Financial Services

HC Deb 07 May 1987 vol 115 cc941-54

Question again proposed.

9.4 pm

Mr. Anthony Nelson (Chichester)

We have moved downstream from the city of Westminster to the City of London, where the problems are perhaps graver than those of litter bugs and where there are miscreants on whom we seek to impose more substantial fines and penalties than were the subject of our earlier discussions.

I reiterate my warm welcome for the orders. As I said, this legislation and the delegation order are important in giving to the Securities and Investments Board considerable powers and authority of regulation and investigation in the City. The financial services sector is of pre-eminent importance to the economy, deploying more than 1 million people and contributing more than £7.5 billion in overseas earnings. This legislation, of which the orders are a subsidiary part, is effectively the most comprehensive overhaul of investor protection and legislation for 40 years. The House and the public should be aware of the magnitude of what the Government are doing—for the first time, both establishing and delegating to a body of this importance and stature significant responsibilities in terms of future regulation of the City.

It is appropriate to remind my hon. and learned Friend the Under-Secretary of State and hon. Members that the principal object of the legislation and of the orders is to enhance investor protection. Our principal concern must be to improve the lot of investors. We are not, I hope, giving powers to a body that will be an apologist for the City or a greaser of wheels. That is not our principal objective, although obviously we hope that this body will not stand in the way of an efficient, profitable and vibrant City, especially the investment industries.

I should like to ask my hon. and learned Friend the Minister a number of specific questions which, although I have paid tribute to the legislation, are of some concern. I note from the orders that a number of important powers are being transferred. As I understand it, a number of the powers which were added in Committee to the SIB will be delegated under the order. I am interested in those powers that are not being transferred, which my right hon. Friend the Secretary of State has deemed appropriate to keep unto himself. He is empowered under the relevant section of the Financial Services Act 1986 to delegate to the SIB a wide range of responsibilities. In fact, he has chosen to delegate the majority of those powers, but it appears that some significant ones have not been delegated, and I should like to ask why.

Why, for example, is the power to withdraw authorisation not being delegated to the SIB? It is nonsense that the SIB will be responsible for granting certain businesses authorisation if they seek it from the SIB, but the SIB will not be empowered to take that authorisation away—that power will still be vested in the Secretary of State. The SIB will be responsible for overseeing the self-regulating bodies which, in turn, will grant authorisation through membership to institutions, yet the SIB will not in those instances be able to withdraw authorisation. That is a fairly minimalist approach. Perhaps, if we intend the SIB to be taken seriously in the City, we should have been a bit more courageous in the teeth and the power that we are giving to it.

It seems rather odd that the SIB will not be allowed to make statements on misconduct in the City. Why not? The watchdog body, the SIB, is responsible for ensuring, on a day-to-day basis, that people are conducting good business. If it finds that they are not, that there are misdemeanours or possible criminal activity, why should it be prevented from making statements about that misconduct? I want it to make statements about misconduct, and I want it to be respected and fair. It should be able to say, in the City and publicly, that certain activities are unacceptable and that they need further investigation. It should be able to pin the blame, where it is justified, on certain institutions and persons, be they authorised or not. Why is the power to make statements on misconduct reserved to the Secretary of State? It could have been transferred to the SIB. The Minister has deliberately chosen not to do so.

Why are the powers on injunctions not being transferred to the SIB? It will he able to investigate, authorise and bar businesses. It will be able to grant authorisation and set up a long and detailed rule book on the way that the City should operate, yet when it discovers that something is going wrong it will not only be unable to withdraw authorisation or make a statement on misconduct, it will be unable to take out an injunction to prevent that misbehaviour. The power to ask a court for an injunction rests and remains with the Secretary of State. That would have been a reasonable power to give to the SIB if we are sufficiently satisfied that it has the personnel, rules, authority and statutory identity to he able to do the job that Parliament is setting for it.

I see why, by way of contrast, my hon. and learned Friend the Minister has said that the rules on indemnity should not be transferred to the SIB. It is wholly proper that indemnity from the civil law should not be delegated to any body other than the Government. Rightly, my hon. and learned Friend and the Government have kept that power for the Secretary of State.

In all other respects we are adopting a softly-softly approach, but we could have gone further in giving the SI B the teeth to do the job that we envisage for it.

