Selective Investment Brokers (Hansard, 3 March 1992)

§ Sir Charles Morrison (Devizes)

In almost 28 years in the House, this is only the second occasion on which I have the Adjournment debate. It will almost certainly be the last, because I shall not he here after the next election. The matter which I propose to raise is of great importance to many unfortunate people, and I am pleased to have this opportunity to air their real grievances and to call on the Government to consider now and later, action to ameliorate the condition of those people.

I emphasise that I raise the issue of Selective Investment Brokers Ltd. and the role of the Department of Trade and Industry with the complete support of the Under-Secretary of State for Northern Ireland, my hon. Friend the Member for Wiltshire, North (Mr. Needham). He has taken a lead in this matter and will continue to do so, if need be after the election. I am sure that he will be supported by other hon. Members who have written to me and by my hon. Friend the Member for Swindon (Mr. Coombs). Unfortunately, my hon. Friend the Member for Wiltshire, North cannot be here because of his duties in Northern Ireland.

I have spoken to the Chairman of the Select Committee on the Parliamentary Commissioner for Administration, my hon. and learned Friend the Member for Colchester, North (Sir A. Buck), who says that in his view it is highly likely that the Committee will wish to look at the ombudsman's report on the case after the general election.

In early February, Anthony Wheeler, former mayor of Chippenham and formerly a respected local citizen, was convicted and sentenced to four years in gaol for fraudulent trading between 1986 and 1988. He was also convicted of the theft of money belonging to Selective Investment Brokers Ltd. and of procuring the execution of a valuable security by deception.

Selective Investment Brokers Ltd. was set up in 1980 in Chippenham. Among the financial investment products that it offered was a tax-free investment in what was described as the Cotswold Trust. The trust gave all the appearance of being similar in every respect to a unit trust whereby the investors invested their money with the trustees who had absolute discretion to determine which investments would form the basis of the underlying trust fund. Investors, who consisted mostly, but not entirely, of local people, were advised to spread their risk by investing part of their disposable capital in well-known, authorised products, but including a proportion in the Cotswold Trust.

Before the passing of the Financial Services Act 1986, the operator was not a licensed dealer in securities, nor was he a member of any authorised body. After the passing of the Act, the operator became a tied representative for an authorised investment institution. The Cotswold Trust was an unauthorised investment product in any event and not one which could be lawfully marketed.

Since 1984, SIBL had been in receipt of statutory correspondence from Companies house regarding its failure to provide annual returns and accounts. On at least two occasions, Companies house had indicated its intention to exercise its powers to remove the company's name from the list of companies as it appeared that the 290 company had ceased trading. In 1985, Companies house had passed this information to the Inland Revenue. On all occasions, the company's auditors had replied to Companies house, stating that they were still trading and would supply the relevant returns and accounts in due course.

In November 1985, the company became the subject of an investigation by the special investigation department of the Inland Revenue, which concentrated specifically on the tax-free status of the products that the company was offering. The Inland Revenue served the company with an assessment of unpaid tax and demanded that immediate steps be taken to pay the unpaid amounts assessed while the Revenue carried out a full evaluation of the total figure.

In December 1986, an independent accountant preparing an account for a client contacted the Department of Trade and Industry to identify the trading status of the operator of the Cotswold Trust. His concern related to whether his client's investment in the trust was tax-free and whether the investment itself was authorised. His information was examined, and as a result it became clear that the DTI believed that an investigation of the affairs of SIBL was urgently warranted.

The DTI took no action, but invited the accountant to report his concerns to the Wiltshire police. The accountant wrote to the DTI again, expressing his surprise and concern at its apparent lack of interest and was yet again urged to report his concerns to the police. In April 1987, the informant went to the police.

In May 1987, the police found that they could undertake no immediate investigation into the company, as at the time they had no information that would constitute sufficient prima facie evidence that a criminal offence was being committed. They referred the matter back to the DTI, with the request that the Department undertake an urgent investigation using its powers under section 447 of the Companies Act 1985. The DTI, however, took no further action in the case.

The company continued to solicit investment in the Cotswold Trust and, throughout the remaining period, accumulated in more than half a million pounds in new investments. In June 1988, the Inland Revenue presented its final accounting for unpaid revenue to SIBL, which resulted in the company's placing itself in voluntary liquidation, leaving investors with a loss of £1.3 million.

