HL Deb 15 December 1983 vol 446 cc374-83

5.15 p.m.

Second reading debate resumed.

Lord Boyd-Carpenter

My Lords, perhaps I may bring your Lordships back, in every sense, from the frozen North. I have the great pleasure and privilege on behalf of your Lordships' House, and on my own behalf, of congratulating my noble friend Lord Brabazon of Tara on what all your Lordships will agree was an absolutely first-class maiden speech. My noble friend wisely chose a subject of which obviously he has a complete mastery and the House greatly appreciated his speech. I hope my noble friend will allow me to say that it was a particular pleasure to those in this House, and there are many, who knew and admired his famous grandfather, to hear him excelling himself in this House this afternoon since one could not help feeling what pleasure it would have given to that great man to know that the family name was being carried on with such distinction.

Coming to the Bill, I am bound to say that I feel less enthusiasm. Indeed, I am rather less happy about this Bill than about any Bill which has come to us this Session. My unhappiness is increased to almost physical discomfort when I find myself being forced into at any rate some measure of agreement with the noble Lord, Lord Bruce of Donington, because something inside me says that if I agree with him I must be wrong.

This Bill seems to me—and I say this to my noble friend with all deference—to be somewhat contrary to the general philosophy and approach of the Government and of the other measures which Her Majesty's Government have, with the support of many of us, brought forward to this House. The emphasis which has been put elsewhere on competition and on the operation of the law seems to be a little blurred by these proposals. It is impossible to get away from the fact, as stated by the noble Lord, Lord Bruce of Donington, that this involves some interference in the operation of the law in respect of a particular case.

What puzzles me still more about that is why it has been thought necessary to take this action at this stage. It is nearly five years since the reference was made by the Director General of Fair Trading to the Restrictive Practices Court. If there was something so peculiar about the constitutional operation of the Stock Exchange as to make it inappropriate to have its activities examined by that court, one would have thought that that problem and difficulty would have manifested itself some time ago.

What I think is difficult to understand, and which I hope my noble friend Lord Cockfield will seek to deal with, is why it has been left so long, right up to this stage, before taking this action. Has there been some disagreement inside the Government machine which has involved the necessity to resort to legislation? I am sure my noble friend will appreciate that to those of us who do not know the answer it seems strange that if this action was necessary it should be taken at so late a stage.

I hope, too, that when he comes to reply my noble friend will be able to deal with the point put from the Benches opposite as to the enforcement of the agreement between the Government and the Stock Exchange. Of course I accept what was said by one noble Lord, that the Stock Exchange, which is an honourable body run by honourable men, will undoubtedly endeavour to carry out its bargain. But those of us with any commercial experience know that honourable men can differ as to the construction and effect of an agreement, particularly when it is an agreement covering complex factors, as in this case. In the event of disagreement—in the event of the Government being of the view that the Stock Exchange is not fully implementing the agreement—what instruments will the Government have for enforcing their will? As the Bill stands, they are completely cutting out from this area the operation of the monopolies and restrictive practices legislation, so presumably it would not be open to them to resort to that if anything were to go wrong in the implementation of the Stock Exchange agreement.

Also I find it difficult to understand why, as we have been told, it will not necessarily be until the end of 1986 that the system of minimum commission will be brought to an end. It is true that my noble friend Lord Brabazon of Tara, in his admirable speech, indicated that it might come to an end earlier. This is indeed the first that many of us have heard of this, and we should certainly welcome that. As I understand it, in the Government's statements and in the agreement there is no undertaking that these fixed margins should terminate until some three years from now. This is a very long time. On the face of it, it does not seem that the operation is so complex as to require that length of time to carry it out. Indeed, as we have been reminded, the New York Stock Exchange has operated on negotiated commissions for years, and is certainly not an apparently inefficient body. These fixed commissions are a handicap to the international use of our Stock Exchange. They are a discouragement. They are also very difficult to justify in principle.

I know that it is said—and said with truth—that many Stock Exchange firms maintain extremely valuable and helpful teams of analysts and research workers who can advise investors on their investment. This is a valuable service for many people. Those who avail themselves of it should pay for it. But with so much investment now being undertaken by large investors—pension funds, insurance companies, and so on—which maintain their own highly expert teams of investment analysts, et cetera, there is a large proportion of the work of the Stock Exchange which does not require the work of the stockbroking firms' own analysts. The sooner we can get into a system which again accords so much more with our present Government's present policy of letting individuals negotiate, shop around and see what terms they can get in respect of commissions, surely so much the better both for the Stock Exchange itself and for the British economy.

