§ Motion made, and Question proposed,
§ That a sum not exceeding £30,079,000 be granted to Her Majesty out of the Consolidated Fund, on account, for or towards defraying the charges for the year ending on 31st March 1997 for expenditure by Her Majesty's Treasury on economic, financial and related administration, including debt management; payments to certain parliamentary bodies; and certain other services including expenses in connection with Honours and Dignities and a grant in aid to the Private Finance Panel Executive.—[Mrs. Angela Knight.]
§ [Relevant documents: The Fourth Report from the Treasury and Civil Service Committee of Session 1993-94 on Retail Financial Services Regulation: An Interim Report (House of Commons Paper No. 236), the Second Report from the Committee of Session 1994-95 on Financial Services Regulation: The Building Society Sector (House of Commons Paper No. 26), the Second Special Report from the Committee, containing the Government's Reply thereto (House of Commons Paper No. 283), the Fifth Report from the Committee of Session 1994-95 on Financial Services Regulation: Self-Regulation at Lloyd's of London (House of Commons Paper No. 187), the Fifth Special Report from the Committee containing the Government's Reply thereto (House of Commons Paper No. 745), the Sixth Report from the Committee of Session 1994-95 on The Regulation of Financial Services in the UK (House of Commons Paper No. 332), the First Special Report from the Treasury Committee of Session 1995-96, containing the Government's Reply thereto (House of Commons Paper No. 98), and the Departmental Report of the Chancellor of the Exchequer's Smaller Departments: The Government's Expenditure Plans 1995-96 to 1997-98 (Cm 2817).]
§ 7.3 pm
§ Sir Thomas Arnold (Hazel Grove)
The Treasury and Civil Service Select Committee is most grateful for the opportunity to debate the regulation of financial services in the United Kingdom. It goes almost without saying that the growth of financial services in our country in recent years has assumed an importance that none of us could have foreseen. The reputation of the City of London—indeed, the reputation of our country—is inextricably bound up with that growth and it is an area of life and an activity about which we can truly say that the eyes of the world are upon us. It is for that reason that the Committee has been especially concerned during a long-running inquiry to consider the issues of transparency and accountability. I shall make some further reference to those principles in my remarks.
I thank my colleagues on the Committee for their patience and diligence during the two years in which we have been examining the issues. I thank our Clerks for the long hours that they have put in and the many witnesses who have appeared before the Committee. I also thank my hon. Friend the Economic Secretary to the Treasury for her response on behalf of the Government to our report, dated 12 December, which the Committee received just in time for this debate. I shall make further reference to that in a moment.
I want to give the House something of the flavour of the way in which the Committee carried out its work. We approached the subject in a remarkably non-partisan way 1157 and, mostly, with open minds. We listened carefully to the evidence and for the most part reached our conclusions without votes. Clearly, there were some differences of opinion, as one would expect, but they were not generally major ones. The entire proceedings were remarkable for the degree of open-mindedness and fair-mindedness on the whole Committee.
It is for that reason that I should like to draw the attention of the House to what was arguably the one substantive vote, which took place when we came to debate, discuss and agree the final report. It involved a series of amendments moved by the hon. Member for North Warwickshire (Mr. O'Brien). It raises some important issues that we should consider this evening and with which I propose to deal head on.
It is perfectly true that there are some differences in emphasis, style and tone between the Government and the Opposition on the regulation of financial services, but I do not believe that they should be exaggerated. There is not an unbridgeable gulf across the Floor of the House on the matter. A degree of consensus is apparent, which is to be welcomed in the national interest. For the reasons that I gave at the start of my speech it can only be in the public interest that the Government and Opposition for the most part find themselves in broad agreement on how to tackle some difficult problems and respond to new opportunities and challenges.
The amendments moved by the hon. Member for North Warwickshire went further in the direction of proposing that we should replace the present arrangements with a structure that would more closely resemble the American Securities and Exchange Commission. That led to a vote in the Committee. The key sentence in his amendments is to be found in our report on page xliii in amendment 93B, which states:
The Committee recommends that the ultimate objective should be for the SROs to be folded into SIB to become serving departments.In the event, the amendment was lost because I exercised a casting vote with the Noes.
The report shows, however, the progress of the argument and the difference between Conservative and Opposition members of the Committee. I do not believe that the difference is serious because, while structure in these matters may be important, what ultimately matters is the quality of regulation. We all agreed that we required good, well-trained and properly motivated and paid regulators and staffs, who would enjoy respect in their profession in the City of London and be regarded throughout the world as thoroughly professional men and women doing an important job. We concluded that the regulators in the new organisations have coped well with the immense changes that have swept across the financial markets and the City of London in recent years, although there have been some trying and testing moments and there will no doubt be more in the future.
The majority of the Committee did not feel that the time was right to go as far as the hon. Member for North Warwickshire proposed, but we understood perfectly what motivated him, the intellectual argument that he was putting and the manner in which his proposal was put.
In a fair-minded and positive response to the Select Committee report, the Government have left open for the future many aspects of this debate. At a time of rapid 1158 evolution, it is sensible to allow the changes being made to work their way through before deciding on the timing for the changes that the Committee proposes.
The Select Committee holds the firm view that, henceforth, ministerial responsibility for all aspects of financial regulation and supervision should be concentrated in the Treasury. That view has already provoked a certain amount of controversy. I draw the House's attention to paragraphs 118 and 119 of our report. Paragraph 119 says that we want to encourage
HM Treasury to adopt a more interventionist and active role in the co-ordination of financial services supervision and regulation.Some commentators immediately fell on the word "interventionist" with an unwarranted zeal. The key word in that paragraph is not "interventionist" but "co-ordination". Evidence that the Committee took revealed that we require better co-ordination and one department of state to build up a core of expertise and understanding of the issues and personalities involved so that, when and where it is necessary to bring people together or, more trenchantly, knock heads together, that can be done with a full and proper understanding and awareness of exactly what is involved. As time went by, we were increasingly uneasy about the division of responsibilities between the Treasury and the Department of Trade and Industry. We felt that the time had come to concentrate resources and activity in the Treasury so that a group of civil servants and their ministerial chief would have an even better grip on current events.
We attach considerable importance to that proposal. I was encouraged by the tone of my hon. Friend the Economic Secretary's reply because, while she did not give our recommendation a full and firm yes, she certainly did not say no. She drew attention to the Treasury's memorandum of June 1995 to the Committee, which referred to the arguments in favour of such a transfer of responsibilities, and went on to say:
However, the recommendation raises wider issues which would need careful consideration before final decisions are taken.If time permits this evening, she may care to tell the House exactly what some of those wider issues are.
The Committee felt that concentrating effort in the Treasury would bring about an improvement in what some quarters clearly regard as either a duplication of effort or an overlapping of functions. The co-ordination to which I referred could thus be better achieved.
§ Mr. Nick Hawkins (Blackpool, South)
Does my hon. Friend agree that, despite the valuable work that the Committee has done on this subject, members of the industry are still concerned—I am aware of that concern as deputy chairman of the all-party group on insurance and financial services—that regulation is too often targeted on bureaucratic form filling and not enough on catching criminals who prey on our constituents?
§ Sir Thomas Arnold
I shall have something to say about criminals later. I sympathise with what my hon. Friend says. It is important to note that Mr. Andrew Large, for example, of the Securities and Investments Board recently said that he would be in favour of moving, when and where possible, towards reducing bureaucracy and form filling, provided that greater transparency and disclosure by the firms with which he deals can be assured. He believes that a trade-off may prove possible. I welcome that and hope that he will explore the matter further. 1159 I shall refer to just one or two specific matters in the report without trying to be exhaustive. I draw the House's attention to paragraphs 60 and 61. The Committee felt that the time had come to review the Financial Services Act 1986 not because we did not believe that the Act was flexible—clearly, it is—but because it may be deficient in some respects. Paragraph 60 says:
The problems faced by the regulatory system in dealing with products which do not fall clearly within the remit of one regulator come to the heart of difficulties rooted within the Act itself … The key exclusion from the Act is lending.An example of that which probably struck the Committee more than any other was the fact that mortgage choice is not regulated under the Financial Services Act. The Committee took evidence in respect of a difficult problem with home income plans, which caused us a great deal of distress and anxiety. We certainly do not want to see that happen again. It was an unfortunate and, in some ways, deplorable affair, which caused us a great deal of upset. It is for those reasons, again based upon evidence, that we felt that the time had come to look again at the Financial Services Act, and to consider whether it is sufficient to deal with the rapidly changing market.
That theme is taken up again in paragraph 66 of our report, where we draw attention to the plethora of regulators in the United Kingdom. The evidence from Mr. Sharples of the Securities and Futures Authority was particularly impressive. He said of international regulatory conferences:
I have always been embarrassed because we sit round this table and there are two from France, there may be a couple from Germany, three from the United States and usually about ten from Britain: the Bank of England, the Treasury, the SIB, the SFA and so on.That is why the Committee concluded:
The implication is that regulatory diversity in the UK means that it is unclear who the lead regulator is in a particular area or for a particular institution.Such confusion occurs from time to time. We went on to state:
This confusion is not conducive to the formation of a coherent international approach, where a clear vision of developments in the market and the appropriate regulatory response is essential.When my hon. Friend the Member for Blackpool, South (Mr. Hawkins) intervened, he talked about crooks and other such problems. The collapse of Barings bank took place during the course of the Committee's inquiry. That led us to reflect deeply on the problems of international co-operation and the need to have clear demarcation lines in terms of regulation. Mr. Sharples' evidence was very much in our mind when we considered the collapse of Barings and its consequences.
The Committee's report went into some detail on the nature of regulation and supervision. I do not propose to rehearse those arguments. In compiling the report, the Committee was concerned to provide not merely opinions but a quarry of useful evidence and advice from distinguished outsiders that could be used in future by the Government, the Opposition and other parties, regulators and the City. I hope that we shall achieve that objective because I am sure that the papers and library of evidence that we have built up will help greatly in that process.
It is clear that there have been and continue to be some tensions and difficulties between the SIB and the self-regulatory organisations. I do not find that altogether 1160 surprising because, over time, the SROs, and the SIB above them, have gradually become more accustomed to using the Financial Services Act, and have therefore enhanced and developed their roles. They have become much more proactive. As Mr. Large put it in paragraph 92 of our report:
Yes, the SROs have become stronger frontline regulators and I think we should regard that as a success rather than a failure. It is exactly what we all intended.His judgment was and is correct. The SIB has also increased its role in a manner that I welcome.
I recognise that the tensions between the SIB and the SROs will not disappear overnight, but with patience and the passage of time, and given the hard work taking place now, I am sure that some of those difficulties will be overcome.
I should like to refer to Barings and the position of the Bank of England in some detail. One reason why the Committee is so keen for the Treasury to take full responsibility for the regulation of financial services in our country is that, in addition to the work on which we spent a great deal of time—all the operations of the Financial Services Act—we recognised that the Bank of England, as the lead supervisor and regulator for the banking industry, and responsible as it is to the Treasury, also, in practice, must have dealings with other financial institutions, some of which are not regulated by the Treasury.
The Committee has had plenty of difficulties and scandals with which to deal, Barings being the most recent. In the past decade three serious scandals have affected the Bank of England—Johnson Matthey, the Bank of Credit and Commerce International and Barings. Each time, the Committee has been given assurances that lessons had been learnt and that improvements have been made. That information is most welcome, but life does not stand still and in our fast-moving world the pace of events seems to dictate that, sooner or later, another batch of problems and another crooked deal comes to pass and the result is a catastrophe.