Those facts were subsequently reported to the Parliamentary Commissioner for Administration, who conducted an inquiry into an allegation of maladministration on the part of the DTI on the grounds of its having failed to take any action in May 1987, when it knew—or ought to have known—that the responsibility for investigating the company lay with it. Subsequently, however—in 1991—the ombudsman exonerated the DTI of maladministration, which occasioned amazement and disbelief.

Indeed, the ombudsman's findings were considered to be so transparently at odds with the facts of the case, and the precedents created by previous ombudsman's decisions, that the report was referred by the company's creditors—who had formed a group called Creditors in Action—to an independent QC, who conducted a full examination of both facts of the case and the ombudsman's investigation. He found that the 291 Ombudsman had erred in his findings and that the DTI's failure to act constituted maladministration of a most serious kind.

The case reveals a number of factors, adding up to a degree of inevitability that the investors would lose their money. It is, however, not simply the latest example of a series of cases in which the DTI has been shown to have failed to evince the most basic understanding of the meaning of investor protection, clearly illustrating the way in which regulatory incompetence leads to loss. What is perhaps most clearly identified—along with the degree of incompetence and maladministration displayed by the DTI in its failure to appreciate the urgency of the need to investigate the affairs of SIBL—is the obvious extent of its complicity in an unauthorised and unhealthy relationship with the Inland Revenue. That enabled the Revenue to collect moneys to which it would not have been lawfully entitled had the proper course been taken at the right time.

The DTI was aware that the company had not made any financial returns to Companies House for a number of years yet was continuing to trade. It was aware that the company was not authorised to conduct investment business and that it was dealing in investment products of an unauthorised nature. It was aware of the previous relationship between the operator of SIBL and another investment adviser who had been investigated in regard to a similar operation which had led to investor losses. It was conscious of the need to undertake investigations into SIBL as a matter of urgency, because that fact had been identified by a member of the companies investigation branch. It was conscious of the fact that investors' money was at risk.

The question that must be asked is, why did the DTI fail to take any action at the appropriate time? Also, why did the ombudsman lean over backwards to ensure that no findings of maladministration were proved against the DTI? It would appear that the explanation can be found in the relationship between the DTI and the Inland Revenue.

It is clear that SIBL owed the Inland Revenue a considerable sum in unpaid tax. If any action had been commenced to wind up the company, the Inland Revenue would have been unable to recover any of that money and would merely have been included on the list of non-secured creditors who would have remained unpaid. The only sums for which the Inland Revenue can claim to have a preferential interest are moneys collected by the employer for pay-as-you-earn and national insurance contributions. Therefore, stopping the company trading would have meant that the Inland Revenue would have lost a great deal of unpaid money.

However, permitting the company to continue to trade meant that the Inland Revenue could continue to receive moneys by way of assessment, moneys that it would not otherwise have been entitled to receive had the company been wound up—in other words, the Inland Revenue was enabled to be preferred directly at the expense of new investors in the company.

Had the ombudsman found that the failure of the DTI to act decisively in May 1986—when it knew or should have known that it alone possessed the power to conduct the necessary investigation into SIBL—amounted to maladministration, the legitimacy of the actions of the Inland Revenue would undoubtedly have been called into 292 question. If the practice of allowing the Revenue to collect unpaid but non-preferential taxes from companies that would otherwise be wound up had become widely known, a number of similar cases would undoubtedly have been uncovered, leading to questions being asked about the amount by which the Revenue has benefited at the expense of other creditors.

This case is an unattractive story which reflects badly on the DTI and the Inland Revenue. The DTI is a regulatory body, "regulatory"—I emphasise that word—on behalf of the public. On this occasion, the public were severely let down. The creditors of SIBL want the DTI to admit that it made a mistake and that investors suffered as a result. In consequence, the DTI should take action to put that right, and I hope that the Minister will make a start on that now.

§ The Minister for Corporate Affairs (Mr. John Redwood)

My hon. Friend the Member for Devizes (Sir C. Morrison) referred to the report of the Parliamentary Commissioner on the actions of the Department of Trade and Industry in relation to Selective Investment Brokers Ltd. I shall try to draw a distinction between the actions that could be taken by Companies house—striking off a company that is no longer active—and the actions that can be taken by the police or the investigatory authorities if there is suspicion of wrongdoing. I am pleased to see my hon. Friend the Member for Swindon (Mr. Coombs) present in the Chamber. I know that he takes a great interest in this matter, which has affected some of his constituents.

I am naturally distressed to hear of the losses sustained by investors in the company. It was incorporated in January 1980 and went into liquidation in July 1988. The Parliamentary Commissioner criticised the actions of Companies house in failing to pursue SIBL for overdue accounts and for initiating action to strike off the company instead, but he did not find that that failure led to injustice or loss to the company's investors. Companies house accepts the criticism that it failed to pursue the directors of the company as it should have done, and I apologise to my hon. Friends and to the House on its behalf for that mistake.

