good idea now, why was the Minister so cool and hostile about it in Standing Committee? It is deeply worrying.
It is right that a compensation fund should be established. The only argument is over its size. It is a shame that the Minister is being cautious about its size. The Opposition's view is that the bigger it is the better. It would give confidence to the industry. A sizeable compensation fund would give psychological confidence to the industry. Our first requirement is to provide protection to the investor, in particular to the small investor. He will be under more pressure because of the attempt to regulate.
Yesterday a number of hon. Members went to a lunch that was given by the home service insurance industry, which has always enjoyed a good relationship with its customers. Because it must have a long and continuous relationship with its customers, it visits them month in, month out. Therefore, the industry does not indulge in sharp practice and put pressure on its customers. Now it is being forced, because of the sins of others, to operate within a legislative framework that will impose costs on the industry, which will result in pressure to oversell. It is 563 right that the investor should be protected, but in some respects the close relationship between the investor and that section of the industry will be weakened by the Bill. It is imperative that we provide effective protection if we propose to interfere in the relationship.
The Opposition support the principle of the fund because the danger of the intense competition that will be liberated is that people will cut corners and go in for undesirable and unacceptable practices. There are also the dangers that fraud, negligence and failure to comply with the rules, those things that the Minister gave as the basic causes for compensation, will become more common. That will be as a result of the extremely intense competition that will occur.
There will not only he a threat from foreign instititions and firms coming to Britain; there will be a threat from the natives as well. They will face intense competition that will expose all investors, but especially the small investor, to fraud. It is right to highlight the case of McDonald Wheeler once again because of the points that were tellingly made about one small investor but which, of course, affect a large number of such investors.
I congratulate my hon. Friend the Member for Dagenham (Mr. Gould) on his election to the shadow Cabinet and therefore to the next Government. He defended FIMBRA, but there has been a steady stream of criticism of FIMBRA because of its role in the McDonald Wheeler affair. The "Post", which is the United Kingdom insurance journal, says that the whole affair "makes sad and disturbing reading." It says:John Wheeler had been a director of two companies put into liquidation.But he was still accepted by FIMBRA nee NASDIM for membership. Not only that, but the warning signals about which my hon. Friend the Member for St. Helens, South spoke had been transmitted to FIMBRA because several worried investors had contacted it in the months leading up to all this. However, FIMBRA said:it is not possible to send an inspector into a company as soon as a complaint is made. `SROs cannot be seen to be acting capriciously.'What is "acting capriciously" in the face of representation on this scale?
§ Mr. Tim Smith
The first complaint came from a former employee, and one has to be a little circumspect about former employees. Later, investors complained and at that point action was taken.
§ Mr. Mitchell
The trigger point must be the complaint from the worried investors and it came quite early on. I agree that a complaint from an employee could be made from malicious motives and for that reason the FIMBRA rebuttal was perhaps accurate in that instance. It also had several subsequent complaints from investors and those should have triggered the action. For FIMBRA to say:We must be sure of our facts before we send in the heavy mobcasts a curious light on its own procedures, given the casual nature with which it seems to have accepted the firm for membership.
§ Mr. Bermingham
Does my hon. Friend agree that the system of intermittent or spot auditing of members from time to time might be a safeguard? That happens in other professions.
§ Mr. Mitchell
My hon. Friend is right. What worries me is the casual nature of FIMBRA. It says that it vets "all potential members", but the vetting procedure is carried out on a negative basis. It says:We ask all potential members a whole range of questions, including whether they have ever been bankrupt.As the hon. Member for Beaconsfield (Mr. Smith) said, it is possible for people to lie and deceive. The SROs have to provide for that and must have more stringent checks rather than just accept a casual declaration in answer to a casual question. This firm used the NASDIM logo on its advertising material and presumably that gave it some credibility. If people believed—and this belief appears to be widespread — that these organisations will provide effective protection for the investor, to allow a doubtful firm to use the logo on its advertising is wrong and must require more stringent checks than those which have previously been made.