The collapse of Barings was a catastrophe, and most people recognise it as such. As I said in Committee to Mr. George, the Governor of the Bank of England, the Committee is not engaged in a witch hunt against the supervisory staff of the Bank of England—far from it. We recognise the long hours and the hard work that they put in, but we are entitled to question the apparent discrepancy between the report of the Board of Banking Supervision into the collapse of Barings and that which the Committee has now received from the inspectors appointed by the Minister of Finance in Singapore, in which a different tale apparently emerges. For that reason we will want to take further evidence in the new year to try to get to the bottom of what happened.
We all welcome the review of the Bank's supervisory functions that is now being undertaken by Arthur Andersen. The Minister referred to that report in her reply to the Committee's report. She specifically stated that before committing herself to a further review of the Bank's supervisory functions by the Treasury and the Government, she would want to take into account the report from Arthur Andersen and the Committee's future report into the details surrounding the collapse of Barings.
As the House knows, the Committee took a great deal of evidence on Lloyd's. I do not propose to dwell too much on it beyond saying that, once again, we were of 1161 he opinion that events as they unfolded showed the need for a greater concentration of effort within the Treasury and the need for external regulation. When all is said and done, we were not of the opinion that confidence could be fully restored in Lloyd's by the current regulatory arrangements. I know that there are those in the market who find that irritating, but that is the judgment that we reached on the evidence that we heard, and it continues to be our view.
We recognise that Lloyd's has gone a long way towards making improvements, and of course we welcome that, but we feel that more needs to be done. It is encouraging that, as far as I know, not one single policy-holder has yet been in the position where the market has refused to pay. On the contrary, Lloyd's has continued to function throughout its difficulties, and I hope that it will be able to trade through them and emerge all the stronger. Precisely for the reasons that I gave at the start of my speech, however, the Committee believes that in the interests of transparency and accountability the market would be strengthened and its reputation enhanced if our proposals were accepted.
In conclusion, I welcome the support that the Government and other Departments have given the Committee in terms of the expert witnesses from the Government who have appeared before us. I welcome my hon. Friend the Economic Secretary's positive reply to our recommendations. I urge her to take them seriously and not to allow too much time to elapse before putting a number of them into effect. I hope that the Government, the official Opposition and other parties in the House will feel able to move ahead in a way that will command general support.
§ Mr. Giles Radice (North Durham)
I start by paying tribute to the hon. Member for Hazel Grove (Sir T. Arnold), who chaired the Select Committee in an admirable fashion and produced a report that was broadly agreed—except for our arguments over the relationship between the SIB and the SROs. I thank the hon. Gentleman for his good work and I wish him luck in his continuing chairmanship.
The Select Committee has played a valuable role. Some of us came to the subject with open minds: in my case, it was an open mind perhaps tinged with ignorance. I have certainly learnt a good deal during our 46 sittings. We took a massive amount of written evidence, which seemed to go on and on; we sometimes felt that it would never end. The Select Committee has given the general public a great opportunity to see what is happening in the City and to argue out the case. It has given the institutions a chance to discuss matters in public and it has given the regulators a chance to argue their own corner; they certainly did a fair amount of that during our sittings.
We produced a broadly agreed report; there was a difference of emphasis, but the report is extremely useful. It is useful for the Government—I know that there are some differences of emphasis within Government Departments about what should happen and we have been helpful to them on that. The report is useful for Labour because, if after the next general election we should be in 1162 government, it will provide a mine of information that was not previously available on which to base our Government policy.
The City and financial services are of great importance to the economy and to the general public—given how much of our money is managed in the City of London and how many of the products produced by the financial services industry are used by members of the public. It is therefore essential that the general public have confidence in the effectiveness, openness and honesty of the institutions and firms operating in that sector. That is the case for regulation—for having the markets regulated.
One has to ensure that the regulation does not interfere to such a degree that it piles costs on to firms. But there is a counter-argument which is just as important—I would say more important. Unless the public have confidence in the institutions and firms, we lose out as an economy. The public have been worried about one or two sectors, which has affected business. There is a strong case for good, high-quality regulation.
§ Ms Diane Abbott (Hackney, North and Stoke Newington)
Does my hon. Friend agree that another reason for carefully studying financial regulation is that we now have a much wider and less sophisticated consumer base of financial services products than we did a generation ago? Many more people are purchasing mortgages and private pensions—many more unsophisticated people are purchasing financial services products and they therefore need the best and most effective form of regulation that we can provide.
§ Mr. Radice
I agree with my hon. Friend, whose keen questioning of witnesses I have always valued. She certainly made that point clearly during our sittings.
I shall now turn to what I might call the North Warwickshire point. I congratulate my hon. Friend the Member for North Warwickshire (Mr. O'Brien) on his promotion to the Front Bench, which is well deserved. He moved an amendment that was referred to by the hon. Member for Hazel Grove, which represents the nub of the argument between the two sides—inasmuch as there was an argument, this was it.
We all agreed that there was a problem involving the regulators fighting among themselves—they did so publicly in front of us, so we could hardly avoid drawing that conclusion. There was a problem involving confused responsibilities—some of the witnesses said that. There was a problem about who was responsible for the regulation—a responsibility that has changed over the period. The title SRO is now a misnomer as they are no longer self-regulatory organisations, but have increasingly become—we propose that they should become even more so—organisations containing a majority of public interest members. They are no longer organisations that simply represent the industry professionally—which is, perhaps, how they were originally conceived.
The SROs have changed and the proposal that the Labour party supports—we turned it over in our minds over a long period and were uncertain about which was the best model—is one where the SROs are, in the words of my hon. Friend's amendment, folded into the SIB. We are not envisaging a massive, bureaucratic organisation—on the contrary, there would be two departments: one responsible for retail and the other responsible for wholesale. Our model would keep some of the best 1163 aspects of the SROs such as professional involvement; we need experts who know how the markets work. Such involvement should still be guaranteed, but we would eliminate the unnecessary duplication that occurs at present through the SIB and the SROs. By eliminating duplication, we could reduce costs.
That structure provides a better model and, through our search for consensus, we made a nod towards the possibility of creating that model. In the full body of the report we said that if the regulators could not come together more effectively than in the past, the case for the model that I have proposed today and that my hon. Friend suggested in Committee will be much stronger. In essence, assuming the general election is 18 months away, the intervening time will provide a good testing period to discover whether the two are moving closer together.
§ Mr. Radice
But the period might be shorter, which is the point that I am making. Those 18 months will provide a good testing period in which people such as my hon. Friend the Member for Edinburgh, Central (Mr. Darling) will be able to test to discover whether the organisations are coming closer together and whether the model proposed in the amendment is the best one. The intervening time will provide a good testing period for the regulators.
We produced a separate report and investigation on Lloyd's, although we mentioned the subject in the body of the main report. It was a great experience for me and for many of my colleagues who heard the witnesses who appeared in front of us. I think that one must conclude, as the Committee did, that Lloyd's represented a massive self-regulation failure. That is why the Committee was persuaded that there should be an independent external regulator who is answerable to the Treasury. There can be no practical argument against that case. The Government, even in their dying days, should accept that argument—as I hope that any future Labour Government would. It is a helpful and a sensible move that would help to restore the worldwide reputation of Lloyd's, which has taken a considerable battering in the past 10 years.
My last point refers back to the comments of the hon. Member for Hazel Grove. I have learnt a lot from my service on the Select Committee. I was not a member of the Committee at the time of the collapse of Johnson Matthey, but I chaired the sub-committee that examined the collapse of the Bank of Credit and Commerce International, because the then Chairman, as a chartered accountant, had a vested interest and did not wish to become involved. I examined the BCCI case very carefully and I concluded that it represented a supervision failure on the part of the Bank of England. I was not convinced then that the Bank's supervisory role should be separated from its monetary responsibilities, although we laid down some clear proposals to improve the Bank's supervisory capacity and abilities—some of which it followed and others of which it did not.
We then saw the collapse of Barings. Most people who considered it objectively would conclude that the Bank of England did not do a very good job supervising Barings. Quite a lot of evidence in the Singapore report—which makes very interesting reading—points to that 1164 interpretation. I am not embarking upon a witch-hunt against the Bank of England, but we must have more effective supervision.
In the report, the Committee asks: is the Bank sufficiently divorced from the culture of the banking industry? Some might say, although I do not believe that it does, that that conflicts with the next question: does the Bank have the necessary expertise to be an effective regulator? One of the problems with Barings and BCCI was that the Bank of England did not know enough about the market that it was supposed to supervise. We have asked those questions, but as yet we have not reached any conclusions about them.
I have now changed my mind; I have been swayed by experience and by recent events and I am now in favour of a separate body. When the Committee visited Frankfurt, we talked to officials from the Bundesbank who argued very strongly that the bank's reputation as a monetary body was more powerful because it was not responsible for bank supervision. Therefore, if mistakes were made in the supervision area, they would not affect the bank's monetary position. I think that that is quite a strong argument and the Bank of England, which is now trying to develop its role in monetary affairs, should consider it very seriously.
§ Ms Abbott
Does my hon. Friend agree that, apart from the points that he mentioned, there are three problems with the Bank of England as a supervisor? First, it is wedded to a hands-off, laissez faire form of supervision. Specifically, it conducts much less on-site examination than the supervisors that we visited in America and in Europe. There is too much stress on the personal character of the people leading the institution as opposed to the detail of checks and balances.
Secondly, the Bank's perception of its role as supervisor is rather different from the way in which the public perceive it. It believes that its role is to ensure that there is no risk to the system and once it is sure of that, it tends to think that its job is done. However, the ordinary punter in Hackney or North Warwickshire tends to think that the Bank should offer some degree of security to depositors and consumers. Thirdly, the Bank of England cannot be shifted from its belief that it is absolutely the best supervisor in the world.
§ Mr. Radice
I congratulate my hon. Friend on that brilliant mini-speech in which she encapsulated her arguments—or perhaps trailed the arguments that she will use on another occasion. She is absolutely correct: they are the proper arguments to deploy.
I have now come around to the view that bank supervision should be conducted by a separate body. I do not know the Labour party's position in that regard, but the Government continue to support the Bank of England and its view that banking supervision should not be separate. I think that it would be better for the Bank of England, for banking supervision, banks and the general public if we were to make that reform.
I think that I have spoken quite long enough. This is my last speech in the House as a member of the Select Committee—I had my last hurrah in Committee when the Chancellor appeared before us yesterday. I believe that Select Committees perform good work. The Treasury and Civil Service Select Committee comprises a curious body of men and women who have very different and disparate 1165 views on many matters. It is quite remarkable how, more often than not, we manage to produce agreed reports. A key feature of the Select Committees is its power to send for persons and papers; that is what makes Select Committees powerful. Mr. Andrew Man, the brilliant columnist for the Independent—
§ Mr. Radice
Yes, I think that he is brilliant. He wrote a book entitled "Ruling Britannia", in which he makes the enormous error of playing down the role of Select Committees. He says that interviewers on programmes such as "Newsnight" are much more powerful interrogators than Members of Parliament. That may be so, but they do not have the same powers. They cannot send for the head of the civil service or the Governor of the Bank of England and question them. They cannot call people from Lloyd's to appear before them. Select Committees have an enormous advantage which we must put to good effect because that is what makes our work valuable.
I wish my Select Committee colleagues—if I can call them that—well in their further deliberations. I hope that their next report about the City and regulation is not quite so long in coming as this one was.
§ Mr. Douglas French (Gloucester)
Under class XVI, vote 1, no fewer than 12 documents are listed on the Order Paper as relevant to this debate. Of those documents, the sixth report of the Treasury and Civil Service Committee is unquestionably the most important.
