§ Motion made, and Question proposed,
§ That a further supplementary sum not exceeding £14,304,000 be granted to Her Majesty out of the Consolidated Fund to defray the charges which will come in course of payment during the year ending on 31st March 1991 for expenditure by the Department of Trade and Industry on support for industry, international trade, statutory and regulatory work, consumer protection and administration. —[Mr. Redwood.]
§ Mr. Speaker
I must announce to the House that I have selected the amendment in the name of the hon. Member for Hastings and Rye (Mr. Warren), who is Chairman of the Select Committee on Trade and Industry.
§ Mr. Kenneth Warren (Hastings and Rye)
I beg to move,
That Class IV, Vote 2 be reduced by £10,000 in respect of Subhead K1 (consumer and investor protection).The Select Committee on Trade and Industry has carried out extensive investigations into the way in which investigators work in policing business standards. Rising at this hour of the afternoon, I almost feel that I should seek the leave of the House. This is the second time that I have spoken in the House today, having spoken after midnight last night. I hope that I do not trespass on your patience, Mr. Speaker, by speaking now. I trust that hon. Members will hear me as kindly now as they did then. My hon. Friend the Minister for Corporate Affairs, who sits on the Government Front Bench, had to endure that speech as well.
We are calling for a reduction of £10,000–I believe that it used to be £1,000, but it has been inflated to a more respectable figure. We want to draw the attention of the House to the fact that the public are rightly worried about investigation standards and the qualities of those carrying out investigations on behalf of the Government in the Department of Trade and Industry and in the self-regulating regulatory agencies which result from the financial legislation of the past decade.
It is interesting to note that the increase proposed in the supplementary estimates is £2.7 million. Although that sum covers expenditure on several aspects, it reflects the rise to £9 million in 1989–90 from just under £7 million in the previous financial year. Even taking inflation into account, there has been a small, but important, increase in expenditure.
Hon. Members who supported me on the Select Committee and others wish to take part in the debate, and I trust that I shall not detain them long. I should like to concentrate on three items: who pays for investigations, who investigates and a particular investigation relating to the House of Fraser.
Who pays? It is interesting to note that, in 1988–89, the cost of the Department of Trade and Industry investigations was £6.2 million and the income from 1127 Companies house fees and charges was set to recover the costs arising from the regulation of companies, including the costs of investigations. Three investigations have principally dominated the headlines of the press. The investigation into the House of Fraser cost £1.5 million, the investigation into Guinness cost £1.6 million and the investigation into County NatWest cost £1.1 million.
The Select Committee recommended that more steps should be taken to recover the cost of investigation from the companies and individuals involved unless the inspectors found no evidence of wrongdoing. We persist in that view, and we do not expect those who have not erred and strayed to have to pay for those who have. We hope that my hon. Friend agrees that that requirement should be an expectation of Government and should be under review at all times, so that we ensure that those who have erred and strayed pay for their misconduct.
§ Mr. Tim Smith (Beaconsfield)
Can my hon. Friend explain what the Select Committee had in mind? Was it that the inspectors should make a recommendation about whether the company under investigation should pay the costs, or was it that the Secretary of State should make such a recommendation? Would not it be rather invidious to leave it to the Secretary of State? It might be better for the inspectors in reaching their conclusions to determine that matter.
§ Mr. Robin Maxwell-Hyslop (Tiverton)
It is quite important that the Chairman of the Select Committee should not be asked what the Committee had in mind. What it had in mind it said in its report. Although any member of the Committee may give his own view, it is quite improper to ask the Chairman of the Committee what the Committee had in mind that it did not say in its report.
§ Mr. Warren
I am extremely grateful for both those interventions. One has ensured that I do not commit the Committee to something that it did not have in mind and the other has ensured that I am allowed to say what I have in mind.
In reply to my hon. Friend the Member for Beaconsfield (Mr. Smith), I must say that I do not mind who makes the recommendation as long as somebody does. If my hon. Friend wants me to choose, I will say that, bearing in mind the fact that we believe that the inspectors should come to conclusions, I believe that they should also come to a conclusion on the costs. However, I am prepared to be swayed on the matter in our debate.
Who investigates? The Committee was very concerned that it took a long time for the inspectors, who are the investigators, to be appointed, especially in insider dealing cases, in which it can take weeks or months. That response time is not in line with business needs. Business should not be held up if there are no problems, so one must get the answers as quickly as possible. The fact that weeks or months often elapse before inspectors are appointed is not acceptable in this country where the highest standards are expected of business and where the Government are expected to act promptly in response to the perceived problems.
1128 We came to the conclusion that the right staff—there are many in the Department of Trade and Industry—need to be supported by more people from various professionally skilled occupations. It was good to see that the Government conceded in their reply:it would be desirable for a somewhat higher proportion of investigation staff to have full professional qualifications".That is important. We have noticed in the past decade of inspections that too often we did not see inspectors reappear to help, so the Government and the public are losing the lessons that have been learnt. The learning curve for inspectors is always steep; they come into the job and they have to find out how to do it. It takes them a long time to acquire the internal expertise they need to carry out investigations.
I hope that it will be possible for the Government, and especially for the Department of Trade and Industry, to look at the calibre of the staff in the investigation service, and either to bring in more people or to encourage people within the Department to enhance their own qualifications so that the highest possible standards of investigation can be available at all times. Perhaps the Department could establish a panel of inspectors who could be on call so that there should be no delays such as those that we encountered in our review.
§ Sir Anthony Grant (Cambridgeshire, South-West)
I am not endeavouring to probe the collective mind of the Committee, of which I was a member, but does my hon. Friend agree that, if we are to have the very best inspectors, they are inevitably people who are busy and successful in their own professions and cannot therefore spend a vast amount of time probing and fathoming things as my hon. Friend has suggested? That is another reason why it is important that there should be very good back-up, since otherwise we shall have second-rate inspectors or the inspectors will be deterred from carrying out that work ever again because it takes up so much time.
§ Mr. Warren
My hon. Friend is absolutely right. That is why we hope that more inspectors will be drawn from within the Department, thus keeping the learning that has been acquired at public expense within the Department.
Let us consider the time that recent investigations have taken to complete. The 10 investigations in 1987 took an average of 14 months to be completed under section 177 of the Financial Services Act 1986. In 1989, 16 investigations were launched, of which seven are not yet complete, but the average time is already running at over 12 months. I know that it looks on the surface as if there has been more malpractice, but perhaps one could look at it the other way round and say that there is a higher quality of investigation in the Department. In any case, there is no shortening of the time taken in investigations. In saying that, I am not taking any account of the point that I made earlier about the time that it takes to appoint the inspectors.
I turn now to the point raised by my hon. Friend the Member for Beaconsfield (Mr. Smith) about the duties of inspectors. The Committee came to a firm conclusion, after hearing evidence from both sides, that conclusions should be expected from the inspectors, taking account of the evidence before them. We are pleased that the Government agree with that recommendation, because the inspectors must have an end duty in sight, which is what one would expect of men of the calibre required to take part in the investigation.
1129 My last point on this area deals with the time taken by the investigations, to which I have already referred. In their reply, the Government said that they did not believe that it was wise to have time targets. The Committee was concerned that if targets were not set, the open-ended nature of the investigations would not concentrate the minds of the investigators in the way that we believe they should be concentrated. This is merely standard management practice, and I am sure that the whole Committee will stand with me in commending it to the House.
I refer now to the investigation into the House of Fraser. You will remember, Mr. Speaker, that the then Leader of the House replied, in answer to requests from hon. Members of all parties about the publication of the House of Fraser report, that he had taken note of the fact that the Select Committee was itself carrying out an investigation. I drew his attention to the fact that we were not looking at specific investigations, but at the nature of investigations and the way in which they proceed with a view to making recommendations thereon. However, during those investigations and subsequent to the publication of our report in May this year and the Government's response to it three months later, we have been receiving further information on the subject.
As you know, Madam Deputy Speaker, the House of Fraser report was passed to several authorities in March this year. The Bank of England had received a copy earlier. Those who received the report besides the Bank of England included the Solicitors Complaints Bureau of the Law Society, the Securities and Investments Board, the Securities Association and the body with that most complicated title of all—the Financial Intermediaries, Managers and Brokers Regulatory Association, or FIMBRA. I shall go through the last four in that group and return to the position of the Bank of England.
The Solicitors Complaints Bureau said in a memoran-dum which the Department of Trade and Industry kindly passed to the Select Committee that it recently received a report from the solicitors instructed by it to investigate the part played by Herbert Smith in the matters dealt with in the inspectors' report. I have been pleased to learn in the past few days that no evidence has been found of professional misconduct by that firm of solicitors. However, the time taken to carry out that evaluation is worrying. It took some seven months. It must cause considerable anxiety to a firm such as Herbert Smith, which is well known internationally, to know that it is under investigation. It was probably dealing with all sorts of contracts of major importance during that time, some of which may not have been placed with it while the investigation was proceeding.
I have no duty to speak on behalf of any firm, hut it occurred to me that the time taken to investigate a company such as Herbert Smith is unduly long, particularly when the Solicitors Complaints Bureau—a professional organisation—has the duty to carry out that study.
§ Ms. Mowlam
I beg his pardon.
Will the hon. Member accept that one of the difficulties of the Solicitors Complaints Bureau in the report was over 1130 the distinction between a solicitor acting as a referee and a solicitor acting as an advocate and that that was part of the confusion? Does he have any views on that point which the Solicitors Complaints Bureau should consider?
§ Mr. Warren
The hon. Lady is right. I refer to her as an honourable Lady, and I accept her comment.
The Securities and Investments Board believed that it did not have much more to contribute on the matter, and I accept what it said for the moment. I am reticent to pass any comment because the Select Committee on Trade and Industry will have the pleasure of the company of members of the board as witnesses next week. I would not wish to dull the enthusiasm of any members of the Select Committee to hear the excellent questions that I am storing up for that occasion.
Turning to the Securities Association, it is good to see that, since the events leading up to the appointment of the inspectors, both Kleinwort Benson and Macarthur and Co. Ltd have been through the Securities Association's rigorous and vigorous authorisation process and that both firms are now subject to the principles and rules established by the Financial Services Act 1986. It is worrying that it took an investigation to bring them to that happy position.
I turn lastly to FIMBRA, before coming to the Bank of England. FIMBRA has told us that it is monitoring the position continuously—a nice phrase. But it is the regulator of only a small proportion of the business of Harrods bank.
