Financial Services and the Single European Market

HC Deb 15 October 1990 vol 177 cc945-82

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

[Relevant documents: The fifth report from the Trade and Industry Committee (House of Commons Paper No. 256 of Session 1988/89) on Financial Services and the Single European Market and the Government Reply contained in the Committee's second special report (House of Commons Paper No. 598 of Session 1988/89).

European Community documents Nos. 4454/89 on guarantees issued by credit institutions or insurance undertakings, 6208/90 on "Capital Adequacy of Investment Firms and Credit Institutions", and the unnumbered explanatory memorandum submitted by the Department of Trade and Industry on 13 July on investment services.]

4.37 pm

The Secretary of State for Trade and Industry (Mr. Peter Lilley)

I welcome this opportunity to debate the development of the single financial area in Europe. Before I begin, I wish to apologise to the hon. Members for Gateshead, East (Ms. Quin) and for Redcar (Ms. Mowlam) if there has been a failure of communication on my part, although it has the happy result, from my point of view, that I have the opportunity to debate with them. I suspect that we shall find that, although we may have occasional disagreements over measures, we shall have a large measure of agreement on our final objectives.

I begin by paying tribute to the work of the Select Committee on Trade and Industry, whose excellent report forms the prelude to this debate. The Government agree with the bulk of the Committee's findings, as we made clear in our response. Like the Committee, we believe that the creation of a single European financial area should open up opportunities for one of Britain's most important industries. Indeed, the British Government have been the foremost exponent and supporter of the single market programme as a whole and of the single financial area in particular.

The single market is a natural extension of the policies of competition, deregulation and free markets which we have implemented domestically, and the single market programme was largely the brainchild of the British Commissioner Lord Cockfield. The unique and original feature of the single market programme was the idea of mutual recognition. Essentially, once a business or process has been authorised and is supervised in one country, all other member states agree to recognise that the business is duly regulated. It will therefore be allowed to do business or to set up branches in their states without undergoing further authorisation. This paradigm is particularly applicable in the financial services industry, as we shall see.

Implementing the single market in financial services is of special importance to the United Kingdom. Financial services are an area in which the United Kingdom has a relative advantage; that is clear from the Cecchini report, which shows that in many aspects of financial services United Kingdom industries' costs are lowest and their financial products are the most competitive.

The importance of the financial services industry to the United Kingdom's economy is shown by the number of people that it employs—some 2.7 million as against 1.6 million only 10 years ago. I refer advisedly to the United Kingdom financial services and not just those of the City of London, because the United Kingdom also contains Scotland, which is our second most important financial centre. The financial services industry is already the largest industry in Scotland, having increased employment by 40 per cent. since 1979. Its contribution to Scottish GDP has grown at the rate of 6.3 per cent. per annum compound. The City of London is one of Britain's most important economic assets. It has the world's largest foreign exchange market, more cross-border equity transactions are carried out in London than in any other world market centre, and the Lloyd's insurance market is unique.

Mr. D. N. Campbell-Savours (Workington)

It is now generally recognised throughout the City that the exchange rate mechanism statement and the base rate cut were leaked. Evidence of that is to be found in the FTSE 100 index, which went up 16 points, from 2,035 to 2,051, in the 90 minutes before the Chancellor's statement. We are told that the City is properly regulated. Will there be a leak inquiry and will the Minister ask the stock exchange surveillance department for a report on what happened during those one and a half hours so that there can be the fullest possible inquiry? May we have an assurance that this matter will not be brushed under the carpet, because many dealers and speculators in the market made millions of pounds in that 90 minutes as a result of having price-sensitive information.

Mr. Lilley

The hon. Gentleman has an unattractive habit of assuming that any allegation is automatically true. Allegations are examined by the authorities that we have established. I shall deal with that later.

All these businesses in the United Kingdom produce a total net income for the balance of payments of more than £6.5 billion per annum and the Government continue to create the conditions for further success. Taxes on business and on individuals have been brought down to more internationally competitive levels and the Chancellor's forthcoming abolition of stamp duty and the change of basis for the taxation of futures and options represent two further breakthroughs for our financial markets.

The strength of the British industry has been accumulated over generations, but it has been based particularly on two factors—its relative openness to competition and the rest of the world and its relatively high standards of integrity and reliability for which the London market is renowned. The Government have been particularly keen to reinforce both strengths. Hence, on the competitive side, the abolition of exchange controls and the removal of restrictive practices prior to big bang. Both these changes intensified domestic competition, encouraged more international players to base themselves in Britain, and consolidated London as the great world financial centre in this time zone.

Raising the standards of probity in financial markets and seeing that these higher standards were properly enforced has been a Government priority since our inception. In 1980, we brought in the first legislation against insider dealing. In 1981 we appointed Professor Gower to review the whole body of law on financial services and investor protection. His report led to the Financial Services Act 1986.

In 1988 we set up the Serious Fraud Office, with its special powers under the Criminal Justice Act 1987, and we reorganised my Department's investigatory and prosecution functions by creating a new investigations division.

The Companies Act 1989 improved international co-operation with the establishment of memoranda of understanding with the USA and Japan in the securities area and the provision of new powers to assist overseas regulators. This is a real record of achievement and contrasts with that of the previous Government, who made no improvements whatever to the regulatory environment. We have strengthened the framework to tackle abuse and dishonesty in the City and other financial markets. The fact that a number of offences and alleged offences have been brought to light in recent years is not evidence that City standards have declined; it is proof that higher standards are being more vigorously enforced. Moreover, some of the more disturbing events took place under the old regime, and would have been more easily detected and therefore deterred under present arrangements.

In creating the main part of the regulatory framework—the Financial Services Act—it was important to strike a balance between the needs to ensure effective investor protection and to avoid a system so onerous and rigid that it would damage businesses and stifle innovation. With the later fine tuning introduced in the Companies Act 1989, we are getting the balance right.

Our system is based firmly in statute, but it also incorporates a significant degree of practitioner involvement. This gives flexibility and the scope for regulation to be sensitive to market needs. It is no accident that much of the regulatory reform at present going on in other EC member states is based on a similar approach. Having put the structure in place, we now look to the regulators and practitioners to make it work. They must do that in as cost-effective and flexible a way as possible, consistent with providing real protection to investors.

Our first priority has been to ensure that our own domestic arrangements are soundly based, but in negotiating the directives that open up the single financial area—the SFA—we have had similar objectives. The keystone to creating an SFA in Europe was the capital liberalisation directive. It came into force on 1 July 1990, by which time exchange controls were abolished in all the main EC countries.

An invaluable aspect of the capital liberalisation directive is that it requires member states to abolish restrictions on foreign exchange transactions not just between member states but erga omnes—that is, with the world as a whole.

Mr. Barry Porter (Wirral, South)

Very good.

Mr. Lilley

I had to look it up.

Following that, the second banking directive was adopted in December 1989. It will take effect on 1 January 1993. It incorporates the mutual recognition principle, and we hope that it will be the paradigm for all directives in this sector.

Essentially, banks and building societies will be given a passport to sell their services across borders and to establish branches, authorised and supervised by the monetary authorities in their home state.

Mr. Anthony Nelson (Chichester)

Everyone recognises the importance and the fast progress that has been made in negotiating and agreeing these directives. Does my right hon. Friend agree that, important as the directives are, it is equally important that they be observed in the same way in each country? It is one thing to have a single passport or a level playing field, but it is quite another to translate that into the same degree of observance in each member state. Although there is commonality in the trade in agricultural products, other countries frequently flout the rules.

Mr. Robin Maxwell-Hyslop (Tiverton)

Lamb in France.

Mr. Nelson

Lamb in France is an example. What guarantees or sureties are there that not only will the directives be enforced but that they will be interpreted in the same way in each country?

Mr. Lilley

My hon. Friend makes a good point. The United Kingdom is always in the forefront in implementing directives once they have been agreed, even though we may have difficulties with them when they are being negotiated. We are also in the forefront in enforcing them properly, objectively and effectively. We expect to see similar practices followed by our partners in the Community and, of course, they are subject to the European Court of Justice if they fail to do so.

As I have said, the second banking directive will give banks a passport to offer investment services as well as normal banking services, but specialist investment service companies that are not part of banking groups are not covered by that directive.

The investment services directive is intended to entitle them, too, to a single passport. On the continent, most investment advisers are parts of large banking groups and only the United Kingdom has a sizeable number of specialist investment firms outside banking. Hence this directive is particularly important to the United Kingdom.

One of our key objectives has been to ensure that the second banking directive and the investment services directives come into force simultaneously. Any delay in the investment services directive would put our independent investment services firms at a disadvantage to competitors that are part of big banking groups. Happily, negotiations on this directive are proceeding apace, and the United Kingdom welcomes the goal of the Italian presidency to reach a common position among member states by the end of this year.

However, the House will understand that agreeing this directive is a negotiating process and we still have some very important work to do to achieve the right provisions. Some of these provisions, such as those affecting the position of the professions and independent financial advisers, depend on the outcome of the capital adequacy directive. I should like to see them given a passport under the investment services directive.

The position of appointed representatives is another area where we have not yet reached agreement. Under United Kingdom law, appointed representatives of investment firms do not need to be separately authorised. The directive, as currently drafted, would require them to be authorised and I know that this is causing the industry some concern. However, I hope that we shall be able to resolve that point satisfactorily.

The concomitant of the second banking directive and the investment services directive is the capital adequacy directive, which ensures that all financial services supervisors enforce certain minimum standards of capital adequacy to prevent regulatory arbitrage. However, it is important that the final capital adequacy directive should relate capital requirements for each type of business to the risks that firms actually accept. That means not overburdening existing firms or closing the market to new firms. Equally, I do not want such a level of reserves that business is lost from the whole Community.

The third measure—the proposed regulation on guarantees—is also a market-opening measure, but it is not yet one that we can support. It would oblige public bodies to accept guarantees offered by any credit institution or insurance company authorised in the European Community. The Government appreciate the intention behind the draft regulation—which I understand to be to prohibit discrimination on the ground of nationality—but we believe that it is unnecessary, because discrimination on the ground of nationality is already prohibited by the treaty of Rome.

As drafted, the regulation is seriously flawed and unworkable. It would require a public body to accept any guarantee offered, irrespective of the financial standing of the institution offering the guarantee. It would have to be accepted, regardless of whether the guarantee was unreasonably large in relation to the size of the institution offering it; regardless of its terms; and regardless of the merits of competing prospective offers, which would have to be ignored. Those concerns have been put to the Commission, which, we believe, recognises some force in them. It is reconsidering the terms of the regulation and we await further proposals.

The Select Committee expressed particular concern about the lack of progress in the liberalisation of insurance. While some progress has been made, the Government fully share the Committee's concern. There has been freedom since the 1970s for establishments to set up branches and subsidiaries in the Community, but that freedom has been subject to regulation by the host state. Some host states have used that supervisory role to control tariffs and the terms of the policies that may be sold. The result has been to protect home markets from price competition and from the innovation in which the United Kingdom industry excels.

The Cecchini report noted a wide disparity of prices for insurance throughout the Community which could not be explained by differing risks. Freedom of services is especially important for the British insurance industry. Last year, the insurance sector contributed almost £3 billion in invisible earnings—about half of the total of all financial institutions. It employs 340,000 people in the United Kingdom, a quarter of them in Scotland and the north of England.