The Committee was ably chaired by my hon. Friend the Member for Hazel Grove (Sir T. Arnold), and other hon. Members who are present in the Chamber served on it. I congratulate them on what is undoubtedly an excellent report. It contains a mine of evidence and information and reaches a number of very sound conclusions—although I am not entirely sure that it would serve the purpose of the hon. Member for North Durham (Mr. Radice), who seems to believe that a future Labour Government could use the report as a basis for financial services legislation. I do not think that he will find himself in that position, but were he to do so, I suggest that the matter be viewed in a rather wider historical perspective. He vouchsafed that he learned things when serving on the Committee, and I am sure he did, but I wonder how much attention he paid to the long history of the subject, and in particular, the long history of the retail side.
The sixth report is the most up to date, but in considering the insurance, savings and investment side of the industry, we must go back to 1982 and 1984, when the Gower report was produced. We have debated the subject almost continuously for more than 10 years, and a number of substantial reports have been published during that time: the Gower report, the Securities and Investments Board report in 1989, the Clucas report in 1992, and Andrew Large's report in 1993. Each was regarded at the time as the report to end all reports, but the debate has continued nevertheless.
During those 10 years, there has been a significant restructuring of self-regulatory organisations. During a five-year period following the Financial Services Act 1166 1986, it was continually said that the Act was not working as well as people had hoped. The Treasury said that such legislation should be given time to "bed down": that was its favourite expression.
When the "bedding down" period became too long to be credible, we were told that it was not appropriate to embark on new primary legislation, because that would send the prospect of a solution to the perceived problems too far into the future. We have been stuck in a limbo, in which practitioners in particular recognise significant deficiencies in the workings of the Financial Services Act, but there is a difference of opinion on how those deficiencies should be rectified and on whether primary legislation is required.
Meanwhile, during those 10 years, the poor practitioners have been trying to run their businesses. They have been faced with rule books and practice directions that have changed, and with consultation papers heralding further change; they have been buried under an enormous burden of constantly changing regulation. That is not the sort of environment in which any business—particularly the savings, investment and insurance business—can hope to prosper.
It is easy to lose sight of the original purpose of the Financial Services Act. I can sum up that purpose in six words, although many volumes have been published that say the same thing: "Sell something suitable and be honest." The attempt to implement that principle, however, has gone seriously wrong. The original intention was laudable, but its execution has backfired and, in some respects, has proved self-defeating.
The original principle was that the client must have a proper choice of product, accompanied by independent advice that came to be described as "best advice". That is a praiseworthy aim in itself, but major institutions found it impossible to implement. Soon after the Financial Services Act, many institutions with household names endeavoured to offer independent advice and a proper choice from a range of products, but one by one they dropped out.
The last two big names to provide such a service were the National Westminster bank and the Bradford and Bingley building society; I believe that the Bradford and Bingley is now the last major institution that is still clinging to the principle of offering independent "best advice". The requirement to offer clients that service has been made so difficult to deliver that institutions have abandoned any hope of doing so. Surely that is contrary to the original intention of the Act.
Another principle was that the client must be given good value. There have been many examples of clients being sold poor-value products. They had been sold life insurance or investment policies whose returns were unreasonably low, or whose surrender values were discounted to a ridiculous extent.
The worst abuses appear to have been removed at the expense of giving everyone poorer value: the overall costs of compliance, especially in the insurance sector, have become massive. Institutions have huge compliance departments devoting their efforts to ensuring that no rules are broken, and ensuring that lengthy procedures are followed. They impose spot checks themselves, or try to ensure that, when such checks are imposed by visiting regulators, they measure up to requirements. 1167 That has used up a large amount of management time in an unproductive way. Moreover, the process has been so costly that products offered by some institutions have become considerably less competitive than they would otherwise have been. After all, the costs of compliance—the costs of the whole regulatory regime—are ultimately borne by the investor or the policy holder: they will come out of his premium or deposit. That is the part of his money that is not invested, which means that investment returns are worse than they would otherwise have been.
That is one reason why business has become so much more difficult to write for the retail sector and the life insurance companies. The institutional compliance costs have become greater than is justified, which detracts from the potential value of the product.
§ Ms Abbott
The Select Committee has already heard all this heart-rending stuff about the tremendous burden of regulation. Before Opposition Members all break down in tears, will the hon. Gentleman answer a question? If the problem is too much regulation rather than too little, why have we seen the horrendous scandal of mis-selling of personal pensions, home income plans and endowment mortgages?
§ Mr. French
I do not mean to sound heart-rending; I think that I am reflecting the views of the management of most leading life insurance companies. Such companies can make an important contribution to our economic life and our business potential overseas.
The hon. Lady picked on three examples. It is true that the industry has failed in those cases, but they do not remotely represent the way in which the industry conducts its business generally. It is possible to identify shortcomings in almost any industry, and the hon. Lady has identified three important shortcomings, but in the context of all the business undertaken by those institutions, even those shortcomings—heart-rending though they may be—are comparatively insignificant.
Another problem that has made life difficult for institutions endeavouring to sell life insurance and investment-related products in particular is the fact-find, which has to be completed whenever a sale is made. I have seen fact-finds that extend to 72 pages. They are for products which may be fairly but not over complex. That is a very thorough approach, but I suggest that it is, in fact, overkill, that it is too thorough. It makes it extremely difficult, even for an honest and straightforward salesman, to clinch a deal that might otherwise have been clinched comparatively easily.
In addition, the sheer drudgery of going through a lengthy fact-find makes the prospective client suspicious and inclined to defer purchasing a policy which he might be well advised to have. It is an example of the best being the enemy of the good, when, in order to ensure that not a single tiny detail is missed, one must go through a procedure that results in the business not being done at all. That is a disadvantage, of course, to the institution, but also to the prospective policy holder.
§ Mr. Forman
Is my hon. Friend sure that all the excessive questionnaires, which I have also seen, are attributable to regulatory obligations? I have a feeling that many of the questionnaires, which no ordinary person is under a legal obligation to answer, exist to create market 1168 opportunities for conglomerate financial institutions which wish to pass information from one part of their activity to another in order to open up other avenues of business.
§ Mr. French
My hon. Friend is absolutely right, but there is also a third explanation. More questions may be asked than are strictly necessary, but only in order to ensure that the approach is very cautious, and that nothing that a compliance officer or regulator might subsequently say should have been noticed was not noticed. That is what I describe as overkill.
Too many questions are asked and too many answers are received, so that the financial institutions are not caught out. If they are caught out, the penalties are severe. I accept, however, my hon. Friend's point that additional information may be thought highly desirable for marketing purposes by other parts of the same institution.
Let me give the House another example of where I think that the regulatory regime is too burdensome. Friendly societies are in the business of selling comparatively small policies, what they call small ticket business involving premiums of, say, £10 or £20 a month. Even though the salesman is selling such a small policy, the full panoply of the regulatory regime falls on him, and the enormous cost of regulation is reflected in the value, or otherwise, of the policies that he sells.
That is acceptable if the policies involve a large premium, or if the sellers are institutions offering a broad range of policies. In the latter case, the regulatory cost of the £10-a-month policies can be shared with that of the £500-a-month policies, so that the cost is evened out. Friendly societies, however, do not have large-premium business. That means that there is a conflict between the cost of regulation within the premiums that they are charging and the Government's present policy, which is to give a tax concession to people paying premiums to friendly societies on qualifying policies. I have evidence that the value of the tax concession in respect of such a policy can be outweighed by the cost of the regulatory regime. That is a ridiculous situation that requires attention.
One of the consequences of the difficulty that the industry has had in following the requisite sales procedures correctly has been the generation of new forms of what are known as direct products. Very often, they are execution-only products, and no advice is offered. Of course, they are attractive, because it is the giving of advice and the responsibility involved in giving it that are expensive. If products can be sold separately from the giving of advice, they are likely to be easier to sell and, if correctly sold, might represent better value for the purchaser.
With such products, however, there is absolutely nothing to prevent the client from buying something wholly unsuitable. That means that they escape the regulatory regime completely, and ever more products are being sold in that way to avoid the heavy regulatory regime that would otherwise apply.
It has become easier to sell such products thanks to the recent improvements in technology. Much has become possible because the telephone and computer can work swiftly together to clinch sales. I believe that the problem will become greater as financial services come to be offered on the Internet—indeed, this is already happening—and become available on a cross-border 1169 basis. There is likely to be a proliferation of direct, no-advice, execution-only products, which escape the regulatory regime altogether even though they may be wholly unsuitable for the person buying them.
I have a high regard for the people currently responsible for the Personal Investment Authority and the Securities and Investments Board. They are undoubtedly trying to act in the best possible interests of the consumer and the industry. Ultimately, there must be common ground between those two interests. However, an independent financial adviser, who is a member of the PIA, came to my surgery last week. He brought with him the PIA rule book, the PIA fact-find—or his version based on what the PIA requires—and copies of 16 consultative documents issued by the PIA or the SIB in the past 18 months or so. He felt that he should have a passing interest in all of them, or that he should at least have read them. He said that, if he were an employee of Allied Dunbar, for example, he would have a department to read the documents for him and advise him when he needed to take notice of them in the daily conduct of his business.
However, as he is an IFA heading a company of only eight people, the responsibility fell on him. He said that there were hundreds or even thousands of IFAs across the country in exactly the same position. One day in every fortnight—or 10 per cent. of his business time—had to be devoted to reading the latest material from the self-regulatory organisation. He suggested that the situation was out of control.
That might be the right way to deal with people proposing deliberately to be dishonest or negligent in their selling of products, but it should not be necessary for that person, as an honest and competent intermediary, to devote 10 per cent. of his time to reading the rule book instead of going out and getting the business on which his living depends. I have considerable sympathy with him. The current rule books are too complex, burdensome and detailed. They work on the assumption—a wrong assumption—that people in the industry will always do a bad job.
In general, all this is doing great damage to the insurance and personal investment industry. It does not help customers, except in a small number of extreme cases. Meanwhile, it is increasing costs and reducing the value of the products on offer. It also renders those products less sophisticated and less tailor-made to the client—the exact opposite of the original intention behind the Financial Services Act.
Moreover, insurance and investment institutions are being prevented from enjoying the sound, thriving domestic market which is so essential if they are to play their proper part in European and world markets. We have a wonderful basis on which to build; this country's institutions are highly sophisticated. They have a marvellous opportunity to do well in overseas markets, but the current domestic market is proving so difficult that what could be golden opportunities are being lost.
I agree with a number, although not all, of the proposals in the Select Committee report. I agree with my hon. Friend the Member for Hazel Grove about placing all responsibility for the retail and wholesale markets with the Treasury.
1170 I should like a greater recognition of the fact that we should not throw the doctrine of caveat emptor out of the window. It seems only right to invest some responsibility in the client for what he is doing. At present, all responsibility seems removed from him. That is why I was pleased to read the recent speech by Andrew Large on this very point. He said:
Over time we may see a shift away from the bulk of the customers placing trust and reliance in financial advisers towards a situation where more of them take full responsibility for their own investment decisions.That is the direction towards which we should strive. I am certain that there should be less prescription. The benefits of a product, and its price, should be clearly presented; but there must not be so many prescriptive rules governing the exact procedures involved in selling the products.
I also believe that regulation requires some cost benefit content. It is all too easy for self-regulatory organisations to make regulations without regard to their cost to the industry. Whenever new regulations are made, some assessment of the likely accompanying costs should be a requirement. I also agree with the proposal to rationalise the SROs. The proposal most often made—one SRO for the retail and another for the wholesalside—commands a great deal of support.
Lastly, we need a vigorous enforcement mechanism and effective redress for people when things go seriously wrong. At present, a huge amount of effort is devoted to ensuring that nothing goes wrong in any sale of any retail product. If something small goes wrong, someone may suffer a small amount of damage. The greater effort should therefore be directed to vigorous enforcement when there have been serious departures from what should happen.