The area of principal concern to me, and on which I believe that other hon. Members wish to comment, is the position of the Bank of England. It has had several inquiries by the Select Committee. We asked it on 21 March 1990 what action was being taken about Harrods bank following publication of the inspectors' report on the House of Fraser. There ensued an exchange of letters. The Governor of the Bank relied on section 82 of the Banking Act 1987 and told the Chairman of the Select Committee and, therefore, the whole Committee, in a letter dated 3 August 1990:I am told by a senior counsel that I am at risk under section 82 if I disclose information concerning Harrods bank unless I am able to do so under one of the exceptions provided for in the Act".Section 82 makes it a criminal offence to disclose information received under the Banking Act other than to people specified in section 84 or, under section 83, to others to enable the bank to discharge its functions under the Act—something with which you are immediately familiar, Madam Deputy Speaker. That did not satisfy the Committee. In response to my further letter of 17 October, the Governor replied that the legal advice which he sought did not cover whether the Select Committee could compel him to disclose confidential Banking Act information, nor whether in so doing he might be protected by parliamentary privilege. My hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) is much more adept at these matters than I am, and he will wish to catch your eye, Madam Deputy Speaker, to comment on this particular area.
I have taken advice from those who serve us in this House, and I am told that, if the Governor gave the information to the Select Committee, his evidence would be covered by parliamentary privilege. On page 132 of "Erskine May", the general rule is that the House 1131will treat the bringing of legal proceedings against any person on account of any evidence which he may have given in the course of any proceedings in the House or before one of its committees as a breach of privilege.Whether the courts would entertain an action against the Governor for having given evidence contrary to the provisions of a statute, and how the House would enforce its authority if necessary, would depend on the circumstances. I hope that you would agree, Madam Deputy Speaker, that, in the traditions of the House, it would be surprising if the House did not take some action in support of the Select Committee and its privileges.
I have not yet covered the powers of the Select Committee to send for persons, papers and records. Before embarking on any such matter the Select Committee would consider the consequences carefully. I speak for myself when I say that I hope that the Governor of the Bank of England will look carefully at his position. As, since before March 1990, he has had an opportunity to look at the situation relating to Harrods bank, it is high time that he responded on behalf of the Bank of England to this worrying matter, whether or not the bank and its directors, including the Fayeds, are trading in a proper manner as required under the Banking Act 1987.
§ Mr. Maxwell-Hyslop
Before my hon. Friend reaches the substance of the matter, may I ask whether it is not absolutely clear that the order of the House establishing the Select Committee gives the Committee power to send for persons, papers and records and that, in the light of the precedent of the moneylenders' case, the House enforces the order of the Committee to answer to the satisfaction of the Committee, not the House, such questions as it is pleased to put? There is no question whatever that the Governor of the Bank of England is not above the law of the land or of this House, but is bound to answer questions from the House. A judge who entertained a criminal proceeding against him in the light of that would expose himself to dismissal by a motion of both Houses of Parliament.
§ Mr. Warren
I am most grateful to my hon. Friend for his intervention. He is perfectly correct. You will be aware, Madam Deputy Speaker, that the Committee on which I serve as Chairman has many parts to it. I am the nicest of people and I am surrounded by elegant gentlemen, like my hon. Friend, who are of a much tougher calibre than I am and who express forcefully what I feel. It is hard to hold on to my job with such elegant advice all around me. We have yet to hear from our friends on the Opposition Benches.
§ Mr. Anthony Nelson (Chichester)
My hon. Friend will recall that, in the section of our report that dealt with the House of Fraser, two main conclusions and two recommendations were made. Neither of the Committee's important conclusions was addressed in the Government's published response. Both the Committee's recommendations have been summarily dismissed by the Government in their response. Those of us who do not want that matter to be whitewashed, who are not prepared for it to be quietly forgotten—many regulatory bodies would seem to prefer that—are not happy that the House, or the Committee, should persist, pursue and prosecute it. Surely 1132 it is most unsatisfactory that such important conclusions and recommendations were not given the attention, or assent, that they deserved in the Government's response.
§ Mr. Warren
I am most grateful to my hon. Friend, who has summed up accurately the feeling of the entire Committee. I should draw to my hon. Friend's attention, however, the fact that, since the publication of our report, new brooms have swept through the Department of Trade and Industry in Victoria street, of which my hon. Friend the Minister is one, ably supported by my right hon. Friend the Secretary of State.
If my hon. Friend the Minister has an opportunity to participate, I am sure that he will want to assure all hon. Members, and not just my hon. Friend the Member for Chichester (Mr. Nelson) and me, that there is no cause for the concern that my hon. Friend was right to express. It is not right that this issue should drag on for ever in this manner.
I have sought to identify the need for constant public assurance that the United Kingdom regulatory system is of world class calibre. That assurance of quality must be the hallmark of the United Kingdom if it is to be the premier financial services nation of Europe. We cannot count on London, Bristol, Edinburgh or any other of our financial centres holding on to that premier position. Frankfurt is coming up fast behind, and it is anxious to establish itself as the major focus of Europe.
The Government must demonstrate that they un-derstand that assurance is required today and at all times. The Government must recognise their duties, so that there is a constant assessment of the self-regulatory organisa-tions' performance. Investors require such essential confidence in those organisations at all times. The powers of protection and vigilance must be sufficient to the task expected of the Government.
§ Mr. Stan Crowther (Rotherham)
The hon. Member for Hastings and Rye (Mr. Warren) has, on behalf of our Committee, covered the specific recommendations in the report. I should prefer to make a few general comments.
No one really knows the full extent of financial crime committed here or elsewhere. The one thing that is certain, however, is that far too much of it is going on. On page 4 of the Government's response to our report, they make an apt comment when they say:The financial services area is a particularly attractive target for fraud, since its raw material is other people's money".That sentence sums up the problem well, but it is a pity that the Government's response has, in general, failed to recognise that the problem is as serious as that sentence suggests.
It is clear that the development of information technology, which allows vast sums of money to be switched around the world in a matter of seconds, has made financial crime much easier. It is also clear that that crime is now committed internationally on an unprecedented scale. I fear that the villains are in front of the forces of law and order and are getting even further ahead, which is disturbing.
On 15 October, the House debated one of our previous reports on financial services in relation to the single European market. I contributed to that debate and the 1133 Minister, then Parliamentary Under-Secretary of State—I congratulate him on his well-deserved promotion—accused me of casting aspersionson practically the entire City and much of the corporate sector."—[Official Report, 15 October 1990; Vol. 177, c. 1020.]Nothing could be further from the truth. I did not doubt then, nor do I now, that the vast majority of people employed in financial services are perfectly honest, and as anxious as we are to root out the criminals. That does not alter the fact, however, that such crime is widespread. I do not believe that the country is tackling it as vigorously as necessary.
A few weeks ago, before our debate in October, the newly appointed director of the Serious Fraud Office said that the cases under investigation by her office, or awaiting trial, involved sums totalling £1.16 billion. By any standards, that is not peanuts; such is the scale of the problem.
During our long inquiry, I felt that the cases that were coming to light represented a minority—the tip of a large iceberg. One of the problems facing the prosecuting authorities is the slow pace at which investigations proceed —the hon. Member for Hastings and Rye has referred to that. The most obvious recent example of that is the notorious Barlow Clowes affair, but there are many others. We are far too slow in proceeding with such investigations, and that creates problems for the prosecuting authorities.
Another problem that confronts those authorities is that, once the wrongdoer is caught and convicted, the courts often impose derisory sentences. We appear to operate different scales of penalties for different classes of offence, even though all the cases relate to dishonesty of one kind or another.
A few weeks ago, there was a press report about a member of a local authority who received a fairly lengthy jail sentence for fiddling his travel expenses to the extent of a few hundred pounds. When we contrast that with the sentences that were imposed at the end of the Guinness trial on some extremely rich people who engaged in serious crime involving millions of pounds, no one can pretend that there is any real fair play when it comes to court decisions. The public find that most disturbing.
§ Sir Anthony Grant
I am extraordinarily grateful to the hon. Gentleman for his courtesy.
I agree with the hon. Gentleman, but judges must take into consideration the length of time that people have been in agony or at risk because the case has taken such a long time to come before court. In those circumstances, much of the punishment has been suffered before the actual conviction. That fact, however, reinforces the hon. Gentleman's point that it is necessary for procedures to be speeded up. The Guinness case was far too long; it is an example of why justice should be speedy as well as just.
§ Mr. Crowther
I agree, and the whole Committee was unanimous on that issue. I hope that it will be taken up by those responsible for carrying out investigations and bringing matters to the courts.
Most alarming throughout our inquiry was the complacency, indeed inertia, of the then Secretary of State, the right hon. Member for Cirencester and Tewkesbury (Mr. Ridley). From his laid-back attitude, one might imagine that there was no problem and that any difficulties that did exist were not worth bothering about. His attitude was exemplified by his almost incredible refusal to take any action against the people whose reprehensible conduct was graphically described in the House of Fraser report. It was almost unbelievable that no action was taken at the end of it all.
That general feeling that there is not a lot to worry about comes through in the Government's response to our report. It does not apply as seriously as it did to the attitude of the then Secretary of State, for the Government admit that there is a problem, but they are not taking it as seriously as they should, and I do not find in their response the sense of urgency that the Committee tried to bring to the attention of the Government.
I hope that the present Secretary of State will a more realistic attitude. As a former Treasury Minister, perhaps he understands more clearly the need for absolute probity in financial dealings. I agree with the hon. Member for Hasting and Rye that, if the City of London is to retain its place as the greatest financial centre of the western world, those who besmirch its reputation by criminal acts must be relentlessly pursued and severely punished when they are caught.
§ Mr. Robin Maxwell-Hyslop (Tiverton)
I cannot reasonably, in the short time we have for this debate, cover the whole spectrum of this immensely important report. I express at the start my disappointment that the new Secretary of State did not think that the response to this very major report which is being debated—which is not an Adjournment debate, to which a Parliamentary Secretary or Under-Secretary of State is the appropriate replier for the Government—was one that warranted his presence in the House. I think that is a matter of regret. I am bound to balance that comment by saying that I am equally disappointed that my colleagues on both sides of the House do not also regard it as a matter which ought to require their attendance in the House.
If you look, Madam Deputy Speaker, at the number of questions that there have been on the Order Paper in the last nine months on the matters covered by this report, I think it is a matter of shame that the hon. Members who asked those questions did not think it necessary to be here today to listen to, or participate in, this debate. This is not a matter of criticism merely of hon. Members or Ministers; it is of both.
I direct my particular attention to recommendations which I will read out. Number 23:We recommend that company law be amended to provide that (1) if inspectors report that directors have given false information to them, the Secretary of State should automatically apply to the court for their disqualification".That has not been done in the case of the House of Fraser, where knowingly lying statements were made to the inspectors.
1135 I am not a lawyer, but I have little doubt that the provision of the Perjury Act 1911, I think section 6, which makes it a criminal offence knowingly to make an untrue statement, which is materially untrue, before a court or tribunal, even though not under oath, constitutes perjury, where the person concerned has a duty to do so. I understand that in the case of the Al Fayeds, the only question which perplexed the mind of the Director of Public Prosecutions was the extent to which they had a duty to make the—untrue—statements which they made. But untrue they were, and that is known.
Whether the fate of a grandiose firm of grocers and haberdashers should be a matter of concern to this House I beg leave to doubt. That is not a great matter to us, however Harrods may describe itself. But it happens to embody a bank, Harrods bank, and the regulatory organisation for banks is the Governor of the Bank of England, and it is that to which I intend to turn my main remarks today.