Those matters relate to the powers that will not be transferred. I ask my hon. and learned Friend why some of the powers that will be transferred are to be exercised concurrently with the Secretary of State. In other words, the order is saying that some of the orders that the Government give or delegate to the SIB are powers that both the Secretary of State and the SIB will be able to exercise. Why is it necessary to have a concurrent exercise of power for injunctions against unauthorised people? It is strange that under the proposed order the SIB will not be able to take out an injunction to stop an authorised institution doing something but it will be able to take out an injunction against unauthorised people doing something that they should not. It seems an arbitrary and questionable decision to provide a distinction in this case. The SIB should have the power of injunction in authorised and unauthorised cases. I do not see why, in the case of unauthorised concerns, it has been deemed permissible to give that power concurrently to the SIB yet not in the case of authorised businesses.

I turn to the delegation of investigations. It is proposed that the power to investigate certain misconduct will be exercised by the SIB. In Committee that power was envisaged and extended. The SIB will be able to exercise that power currently with the Secretary of State.

Who is to take the lead? Where will the responsibility lie, in certain instances, to investigate suspicious cases? Will certain activities be the responsibility of the Department and others the responsibility of the SIB? Will it be the body to which the complaint is made in the first instance that will take up an investigation?

At some stage, we shall need some rather clearer guidelines if there are not to be gaps in or, conversely, overlapping of responsibility and an explanation of why such a concurrent exercise of power is deemed to be necessary.

The SIB will take on significant powers. I have three points of advice. First, I urge it to think ahead and not respond only to past events when framing its rules or making any statements on matters concerning investor protection and the running of investor markets. Secondly, I advise it not to be nobbled. It is easy to be nobbled in the City. The City and many investment institutions have a way of making people who are not part of its inner circle believe that they do not understand the principles or mechanics of their operation. In fact, the City is by no means invulnerable—nor should it be invulnerable—to questioning and supervision. I hope that the SIB will continue to have the independence and authority that it has already demonstrated and will not move into the cosy club of the City and be nobbled by City opinion and City experience.

Thirdly, the SIB must remember who sent it there. Parliament did. It is not the creature of the City, set up either to preserve a closed shop or to establish the smooth running of the City. It is there principally to do the job of investor protection. In my judgment, the relationship between the SIB, SROs and the many institutions under them should be slightly uncomfortable at all times. They should not get on too easily and too well. They should be slightly fearful and respectful. In striking the right balance between co-operation, in which the SIB must engage, and the vigorous pursuit of control and supervision, they should err on the side of recognising the principle of investor protection as paramount.

For those reasons, the debate and the orders are important. The orders are the culmination of a trilogy of important pieces of legislation that not only will transform the regulation of the City but will create a more vibrant, profitable and respectable City whose integrity and profitability will earn the respect of the world.

9.17 pm

Mr. Jeremy Hanley (Richmond and Barnes)

I declare an interest as the non-executive chairman of Fraser Green Ltd, a firm of investment managers who are licensed dealers and who have applied for membership of the Investment Managers Regulatory Organisation. I also help to run courses teaching members of the Financial Intermediaries and Managers Brokers Regulatory Association their rules. I assure the House that it is in nobody's interest to make sure that the rules are difficult so that as many people as possible come to me for guidance. It is in everybody's interest that the rules are workable, that they are able to be understood by people in the investment world and that they are flexible enough to deal with changes as they occur.

As Professor Jim Gower said, the most important point of the rules is that FIMBRA members should be able to carry them out. If the retail end of the market cannot accept the rules and finds that it cannot work to them, the whole edifice will come crashing down. The framework that is set out in the Financial Services Act 1986 is the right set of rules to give the best possible chance to all those involved in investment business to carry out their operations and, at the same time, to give the best chance of effective investor protection.

I welcome the order and pay tribute to my hon. and learned Friend the Minister. When he took on his onerous task, he little saw the difficulties with the legislation that lay ahead. I would not mind betting that, had he seen the rocky road in front of him, he would have considered rejecting his position. He has gained the admiration and respect of those in the City and of hon. Members for the way in which he tackled the legislation.