All this leads me to my final conclusion. I have great respect for the Minister who is to answer the debate. I believe I am right in saying that her view is that what we want can be achieved through existing legislation. I, on the other hand, have reached the view that primary legislation will be necessary to reach our objectives.
§ Mr. Malcolm Bruce (Gordon)
I was waiting with bated breath to see what conclusion the hon. Member for Gloucester (Mr. French) would arrive at. When it came, it was not quite what I had been expecting. Most of his speech seemed to be against regulation, so his ending surprised us.
I defer in these matters to other members of the Select Committee, because I joined it only when most of the work had been done and most of the evidence had been taken. I am therefore not as apprised of the issues as is the hon. Member for North Durham (Mr. Radice). Nevertheless, we all have an interest in them.
Whatever our differences of view, no one is looking for heavier regulation. What we want is more effective regulation, to engender confidence at home and abroad. The reputation of the City of London and of our financial services and banking regulations is an important factor in the confidence of the home market and of our European and international markets.
The crises and scandals can have an international impact—the banking scandals are a case in point; the impact of the Lloyd's crisis might be termed intermediate; 1171 then there are the domestic scandals which also affect the reputation of the City. That is why we must all be concerned to find a regulatory framework which is effective, confidence-inspiring and good for the City's reputation, at home and abroad.
The hon. Member for Gloucester rightly said that there is a balance to be struck: regulation must not stifle the flexibility and innovation which are characteristic of British financial service institutions and which render them world class. There is a huge cultural difference between our system and the conservative and cautious approach in Germany to the financial instruments of saving and investment. The approach in the United Kingdom is far more creative and flexible; in general, that means that every pound invested through the City of London will produce a better return. Of course, more risks are involved too.
All this points to the conclusion that we need to get the balance right. We cannot afford another catastrophe at home or abroad, because the City's reputation is already tarnished. If we fail to ensure that the system can anticipate scandals, we will face a problem that could have long-term repercussions for the City's earnings.
It is widely argued now that the self-regulatory organisations are wrongly described. They have become much more formalised; there has been some blurring at the edges, resulting in confusion. There is a clear need to tidy up that confusion. Indeed, some of the problems to which the hon. Member for Gloucester referred may have arisen precisely because of confusion over where the boundaries lie. That could be reduced if the lines of communication were made clearer.
Here, too, a fine balance needs to be struck between practitioners and consumers. Perhaps there should be an over-arching umbrella under which a bilateral division is set up. Even if boards are set up with a slight majority of practitioners, to ensure that regulations are based on knowledge of the internal workings of the market, the effective chair should perhaps be drawn from the consumer side so as to provide balance and confidence.
I certainly do not intend to launch a broadside against the Minister's response to the report, which I have managed to read through quickly. I would say, however, that there was a wait-and-see flavour to her response, suggesting that she is not quite as apprised as we are of the need for definitive action in all these areas. The hon. Member for North Durham pointed out that, after three major banking scandals, it is becoming difficult to believe that the Bank of England is the right institution to regulate banking.
The hon. Gentleman's point about the Bundesbank and the benefit that the Bank of England would have from that separation is powerful. That must be worthy of consideration as we move towards a more independent central bank. The Minister knows perfectly well that I and my party favour an operationally independent central bank and believe in any case that, if we move towards monetary union, we will have to take that step. That being the case, it seems better that the Bank concentrates on its role as monetary regulator, and divests itself of the role of banking regulator.
Having given that as my personal opinion, I say to the Minister that I am not sure about her waiting for the Bank's report—which is presumably the Arthur Andersen report—and the Select Committee report. Although all of 1172 us on that Committee are grateful for the role and status that she gives the Committee, and in spite of the very important points made by the hon. Member for North Durham about the power of Committees to take evidence, the Government should commission their own clearly independent inquiry, at the very least—if they do not accept the argument—to determine whether the separation would be beneficial.
This is no pejorative criticism of Arthur Andersen or any consultant at all, but when the Bank of England commissions a firm of consultants to look into something independently, the consultants tend to work out who the purchaser is and what kind of reply they might be looking for; it is only human nature. The report therefore inevitably falls into the category of being commissioned by the Bank of England.
It is not entirely clear what the Bank of England's view is. Eddie George says that he is relaxed, and is not fighting hard either way. That being the case, the Government therefore would not cause any particular difficulties at the Bank if they were to commission an independent report.
The members of the Committee who worked on the report throughout produced a great deal of detail, a great deal of information and a clear indication that specific steps need to be taken to move the matter forward. It may be that the Minister wishes to leave the decision on action to the next Government. That might be the right thing to do.
But there are one or two useful things that the Minister could do to show that the Government were in control and recognised that we were moving in the right direction. The industry itself has been moving in the right direction, but pretty well everyone one talks to acknowledges that we need a reformed legislative framework. Indeed, there is potential cross-party agreement on the desirability of that.
In his opening remarks, the Chairman of the Committee, the hon. Member for Hazel Grove (Sir T. Arnold), rightly stressed that, whatever the differences among members of the Committee, the strength of common ground is much more important. In that sense, there is plenty that the Government could do to move the matter forward without opening up party differences. I would certainly regret it if the issue became in any way a party political battleground, because the working of these markets, both at home and abroad, is a vital component of the British economy and must be got right.
The system is not working correctly at the moment, and nobody really believes it is. We are exposed, due to the question mark over the reputation of our financial services institutions and the City of London, and we have a duty to ourselves, as well as to the City's international reputation, to do something about it. The Committee has produced a report that points in the right direction, and I urge the Minister to take it up with slightly more enthusiasm than her response suggests she intends to do.
§ Mr. Nigel Forman (Carshalton and Wallington)
I declare my interests as they are registered in the Register of Members' Interests. They are in some way relevant to the debate in the sense that they give me a background in these matters that is slightly more knowledgeable than it 1173 would otherwise be. From that point of view, there is no harm in Members of Parliament having openly declared outside interests.
I congratulate my hon. Friend the Member for Hazel Grove (Sir T. Arnold) not only on the compelling way in which he spoke, but on the highly competent way in which he chaired our Committee through this long set of hearings. He managed with his usual subtlety to produce a well-balanced report and one with which, broadly speaking, I found myself in agreement, even thoughalas—I was not able to be present at the final voting sessions on the report.
It is good that the House had the opportunity to listen to my hon. Friend the Member for Gloucester (Mr. French). Although what he said might not have been flavour of the month with all Opposition Members, it needed to be said. There is another point of view on these matters, which was well reflected in my hon. Friend's speech. I commend him for the way in which he put his case.
I remind the House of the vital importance of financial services to our national economy—both now and in the future—especially services in the City of London, which is almost a form of shorthand for them. I hasten to add, though, that many other financial centres are growing where offices and so on cost less, which are very important. I think of Edinburgh, Brighton, Cheltenham and a number of other places.
First, it is perhaps not widely known that financial services represent about one sixth of our national economy—and the proportion is growing all the time. Secondly, the City of London itself has an unduly—or perhaps I should say very strikingly—high proportion of global equity and bond trading, of foreign exchange transactions, of derivatives trading, of marine, life and non-life insurance and of fund management. That is not just because we are the widely acknowledged leader in our time zone, as it is called, but, I can say quite dogmatically, it is because in certain specialty areas there is no financial centre in the world to match the City of London. Long may that remain. It is a vital national interest that it should be so.
I would like to comment on the collapse of Barings, which has been mentioned in the debate. With the wisdom of 20-20 hindsight, the collapse of Barings may not have been such a bad thing; it was sad, but salutary. I say that because it was large enough to trigger a major review and shake-up of the necessary controls, especially on derivatives and rocket scientists' instruments, but it was small enough not to threaten a systemic collapse either of our financial system or of the global financial system. From that point of view, again with 20-20 hindsight, it has served not only our interests but the wider interests rather well.
Looking at some of the main issues in our report, I should like to say a word or two about first principles. First, the protection of investors and consumers is obviously the main concern of the House of Commons in financial services, and rightly so. Indeed, it was the Committee's main concern. But that protection and general safeguarding of their interests should not be taken to the extent, as my hon. Friend the Member for Gloucester has already said, of removing all need for caveat emptor and of removing all moral hazards. After 1174 all, people are expected to be grown up in most other areas of their life, so why should financial services be a notable exception?
Secondly, it would not be wise for us to over-burden the sector with excessive rules and costs, as my hon. Friend the Member for Gloucester also said. Thirdly, one must recall that all jurisdictions these days—tax and regulatory—are in fact involved in a form of international global competition. It was not always like that, but it is now, in a world of footloose capital and mobile individuals. As a result of that, we have to take account, as must the Treasury, of the danger of driving lucrative and lawful business offshore if our regulatory and tax climate were to become too intrusive.
Fourthly, if we move, broadly speaking, from trust to contract, which is a brief soundbite describing what has been going on over the past 10 years, we must recognise that we are being driven in a more and more legalistic direction. One has only to look across the water to the United States to see the downside of that if it is allowed to be taken too far. Therefore, while protection of the consumer and the investor must be absolutely important, it must be balanced by the rather commonsense factors that I have just mentioned.
My second theme is the structure of regulation, with which the Committee's report is largely concerned. I remind the House, not that it needs to be reminded, that the current structure traces itself back to the free concordat between Lord Parkinson—who is now in another place but who was then Secretary of State for Trade and Industry—and Sir Nicholas Goodison.
The deal was done essentially in relation to the stock exchange. It eventually found its way through to the Financial Services Act 1986. It gave birth to what the hon. Member for North Durham (Mr. Radice) has described as self-regulation. That is a misnomer in today's world. More appropriate would be the term practitioner-influenced regulation. That is what it is and that is what it should be. In other words, it is regulation by consent based upon what is practicable.
We may write as many elaborate rule books as we like—there were some signs that the Securities and Investments Board would do that in the days of Sir Kenneth Berrill—but that merely creates extra problems rather than new solutions. I am delighted that the trend of the SIB was pulled back to some extent by subsequent chairmen. Mr. Large is doing an excellent job and getting the balance about right.
It is worth saying that good regulation is in the market interests of the regulated. That is important. In responsible and reputable markets such as those based in London and other cities in the United Kingdom, practitioners see good regulation as being in their market interests. They want a good regulatory structure within which to operate and they wish to abide by its regulations. Enormously adverse publicity is attracted to any financial institution if it gets things wrong or steps on the wrong side of the line. That demonstrates the strength of my argument.
Paragraph 26 of the Government's response takes up the argument whether there are too many layers of regulation. In the Select Committee, Opposition Members, especially the hon. Member for North Warwickshire (Mr. O'Brien), expressed the view that there are. They argued that rather than having the departmental level, the SIB level and the self-regulatory 1175 organisation level, we should have two rather than three. It was suggested that at the departmental level the Treasury should have sole responsibility.
I quibble only about the desire of the hon. Member for North Warwickshire and his hon. Friends to make three layers into two. On reflection, I think that the three-layer system is satisfactory and, by international standards, is working pretty well. I agree, however, with Opposition Members in their keenness to give the Treasury sole and therefore lead responsibility within Whitehall for arrangements at departmental level. That makes good sense. I happen to know that the Treasury is becoming increasingly geared up for that purpose and is attracting many well-qualified people to its ranks to undertake supervisory functions in so far as they belong in a Department of Government.
If I had to justify the continuation of three layers, which is what I favour, I would argue that the top layer, the Treasury, would provide the necessary public accountability through Ministers to the House for the framework of law and for the broad lines within which the structure operates. The middle layer, which is represented by the SIB, would be there to regulate the regulators. That is the way in which Mr. Large describes his main role. The bottom layer, in a hands-on and day-to-day way, would administer regulation and ensure that wherever possible it was done with the intelligent and active co-operation of the regulated.