For most regulatory organisations there is a Minister answerable to this House, or else there is a court of law. But here we have the Governor of the Bank of England who is the regulator of banks with very clear duties laid on him by statute, and among those are whether the persons running a bank or controlling it are fit and proper persons.
How it can be held that somebody who has lied in a major degree to a company inspector is a fit and proper person to control the Harrods bank passes my understanding. So the first thing that is relevant for us to consider is whether the Governor of the Bank of England, who was invited to give private evidence to the Committee but declined to do so, has discharged his duty properly. If he does not discharge it properly in the case of Harrods bank, are we—and we are the Select Committee on Trade and Industry upstairs, and we are Members of the House of Commons here in this debate—entitled to assume, or dare we assume, that he does perform those functions properly when the Government—the Minister responding to our recommendations—have given no satisfactory reply to our recommendations?
Why does it matter if a fishmonger, butcher and haberdasher with a bank attached has a corrupt ownership, because the corrupt ownership is also the shareholders? So in law the shareholders are not at risk except by the same corrupt ownership. It matters for this reason. The whole of that pyramid enterprise is enormously in debt, and its debts extend in a large degree to the weakest of the three great banks in this country, whose own stability is not out of question at this moment.
So if the Governor of the Bank of England does not discharge his regulatory duty properly in the context of Harrods bank, and the whole edifice of which it is part comes tumbling down because it cannot meet the interest on its enormous loan of debt, that has an implication—I would not want to say a fatal one because it probably is not a fatal implication—for one of our three great clearing banks for which the Governor of the Bank of England has another enormous regulatory responsibility.
The House of Commons has, and it uses as its instrument, the Select Committees which have grown up, first, since 1971; and then—since the then Government refused to put the Procedure Committee's recommendations for reformation of them into practice, it had to wait 1136 until 1980—since 1980 we have had the much stronger Select Committees, in which the House reposes its trust for examining not only Government but other bodies which control our nation, in a manner directly or indirectly responsible to Ministers, who in turn are responsible to this House. And that is why this debate is so important. It is important because the banking system of our country is different from that of the United States of America, which may shortly be in cascade collapse through lack of proper regulation. We have to learn from the lessons of other countries, and within the United Kingdom we have a very imperfect system of banking regulation—imperfect if the Governor of the Bank of England either does not read evidence sent and addressed to him by first-hand witnesses —not tittle-tattle—or if he ignores such evidence because he finds it embarrassing. If he will not respond to the Select Committees of this House which have power to take evidence in strict confidence, then to whom is he answerable?
§ Mr. Warren
I am sure that my hon. Friend would want to make it clear that as yet we have not sought to send for the Governor, but that we have the right to do so.
§ Mr. Maxwell-Hyslop
We have communicated with the Governor. He has refused to give us information, and the moment of this debate was not of our choice. It was the choice of the Leader of the House, and I would have preferred it to have come later so that we could have had the Governor of the Bank of England, who, in response to our first inquiry, asked the wrong questions of his legal advisers. He did not ask whether he could tell the Committee the truth. He asked whether, outside the Committee, revealing information that we needed to discharge our obligations to this House would constitute a criminal offence.
This was not the question that the Governor needed to ask. I could have told him the answer to the question that was material: that proceedings in Parliament, which taking evidence from witnesses pursuant to the Order of the House most certainly is, are wholly outside the province of the criminal law of this country; and any judge who heard an indictment on such a matter and who did not throw it out as outside his jurisdiction would open himself to dismissal by both Houses, not because of amour propre. The Houses of Parliament today only exert their privilege not as it has historically existed but in so far as it is strictly necessary for them to fulfil the trust that the House has reposed in them. That is the restriction in which privilege today is applied.
Can anybody believe that inquiring why the Governor of the Bank of England does not use his regulatory functions against admitted liars running a bank belonging to and secured on an organisation of doubtful capacity to meet its financial obligations and in debt to one of our major banks is not a matter on which this House has the proper right to inquire in confidence? Then the only way to deal with the situation—I repeat to the Minister of State, since the Secretary of State is not here—is to raise it tonight on the amendment—a very rare one indeed—to the proceedings today.
I add for the information of the House that I have sat on the Select Committee since it first existed in 1971. Unusually, this Committee has always sat mixed. It has not sat Government supporters on the right, Opposition on the left, and then voted on party lines. One of the 1137 greatest Chairmen under whom I have ever sat is the hon. Member for Sheffield, Attercliffe (Mr. Duffy). This Committee since 1971 not only has always sat mixed: it has always endeavoured to serve the House of Commons rather than the political parties from which its members are drawn. I wish that that could be said of all Select Committees.
In concentrating on the supervision of banking, which has to be one of the aspects that emerge from our report on company investigations, I do not wish to usurp the function of the Select Committee on Treasury and Civil Service. It is because in this case there is a bank which is embodied in a grocer, fishmonger and haberdasher that it comes within our remit. But if that—and here I rest my remarks—reveals a dangerous weakness in the control mechanism which is the personal responsibility of the Governor of the Bank of England, and he has declined either to justify his inaction or to report his action to the Committee charged by this House with supervising that immensely important aspect of our affairs, then he ought to call into consideration his own occupancy of that office.
§ 5.9 pm
§ Mr. Doug Hoyle (Warrington, North)
First, I must declare an interest. I am the president of Manufacturing, Science, Finance, which has more than 80,000 members working in financial services. Secondly, I congratulate the Minister for Corporate Affairs on his promotion and look forward to his winding-up speech.
Thirdly, this is the first time that I have had the opportunity to follow my good friend the hon. Member for Tiverton, (Mr. Maxwell-Hyslop), to whom it is always worth listening. He has no interest of any kind to declare and is fearless and of independent mind. I do not always agree with his views, but I always listen to them in the Chamber or in Committee with great interest. All hon. Members have benefited from his forthright style in presenting his case. I agree with every word that he said about the Governor of the Bank of England. The Committee needs to ensure that the Governor appears before it and stops making feeble excuses and hiding behind legal opinion which, as the hon. Member for Tiverton has shown, does not stand up to scrutiny.
Like other hon. Members who have spoken, including the Chairman of the Select Committee on Trade and Industry, the hon. Member for Hastings and Rye (Mr. Warren), I shall refer to the House of Fraser. I am sure that you will be busy over Christmas, Madam Deputy Speaker, but if you can spare the time and have not already read the inspector's report, may I recommend that you do so because it is far better than any mystery novel. If a book were published containing events such as those that appear in that report, no one would believe that they had happened. The television serial "House of Cards" is more believable than some of the events that are recorded in the report.
The report is right in what it says about the people running the bank and the largest corner shop in the country. The report says that the Fayed brothers dishonestly misrepresented their origin, their wealth, their business interests and their resources to the Secretary of State, the Office of Fair Trading, the press, the House of Fraser board and shareholders and their own advisers. It is amazing that the Fayed brothers are still there.
1138 The report has shown deep flaws in our system of company investigation and in the role of the Department of Trade and Industry in protecting shareholders, consumers and, not least, the public interest. After six years and six Secretaries of State, and despite the catalogue of dishonesty and deceit outlined in the report, it is clear that no action will be taken against the Fayed brothers by the DTI, by any of the regulatory bodies or by the Governor of the Bank of England. There could not be a clearer indictment of the system as it stands.
Perhaps I may remind the House of the history of this case. In 1984–85 and amid some controversy, the Fayeds acquired House of Fraser Holdings. That gave them not only the ownership of the largest chain of department stores in Europe but, as the hon. Member for Tiverton said, status as bankers through Harrods bank. As the inspector's report shows, since then the Fayeds have systematically lied about their circumstances to prevent the authorities from intervening.
In 1985, the Office of Fair Trading and the Department of Trade and Industry were deliberately misleds by the Fayeds about their assets and business interests. Their claims that they had widespread international interests in a number of businesses have since been shown to be false. Their interests in shipping, construction, oil, banking and other areas were minimal and their claims did not fit the facts that emerged.
The assets of the Fayeds were tiny and could not have generated anything like the capital that was used in the House of Fraser takeover. That has been satisfactorily illustrated in the inspector's report. Time after time the Fayeds failed to give a proper account of how they financed that takeover. People could speculate about that, but I do not intend to do so. The claims made on behalf of the Fayeds by Kleinwort Benson and by Herbert Smith have also been shown to be untrue.
§ Mr. Hoyle
I thank the hon. Gentleman. False is a better word. There is a fine distinction in relation to Herbert Smith because it was not acting as advocate for the Fayeds at that time. We must take up the matter with the Law Society when it conducts an inquiry. Perhaps the House should return to the issue of how the firm of Herbert Smith discharged its duty in that respect. I am not completely satisfied about the way in which it was done. The hon. Member for Tiverton told me that what the Fayeds said to Kleinwort and to Herbert Smith was false.
The Fayeds' claim that they were worth several billion dollars was also false and they are not from an established family of Egyptian landowners. One genuine detail appears in the inspector's report, and it is about the conduct of Mohamed Fayed in the capital of Haiti in 1964. According to the report, he entered into a deal, using a false identity, to modernise the harbour, and subsequently absconded with up to $187,500 that belonged to the harbour authority.
Despite everything that we know, the Government have repeatedly refused to refer the takeover to the Monopolies and Mergers Commission and have not sought to disqualify the Fayeds as directors. It seems to be acceptable to the Government to have proven liars and at least one proven thief in control of a major company, the 1139 House of Fraser, and certainly in control of a bank. I am sure that that causes the Minister some concern and I shall listen with interest to what he says about it.
My hon. Friend the Member for Rotherham (Mr. Crowther) spoke about the previous Secretary of State for Trade and Industry, the right hon. Member for Cirencester and Tewkesbury (Mr. Ridley). From the beginning he was not only laid back but confused the issue in his statement to the House on 7 March. On the one hand he said that disqualification should be used as a means of protection for the public, and on the other that it should be usedto protect the interests of shareholders."—[Official Report, 7 March 1990; Vol. 168, c. 876.]Section 8(1) of the Company Directors Disqualification Act 1986 allows the Secretary of State to apply for the disqualification of an individual when he considers it to beexpedient in the public interest".Under section 8(2) the court would then disqualify a director ifit is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of a company.In what sense can the public interest possibly be protected by taking no action? Why were not the courts asked to make their own judgment on the conduct of the Fayeds and their fitness to run the House of Fraser?
Even more disgraceful was the former Secretary of State's attitude when he appeared before the Select Committee. He refused to give reasons for his failure to take any action that would have led to disqualification. I still do not know why he did not go to court. That is still a mystery to me. He gave us no explanation for it.
The Government's conduct during the entire episode has been negligent. They failed to conduct a proper investigation during the takeover, and once the facts were known they failed either to refer the takeover to the Monopolies and Mergers Commission or to take steps to have the Fayeds disqualified as directors.
If we can have no faith in the Government's willingness to clamp down on shady business practices, we cannot have much more faith in the regulatory bodies that have been set up.