I must also pay tribute to my hon. Friend the Member for Chichester (Mr. Nelson). His speech was typical of the care and consideration that he has given to the legislation throughout its progress. I know that my hon. and learned Friend the Minister would agree that my hon. Friends the Members for Chichester and for Beaconsfield (Mr. Smith) — it is invidious to choose but two — made such constructive contributions in Committee that, through their own power of persuasion and depth of knowledge, they improved a Bill that has since become a workable, practical Act.

Some unavoidable problems still remain. The bulk of the SIB's rules, for example, is unavoidable. Anyone confronted with that draft set of rules would be daunted by the task of reading through them—yet many people will have to do that if they are to adhhere to the rules properly. The legalistic language in the rules is extremely difficult, and it would be better if it were not quite so complicated. However, I see no alternative to the way in which the rules have been drafted. As my hon. and learned Friend the Minister said, they are merely the codification of best practice. They are not a couple of hundred pages of legislation or brand new rules to which people must adhere, but a catalogue of what they should be doing already, coupled with some extra requirements to ensure that they fit into the self-regulatory framework.

Other remaining, unavoidable problems are the complicated formulae that are to be found from time to time in the rules, and the procedures through which many people will have to go. Some of the remaining problems are regrettable; happily, they are open to review in the future. One of them is the abolition of the requirement for professional indemnity insurance. I understand why that has been removed and many small businesses will be happy that that requirement has gone, because it reduces an extra cost for smaller businesses. I fully recognise that it has been replaced by the compensation scheme, which I believe is one of the most hopeful aspects of the legislation. It represents genuine investor protection. The fact that an investor is guaranteed his losses up to £48,000 out of £50,000 is a comfort that many investors wish had existed in the past.

I regret the fact that the registration of individuals under the SIB's draft rules will not extend to those who deal with the public but do not have management authority. The registration of individuals, which is limited to principals, directors and partners, has not gone far enough. Many people deal directly with the public and they, too, should be registered and their qualifications for doing their jobs should be open to scrutiny.

There could be stronger inspection and suspension regulations in cases in which those who inspect the finances of an organisation are not yet satisfied. I further regret the fact that foreign-owned branches are still not being properly controlled. They could still avoid full scrutiny. They should be required to deposit an amount equal to that required in the financial resource rules with a bank in the United Kingdom to make sure that there is no possibility of their failing to meet the requirements that they would have to meet were they part of a wholly United Kingdom group. However, I am sure that experience during the months and years ahead will show whether the rules must be tightened in that regard.

I also regret that cold calling is still allowed in its present form and has been extended in some respects. I do not like cold calling when it is practised on me. It is an extremely annoying intrusion, especially when done by telephone. However, it is a well-established principle. Those in the investment industry who use cold calling have persuaded my hon. and learned Friend that the practice is necessary and not especially harmful and that through its use many who would not have been able to benefit from investment and savings have been able to enjoy the advantages of so doing. Therefore, I can understand why the rules are as they are. Against this background, I hope that there will he regular scrutiny of the experience of investors, of' the industry and of the public generally over the months and years ahead. If rules need to be tightened, I hope that the process will be put in hand quickly and effectively. When a new form of investment is created or when a new investment practice is conceived, I hope that the changes that flow from these developments will be carried out quickly and effectively so that loopholes are not allowed to continue for too long.

There are certain regulations that I consider to be too harsh. I understand, however, that it is extremely difficult to get anything right in legislation of the sort that we are considering. It is clear that one is open to subjective judgment.

Many small firms may find themselves defined as category 4 firms and therefore required to produce a minimum liquidity requirement that is more suited to that of a larger stockbroking firm. This will be unfortunate, but I am sure that the problem can he dealt with in time.

I welcome the strong stand on polarisation that has been taken by my right hon. Friend the Secretary of State and by my hon. and learned Friend. I would hate the message to go from the Chamber to the other place that we do not feel firmly and strongly that we are introducing investor protection and not investment business protection. That is the basic principle and the pivot of the Act. We believe that the public should know with whom they are dealing and what they are buying. They should understand what they will get for their money and the risks that are involved in getting it, and any confusion of these principles must be eradicated by this measure. Many hon. Members have supported the principle of polarisation even though they have been subject to extremely strong lobbying and even though the basic Conservative philosophy would be to leave that which has been successful and which has not been proved to be abusive to continue as it is. In this instance we can see that the public need to be protected, and I am pleased that the banks in different ways are adjusting to their task. I do not see the likelihood of a strong battle for polarisation to he reversed, and I hope that wisdom will prevail in another place. I am sure that it will.