As I have said, the regulated recognise that it is in their interests to co-operate and to be on the right side of any line. On my quick reading of the Government's response, which I accept took place only this evening, I was glad to read the concluding sentence in paragraph 35, which states:
The Government considers that the review mentioned by the Committee would be destabilising for an industry which has already seen considerable change and therefore is urging all regulatory bodies to ensure that such a review will not be necessary.I agree with that sentiment and I hope that my hon. Friend the Minister will adhere to it.
I support the idea of the Treasury being given the sole and consequently key departmental role in the three-layer structure, but I would like to hear from my hon. Friend the Minister, when she replies, a little more about the Government's thinking. As set out in the Government's response, it is delphic. Paragraph 26 reads that the Government are quite warm to the idea of having the Treasury as the main Department involved, but adds that
wider issues … will need careful consideration".The House deserves to know what some of those wider issues are. It is unfortunate if the Minister has to be coy. If that is the position, we might have to pursue the matter elsewhere at a higher level.
The present structure is, broadly, working rather well and needs to be left well alone. We should not spend all our time in this place pulling up plants to see how the roots are getting on. There is no decisive advantage in fundamental change. That is the point that I made in some of the friendly arguments that I had with the hon. Member for North Warwickshire when in Select Committee. We used to cross swords on the issue.
The corollary of what I have just said is that the House and legislators generally should remain constantly vigilant about these matters and not be complacent. Our financial services attract some of the brightest and most energetic 1176 in our society, but some of them may be tempted from time to time to transgress. It is vital that we as the supreme regulatory body in the United Kingdom be alert to any danger of mis-selling or malpractice. Aside from that, I do not want to end on a negative note. Let us celebrate the contribution that is made by financial services to the economy, jobs, inward investment and everything else. I hope that hon. Members on both sides of the House will recognise that contribution.
§ Mr. Matthew Carrington (Fulham)
First, I declare my interests as in the Register of Members' Interests. I declare also an interest that I understand is still not registrable, which is that my wife works at the London international financial futures exchange. I understand, as I have said, that it is not a registrable interest but it is something that the House will wish to know before I continue.
It has been a good debate because we have seen what is often apparent in the Select Committee on the Treasury and Civil Service—that is, a measure of strong agreement throughout all parties. I welcome that consensus.
We are not discussing a barnstorming report. Nevertheless, it is a worthy report. It highlights important issues that need to be considered but are not capable of instantaneous solution. Nor should they be capable of it.
I do not propose to go through the details contained in the report. That has been done already, and extremely capably, by my hon. Friend the Member for Hazel Grove (Sir T. Arnold), who chairs so excellently the Select Committee, and by the hon. Member for North Durham (Mr. Radice), whose presence in Committee we shall greatly miss. We are pleased that he has transformed himself to another Select Committee—or that is what we understand—but we shall miss his wise advice and contributions to our meetings.
The report is important because we have highlighted the purpose of regulation. I say that because the purpose of regulation is not immediately obvious. Indeed, the purpose is difficult to define. Regulation varies enormously depending on what we are trying to regulate. One of the most obvious purposes of regulation is to stop wrongdoing. It is clear that the purpose of regulators is to catch crooks. That is the easy part of understanding regulation.
With regard to protection of the public, as we heard from my hon. Friend the Member for Gloucester (Mr. French), protecting the public is a complex business. If we try to protect them in the wholesale markets it is necessary to have a certain form of regulation, whereas in the retail market a very different form of regulation is needed. It is possible to say that the Financial Services Act 1986 has worked quite well in wholesale regulation, but perhaps less well in the retail sector. Not only have enormous burdens been put on to the practitioners in the retail sector, but there have been significant failures of regulation, such as the mis-selling of products, which has already been described.
Perhaps one of the major purposes of the regulator, and possibly therefore of regulation, is really to create transparency. It is to enable people to exercise the right of caveat emptor when they are buying a product, and to know what they are buying. Frequently, perhaps 1177 especially in the retail sector—although I know from experience that it happens in the wholesale sector too—the same product can be packaged so as to make it hard for someone who wishes to buy it to determine from whom to buy it, to the best advantage of the purchaser.
Of course, another purpose of regulation is to avoid crashes, such as that of Barings. Another theme that emerged from our report is that regulation in the banking sector has not been very effective in stopping crashes, and I shall ask in a moment whether that could be improved.
However, the real purpose of regulation is more than all those things: it is to instil confidence in the markets that are being regulated. That was one of the criticisms that came out of our separate report on Lloyd's. The question was not whether Lloyd's is being properly regulated now—although there is no doubt that it was not properly regulated in the past. In some ways, whether it is properly regulated now is not the issue. The issue is whether the people who might place their insurance business with Lloyd's believe that it is being properly regulated. That is the strongest argument for an external rather than an internal regulator for Lloyd's. The question is purely one of confidence.
We have heard about the conflict between the Securities and Investments Board and the self-regulatory organisations. That has led some members of the Select Committee, as well as other hon. Members who are not members of the Committee, to conclude that the SIB should absorb the SROs. In some respects that is a perfectly rational argument, and it is not an argument with a great political element to it. The decision should be made on grounds of practicality and functionality.
Rather as was suggested by my hon. Friend the Member for Carshalton and Wallington (Mr. Forman), I suspect that a system of dynamic conflict between the SIB and the SROs is rather helpful, in that it answers the age-old question: who will regulate the regulator? A regulator's ability to become complacent—and, one must say, corrupt—is substantial. Although none of our regulators has shown any sign of being corrupt, there are examples from all round the world of regulators who have become extremely corrupt, and one does not have to look far, either geographically or back in history, to find them.
There is a great need for somebody who monitors regulators very closely and who, indeed, has a certain amount of conflict over turf with them, so as to ensure that there is a degree of competition.
That leads me on to the role of the Bank of England, especially in the light of the collapses of Barings, of the Bank of Credit and Commerce International and of Johnson Matthey. The question is whether the Bank of England is capable of supervising banks. I do not think that that is an especially political argument. Again, it comes down to practicality, and I would summarise it in a straightforward way.
Do we believe that there is an overlap between the role of the Bank of England, first in its regulation of monetary policy and its management of the Government debt—an important, traditional and large function of the Bank—and secondly, in its ability to regulate the money markets and to provide banking supervision?
Is there a transfer of knowledge between the Bank's management of the various money markets? In other words, by being an active member and participant in the 1178 markets, is the Bank of England able to understand problems arising in the other participants in those markets? Can it see problems arising before they become serious, and can it judge the ability of the management with which it is dealing in other institutions? Can that then feed into its appraisal of those banks and its decisions as to whether they are being properly run?
None of that can possibly be a substitute for the Bank's ability to go in and do a proper audit and inspection of the banks, but it may have access to additional information to which a separate regulator would not have access. If that overlap exists, it is important that it be retained. And the question whether the overlap exists in practice is capable of being determined by a proper inquiry. Possibly the Arthur Andersen inquiry will establish that.
If the answer is that there is a benefit, the Bank of England should retain its supervision of banks. If not, the answer is probably that it should lose that supervisory role. However, I add one caveat, because my experience, having in the long-distant past worked for an American bank that was regulated by the American banking system, is that that system of regulation, which is separate from the American equivalent of the Bank of England, was very bureaucratic and intense, yet not very effective, as has been shown by the number of bank collapses throughout the United States.
Before anyone suggests that a change in the way in which we supervise the banks would, by definition, produce a better system of supervision, we should look hard at the experience in other countries, because it may not necessarily support that conclusion.
The Committee is still in the throes of examining the causes and consequences of the Barings collapse. One of the questions that we need to consider closely is whether the Bank of England can co-operate properly with banking supervisors in other financial centres. One of the big difficulties that we as a Parliament face, and which the Bank of England will also face, is the growing problem of competitive regulation between financial centres.
There is a large and increasing incentive for regulators in evolving financial centres to provide cheaper and less stringent regulation than we provide in London. The consequence of that would be either that the quality of our supervision would decline, or that London would lose business. I am sure that the Select Committee will return to that subject, and I look forward to debates on the Floor of the House on the future of banking supervision in general.
§ Mr. Alistair Darling (Edinburgh, Central)
I start by acknowledging the work of the Treasury and Civil Service Select Committee, which has been praised by every hon. Member who has spoken—[HON. MEMBERS: "They are all on it."] Surely there must be at least one Member present, other than me, who is not a member of that Select Committee. I can praise the Committee genuinely, as I am not a member. In particular, I can acknowledge the way in which the hon. Member for Hazel Grove (Sir T. Arnold) introduced the Committee's report.
I also pay tribute to my hon. Friend the Member for North Durham (Mr. Radice). It would be wrong for me not to acknowledge his work on the present report and on previous reports of the Select Committee. I have always 1179 found his contributions helpful, and equally helpful is the advice that he is prepared to give his colleagues behind the scenes. Of course, my hon. Friend is not leaving us altogether; as is common knowledge, he is moving to another Committee. I am sure that the House will acknowledge his work.
I would like also to acknowledge the work of my hon. Friend the Member for North Warwickshire (Mr. O'Brien), to whom reference was made in just about every speech tonight. My hon. Friend did so well on the Select Committee that he was put in the Opposition's Treasury Front-Bench team and, as a result, cannot say anything tonight. He is here with us tonight, and I can assure the House that he has been saying plenty sotto voce during the debate.
Most hon. Members who have spoken have made the point that the financial services industry is of immense importance to this country. It has been said that that was not fully appreciated 10 to 15 years ago. The industry—broadly defined—employs nearly 2.5 million people, and not just in the City of London. Clearly, the City of London—as the hon. Member for Carshalton and Wallington (Mr. Forman) said—is one of the three main financial centres in the world, and it is unquestionably the major centre in our time zone.
Although we are mindful of the competition from other European centres, London does have a pre-eminent status, and the critical mass is here. It is home to more than 500 foreign banks, and many other institutions from outside the United Kingdom are in London because of its importance in the world. It is very important that no Government should do anything that would discourage people from coming to London and remaining in London. We should do everything that we can to continue to encourage London and to build its reputation. This is an industry we are very good at operating and, for that reason, it must be encouraged.
The industry is not just based in London. Many towns and cities in this country depend on the industry for employment. I represent the constituency of Edinburgh, Central, and Scotland is now Europe's fourth-largest financial centre in terms of funds under management. The industry is important to this country not only as a wealth creator but as a service provider. My hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) made a series of interventions which, taken together, amounted to a speech. She made the valid point that, unlike in the past, most people now have some contact with the industry in terms of buying products.
I shall return later to the question of regulation of the retail end of the market. It is crucial that people have the confidence to deal with the retail end of the market, which will grow more important as more and more people want to make provision for themselves and their families. We want to promote saving and we want to encourage people to save. Therefore, it is important that people are able to make informed choices between products and between product advisers. It is important that there should be as much diversity as possible, so people can get the sort of products they need.
Clearly our discussion tonight has been about the nature of regulation and what it is meant to achieve. One of the objects of regulation must be to ensure that the public interest is met, whereby people who want to buy long-term products are put in the position where it is more 1180 likely that they will buy the right sort of product, and less likely that they will make a mistake. I use those words advisedly, because I should acknowledge at the outset that it is not possible to have a foolproof system of regulation. Nobody is asking for that, and arguing for such a system would waste everyone's time.
I am conscious of the fact that there is some regulatory competition, and the hon. Member for Fulham (Mr. Carrington) referred to that point. I do not think that we should get carried away about it; I do not think that we are quite at the stage where people will leave because of it. However, there are worrying signs. I worry when I see people involved in retail sales setting up bases in Luxembourg and Dublin because of the advantageous regimes there. One wonders how, in the single market, some regimes are able to offer all the encouragement that is not apparently available in this country. The Minister might dwell on that point when she comes to reply.