The hon. Member for Tiverton expressed the case exceedingly well in his forthright manner when he said that the Governor of the Bank of England has so far refused to come before the Select Committee. The Bank of England will not tell us what it intends to do, but it is obvious that it intends to do nothing.
The Securities and Investments Board has completely washed its hands of the issue. The Financial Intermediaries, Managers and Brokers Regulatory Association is waiting to see what everyone else will do. That is not its only failure. It also failed to act in the public interest with regard to the Levitt group where 18,000 investors are in some difficulty. In the light of what the Select Committee had to say about auditors, it is interesting that Levitt's auditors, Stoy Hayward, were also accountants for Polly Peck. It is a matter of great concern that FIMBRA has done nothing about that.
As I said earlier, the Law Society cleared Herbert Smith on the ground that it was a referee in the affair, despite the fact that it was used by the Fayeds to provide false information to the authorities.
1140 It is perfectly clear that the structure of company investigations in Britain is a bureaucratic nightmare. Because there are so many bodies, the buck can be passed from one authority to another, and often the wrongdoers manage to slip away. We have far too many bodies and the knife should be taken to them. Their streamlining is long overdue. While we have so many bodies, it is not surprising that the crime that was described by my hon. Friend the Member for Rotherham is taking place to the extent that it is.
I hope that there will be some action on many of the Select Committee's recommendations. In particular, I would like a central clearing house to provide comprehensive co-ordination of the regulatory regime to be established without delay. The Department of Trade and Industry should more closely monitor the workings of the regulatory bodies and develop its own permanent staff of qualified investigators.
In addition, the broader public interest and the way in which it is applied should be more clearly enshrined in company law. Intermediaries should be under an obligation to ensure that they do not facilitate dishonest business practices. Finally, providing false information to inspectors should become a criminal offence and should lead to automatic referral for disqualification from directorship. That is essential.
I agree with the hon. Member for Hastings and Rye (Mr. Warren) and my hon. Friend the Member for Rotherham that we must not be complacent about the position of the City of London. That we are the greatest trading financial centre in western Europe gives me no grounds for complacency. We are looking at a Europe, whether we like it or not, in which the deutschmark dominates and the Bundesbank is becoming more and more powerful. Unless something is done to clean up our act, to clean up the City of London once and for all, in years to come the centre of financial dealing will move from here to Frankfurt or Berlin. Let us do all that we can to prevent that from happening.
§ Mr. Douglas French (Gloucester)
I am grateful to have the opportunity to speak in the debate. I did not have the privilege of serving on the Select Committee on Trade and Industry when it prepared its report. I congratulate the Select Committee on a comprehensive, extremely interesting and effective report. Having listened to my hon. Friends the Members for Hastings and Rye (Mr. Warren) and for Tiverton (Mr. Maxwell-Hyslop), I realise that not having participated in those proceedings was a privilege forgone. However, it means that I have not formed any entrenched views on the matter of the House of Fraser, so I shall leave others to speak about that.
I want to focus my remarks on some of the Select Committee's other recommendations, in particular recommendation 21, which received a reply on page 15 of the Government's response. That recommendation says:We recommend that the DTI monitors closely the performance of the SIB and SROs in discharging their investigatory duties and reports annually to Parliament.As the House will know, under section 114 of the Financial Services Act 1986, the Secretary of State has transferred most of his powers under that Act to the SIB, including investigations and enforcement powers. The Secretary of State has the responsibility of ensuring that those transferred powers are properly carried out.
1141 I wish to address some remarks to the respective costs and effectiveness of self-regulation compared with statutory regulation, particularly as it applies to financial services. In particular, I want to refer to the Government's response on page 15. The Government clearly believe that the new arrangements under the Financial Services Act 1986 need a period of stability, to bed down and to demonstrate the Act's full effectiveness. That period of bedding down is fast running out. It will not be long before the Government must decide whether they are to introduce further legislation to amend the 1986 Act's operation, or should consider alternative solutions to the problems that remain under that legislation.
I do not want to see statutory regulation of financial services. That would result in substantial extra costs for everyone, which would affect the level of funding that we are debating tonight. Also, best business practice in the financial services sector is much more likely to be the route to satisfactory results than a legal jungle of the kind that is to be found in other countries, notably the United States. Having said that, it is essential that the work of FIMBRA, the SIB and the other SROs is made more effective. If that means providing them with additional funding through the DTI—though admittedly the SROs do not receive that at present—or, as The Economist put it recently, beefing them up with taxpayers' money, so be it.
I believe that the Securities and Investments Board is fairly conscious of the need to watch costs. I expect that, when its chairman meets the Select Committee on 19 December, he will show that the board is cost-conscious. There has been some misguided criticism of the SIB, with references to its luxurious new offices and its staffing levels, but much more important is the extent to which the board recognises when it is appropriate to deploy its full statutory powers in making an investigation, or when its objectives can be readily achieved by less formal and expensive means. Its judgment in that respect has generally been sound. However, I remain of the opinion that the SIB is not as effective as it should be—particularly in its relationship with the different SROs, and with FIMBRA in particular.
FIM BRA has some considerable operating strengths. I spent some time at its headquarters examining its procedures, and reached the conclusion that it has great strengths, particularly in the collection and collation of material about offenders and would-be offenders. That part of its operation is efficiently and carefully run, and secures most of the information it needs. None the less, FIMBRA remains a victim of its own rule book. In the public's perception, there is a gap between what FIMBRA should do and what it is able to do. There is a gap also between the point at which FIMBRA's responsibilities and powers end and those of the SIB begin, which gives rise to much misunderstanding and ambiguity. Consequently, certain practices have a tendency to fall between two stools.
That is particularly evident in cases where FIMBRA decides to terminate a company's membership. From that moment, FIMBRA ceases to have responsibility for the ex-member's conduct, and the SIB assumes it. In my experience, the board has shown some reluctance to pursue ex-FIMBRA members in respect of misconduct during their period of membership of FIMBRA, even though the SIB has responsibility for monitoring them. That gap urgently needs plugging.
1142 There is something of a gap also between the SIB'S responsibilities and those of the Department of Trade and Industry, which devolves to the board the bulk of its monitoring responsibilities. However, I know of cases in which, when a point has been put to the SIB, it has responded that it is powerless to act, or has passed responsibility to the DTI. But when the same point is taken up with the DTI, it argues that the matter remains the responsibility of the board. That is a nightmare for people pursuing important inquiries.
§ Mr. French
I agree with my hon. Friend that it is absolutely unacceptable. I urge my hon. Friend the Minister to tighten up the lacuna between the DTI's responsibilities and those devolved to the SIB. Members of the general public and others wanting to undertake serious inquiries do not want to be shuffled off from one Government body to another.
I take the view that, in financial services, as in other consumer areas, the principle of caveat emptor remains extremely sound. That does not mean that the public should take a total risk. The public may be expected to do so in respect of the quality of an investment, and that risk cannot be removed from them. However, whereas one can make a judgment at the time of purchase about the quality of a pair of shoes, it is not reasonable to expect an individual investor to make a judgment as to whether or not the company in which he is investing his funds is honest and correctly administered. The individual investor does not have sufficient information on which to form a view and to make a proper judgment.
Nevertheless, if an investor is called upon to judge the integrity, honesty or administrative competence of a financial institution or intermediary, he should not be hampered in his attempt to do so by the presence of a FIMBRA imprimatur, as displayed in the literature or on the premises of the firm in question. Such an imprimatur, if it conveys anything at all, conveys the message that the company has been judged as honest and one with which the investor may reasonably do business. That is what the FIMBRA imprimatur conveys to the majority of the investing public: that the organisation's integrity has already been screened. When FIMBRA membership is withdrawn without proper publicity and public knowledge, as has happened, the investor is being perfectly reasonable when he protests that he thought that FIMBRA's stamp would provide him with some safeguard.
§ Mr. Tim Smith
I agree with my hon. Friend's remarks, but a difficulty arises because there is an expectation gap— I say that as FIMBRA's adviser. The FIMBRA imprimatur gives some investors the impression that they have a total guarantee, and caveat emptor appears to have gone completely out of the window.
§ Mr. French
I accept my hon. Friend's argument, and I should not want investors to imagine that the FIMBRA imprimatur provided them with a total guarantee.
§ Mr. Maxwell-Hyslop
My hon. Friends have used the phrase "total guarantee". Can we distinguish between a guarantee against criminal conduct and a guarantee of profitability? If an investment yields no profits, it is a bad investment and the result of bad judgment. The point that my hon. Friend the Member for Gloucester (Mr. French) 1143 is making—quite rightly—is that FIMBRA membership should not be taken to relate to profitability; it is to do with policing against criminal dishonesty in the running of businesses.
§ Mr. French
That is exactly the point that I was trying to make. I would not seek to protect an individual investor against the investment ability of the firm into which he was putting his money; that is a risk that he must take. There can never be any guarantee in that regard: there will be good investment companies and there will be bad ones, and we must accept the position as it is. If the FIMBRA imprimatur is to mean anything, however, it should mean that a company is adjudged to be an honest company that administers its affairs correctly. At present, the public are confusing the two issues, believing that the one is the equivalent of the other.
§ Mr. French
Which it is not.
If an investor loses his money in circumstances in which compensation is due, he will encounter significant weaknesses in the present compensation scheme. Since August 1988, under the Financial Services Act, compensation for a loss of up to £30,000 has stood at 100 per cent. It stands at 90 per cent. for a further loss of up to £20,000, with a maximum of £48,000. The scheme is run by a separate company, but financed by levies from the SROs. The payments, however, are not guaranteed: compensation will depend on the number of claims presented in any given year.
Thus, someone unfortunate enough to make his claim in the wrong part of the year, however valid that claim, may not receive the compensation that he might have received had the claim been made earlier in the calendar cycle. That, surely, is unsatisfactory: if there is to be a compensation scheme, it must of necessity be open-ended to the extent that it is not time-limited.
§ Mr. Jim Cousins (Newcastle upon Tyne, Central)
I have a good deal of sympathy with the hon. Gentleman's arguments. Does he not agree, however, that difficulties are caused to people who may be faced with a bewildering array of investor compensation schemes? Those dealing with other bodies covered by the Financial Services Act —such as the recognised professional bodies—may find themselves in a very different position from those using companies covered by the self-regulatory organisations created specifically by the Act.
§ Mr. French
That is certainly a problem, and I think that much more clarification is needed. It may be simply a question of communication, but I suspect that it goes rather further, and that a tightening of the system will be necessary to enable people to understand fully the circumstances in which they would receive compensation and the precise source of that compensation. If that requires additional public expenditure, we can no doubt make savings elsewhere to cover it.
§ Mr. Maxwell-Hyslop
My hon. Friend has taught me something this evening. I have studied the matter with some assiduity, but I did not know that the pathetic guarantee which replaced the £100,000 stock exchange guarantee, and which has not been adjusted in accordance 1144 with inflation and the cost-of-living index in the two and a half or three years since its introduction, tapered off as the year went by. Will my hon. Friend comment on that lack of indexation, and on the difference between the payment now made if a stockbroker defaults and the previous £100,000 guarantee—or was it an unlimited guarantee?