The message from this Chamber is that what has been achieved on polarisation is for the benefit of the general public. It is not every piece of legislation that is so clear in its objectives.

I welcome also the reduced costs for small firms. The Act was not intended to drum out of business the sole trader, and that should not have been its objective. That would have been anti-competitive and grossly unfair. It does not follow that a person who happens to work in a large firm is competent and that someone who works for himself is incompetent. However, if small traders in the investment world do not have the resources that are necessary to carry on with their business, they should not be in business. It is strange that many stockbrokers carp at the amount of capital that they are required to have to survive, yet would never consider the flotation of shares in another business unless it were vastly bigger. Businesses must have sufficient capital to be able to survive and sufficient liquidity and solvency to enable them to carry out their work effectively.

On the other hand, there is no need for unnecessary costs that lead successful individuals towards insolvency. The reduction of costs that we have seen during the formulation of the draft rules by the SIB, the reduction of costs for those not handling clients' money and the withdrawing of the insistence on professional indemnity—although I hope that many firms will take that up voluntarily — is a constructive step in helping small businesses.

When Opposition Members read the report of this debate in Hansard—they are certainly not here to listen to it — I hope that they will understand that we have arrived at the right framework for investment protection. The Securities Exchange Commission in America has said repeatedly that if it were to begin again it would choose the framework which my hon. and learned Friend has ferried so successfully through Parliament, in a measure that has been amended as a result of detailed consideration and consultation with all interested parties and right hon. and hon. Members. This is exactly the right framework, as it produces effective and qualified people to regulate those in investment.

Mr. Deputy Speaker (Mr. Harold Walker)

Order. I have given the hon. Gentleman much licence because of the technical nature of the matters with which we are dealing, but I remind him that we are not dealing with a Bill or an Act. We are dealing with a very limited order, which seems to have little to do with the point he is raising.

Mr. Hanley

I am most grateful, Mr. Deputy Speaker. If I may continue with my conclusion, I hope that you will forgive me for the enthusiasm of my speech because I have been unable before now to speak at length on this matter.

Given the powers which have been granted to the SIB., and the fact that a child has now been born, I congratulate all of those concerned and say that this is the right framework. I am merely responding to points made by Opposition Members earlier. As long as this framework is shown to be flexible, it will serve extremely well not only the nation but those in the investment world.

9.31 pm

Mr. Robert McCrindle (Brentwood and Ongar)

Like all my hon. Friends, I welcome this delegation order. I wish the greatest of good fortune to the SIB in the marathon task it has been given by this legislation. I utter the tiniest word of caution, following what was said earlier by my hon. Friend the Member for Crawley (Mr. Soames), who requested the Minister to—if I can paraphrase him —hasten slowly on the basis that we had better get it right rather than get it fast. It is difficult to disagree with that sentiment, but I remind the Minister that we are substantially behind the timetable upon which we embarked after the Second Reading of the Bill some 18 months ago when, although no specific date was given, the hope was expressed that it would be operational by the middle of 1987. That cannot now be the case.

While I endorse the statement that we have to get it right, I hope the Minister will take on board that with the acceptance of this delegation order there should be a continuing sense of urgency. I put it no stronger than that. The rules of the SIB, which are now available to us, are opaque and complicated, but it is little short of a miracle that we have been able to produce in a relatively short time rules which had to be started from scratch. The rules are changed slightly from those proposed originally. Whether the Financil Services Act is seen as a protection for the investing public or a vehicle for regulating practitioners, there can be no question that the rules of the SIB are the test of the effectiveness of the new system.

For that reason I express some concern that professional indemnity cover—a point referred to by my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) — is no longer a requirement under the SIB rules. I have long taken the view that the existence of professional indemnity is of benefit to both the public and the intermediaries. I feel a sense of loss that this requirement is no longer part of the SIB rules.

I recognise that professional indemnity cover must be paid for and some intermediaries will shed few tears over the fact that they are no longer required to effect it. But that is a rather short-sighted view. Here I should declare an interest, which I have declared on the many occasions that I have addressed the House on this subject, in that I am parliamentary adviser to the British Insurance Brokers Association, a trade association of some 4,000 member firms, of which approximately 3,000 could be categorised as small brokers. Yet there is no doubt that the BIBA is full of regret that the previous requirement for professional indemnity cover is no longer part of the SIB rules.

