§ 3.37 p.m.
§ Order of the Day for the Second Reading read.
§ LORD DERWENT
My Lords, in the years since the end of the war hire-purchase has become a widely accepted and much used way of buying motor cars and many kinds of equipment for use in industry, on the farm and in the home. The traders and dealers who supply these goods on hire-purchase need to be financed, and their need is supplied by some hundreds of finance companies many of which were formed in the post war period for this particular purpose. Some of these finance companies obtain a large part of their funds by accepting deposits of money at interest from the public. This Bill is concerned primarily with the public who invest their savings in this way and with the companies which issue advertisements inviting them to do so. As I have indicated, the business of the companies is usually the financing of hire-purchase. But a few finance the management and development of property. The Bill is concerned with any company which advertises for deposits from the public, no matter what the use to which the deposits are to be put.
The need for legislation arises from the fact that advertising for deposits to finance hire-purchase and property 672 development is a relatively new development. It was of little significance when the Companies Act was last before Parliament. The Act of 1948, which in its prospectus sections requires a company to disclose a very considerable amount of information about its affairs before it seeks to raise money from the public by an issue of shares or debentures, requires nothing of a company solely on account of its inviting deposits from the public. Indeed, as the law stands at present, an exempt private company which, because it is exempt is not required to publish its accounts by filing them with the Registrar of Companies, may nevertheless advertise for deposits.
There are, as is well known, many deposit-taking companies which are efficient and which conduct their affairs in a way which benefits both their depositors and the traders and dealers they finance. But events have shown that this is not always the case. Companies have over-estimated the profits to be made from hire-purchase, or they have taken too optimistic a view of the debts owed to them, or they have spent too much on an advertising campaign, or they have offered too high a rate of interest. Whatever the reasons, there have been failures and depositors have lost all or part of their money. The Bill seeks to make failures less likely and less damaging in the future.
There are two main ways in which this question of protecting depositors could be approached. One would be to set up a registrar with powers to demand information, impose conditions, and, when he thought fit, prohibit the taking of deposits. The registrar would attempt to draw up rules concerning such matters as the ratio of cash to deposits, the relation between deposits and risk capital, and the provision for bad debts. He would hope that if his rules were observed a company would not fail, and he would ensure that if his rules were not observed a company did not accept further deposits. The Government have examined the possibility of control of this kind with care. Its special advantage is that, if it could be operated effectively, it would ensure that any finance company that advertised for deposits was sound and unlikely to fail. But the Government believe that in fact 673 such a system could not be operated effectively.
The reason is the very great variety of the hire-purchase and property transactions which these companies finance. This makes it virtually impossible to frame rules which it would be sensible to expect all companies to observe. If the rules gave some of the more efficient and enterprising companies sufficient freedom they would not be demanding enough to ensure that other companies kept out of trouble. If, on the other hand, the rules attempted to guard against failure in all circumstances they would be so strict as to interfere unduly with the way in which a number of sound companies conduct their business. The Government would be doing depositors in general a poor service if in order to protect a few they made it impossible for the many to obtain the current rates of interest on their savings.
The alternative way to protect depositors is to apply to invitations to make deposits the principle on which the prospectus provisions of the Companies Act are based. That principle is that any company may invite the public to subscribe to an issue of its shares or debentures, provided that it first publishes in a prospectus adequate information about its affairs. The principle must of course be applied in a way which takes account of the differences between taking deposits and issuing shares. In particular, it must be recognised, first, that taking deposits is a continuous operation, whereas an issue of shares is a single operation which is usually completed in a short period; and, second, that deposits become repayable whereas money raised by issuing shares stays with the company.
The Bill seeks to protect depositors in this way. It requires any company that intends to advertise for deposits from the public to publish before it issues its advertisements up-to-date information about its affairs; and after it has advertised, the company is required to continue to keep this published information up-to-date. The information required is in the form of accounts. The accounts will be similar to those required by the Companies Act, but they will contain more information, they will be required twice a year instead of annually, and they must be published soon after the end of the period to which they relate.