The second non-life insurance directive, which came into force this year, provided genuine liberalisation of the market for large commercial and industrial risks, but outside that area the picture is not bright, at least in the short term. We are far from a position in which every European consumer has a free choice in purchasing any insurance policy that he wants from an authorised insurance company. That denial of freedom of choice is said to be justified on consumer protection grounds, but sometimes it appears to be more like producer protection.

However, at the end of last year, Sir Leon Brittan announced that the Commission intended to adopt for the insurance market the principle of the single licence, or single European passport, which has already been introduced for other financial service sectors. That approach is embodied in the Commission's proposal for the non-life insurance framework directive. It was formally presented to the Council by Sir Leon Brittan on 17 September, and it will shortly be undergoing the usual scrutiny procedures of the House.

The single licence will enable insurers to provide all types of non-life insurance throughout the EC. They will be able to establish local branches in other member states and transact business across frontiers, subject to the authorisation of and prudential supervision by the authorities of their home state alone. Control of British insurers' prices, tariffs and policies by other member states will end and there will be genuine freedom of choice. That is good news for European consumers and also for British industry.

Mr. Stan Crowther (Rotherham)

Does the Secretary of State agree that that happy state of affairs will not happen by 1993?

Mr. Lilley

I agree that it is unlikely to be implemented by then, but I hope that agreement can be reached on the directives.

Mr. Spencer Batiste (Elmet)

My right hon. Friend rightly stressed the importance of all the directives to the financial services industry, but even more important is the impact on the wider Community—the investors and the businesses that want to take advantage of the single market. One of the great problems in Britain is the considerable delay in clearing payments between one country and another. I understand that a discussion paper published by the Commission, that was recently given to my right hon. Friend, dealt with possible methods of speeding up payments. That would be of great benefit to small businesses and investors in this country. What is my right hon. Friend's attitude to that discussion paper?

Mr. Lilley

My hon. Friend has made a good point about an important aspect of business across frontiers. We shall consider the discussion paper, but it would be wrong to give an off-the-cuff response.

British industry has welcomed our approach to liberalisation, and it is for it to take advantage of the new opportunities in prospect. The Commission is due to bring forward, by the end of the year, a parallel proposal for the life assurance framework directive. That will extend the single licence principle to the life assurance sector. We welcome the Commission's declared intention to give the highest priority to achieving its early adoption. It is essential that insurance is treated on a par with other financial services.

Mr. Maxwell-Hyslop

Is my right hon. Friend seized of the point that time is of the essence in reciprocity? While German banks can sell German life insurance in Britain, but British life insurance companies cannot sell their policies in France, there is unequal competition.

On the question of fraud, will my right hon. Friend comment on the recommendation in paragraph 82 that actions for damages should be justiciable in the country in which the person who suffers lives? People with modest means have access to legal aid for an action in this country, but they cannot sue a Greek insurance company in Greece with British legal aid.

Mr. Lilley

I agree that it is important that we reach agreement as soon as possible. The Commission is now seeking to do that, and we are giving every support. Of course, for as long as we fail to have the directive in place, the position described by my hon. Friend will pertain. In general, British insurance companies have the edge over foreign competitors, so it is they who want access to foreign markets, rather than the reverse. I think that I accept my hon. Friend's point on justiciability, but I want to consider it further. My hon. Friend the Under-Secretary may give him an answer when he replies to the debate.

Mr. Tam Dalyell (Linlithgow)

The Secretary of State said that British insurance firms have the edge, and I do not doubt that that is true. Is not that also precisely why—quite frankly, this is anecdotal—a number of Scottish firms are worried about doing business in Europe? They believe that barriers are being put up by people who know that we have the edge. That is especially true with medical insurance. Has the right hon. Gentleman received any representations from medical insurers?

Mr. Lilley

I have. I have visited Scotland twice in the past fortnight and that point was made on each occasion. The Scottish institutions are at the forefront of the industry, and if they have any specific evidence of obstacles being put in their way, I hope that they will bring it to the Government's attention. We will use it as further evidence of the need for progress.

Sir Anthony Grant (Cambridgeshire, South-West)

Is my right hon. Friend aware that the Germans are saying that they do not understand the concept of insurance broking, and therefore would have to pass special legislation before Germany could achieve the same standards as Britain? Does he agree that that is largely an excuse for delay? Will he do everything possible to ensure that the Germans do not use that bogus reason for delaying progress?

Mr. Lilley

It is true that insurance broking is not as developed in Germany as it is in this country, which is one reason why our insurance industry could benefit from the liberalisation of the Germany market. I agree that there should not be any artificial restrictions, and the absence of legislation should not be taken as an absence of permission to trade under Common Market rules. We would be hostile to any such legal interpretation.

For the Government, an important aspect of the debate will be the contributions from many hon. Members who have expertise and interest in this subject.

Progress with the single financial area is moving in the right direction, and we have avoided the dangers and pitfalls that might have presented themselves. We avoided also the over-rigorous harmonisation of sectors, which could have meant that idiosyncratic institutions and those perculiar to the United Kingdom—such as discount houses, gilt-edged market makers, and so on—would have suffered. We obtained proper permission to allow them to continue operating.

We also avoided the Fortress Europe approach and placing too much emphasis on reciprocity provisions with others outside Europe. We have ensured that the main emphasis is on mutual recognition of supervision by different member states, so that we are in the business of deregulating and of freeing up the market rather than otherwise.

The greatest changes will be those that result from the psychological changes that the directives bring about. I mean by that a greater willingness by producers and consumers alike to think beyond their own national borders. It is very much up to our industry to take advantage now of the opportunities that have already been opened up, to prepare for those that have yet to present themselves, and to respond to the change in the psychological climate. It will be immensely to the advantage of the industry and to this country if that is done.

5 pm

Ms. Marjorie Mowlam (Redcar)

I welcome the new Secretary of State of Trade and Industry and congratulate him on his appointment. This week, we read in our newspapers that only 2 per cent. of the public knew who he was.

Mr. Lilley

That is a higher proportion than the percentage of the general public with whom I am familiar.

Ms. Mowlam

I am sure that that is so, but that is the Secretary of State's problem, not the public's. The right hon. Gentleman is the Secretary of State for Trade and Industry, and the public are not.

If only 2 per cent. of the public know anything about the Secretary of State, one must hope that he will double that figure by the time of the next general election. If so, he will be progressing as fast as inflation under the present Government.

The Secretary of State's speech was marked by a great deal of complacency. He said that regulation is in place and working, but has he forgotten Barlow Clowes, House of Fraser, Dunsdale Securities, Blue Arrow, Polly Peck, Guinness, and British and Commonwealth?

The right hon. Gentleman said also that he hoped that a "psychological change" would flow from the directives, and that the City would wake up to that change. However, as the many questions from all parts of the House show, the insurance industry does not need a psychological change. It is worried about the built-in structural differences that pose difficulties to British insurance companies. It does not need a psychological change, and for the right hon. Gentleman to suggest that one should be the main focus of the directives is very worrying.

Mr. Quentin Davies (Stamford and Spalding)

Does the hon. Lady appreciate that the Barlow Clowes scandal and the others to which she referred occurred under the previous regulatory regime, before the existing financial services structure was put in place and before the single market regime came into effect?

Ms. Mowlam

I am sure that the hon. Gentleman acknowledges that the same degree of complacency was evident before the new legislation's implementation in 1986. There is no substance to the point that he makes. The Blue Arrow case is to go before the courts this week, and in that instance the compliance officers were operating as a consequence of the Financial Services Act 1986. Other cases that have arisen since then include British and Commonwealth and Polly Peck. I accept that the Guinness and Barlow Clowes scandals, together with others, were perpetrated before that legislation, but of the six or seven instances that I cited, the majority have occurred since the Act was implemented.

Mr. Campbell-Savours

Perhaps I may add to my hon. Friend's list the case that I raised before. I refer to the leaking of price-sensitive information relating to the cut in the base rate a week last Friday. It is known by City dealers that a firm named Barclays de Zoete Wedd and another named Salomon Brothers were both active in the market in the one and a half hours before the Chancellor's statement. People are asking questions about those companies' actions, and if only to clear their reputation, if that is possible, the Government should order an inquiry into how that price-sensitive information got into the hands of people in the City.

Is it true that a senior Minister had dinner the evening before with a director of a major City bank, when the imminent cut in the interest rate was discussed? I only want to know the truth. Did that happen, or did it not?

Mr. Ian Bruce (Dorset, South)

Answer.

Ms. Mowlam

I thank my hon. Friend for raising that point.

Mr. Bruce

Answer.

Ms. Mowlam

I will answer, if the hon. Gentleman will permit me. I am sure that the Secretary of State listened carefully to my hon. Friend's remarks, and I hope that he will fully cover them when he winds up the debate.

As the House knows, we welcome the move towards a single market. At the same time, we accept the widely held view that the pace of change will be slow as a result of the many aspects that the Secretary of State mentioned, including derogation, different regulatory systems, and cultural and linguistic barriers.

Mr. Batiste

The hon. Lady welcomes the creation of a single market, but does she accept that the introduction of credit restrictions in the United Kingdom would severely weaken our banks and financial institutions at the very time that they need to perform at their best? Will she completely dissociate the Labour party from the introduction of any system of credit control?

Ms. Mowlam

I am sure that the hon. Gentleman is aware that the proposals contained in our three-pronged approach to the country's economic problems are no different in respect of credit controls from those of the French and Germans, so clearly that will not be a problem in the single market.

It would be helpful if the Government would take into account and recognise the contribution by the City and the financial services sector to the British economy, and that it is in the interests of all British people that Government policies—including those of the next Labour Government—help to maintain the financial services industry's quality and vitality.

Contrary to the assertions by the Secretary of State last week, the Labour party is happy to be an ally of the City, provided that the City is happy to be an ally of the British people. The aims and values that the Labour party conference openly embraced state that we welcome the open market wherever its free operation achieves the end of providing real choice for the consumer. The difference between our attitude and that often displayed by the Government is that they and the Tory party have become hypnotised by their own obsessions with the single market and have forgotten its ultimate purpose. The open market has become for the Government an end in itself. For us, it is the means to an end. Only at the point at which the single market fails to deliver that end will we intervene.

That view does not detract from our concerns about the failure of long-term investment in British industry—but no doubt a debate on the implications of taking the short-term approach will take place on another occasion. From the principle that I have stated flow our two main objectives—to ensure a positive enabling approach to UK financial services in Europe, and to maintain a firm commitment to investor protection for consumers of financial services in the UK.

From the negotiations leading to the big bang, to the introduction of the Financial Services Act 1986, one Minister after another has tried to convince the industry that the Government have been doing a good job. As has already been pointed out, the new Secretary of State for Trade and Industry is the ninth in as many years. I am sure that the new Secretary of State believes, like his predecessors, that he can do an even better job and that only a few changes are required to correct the minor errors that remain.

The reality is very different. Over the past year, I have spent a considerable amount of time listening to people in the financial community voicing their growing resentment of the failure of strategies executed or supported by the Department of Trade and Industry over the past 10 years. Examples include the selection of the wrong market maker system in SEAQ to the virtually complete re-writing of the FSA rules and structure, where the Government blundered along without direction.