§ Mr. French
The compensation to which I was referring does not relate to matters connected with stockbroking firms; it relates to personal investors, and would apply, for example, to an investor who lost money as a result of investing with a FIMBRA member. Over a period, the compensation funds available run out, so that, at the end of the cycle, an investor may run the risk of not receiving the compensation that he might legitimately expect to receive earlier in the cycle.
§ Ms. Mowlam
The hon. Gentleman said that he would welcome the use of public funds if an increase in the scheme was necessary, and implied that he was sure that the Minister could find such funds. Has he any suggestions about where the Minister could find them—bearing in mind the fact that the Minister took the Barlow Clowes compensation funds from the budget for small businesses, research and innovation and the regions, as reported in the estimates?
§ Mr. French
I was not proposing to make any suggestion at this stage, although I shall have something to say about Barlow Clowes a little later. I do not believe that public funding is essential for such purposes; it is one solution, but it would also be possible, within the existing framework, to raise more funds than are currently raised through a levy on the SROs, which derive their funds from subscribing members. If, however, the money cannot be raised through an extension of the existing arrangements, I would expect a small saving to be made somewhere in the DTI's budget. In the context of that entire budget, we are talking about a very small amount of cash.
We see under subheading (k) of class 4, vote 2 that the figure of £156 million is listed for 1989–90, relating toSpecial payments to the Government's agents in connection with Barlow Clowes".That sum does not need to be included in this year's estimate as the Barlow Clowes affair is now behind us, but I believe that there are other special cases that come close to being in the same category.
Let me cite a constituency-related case. C. J. How, a company that operated in Gloucester, Cheltenham and Worcester, was a FIMBRA member, and accepted investments from many of my constituents as well as those of my right hon. Friend the Member for Worcester (Mr. Walker), my hon. Friend the Member for Cheltenham (Sir C. Irving) and, probably, others in that part of the world. Some of the investments amounted to £20,000 or more. The firm was suspended in April 1987 for failing to submit its accounts. In January 1988, its FIMBRA membership was formally withdrawn because of accounting problems, and at that point FIMBRA's responsibilities were ended.
The direct responsibilities of the SIB began in April 1988, which was when the relevant part of the Financial Services Act came into force. That meant that, between January and April 1988, the DTI was itself responsible for monitoring the affairs of this ex-FIMBRA member. By August 1989—some 16 months later—the DTI had stepped in and stopped C. J. How from running its 1145 business altogether. It then became clear, however, that, in the intervening period—after FIMBRA membership had been withdrawn—particular categories of the firm's business had continued; that unit trust companies and life assurance companies had continued to supply it with investment products; and that investors had continued to invest.
One of the reasons for investors continuing to invest was that they had not been told about the termination of membership. Existing members reinvested and there were new investors because they did not know that C. J. How was no longer a member of FIMBRA. When asked about that, one of the reasons given by FIMBRA is that it has to restrain itself in the extent to which it publicises the withdrawal of membership in cases where there may be damage to the remaining part of the business that is unaffected by the withdrawal or, in extreme cases, where there might be a claim for defamation.
FIMBRA makes announcements in trade papers, but such specialist papers are not read by ordinary investors who walk down the high street. It is essential, when membership is to be withdrawn, that a way should be found to let potential or existing investors know about it. It should be more effective than now and should not involve any problems of defamation or damage to the rest of the business.
At the time of the withdrawal of membership, FIMBRA claimed to have no evidence of fraud or misappropriation. Clients were said not to have been complaining. At that time, no clients were seen to be at risk. However, in the event, many clients lost a substantial amount of money, and in that way it bears a close resemblance to the procedures in the Barlow Clowes affair. As the Barlow Clowes investors have received a substantial amount of compensation, as provided for in the estimates last year, at the very least the investors who lost money between January and April 1988 when the scrutiny of the company lay with the Department of Trade and Industry —it was no longer a member of FIMBRA, and the Securities and Investments Board was not responsible—the Department should accept some responsibility for the losses incurred, especially for those who invested in a company where the FIMBRA imprimatur was still in evidence.
I wish to comment on the remarks of the hon. Member for Warrington, North (Mr. Hoyle) and the remarks attributed yesterday—correctly, I hope—to the hon. Member for Redcar (Ms. Mowlam). The hon. Member for Redcar said that the Levitt company—that seems to be on everybody's mind this week—raises serious questions about how FIMBRA does its job and what protection is being provided for small investors. I agree that it does raise those issues.
Some of the events in the Levitt story are extremely similar to those involved in the cases of Barlow Clowes and C. J. How. It is about time that we began to learn from experience. FIMBRA became alarmed during a routine inspection of Levitt when it discovered invoices of £21 million appearing apparently from nowhere. Presumably, in this case, it was to get funds into the company rather than the other way around. That is a substantial sum of money. One must ask whether the discovery came about from one day to the next or whether it evolved over a period. If the latter is the case, it suggests that more regular routine inspections by FIMBRA should be the order of the day.
1146 FIMBRA declared itself dissatisfied with the com-pany's accounting records. As the hon. Member for Warrington, North pointed out, it apparently relied upon assurances from the auditors of Polly Peck, if you please, that the client's assets were intact. As I understand it, FIMBRA did not make a formal announcement at that time because of potential effects on the liquidity of the company and the fact that it had no evidence of mismanagement or misappropriation of funds. Therefore, it kept its inquiry secret to avoid public panic.
As I understand it, and on the basis of press reports over the past seven days, even now the company has not been formally suspended by the SIB but, rather strangely, it has been "effectively suspended". Perhaps my hon. Friend the Minister can tell us the difference between those two terms. What is more, FIMBRA pronounced that it considered that client money was not thought to be at risk. That was only a few days ago, yet this morning one sees that there are projected losses of up to £40 million. I wait to see how those two positions are reconciled. It may be that the £40 million has nothing to do with client funds. We do not know. But I suspect that the two sums have been muddled up.
§ Mr. Warren
I have before me a document published this afternoon by FIMBRA, and I have no doubt that my hon. Friend would like to take it into account. It says:FIMBRA's newly-appointed Chief Executive … has praised FIMBRA's regulatory action in respect of The Levitt group Limited.Is that not a little self-congratulatory?
§ Mr. French
FIMBRA's new chief executive has been in his job for only a few days or weeks. I suspect that he was not in post when the earlier investigations should have been taking place. However, I agree that that comment seems rather more casual than is appropriate in the circumstances. I look forward with great interest to reading the full statement.
One key problem in the case involving the Levitt group is that there are no specific rules about the way in which financial services companies recognise receipts from long-term contracts, particularly from insurance commissions. The receipt of such commis-sions may be spread over a considerable time, but they may be brought into account the moment the policy or instrument has been sold. The Levitt group has admitted that the commissions were put into its accounts when the contracts were formally signed. That provides no allowance for subsequent cancellation of investments which frequently occurs in that type of personal investment. Therefore, the company is cashing in on the commission before it is in the bag. This is fundamentally unsatisfactory and a proper rule to address the problem should be set out by FIMBRA or the Life Assurance and Unit Trust Regulatory Organisation.
Section 447 of the Companies Act 1985 provides that Department of Trade and Industry staff can investigate where they have grounds for suspicion of fraud, misconduct or failure to provide shareholders with information that they may reasonably expect to have. I believe that there is a significant lack of enforcement of those provisions. I want to give an example. I am thinking of cases that also affect the stock exchange regulations, where undertakings are given to repay loan stock at a date in the future but where nothing is done at the date of maturity.
1147 For example, the Metropolitan water board 'B' stock was issued under the registration of the Bank of England in a prospectus going back as far as 1908. It was due for repayment in 1958. It was not repaid in 1958. The Metropolitan water board was taken over in 1974 by Thames Water, which was privatised in 1989. The flotation document contains a small paragraph on contingent liabilities, which says:Thames Water has been informed that a holder of part of the loan stock considers such stock to have been overdue for a number of years prior to the establishment of Thames Water Authority and that such stock is immediately repayable together with an additional amount of interest at market rates. The Directors of the company have been advised that the principal amount of stock potentially involved is unlikely to exceed £3 million.That reference to £3 million is relegated to a small paragraph in the flotation document.
§ Mr. Maxwell-Hyslop
Was not that a rather economical statement by the directors? Should not they have said whether or not their legal advice was that that amount, however much, was owing or not?
§ Mr. French
My hon. Friend takes the words out of my mouth.
The loan stock holders who should have been repaid in 1958 have lost the value of that stock, which remains unpaid, and the interest on it. They have suffered from the fall in the value of the pound since 1958, which amounts to about 90 per cent. If all those factors are taken into account, far from it being a contingent liability of £3 million, it may easily be 10 times as much. If the fall of the pound is taken into account, it may be a further 10 times higher even than that.
Although I believe that that loan stock should be repaid, I accept that there may be some argument as to why it may not be due. But I cannot defend the failure to state clearly whether it will be repaid, and if not, why it will not be repaid. What hope is there for the small investor whose predecessors invested in that stock? Is he to take up the burden through the courts of reclaiming the amount that he believes to be due? If he is not to do so, could not he reasonably be expected to be told that he has no case? The position in the flotation document is ambiguous.
That situation is known to the Governor of the Bank of England—to the Treasury, to the stock exchange, to the directors of Thames Water, who are potentially, if not actually, in breach of the Companies Act, and to the Department of Trade and Industry. It has been known for some considerable time, yet no one has been willing to act. A regulatory system that permits that is inadequate and should be dealt with promptly.
§ 6.3 pm
§ Mr. Jim Cousins (Newcastle upon Tyne, Central)
I hope not to take up too much of the House's time, but the Select Committee on Trade and Industry, of which I am a member, has performed an important function in its report. As it is an all-party Committee, it gives the lie to anyone who might suggest that those who want vigorously and rigorously to pursue the problems of cleaning up the City are simply weevils in the great biscuit of capitalism and do not have the interests of the City at heart. My hon. Friend the Member for Warrington, North (Mr. Hoyle) made his views on the matter quite clear and I thoroughly 1148 agree with him. It is in the best interests of the City that all these matters, and the detailed matters referred to by the hon. Member for Gloucester (Mr. French), are pursued with the utmost rigour.
It has emerged clearly in the debate and from the report that what should concern us is not the writing of a bible to explain the concept of due diligence or to file any amount of appendices, principles or sub-principles to clarify what obligations are owed to a client, but regulation, compliance and enforcement. My hon. Friends and others mentioned the problems at Harrods bank. I shall not refer to them because, bearing in mind the remarks of the hon. Member for Tiverton (Mr. Maxwell-Hyslop), and as I have greengrocery in my blood, I should not wish it to be suggested that haberdashery and greengrocery were not equally honourable professions compared with banking. I venture to suggest to the hon. Member for Tiverton that beetroot will be boiled long after the last banker has been buried with whatever honours he or she may have deserved.