Again I hope that we may be given by my noble friend some encouragement on the lines of the encouragement given by my noble friend Lord Brabazon of Tara. I hope he will indicate that the Government will not be happy in leaving the whole of this salutary change for another three years. I have expressed these doubts. I am bound to say my enthusiasm for the Bill can at the moment be restrained within the limits of decorum. I have the highest admiration for the abilities of my noble friend the Minister. I can only say to him that in the conduct of this Bill he may well need those abilities.

5.26 p.m.

Lord O'Brien of Lothbury

My Lords, although my name is not down on the list of speakers, I hope with your Lordships' indulgence I shall be allowed to say a few words. Perhaps I should declare an interest in that my son is a member of the largest firm of Stock Exchange jobbers. We do not in fact discuss the questions which are before the House tonight to any great extent, our mutual interests lying elsewhere. I should like to preface my remarks by congratulating the noble Lord, Lord Brabazon of Tara, on his admirable maiden speech. What a joy it was to hear a young man speak in this House, as opposed to the old men like myself who tend to monopolise the proceedings!

I am going to take a rather different point of view from the majority of speakers tonight. First, I should like to assure the noble Lord. Lord Boyd-Carpenter, that his instincts are infallible. If he agrees with the noble Lord, Lord Bruce of Donington, he is undoubtedly wrong. I have been a close observer of the Stock Exchange—and I mean close—for nearly 57 years. In the middle of that period, for nearly a decade, I dealt daily in the market, admittedly only in gilt-edge but on a large scale. I think I can claim to have as intimate an understanding of the Stock Exchange as most people who are not actually in it. I have no doubt at all that it is an admirable institution. If my information is not out of date, I think it is now the third largest Stock Exchange in the world, after New York and Tokyo. I am sure that it provides as good a market for the investor as any Stock Exchange in the world.

I am not wishing to suggest that it is a perfect institution—what human institution is? But I have no doubt at all that it serves, and has served, the public well. I am equally sure that the original reference to the Restrictive Practices Court was a great mistake. It ought never to have been made. It has wasted a great deal of time and resulted in a lot of money being spent unnecessarily. I do not know whether the reference was made because of inadequate advice to Ministers or because of Ministers' own shortcomings. My experience is that such situations are usually a blend of both.

I have been a strong believer all my life in self-regulation—self-regulation per se in any area but particularly in the City of London. I do not say that self-regulation is something which should go on untouched. It should be subject to the approval of public opinion, to the comments and criticism of informed persons and to correction when those criticisms seem to be valid. I recall when there was great criticism of what was going on in the area of take-overs in 1966–67, when I was governor of the Bank of England, and when I created the take-over panel, which, I think, after 17 years has proved that self-regulation, reinforced by official intervention, can be even better than it was before. I think it is fair to say that Lloyd's, after the passage of its new Bill and with its recent troubles having come under public scrutiny, criticism and comment, has now reinforced its own self-regulation in a way which can only be good for its future.

As I say, I am a great believer in self-regulation. One cannot get self-regulation through the operations of a legalistic system—through a Restrictive Practices Court—and still less through the establishment of an SEC on the American lines, to which I should be strongly opposed. I give my very strong support to the Bill. In reference to what the noble Lord, Lord Mais, said about possible criticism from the European Community, from what I have seen of markets in Europe, they cannot stand up to open competition in the way that ours can. I do not greatly fear criticism in that field.

I think that the combination of the Department of Trade and the Bank of England, as provided for in this Bill, to over-watch the self-regulation of the Stock Exchange, keeping it on the rails, opening it up with flexibility and understanding, with an enlightened understanding of the way the world is changing in the financial field, and becoming, as it has been, for the past 20 years or more, more and more international, will produce a result which will be far better than could ever have been obtained through the action of a Restrictive Practices Court. I strongly support the Bill.

Lord Bruce of Donington

My Lords, the noble Lord has been kind enough to confer upon me the accolade of his dissent before he sits down will he say, following his argument, that he would advocate the repeal in its entirety of the Competition Act 1980, the Fair Trading Act 1973, and the Restrictive Practices Act 1976?

Lord O'Brien of Lothbury

Indeed not, my Lords.

5.31 p.m.