674 The Bill does not, therefore, lay upon a registrar or the Board of Trade the duty of assessing the merits of a company and then deciding whether it may safely be allowed to advertise for deposits. What it does do is to require the publication of informative and up-to-date accounts. A person contemplating making a deposit will be able to study these accounts and decide, perhaps—probably, we hope—after consulting anyone to whom he may go for further financial advice, whether the company is one to which he is prepared to entrust his money. Similarly a person whose deposit has become due for repayment will have information on which he can decide whether the company is one to which he can continue to entrust his money.
I now turn briefly to the clauses in the Bill. Clause 1 is based upon Section 13 of the Prevention of Fraud (Investments) Act, 1958, which makes it a criminal offence fraudulently to induce anyone to acquire securities. This clause makes it a criminal offence for any person fraudulently to induce another person to invest money on deposit. That is Clause 1 of the Bill. Clause 2 contains in subsection (3) the provision I have mentioned to the effect that before a company advertises for deposits it must deliver the accounts required by the Bill. But the clause is also concerned with exemptions from the Bill, and for that reason it begins in subsection (1) with a general prohibition on all advertisements inviting deposits from the public. It is not necessary in this Bill to control either the banks or the various bodies which are controlled by their own legislation.
Subsection (2) therefore exempts from the general prohibition the banks, the building societies, the friendly societies and the industrial and provident societies. It also exempts, by reference to the Trustee Investments Act, trustee savings banks and local authorities. Subsection (4) provides for exemptions by regulations or by permissions. There are certain classes of advertisements for deposits which are not of the kind with which this Bill is concerned, for example, advertisements for deposits to be used for charitable or social purposes including those concerned with church funds; advertisements made in connection with employee's thrift or savings schemes; and 675 advertisements for deposits with department stores which will be used for future purchases. Advertisements of this kind will be exempted by regulation, no matter whether they are issued by a company, a society or an individual. The power to exempt by permission is required to deal with the relatively few cases where persons other than companies put out advertisements which, if they had been put out by companies, would have been exempted: for example, advertisements by certain banks which are not companies, and for that reason are not exempted under subsection (2).
Before leaving this clause, I should mention that a company, in addition to delivering accounts, is required by subsection (3) to comply with regulations as to the content of its advertisements. These regulations will be concerned mainly with preventing advertisements from being misleading by containing partial information. For example, if gross assets are mentioned there must be an indication of net assets; or if authorised capital is stated, the amount issued and paid up must also be stated. Advertisements will not have to be prospectuses: as I have said, the Bill relies mainly on accounts for the provision of information. Companies of the highest reputation put out short "two line" advertisements, and the regulations will permit these to continue.
Clause 3 gives the Board of Trade power to make the two kinds of regulations I have mentioned; that is, regulations as to the content of advertisements and exempting regulations. A private company, by definition, cannot offer its shares to the public. As advertising for deposits has some of the characteristics of offering shares, it is reasonable to take away from a private company which advertises for deposits the privileges of a private company; in particular, the privilege of making loans to its directors. This is effected by Clause 4.
Clauses 5 to 11 and Clause 13 contain the accounting provisions of the Bill. Clause 5 provides for the accounts a company must deliver before it issues an advertisement, and Clause 6 for the periodical accounts it must deliver after it has advertised. The accounts consist of an audited profit and loss account and an audited balance sheet, and in 676 general they will be delivered within three months of the balance-sheet date. Nine months after the balance-sheet date these audited accounts must be supported by interim accounts which again consist of a balance sheet and a profit and loss account, but cover only a period of six months.
The interim accounts need not be audited. Interim accounts are required in order to get information which is more up to date than would be the case with only annual accounts; and auditing of these interim accounts is not made obligatory in order to save companies from the interruptions to their work which might be caused if they were required to call in their auditors twice a year. I should perhaps mention that, once a company has advertised and become subject to the obligation to deliver periodical accounts, a single set of accounts will serve both as the periodical accounts required under Clause 6 because the company has advertised in the past, and as the accounts required under Clause 5 if the company is to issue further advertisements.