The same is true of the Government's dealings in respect of Europe. Despite their recent trumpeting about co-ordinating international bodies, which the right hon. Gentleman repeated today, successive Ministers failed to rationalise the dissemination of information in the real business of enforcement. Ministers have gone to the United States and to Japan, and have returned only with agreements that had already been reached between the regulatory bodies of those countries and of this country.

How can the City have faith in a Government who pay minimal attention in the directive on undertakings for collective investment in transferable securities to the problems confronting our unit trust industry, which the Secretary of State failed to mention, because of the unfair advantage enjoyed by our competitors who have, as the Germans do, tied distribution channels, so making access for our industry more difficult and problematic?

Secondly, as the Minister mentioned, there are the difficulties in the insurance industry, which faces structural problems. Banks in Germany and France make it difficult for competitors to get into the market, as they are an addition, and it worries them greatly. Then there are the problems of greater vulnerability to takeovers in the industry when faced with French and German conglomerates.

Thirdly, there is the question of the future for our intermediaries when they are faced with the high capital adequacy levels demanded in the capital adequacy directive that the Minister referred to. Labour wants the London market to remain the lead financial centre in Europe. It is quite clearly a national asset of considerable value.

Mr. Jeremy Hanley (Richmond and Barnes)

Will the hon. Lady give way?

Ms. Mowlam

Yes, but it is the last time.

Mr. Hanley

I am grateful, and I declare any interest which might be published in The Observer colour magazine.

Will the hon. Lady make it absolutely clear whether her party's major policy is that of direct intervention by the state, or whether she will still uphold the Government's policy, which is basically self-regulation under supervision from the state?

Ms. Mowlam

I have answered that in principle, and I shall answer it in detail in a minute.

The London market is of essential importance to this country and we want it to continue. The difficulty—this was evident from the Secretary of State's remarks on the insurance industry—and what the Secretary of State does not seem to realise, is that, when other representatives in the EC talk about level playing fields, they send 12 players to the negotiations. The Government send our team without even a goalie. That is the sort of problem we face in negotiations in Europe. If the Government do not do what the French Government are doing for Paris and what the Germans are doing for Frankfurt, however hard the City competes for business in the single market its prospects will be scuppered.

Our greatest concern must be the Government's cavalier attitude towards consumers' interests. The Government were primarily motivated to promote wider share ownership as a cheap way of trying to popularise privatisations. Having created those investors for their own convenience, the Government must now have a responsibility for their interests.

What have the Government done to avoid the situation in which the number of brokers prepared to deal with private clients has plummeted? There has been no mention of that today. The minimum size of deals now accepted by some brokers is as high as £50,000 or £100,000.

If the investment services directive, to which the Secretary of State referred, is accepted as it now stands, investors who put their money into other European firms may not be entitled to the same sort of protection for their money as investors in British firms. In the years ahead, we could well be hearing of another Barlow Clowes, and even if it was a Barlow Clowes with a French, Spanish or Italian accent, the outcome for British investors will be exactly the same.

The major area where the Government have failed to protect the British people in the open market—it is amazing that the Minister got through his speech without even mentioning it in passing—is by ignoring the need for a consumers directive to be implemented at the same time as other directives in 1993. When I mention the interests of the British people, I mean the British people, not some small group of people dealing in an obscure market. I mean the 41 million people who have building society or bank accounts, the 24 million people with car insurance and the 18 million with life assurance. They need to know what rights and protections they have if they purchase services from other European countries. At present, the Government will fail to tell them.

Let us turn briefly to what the City is saying. Today, the Minister described why he thinks that the Government should be proud of their record on regulation and investor protection. The Government have introduced a cycle of regulation followed by deregulation. Let us look back to the curtailment of powers of business investors to take civil actions when firms breach self-regulatory organisations' rules, which was once described—the Secretary of State grins—as the cornerstone of the Financial Services Act 1986. That is one of the many U-turns which the Government have implemented and the industry has had to survive.

There is no doubt that a quality product, produced in this country, needs defending and that its standards need to be maintained. If self-regulation cannot enhance and maintain that quality, the Government should act as quality controller.

The structure of regulation of financial services in this country requires amendment. It seems that everyone except the Government agrees with that. On this side of the House, we are not interested in change for change's sake. Quite clearly, the present structure is young and needs a period of stability to bed down, but several major weaknesses have been exposed in the existing system which need changing, both in the duplication of regulatory agencies and in the detection of fraud. What the Government and the Secretary of State have failed to acknowledge today is that, unless these problems are dealt with, the integrity of the present regulatory regime will be undermined.

We are not arguing for more regulation: we want more effective and precise regulation. If one talks and listens to people in the City, one realises that that is the problem that they and the investors are facing.

Sir Robert McCrindle (Brentwood and Ongar)

rose—

Ms. Mowlam

I am sorry, but I have given way too often, and many hon. Members wish to speak.

Consumers are heavily dependent on other people's skill and integrity when buying a financial service. Therefore, it is as well, in some senses, that the Government are not offering financial services. Investors are bombarded by cross-selling between banks and building societies, and are exposed to the highly dubious practice of cold calling. We need to know what has happened to the attempt to agree even minimal harmonisation of regulatory rules across host nations so that consumer protection is maintained.

In its place, we have conduct of business rules, which, as the Secretary of State mentioned earlier, are designed to protect the consumer. The Secretary of State failed to tell the House that these rules can be challenged by non-British firms in the courts on the basis of whether or not they serve the "general good". If that happens and the case is taken to court, it could take a number of years. The person who suffers in the interim is the British investor. In the meantime, EC firms will come here and our firms will suffer for lack of a competitive advantage.

The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. John Redwood)

Could the hon. Lady clarify for us which regulatory bodies the Opposition would abolish, and which ones they would set up and strengthen?

Ms. Mowlam

I was not referring specifically to financial bodies. I made two points very clearly. First, under the present system of regulation, there are a number of regulatory bodies, and they need streamlining—talk to anyone in the City and they will confirm that. As the Minister well knows, the Association of Futures Brokers and Dealers and the Securities Association are in negotiations, and other negotiations have been considered and will be considered, so streamlining is already under way.

Secondly, I referred to the regulation of serious fraud. About a dozen bodies deal with that. The Select Committee—not the report that we are discussing today, so this is not really relevant, but I shall answer the Minister's question—stated quite clearly that, in company investigations, a centralised computer-based system was needed. The Minister is so concerned about what we shall do with those regulatory bodies, but it will be equally interesting if he can answer whether that centralised database will be provided. The regulatory bodies need that degree of communication.

It would also help, if the right hon. Gentleman is interested in answering, if he told us how he advises Japanese and United States regulatory bodies when they come to this country. I have been to the States and talked to such bodies. With the present Government's regulatory structure, it is impossible for such bodies to know whether they should talk to the Serious Fraud Office, the Department of Trade and Industry, TSA or the Securities and Investments Board. Clearly, under our present system, that is a problem which we would address. It will be interesting to see if the Minister has any suggestions to make about what he would do.

Sir Robert McCrindle

rose—

Ms. Mowlam

I am sorry, but I gave way to the Minister as a matter of courtesy and I shall not give way any more.

The point that I was making about business rules, which is central to consumers in this country, is that we have a set of rules that can be taken to the courts and as a result the protection that we consider essential for our consumers could be rejected on the grounds of general good. That is not just my worry. The British Bankers Association, which made a submission for this debate, is particularly worried about that point, not just for consumers, but for the competitive disadvantage to British industry.

The Minister knows, but failed to tell the House today, that in reality, without a consumers' directive but with the list of directives that he gave us, we shall get a harmonising down in consumer protection to the lowest common denominator of the European countries. When the Labour party comes to power, it will fight hard for a consumers directive. In the interim, the least that the Government can do is ensure that clients' assets are not available to the liquidator in the event of an investment firm becoming insolvent. Clearly that is not a problem here, but because of some structural conditions in other countries, it will present difficulties in harmonisation.

The Government should further ensure that all EC firms must disclose the nature of their compensation scheme by telling investors at the point of sale exactly what scheme applies, so what compensation they are entitled to. The minimum that the Government should achieve is that compensation schemes throughout Europe meet strict criteria, such as the index-linking of any limits on compensation and cheap, easy access to such claims.

The problems of cross-frontier dealing create considerable difficulties for British consumers. In 1987, there was a case before the European Court of a British person living in Spain dealing with a Swiss insurance company about a problem with his car in Italy. It was not clear under which country's law that particular consumer should make his complaint. Such a problem is a legal nightmare for the individual. It is enough to make any British consumer break out in a cold sweat. They now face the prospect of recurrent cosmopolitan nightmares under the present regulations without that directive.

Consumers will not be alone in suffering from sleepless nights if the future of London as the lead financial centre is called into question. The House is well aware of the City's present clear advantages: in-depth experience, a range of specialist markets and greater liquidity than elsewhere. They need to be supplemented with Government assistance and encouragement not only to improve infrastructure and to supply trained and qualified staff, but to integrate technological infrastructures and to extend communications, such as the countrywide broad-band network.

Without those changes, the City will struggle to keep its competitive edge. The Labour party is pledged to give that support. The disengagement of Department of Trade and Industry Ministers is pervasive, yet the task is so central that it is left to the chair of TSA, Stanislov Yassukovich, to suggest that City of London corporation should set up a research unit to fund the problems of infrastructure in the City of London. If the Department of enterprise illustrated half the enterprise that it expects of others and dealt with that problem, the City would not face its present difficulties.

The Government in their response not just to Europe but to the City may go down in history as so complacent—perfectly illustrated by the Secretary of State's speech today—that the map of the square mile must undergo a humiliating boundary review as we reach the next century.

5.23 pm

Mr. Kenneth Warren (Hastings and Rye)

I congratulate my right hon. Friend the Secretary of State on his first speech in his new post from the Dispatch Box. Whatever the stupidity of the 2 per cent., he is admired by 100 per cent. of Conservative Members, who believe that he is the man for the job.

I declare a formal interest in the debate. I doubt whether any hon. Member with outside interests is not affected by the developments as we move increasingly fast towards 1992. I hope that the business managers on both sides will note my regret that Back-Bench Members are to be given only 70 or 80 minutes to debate this important subject. The benefit of that to those present is that my speech will be severely truncated. It is important that more time should be given to these important issues.

I am not so much concerned that it has taken 16 months for this matter to come to the Floor of the House. When a Select Committee report is published, it is good to give the House and those outside who are interested in it time to review what is going on. It may be uncharacteristic for a Select Committee member to do so, but I thank the Department of Trade and Industry for the efficiency with which it has made available in time for this debate several papers which we requested. We trust that that is a foretaste of how it will assist us in future. Today's papers state that the Confederation of British Industry will investigate the DTI. After that, the light cavalry of the Select Committee may investigate the CBI. We are grateful to the DTI for its response.

In my short speech today I shall touch on three items: the Export Credits Guarantee Department, which is causing considerable concern inside and outside the European Community, in terms of our competitiveness compared with other Government-sponsored organisations within the EC; the regulatory organisations which were touched on by the hon. Member for Redcar (Ms. Mowlam); and banking. I shall leave insurance to my elders and betters.

The report and this debate seek fair and equal access for firms to EC and worldwide markets.

Mr. Maxwell-Hyslop

At the same time.

Mr. Warren

My hon. Friend is always at my right hand with the apposite words.

