§ 4.14 p.m.
§ Lord Lucas of Chilworth
My Lords, it might be for the convenience of the House if, with the permission of the House, I repeat a Statement on financial services which is now being made in another place by my right honourable friend the Secretary of State for Trade and Industry. The Statement is as follows:
§ "With permission, Mr. Speaker, I wish to make a statement about the Government's proposals to establish a new regulatory framework for the financial services industry. These proposals are published in a White Paper which I have today laid before the House and, subject to the parliamentary timetable, I plan to introduce a Bill in the next Session for their implementation.
§ "Modern technology and intense international competition are bringing about rapid changes in the financial services industry. The responsibility for 582 responding effectively to these changes lies principally with the industry. The Government's task—in this sector as in others—is to create an environment in which it can do so. This is best done by allowing market forces to operate responsibly but without unnecessary constraints, in a way which promotes efficient and competitive business.
§ "A prerequisite for an internationally competitive industry is a clear regulatory framework within which practitioners and customers can deal with confidence, and which safeguards the interests of investors. This regulatory framework must be capable of adjusting to changes in the shape of the markets, and of accommodating rather than stifling innovation.
§ "This, the proposals set out in the White Paper are designed to achieve. They will assist enforcement, deter fraud and malpractice, improve disclosure and lay down the principles on which business should be conducted. The proposals cover both a new regulatory framework and a new institutional structure through which it will work.
§ "First, the regulatory framework. This will be based on new and comprehensive definitions of investment and of investment business. It will be an offence to carry on an investment business in the United Kingdom without authorisation. To obtain such authorisation, an investment business will have to show it is fit and proper and will be required to observe detailed rules for the conduct of business based on principles to be set out in the legislation. Breach of these rules will be subject to sanctions up to and including the withdrawal of the authorisation to trade. There will be a number of important further changes. I intend to rationalise and update the legal provisions dealing with offer documents and the advertising of investments, first to make clear what must be disclosed and second to establish standard provisions on civil and criminal liability for omissions and mistakes. I also propose to liberalise some restrictions on the unit trust industry and enable it, subject to appropriate safeguards, to offer a greater variety of schemes to the public. Commissions and other payments to intermediaries will be disclosed. As far as is possible, the marketing of life assurance contracts will be treated in a manner similar to the marketing of other investments.
§ "I now turn to the institutional structure designed to implement the new regulatory framework. It is based on my belief that the crucial tasks of authorising investment businesses and keeping high standards of business conduct amongst those so authorised can be discharged much more effectively by those closest to the market—practitioners and their customers—rather than by Government. Malpractices can be identified and dealt with more quickly by these people than by Government regulators.
§ "I therefore intend to build upon what is best in self-regulation. I shall propose legislation to confer on the Secretary of State the necessary powers to grant authorisation to investment businesses; but also to enable him to delegate regulatory responsibility, including the power of authorisation, 583 to one or more bodies composed both of those who provide and those who use financial services. Before doing so I shall be required to be satisfied on the composition, constitution and proposed rules of these bodies and I will have power to withdraw delegated powers in the event that such a body fails to continue to meet the criteria. Steps are already in train to set up the bodies. I hope that those concerned in the financial services industry will press ahead, so that the structure is in place by the time the legislation is on the statute book.
§ "The Government see great advantages in the system of self-regulation within a statutory framework. At the same time we recognise that self-regulation should receive statutory backing only if there is proper accountability. The White Paper sets out the detailed means by which accountability of these bodies to Government and Parliament will be achieved.
§ "I would highlight three particular statutory safeguards. First, there will be a right of appeal on authorisation and on penalties for breach of the rules to an independent tribunal to be appointed by the Secretary of State. Secondly, the Secretary of State will have the power, to be exercised on the advice of the Director General of Fair Trading, to revoke or amend rules which have anti-competitive effects. Thirdly, the Secretary of State will have various powers of appointment. I believe our proposals combine the advantages of self-regulation within a statutory framework and proper accountability to Parliament.
§ "I have today set out the Government's aims; our proposals for a new regulatory framework; and our proposals for a new institutional structure. The White Paper contains many details which the House will no doubt wish to study and then debate. I look forward to the contribution to be made by those both within and without the House especially those with knowledge and experience in these matters. We have much benefited already from the advice of Professor Gower; the Governor of the Bank of England; and of the groups chaired by Mr. Jacomb and Mr. Field.