Clause 13 provides for the regulations the Board of Trade will make as to the content of the accounts. These regulations will require the accounts to be based on the accounting provisions of the Companies Act. But they will call for additional information. This additional information will be related to the purposes the accounts will serve, that is, the information of prospective and existing depositors; and it will take account of the activities in which the companies are engaged which, as I have said, is usually financing hire-purchase, but may be financing the management and development of property. The regulations will require a company to describe the business in which it is engaged, to give information as to the extent of its obligations towards its depositors, and to give information about its assets. A large part of these assets will of course be debts owed to the company.
The other accounting clauses deal mainly with subsidiary matters such as the company which has ceased to advertise for deposits and wishes to rid itself of the obligation to deliver periodical accounts, the company which for some exceptional reason cannot deliver its accounts on time, the company which 677 has advertised for deposits before the accounting provisions come into force, and the newly incorporated company which, because it its newly incorporated, cannot be required to deliver accounts containing a profit and loss account covering a significant period. In addition, there is Clause 11 which provides for the supply of copies of accounts to depositors and prospective depositors. A copy must be supplied free of charge when a deposit is accepted, and a copy must be supplied free of charge to any prospective depositor or existing depositor who asks for one.
Clause 12 is designed to provide depositors with a safeguard against the possibility that a company may decide to engage in business of a different nature from that described in its advertisements. For example, a depositor who has put his money in a company which was financing the hire-purchase of motor cars may not wish to leave his money with the company if it branches out into financing property development. The clause provides that if such a change is made, the depositors must be informed of it and given the opportunity to claim repayment of their deposits not with standing anything to the contrary in the terms on which the deposits were made. There are, of course, certain safeguards for the company: in particular, it may inform its depositors of a contemplated change and require them to let it know whether, in the event of the change taking place, they would claim repayment. A depositor must either reply that he would claim repayment or be content that, in the event of the change taking place, the terms on which he made his deposit should remain unaltered.
Clauses 16 to 20 deal with the Board of Trade's power to ask for papers and documents and to petition for a winding-up. At present the Board's power to petition under the Companies Act is very limited and exists only when an inspector's report suggests that a company has conducted its affairs in certain fraudulent, unlawful or harmful ways. But if a company's position has seriously deteriorated, the right course might be to wind it up. Clause 16 enables the Board to petition for a winding; up if the company is insolvent or if it fails to produce the information required in order to ascertain 678 whether it is, or is not, insolvent. Clause 18 enables the Board to make inquiries without the publicity attendant on the appointment of an inspector under the Companies Act. This is important as publicity could hasten the downfall of a company in trouble and do harm to one which in fact was not in difficulty.
Clause 21 is apart from the rest of the Bill as it is not concerned with deposits but with schemes in which the investor is sold a sow or a store pig or some other livestock which is managed for him and said to bring him a profit. There have been a number of schemes of this kind in the past two or three years, and some have failed with losses to those who have put their money in them. The schemes are not essentially different from those which the Prevention of Fraud Act was designed to stop. The clause amends that Act so as to bring schemes of the kind I have mentioned within its scope.
My Lords, my speech has been rather long, but it is a fairly complicated Bill, and I commend it as one which will do much to protect depositors and will do so without making unreasonable demands on the companies which it will affect. I beg to move.
§ Moved, That the Bill be now read 2ª.—(Lord Derwent.)
§ 3.55 p.m.
§ LORD LATHAM
My Lords, this is a modest Bill to which we can, I am sure, give a modest welcome. The noble Lord, Lord Derwent, has explained very clearly its purpose and provisions. As I understand it, the emphasis is a little different from what he indicated. To judge from the debates which have taken place, and the statements made by the Minister in another place, the primary consideration in this Bill is not the vast majority or generality of companies and persons inviting money on deposit but the protection of the public, and especially the small man or small woman, against the nefarious malpractices which have grown up fraudulently and recklessly.