Some people will say that the compensation fund is sufficient. But I would venture to question whether that is so. Let me pursue separately the two points of the cost to small intermediaries, in particular, and the fact that having a compensation fund makes it less necessary for us to have professional indemnity cover as a requirement.

Many small intermediaries will contend that professional indemnity cover will be too costly at a time when many people are calling, successfully, it would seem, for a reduction in the costs to the small intermediary in particular. That overlooks the fact that the existence of a professional indemnity policy can sometimes represent the difference between a company staying in business and being sued out of existence. There may well be a powerful argument, particularly for small intermediaries, for requiring professional indemnity cover.

From the investor's point of view, even if the company with which the investor entrusts his savings were to act fraudulently, professional indemnity underwriters have shown over the years that they will pay up in such circumstances, enabling——

Mr. Deputy Speaker

Order. I may not fully understand these matters, but I find it difficult to understand what this has to do with the delegation of the Secretary of State's responsibilities to this new body. Perhaps the hon. Gentleman will tell me to which part of the orders his remarks relate.

Mr. McCrindle

If you are telling me, Mr. Deputy Speaker, that it is out of order to refer to the SIB rule book, which is part and parcel of the Secretary of State's decision to introduce the order, clearly I have wasted my time in waiting for the past four hours to be called. However, I respectfully suggest that that delegation——

Mr. Deputy Speaker

Order. I am at the hon. Gentleman's feet in these matters. If he honestly assures me that these are relevant matters, I shall accept his word.

Mr. McCrindle

My powers of persuasion are clearly greater than I had expected. I was ready to make the case more extensively, but the fact that I am now permitted to continue will enable me, to your pleasure, Mr. Deputy Speaker, and to that of the House, to restrict my remarks to a shorter period than might have seemed necessary a few moments ago.

In the event of a professional indemnity policy being in existence, even if there is an element of fraud, underwriters have shown over the years that they will pay up, thereby enabling the excess above the compensation fund limit to be recovered. That is clearly in the interests of investor protection.

That brings me in turn to the compensation fund, which, again, is very much part of the rule book to which I have taken the liberty to refer. I welcome the existence of a compensation fund, but £48,000, although it sounds a good deal, is not a vast sum in 1987. Besides, if there is no professional indemnity protection, more claims are likely to be lodged against that compensation fund.

If my prediction in that respect is correct, this welcome compensation fund may soon come under some strain. I do not know why, if professional indemnity were thought necessary by the SIB before, it is not considered necessary now. I cannot understand why all mention of it is now absent and I cannot understand what has changed to persuade the SIB that it is no longer necessary.

But again, thinking in terms of the SIB rule book and the effect that that would have on not only that institution but the self-regulatory organisations to which the Minister referred, if the SIB intimates that it no longer requires professional indemnity insurance, it follows that it will be acutely difficult for any of the SROs to require professional indemnity cover under their rules.

FIMBRA, to which my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) referred, clearly intended, and still intends, to require professional indemnity to be affected, but there is no way that I can see that that requirement could be maintained if the SIB withdrew from its earlier suggestion that it should be effected.

Let me point out to my hon. and learned Friend the Minister the effect on the Insurance Brokers Registration Council, a body that arguably runs in parallel in investor protection with the SIB. Since 1980, professional indemnity cover has been required before an intermediary can register as an insurance broker under the legislation. Part of the requirement to enable an intermediary to do so is the possession of a professional indemnity policy. If the SIB drops the requirement, what will be the effect? I venture to suggest that a great many companies involved in non-life assurance business would be inclined to deregister. What price consumer protection then?

Let me try to summarise the case. In my view, professional indemnity insurance has, and must have, a place in any total regulatory regime. As with the Insurance Brokers Registration Council, it must be viewed in conjuction with capital adequacy rules and a compensation fund. Without a professional indemnity requirement, a gap, through which consumer protection may be lost, still exists.

I accept that professional indemnity insurance has a cost attached to it. However, I would argue that the cost is borne by the firm of intermediaries, and will bear a direct relation to the claims record of that firm. I raise that point to underline that, if there is no record of fraud or negligence, the cost in many cases will be quite reasonable. That compares equitable with the proposed compensation fund, where the cost w ill he borne by every firm other than the one that has caused the problem. Secondly, the amount of contribution to a compensation fund required, and thus the costs incurred, will increase if PI insurance is not required, and the cost of PI may therefore not outweigh the increased cost of contribution to a compensation fund.