That is an example in which no one appears in a good light. However, it should prove a ghastly warning for us. It shows the need for the compensation fund. Even the Minister — recalcitrant learner though he is in these instances—with the blandishments and in the face of the brilliant adult education course given to him on these matters by my hon. Friend the Member for Dagenham over the months, has, thanks to the class, been slowly brought up to scratch. However, it has not brought him far enough up to scratch. We want the Minister to pass his 0-levels in this subject. That means accepting the principle of a larger fund. When it comes to the principle of extra compensation funds for the SROs, he should give these a somewhat more enthusiastic endorsement. The Minister said, in relation to the extra compensation funds, that "there is nothing to prevent them". That is a ringing invocation to get out there and establish the fund. That was a classic reply, written by a civil servant on whose doormat it must say "Not unwelcome". There is nothing to prevent the setting up of extra compensation funds.
I believe that it is essential that these supplementary funds be created. However, I end by welcoming the Minister's belated conversion to the principles that have been urged on him so strenuously by the Opposition. I hope that he goes further in his educational process.
§ Mr. Butterfill
These amendments make a worthwhile contribution to the improvement of the Bill. I understand and sympathise with the concerns of the stock exchange and the clearing banks and others who for a long time have been maintaining well-regulated markets, and providing more than adequate compensation for investors. They might be called upon to contribute in a scheme in which some of the participants were not as well regulated and did not cover their members adequately for the losses which might be sustained. That is a legitimate concern which is met in part by the proposal.
We must have more stringent policing. The examples that have been quoted about McDonald Wheeler and the present requirements of FIMBRA illustrate that all too clearly. It would not be unreasonable for FIMBRA to be expected to have details of county court records— for example, of bankruptcies. Such details are already available to all credit organisations, banks and hire: purchase companies which subscribe to a service which exists at relatively modest cost to provide that information. All SROs should also subscribe to that service and ensure that they know more about the people whom they accept for membership.
565 Those of us who are members of professional bodies will know that we already accept an enormous cost by way of insurance for the right to be able to practise. Those members or putative members of SROs who are squealing about the cost of being permitted to trade in future do not have a case. We are talking about protecting investors and they must be prepared to pay an adequate price if they want to be in business.
I have a suggestion for those SROs. By way of compensation fund, they should require individual members to insure themselves as the price of membership. If they are dodgy enough, they will not get insurance, and if they are relatively dodgy they will have to pay a large premium. That should be the basis on which the compensation fund is assessed.
§ Mr. Cash
We in the Conservative party put an enormous premium on the small investor. The flotation of British Gas and TSB and other activities fall into the general context of the private investment activity in which members of the SROs engage. It is of vital concern to us, therefore, that the small investor has adequate protection. I welcome the provision for compensation. Because the SROs provide an imprimatur to the investor, he knows that when he deals with a member of one of those organisations he will receive the advice that he requires and that the organisation is fit and proper and—as I argued in the Committee—competent. The compensation question is extremely important to the proper running of the City in the future. The example given relates to the situation before the rules are brought into effect and shows the extreme difficulty and danger which apply without proper rules and compensation.
The clause provides that the Secretary of State may, among other things, specify the terms and conditions and the extent to which compensation is payable, and the circumstances in which the right to compensation is excluded or modified. If the Minister cannot do so, I hope that the SIB will indicate where the right to compensation might be excluded or modified under the rules. Reference has already been made to the comparable professional bodies engaged in investment activity and advice. They have limitless compensation provision. There is no reason why there should not be extemely effective compensation provision. A limit of £30,000 for any one claim is derisory. I recommed a revision of the thoughts expressed by the SIB on that matter. I understand that it might increase the limit.
