Uncertificated Securities (Hansard, 28 January 1992)

§ The Minister for Corporate Affairs (Mr. John Redwood)
Before the interruption at 7 pm, I was saying that there are a number of measures to help small shareholders—the complaints commissioner, the compensation scheme and a system allowing small shareholders to lock up their holdings and ask that they are not released unless they give special permission. I shall be happy to respond to any points made, but, in view of the lateness of the hour, I commend the regulations to the House.

§ Ms. Marjorie Mowlam (Redcar)
I welcome the Minister's short introduction of these regulations governing stock exchange transactions. We welcome the regulations.
We have been waiting many years for the legal underpinning of TAURUS, which is at last provided in the paperless electronic transfer system announced in legislative form today. To be precise, we have been waiting for 13 years. It is a full 13 years since the Group of 30 first set down internationally agreed standards for settlement of share transactions, and it is a full 10 years since the London stock exchange formally responded with the concept of TAURUS.
The Opposition sincerely hope that tonight sees the end of the Government's procrastination in the implementation of TAURUS. We do not want to have to sit through the experience of individuals at the stock exchange thinking of reasons for further delays. One's sympathy goes out to Peter Rawlins, the chief executive of the stock exchange, when he has to come up with excuse after excuse. The poor man is quoted as having said, when he had to announce further delays: This is another disappointing blow to our aspirations. It is a relief that he will not have to come up with any more such remarks.
As I have said, we have waited 10 years for the Government and the stock exchange to come up with some practical proposals. Throughout the years, we have witnessed minimal progress but a lot of buck-passing to explain the delays to which we have been subjected. The stock exchange, in its polite, indirect fashion of briefing, has discreetly said that the delays are due to the Government's late legal advice and to the fact that the Government's drafting was behind schedule.
On the other hand, the less delicate and more heavy-handed briefing of the DTI explains that the delay is due to the Stock Exchange's lack of correct computerisation or the inadequacy of staffing levels. In any case, there has been bickering between the two bodies as to why the process has taken so long, why it has been delayed month by month and year by year, until we are now waiting for May 1993.
If there is a further delay—one seriously worries that there may be—neither the stock exchange nor the DTI will be blamed. This time there will be another target. We shall be waiting for the annual general meetings at which companies will have to pass the regulations. No doubt the shareholders will be blamed for any further delays. It has 918 been a sad tale of delay and procrastination. One has been waiting so long for the Government and the stock exchange to come up with some practical proposals that one is tempted to welcome almost anything as better than nothing. DTI Ministers must be grateful to the Prime Minister for delaying the election long enough to allow these regulations to stand as the Government's final memorial.
In a sense, it no longer matters who is to blame—the stock exchange or the DTI. It is petty squabbling. At this late stage, we are just relieved to see the regulations going through. But at another level, the delay is in some ways a good case study of the problems that we have seen at the DTI over the years.
This is an example of the lack of leadership, the lack of drive, that we have seen in Minister after Minister. We have had Secretary of State after Secretary of State—as many as we have had years. The TAURUS delay is indicative of that kind of lack of management and lack of direction. That is why the DTI has come to be known in some quarters as the Department of total inertia.
I want to emphasise this point, which is not a cheap debating point.

§ Mr. Quentin Davies (Stamford and Spalding)
Exactly.