Persons or companies get money from unsuspecting depositors by the dishonest method of promising fantastic returns or rewards. In one case cited in another place the offer was 260 per cent, per annum; and, as if that were not enough, it was to be tax-free. Livestock has 679 been bought and sold, casinos have been established and all sorts of purposes have been advertised by these people who have deceived, tricked and cheated the unsuspecting depositors. This is done by advertising in the Press and elsewhere; by impressive and glossy prospectuses and brochures and things of that kind; and also, in some cases, by personal call. All these tricks and devices have resulted in quite a number of very substantial losses by uninformed and deceived depositors. The tricks and devices to which some people have resorted show how inexhaustible, as it were, are the facilities for roguery in a civilised country and in a civilised economic State.
One of the great difficulties in this matter is that depositors are invited to gamble. Well, if persons wish to gamble they are entitled to do so; but where these concerns go wrong—and must be stopped if possible—is that they invite people to gamble in the name of investment. It is this rapacity, this lively defect in all of us, of which the "wide boys", as they are called, take advantage. Whether this Bill will in fact afford much protection against that type of company or person is doubtful; but at all events, it is an endeavour.
This Bill, like many another Bill recently, is very belated. The Government proposed to do something in this direction as far hack as six years ago. It appeared in the gracious Speech of 1956; it was in the Conservative Party's Manifesto in 1959; and, three years ago, the then Economic Secretary to the Treasury said that the matter was urgent and that the Government would press on with all speed. Now, after six years, we have this Bill. Almost the same delay occurred in connection with the Offices, Shops and Railway Premises Bill: in that case also there was a delay of some six years. If the provisions of the Bill prove to be efficacious in preventing or diminishing the kind of fraud I have indicated, then the delay which has occurred must have meant very serious losses which could have been avoided but for the procrastination of the Government.
The purpose of the Bill being what it is, the Bill does not match up to the problem, as members of all Parties in another place said when it was first intro- 680 duced. It was then described as being "flabby and feeble". It is fair to say that the Bill has been appreciably improved as a result of the unexpectedly lengthy consideration by the Standing Committee of another place. It is a better Bill now, but it is still inadequate. The view is taken that the worst offenders will get away. Some people might say that they get away in any event; but they get away to a larger extent than otherwise would have been the case if the Bill had been strengthened in one or two practicable directions. One should here say that, as the noble Lord indicated, the majority of persons or companies who seek money on deposit by advertisement or otherwise are not guilty in any way of the malpractices to which I have referred, or to recklessness. It is true that the whole trade had a shock in regard to hire-purchase financing resulting from the credit squeeze, but the majority of the persons and companies seeking deposits, whether by advertisement or otherwise, carry on respectable and honest businesses in a worthy and proper way. It is against the minority who do otherwise that protection is so essential.
The added protection sought is, as the noble Lord explained at some length, to close the gap which exists between the provisions of the Companies Act and the Prevention of Fraud (Investments) Act, 1958, because the latter Act does not refer to deposits. That Act deals with and refers to shares and debentures, and accordingly, so I am informed, money which is obtained on deposit would not come within its provisions. It is proposed to close that gap, and also, as the noble Lord stated, to control the issue, the character and the content of advertisements. In addition, it is proposed to require certain accounts to be prepared—periodical accounts, annual accounts, accounts for six-monthly periods—and for those accounts to be sent to the Registrar, to the Board of Trade and to the depositors themselves. This casts a pretty big responsibility upon the Board of Trade, but it should eliminate many of the worst offenders and keep advertisements to fact in place of what they frequently are—glossy fiction.