One of the things that the Government can do in Europe, and I shall return to this point shortly, is to ensure that our institutions are playing on the much-clichéd level playing field.
§ Mr. Forman
The hon. Gentleman will notice that I paid tribute to Edinburgh in my speech. He should avoid the danger of being complacent about the point of regulatory competition. Evidence has come before the Committee, and we know from other sources, that large multinational conglomerate financial institutions are placing an increasing part of their firepower—if I can call it that—in countries such as India, where there are educated and competent people who are well able to do the job, and communist China. Over the horizon lies the prospect of Shanghai becoming a booming financial centre in its own right. In addition, these places do not recognise western versions of intellectual property.
§ Mr. Darling
I appreciate what the hon. Gentleman says, but I made the point that we should not get carried away. There are those—I have not heard any of them tonight—who argue that we should have a minimal level of regulation to compete. I intend to return to this point shortly, and I am conscious of the fact that there are problems which must be dealt with. As the hon. Gentleman will find out, the thrust of what I have to say is that it is necessary not just to simplify the structure of regulation but to revisit the nature of regulation because this country is going down the wrong path and a change of direction is necessary. That has been the Opposition's belief for some time. I caution those who would say that the best thing would be to try to compete with those countries where there is no regulation whatsoever. No hon. Member from either side of the House has said that, but the view exists and it must be dealt with.
The Select Committee covered a wide range of subjects, and I shall touch on one or two before I return directly to the Bank of England and to the SIB regime which have dominated our discussion tonight. I agree in general terms with much of what the Select Committee had to say, but I wish to look at a couple of points briefly.
The first is the question of Lloyd's. We agree that external regulations are overdue and should be put in place. That view is not unique to the Opposition—Conservative Members have mentioned it, and the council of Lloyd's happens to take that view. I hate to inject a note of controversy into the debate, but it is matter of 1181 regret that the former President of the Board of Trade—now the Deputy Prime Minister and First Secretary, or whatever he calls himself—told the council of Lloyd's that the Government would not sanction legislation. The reason for that was perfectly obvious to Opposition Members—it was because of the political embarrassment in which the Government would have found themselves. At least 49 Conservative Members are members of Lloyd's, many of whom are in the Cabinet.
The House may remember the last time we debated financial services in the House. The Opposition started off with a general review of what was happening, but very soon two Conservative Members—one who had lost a lot of money and one who was a member of the council of Lloyd's—started saying things to each other in such a way that outsiders would have found it hard to believe that they were in the same party. I can well understand why the President—as he then was—took the view that the Government wanted nothing to do with the matter.
It is intolerable that the interests of Lloyd's and of the reputation of the insurance market in Britain should take second place to the political embarrassment that the Government would endure if they introduced a further Lloyd's Bill to allow for external regulation. We believe that external regulation is essential and at an appropriate opportunity we intend to give Lloyd's that assistance. That would also help Lloyd's to make the recovery on which it is embarking. I acknowledge, as other hon. Members have done, the work that Lloyd's has been doing.
§ Mr. John Butterfill (Bournemouth, West)
I am a little puzzled by the point that the hon. Gentleman makes. Before I go further, I remind the House of my declared interest in the matter. The hon. Gentleman admits clearly that the council of Lloyd's would be happy to co-operate with any legislation that might be introduced. How might that be embarrassing to the Government?
§ Mr. Darling
The council of Lloyd's was keen for legislation to be introduced. I cannot remember whether the hon. Gentleman was present for the earlier discussion on Lloyd's. He will know that whether it is a matter of controversy to his colleagues depends on where they stand on Lloyd's. It was good of the hon. Gentleman to declare his interest. He might also declare that he has just walked into the Chamber. He may have missed the introduction to the debate.
A section of the report dealt with plea bargaining and enforcement. I caution hon. Members to be careful before institutionalising plea bargaining as a way of resolving problems in the City. The Securities and Exchange Commission in the United States uses it, but its modus operandi is different. 1 argue strongly against buying from the United States an off-the-shelf solution to our problems. That is not to denigrate the SEC. It is an American creation for the American market. I declare an interest as a Scots lawyer. I am wary of importing American legal methods into this country unless there is good justification for doing so.
I want the Select Committee to do some more work to find out whether the regulatory system could be used to better effect in matters such as insider dealing. The law on 1182 insider dealing has fallen into disrepute. There has been a handful of prosecutions in the past 10 years. A number of recent cases, to which I shall not refer, for the sake of brevity, have led the public to believe that the law on insider dealing is not enforced. People who work in the industry will tell anyone who cares to listen that there needs to be a change. Perhaps the regulatory system could help; the criminal law is not working. If there were an effective deterrent, instances of insider dealing would be greatly reduced because people would believe that they had every chance of being caught.
No one is asking for more regulation. I have a great deal of sympathy with the hon. Member for Carshalton and Wallington. We do not need more regulation. We are talking about effective regulation and fewer rules that work. Four rules that work are worth far more than 400 that do not. I agree with the hon. Member for Gordon (Mr. Bruce) that we have an innovative industry. That is why we and everyone else have shied away from notions of supervision or authorisation of products. That would be stifling and unnecessary.
Talking of fewer rules that work, let me return to Europe. Many companies and institutions now face the problem that, in addition to having to deal with the United Kingdom domestic regulatory regime, they have to deal with an increasing number of regulations from Europe as well as meet their international obligations. As we have heard, most institutions in Britain trade throughout the world. Compliance officers frequently have to deal with three or four different regimes. Usually, none of them tries to do the same thing. They are often contradictory and do not always fully equate with the business practice of the company.
One of the reasons why we argue that we ought to be at the heart of Europe is that it is high time that our influence was felt more when regulations are formulated. The European Commission has a tendency to regulate for an industry that does not exist as such across Europe. The structure of the United Kingdom industry is very different from that of the industry in Germany, Italy and other European countries. It is important that the British Government fight for British companies and argue the British corner and that we do not allow ourselves to be lumbered with regulations that impose a burden on our country.
The United Kingdom industry has a sophistication that is not always reflected elsewhere. Our companies and institutions will be at a competitive disadvantage if they face rules and regulations that were never designed for the United Kingdom industry. I am not a Euro-sceptic, despite what I have just said, but the Government could do more.
The Committee examined regulation and supervision. I should like to make a few remarks that I hope will encourage the Committee to look further at certain issues. Such work provides a useful basis for policy formulation by the Government, I hope, and certainly by the Opposition.
When we pose the question, "What are supervision and regulation?", we cannot make the distinction often enough that the City of London—our financial services industry—is many different industries, so a generalised approach to regulation simply will not do. We have to distinguish between supervisory requirements, where we are guarding against systemic failure, and regulation, where we are 1183 dealing with the conduct of business. We must recognise the difference between what is required at the wholesale end of the market, where we are dealing with relations between institutions and the doctrine of caveat emptor can apply more or less unencumbered, and what is required at the retail end, where we are dealing far more with customer protection and that doctrine must apply.
The object of the regulatory system must be geared not only to protecting members of the public from unscrupulous selling techniques or bad advice but to enabling them to make a genuine and informed choice. I would slightly temper the doctrine of caveat emptor because the object of the regulatory system, particularly at the retail end, must be to put buyer and seller on an equal footing.
I must say a word or to about supervision and prudential supervision with particular reference to the banks. On Barings, suffice it to say that we know that it collapsed because of incompetent management. How can a bank shift its entire capital out of the country with no one asking what is going wrong? How could Sir Peter Baring, within a couple of days of the collapse, say that it was all the work of a competitor? I cannot imagine that any competitor could do as much as the company managed to do to itself.
The people who run Barings now should think long and hard about paying bonuses to those who were involved in the collapse of the bank. It sends the wrong signals around the world. Just as we in the House have to think about how others see us, so corporate institutions must do the same. Barings might like to reflect on that and a bit of humility would not go amiss.
The real lessons that we have to learn are for the Bank of England and other regulators. As has been said, Barings was the third major failure with which the Bank had to contend. The Board of Banking Supervision produced a good, but damning, report that should cause us some concern. We were particularly struck by the board's observation in paragraph 14.35 of that report:
We believe the Bank should explore ways of increasing its understanding of the non-banking businesses (particularly financial services businesses) undertaken by those banking groups for which it is responsible".Again, one has to wonder how the Bank of England did not understand the broader financial services activities of the banks that it regulated, given that so much of their profits now come from that source. I trust that the Bank is now doing so.
I also find it difficult to understand why the Governor of the Bank of England is so defensive towards those of us who have been critical. Our criticism has in many ways been remarkably restrained. In the summer preceding the collapse of Barings, the Governor said that there was no need to worry about derivatives because, "These chaps know what they are doing." Those of us outside and who, in whatever capacity, are charged with deciding what supervisory regimes are appropriate are bound to have regard to what the Governor said then and what happened subsequently when Barings collapsed.
The culture of the Bank of England and its attitude to supervision need to change. A new executive director responsible for regulation is to be appointed next week. The Select Committee might want to have that individual before it at an early stage, to find out whether there will be a change of emphasis.
1184 We have heard references to the Arthur Andersen report. Perhaps the Minister will take the opportunity to deal with two matters. I strongly believe that any system is only as good as the people who employ it—that is crucial in supervision and regulation. We have spent some considerable time exploring opinion on the matter and it has been put to me that one of the problems in the Bank of England might be the difficulty that it has in attracting and keeping appropriately qualified staff. There may be pay and status implications. Clearly, the Bank can do a certain amount by finding resources from within itself, in the obvious way, but the Government may have to face up to the fact that it may be necessary to consider the pay structure and the structure of the Bank itself, if it is to deal with an increasingly complex area. Leaving aside whether the Bank has to do so in the long term, in the short term the Government may have to face up to that problem.
There has been much talk about the structure of the regulatory system and it would be appropriate to say a word or two about our view of whether the Bank of England should be the supervisory body. For the sake of completeness, for those who follow our proceedings outside the House, the Financial Times published an interview with me on 10 November which is wholly accurate and which summarises the state of our thinking.
I made several points in that interview. The argument about whether the Bank of England should be the supervisor is finely balanced and we have not reached a conclusion. There are arguments for and against making a change. For making a change is the fact that major structural exchanges are taking place in the industry. The neat distinctions between banks, building societies and insurance companies are disappearing. Indeed, the Building Societies Commission may find that the number of bodies for which it is responsible will diminish quite sharply. It is expected that most major building societies will have moved over to the Bank of England's supervision because of conversion in the fairly near future.
In the light of that, one is bound to ask whether it is appropriate to have the Bank of England, the Building Societies Commission, the DTI and others all concerned with prudential supervision. My guess is that, in the not-too-distant future, it will be appropriate, for that reason if for no other, to revisit the issue of who should be responsible for prudential supervision. At the moment, it is historical accident as to whether an institution comes under the supervision of the Bank of England, the Building Societies Commission or the DTI.
The second argument was touched upon by my hon. Friend the Member for North Durham. If there was a body such as, for example, a banking commission, fully focused on regulation, it might improve the quality of regulation. That was raised by Lord Justice Bingham in the Bank of Credit and Commerce International report and is a model followed in other parts of the world. I accept that there is an argument for that. Against that, the most important feature of supervision and regulation is the quality of people involved; changing, or removing to another office, the brass plate does not resolve the problem. At the end of the day, it is the people who matter.
Despite what hon. Members have said about the reputation of the Bank of England, it still enjoys a formidable reputation and can still attract staff because of its status. More important, it is recognised to have a formidable reputation around the world. We should be 1185 careful about lightly interfering with it until the case is made for change. The argument is finely balanced and we are keeping it under review. We certainly do not want to throw out the good work that has been done by, say, the Building Societies Commission.