Lord Taylor of Gryfe

My Lords, I too should like to welcome a new voice into your Lordships' House and, as the noble Lord, Lord O'Brien, has said, how good it is that we have young and experienced Members of your Lordships' House to guide us in our considerations of complex matters such as the business before us this afternoon. I hope that the noble Lord, Lord Brabazon of Tara, will not be detained by Stock Exchange duties to an extent which will not permit him to pursue these matters in the Committee stage of the Bill.

May I just say a word about the point made by my good friend, the noble Lord, Lord O'Brien? The reason why this matter was referred to the Office of Fair Trading was that there was clear evidence of restrictive practices, and that is the purpose of the office: to examine in all areas of our industrial and financial affairs evidence of restrictive practices.

Despite the fact that we all prefer self-regulation to Government edict on all matters, I doubt whether the changes which have been announced today by the noble Lord, Lord Cockfield, following on the exemption of the Stock Exchange from the Restrictive Practices Court, would ever have appeared if the Stock Exchange had not been threatened with the possibility of legal action. I should like today to pay tribute to Sir Gorden Borrie and the office of Fair Trading over which he presides, for doing the important background work for five years and then, at the last stage, being frustrated by the exemption which is contained in this Bill.

I agree completely that it would have been wrong to have had this matter referred to the courts; I do not think the adversarial environment of the courts is the right place to pursue this; but at the same time there is no reason why if we approve this Bill there should not he a continued investigation by the Monopolies and Mergers Commission to supervise the effect of the changes which are promised in it. It is likely that on the Committee stage we on these Benches will wish to move amendments which will provide for a continuing role for the Monopolies and Mergers Commission.

I very much welcome the extremely lucid and helpful statement made by the Minister this afternoon in which he outlined just what were the consequences of the agreement which had been reached. The field of negotiated commissions is certainly an area where there is an element of fresh winds of competition. As the noble Lord, Lord Boyd-Carpenter, has just said, most of the large investment institutions in the City have very substantial economic analysis departments through which they offer guidance on investment to their clients. They should therefore be permitted to negotiate terms and commissions which would compensate them to some extent for the work which they do as they are riot dependent on stockbrokers for their decisions.

I very much welcome the provisions which are now made for the establishment of the minimum commissions. I also welcome the steps that have been taken so promptly to permit brokers to deal in international securities. I think this is bringing them into the real world of international finance. So far as the single capacity is concerned which the noble Lord, Lord Brabazon of Tara, was anxious to defend, I am sorry to say that the Government do not bring much comfort to him. I shall read now from the Financial Times an interview with the Minister of State concerned with these matters: he conceded then that single capacity might not be possible once commissions are negotiable". I think that is a reasonable conclusion. He goes on to say: Although the broker/jobber distinction will probably disappear, investors may be protected in the same way as in the U.S., with market makers and all transactions being compulsorily recorded and published". I think that the disappearance of single capacity will not necessarily jeopardise the protection which the investor is entitled to secure. Again, I have no objection at all to the new arrangements which are being made to enable purchase of shareholdings by outsiders in Exchange members. This is a highly dramatic change and the full implications of it may be read daily in the Financial Times with the acquisitions which are now being made by outside shareholders in member firms. This is probably not a bad thing.

I am not so sure that the arrangements which are being made for monitoring these changes are desirable or effective. With due respect again to my noble friend Lord O'Brien I think that we have to look at the Bank of England's role in relation to the City in this matter. While I would never reflect on the integrity of the Bank of England, they have too many conflicts of interest in the City to be a judge of the Stock Exchange in terms of its competition and its efficiency in providing funds to the public and private sectors, and I would have thought that the Council for the Securities Industry might have been a better body, but the Bank of England has made it clear that it will not cede its primary supervisory role to the CSI in the foreseeable future.

I think this is an area which has got to be examined quite objectively to see just what the role of the Bank of England is in this regard. Incidentally, when this matter was discussed in another place it was pointed out by one speaker: At the same time, the Government—rejecting the judgment of four previous Secretaries of State—have ridden roughshod over the considered advice of the Office of Fair Trading, without even consulting the Council for the Securities Industry whose chairman and vice-chairman are appointed by the Governor of the Bank of England. Their responsibilities include: to keep under constant review the evolution of the securities industry, market practice and related codes of conduct and to scrutinise the effectiveness of existing forms of regulation and the machinery of their administration". [Official Report, Commons. 22/11/83: col. 201] I should have thought that considering these responsibilities, the CSI might have been the appropriate body to take a continuing interest in these affairs, although it would appear that the Bank of England is anxious to preserve its position.