It has been said that the provisions relating to the preparation and publication of accounts amount to a discipline 681 of accounts. As an accountant, I should not object to that description. Some people might think that the accountants themselves could do with some discipline. But the point as regards these accounts is this: admirable as they may be, what use is to be made of them? They are to be sent to the Registrar, which is the case now with the annual accounts; they are to be sent to the Board of Trade; and they are to be sent to the then existing depositors. But what happens? What the depositors need is not the accounts after they have deposited their money: they want the accounts before they have deposited their money, in order that they may be able to judge as to the soundness or otherwise, the honesty or otherwise, of the undertaking, concern or business which invites them to loan their money on deposit. The trouble is that this information arrives too late.
In any case, how many of the depositors or persons likely to deposit—those persons who are approached by advertisement—know how to search the files of the Registrar of Companies and obtain the information? In another place an Amendment was considered which would have provided that any person who, in reply to an advertisement, was considering whether he or she should become a depositor should be entitled to receive copies of the annual and the periodical accounts which had been issued and which had been sent to the Board of Trade and to the Registrar. After all, an advertisement is what I think is described in law as "an invitation to do business". If there is an invitation to do business, I think the person to whom the invitation has been sent is entitled to have further and better particulars—shall we put it that way? But, unfortunately, that Amendment was, I think, defeated. Another proposal considered was whether the Board of Trade, if they were to come to the opinion, after an examination of the accounts lodged with them—which may go over some period of time—that the company was financially unsound, should then be in a position to stop further advertisements and prevent further deposit money from being received.
So, my Lords, we reach this position. It may well be, as I have said, that this Bill will diminish the risks of loss on the part of depositors who are not informed and who are unable to judge as to the 682 propriety and financial soundness of a particular concern or company. The point remains as to what the Minister is otherwise going to do with the accounts which are filed with him. I gather, from the statements made on the Second Reading of the Bill in another place, that the Minister is relying principally on the publicity in the Press which would result from the publishing of the accounts, if they were irregular in any important way. There may be some publicity. There certainly would be if there were glaring and outstanding irregularities. But it is hardly seemly for the Minister to pass on his responsibility and the responsibility of his Department to the Press, able and helpful as the Press can be in matters of this kind in making known the situation which may exist in connection with any particular concern.
It really does amount to an abdication of his functions, his duty and his responsibility. The Board of Trade have the accounts and examine them, and they should be able to judge whether a company is unsound financially and whether they should forbid any further advertisement. As I have said, we welcome this Bill. We shall seek to strengthen certain of its provisions. In the meantime, I think that the Bill is entitled to receive a Second Reading.
§ LORD TERRINGTON
My Lords, I should like very briefly to welcome this Bill, as someone who is much concerned with day-to-day advice on the investment of money. I welcome it in a general sense for what it sets out to do—namely, to protect the unwary investor in this particular field. And I welcome it in a more particular sense on the question of advertising, for reasons which I would elaborate. I have here an advertisement which has been appearing fairly regularly in a leading weekly financial journal and which is of a type that personally I hope will no longer be permitted once this Bill has become law. With your Lordships' permission, I should like to quote some extracts from it, in order to illustrate my point.
To begin with, the advertisement is headed in bold print with the statement that a certain county "welcomes careful investors". Now this statement, taken in isolation, is obviously quite harmless and is very probably true. But further 683 study of the more normal size print which follows reveals the fact that the advertisement is describing a finance company which incorporates the name of the county referred to and is inviting the public to make deposits. After this description and invitation to depositors, the name of the county appears again, in even bolder print, with "6½ per cent. interest" alongside it. Then, for the first time, in somewhat smaller print, appears the remainder of the title of the company issuing the advertisement.
I am not for one moment trying to suggest that there is anything undesirable about this particular company, of which I must confess I know nothing; and I would make this point absolutely clear before proceeding any further. But I do suggest—and I am certainly not alone in this view—that this particular type of advertising is most undesirable, since it implies some sort of connection with the county council concerned and, therefore, in the eyes of the ill-advised investor, it probably has some special status. Obviously, if the word "the" were to appear in front of the name of the county, as in fact it does at one point in the main body of the advertisement, it would be more acceptable. But I feel that this is more a question of degree and, certainly as it stands at the moment, this heading catches the eye in a way that it is no doubt intended to do, and I suggest that there is no question that this is misleading and deceptive.