There is no doubt but that compliance is at the heart of the matter. I congratulate my hon. Friend the Member for Redcar (Ms. Mowlam) on her efforts in exposing the Levitt group, with the result that this afternoon an arrest has been made.
It would be unfortunate and wrong to follow the hon. Member for Gloucester in attributing responsibility for regulation to one or two of the self-regulatory organisations or in singling out individual self-regulatory organisations such as the Financial Intermediaries, Managers and Brokers Regulatory Association for scapegoating. The structure of compliance is wrong, not the performance of an individual part of it. It would be unfortunate to single out FIMBRA—I have no brief for FIMBRA—because perhaps more than any of the SROs it has tried to let the world know about its regulatory activities. It has attempted to combat the difficulty that was referred to by the hon. Member for Gloucester—that in publishing the names of people from whom it has withdrawn recognition it leaves itself liable to subsequent action. None the less, its record in that regard strikes me as being at least as honourable as any of the other self-regulatory bodies and better than most. It would be unfortunate to think that the matter could be resolved by scapegoating the performance of any of the organisations.
Resources are of fundamental importance. Any organisation whose activities must be financed by levies on its membership will experience difficulty in exercising effective compliance if the resources that it needs to carry out the compliance effectively are drawn exclusively from those members. Budgeting for effective compliance is one of the great weaknesses of the system created by the Financial Service Act 1986.
The Department of Trade and Industry has no problem with resources because its compliance activities are financed from the surpluses or profits made from the Companies House agency. I think that last year those profits or surpluses amounted to £11 million. Oddly, far from there being a shortage of resources for public sector enforcement, a profit is being made from it. Plenty of resources are available.
Those who served on last year's Finance Bill Committee will recall the concession that was given to the City on stamp duty relief in anticipation of paperless trading. Many members of the Committee were staggered to learn that the relief of stamp duty meant a loss of 1149 revenue to the Exchequer of £900 million a year. In that context, there can be no difficulty about finding public resources to beef up whatever system of compliance we may choose to adopt, whether it be a statutory one or one using the existing self-regulatory bodies. There can be no doubt about that.
The present system has limitations and weaknesses. When a crisis arises, there is almost an embarrassment of different bodies involved, all with a small corner of the action. This points up some major discrepancies between the course of action pursued by outfits such as FIMBRA, which attempt to let the world know what they are doing in pursuing their regulatory activities, and bodies such as the Serious Fraud Office and the Department of Trade and Industry, which operate on different principles and where the public's need to know is not so clearly recognised.
§ Mr. Maxwell-Hyslop
Does the hon. Gentleman agree that there is an important difference between real and formal information? As my hon. Friend the Member for Gloucester (Mr. French) pointed out, advertisements in financial journals, which often people do not read, may exculpate someone in law for not announcing what he did. But if FIMBRA wants to let investors know when it imposes restrictions, it should issue that information to the popular press rather than just put a notice in financial journals that only financial advisers read.
§ Mr. Cousins
The hon. Gentleman makes an important point, but we should not lose sight of the fact that even the system of financial advisers that the City has may not be sufficiently effective in picking up these problems to circulate the information. Commenting on the problems of the Levitt group which had hit the newspapers, Tuesday's Financial Times stated:The accounts told a wonderful story of vaulting profits and turnover … but gave very litty indication about the way in which the figures were calculated.It is clear that, given the system of auditing and accountancy, even insiders with expert knowledge find it difficult to comprehend the meaning of some published accounts. That point is recognised in the Select Committee's second recommendation.
We will not make much further progress on company regulations until we tackle the weaknesses of the system of accountancy and auditing. We must recognise the problems in terms of setting accountancy standards—which are reluctantly beginning to be addressed—and the practice of auditing. Auditing firms enjoy a monopoly on external auditing functions. The top 10 firms may possess enormous resources arising out of the fee income from their practice, amounting to thousands of millions of pounds a year. They are major businesses by any measure of size or practice and they wield enormous power. Their performance in the Polly Peck and Levitt group matters does not lend total confidence. Accounts are being exposed as practically meaningless, offering no protection to anyone. They have been beautifully prepared, filed and presented, but have turned out to be worthless. I hope that the Select Committee's recommendation will be pursued vigorously.
In defence of the existing SROs, I hope that those who apply to them for recognition—I hope that this treatment will be extended to the recognised professional bodies which existed before the Financial Services Act and which were caught up in its mechanism—in the conduct of financial business and who give false information will be 1150 subject to criminal sanctions in exactly the same way as people who give false information to the Securities and Investments Board.
I wish to return to the central recommendation in the Select Committee's first report. We must answer the following questions: what is a company and to whom does it belong? In British company law, a company is narrowly defined—it is the property of its shareholders and directors. We are now confronted with a new situation in which new classes of people are involved in a company's affairs, many of them indirectly through their ownership of life insurance or pension funds. The problems, oppor-tunities and investments of those people are not recognised properly in the existing structure of British company law.
In a few years' time, we will be confronted with the problem of reconciling our company law with that of Europe, which operates on different principles. It operates in the Christian Democratic tradition—I put it that way because it may be more acceptable to Conservative Members—of social partnership in which workers, employees and managers are recognised as full partners who, through their labour, have a property right in the companies for which they work. Reconciliation of the European approaches to the question "What is a company?" and the traditional British one will trigger a wave of new approaches in company law and new company reforms.
Many of the proposals by the hon. Members for Chichester (Mr. Nelson) and for Beaconsfield (Mr. Smith) in the debates on the previous Companies Bill will be relevant to that reconciliation—the proposals for audit committees and two-tier boards and the proposals to increase the role of the independent directors accountable to specific social partners, to members of the social constituencies of which we must now recognise companies are a part. With those thoughts, I shall sit down in the knowledge that I shall give the hon. Members for Beaconsfield and for Chichester a chance to contribute to the debate.
§ Mr. Anthony Nelson (Chichester)
In the short time left in the debate, I should like to make a few comments because my hon. Friend the Member for Hastings and Rye (Mr. Warren) and all members of the Select Committee have done the House a singular service in undertaking this inquiry and bringing forward their report. Ever since the passage of the Financial Services Act 1986, the Banking Act 1987, the Building Societies Act 1986 and the latest Companies Acts, some of us have pressed for the supervisory process to be monitored more carefully and be accountable more regularly. Some of us said in the House and directly to my hon. Friend the Member for Hastings and Rye that we would like the Committee to do that. The Committee has done that job in the context of the report, and I am grateful for that. It is an interesting, positive and constructive report.
I am grateful to the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) for referring to the amendment that I and others tabled for debate on the Companies Bill. There is a strong case for empowering members of boards to have rights of auditing reporting and a separate statutory responsibility to ensure that the prudential management of company funds is discharged properly. Under our current unitary board structure, we 1151 shall do that only by biting the bullet and empowering a specific body of directors to take that responsibility and not leave it to the voluntary processes, which are disregarded by many companies.
There is an on-going need for the Select Committee and for the House to supervise the supervisors. In that context, I was pleased to learn that the Committee intends next week to ask the Securities and Investments Board to appear before it so that it can inquire into the board's activities and into its discharge of its responsibilities under the Financial Services Act 1986. That is excellent news and follows the Government's response on ways in which supervisors can be held more accountable.
Other hon. Members have referred to Harrods and to the role of the Bank of England. I believe that, although, strictly speaking, the Governor of the Bank of England may have been correct in his legal interpretation of section 82 of the Banking Act 1987, it would probably have been a better judgment from all points of view if he had decided to appear before the Committee, if it had invited him to do so. I understand that the Committee has not asked the Governor of the Bank of England to appear before it because the bank has submitted a memorandum in answer to a number of questions and has sought to explain why, for legal reasons, it is not willing to go far in answering the questions that the Committee might put.
I was a member of the Standing Committee on the Banking Bill. It was clearly not the intention of the House or of that Committee that we should not be able to obtain essential information about the supervision of the banking system. Although it is said that the House of Commons was not expressly mentioned as one of the exceptions to section 82, I believe that it would have been a better judgment for the Governor of the Bank of England to be more forthcoming. We share the objective of trying to ensure the protection of depositors' funds. Confidence is involved in this and the Governor of the Bank of England could have been rather more forthcoming.
§ Mr. Nelson
No, as time is limited and I have a lot more to say.
In recommendation 2, the Select Committee suggested:the permission for auditors to disclose confidential information to the supervisory authorities should be raised to the level of a statutory obligation.The House has considered that from time to time, but the Government have been reluctant—as they are again on this occasion—to raise that obligation to more than a moral one. That is probably right as the present improved procedures for reporting are satisfactory. However, there are still shortcomings and the way in which they should be overcome is not, as the Committee suggests, by raising the obligation to a statutory level, but by doing exactly what I proposed during the passage of the Companies Bill.
We should have audit committees for public limited companies above a certain size. If we brought that about, we should prevent autocratic and powerful chairmen or chief executives of public limited companies being able effectively to defraud the shareholders and to misuse funds under their control. At present, many non-executives in such companies are placemen—appointees of the chairman and the chief executive. They are yes-men on the unitary board. We must find a way to embolden them and 1152 to reinforce their ability to bring to account directors who might subvert or covertly misuse funds that are not theirs. As directors of public companies, they are trustees for the shareholders, for the creditors and, to some extent, for the employees.
Non-executives should be given a statutory responsibility and a statutory ability to inquire about substantial movements of funds within a company. There should, through the audit committee, be a separate reporting requirement from that of reporting to the auditors. We should insist that all the non-executive members of the board—and not the other members—say at each annual general meeting, "Yes, we certify that the auditors have been to see us. We have asked whether there are any unusual movements, capital flows, disbursements or payments that do not fall within the articles of association as we understand them. We are satisfied with the answers that we have received. If we were not satisfied, we should have brought them to the attention of the board." That would not change the course of events, but the matter would be flagged if there were a statutory requirement that at every annual general meeting there must be a report that the responsibilities have been discharged.
The Department of Trade and Industry has always believed that it must not separate the responsibilities of directors of the board. However, we now face the problem of leverage buy-outs in which massive amounts are involved. Companies nowadays are vulnerable to the misuse of funds or to being defrauded by particular individuals. We live in changing times. We must amend our company law and our supervisory structures within companies so that we can flag the problems far earlier and thereby prevent many problems happening. That major change will come about, although it may require a bear market and some more disasters first.
Apart from that omission, we now have a sound and effective supervisory structure. If we can bolster that structure from time to time through the discriminating scrutiny of the House, as the Select Committee has done, it will be all to the good for the corporate sector and we shall be discharging an important parliamentary responsibility.
§ Mr. Tim Smith (Beaconsfield)
I congratulate my hon. Friend the Member for Hastings and Rye (Mr. Warren), the Chairman of the Select Committee on Trade and Industry, and all the members of the Committee on producing a comprehensive report on company investiga-tions. The report is worthy of examination, although I am not saying that I agree with the Committee's conclusions.