Similarly, I very much welcome—I am sure we all do—the introduction of lay members to the Stock Exchange Council and the introduction of appropriate appeals procedures for the membership. The introduction of a greater degree of competition in this area and the abolition of the closed shop are both ideas which appeal to the Social Democratic Party as being very much part of our general philosophy. I am glad that this at last is seeping into the Stock Exchange. We look forward very much to the consideration of the Bill on Committee stage when perhaps some of the views that I have mentioned can be discussed. We also look forward to the contribution of the noble Lord, Lord Boyd-Carpenter, at Committee stage. It should be a most interesting debate.

Lord O'Brien of Lothbury

My Lords, before the noble Lord. Lord Taylor, sits down, may I say for the record that I had intended to say that the one good thing to come out of the Restrictive Practices Court reference was the amount of information obtained. If that hastens reform, so much the better. I would not want anyone to think that I am against reform as such, but it has to be sensible reform in the proper quarter.

5.41 p.m.

Lord Cockfield

My Lords, I should like to start by congratulating my noble friend Lord Brabazon of Tara on a most interesting and well-informed maiden speech. He has a very direct knowledge of these matters. It is always of great value to have views expressed in your Lordships' House by someone with day to day experience of the matters about which he is talking. From this point of view, we were also most interested to hear from the noble Lord, Lord O'Brien, and the noble Lord, Lord Taylor of Gryfe, both of whom, while not members of the Stock Exchange, have a very close knowledge and experience of financial markets.

The noble Lord, Lord Bruce of Donington, referred to the Bill as being an interference with the due process of law. I cannot possibly accept that interpretation of what the Bill represents. The Bill is not an interference with the due process of law. It represents a decision by Government that the existing law is wrong and should be put right. Nor is it true that action of this kind is unprecedented. The noble Lord, Lord Bruce of Donington, is himself a distinguished accountant, and he will be well aware of numerous cases in which action not dissimilar to this has been taken in the fiscal field. May I refer him, for example, to Section 15(7) of the Finance Act 1971 which overturned the decision in Restorick v. Baker (47 Tax Cases 116)? The law in that case was changed retrospectively, the only exception being where there had been a determination by the commissioners or a court had actually given judgment. Again, Section 86 of the Finance Act 1981 overturned the decision in Berry v. Warnett despite the fact that in that case judgment had been given in the Court of Appeal and that judgment was under appeal to the House of Lords but not then decided. The position simply is that in matters of this kind the decision as to the content of the law is one for Parliament and the Bill therefore is a very proper Bill in that respect.

The noble Lord, Lord Bruce, also drew attention to the decline in the number and importance of private investors. We share his concern on this point, which is due, in part, to the nature of tax provisions which tend to favour investment through certain kinds of institutions. We would hope that the freeing up of the Stock Exchange under the proposals in the Bill will improve the opportunities open to private investors. The noble Lord, Lord Bruce, and, indeed, my noble friend Lord Boyd-Carpenter referred to the fact that the decision to refer the case to the Restrictive Practices Court—a decision which, incidentally, is taken by the director general and not by the Minister—had been upheld both by the right honourable gentleman who was Secretary of State for Trade in 1969, Mr. John Smith, and also by my right honourable friend Mr. John Nott, as he then was. Sir John Nott as he now is, in 1979. But both those decisions were taken very shortly after the first reference was made, and it would have been most remarkable if, at that stage, there had been a change in front. But many years have passed since then and there has been a very considerable change in the background against which a decision has to be taken. In particular—and I think it is important to make this point—the Stock Exchange has progressively shown a greater willingness to adapt itself and to abandon many of its restrictive practices. This is a factor of major importance. It was the judgment of Government that the continuation of the case would prevent the evolution of the Stock Exchange along lines that would result in greater competition and fewer restrictive practices.

The question was also raised by the noble Lord, Lord Bruce, and the noble Lord, Lord Mais, raised very much the same point, as to why the Stock Exchange was being removed completely from the ambit of the Restrictive Trade Practices Act and not merely for a period of time. We think that it would be undesirable and, indeed, unnecessary to introduce an exemption which would limit it in time in this way. In the extremely unlikely event of the kind of situation envisaged by the noble Lord, Lord Bruce of Donington, occurring (and the monitoring arrangements have been established specifically to enable the Government to see whether the agreement is being strictly observed) there would then be a totally new situation. What would then happen and what action should be taken would depend to a large extent on consideration of the conclusions reached by Professor Gowers' report on investment protection. As my noble friend Lord Brabazon of Tara has said, I, too, believe that the Stock Exchange, with its reputation for its word being its bond, will comply with the letter as well as with the spirit of the agreement that has been entered into.