I do not wish to labour this point, as Clause 3 of the Bill clearly enables the Board of Trade to make regulations prescribing the form of advertisements and matters which must or must not, be included. Therefore, I presume that such regulations and the form so prescribed will specifically preclude the use of the name of any public body, such as a county council, in a way which could imply, however remotely, that a public body was connected with the advertising. At the same time, while commending this most useful Bill to your Lordships' House, I should be glad of some assurance that the Board of Trade regulations will pay particular attention to this form of advertising, which I feel is very definitely not in the public interest.
§ 4.16 p.m.
§ LORD DERWENT
My Lords, may I thank the two noble Lords who have spoken, in one case for the qualified welcome and in the other, for the wholehearted welcome which they gave to the Bill? May I deal with the first remarks which the noble Lord, Lord Latham, made, in which he said that he hoped that this Bill would put a stop to the fraudulent companies. I think that the Bill goes farther than that. I think that it would deal not only with fraudulent companies, but also to some extent with inefficient companies, companies that have bad managements and have not done well, by preventing them from continuing to advertise without giving the necessary information, just as they do not give the necessary information required of them in their accounts.
§ LORD LATHAM
My Lords, does the noble Lord mean that the Board of Trade are going to determine whether a concern is efficient or otherwise?
§ LORD DERWENT
My Lords, I was merely saying what it was hoped this Bill would do. I think that the noble Lord may be misunderstanding a little the intention of the Bill. The intention is not that the Board of Trade should prevent people from depositing money, except in purely fraudulent concerns, which is a different matter. But if a company is not doing very well, the public should know, principally by the control of advertisements, but also by the publication of accounts, the exact position of the company so that when anyone proposes to make a deposit he is in the position to know what it is desired to know before making up his mind.
We are making no attempt to say that people should or should not invest in this or that company, or that company A is better than company B. That is not the job of the Government or of a Government Department. My own view, though I may be wrong over this, is that the control of advertisements may have an even greater effect than the publication of accounts on fraudulent companies. I think that they will think twice, if they have to "spill the beans" in their advertisements, quite apart from the accounts.
I would say just one word about purely gambling companies, such as 685 casino companies. There is no intention of bringing them into the Bill. At the moment, the semi-fraudulent casino enterprises have largely stopped. But it should be obvious to anyone that the sums of money they draw in are not deposits or investments; they are purely gambling money. What they are saying to people is, "If you want something for nothing, have a go". The Bill is not designed to deal with that sort of thing.
May I say a word in reply to the noble Lord, Lord Terrington? I am grateful for the particular point he has brought up. Under Clause 3, the types of advertisement will be regulated by the Board of Trade. I think the advertisement he is talking about would be covered, but I should be grateful to him if he would send me confidentially that particular advertisement so that we can decide whether it can be stopped by regulations under this Bill, and, if it cannot, whether we ought to take stronger measures. My view is that it can be stopped, but I am not certain; and if he will let me have the advertisement, I shall be glad to look into it. I am grateful to the House for listening to me so patiently.
§ LORD LATHAM
My Lords, with the leave of the House, I should like to make one point. If the noble Lord will look up the circumstances which led first to the introduction of a Private Member's Bill dealing with this matter and later the introduction of the Government's Bill, he will find that the motive was to prevent fraudulent, reckless persons cheating depositors out of their deposits. That was the origin of this legislation. It was not to deal generally with finance houses and concerns which invited deposits, whether by advertisement or otherwise, but in order to protect the public from the malefactions of persons and of companies.
§ LORD DERWENT
I agree with the noble Lord that that was the original intention, and it is the present intention. But it goes some way to providing knowledge to the people where a company is not very sound, but not necessarily fraudulent.
§ On Question, Bill read 2ª, and committed to a Committee of the Whole House.