The Parliamentary Commissioner also concluded that potential investors could have searched the records held by Companies house and obtained a warning from the lack of up-to-date information. Companies house records exist to protect members of the public who intend to deal with limited companies, and those services should be used. The fact that a company has not filed accounts or is late in doing so should act as a warning to people thinking of trading or dealing with it.

The Inland Revenue and other creditors can seek to prevent an active company from being struck off in error. An intention to strike off a company must be published in the London Gazette, and it would be open to the Inland Revenue or any other creditor to petition to avoid such an error being made.

Since the criticism by the Public Accounts Committee of the low level of compliance in 1984, Companies house has made great progress in raising the level of compliance with the filing requirements of the Act. The target set for Companies house is to achieve 85 per cent. compliance by the end of June 1992. This target is still less than I would 293 like, and I have told Companies house that raising compliance is the highest priority. Its efforts have met with considerable success. It sends out more than 2 million default letters and prosecutes a considerable number of directors each year. It is striving continually to improve the level of compliance still further. It has improved its computer systems, introduced road shows throughout the country, advertised nationally, and produced a publicity video which is widely available. July will see the implementation of late filing penalties. These will apply to any company which delivers its accounts to the registrar after the statutory period has expired. I hope to see a further increase in compliance as a result of these measures.

As my hon. Friend is aware, the Parliamentary Commissioner found no evidence of maladministration in the actions of my Department's financial services division or of companies' investigation branch in relation to this case. When the matter was first drawn to the attention of the companies' investigation branch, my officials established that the Wiltshire police were undertaking investigations into associated business concerns. The police told my officials that they wished to extend their inquiries to Selective Investment Brokers. It was accordingly suggested that the complainant should contact the police with the complaint. This was eventually done, and my Department decided not to undertake an investigation under either the Companies Act or the Financial Services Act.

That decision was entirely in accordance with my Department's long standing and sensible policy not to duplicate police inquiries into a company. Such duplication would be wasteful of investigative resources and might prejudice possible police action. However, my Department will always consider whether to use its investigatory powers if requested to do so by the police or by the prosecuting authorities looking into the case.

Thereafter, as is stated in the Parliamentary Commissioner's report, the police said to my officials that the client of the firm of actuaries who had contacted my Department had declined to make a formal complaint. The police officer concerned told my Department that he would he reporting to the Director of Public Prosecutions. He said that he would be suggesting in that report that the Director should request my Department to undertake a confidential investigation under section 447 of the Companies Act, as my hon. Friend mentioned.

The Director, having considered the matter, decided 294 that the police report should not be passed to my Department. I understand that he was satisfied that the police had been unable to find any additional evidence which would add weight to the material which the complainant had passed to my Department. My Department took no further action.

The Parliamentary Commissioner weighed whether the DTI should have ordered a further inquiry at this point. He concluded: I do not consider that DTI acted maladministratively in waiting on the DPP or, in the absence of further approaches about SIBL from members of the public, in not having initiated a section 447 enquiry into SIBL before its liquidation. The ombudsman is an independent figure who is empowered to look into these matters and to have a judgment independent of Ministers. His report speaks for itself.

Following the liquidation, it became apparent that much was wrong with SIBL and a further police investigation ensued. That resulted on 7 February in Mr. Anthony Wheeler, the principal director of the company, being sentenced to four years' imprisonment on counts of fraudulent trading, theft and breaches of the Prevention of Fraud (Investment) Act 1958.

About 180 companies will be investigated under section 447 this year. The Department is not shy to use the section when it is the right means of investigating and when police inquiries are not already under way. In the first three quarters of this financial year, to 31 December 1991, 14 companies were wound up by the court on the petition of my right hon. Friend the Secretary of State following investigations under the section. There were also 19 prosecutions. Additionally, a great deal of valuable information obtained through the use of these powers was made available through the statutory gateways to other regulators to assist them in the exercise of their functions. I am determined that Department of Trade and Industry and other regulatory powers should be used to expose fraud and malpractice wherever it is suspected. I have today met City regulators to discuss with them how they can improve their chances of detecting it earlier.

I am extremely sorry about the losses that my hon.

Friend's constituents have incurred, but I rest on the ombudsman's report.

Question put and agreed to.

Adjourned accordingly at twenty-six minutes past Twelve o'clock.