I apologise for having concentrated almost exclusively on what may seem to many to he a narrow point. I hope that, if I have done nothing else, I have at least underlined to the House the importance that I attach to it, as do a great many other people. I hope that a message will go out from the House that, while welcoming the SIB, supporting the delegation order and wishing that body the best of good fortune, we feel that there would be some advantage in reconsidering its decision to drop its previous requirement that PI cover should be effected.

9.42 pm

Mr. John Butterfill (Bournemouth, West)

When we started out on the Financial Services Bill, I think that all of us on the Standing Committee, whatever our party, had certain specific objectives. One was to ensure, first and foremost, that investors were properly protected. The second was to establish a fair market in which there was a level playing field, and in which all the players were at least as equal as we could make them. Our third objective was that regulation should he achieved at reasonable cost, and that it should be flexible in itself. Our final objective was that any form of regulation that we proposed should not impede the proper development of the market, and its future expansion for the prosperity of the nation as a whole.

However, we perhaps little realised when we embarked upon the legislation the extraordinary pressures that would be brought to bear on us from all sectors and all sides of the market, and the learning process that many of us would have to go through. I pay tribute to my hon. and learned Friend the Under-Secretary of State for Trade and Industry for having achieved these objectives and for the extraordinarily flexible way in which he has dealt with the problems. We are all greatly in his debt regarding the activities to date of the Securities and Investments Board.

As for flexibility, it is essential that the market should be allowed to develop new products and to deal with new products. It would be tragic if today we created a precedent that set the SIB rules in tablets of stone for all time. That is not our intention, nor is it the intention of the SIB. It is important that the message should go out that all hon. Members regard the development of a prosperous and thriving market as vital and that it should be possible to incorporate future developments.

I am particularly interested in the development of a unitised property market. I hope that it will be possible to accommodate it within the SIB rules and that nothing we do today will impede the development of that or similar markets.

As for the level playing field, it is vital that either old or new products should not have an unfair advantage over other products. Both the current and future regulations should be as fair as possible to companies that offer different products. We have gone a long way down that road. It has been a difficult process and there has been a good deal of controversy. I am not convinced that we have gone as far as we could over the disclosure of expenses on with-profits policies. I understand the difficulties, but I hope that the SIB and the Department will continue to think about the problem and that they will introduce practical proposals.

On cost, I am pleased that it has been possible to reduce the cost of regulation for smaller firms. In the early days of the legislation there were many scare stories in the popular press and in the financial press about cost. It was feared that smaller firms would be driven out of business. Very few people now think that that is so, even though the costs are so high.

One hopes that it will be possible to reduce the costs even further. Nevertheless, there have been developments in the market, and some of the larger elements in the industry have supported some of the smaller elements. I hope that that process will continue so that the establishment of small firms is not inhibited. They can contribute to variety in the market and to the range of advice that can be given to potential investors.

Furthermore, the SIB must be seen to be fair. It must clamp down on abuses, wherever they arise. It is no use passing legislation if people are able to get away with practices that all of us would regard as reprehensible. There has been quite a lot of that in the recent past. We hope that it will not arise in the future.

We should all support the actions of the SIB and the SROs in policing this legislation. I hope that none of us will be backward in supporting those actions as and when necessary. I have been pleased to see the firm line that the SIB has taken on polarisation. That was the first big test of the resolve of the SIB and of this House in the face of immense pressure from the big battalions of the banks and building societies, who wanted to be a case apart.

The banks said that the friendly neighbourhood bank manger was able to speak to his clients quite differently from the way sharp insurance salemen would talk to their so-called clients. The banks are thrusting, aggressive commercial organisations and are quite different from the friendly old banks that we were used to in the past, and the new market players are also quite different.

Today's bank managers are motivated to achieve results for a financial conglomorate. Sadly but truly, they cannot be relied upon to be totally impartial because the pressures on them are far too great. It is right that they should be subject to exactly the same rules as everybody else in this market. There can be no exceptions. They must decide whether they can give impartial advice to the public or sell their own products. The two are not compatible and cannot be conjoined.