Hon. Members referred to the need for international co-operation. One thing that will have caused hon. Members some concern is that when the Singapore authorities published their report into the collapse of Barings, one got the impression that there was an attempt to knock the ball out of the Singapore court, preferably into the court of the Bank of England. In the Barings collapse, there was an obvious dispute between Simex in Singapore and the Osaka authorities in Japan. Such regulatory competition is thoroughly unhelpful.
Hon. Members have said that they are depressed about the turf war between regulators in this country. More worrying, in some ways, is the turf war that results when markets, and therefore regulators, are in competition. The Government need to take the lead because it is Governments who operate in that area.
The Securities and Investments Board met its international counterparts earlier this year. The concluding document was entitled the "Windsor declaration"—strangely enough, because the meeting took place in Windsor. Such co-operation is essential. I agree with what was said about the need to have a lead regulator in the case of each institution. Again, the BCCI case highlighted that need. The hon. Member for Hazel Grove made the point that, in international terms, having one regulator is important. That was supported by Christopher Sharples—who did good work at the Securities and Futures Authority before he moved on—in his evidence to the Select Committee. That again points to the desirability of having one regulator of international standing.
I want to consider the SIB regime, which has been the subject of much discussion tonight. There are two parts to the matter. One involves structure, the other the nature of regulation. The structure needs to be changed as the present system is cumbersome and full of duplication. The view that it needs to be simplified commands increasing support within the industry.
We propose to make the SIB directly responsible for the regime broadly covered by the 1986 Act. We do not want to create a Securities and Exchange Commission and we shall not create a bureaucracy. I do not want an organisation run by lawyers. I can say that because I am a lawyer and I know what happens when organisations are run by lawyers. We no longer need a distinction between SROs and the SIB, as that is expensive. One can see the difficulties with pension transfers, for example, on which both the SIB and the Personal Investment Authority make parallel rules.
Under our system, the SIB would still have practitioner input and two separate operating divisions, broadly along the lines of the Securities and Futures Authority and the Investment Management Regulatory Organisation on the one hand and the PIA on the other. I stress that we want to build on what we have and avoid traumatic disruption. The change that we suggest is radical but incremental, and it would be welcomed. I see no reason why the recognised 1186 exchanges—LIFFE, the stock exchange, Tradepoint, and so on—should not continue, following the American maxim, "If it ain't broke, don't fix it."
I agree with what the Select Committee said about self-regulation: let us end it. It might cause the Home Secretary some embarrassment as he introduced the 1986 Act, although embarrassment does not seem to put the Home Secretary up or down so we should not worry too much about that. Self-regulation is a misnomer. The present system is rooted in statute. The problem with self-regulation is the public's perception that trade interest dominates, which is extremely damaging.
§ Mr. Darling
No, I shall not give way as I want to give the Minister time to reply. I am not being unfair to the hon. Gentleman, as he has not been present for the debate.
The regulatory system has gone completely wrong. The Government are mistaken to think that, by working with the industry and hoping that something will turn up, the position will improve. A radical rethink to this country's approach is required, particularly at the retail end of the market.
As the hon. Member for Gloucester (Mr. French) said, the costs are substantial. The other day, I spoke to a large institution, which reckoned that some 5 per cent. of the cost of selling a product arose because of compliance. Given that it takes some six hours to sell a pension policy, one must wonder whether we are going down the right road. I asked a life assurance office to try to sell me a policy to demonstrate the difficulties. After an hour, I was bored and fed up. I wanted to hear no more about the financial services industry or pensions, and we had not even begun to discuss the product. We were still struggling with how much we spent on groceries each week. I am bound to ask whether that is how to sell a pension. I wanted to know about the product; what happened if I gave it up too early; how much I would receive; what expectations were reasonable.
I often visit institutions where the compliance department is growing faster than the marketing department. That cannot be right. Whenever I attend meetings or lunches, I notice that the compliance officer is always in attendance. I do not know whether that is to watch what the directors say to me or whether it reflects the compliance officer's growing importance. I make those points to show that compliance is getting out of hand. I would tolerate that if the public were happy with it and felt that it was a price that people had to pay. But neither the public nor the industry has confidence in the system, which is why I believe that radical change is necessary.
The system is also irrational. For example, personal equity plans, which are widely sold, have no disclosure requirement on management fees, whereas the sale of pensions and other savings products is regulated and subject to disclosure. I agree with the Select Committee's comments in paragraph 60 about the inclusion of lending within the purview of the Financial Services Act. That is extremely important, and mortgages are a case in point. The selling of a mortgage is often the starting point of the sale of many other products, which is why in the 1980s institutions thought that it was a good idea to buy estate agencies. They thought that if they could collar people at the start, they could sell them everything under the sun. 1187 It so happens that many estate agencies are now on the market, if anyone is looking for one. The selling of mortgages is not regulated, whereas everything else that follows from it is regulated—that cannot be right.
Many institutions are going for execution-only sales, not because that is necessarily what the customer wants, but to avoid the burden of compliance. The entire market is being distorted by a regulatory system that does not work. On a serious note, I have already mentioned that 2.5 million people are employed in the industry and it is an open secret that there will be job losses in the next year or so—perhaps a great many. One of the drivers of job losses is the compliance cost. If we can lift the burden of compliance, some individuals may keep their jobs. We should take that option extremely seriously.
I believe fundamentally that the approach to compliance, in particular the advice by box ticking, is misconceived and wrong. If the late Robert Maxwell had still been with us, he would have ticked every single box that was ever thrust in front of him. Nick Leeson completed compliance forms. In neither case did that stop what eventually happened.
A problem with the self-regulators is that they are becoming increasingly defensive and are producing more rules and regulations to protect their own position. The approach to compliance through box ticking must come to an end. Instead, one should concentrate on education and training. One of the best protections for a lawyer or a doctor is their own professional qualification. They know that if they do anything wrong they will be struck off.
The answer to many of the problems in the financial services industry is to concentrate on education and training, and, having done that, to trust the individual. We will always have problems somewhere, because it is impossible to have a foolproof system, but we should opt for a system based on education and training. We will not get the necessary change unless there is a change in the structure and culture of regulation. Many people look to a Government to give a lead.
We must also look at the role of management. It was management as much as unscrupulous salesmen who sold the personal pensions. It is management that insists on selling targets and which sometimes has a commission structure that makes mis-selling more likely than not. The nature of regulation has not been concentrated on nearly enough and it is something that the Select Committee might like to consider.
The consensus is that the present system is not working and that primary legislation is needed to change it. This is an extremely light Session of Parliament. I understand the Minister's difficulty, because she has been given an instruction from above that the only legislation that the Government will contemplate is that which puts what they call "clear blue water" between them and us. The result is that we have one vote a week. Many people outside who depend on the industry for their livelihood and members of the public who want to use that industry will wonder why the Government are not legislating when such a political and industrial consensus exists about the direction in which we should go.
I must ask the Minister, how many more reports and failures will there be before we get the Government to act? I do not accept the Government's wait-and-see approach, and their hope that something will turn up. That is not the correct approach. Radical change is needed.
1188 Even if legislation were passed now, the lead time between that and improvements being made would be about three years. We cannot wait much longer. I hope that the Minister will accept the urgency of the situation and will announce tonight that the Government accept that changes are needed. It would be a great pity for the industry if it had to wait for a change of Government to get the change in regulation and supervision that most of us would like to see.
§ The Economic Secretary to the Treasury (Mrs. Angela Knight)
This has been a particularly useful debate. I congratulate my hon. Friend the Member for Hazel Grove (Sir T. Arnold) on introducing it. I notice that he said that the Select Committee's report provides a quarry of useful evidence for the future. The hon. Member for North Durham (Mr. Radice) said that the report provides a mine of information. Clearly the consensus in the Committee runs to the phrases used in the House. I should also like to take the opportunity to congratulate the hon. Member for North Durham on his last hurrah. I hope that he enjoys his spell on the Public Service Select Committee as much as he has enjoyed his time on the Treasury and Civil Service Select Committee.
Before answering the specific points raised in the debate, I should like to comment on the financial services industry of the United Kingdom. London, Tokyo and New York are the three largest financial centres in the world. In Europe, Edinburgh is the fourth-largest centre after London, Frankfurt and Paris.
Therefore, while we are here today to discuss financial regulation, we must all remember that we have a fine success story and a thriving industry about which we should all be proud and positive. It would not be so if our regulation were too harsh or if our regulation were too light. We would not have as many foreign banks as we do; we would not have £666 billion under fund management; we would not have the largest and liveliest futures and options market in the United Kingdom if it were not an attractive and effective place in which to operate.
We also have in the City of London a foreign exchange market that is 50 per cent. larger than that of anywhere else, a domestic equity market that is three times the size of Paris or Frankfurt and the greatest concentration of insurers, pension funds and foreign bankers in the world. That good success story does not make me either complacent or blind to glitches or unaware of the need to look to the future, but it means that criticism of our existing system should be balanced, as should be calls for change. The essential combination, as my hon. Friend the Member for Fulham (Mr. Carrington) said, is to have a regulatory system that catches and deals with fraudsters quickly, protects investors and ensures quality professional standards while avoiding a bind that is so tight that the average man, woman or company finds it difficult to operate within it.
My hon. Friend the Member for Hazel Grove raised a number of issues, the first of which was his concern that regulators need properly motivated staff. I agree: it is a professional industry and professional regulators are required. The movement from the industry into regulation and out again, as part of a career projection, is happening. That means that new blood from the industry, well versed 1189 in the clever tricks of the trade, is coming into regulation. That process will benefit not just regulation but the industry as a whole.
Many hon. Members have mentioned the structure of regulation. There is more than one view on it in the House and, more to the point, there is more than one view from those who work in the industry. I agree that there are problems that must be tackled, but I question the call for structural change. First, as soon as open season was declared on the regulatory structure, it would divide both the industry and the regulators between those who wanted change and those who wanted to stick with the status quo. This summer we saw some skirmishes in that sphere, which gave us a flavour of what would happen if the proposal were implemented.
Secondly, having made a proposal, there would be a period of consultation, followed by a period of debate, followed by a period of implementation and then, no doubt, there would ultimately be a compromise. If we were lucky, we might achieve something better, but who is to say that that would happen? We would certainly get something different. If, having put the industry through a period in which it was split between those who wanted change and those who wanted to remain with the status quo and having taken the proposal through the House and achieved a compromise, we then told the industry to implement the proposal, the consequence would be change, which would bring a cost to the industry.
If we wanted to introduce structural change, we would tell the industry that there would be a period of uncertainty for two to three years as the new system was sorted out—and all that just when the existing system was bedding down and making more effective use of the flexibility at its disposal.
§ Mr. Butterfill
I am grateful to my hon. Friend for giving way as, contrary to the impression given by the hon. Member for Edinburgh, Central (Mr. Darling), the miracles of modern science have allowed me to follow the debate from my office while dealing with the work imposed on me by my private Member's Bill, which will be to the great benefit of his constituents.
Does my hon. Friend agree that the problems in the industry exist primarily in the retail and personal sectors and that self-regulation in the wholesale and professional sectors remains almost entirely satisfactory? To impose further change on the retail sector now, when it is just getting over the trauma of the establishment of the Personal Investment Authority, which we should have had in the first place, would impose unnecessary burdens on the industry as a whole.
§ Mrs. Knight
My hon. Friend is quite correct, and that is the point that I was trying to make. I thank him for casting light on the issue, in the same way as he does on our days and our nights. My mission with regard to the Financial Services Act 1986 is to ensure that the current system is working well. The Select Committee report refers to its strengths, and it points particularly to its flexibility. We shall draw on those strengths to make regulation truly effective.