I strongly agree with my hon. Friend the Member for Chichester (Mr. Nelson) that it is welcome news that, next week, the Select Committee is to take evidence from the Securities and Investments Board. When we discussed the structure of the regulatory regime under the Financial Services Act 1986, we were clear that the board was to be accountable through the Secretary of State to Parliament. Parliament has a duty to examine every so often the activities of the SIB and to look at the annual report and accounts. I am not quite as complacent as my hon. Friend the Member for Gloucester (Mr. French) is about the costs, and the Select Committee may want to ask a few questions on that. The SIB does not have the same direct pressure on it as the underlying self-regulatory bodies have 1153 from their members to keep costs down. However, under the Companies Act 1989, the SIB now has a statutory duty to ensure that it delivers regulations that are not merely effective, but cost-effective.
I began working in the City at the beginning of January 1966—almost a quarter of a century ago. Since then, there have been many changes in the City—most of which, I believe, have been for the better. The changes were most notable in the 1980s, when the City became one of the three pre-eminent financial centres of the world, along with Tokyo and New York. That occurred because of the Government's deregulatory moves during that period, which attracted banks and others from all over the world to the City of London. Today, the City of London is pre-eminent not only in banking. The Baltic exchange remains the centre of the shipping business and of the insurance business. The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) mentioned accountancy firms, which are very successful, do a great deal of business overseas, and contribute substantially to our invisible exports.
When we discuss regulation and the important matter of the protection of investors, we must remember that we do not want to over-regulate and thus drive business away from the City. We must find the balance between the two policy objectives. I believe that, in general, we have it about right and that we should not go too far down the road of additional burdens of regulation.
The other thing that has changed radically in the past 10 years has been regulation itself. Five to 10 years ago, many of the businesses that we have been discussing would have been wholly unregulated. Many of the members of the Financial Intermediaries, Manager and Brokers Regulatory Association still object to the fact that they are subject to regulation. They still find that difficult to accept. Firms of accountants and solicitors have been regulated for many years by their own organisations but, until April 1988, there was no organisation to regulate many of the small financial services businesses. Many are literally shops in the high streets, which offer insurance and other financial services products. They are still getting used to the idea that, in the 1990s, they have to pay a price if they wish to offer financial advice, and especially if they are taking clients' money and investing it on their behalf.
There can be no objection to such regulation. I am a supporter of the Financial Services Act 1986 and the structures that we established under its provisions. Although I understand the frustration of my hon. Friend the Member for Gloucester (Mr. Finch) about its failures and weaknesses, given that this system is so new and has been such a radical change, I believe that we should not make any more major changes until FIMBRA has had an opportunity to prove itself. After all, changes were made as recently as the Companies Act 1989. They were designed to introduce a simpler form of regulation but many of them have yet to work through the system. We should allow them to do so. Two of the SROs—the self-regulatory organisations—are about to merge, which will produce a more efficient system.
We have also seen the establishment of the Serious Fraud Office. We should not underestimate what it is doing at the moment. I went to the SFO about six weeks ago and found it a most impressive operation. We did not have a Serious Fraud Office before, and the responsibility for dealing with serious fraud was widely spread across the different police forces. Today, all the major fraud cases are 1154 dealt with by people of the highest calibre. I am glad that the SFO now employs a few accountants who can get to grips with balance sheets. Although my hon. Friends may not believe it, that was a major deficiency previously, because the police did not have an adequate number of people who were sufficiently numerate to cope with major fraud. The SFO also has impressive information technology systems.
Although it would not be appropriate to go into too much detail, I recommend any hon. Member who is interested to visit the Serious Fraud Office to see what it is doing and the way in which it is preparing evidence for the trials that are due to take place next year. As I have said, it is an impressive operation, but perhaps more resources need to be devoted to it. It has an outstanding head in Mrs. Barbara Mills, who is an excellent appointment. There is no doubt about the SFO's determination to get to grips with serious fraud. We should not underestimate its deterrent effect. The way in which it has dealt with Polly Peck, for example, will send a message to many other people who may be contemplating breaking the law. They will see that we really mean business about fraud, and that we mean to get to grips with it.
I commend what the Government have done, both in terms of the Financial Services Act and in combating fraud.
§ Ms. Marjorie Mowlam (Redcar)
I agree with much of what has just been said by the hon. Member for Beaconsfield (Mr. Smith), who is an adviser to FIMBRA. The mergers between the SROs are an efficient move, and the Serious Fraud Office is efficiently run by a woman. I have no difficulty with that at all. However, the hon. Gentleman cannot have his cake and eat it. He cannot argue on the one hand that he can understand the frustration of FIMBRA members who do not want to be regulated, while listening to the tale of woe told by his hon. Friend the Member for Gloucester (Mr. French), whether that relates to C. J. How, Hamilton House, Dunsdale Investment Group, Barlow Clowes or Levitt. We have a serious problem on our hands. Although there may be a need for parts of the system to bed down, there is also a need for the system to be adapted to respond more quickly, efficiently and directly to some of the problems that we are facing.
I congratulate all members of the Select Committee on what seems to have the general agreement of the House as being a strong and positive report, which has proved useful to hon. Members of all parties. In view of the time constraints, I shall not refer to the House of Fraser because the hon. Member for Tiverton (Mr. Maxwell-Hyslop) and my hon. Friends have discussed it in detail. Looking back to our debate on the House of Fraser, we can see how —let us be honest—the then Secretary of State for Trade and Industry, the right hon. Member for Cirencester and Tewkesbury (Mr. Ridley), hid behind the legal framework and the responsibilities of the Attorney-General. The Governor of the Bank of England is now hiding behind legal opinion. There is some similarity between those two examples in terms of trying to halt the truth and the facts coming out, and action being taken.
Much of the Select Committee report deals with insider dealing. The Government's response in their White Paper has been minimal although they have gone through a 1155 process of consultation. I hope that if the Minister has the time, he will tell us some of the results of the consultation process. I should like to hear some evidence about what the Government will do in terms of insider dealing. That was well researched by the Select Committee and there is no doubt that problems still exist. The stock exchange "Quality of Markets Quarterly Review", summer 1990, outlines the extent of the problem. Of the 103 cases that the stock exchange referred to the Department of Trade and Industry, there have been 42 investigations, resulting in only nine convictions. It is worth pointing out that those convictions cover only the small fry. In the United States, where the markets are similar, the people at the centre of the trading are being caught, but it is a different story here.
The DTI's confidence to deal with insider dealing is still very low. The report of the accountancy firm Ernest Young states:Over 90 per cent. of people have little or no confidence in the ability of the DTI to deal with fraud of just £10,000." That confidence increases as the amount of money involved increases, but it never gets higher than 60 per cent. of people feeling confident that the DTI will deal successfully with insider dealing.We have stated our policy proposals on insider dealing. I am sure that the Minister is aware of them—
§ The Minister for Corporate Affairs (Mr. John Redwood)
§ Ms. Mowlam
Yes, but I have a copy of our proposals for the Minister if he has not seen them. We have gone into the matter in some detail. Like the Select Committee, we recommend a number of things such as the introduction of civil law sanctions—as well as criminal sanctions—against insider dealing. We want the criminal law—the Insider Dealing Act 1985—to be simplified and to deal with unpublished price-sensitive information. We do not want it to be a question of only the published price-sensitive information and of whether the authorised person—the tippee—should be named or the provisions should apply simply to an authorised source.
I agree completely with what the hon. Member for Chichester (Mr. Nelson) said about non-executive directors and giving them an auditing function. That is a positive suggestion. However, he implied that that would contradict the auditors' statutory responsibility to report. I do not accept that. I should like to see the two auditing functions. We have recommended that auditors should have a statutory obligation to report suspected fraud in a company.
We have also made some suggestions about insider dealing and company fraud at the international level because much work could be done, especially with the United States and Japan and, to a certain degree, with Switzerland, with which we do not have even the mutual MOUs that we have at present with our European neighbours.
I am still disappointed, having read the White Paper, that the Government are not willing to have a centralised database. That should be a basic starting point, which should be expanded internationally as the markets move more globally. We would support such a proposal.
I shall concentrate my remaining time on the wonderful understatement on page 7 of the Select Committee's report: 1156Fraud within companies … appears to have increased.That is indeed an understatement when one considers the frauds that have taken place since the enactment of the Financial Services Act 1986 and the publication of the Select Committee's report. I seem to have spent most of the short time that I have been doing this job dealing with fraud and responding to statements on fraud. I assure the Minister that I have not done so willingly. I would rather consider the relationship between the City and industry and what we can do to help our manufacturing industry. I would much rather spend my time looking at what we can do in relation to the City and Europe. I wish that I did not have to come to the House, as happened on 7 March in relation to the House of Fraser, to deal with fraud.
I remind the House of what another Minister said on 7 March—incidentally, Ministers seem to change as quickly as Government statements—when I asked him why the Government did not investigate the allegations in more depth and why they did not fulfil their responsibility to protect the public interest. I asked:Will he insist that those lessons"—I was referring to the lessons of the House of Fraser case—are acted upon by the regulatory bodies"?—[Official Report, 7 March 1990; Vol. 168, c. 874.]The Minister made absolutely no response to those questions and, as many hon. Members on both sides of the House have pointed out, the Government have done nothing since about the House of Fraser.
The hon. Member for Gloucester pointed out the similarities between the alleged fraud at Levitt and the case of Barlow Clowes. On 13 June 1988 the then Parliamentary Under-Secretary of State for Corporate Affairs, the hon. Member for Warwickshire, North (Mr. Maude), who was dealing with the matter, said:I of course confirm that the interests of investors are our highest priority, and that we shall do all we can to safeguard them."—[Offical Report, 13 June 1988; Vol. 135, c. 28.]It will be interesting to find out what the Minister or his successors have done to ensure that investors are the highest priority and to safeguard their interests.
In October 1988 the next Minister said:The Government have acted to correct those weaknesses in the Financial Services Act 1986, whose main provisions came into effect in April this year."—[Official Report, 20 October 1988; Vol. 138 c. 106.]Clearly, if they had done so, the problems that we have faced since with Hamilton House, Dunsdale and Levitt would not have occurred. That suggests that we have had statement after statement from Ministers at the Dispatch Box talking about dealing with fraud and investor protection, but doing very little. When will the Minister make some specific points about company fraud and insider dealing?
The case of Levitt is a good example of fraud, which was related to the Select Committee. It has been mentioned several times. The Select Committee deals with fraud and what the Government's response should be. I shall understand if the Minister does not have time this evening but, in both the case of Levitt and other cases as the Select Committee report states, it would be useful and in the interests of both the broader public and investors if the Minister could answer some of our questions.
There is a great deal of confusion about whether the Department of Trade and Industry has set up an inquiry on Levitt. Some newspapers say yes and others no. When one phones the DTI it says, "No comment." It would be useful for the public to know what response the 1157 Government have made, especially as FIMBRA was in Levitt back in October. One would have thought that even the DTI would have had time to make a response.