§ Ms. Mowlam
If the hon. Member wants to intervene, I shall give him numerous other examples of the way in which the DTI reacts to a problem that has become too large to ignore. The Department does not take the initiative in solving problems. TAURUS is an example of the way in which it lets problems fester year after year.
I want to make it clear that we are committed to the forging of a constructive partnership with the stock exchange, as with other parts of the financial sector. [Interruption.] The hon. Member for Wyre Forest (Mr. Coombs) may laugh, but the partnership that we have seen over the years has resulted in arguments between Departments and the City. Institutions like the stock exchange and the DTI have had arguments.[Interruption.] The hon. Member for Wyre Forest may snigger in disbelief, but if he goes to France and Germany he will find Governments that work in partnership with industry because they want to encourage an active leadership role as they move into the 1990s. That is what we want for the financial services industry in this country.
I shall emphasise the main criticisms or problems that we perceive, and I shall welcome the Minister's response to them. First, the Government have shown that they have no clear and strategic approach to financial services. Their approach to equity holding is a good example of that. We have heard the Minister argue in favour of wider share ownership when the Government have underpriced privatisation issues in the hope of attracting small investors.
The thrust of the TAURUS proposals that are before us is the same as that of the big-bang reforms because they will favour large transactions from institutional investors. The Minister has said that the Government are interested in helping and protecting the small investor, and he mentioned lock-up and other facilities, but that is surely going a point too far if the process of introducing TAURUS means that the small investor is lost. I have no doubt that the economies of scale will mean cost savings for the larger players while the smaller players will lose out.
919 I hope that the Minister will not lower himself by using the hypocritical argument that smaller investors can use their votes at annual general meetings, if they do not want to use TAURUS, to stop company directors dematerialising. As he and I well know, company directors need only twist the arms of institutional investors, with the result that they will have the 75 per cent. interest that they need to ride through AGMs. In other words, there will be a negative outcome for the small investor.
Given the scandals that we have seen in the City in financial services in the past few years, we are seeing the establishment of a parallel regulatory regime for the TAURUS system rather than integration into the structure of the Financial Services Act 1986. We have often seen that self-regulation, without any accountability to an outside authority such as the Securities and Investments Board, is courting trouble for the future. That is scarcely likely to appeal to overseas investors.
The Minister talked about the role of account holders, and the problems with the present regulatory structure are well illustrated in that context. If we are considering the fitness and properness of account holders, it is for the stock exchange to define them as fit and proper. I am sure that the Minister understands that, to avoid costly duplication, the stock exchange will be dependent on the self-regulatory bodies for the testing of "fit and proper". That means that the stock exchange will be dependent ultimately on outside sources for defining the fitness and properness of account holders.
I am sure that hon. Members on both sides of the House can envisage situations in which there will be disagreement between the stock exchange and the self-regulatory organisations over the quality and validity of different information. That is the result of the parallel structure of regulation that the Government propose.
Another criticism is that the compensation fund arrangements have not been properly structured. The Opposition argue that £250,000 is not a large enough sum in view of the transactions that are involved. Given the long debate that has taken place on compensation, it would seem that the same view is taken by many others. In May, when it was suggested that the level would be much higher, the Minister said that, in the event of something going wrong, there would be substantial compensation.
Since then—I am sure that the Minister will correct me if I am wrong—we have had the battle between lax regulation/high compensation and tight regulation/low compensation; and what we have ended up with this evening is both lax regulation and low compensation. That is one of the weaknesses that we see in the compensation fund arrangements before us tonight.
It also furthers some of the problems of the compensation schemes in the City for the various financial services that we have seen manifested in previous years, because, with the TAURUS compensation fund outside the investor compensation scheme, the present system forgoes the opportuity to draw on a wider pool of contributors and hence improve the management of risk.
Those are the main questions that we on this side have about the regulations. The regulations are complex. Some of the complexity of the legislation is lessened by the fact that some of the details, as I understand it, will be put in the new rule book that will not come before the House. The Secretary of State will agree to the stock exchange's new rule book for TAURUS operators, and it is important at this point to say that the next Secretary of State in the 920 Department will look at the rule book carefully; we want to ensure that it is clear and coherent. But we want no further delays in a system that has already waited so many years for its implementation.
TAURUS is essential to maintain London's position as the top financial centre of Europe. We worry that the delays of previous years have helped to call into question the role that the financial institutions perform. With the French systems up and running in the Paris Bourse and the German Government making a concerted effort to modernise Frankfurt, there is no room for complacency such as we have seen in the Department of Trade and Industry in years gone by. A Labour Government will not be encumbered by misplaced loyalty to the Financial Services Act 1986. We will cut through the present jumble of responsibilities and plethora of bodies to achieve a streamlined system of regulations.
In the financial services industry, long-term business growth can only be achieved when the customer has confidence in the sound governance of the market. What we have seen up to now is not that. We want to see good business and good regulation go hand in hand. We argue that the Government have failed on both counts, and that is why even the financial services industry needs a Labour Government.

§ Mr. Redwood
The hon. Member for Redcar (Ms. Mowlam) says that the thrust of the proposals in the regulations is to help large investors and not small. I do not think that she can have read the proposals, because the regulations are full of protection for the small investor. As I itemised before and after the 7 o'clock bar on our proceedings, a number of the regulations have been designed with exactly that point in mind.
The hon. Lady should remember that, if the small shareholder wishes to keep his or her shareholding under the new TAURUS system through the company account rather than through a commercial controller, there will be no direct cost charged to him or her as a separate shareholder; it will be handled in the normal way, as at the moment, as a cost on the company generally. So I do not understand her point that it will be costly and burdensome to small shareholders, whose position is protected by the existence of the company account. They will go to the commercial account system only if it offers them a service that they wish to purchase at a sensible price.
The hon. Lady then said that she does not think that the regulatory regime here is tough enough. She does not feel that so strongly, I think, that she wants to vote against the regulations tonight, and I think that she conceded towards the end that the combination of this regulatory framework and a suitable rule book will do the job. Of course it will, because the regulations make it clear that the Secretary of State must satisfy himself before allowing the TAURUS operator to go ahead, and there will be a full, independent inspection of the system before the Secretary of State grants the authority to the operator to go ahead under these clear regulations.
Finally, the hon. Lady said that she did not think that the compensation scheme was adequate or properly structured. The sum is as large as I ever imagined it would be during our negotiations to get satisfactory compensation for individuals. The hon. Lady seems to forget that the compensation scheme is intended for private investors.
921 The level of cover—£250,000 for a single error or problem in a private investor's account—is more than adequate to the task. I should have thought that that sum would cover most investments made by most people—even members of the Labour party. The intention is to cover the private investor. Professionals look after themselves in other ways —through business checks and controls and by recourse to the law if things go wrong; £250,000 is a lot of money.
The hon. Lady made a number of procrastinatory remarks about delays. I do not recognise the story that she told. I established a full consultation exercise on TAURUS when I had from the stock exchange an idea of what it wanted. We wanted to consult widely—that included consulting the hon. Lady and the Labour party —because that is the fair way in which to do these things. I then brought the regulations to the House with expedition. There was no lack of initiative on the part of the Department of Trade and Industry. It is now over to the stock exchange to develop the system.
Question put and agreed to.
Resolved,
That the draft Uncertified Securities Regulations 1992, which were laid before this House on 19th December, be approved.