The message should go out from this place to another place and elsewhere that we will not be moved. Despite all the insinuations that we will be moved, polarisation is an essential part of these proposals and cannot be removed without destroying the legislation that we have strived so hard to put into place.

9.47 pm

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

This has been a most interesting debate, characterised by thoughtful and constructive contributions from my hon. Friends which has marked this legislation from the outset. I say that not in any sense of undue controversy in relation to the hon. Member for Livingston (Mr. Cook). I am grateful for the kind remarks of my hon. Friends, and I pay tribute to the part played by my hon. Friends in Committee in the formulation of this legislation.

The hon. Member for Livingston suggested that if we were starting again we would do it differently. I reject that assertion unhesitatingly and unqualifiedly. That suggestion springs from a profoundly mistaken view which the hon. Gentleman and some of his hon. Friends have held, or pretended to hold, about the legislation from its commencement — that it is a soft option or halfway house between statutory regulation, which they purport to see as tough and fierce, and unmitagated self-regulation, which they rightly see as being more of an easy option.

This legislation was not put on the statute book as an easy or soft option. It was formulated in the way in which it was because it represents the most effective way of regulating financial markets, and it incorporates a flexibility and an ability to respond quickly to developments in the market place which a fully statutory system would not have done.

Mr. Robin Cook (Livingston)

Is the Minister saying that, if he could transport himself back two years and drafted the Bill afresh, he would still say nothing in that Bill about the Takeover Panel?

Mr. Howard

Unhesitatingly. The Takeover Panel is under review. We may before too long learn more about improvements which can be made in the operation of the Takeover Panel. But it by no means follows that taking a statutory approach necessarily improves the way in which the provisions regulate the markets with which they are concerned.

The other point about the hon. Gentleman's speech which ties in with this relates to resources. He talked about the resources which are available to the Securities and Exchange Commission in the United States. The SEC has been bedevilled by endemic complaints of lack of resources. Only recently its chairman asked for an increase of a third in his budget. It is absurd to suggest that putting such a body in the public sector would assist in making resources available for it to do its job properly. It is another of the fundamental misapprehensions which Opposition Members have had about the legislation from the outset.

Mr. McCrindle

Does not my hon. and learned Friend also agree that the point the hon. Member for Livingston (Mr. Cook) was making was that more resources will find more fraud? In fact, in the Boesky case it was a tip-off to Merrill Lynch that brought about the disclosures. No amount of money in the SEC would have opened up that can of worms.

Mr. Howard

I prefer not to comment on individual cases, tempting though it is, but the point underlying my hon. Friend's intervention is undoubtedly valid.

My hon. Friend the Member for Crawley (Mr. Soames) urged caution about the timetable and raised issues which he said are not yet fully resolved. In answering him, I would very much pray in aid the observations of my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle), who rightly pointed to the need to get the system in being as soon as we can. I am not sure that there has been a slippage. I think the phrase we used when the legislation was under consideration was that we hoped to get the system in place in the second half of this year. We now say by the end of the year; that comes within the second half of the year. I hope that the main provisions will be in place by then.

We must be on our guard against falling into the trap of allowing the best to become the enemy of the good. It is important that the issues raised by my hon. Friend the Member for Crawley should be resolved, and I am confident that they will be. We must try to get them right. But ordinary savers and ordinary investors should have the right to compensation if they lose money because of someone's misconduct, and they should have that right as soon as possible. That is an important factor to be borne in mind.

My hon. Friend the Member for Chichester (Mr. Nelson) raised several points springing from the deep concern which he has displayed on the legislation from the outset and from the important part which he has played in shaping it. He asked why a number of functions have not been transferred. I hesitate to say this, but there may have been a tinge of misunderstanding at the bottom of the points which he raised because the powers to which he referred will he transferred in nearly all cases.

The limitations on their transfer are narrow and somewhat technical. For example, the power to withdraw the authorisation to which he referred is reserved to the Secretary of State only when the grounds for doing so are a contravention of a reciprocity notice issued by the Secretary of State. The power to issue reprimands is reserved only when misconduct relates to business at Lloyd's because of the separate arrangements being made for regulating Lloyd's. The power to seek injunctions is reserved only when the contravention in question is a contravention of the provisions on the promotion of foreign insurance contracts. I hope that those observations will reassure my hon. Friend about the concern which he expressed.