I hope that my right hon. Friend the Secretary of State will recognise that, in all discussions and negotiations in the EC, we must not merely focus on what Brussels says. British companies must operate across the world. The threat from Tokyo and New York to the acknowledged supremacy of London is constant and growing. My right hon. Friend and his colleagues are well aware that, within the EC, Frankfurt is breathing increasingly hotly down our neck, with Paris and Amsterdam not far behind keeping the pressure on us.

We must see ourselves not just within the EC. We must recognise that disparities in competition must be measured on a worldwide scale. We may understand that, but I am not sure whether Mr. Delors and his merry troop see further than the gates of Brussels. I hope that the Government will bring it to their attention that we seek to operate within the world market, as should the whole EC.

One of the benefits of giving a report time to settle is that various authorities have a chance of telling us how they see the developments to which we have drawn attention. There is absolutely no question but that the lack of a proper working regime for the ECGD worries British exporters more than anything else. There is unquestionable evidence that the ECGD premiums are higher than those charged to our competitors by their national credit insurers. The Select Committee and those in industry are worried that the portfolio management system as it is proposed will not enable us to remain competitive with other nation states.

The Government—even a non-interventionist Government—must recognise that they are in partnership with all those who seek to export. They cannot escape that liability. Unless they campaign within the EC for reductions by organisations, such as Hermes and COFACE, in their methods of operation in parallel with our own, in seeking to provide more private enterprise, we shall destroy it.

Hon. Members have referred to regulatory bodies. When my hon. Friend the Under-Secretary of State for Corporate Affairs intervened to ask the hon. Lady which bodies she would like to get rid of, I wondered whether I could stand up and say anything about that. I have a shopping list and I shall run quickly through it.

There are six financial service regulators, nine professional bodies, seven recognised investment exchanges, two clearing houses, the Bank of England and a partridge in a pear tree. We have 24 separate regulatory bodies. When my hon. Friend the Minister replies to the debate it would be worth looking at that and seeing whether, after some years of working, the Banking Act 1987 and the Financial Services Act 1986 can be improved. The Government must maintain a competitive stance in parallel with the efforts of our exporters of visible and invisible goods.

The Securities and Investments Board is doing quite a good job but if we look at some of the other organisations it is extraordinary to find the number of staff they have in relation to the number of firms they serve. I shall throw a few acronyms around and hope that hon. Members will be able to translate them immediately in order to save time. The AFBD—Association of Futures Brokers and Dealers—has one member of staff for eight member firms. However, FIMBRA—the Financial Intermediaries, Managers and Brokers Regulatory Organisation—has one member of staff for 400 member firms. LAUTRO— the Life Assurance and Unit Trust Regulatory Organisation—has one member of staff for 10 member firms. IMRO—the Investment Management Regulatory Organisation—has one member of staff for 130 member firms and TSA—the Securities Association—has one member of staff for five member firms. There is something wrong that so many regulatory bodies are needed. Something should be done to try to sift them down, because for the financial service regulators alone, there are 800 staff costing 46 million.

On rare occasions, Select Committee members are invited to sumptuous dinners in the City. We are not regarded as highly as my right hon. Friend the Secretary of State and his colleagues, but on those occasions we are told that one of the penalties of the Financial Services Act which is now becoming apparent is that it is costing more to compete and that therefore we are not achieving the sort of service that my right hon. Friend and his colleagues intended in order to make the country and the City more competitive.

Mr. Nelson

This is an important point, about which some of us have written to my hon. Friend in his capacity as Chairman of the Select Committee, and I hope that he will answer me. My hon. Friend mentioned the cost that falls on many firms. Part of that cost is that they pay subscriptions to the Securities and Investments Board to keep it running. Although my hon. Friend has said that the SIB is doing a good job, many firms feel aggrieved that there is little accountability for the way the money is spent or the administration of that body. The Select Committee on Trade and Industry has done an excellent job in producing the report. Why does it not ensure that the SIB is brought before it annually for proper scrutiny and press for a debate at least every year on the annual report of that body?

Mr. Warren

I have taken note of my hon. Friend's letter and I have brought it to the Committee's attention. We have a busy schedule, but my hon. Friend has reinforced his concern and we shall consider it as we come to our new programme in the month ahead.

Britain has over 330 banks of various types and they are almost unanimous, as are many other organisations, in that they are pleased with the responsiveness of the Department of Trade and Industry and the Government to representations made to them. However, they are concerned that the dialogue should go on and on and that it should not be simply an occasional meeting. There must be a continual flow of information.

If the trade associations are to function properly, they must get good and efficient feedback to their members. The banks feel that there are still considerable problems in investment services, capital adequacy directives and others. If time permitted, I would have gone into detail. I shall not do so now, except to say that I hope to have an opportunity to write to my right hon. Friend the Secretary of State about the concerns.

The Government are pursuing the negotiations towards 1992. As my hon. Friend the hon. Member for Tiverton (Mr. Maxwell-Hyslop) is repeatedly pointing out, 1992 first becomes effective in 1993, and other hon. Members have pointed out that it will become effective much later than that as some of the German insurance companies are brought to heel and become as competitive as we are. I hope that the Government will recognise that the negotiations must look at the world context, which I mentioned at the beginning of my speech. In the negotiations proceeding with the European economic space, which the Select Committee has recently investigated, I hope that it will be seen that the new dimension provides partnerships which will be of interest to this country in the furtherance of its objectives in the EC.

In terms of the Government as a partner, it must be said that the criticism that often flows from the Select Committee is that it must be more efficient in terms of its regulations and negotiations. This is about ordinary people—the customer, the person with the bank account and those who invest in the privatisations that occur nicely and regularly. Above all, it is about the need for the Government to ensure that quality is available for all customers at home and those from across the world who want to invest.

5.35 pm

Mr. A. J. Beith (Berwick-upon-Tweed)

I congratulate the Secretary of State on his promotion. When the lights in the Chamber suddenly brightened alarmingly, I thought that it was a belated attempt to give him the star billing that he achieved at the Conservative party conference. However, as it happened during the speech of the hon. Member for Redcar (Ms. Mowlam) I thought that perhaps Peter Mandelson had made his way into the building and that sweet music would shortly follow. Fortunately, all has been restored to normal, which is better for the rest of us who may not be improved by the shining of brighter lights.

I congratulate the Chairman of the Select Committee, the hon. Member for Hastings and Rye (Mr. Warren), on the excellent report, massive though it is. It said that we should join the exchange rate mechanism as soon as possible. It was published on 12 July 1989. Between that date and now there have been some competitive exchange rates at which we could have joined. I hope that the hon. Gentleman's recommendations are implemented more quickly in future.

We welcome the single market in all aspects, financial services and others, and seek to bring it to reality as soon as possible. In general, I support and approve of what the Government are doing in that respect. However, the Government are wrong in their rhetoric. They have not really helped the British public understand what this is all about. Despite all the publicity produced by the Department of Trade and Industry, so much of what Ministers and Back Benchers say is about meddling Brussels bureaucrats daring to interfere in how we organise things in Britain.

In reality, much of it is about trying to harmonise standards so that no one country's products are disadvantaged in the market of another. Sometimes, that works against our immediate interest. However, the Government should not constantly deride, attack and ridicule that process. If they do so, people will never understand that, as with French lamb, in insurance services it is in Britain's interests that there is proper harmonisation and uniform enforcement of rules so that we have access to markets in other countries.

The test we should apply to harmonisation is whether it advances the interests of the single market. Of course it does not always do so, and we can criticise it on those grounds. Putting VAT on the acquisition of lifeboat equipment by the Royal National Lifeboat Institution would do nothing to improve the single market; nor does general VAT harmonisation seem to be necessary to the achievement of a single market. Some harmonisation of standards is required to ensure that our products are not put at a disadvantage by the imposition of different and, in some cases, artificial restrictions by other member countries. No doubt they will think the same about us from time to time.

I want to remind the Government about several areas of concern, some of which are in their minds already. The first is the position of independent advisers, including sole traders. That includes many FIMBRA members. They are the subject of the new regulations system, but their position is different from that in other member countries. Independent financial advisers have had a hard time of late in several respects, not least of which is that the rules of disclosure that apply to them have been more demanding than those applied to building societies where tied assurance arrangements are becoming widespread.

People are taking on insurance commitments without realising the financial advantages that have accrued to the people who sold them, even though it is sometimes a body as respectable as a building society. Against that background, independent financial advisers, who quite properly are subject to a developed system of regulation, need some assurance that their interests are being looked after and that their opportunities to trade will continue.

Mr. Hugh Dykes (Harrow, East)

Should we not quickly make further progress to ensure proper, clear disclosure of insurance brokers' commissions on the premiums of underwriting insurance companies' policies?

Mr. Beith

I agree absolutely. Whether it be brokers, building societies or any other bodies, disclosure is essential if a customer is to know what is going on, not least a customer who has started on the road to obtaining a mortgage but starts to realise some way down that road the financial transactions that lie behind the insurance that is being offered.

The second point that I want to draw to the Government's attention is the position of the insurance industry in general, and I was glad that the Secretary of State referred to it. The insurance industry provides substantial regional employment in England and key employment in Scotland. In Edinburgh, increasingly in Glasgow and even in places such as Stirling, the insurance industry is a big employer. In the regional capitals of England such as Liverpool, Bristol and Norwich—

Mr. Doug Hoyle (Warrington, North)

Manchester.

Mr. Beith

Yes, but central Manchester is no longer the centre that it was because companies have moved further out into the leafy suburbs. Nevertheless, the insurance industry is an important regional employer and it is at specific disadvantages trading in Europe, of which the Minister is well aware and which must be removed if there is to be a genuine single market.

I have a worry about the passport system for all the various categories of financial trader, whether it be an insurance company, a security company or anything else. Certification in a company's own country being valid elsewhere is the right way to make rapid progress, but I should not like us to move towards a flag of convenience pattern, whereby companies are invited to move to a country of less stringent regulation, thus obtaining the passport to trade anywhere and yet be subject to less effective controls. The passport system must be accompanied by steadily growing uniformity of standard and regulation. We do not want a Liberia or Panama of the insurance or security industry world, whereby a country is attractive for a company to base its operations because regulation is less stringent and the consumer less well protected.

There is a further concern to which the Minister referred—ensuring that securities companies are able to trade and are not subject to unfair competition from the security operations owned by banks in other member countries. This revolves around getting the simultaneous approval of several directives. I was not clear whether, by suggesting that this is "proceeding apace", the Minister is confident that from day one of the financial single market there will be fair competition. We must ensure fair competition, and companies are seeking to do so, but we should like some assurance that it will be achieved.

A further concern is the takeover and merger differences between this country and other countries. British companies are severely subject to the threat of takeover and merger—a threat which is not present in some other member countries. That represents a significant distortion of the market, and we must address it. It is difficult, because in some respects the pressure for takeovers aned mergers in this country is oppressive, although it can also be argued that it is one means of promoting management efficiency, and its absence in some other member countries allows inefficiency to flourish. We must ensure that the extent of exposure to takeover, which is characteristic of British companies, does not place them at a disadvantage in the competitive market.