I have expressed my concern about the "cosy club." I am worried that people can be blackballed out of some organsiations without due cause. I deplore the notion that people should be accepted, or not accepted, on the basis of negative clearance. That is the nearest thing to total nonsense that I have heard tonight. I hope that in applying the fit and proper person test in conjunction with compensation we shall ensure that the small investor is properly protected. I am confident that the Minister will monitor the provision and that it will work effectively.
§ Mr. Howard
I am grateful for the general welcome for the provisions. It is impossible not to have sympathy with the constituent mentioned by my hon. Friend the Member for Chichester (Mr. Nelson). One of my constituents came to my surgery on Saturday with a similar tale. It is impossible not to feel sympathy for those who have 566 suffered losses in similar circumstances. Clearly, the legislation must prevent such losses occurring in the future without the benefit of compensation. Our objective is to provide for the best protection reasonable. That is a requirement of schedule 6. The Bill does not set a maximum limit on the payments that can be made to an individual investor. That is provided for in the rules contained in the new clauses.
The SIB has indicated its policy and is considering a limit higher than that found in other financial sectors. For example, for banking the limit is 75 per cent. of up to £10,000 and for building societies the limit is 90 per cent. of up to £30,000. The Law Society compensation fund is not as extensive or generous as was suggested by the hon. Member for St. Helens, South (Mr. Bermingham). There is a discretionary compensation fund covering fraud only. Indeed, I believe that it is popularly referred to as the swindle fund. That body's scheme has limits, but other professional bodies have no compensation scheme at all, so one should not lightly assume that it is easy to make very generous arrangements. Any compensation provvision can be made only by levying investment firms. It is the investor who ultimately pays, and it is not to the benefit of investors if an extremely high notional limit is achieved by levies which drive many firms out of business or result in very high charges to investors. Nevertheless, I am sure that the SIB, in arriving at what it will regard as the best provision that can reasonably be made, will have regard to the observations made in the debate by hon. Members on both sides of the House, and will pay serious attention to them.
My hon. Friend the Member for Stratford-upon-Avon (Mr. Howarth) raised two points. The first related to whether it was necessary for fraud or negligence to be proved. That is a matter for the rules of the SIB and of the SROs in relation to their schemes, which will define the cases in which money can be paid. They would also be able to provide for provisional payments to be made in advance. To some extent, that will meet the concern that my hon. Friend expressed about the difficulties that would arise if formal proof had to be provided. My hon. Friend also raised a point about the circumstances that could arise if a firm left an SRO. A firm that has once been authorised will be subject to the compensation rules. Those rules will determine exactly how investors will be compensated, and the clause provides expressly for the situation described by my hon. Friend.
If I understood the hon. Member for Yeovil (Mr. Ashdown) correctly, he wanted to know why subsidisation could not be prevented altogether. All compensation arrangements involve an element of cross-subsidy, and the safeguards in the clause mean that in normal circumstances members of an SRO participating in the scheme will meet the cost of the claims on their fellow members. Thus cross-subsidisation will arise only in extremis, when an SRO demonstrates that a major default or series of defaults means that its members cannot bear the full cost of the compensation required, even over an extended period of years. If the body running the scheme is convinced of that, however, the affected SRO can receive a grant from the fund, which might well be repayable and which can be raised by levying the members of all the other SROs and any businesses directly authorised by the SIB. On top of that, participating SROs and RPBs would be represented on the body making that decision. With those safeguards, I do not think that it is unreasonable for other 567 businesses to contribute. The alternative is that investors might not be compensated. The view expressed in all quarters of the House is that that should not happen.
My hon. Friend the Member for Stafford (Mr. Cash) asked about the circumstances in which exclusion from the right to recover compensation might be made. One such example might be where the person suffering the loss was involved in a conspiracy with the investment business concerned. It would not be unreasonable in those circumstances to provide for an exclusion.
I am sure that the Bill's compensation provisions represent a substantial improvement for the protection of investors, and I am grateful to hon. Members on both sides of the House for the welcome that the provisions have received.
§ Question put and agreed to.
§ Subsequent Lords amendments agreed to.