My hon. Friend also asked why some matters were still concurrent in relation to the SIB and the Secretary of State. That is of importance in the early stages of the system while the SIB begins the task of exercising its powers, and not necessarily something which is to be regarded as a permanent feature of the system. We do not anticipate that it will lead to problems about who should take the lead in the specific difficulties to which my hon. Friend referred. There will be close co-operation between the Secretary of State and the SIB on these matters, and I suspect that in practice it will largely depend on to whom the information leading to the action is given. I do not expect this to give rise to any difficulty.

I hope also that, in the light of what I have said, my hon. Friend will acquit us of any half-heartedness in our desire to see the SIB playing its prominent role with the full force and powers which all of us who have been concerned with this legislation have always had in mind.

My hon. Friend the Member for Richmond and Barnes made a number of points. He referred to foreign-owned businesses. They will of course be subject to the rules, including the financial resources rules, and in appropriate cases where it is necessary to protect investors the SIB will be able to require a business to keep assets in the United Kingdom.

My hon. Friend raised a number of other points on the rules, some of which he said were too harsh and some not harsh enough. One of the great advantages of the system, largely missed by those who keep talking about some other ill-defined system, is that it will have the ability to change its rules with a minimum of legislative formality so long as they comply with the provisions of the statute. The rules are not writ in stone but will develop with time, and I am sure that points such as those raised by my hon. Friend will be taken into account by the SIB when it reviews the matter, as it inevitably will.

My hon. Friend the Member for Brentwood and Ongar, in particular, referred to the lack of a requirement that there should be indemnity cover. I understand the point my hon. Friend made, but he wil, particularly in view of his own experience and intimate knowledge of the industry, understand the importance of balancing against those requirements the need to limit costs. If one takes into account the compensation fund which will be available, it is difficult to find serious fault with the reasoning process which led the SIB to come to the conclusion which it did. Again, this is not necessarily a matter which is writ in stone; it is a matter in relation to which it is possible for the system to develop. But one can readily see the reasoning process which led the SIB to its conclusion.

My hon. Friend the Member Bournemouth, West (Mr. Butterfill) pursued some matters which he originally raised in Standing Committee. He played his part in ensuring that some of those concerns were fully taken into account in the rules and in the process of evolution. I am sure that he will welcome the study that has been set up by the SIB into the degree of information which can be made available, in particular in relation to endowment insurance policies.

I have already emphasised that these orders are but one step in the process of implementing the framework envisaged by the Financial Services Act 1986. Once the orders are approved and made, the way will be clear for the SIB to recognise self-regulating organisations — assuming of course that they meet the criteria set down in the Act. Those recognised SROs will then need to consider the applications of thousands of businessess, which will be seeking authorisation. The SIB, for its part, will need to process applications for direct authorisation.

Both the SIB and the SROs will be building up their staffs to cope with the requirements of day-to-day regulation. This cannot be done overnight. Indeed, it would be idle to suppose that an entirely new system of regulation which was both effective and balanced could be introduced with the stroke of a pen. But I have no doubt that all these matters will be resolved as quickly as possible. Investors have a right to expect an adequate level of protection. That is why we passed the Financial Services Act. Investors naturally wish the Act's provisions to be introduced as quickly as possible. That is why we have forged ahead with these orders. The SIB has shown itself alive to the requirements of the new requirements of the new system and determined that the United Kingdom will be, and will be seen to be, a "clean" place in which to do investment business. That is why I ask the House to approve the draft orders.

Question put and agreed to.

Resolved, That the draft Financial Services Act 1986 (Delegaton) Order 1987, which was laid before this House on 22nd April 1987, be approved.

Resolved, That the draft Finacial Services (Transfer of Functions Relating to Friendly Societies) Order (Northern Ireland) 1987, which was laid before this House on 22nd April, he approved.

Resolved, That the draft Financial Services (Transfer of Functions Relating to Friendly Societies) Order 1987, which was laid before this House on 22nd April, be approved. — [Mr.Howard.]

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1. STATUTORY INSTRUMENTS &c. 18 words
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1. ATOMIC ENERGY AND RADIOACTIVE SUBSTANCES 26 words
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2. TERRITORIAL SEA BILL [LORDS] 30 words