That raises some of the wider issues about how industry is financed and how financial institutions operate, because there are further differences between practice here and in other European countries. It is a common cry of industry in this country that a more long-term view is taken by German financial institutions than British ones and that their attitude to borrowing is different. The single market is an opportunity for us to enter that debate and to see whether we can change some of the short-termism that Ministers have criticised, while opening up financial markets. That is one aspect from which we may be able to learn from other countries in Europe.

The last point that I wish to make concerns the position of the City of London in the system. Competition is brewing between London, Paris and Frankfurt. The decision to enter the exchange rate mechanism helps to secure the position that London has already earned because of the scale of transactions and the free market in London. It is my firm view that that position would be better enhanced if Britain were clearly committed to the single currency and to European monetary union in more than the nominal sense in which the Prime Minister accepts that concept. London will lose out badly without that commitment.

I think that it was a Deutsche bank adviser who said that the ideal European currency would be a currency with a French name, managed according to German principles from a central bank based in London. That is exactly what I want to see—a currency based in London, but managed with the attitudes to price stability and prudence that have characterised the Bundesbank for many years since the war. It is time that the Government, who are supposed to be in favour of combating inflation, took that principle on board. If we are, in the words of the Leader of the House, in the ticket office or the back carriage of the train, we impede London's opportunities to be the financial capital of Europe, which in so many respects it so obviously deserves to be.

5.45 pm

Mr. Barry Porter (Wirral, South)

I shall do my best to be brief. That is normally a precursor to a very long speech, but it is a very long report from the Select Committee on Trade and Industry.

After months of modest meals and hard work, the Select Committee reached 20 conclusions and 37 recommendations. In retrospect, perhaps we involved ourselves in a scatter-gun approach, and it might have been better if we had brought those things together, but the fact that the Committee reached 20 conclusions and 37 recommendations shows the mind-bending complexity of the problem that we are considering. I should not dream of taking hon. Members from one to 20 or one to 37, but I shall emphasise those matters that seem of importance.

If we are using Latin tags, the Minister may recall the simplistic philosphical observation cogito ergo sum, which for his benefit means: I think, therefore I am. That cannot he applied to every hon. Member of this assembly. I have just invented something that might be appropriate to the Brussels directorate—directamus ergo existo. If I remember the Latin word for table, tablamus, it could be tablamus ergo existo, which clearly is not true. The fact that there is a directive or something is tabled does not necessarily mean that it exists in the real world, and certainly not in the financial world.

May I deal with the point made by the hon. Member for Berwick-upon-Tweed (Mr. Beith)? The Committee did not say that we should join the ERM as a matter of urgency. It said: United Kingdom membership of the ERM or the use of a common currency would help to promote a single market in financial services but the absence of either is not a major barrier to such a single market. We are 50 per cent. of the way there, although I suspect for different reasons.

Mr. Beith

The Committee said in a recommendation printed in heavy type that Britain should join the Exchange Rate Mechanism of the EMS as soon as possible at a competitive exchange rate.

Mr. Porter

We are halfway there; 50 per cent. is not bad and I shall agree on that basis.

The Select Committee said that the policy of the Department of Trade and Industry of raising awareness of the single market has been timely and essential. It is important to avoid giving the impression that the single market in financial services will be complete or even approaching completion by 1 January 1993. That point has been made by the Chairman of the Select Committee and other hon. Members, but I repeat and emphasise it. No doubt 1993 has many attributes, but it will not happen in 1993.

I am sorry that the Government have been accused of complacency, although I must say that there has been an element of that. I am sorry, too, that the hon. Member for Redcar (Ms. Mowlam) went to the lengths of making a party attack on the Government, as our report was written on an all-party basis. Nevertheless, there was something in what the hon. Lady said and it deserves consideration by the Government. They may be well advised to apply the phrase that I heard in a seaside place last week—"Good enough, but not really good enough yet," or words to that effect.

Mr. Lilley

"Good, but not good enough."

Mr. Porter

That is it. Perhaps my right hon. Friend was listening more carefully than me because he had to.

We concluded that the single market will offer wider choice and potentially lower costs for consumers throughout the Community, but that such results may not be fully apparent by 1993. That is absolutely true. We should not pretend to the outside world that suddenly, on that day in 1993, all will be well; it will not.

I should like to emphasise a point to which hon. Members have already alluded: the slowness of the programme for achieving a single market in insurance seriously undermines the credibility of the single market programme in financial services generally. I know that, since the Committee reached that conclusion last year, a proposed directive has been tabled in relation to non-life insurance. That proposed directive, designed to widen a consumer market worth hundred of billions of ecu a year, seems certain to arouse fierce resistance in such countries as Belgium and West Germany. That is a quotation from The Sunday Times, so it must be right.

It is all too true that fierce resistance will be aroused in such countries and even though the proposed directive has been tabled, it will not necessarily be implemented in the foreseeable future. The only country that would benefit if the proposals were implemented in the next year would be the United Kingdom. There is no doubt that Germany, Belgium and other countries will resist their implementation vigorously. I urge the Government to oppose that resistance and to win.

People have already talked about Frankfurt and Paris as potential competitors for the City of London. I do not take such talk all that seriously. I do not think that Paris will be in the same league, although Frankfurt could be. I still believe that the single market, as and when it arrives, will not be a problem but an enormous opportunity for the City of London. Its history, traditions and expertise will ensure that.

Hon. Members have referred to the question whether there should be a change in the regulatory structure created by the Financial Services Act 1986. I do not know; I receive contradictory comments and advice about it, although a particularly vigorous and authoritative source tells me that the structure is not working well from anyone's perspective and that it needs radical reform. Although the hon. Member for Redcar was asked about that matter, she did not come up with a suggestion, and I am not making a suggestion either: what I shall outline is a suggestion made by someone else.

The two-tier structure of the Securities and Investments Board and the self-regulatory organisations is redundant. The Financial Intermediaries, Managers and Brokers Regulatory Organisation, the Life Assurance and Unit Trust Regulatory Organisation and the Investment Management Regulatory Organisation should be abolished and their role subsumed entirely within the SIB. The Securities Association has a better case for survival. A centralised system would be more efficient, effective and consistent, and I am pleased to note that even the building societies are now calling for a common system of regulation for banks and building societies. Perhaps my hon. Friend the Minister will address his considerable intellect to those suggestions. He might even find an answer to the question.

This is a complex problem, but the sooner we get on with it, the sooner we shall achieve a single market. At the moment, progress is too slow and we are being held back in various matters by those who wish to protect their national interest even though they may spout the rhetoric of the new Europe. I agree with the Government that we are the ones who get on with implementing directives. But let us not fool ourselves into thinking that those in the other capitals of Europe are as enthusiastic as they say they are in public. It is certainly not what they say in private.

5.56 pm

Mr. Stan Crowther (Rotherham)

It is a rare pleasure to find the Government accepting so many of the recommendations in a report of the Select Committee on Trade and Industry. They have accepted so many that I am beginning to wonder where we went wrong.

I support the view expressed by the hon. Member for Hastings and Rye (Mr. Warren) that the time allowed for the debate is too short. This is an extremely important subject and we all recognise the very important role in the economy that the financial services industry plays. Not all of us are quite convinced that the extent to which some people in the industry are rewarded is entirely justified. Ministers constantly complain about demands for what they regard as excessive pay increases in manufacturing. They would do well to take into account the fact that, according to The Daily Telegraph at least, salaries in the stock exchange rose on average by 49 per cent. last year. Perhaps Ministers would care to comment on that.

I propose to refer to one aspect of the report—the part that deals with takeovers and mergers. I express my unreserved support for the Committee's recommendations especially that dealing with the vulnerability of United Kingdom companies. However, I do not agree with the view held by some of my colleagues on the Committee, and certainly by the Government and the Commission, that takeovers and mergers are marvellous in principle and that all barriers should be removed as soon as possible. There has not been much evidence in recent years that bigger is necessarily better. One field in which the creation of bigger and bigger firms, many of them now conglomerates, is positively unhealthy is accountancy. A mere handful of very large firms now audit the accounts of the great majority of large companies throughout the western world. That cannot be a healthy state of affairs. It is a dangerous tendency and any further mergers among accountancy companies should be examined most carefully.

The fact that the firms have increased their size enormously in recent years by developing and expanding in management and tax consultancy activities must make the danger of a serious conflict of interest considerable—especially in view of the Law Lords' ruling not so long ago that auditors have no duty of care to individual shareholders or potential investors. Given that ruling, and given that an accountancy firm may be doing the auditing as well as offering management consultancy services, we are getting into dangerous waters.

It is high time that auditors were not merely allowed but legally required to report to the appropriate authorities anything suspicious that they find in the books of any company whose accounts they are auditing, even if they hope to do business with that company in another capacity—as management consultants or tax consultants, or in the provision of any other service that they may offer. If it were made a requirement to report to the appropriate authority anything that aroused the auditors' suspicions—a Community-wide and, it is to be hoped, a worldwide requirement—the public would be afforded some protection against what seems to me to be the relentless advance of international financial crime.

It is an interesting coincidence that two of the Select Committee's recent reports have a considerable bearing on the matter that we are discussing tonight. Not long ago, we examined in great depth the information technology industry and more recently we looked at the growing problem of company fraud. During our inquiry into the detection and prosecution of people who engage in various forms of financial crime, many of us became more and more alarmed at the apparent ease with which substantial frauds and thefts can be committed with a very good chance of being unpunished. The scale of that crime is literally immeasurable. No one knows how much of it goes on, but we took sufficient evidence to convince many of the Committee members that there is an alarming level of such crime.

One little indicator of the level of that crime is that the Serious Fraud Office is not interested in anything less than £1 million. That may be the Serious Fraud Office's definition of serious, but many of my constituents would regard a fraud involving one tenth of that sum as very serious. Perhaps that gives us a guide to the scale of the problem in the City today.

I share the concern expressed by my hon. Friend the Member for Redcar (Ms. Mowlam) that the Secretary of State appears to be in some danger of sinking into the same puddle of bland complacency from which his predecessor was quite unable to escape. No matter how many opportunities we gave him to escape that complacency, we could never persuade him to do so. I hope that the new Secretary of State will not take the same view.

I am not suggesting for a moment that financial crime is new. It has been going on for centuries. However, a new dimension has been added by the fantastic development of information technology. Billions of pounds can now be moved around the world at the drop of a hat or, more precisely, by pressing a button. That makes the matter far more serious. I get the impression that the agencies responsible for regulating the financial services and detecting crime are fighting a losing battle in trying to keep up with developments. There is clearly a need for much closer contact—and I believe constant contact—and co-operation among the various agencies throughout the world which are responsible for crime detection. In the Select Committee we received little evidence that that kind of co-operation is happening on the scale required.

Modern information technology is clearly as available to the forces of law and order as it is to the crime syndicates. However, the criminals seem to be winning at the moment. On the rare occasions when people are caught and hauled before the courts, if they are convicted the penalties tend to be derisory in this country, although perhaps not elsewhere. They are derisory here especially if the criminal concerned happens to make a contribution to a suitable charity.

Mr. Hoyle

Or political party.

Mr. Frank Haynes (Ashfield)

The Conservative party.

Mr. Crowther

I would hardly dare to mention the Conservative party in that connection.