It would be useful if the Minister told us about the nature of the fraud, the amount of money involved and where the £21 million or £20 million has come from. If it is borrowed money, clearly whether that is a printable asset is called into question. The problems faced by investors may be even greater if that £20 million is already set against other assets.
In response to my earlier intervention, the Minister indicated from a sedentary position that it was not the case that the money was borrowed. If, as in the case of Barlow Clowes and C. J. How—which was raised this afternoon —compensation is needed, where will the money come from? The Minister will correct me if I am wrong, but I understand that the money came from a supplementary estimate and £80 million came from industrial budgets for the regions, education and training, and research and innovation. That money went to compensate investors in the case of Barlow Clowes. When, on 19 December 1989, the Secretary of State told the House that the cash would be made available to pay compensation, he did not make it clear where it could come from. The budget headings that I mentioned were down 15 per cent. without taking inflation into account. We suggest that that is where the money came from.
It would also be useful if some of the other people involved in Levitt made statements about what is happening. There are several well-known directors. Mr Sebastian Coe, who hopes to join us in the House, is one. I am sure that he will not run a mile, or at least a quick mile, at the thought of making a statement. As the Select Committee report said, we need more information in the broader public interest. In the case of Levitt one hopes that other directors will come forward and take their responsibilities seriously. They should state the position as they see it.
My penultimate point about Levitt is that it is not simply a case of people having invested in Levitt. It seems that the number of small investors is small. The main investments were by four of the larger insurance companies and 70 per cent. of Mr. Levitt's own money was invested. However, there is anxiety about whether the money of the 18,000 investors who have insurance policies or left funds to Levitt to manage in a discretionary fashion is safe. That is the question that many people are asking.
I have here a large file of letters that I received from constituents about Barlow Clowes. It does not include letters that I received in my role as an Opposition spokesperson on trade and industry. I am worried that if the problems that the Levitt case will cause are as great as many people suggest, several Members of Parliament will receive many such letters from Levitt's investors. It is incumbent on the Minister to make the position clear to small investors who are worried about their future and the fact that they may come out with neither a life insurance policy nor the money that they paid into it. That is the anxiety of Opposition Members.
In the week of the electricity privatisation, when Ministers have encouraged wider share ownership, it would be useful if the Minister could make a statement about the success of the wider share ownership programme. The "Quality of Markets Quarterly Review" of the stock exchange shows that in 1981, not long after the Government came to power, 28.2 per cent. of the share of 1158 United Kingdom equities was held by individuals. That has now fallen to 18 per cent. Does the Minister consider that the Government have been successful in promoting wider share ownership?
Again I congratulate the members of the Select Committee on producing a good report. I ask the Minister to allay some of the fears of many small investors who have life insurance policies with Levitt and people encouraged by the Government to move from SERPS into private pensions, on which Mr. Levitt took 50 per cent. up-front commission, who are worried that they may have no pension scheme. Those investors are worried and want reassurance from the Minister.
What have the Government done about investor protection, whether in the case of Levitt, Dunsdale, Hamilton House or Barlow Clowes? As both Conservative and Opposition Members have said today, the financial services system does not protect investors individually, it is costly to the industry and could cost us more as we go into Europe. It is a cumbersome, inefficient system which does not work in the interests of the people whom it set out to protect. I should appreciate a response from the Minister on that point.
§ The Minister for Corporate Affairs (Mr. John Redwood)
I shall begin by responding to the hon. Member for Redcar (Ms. Mowlam). There has been an arrest today in connection with the Levitt group. The police are making inquiries and are working with the Serious Fraud Office, which is investigating the whole matter. That is a sign that the regulatory authorities have moved swiftly and acted with purpose. The question of compensation may arise. As the hon. Lady is aware, most people invested through the company in the form of life insurance policies. They are advised to check with their life insurance company that the documents which they hold relate to a valid, current policy. If not, they should approach the liquidators direct because, of course, the group has been put into liquidation. If there proves to be a shortfall, the compensation scheme provided for under the Financial Services Act 1986 may be called upon. Decisions on that scheme are made by those who run it.
The hon. Member for Redcar and her colleagues seem to believe that they have a perfect mechanism for abolishing crime. Yet when they were in government for five years they did precious little to amend or strengthen the law on financial services even though they had every opportunity to do so. They certainly did not abolish malpractice or crime during that period. Now they sit like second-rate vultures about to swoop on any company in difficulties where they think that they might pick up a scrap of political advantage. That does nothing to help the City of London or to ensure that it retains and improves its position as one of the world's big three financial markets. Its reputation is high and the Government's actions are designed to improve and strengthen that reputation.
The hon. Member for Redcar asked me about insider dealing. We have been consulting on it and are examining the replies to determine what type of legislation will be required to implement the directive and respond adequately to the consultation.
We are improving our record on tackling insider dealing compared with that of our neighbours and partners and compared with experience. The House might 1159 like to know that Italy and Germany still have no operational insider dealing laws. France, which has an insider dealing law, has brought two cases to a successful conclusion since 1983. We have had longer experience of insider dealing law. Between 1980 and 1985 some five cases resulted in three convictions. In the past two years, the pace has quickened with 10 cases producing five convictions. The stock exchange is also bringing cases under its own aegis. Under the Labour Government there were no cases and no convictions because they did not think it sufficiently important to introduce a law to make insider dealing a criminal offence. That shows the difference between the two sides in how seriously we take the issue and the action that we adopt to make progress towards a clean, open and honest City.
Those actions have been bolstered in other areas. In the first six months of this year, following DTI reports, there were 26 winding-up petitions and 12 defendants were convicted on criminal charges other than insider dealing. That illustrates that we are serious about rooting out crime. We shall continue to do so with all the forces at our disposal.
§ Ms. Mowlam
The Minister is factually incorrect. Cases of insider dealing were dealt with on the stock exchange before 1980. Since 1970 Germany has had a strict code on irregular dealing on its stock exchange.
§ Mr. Redwood
There were no cases of criminal law prosecutions for insider dealing because there was no such law and the hon. Lady well knows it. She is trying a silly dodge to cover a glaring mistake in the Labour Government's conduct when they were in office in the mid-1970s.
In the first half of this financial year 111 cases were accepted by my Department for confidential Companies Act investigation. That is a major increase on the 68 for the same period in the previous year. It shows that we are taking to heart our duties to follow up those cases that seem suspect and to initiate inquiries where we are concerned about what is going on. In that period we completed 83 investigations compared with 62 in the same period the previous year. Those confidential inquiries often result in matters that need following up either by bringing criminal charges or, more normally, by tough regulatory action. Over half the cases that we investigate lead to such courses of action as a result of findings.
I, too, am grateful to the Select Committee for its hard work in producing this valuable report. We have responded at some length in the published documents before the House, so I shall confine my remarks to those made during the debate.
My hon. Friend the Member for Hastings and Rye (Mr. Warren), who conducted the inquiry with such skill, asked about the pursuit of costs arising from investigation and prosecution work. The Government intend to pursue costs wherever possible and the Companies Act 1989 included proposals to facilitate that process. The award of costs lies with the courts. It is for the prosecutors to make the best possible case where people or even companies are found guilty of malpractice. I promise my hon. Friend that we shall pursue costs wherever possible. I agree that where 1160 malpractice and criminal deeds are proven, it is a good idea to recoup some or all of the costs of the prosecutions and investigations through the courts.
My hon. Friend asked me about the time taken. I agree that it is important to conduct investigations with all due speed, but they must also be thorough and fair, and to ensure that they start on time if the matter is time sensitive. There have been dramatic improvements on the not very satisfactory position of some years ago. For example, between 1980 and 1984 investigations involving outside inspectors took on average five years and one month. Between 1985 and 1988 the figure came down to one year and eight months. We aim to improve on that again, as my hon. Friend would wish.
Timetables are common practice when we consider how to proceed with these investigations. The Committee thinks that we can work more swiftly on insider dealing. The average time to make appointments is four weeks. We set targets and no target has been set for longer than six months to complete an inquiry. Obviously, we cannot guarantee that every inquiry will be completed within six months because sometimes there are difficulties in pursuing evidence which take time to surmount.
Several hon. Members asked about the House of Fraser. I am glad that my hon. Friend praised the Securities Association for doing a good job pursuing its regulatory responsibilities with the banks and advisers concerned. My hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) in particular asked about the Bank of England's action. That is a matter for the bank and it can be raised with the Treasury. I shall ensure that the comments made by my hon. Friend and other hon. Members are relayed to the Governor of the Bank of England so that he can see the substance of this debate.
I agree with my hon. Friend the Member for Hastings and Rye that our aim is that London should be the key financial centre in western Europe and one of the big three financial centres in the world. The Government's actions are geared to achieve that. We have an important role to play.
The hon. Member for Rotherham (Mr. Crowther) said, most fairly, that most people in the City were honest. That was a welcome contribution with which I entirely agree. He made a plea for faster investigations and asked for tougher sentences. He will see on reflection that the Government's legislation allows considerable scope for tough sentences to be meted out by the courts. It is not for me, a Minister of the Crown, to go into the individual sentencing decisions of individual courts. Those with an interest in these matters in our legal system will see his comments and his reasons for wanting tougher sentences.
The hon. Member for Warrington, North (Mr. Hoyle) is keen for my Department to monitor regulators. That is exactly what the Secretary of State and I do. We have regular discussions with the Securities and Investments Board which is, indeed, charged with the task of overseeing the work of the self-regulatory organisations. The hon. Gentleman has my assurance that we shall continue to monitor and examine carefully the progress that is being made.
My hon. Friend the Member for Gloucester (Mr. French) asked about the compensation scheme. It has an annual ceiling of £100 million which has never been exceeded. It was set as a generous ceiling in the hope that 1161 it would never be exceeded. His hypothetical point is not relevant to providing compensation to investors who have lost out in past events.
The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) stated that compliance was the main point. I agree that compliance work is the most important of all. Much of the rule and law making has been achieved. It is important that those who undertake misdeeds and malpractice are pursued. As I have tried to demonstrate in the short time this evening, that is exactly what is happening on a scale unlike anything that went before. There has been a big escalation in the number of cases being brought and in vigilance. I do not believe that wickedness has increased greatly since the 1960s and 1970s, so it shows that regulators are taking a much firmer line and finding out more of the misdeeds.
I must conclude now because of time. I am grateful to my hon. Friends the Members for Chichester (Mr. Nelson) and for Beaconsfield (Mr. Smith) for their kind remarks about some features of the Financial Services Act system. I entirely agree with my hon. Friend the Member for Chichester that directors must live up to their responsibilities. Those responsibilities are clear in company law, but I shall do everything in my power to ensure that directors live up to them and I shall pursue directors if they do not.
§ Mr. Warren
Many hon. Members have asked me not to withdraw my motion and to debate it again after 11.30 pm. However, I now feel obliged to withdraw it. Therefore, I beg to ask leave to withdraw the motion.
§ Motion, by leave, withdrawn.
§ The Question necessary to dispose of the proceedings was deferred, pursuant to paragraph (4) of Standing Order No. 52 (Consideration of Estimates).