§ "The Government's proposals offer advantages to investors, to industry and commerce, and to the financial services industry itself. To the investor, our proposals offer more comprehensive protection against fraud or negligence, and better and fuller information on which to make investment decisions. To industry and commerce they offer the prospect of keener and more innovative financial services and therefore of finance at cheaper rates. To the financial services industry, they offer a system administered by those familiar with the markets and without unnecessary Government involvement. The high standards which we seek to promote will be in the interests of all".
§ My Lords, that concludes the Statement.
Lord Bruce of Donington
My Lords, the House will be grateful to the noble Lord for the doubtless painstaking reading of this very long Statement. It is noteworthy that, whereas the former Statement about 584 interest rates was announced to your Lordships' House and in another place with arrogant brevity, this particular Statement, if I may say so, errs slightly on the side of being unnecessarily voluble. We shall indeed read with interest the White Paper. We would take it that it is probably only slightly longer than the Statement that has been made this afternoon because it goes into such detail. Indeed, it may be said that if Her Majesty's Government paid half as much attention to the needs of manufacturing industry as the detailed consideration that they lavish on their friends the financial institutions and the City, the country might possibly be in a much better position.
We have in the Statement the customary genuflection to allowing market forces to operate responsibly but without unnecessary constraints. There is of course a slight contradiction here in a way because the basic philosophy of the party opposite is to allow market forces to operate without restraint, without tiresome Government regulations, and so on. So quite plainly they have had second thoughts about that.
The Statement itself of course arises from the original withdrawing by Act of Parliament of the action that was being brought by the Director General of Fair Trading, since when there has been a good deal of cogitation in the City; there has been the consideration of the Gower Report; and what we are now told is that the Government themselves have determined a clear regulatory framework, even though the form of that, according to the Statement, has not yet been decided.
We note with some interest that the Government intend to rationalise and up-date the legal provisions dealing with offer documents and the advertising of investments. Well, it comes a bit late, after the grossly excessive advertising of the British Telecom issue for which the Government had to seek special legislation in order to carry it out. I take it that the Government will make it quite clear to the institutions and to other offerers of shares that the kind of behaviour for which they themselves were responsible in the pushing of BT will not be tolerated so far as ordinary investment and ordinary offers in the United Kingdom are concerned.
We note further that the Government consider that their proposals will deter fraud, and that the regulations will cover these matters and will make the detection and prevention of fraud much easier. We shall be very interested when we see the document just how that is proposed to be done because it is quite clear, if I may say so with respect to the noble Lord, that the view is widely held in the City of London itself that the Government themselves are responsible because they do not permit the fraud squads in the country to have resources that are really adequate; fraud goes undetected precisely because of the economies of the Government on that side. Moreover, as is well known and is discussed quite frequently in the City, the technical resources available to the Director of Public Prosecutions are grossly inadequate to deal with the load of actual fraud that is taking place at the present time upon which no action is being taken whatsoever, either on grounds of excessive complication, as in the case of the sanctions busting which became too complicated, or because it is too 585 small in relation to the resources that must be devoted to it.
We shall applaud any efforts that are made by the Government and incorporated in the structure to enable investors to have better protection and to have more information. We shall know when we see the White Paper itself what kind of balance has been struck between the self-regulatory aspect of the matter and the regulatory framework, the statutory framework, within which it will operate. The Statement of course gives no clue of that; it merely consists of a reiteration of the original intentions that were expressed at the time of the Second Reading of the Bill to exempt the Stock Exchange from the legal proceedings that were being brought against it at the time. One hopes therefore that we shall have more information.
§ Lord Taylor of Gryfe
My Lords, from these Benches we wish to thank the Minister for the interesting and informative Statement that has been read to the House this afternoon. We very much look forward to the generalities of the Statement being translated into legislation which will enable us to debate it in some detail. But may I say from these Benches that we welcome the assurances contained in this document and I am quite sure that the City will welcome it. I do not adopt a snide or sneering attitude to the City because of the substantial contributions which it makes to our invisible exports and because of its importance as an international financial centre. If we do not provide the rules and regulations to make it an effective and credible international financial centre we shall suffer as a country.
I welcome particularly the assurances of paragraph 4 that the White Paper will set out how we will assist enforcement, deter fraud and malpractice, improve disclosure and lay down the principles on which business can be conducted. I welcome the nice balance that has been achieved in the Statement between the powers of self-regulation and the continuing oversight and authority of the Minister.