If we ever have a single market in financial services—I do not know whether we shall and the Select Committee warned that it will not happen as quickly as some people think—I should certainly welcome it in principle. Properly regulated, properly monitored and properly policed, it could be advantageous to consumers whether they are investors or pension fund beneficiaries. A single market could be very beneficial if it is properly run and regulated. However, I am afraid that lowering the barriers will make it easier for criminally minded people to pursue their frauds on a much wider scale. There is a danger that we may be creating not so much a single market in financial services as a single market in financial crime. That point needs far more attention in future that it has had in the past.

6.3 pm

Sir Robert McCrindle (Brentwood and Ongar)

Like other contributors to this debate, I propose to encapsulate my remarks in a short speech. I want to draw attention to two matters of concern: the unit trust movement, which I believe has not been referred to so far in this debate and secondly, and perhaps more importantly the effects of the capital adequacy directive on financial intermediaries.

I begin from the premise that, if 1992 is to provide opportunities for the United Kingdom in Europe, I suspect that it is common ground on both sides of the House that we should be seeking a level playing field between different types of investment in this country and also with regard to the differing tax regimes in relation to financial products in the United Kingdom and elsewhere. If such a level playing field can be created, I contend that the British financial services industry can compete.

At the moment, the tax regime for unit trusts operates very much against British companies. United Kingdom unit trusts are unique in paying corporation tax on their income. According to my information, no European fund suffers an equivalent tax. United Kingdom unit trusts should be allowed to distribute to European investors an amount equal to the tax credit to which United Kingdom resident investors are entitled, so as to place United Kingdom unit trusts on a more competitive footing.

If we achieve that level playing field, we can expect the industry to rise to the challenge. It would be ironic if we in the United Kingdom, the pioneers of the whole concept of unit trusts, were to be left behind as the single market approached, not because of some lack of efficiency on our part and not even because of an imposition by the European Commission but, dare I say to my hon. Friend the Minister, because of a tax regime dictated by the United Kingdom Treasury. If we could have the general support of the Minister when he replies for a movement towards that more level playing field, he and the Government would not be disappointed in the response from the unit trust industry in the United Kingdom.

I want now to consider the effect of the capital adequacy directive on small to medium financial intermediaries. Perhaps I should, not for the first time, declare an interest as an adviser to the British Insurance and Investment Brokers Association, many of whose members fall within the A2 category of membership of the Financial Intermediaries, Managers and Brokers Regulatory Organisation—that is, those who are broadly speaking not authorised to hold money but who may advise and effect financial arrangements.

Part of the problem stems from the lack of understanding by our European partners of the concept of independent financial intermediaries, and particularly of small independent financial intermediaries. The case was mentioned earlier of their failure to understand the importance of insurance brokers in this country, and the House will be aware that many insurance brokers are indeed small to medium financial advisers as well.

If that is the reason for the difficulty as the capital adequacy directive confronts us, and if continental insurance fails to grasp the fact that, in this country, one does not have to be a large, very well capitalised institution before one can perform a perfectly respectable service, I hope that our Ministers and officials, as they debate the capital adequacy directive, will draw to the attention of our opposite numbers the fact that they are comparing apples and oranges and asking as what type of apples we should prefer.

I would like to see the A2 category FIMBRA member included within the scope of the investment services directive and thus have the European passport to which reference has been made, but be exempted from an inappropriate level of capital under article 3 of the capital adequacy directive.

The Financial Services Act 1986, to which much reference has already been made—I served on the Standing Committee some years ago with my hon. Friend the Member for Chichester (Mr. Nelson)—has received widespread criticism. Whatever the rights or wrongs of that criticism, there is no doubt that it has taken its toll on intermediaries in this country. Because of the difficulties of continuing their independent role, many of them have chosen to go on tied to insurance companies, just at a time when there is a great need for independent financial advice.

Perhaps I should make it clear that we must make sure that the EC directives which are threatening—I do not put it too strongly—the continued existence of those financial intermediaries which remain do not place additional and unnecessary burdens on the independent financial intermediary, just as I hope that EC directives will give an opportunity for fair competition among intermediaries within Europe.

Reference was made in passing to the disclosure of insurance commissions. In an ideal world, there is no defence against failure to disclose commissions. My hon. Friend the Member for Harrow, East (Mr. Dykes) and the hon. Member for Berwick-upon-Tweed (Mr. Beith) failed to note that—to go back to the level playing field again—if it is expected that independent financial intermediaries, amidst all the other impositions of the Financial Services Act, are duty bound to disclose their commissions, so too in some shape or form should be those who are either part of the sales force of an insurance company or have become tied intermediaries.

Mr. Beith

indicated assent.

Sir Robert McCrindle

I am glad to see the hon. Member for Berwick-upon-Tweed indicating assent. What is sauce for the goose must be sauce for the gander.

In his vendetta against the independent financial intermediary, as he comes back time and again to single them out because they do not declare their commissions in the way in which he would like, Sir Gordon Borrie has overlooked that fundamental point. One of the messages from this debate as we move towards the single market of 1992 is that the independent intermediary has already been substantially pilloried by the regime of the Financial Services Act. I do not say that as a reason to scrap the whole thing. It is too easy and too glib to say that, without thinking carefully of what we would put in its place.

I firmly believe that the financial intermediary must be seen as an extremely important part of the financial life of this country. Therefore, if an imposition is to be placed upon him, it should be no more and no less than the imposition that is placed on his competitors.

The EC's definition of liquid assets in relation to capital adequacy seems to be unduly restrictive. It will be difficult enough for some small operations to show capital required, and that is assuming that the United Kingdom gets its way in the discussions on the directive. It will be very difficult indeed if we go on with the restrictive definition of liquid assets. At the moment, it would be extremely difficult if some assets were not allowed to be classified as liquid.

The Minister is well aware of the important role that is played by unit trusts and independent financial advisers to which I have drawn the attention of the House once again. I ask him, in the negotiations that lie before us, to make sure that the EC of 1992 and beyond liberates our companies and gives us the incentive to benefit from the wider market. Whatever else it might be, it should not and must not be restrictive.

6.13 pm

Mr. Jim Cousins (Newcastle upon Tyne, Central)

One of the unfortunate things about the debate is that a long time has elapsed since the Select Committee produced its original report, and events have moved on. Last Friday, we heard that the country was to join the exchange rate mechanism. That announcement made a substantial difference to many matters that were discussed in the Select Committee's report. Only now that we have entered—according to the Chancellor—a period of stable exchange rates with Germany and France will it be possible to test the Government's supposition that regulatory switching of financial services activity between lighter and heavier regulatory regimes will not take place. That matter is now sharply to be tested.

Similarly, now that we have joined the ERM, we shall see what the City of London is really made of. It will now be possible for investments to be safely carried out on a far larger scale, that is investments in the stock markets of Europe rather than in the stock markets of Britain. The competitive position of the City of London, which was of great concern to the Select Committee when it reported in 1989, is now under much harder scrutiny. We can be far less certain that the Government's optimistic conclusions, outlined in their response to the Select Committee's report, are soundly based.

We also had before us the fast-changing position with regard to the United States and Japan and their role in the City of London. The City of London's strength as a financial market has largely depended on being the vital intermediary between the capital of the United States and Japan and its performance and investment inside Europe. There is now good cause to doubt whether that feature of strength in the City of London will continue. We should closely examine that matter.

We can now also see far more clearly than we could when the Select Committee reported just what the Financial Services Act regulatory regime might bring. Many of the cases that gave us concern when the Select Committee was doing its investigation originated before the passing of the Financial Services Act. We can now see coming forward a whole raft of new cases that were born during the operation of the Financial Services Act regime and still give grounds for continuing concern.

Even as we speak, accountants from Coopers and Lybrand are scouring Europe and parts of the middle east to track down where £200 million of Polly Peck's money might be found. That is a serious matter. We hope that the money is found. However, such matters give grounds for real concern about whether the Government can afford to be complacent about the regulatory regimes that were laid in place at the time of the passing of the Financial Services Act 1986. It cannot be doubted, either, that many practitioners in the City are sceptical about whether the regulatory regime that was laid in place then is at all appropriate for the present situation.

Of course, the focus of the regulatory frameworks of the Financial Services Act regime are on regulatory procedures and authorisation procedures. We can see much more clearly now than we could either in 1989 when the Select Committee reported or in 1985 when the Act was being passed that that is perhaps not the correct point of emphasis. The correct point of emphasis should be the competence of the professional who is engaged in the business, the effective compliance procedures inside the firms that are conducting the business, and proper action against wrongdoing when it can be perceived.

The paper bunker of regulation into which the British financial services industry has been forced will not prove an adequate protection. It is not simply a matter of the scandals and the corruption that are occasionally revealed that is the worrying thing, but the normal routines, the concealment, doubt and uncertainty about what is really going on.

My hon. Friend the Member for Rotherham (Mr. Crowther) rightly drew attention to the role of accountants. The financial press has today reported that the Chartered Institute of Management Accountants has now produced a report which is honest enough to admit what has been clear for some time—that one needs a health warning before one looks at company accounts. What one sees in those accounts may not represent all there is, and what one does see may not be there. This is a matter of great concern, and the Government would be unwise to be complacent about the fate of the basic routines of accountancy.

Doubts have been introduced about the quality of British accounts. As a result of the Companies Act 1989, an accountancy regime has been established. The heads of that regime are now admitting that there are profound problems concerning what one sees in company accounts, inflation accounting, the use of good will, the different definitions of mergers and acquisitions, and the way in which that may enable the manipulation of accounts as well as about other things that can be manipulated so that they do not appear on the balance sheet at all. Given that the heads of the accountancy profession have admitted to those problems, the Government cannot simply stick by their response to the Select Committee report, especially as it was produced in another era.

My hon. Friend the Member for Redcar (Ms. Mowlam) was right to say that the problems we have outlined are not the private concern of a club—we can no longer see the City of London as a club in which rules of behaviour are internal to the system rather than subject to public regulation. Such regulation may well require statutory agencies to enforce high standards. My hon. Friend also made a sound point about the creation of small shareholders, but of even greater importance is the fact that we have already socialised the ownership of industry and our services through the insurance industry and occupational pension funds.

Common ownership has been achieved, but the consequences that flow from that, and the extra requirements they make upon the regulatory systems and standards of conduct of those who operate on behalf of those common owners, have not been perceived. The Government must address that. I doubt whether a framework more appropriate to the Sock Shop capitalism of the 1980s is one that we should allow to endure.

6.22 pm

Mr. Peter Viggers (Gosport)

Financial services represent one of the great successes of the United Kingdom economy. The London stock exchange is pre-eminent in Europe, with a market capitalisation of $500 billion compared with $160 billion in Germany and $100 billion in France and Italy. London's pre-eminence is even more noted regarding foreign exchange. The daily turnover of foreign exchange in London is $90 billion, compared with $50 billion in Tokyo and New York. Our financial services are a great success and, in terms of banking, we are part of a truly international market in which we are predominant.

The circumstances surrounding insurance are somewhat different. The OECD countries hold some 94 per cent. of the $500 billion a year premiums in the world; the United States has some 45 per cent. of that market, Japan 14 per cent. and the European Community countries 30 per cent. The 30 per cent. held by EC countries is fragmented. The largest market is in Germany, where there is close protectionism, the third largest is that of France where there is a great deal of state ownership, but the second largest market is that of the United Kingdom, the most open. It is therefore important to approach banking and insurance in different ways.