The hon. Member for Gordon (Mr. Bruce) said that the structure of the boards should be examined further. He proposed that the chairmen of the boards of the 1190 self-regulatory organisations should be drawn from the consumer side—I hope that I have not misinterpreted him and that he will not need to set me straight. The composition of boards formed the substance of his point and I agree with comments in that regard.
I also agree that the term "self-regulatory organisation" is a misnomer and I concur that "practitioner-influenced regulation" is a better description. Although I agree with much of the substance of the report, I am concerned about the review that is proposed in paragraph 93. I believe that such a review would prove destabilising for an industry that has already seen considerable change.
Mention was made of home income plans. That issue has caused considerable distress and many investors have received assistance. Prior to the introduction of the FSA, investors had to take legal action with little chance of recouping their losses and I realise that many people face residual debt. We are urging all lenders to look sympathetically on anyone in that position, as I understand that several are doing already. Immediately before the debate began I had extensive discussions with the Building Societies Commission about the matter. We discussed involving building societies in home income plans and voluntarily submitting their cases to the building society ombudsman.
I turn now to paragraph 118 and the way in which the Select Committee has encouraged the Treasury to adopt a more interventionist and active role in the co-ordination of financial services supervision and regulation. I am sorry that my reply to that suggestion was considered delphic. I said that the recommendation raises wider issues that will need careful consideration before final decisions are taken. There are wider issues involved if we are considering bringing all regulation under one Department. For example, we must consider the implications for other Government Departments and for interacting areas of policy. In answering the Select Committee, I clearly indicated Treasury inclinations in that area.
§ Mr. Forman
As far as I know, there is only one other Government Department that could create an obstacle. Can we not talk some sense into the Department of Trade and Industry and give responsibility to the Treasury?
§ Mrs. Knight
I thank my hon. Friend for that comment; I am sure that the DTI will heed his words.
Several hon. Members referred to Lloyd's. My hon. Friend the Member for Chichester (Mr. Nelson), the Minister for Trade, sends his apologies for not being present for the debate this evening. He suspected that the subject of Lloyd's would come up, but he was unable to be here as he had to address a meeting in Nottingham. I have been asked to convey his apologies to the House and to assure hon. Members that he will take up and answer any points raised on the issue.
Lloyd's wrote a letter to hon. Members prior to the debate, in which it says:
Lloyd's remains committed to achieving the successful implementation of its plans for reconstruction and renewal".Lloyd's must clearly undertake that task if it is to resolve its problems. The letter continues:
it is not where regulation is done that is important, but how well it is carried out".Whatever our views on Lloyd's may be, I think that we would all agree with that. Let me remind the House, however, that we have agreed on the need for a 1191 fundamental review of the regulatory regime for Lloyd's that would consider the options of continuing self-regulation and independent external regulation. That review may well not start before mid-1997, as Lloyd's is seeking to resolve various complex problems.
My hon. Friend the Member for Gloucester (Mr. French) made some pertinent points about the retail side, citing a number of reports. I agree with him that there is a need for stability, and that all who work in the sector are strongly opposed to change. I rather liked my hon. Friend's succinct encapsulation of the original purpose of the Financial Services Act in six words: "Sell something suitable and be honest."
During the past few months, I have spent a good deal of time listening to people in the financial services industry. We must work with them to ensure that any unnecessary burdens are removed. That is why I support the regulators' efforts to implement the strategy contained in the 1993 Large review, and, in particular, the emphasis on supervision and enforcement. That must be delivered more efficiently to provide proper investment protection.
I am concerned by what my hon. Friend the Member for Gloucester said about the length of the fact-finding procedure. It need not be over-burdensome. Like my hon. Friend the Member for Carshalton and Wallington (Mr. Forman), I suspect that part of the reason for the long-windedness of the form is that those who drew it up wanted considerably more information than was actually required.
Attention was drawn to the need to ensure that friendly societies are not over-regulated. The Personal Investment Authority is currently considering the decisions reached by a committee that it set up to examine friendly society regulation. As the committee was chaired by the chairman of a friendly society, I am sure that its conclusions will be relevant and positive. The PIA has announced that the training and competence of home service agents will be examined, and proposes the establishment of a new qualification known as the home service planning certificate, which should ease the burden on those who sell on behalf of friendly societies.
We must not forget the invaluable role of independent financial advisers. The high streets in our towns and villages invariably contain an office or shop with a sign saying, "Car, house and other insurance, pensions and financial advice". Those offices are run by men and women who have often learnt their skills in the nearby office of a well-known insurance company, or have been trained in a bank. They are as important to the local community as the butcher, the solicitor, the accountant and the supermarket: they provide general insurance services, and help people to plan for the future. The need for those independent advisers has never been greater; the requirement for individuals to take control of their financial future is obvious.
When we discuss regulation and the future of financial services, we should bear in mind the real need to avoid sweeping statements and generalities. We should remember who we are talking about and what we want them to achieve. No system will ever be perfect, but successful regulation of the retail sector can be achieved through training and competence requirements, disclosure and a lighter touch. We need a less prescriptive regime than the present one. This is the so-called disclosure dividend, of which so much has been said; now, much must be made of it. The regulators and the industry are well aware of my views.
1192 The laws of caveat emptor apply to a considerable extent, so those who buy investment policies must themselves be trained. They need to know what they are asking for and what questions to ask, and they need to understand the replies.
§ Mr. Darling
The Minister speaks of the need to train those who buy investment policies—the public. How does she propose to train the public?
§ Mrs. Knight
There are a considerable number of ways in which we can do it. The first would be to talk about precisely what it is that an investor should be asking. When an individual has decided that he is going to buy a second-hand car, for example, he goes to the car showroom—possibly to four or five car showrooms—and looks under the bonnet, gets in the car, and takes it out for a drive on the road. If he is not confident about his knowledge of the vehicle, he will get a friend to come and have a look. If he is still not sure, he will get the Automobile Association to look it over. Only then will he will spend his money.
The same responsibility for one's actions has to be taken if one purchases a pension—a sphere of which neither we nor the individuals involved have taken sufficient cognisance.
§ Mr. Darling
The hon. Lady surely must accept that there is a substantial difference between buying a second-hand car and buying a pension. The whole point of the regulatory regime is to ensure that the buyer and the seller are put on as equal a footing as possible. The way to ensure that is to concentrate on the training, competence and professionalism of those who sell pensions. The hon. Lady's comparison, frankly, will make many members of the public wonder about the Government's attitude. I think that she should clarify what she has said.
§ Mrs. Knight
The hon. Gentleman's comment is really a bit too much. Individuals must take responsibility for their actions; they must ask questions. It is true that a car is a tangible entity and a financial service is not. There are obvious differences, but that does not mean that individuals can ignore the responsibility that they have themselves to ask questions about the product that they are buying, whether it is a financial service or something else.
The regulatory regime is there to assist the individual and ensure that there is training and competence for the salesman. I do not think that it is right and proper to say that an individual does not have to take any responsibility for his action in the sphere of financial services. He must have the same responsibility as in other spheres.
§ Mrs. Carrington
I agree entirely with my hon. Friend. Information must be provided so that one financial product can be compared to another by an individual who does not have specialist knowledge or training. We are talking about regulation to ensure that the industry provides products that are easily comparable by someone who is not a specialist.
§ Mrs. Knight
My hon. Friend is correct, and that is what disclosure is all about. Disclosure provides individuals with knowledge about what they are buying, which was not previously the case. I say again that each individual has a responsibility to ask questions and think about what he is buying. The Government also have the responsibility to 1193 ensure that there is a working regulatory framework and the other features that have been mentioned by hon. Members. I thank my hon. Friend for his comments and hope that he agrees with what I have said.
I also hope that when the hon. Member for Edinburgh, Central (Mr. Darling) leaves the Chamber, he will think through some of the points that have been made because I think that his comment went a little bit far—perhaps it was on purpose. We are talking about people, companies, independent financial advisers and people's futures.
My hon. Friend the Member for Carshalton and Wallington made the point that capital is footloose and that countries are in competition around the world in financial services, as they are in other spheres. He asked what was being done to ensure that this country takes due cognisance of that fact in its regulatory process. I assure him that we are promoting the competitiveness of the financial services industry in the United Kingdom. We are ensuring that it is in a fit state to respond to the ever-increasing pace of developments in products and techniques, and we are keeping a careful watch on the burdens that our own regulatory system may impose so that the right balance is struck between encouraging innovation and maintaining proper protection for the investor.
I take issue with the point that the hon. Member for Edinburgh, Central made about whether the Government were doing enough to fight Britain's corner in Europe.I can assure him that we are, and in a robust manner. We are arguing in the European Union for an approach to financial regulation that enhances Europe's strengths vis-à-vis the rest of the world, and for an approach that does not tie down too tightly the United Kingdom, which has specialities in this field that other European countries lack. I hope that the hon. Member for Edinburgh, Central will remember that when he takes up this matter again.
We are also fighting to obtain maximum access for our firms in overseas markets, either as part of multilateral negotiations or through bilateral efforts—and by looking at some products. It is quite correct that competition has come from Luxembourg, to name but one country; part of our response to such competition comes in the form of new products, of which open-ended investment companies are an example.
Barings has been mentioned several times in the debate. My hon. Friend the Member for Hazel Grove highlighted the differences, as he saw them, between the Board of Banking Supervision report and the report of the Singapore authorities. I assure him that the two reports come to the same general conclusion, however. The Singapore report may come to firmer conclusions about the motives of certain senior managers, but it is important to remember that the BOBS report did not have access to much of the evidence in Singapore. Both reports have been extremely useful.
Much has been said today and for several months about the Barings collapse. The episode carried serious messages for management in every financial institution around the world. Even those—there were many—who said that it could not possibly happen to them put investigations in hand just to be on the safe side. If there is a silver lining to the whole affair, it is that the entire international financial system is likely to be somewhat more secure as a result.
1194 There are important messages for regulators and supervisors as well. The Governor of the Bank of England has welcomed the 17 recommendations for the Bank in the Board of Banking Supervision's report. The Bank will respond to the board by the end of the year on its implementation of the recommendations, and the Governor expects to send a copy to the Treasury and Civil Service Select Committee once it has been presented to the board.
Arthur Andersen has been appointed to review the way in which the Bank approaches supervision. The report should be completed by next April. The Treasury and Civil Service Select Committee has asked the Treasury to conduct its own review of the role of the Bank as prudential supervisor of banks. With the Arthur Andersen review under way, however, and with the report by the SFA due shortly, together with the Select Committee's decision to undertake its own inquiry into Barings, it makes more sense for the Government to await those findings before deciding whether yet another report is required. A further report before the first report has been completed strikes me as slightly silly; waiting for those reports seems rather more sensible.
The clear message to those who regulate as well as to those who manage financial institutions is that in a fast-moving and changing market the need to be up to date with precisely what is happening and its possible consequences is paramount.
International co-operation has been highlighted in the debate. With the globalisation of business, international solutions are required. We take that very seriously. The United Kingdom is in the forefront of efforts to strengthen co-operation. We have negotiated a memorandum of understanding with several countries. The United Kingdom is an active member of the International Organisation for Securities Commissions and of the Basle banking group. In the summer we hosted a conference at Windsor, to which the regulators of futures and options exchanges from 16 countries were invited. They all jointly issued a declaration on the protection of customers' positions, funds, assets, default procedures and co-operation in emergencies. I can assure the House that we take our responsibilities seriously and pursue them actively.
I end by thanking the Committee for its constructive and helpful report. Although I cannot pretend to agree with every word of it, I do agree with much of it. It is an excellent effort to move forward with the debate on the regulation of financial services.
§ Question deferred, pursuant to paragraph (3) of Standing Order No. 52 (Consideration of estimates).