The question was also raised by the noble Lord, Lord Bruce of Donington, and by the noble Lord, Lord Mais, of the date of 1986 which has been inserted into the agreement. That date relates only to the agreement to dismantle minimum commissions. It was set in effect as a terminal date but with the hope and expectation that much progress would be made long before that date occurred. But it was felt that, in view of the magnitude of the changes that were required, it was only right and proper to give the Stock Exchange sufficient time to absorb the impact of the changes.

So far as the other changes relating to membership, the appeals bodies, the introduction of outside capital, and so forth are concerned, no such date has been fixed. The reason for this is that we would expect these changes to be made more promptly than that and, indeed, there is every evidence that this is happening. The noble Lord, Lord Mais, suggested that the Secretary of State had ordered the Director General of Fair Trading to stop the proceedings. This was not so. When my right honourable friend announced to Parliament his intention that legislation of the kind we are now considering should be brought forward, the Stock Exchange applied to the court for an adjournment. The court granted such an adjournment to allow time for the legislation to be passed. The director general did not oppose the adjournment. Perhaps, at this stage, I may say—much the same point was made by the noble Lord, Lord Taylor of Gryfe—that the action of the director general in the pursuing of the Stock Exchange, if I may use that term in its technical sense, was one of the major factors in making the Stock Exchange willing and prepared to make very substantial changes in its rules and in its practices. The trouble, the difficulty or the problem that the Government originally faced in this field was the total unwillingness of the Stock Exchange to move. Against that background it is not surprising that both the right honourable gentlemen Mr. John Smith and my right honourable friend Sir John Nott (as he now is) should have felt that they could take no action on this case. But because of the pressures applied, the Stock Exchange has in fact made a very great movement in the direction of dismantling these restrictive practices.

On this point which was specifically raised by the noble Lord, Lord Mais, perhaps I might say—and I give this simply as a matter of information—that the director general identified 165 restrictions. Of those he was to challenge 59 as not being in the public interest, although of course the Stock Exchange did not accept that. The remainder of the restrictions he was not prepared to challenge. Of the 59 restrictions which were challenged, 52 relate to single capacity, minimum commissions or membership, which are the three major issues which we are now considering. That leaves a balance of only seven, six of which concern general regulation and one is an anti-tax avoidance provision to which I think no reasonable objection would be taken. So in fact what has happened is that the agreement which has been entered into by the Stock Exchange certainly deals with the major causes of concern in this field.

There was some suggestion from a number of noble Lords that the Government should closely follow developments and that the Stock Exchange should be required to report to Government what progress had been made. Of course, the monitoring arrangements which have been set in place are specifically designed for that purpose and it is intended very seriously that the Government themselves, through the Department of Industry, and the Bank of England, who have very great experience in this field, will be monitoring what goes on and will report to the Secretary of State. It follows, therefore, that information about what is happening in the Stock Exchange towards the implementation of these agreements will be a matter of public knowledge.

The noble Lord, Lord Mais, also raised the question of the EEC competition rules. The rules of the Stock Exchange have in fact been notified to the Commission in order to seek clearance under the competition rules. The Commission has not so far sought any changes in the rules of the Stock Exchange. Obviously I cannot forecast what future action might be taken by the European Community, but that is the position as it stands at present.

My noble friend Lord Boyd-Carpenter raised in some detail the question of why we should wait until 1986. I think that I have covered that point adequately. However, as I said in my speech at the beginning of this debate, the agreement is that there should be no unreasonable delay and 31st December 1986 is stated to be, "at the latest". Very considerable change has already occurred and we would expect to see this tempo of change continue.

The question of the involvement of the Council for the Securities Industry was raised by the noble Lord, Lord Taylor of Gryfe. Perhaps I might say that we have been in touch with the CSI. Our own judgment is that the Bank of England is a more appropriate body to monitor the performance of this agreement. The chairman of the CSI, Sir Patrick Neill, in fact issued a press notice on 29th July, when the Restrictive Practices Court adjourned the Stock Exchange case, expressing approval. We have undertaken to consult the CSI, and Sir Anthony Rawlinson, the Joint Permanent Secretary at the Department of Trade and Industry, met Sir Patrick Neill on 6th October.

I hope that I have answered the important issues which have been raised in the course of this debate. I should like to make one comment in conclusion. I realise that this is a contentious measure and I much appreciate the moderate terms in which views strongly held on both sides have been expressed.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

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