In banking there is a lot to play for. The Cecchini report suggested that there are £15 billion of benefits to be gained on a one-off basis from joining together the European financial markets. That is equivalent to about 22 billion ecu as we must learn, I suppose, to say.

On a personal level, it is important to realise how much there is to gain from harmonising the European markets. If someone undertook a round trip of the European capitals and changed his spending money in each of those capitals he would return having lost more than half of his spending money as a result of dealing charges and losses on the official exchange rate. There is a great deal to play for, but we must remember that there are some risks and losses.

Reference has been made to the Financial Services Act 1986, which is not only a tight regulation of the financial institutions of the United Kingdom, but an expensive one. There is a risk that less well-regulated banks operating here might be able to operate with less expense and therefore be more competitive than our own institutions. It is important that we agree host nation monitoring—essential minimum harmonisation. Should it be necessary for the United Kingdom to change its regulations to ensure that our financial institutions are not at a disadvantage compared with other European countries, I hope that the Minister will bear in mind the risks and take steps to make the necessary modifications.

Mr. Maxwell-Hyslop

What about the consumer? As it is now, years have gone by without any increase in the compensation limits despite nearly 30 per cent. inflation. Is my hon. Friend suggesting that, with that miserable record of compensation we should lower our level still further if continental countries do so?

Mr. Viggers

My hon Friend is referring to insurance rather than banking and I shall refer to that shortly.

I hope that my hon. Friend the Minister will also bear it in mind that it is important that EC developments are consistent with operations in non-EC countries. That is particularly important for the United Kingdom, which has much insurance business outside the EC. Perhaps I should declare an interest as a member of Lloyd's although I cannot see that it is relevant, but that might save some Opposition Member from asking whether I have declared that interest.

Mr. Hoyle

Speak up.

Mr. Viggers

I beg the House's pardon, but I am gabbling to save time.

We are concerned that the changes in the EC should not be to the detriment of United Kingdom institutions operating outside the Community. An undercapitalised Portuguese bank that sought to open in the United States might find that it was unable to do so because of United States regulations. If there was full, obligatory reciprocity of recognition within the EC, it might follow that a United States bank seeking to open in the United Kingdom could be barred from doing so because of those reciprocity rules. I am sure that my hon. Friend the Minister will bear that important point in mind, as it is of concern to the financial institutions.

There is also concern as a result of the investment services directive. Banks operating in the EC should not only be able to join EC stock exchanges and operate as investment advisers and operators within those exchanges, but they should not be barred from operating as investment advisers and from the execution of investment matters on behalf of clients outside those stock exchanges. In some parts of the EC, it is felt that banks should not be able to join stock exchanges, but in other parts of the Community it is felt that they should operate only within those stock exchanges.

So far we have heard little about shareholders. I am proud to say that the Government have doubled and redoubled the number of individual shareholders in the United Kingdom. The fact remains that the percentage of shares held in the stock exchange by private shareholders has fallen from 60 per cent. in 1960 to only 20 per cent. now.

I for one feel a great sense of disappointment that the number of individual shareholders continues to fall. There are several reasons for that—one is the cost of dealing for individual shareholders. I am concerned about what individual shareholders who have been encouraged by the Government to become shareholders for the first time will do when they try to calculate how much it will cost them to sell their shares and what the implications might be in terms of dealing cost and the inconvenience of having to declare for tax purposes any profit that they make.

I am also concerned that some companies have felt it necessary to set up their own systems to enable their shareholders to sell and buy shares. 1 believe that Cable and Wireless, British Gas and Reed have done that. That is not a helpful way ahead.

The insurance industry is riddled with complexity and vested interest. There are various standards in different European countries, including in the preparation of accounts and reserves, the handling of claims and legal procedures. There are many vested interests, in some cases assisted by Government. The French Government have a vested interest in the state insurance company's operations in France. The Italian Government require 30 per cent. of insurance premiums to be ceded to the state company, INA. Switzerland, although not in the European Community, provides a monopoly for fire insurance in each canton.

I welcomed Sir Leon Brittan's suggestion in November 1989 that there should be a single passport or licence—home country authorisation. Ideally, we should have harmonisation, but that would be exceptionally difficult. Therefore, the best route seems to be the creation of minimum standards throughout the European Community. Meanwhile, some companies are taking the second best route of cross-border purchases, mergers and acquisitions. That is the second best route because it requires the companies to operate in accordance with the laws of the country in which they made their acquisition. However, it is only the second best route and I urge my hon. Friend the Minister to press ahead as fast as he can with an effective single market as the long-term objective.

6.33 pm

Mr. Doug Hoyle (Warrington, North)

I am pleased to join in this debate, not only as a member of the Select Committee but as president of the Manufacturing, Science and Finance union, a large number of whose members work in financial services. I have been interested in the debate and one point that struck me is that, despite the reassurances given to the Secretary of State—I am sorry that he is not here—by the hon. Member for Hastings and Rye (Mr. Warren) that the Secretary of State's future was secure, I thought his was a pedestrian and lacklustre speech. When the Secretary of State goes to bed at night and has nightmares about all his predecessors, he may also find himself the victim of short-termism, as the Government call it.

The hon. Member for Gosport (Mr. Viggers) was right to emphasise the importance of the industry of which we are talking and which makes up 10 per cent. of the gross national product. In 1987, the industry gave a surplus on invisibles of £7.658 billion, which is considerable. I stress that we must not be complacent, because all the signs, including our earlier debate on ERM, point to the fact that Germany—the Bundesbank—is dominating the financial position in the European Community. That is why we must not be complacent or think that what is happening in the City of London, Edinburgh and the regions will be with us for ever. We must wake up to the fact that there will be increased competition and that Germany is growing in importance. If we do not, one day, probably not in the immediate future but certainly early in the next century, we shall wake up to find that, far from the City of London being in the premier exchange position, it will be Frankfurt.

As president of Manufacturing, Science and Finance, I am concerned about what will happen, particularly in the insurance industry. There is no doubt that we can provide life insurance at a third of the price of our European competitors. As has been repeatedly said today, the problem is that we are subject to takeovers in this country in a way that the Germans, French and Italians are not. It is easier to take over the Vatican than an Italian insurance company, which is almost impossible to do.

Takeovers occur all the time in this country because our companies are far more vulnerable than those in other countries. The German Allianz has taken over Cornhill, Signa (American) has taken over Crusader, and the French Axi-Midi has taken over Equity and Law. Another interesting example is that the French state-owned insurance company, UAP, owns 18 per cent. of Sun Life, which has an arrangement with Liberty Life by which they can bid for each other's shares. It will not be too long before Sun Life is taken over by a French state-owned company. I do not know how the Government will react to that.

We must ensure that the financial industry, which matters to us, has a prosperous future. I do not speak from the point of view of the investors in the industry or those who deal in shares in the City of London, but from that of the employees in the industry. We must ensure—because they built up the companies that those employees have a future. In any of our dealings, we must ensure that we protect their interests.

The Minister was cavalier in jumping up and asking our Front-Bench spokesperson, my hon. Friend the Member for Redcar (Ms. Mowlam) what she would do about the self-regulating bodies. The answer has come from Conservative Members. I do not think that one Conservative Member has stood up to defend such organisations, which are far too bureaucratic and costly, and of which there are too many. There should be rationalisation. I do not think I am alone in the House in believing that the era of self-regulation must come to an end. There must be statutory regulation, with far fewer organisations that are more efficient and less costly.

I hope that the Minister will bear in mind the fact that we should not bear an unnecessary burden when competing against other countries in the European market. I hope that he will also agree that, with our great insurance base, we in this country cannot allow other companies to operate from behind the barriers, which must come down. I hope that he will be fighting our corner to ensure that we maintain not only a great industry, but London as the financial centre. I warn the Minister that time is short.

6.38 pm

Sir Anthony Grant (Cambridgeshire, South-West)

Yes, time is short—we have three minutes, to be precise—so I shall immediately declare an interest in Bowring (UK) Ltd and Barclays bank, both of which are affected by financial services legislation.

I agree with the hon. Member for Warrington, North (Mr. Hoyle) that there is a need for change in the regulatory system. I favour abolishing the two-tier system, but I cannot develop that argument, because I want to talk about insurance, a matter that has dominated the debate.

Our insurance is the best; it is the most skilled and best regulated in the world. When I was at the Department of Trade and Industry, I believe in the same position as my hon. Friend the Under-Secretary of State for Corporate Affairs, there was the Vehicle and General insurance scandal, when everyone woke up and decided that it was important to regulate insurance. Now, we probably have one of the best regulated industries there is, particularly after the Lloyd's Act 1982, which I took through the House. That made our industry well respected, but also the subject of considerable envy. It creates £3 billion net earnings and provides 340,000 jobs. The restrictions in the EC have inhibited development and deprived the consumer of a better service.

If we are looking to the single market for the opportunity to break down barriers, we must accept that progress has been slow. On a visit to Brussels, the hon. Member for Rotherham (Mr. Crowther) tackled the issues vigorously, but I felt that—apart from Sir Leon Brittan—officials did not have the required sense of urgency.

The latest proposals published for non-life insurance are designed to widen consumer choice and cut premiums; however, it seems likely that there will be all sorts of objections from Germany and Belgium. I hope that the Minister will carefully study the suggestion that the Germans—because they do not understand anything about broking—must pass a great deal of legislation and will use it as a spurious reason for delaying what is a most important reform.

Competition is the name of the game: it is immensely important, and is the main thrust of our policy. However, open competition must be accompanied by good conduct. Here, to some extent, I agree with the hon. Member for Rotherham, although not in party political terms. The overwhelming majority of people working in the City are of the highest integrity—I spent some 20 years of my working life there—but in recent years the square mile has become infested with a small minority of newcomers who—as I have said in the House before—are long on cunning but short on morals.

The old saying in the City was that a man's word was his bond; as I have also said, if a man says that nowadays, one tends to take his bond. Some of the loot from dishonest activities there makes the great train robbery seem like minor pickpocketing. The Lloyd's Act 1982 prevented further incidents like the Peter Cameron-Webb scandal, which did immense harm to Britain's insurance reputation, especially in the United States.

This Government have done probably more than any other to crack down, through legislation, on insurance and company scandals. I give them credit for that. But we must not be just the most efficient providers of financial services in Europe; I want us to be regarded as the most honest and the most honourable.

6.41 pm

Ms. Joyce Quin (Gateshead, East)

This has been an interesting debate. I share the view expressed by many hon. Members on both sides of the House that it is a shame that we have had so little time to deal with the issue, especially given the comprehensive nature of the report of the Select Committee on Trade and Industry.

Not surprisingly, a major thread of the debate has been the concern expressed by hon. Members—again, on both sides of the House—about the unevenness of the playing field likely to be created in the single market in financial services. The Government's assurances at the beginning of the debate struck me as inadequate; I do not believe that they will tackle the problem.

An example is the Government's response to recommendation 7 of the report: We recommend that the Government should address itself to the vulnerability of United Kingdom financial institutions to hostile takeover by a company from elsewhere in the Community. Their response was: The Government believe that we should press for the removal of barriers rather than erect new ones of our own. That, surely, is not an adequate response to the problem of the bid-proof nature of many companies in other European countries.

When opening the debate for the Opposition, my hon. Friend the Member for Redcar (Ms. Mowlam) rightly said that the Government were being complacent. I think that they are also being naive if they feel that other countries will automatically accept their view of what the rules of the game should be. It has been interesting to listen to some of today's contributions, especially from Conservative Members. It is clear that many of them agreed with us that the Government were being both complacent and naive.

An example—not related to financial services, but none the less important in the European Community—is state aid. The Government have frequently criticised the level of state aid given by other countries, but recent figures show that other countries have given high and consistent levels of state aid during recent years. All the Government's preaching on that subject has been to no effect. It is not good enough to say that we hope and expect everyone else somehow, magically, to follow our example.

Today—in submissions to me and, no doubt, other hon. Members—the Association of British Insurers said that it was worried about the possible unevenness of the playing field in taxation matters. While I agree that a totally harmonised taxation system is not needed to make the single European market work, the Government must nevertheless be vigilant about the big differences in taxation that may undermine whatever other directives are agreed. Clearly many hon. Members share our concern: I noted particularly the speeches of the hon. Members for Wirral, South (Mr. Porter) and for Hastings and Rye (Mr. Warren), who seemed to express concerns that are dear to our own hearts.

My hon. Friend the Member for Redcar rightly laid stress on consumer protection, and I am glad that her view was reinforced by the hon. Member for Tiverton (Mr. Maxwell-Hyslop). I should like the Minister to tell us what consultations have taken place with consumer organisations in the United Kingdom.

In response to the report by the Select Committee on Trade and Industry, the Government said that they accepted the recommendations on consumer involvement. Perhaps they can tell us what organisations they will be meeting and what will be the time scale involved, if we are to ensure that when the single market in financial services is created there will also be proper standards for consumer protection. To date, the signs are that the proper standards will not be in place, and—not surprisingly—many hon. Members have expressed concern about that. It is important that there should be information on redress, and proper levels of compensation below which European Community states should not go.

The consumer-protection budget in the European Community is tiny. I am disappointed that the European Council allocated such a small amount in the budget for 1991: 0.018 per cent. of the total budget, which compares very badly with the amount available for the support of tobacco production, for example. There needs to be a change of priorities—not just by our own Government, but by other Governments examining the European Community consumer budget. I accept, of course, that it is not just money in the budget that will solve the problem; directives, too, will benefit the consumer at the end of the day.

Not surprisingly, the insurance sector has exercised the minds of many contributors to the debate. It is of particular importance, because the United Kingdom insurance sector has a great interest in the opening up of the market in financial services. It is also true—unfortunately—that there has been a worrying decline in our invisible export earnings in recent months, and the share of that decline accounted for by the insurance sector is considerable. All is not well, and the Government should address that point.

Several reasons given by hon. Members tonight show that it will be a long, slow haul to achieve a common market in insurance. We need greater vigilance than seems to have been exercised up to now. For those reasons, I was surprised at the statement by the Chancellor of the Exchequer, who said that the European market in financial services was almost complete; if he reads the recent publication by the Department of Trade and Industry he will note the number of directives that are still outstanding, and will mean thorny and difficult negotiations in the European Community in the coming months.

The problems of the Export Credits Guarantee Department are also mentioned in the report. They have not had a great deal of attention during the debate—although, if the Government go ahead with their threat to privatise part of it, no doubt that will be the subject of controversial legislation later on. So far, in the internal market, there is no pressure to privatise the ECGD; the Government seem to be doing so as a result of their own dogma rather than any other imperatives.

It appears that the French state export agency is to be allowed to underwrite risks for foreign exporters: if a French export agency can do that, why cannot our own state export agency? There is no doubt that exporters in Britain are worried about the proposals for the ECGD, as a recent article in this week's Financial Times makes clear.

Some worries have rightly been expressed about the regional implications of the creation of a single market in financial services. My hon. Friend the Member for Linlithgow (Mr. Dalyell) referred in an intervention to worries in Scotland, for instance. The Government must give far greater priority to this. There is evidence that the European Commission is studying it, and the Government should too.

Not surprisingly, the Select Committee's report gives considerable space to the problems of transport infrastructure in Britain which affect both the financial centre in London and the other centres outside it. I do not know whether the Minister has seen the recent edition of Lloyd's Log, entitled, "Jams today…The threat to the City's financial future". After 11 years of neglect of our transport infrastructure the Government are now trying to catch up and deal with a problem which is largely of their own creation.

The Government have presided over a massive decline in our balance of payments. It is alarming not only that the manufacturing deficit is so great but that the surplus on the service side and on so-called invisibles has deteriorated sharply. While we believe that the single European market will be immensely important to the future of our financial services industry, we do not believe that the Government are doing enough to deal with the problems. It would be good to think that the Secretary of State, new as he is to his job, would take a fresh look at the issues affecting his Department. Unfortunately, it looks as if he is already weighed down with the dogma and short-termist attitudes of his predecessors—attitudes which have disadvantaged both our manufacturing and our service sectors.

6.51 pm

The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. John Redwood)

The hon. Member for Redcar (Ms. Mowlam) and several other Opposition Members seemed to think that cases of malpractice being unearthed or of criminals being brought to book implied that something was wrong with the system. It is the first time that I have heard the theory that, if the police are successful on detecting crime, that means that they are not doing a good job. Such cases show that we have put in a tougher regulatory framework and that we are pursuing wrongdoers as we should. If only the Labour party had done that before, we should not have had our work cut out to put through the legislation that we have.

The hon. Member for Redcar also said that the Government were making no effort to improve regulatory co-operation with overseas bodies. I have just returned from Washington, where I was pleased to sign with our Japanese and American counterparts the Airlie House declaration. We recognise that financial business is driven by technology and business pressures towards global trading. It is becoming ever more important, therefore, to hammer out common accounting, capital adequacy and other prudential standards on a worldwide basis. The agreement that we have signed is a major advance in that direction.

The document recognises the growing volume of cross-border business in financial markets around the world, and pledges the three major market authorities in London, New York and Tokyo to work more closely together to facilitate further growth in that business.

The agreement enshrines two important principles. The first is mutual recognition backed up by some common standards. When each country is thinking of changing its rules or systems, it will consult the other two to see whether changes can bring practices more into line. The second is co-operation to assist each other in tracking down malpractice and crime. The United Kingdom is well advanced in widening its memorandum of understanding with the United States to exchange information and to carry out investigations on behalf of each other. About one case a week now causes that co-operation to be undertaken.

There will also be close co-operation to monitor the prudential position of major multinational firms. The Government will do everything in their power to ensure that the international regulators talk to one another and track down criminal activity even when it tries to run across borders in search of safety.

The hon. Member for Redcar seemed unaware of the many new dealing services for small shareholders which are now growing up. The Government welcome them and agree with comments made in the House that there should be easy access to good dealing facilities for all who have shareholdings, however modest they may be. Progress is being made in that respect.

The hon. Lady and her colleagues also seemed unclear about what structure of regulation they want. She tells the House that she agrees with the Government that the present system should be given time to settle down—we believe that strongly. More change would mean more disruption, more cost and more elaborate structures. However, the hon. Lady goes on to say that she wants to change the system in a fundamental way but is not prepared to tell the House exactly how. We await her reconsideration of a new structure, when she will have to demonstrate why it would be cheaper and better. Given the way in which institutional changes by the Labour party have gone when it has been in government, it would be surprising if the system turned out cheaper and better as a result of the changes that Labour suggested.

The hon. Lady concluded by saying that, under a Conservative Government, the City would need a boundary review. I agree. I think that the boundaries of the wider City will grow ever wider because of the success of the industry, which has grown in ways that many of my hon. Friends have pointed out in the debate. I look forward to positive and confident 1990s for the City under this Government's tutelage, because we shall work closely with the City to ensure that its businesses can expand and take advantage of all the directives and opportunities that the single market will undoubtedly produce.

My hon. Friend the Member for Hastings and Rye (Mr. Warren) raised the issue of the number of regulators. I must tell him that we need the current exchanges; they are important bodies and they have a range of functions that facilitate choice and competition. But if self-regulatory organisations wish to merge because they think it in their members' interests to do so—it may, for example, lower the costs or improve the quality of regulation—the Government are delighted. The Government will not insist on it, however, because they recognise the divergent interests and concerns of the different members of the different self-regulatory organisations. These things will work only if done on a voluntary basis.

Many hon. Members should concentrate on the fact that it is not so much the institutional framework as the style of regulation that matters when examining the trade-off between its costs and its benefits. The Government believe that we are coming to the end of a period when a lot of effort had to go into rule-making and institutional change. We are working closely with the Securities and Investments Board, David Walker and others so that, in the new phase, we can concentrate less on prescription and detailed rule-making and more on investigation, compliance and detection, because that is what is needed.

It does not help matters if the regulators are continually thinking of yet new ways to tie up in knots the existing compliant businesses—the broad mass of businesses in the City that are doing a good job. The regulators are and will be judged by their success in tracking down the tiny minority who are guilty of business malpractice or criminal deeds. We are putting our efforts into tracking those people, and we are urging the regulators to do the same—

Ms. Mowlam

Oh yes?

Mr. Redwood

Yes, the Government have put a great many resources into detection and investigation—by setting up the Serious Fraud Office and ensuring that it can pursue the cases that come to light thanks to the tougher climate created as a result of our work.

I promise the hon. Member for Workington (Mr. Campbell-Savours) that if he can bring forward evidence of malpractice in any particular deal we, or more importantly the stock exchange authorities whose job it is to do so, will look at it. If the hon. Gentleman knows anything about insider dealing or other criminal practices, he should refer the evidence to the proper authorities and not cast aspersions in the House unless he can back them up with evidence that the authorities will look at.

Several hon. Members asked about the timing of the directives and whether we can bring the whole single market in financial services together ready for 1 January 1993. The Government intend to do all that they can to see that the negotiations are concluded. The banking directives have been agreed; the investment services directive and the capital adequacy directive could be agreed within the next few months.

One of the important purposes of the debate is to give us guidance on the details that need to be put right, particularly to help independent financial advisers, and to help some larger businesses with matters such as liquid assets. We have listened carefully to what has been said and we shall of course carry these issues forward in our negotiations. If we can get the right deal by the end of the year, we shall sign up to it; if it takes a little longer, so be it, because it is important that our independent financial advisers and our major players in the stock market should have access on the right terms, under which capital requirements are related entirely to the risks being run and they are not burdened with unnecessary capital requirements when they are not carrying undue risk.

I agree with many hon. Members including my hon. Friend the Member for Wirral, South (Mr. Porter) that on the insurance side, matters are proceeding too slowly. There are doubts about whether the whole of the insurance regime can be up and running by 1 January 1993. However, failure to reach that target will not be for lack of trying by the Government—we are urging our partners to work with us towards a speedy resolution of all outstanding issues on the passport directives. As a result of our efforts, one directive has been tabled and we shall get it to a working party for extensive negotiation.

It is also largely because of our requests that the Commission has promised to bring the other directive for First Reading in the Council of Ministers before the end of the year. The Government will put their full weight behind reaching a fair settlement in this area. As many hon. Members have said, there cannot be a completely open market in financial products if insurance is stymied for lack of the legislative action that we all seek. The hon. Member for Rotherham (Mr. Crowther)—

It being Seven o'clock, and there being private business set down by THE CHAIRMAN OF WAYS AND MEANS, under Standing Order No. 16 (Time for taking private business), further proceeding stood postponed.