We have avoided the strict legalistic arrangements of the SEC with a system that lays great responsibility on the people who practise in the City, and its financial institutions, and at the same time we have the oversight of the Minister, who has powers to withdraw their licence to operate—which would mean the termination of their existence as practitioners.
I would welcome some advice in respect of the statement that,the marketing of life assurance contracts will be treated in a manner similar to the marketing of other investments".At present, the insurance industry is fairly well regulated in its practices and general operations by the Department of Trade and Industry. What additional supervisory responsibilities will now be assumed in the life assurance industry?
As I have said, it is important that there should be a balance, and paragraph 8 of the Statement states:we recognise that self-regulation should receive statutory backing only if there is proper accountability".This is the price that the City will have to pay for self-regulation and the freedom which that enjoins; that it will be accountable.
586 I welcome also not only the continued involvement of the Minister as the supervisor of all these operations but the continued interest of the Office of Fair Trading as a protection against monopolistic practices. It will be recalled that this Statement derives from the threat by the Office of Fair Trading made about a year ago to refer the Stock Exchange and its practices to the Monopolies Commission. It is probably a good thing that the Secretary of State will continue to have the advice and guidance of the Director of Fair Trading. That is a very useful provision.
In general, the assurance that provision gives to the small investor and the recognition of his interests as a consumer, if you like, of the services of the Stock Exchange are also covered. In the last analysis, the City of London will have to prove its ability to operate within the terms of this Statement. It will survive by the integrity of the men and women who work there and by the credibility of its institutions. This Statement places on the City and on the people who work in the City a vast responsibility for ensuring that London continues to be highly regarded as an international financial centre.
§ 4.32 p.m.
§ Lord Lucas of Chilworth
My Lords, I am grateful—yes, I am grateful—to both the noble Lord, Lord Bruce of Donington, and the noble Lord, Lord Taylor of Gryfe, for their reception of the Statement I have just repeated. I find the noble Lord, Lord Bruce of Donington, extremely difficult to please; would that I could please him more often. He complains on the one hand that my noble friend the Chancellor of the Duchy of Lancaster is too brief, and he complains on the other that I was too painstaking in my reading of the Statement. It was a complex Statement and I believed that it should be read carefully, not only for the benefit of noble Lords who have knowledge of these matters but also for the benefit of those outside your Lordships' House who may wish to read about the Government's intentions.
The noble Lord, Lord Bruce of Donington, was unfair in drawing a comparison between industry and "friends in the City". We have friends outside the City also who wish to and will benefit from these regulations. They are the hundreds of thousands of people who used their own money and are using their own money to buy shares, particularly in the companies for which they work. The measures set out in the White Paper will help them in making the right judgments. There are many people who are currently moving into the area commonly known as wider share ownership who, deservedly, need more protection than hitherto. That is what the White Paper will provide.
I do not know whether the noble Lord, Lord Bruce of Donington, meant to confuse the House or himself with the comments he made concerning advertising. He knows full well that the reference in the Statement is to do with misleading advertising and not with the actual volume of advertising. The noble Lord also spent some time talking about British Telecom. BT had a full prospectus. It was a success in selling shares to that wider ownership to which I have referred.
The noble Lord spoke also about fraud and asked specifically what the Government are going to do. The 587 fraud investigation group has now been set up; it was established earlier this month. It will enable the Fraud Squad to work closely with the Director of Public Prosecutions and with the Department of Trade and Industry's inspectors. That is a further measure of the steps we intend to take.
The noble Lord, Lord Taylor of Gryfe, with his very great knowledge of the City (and is it not odd how frequently I find myself answering both noble Lords?) has my gratitude for his reception of this Statement. I agree with him that the proposals in the White Paper to be enacted in legislation will be acceptable to the City. The City is prepared to accept responsibility for its own actions and, incidentally, to foot the bill for them. This is very important.
I do not disagree with the noble Lord at all when he reminds us of the extremely large and very valuable contribution the City makes to the economic wellbeing and prosperity of our country. It is necessary that the City's endeavours are seen to be as fair as possible within the regulatory framework proposed. That will lead to greater confidence throughout the world in maintaining London as the world centre of financial activity.
The noble Lord, Lord Taylor, asked particularly about assurance. The Government have paid regard to the steps taken by the life assurance industry to develop licensing. To some extent, those proposals were drawn up to deal with the marketing issues to which the White Paper is addressed. It will be a matter for the industry itself to deal with the organising committee in deciding the best way of restructuring, so that the industry will fall in line with the Marketing of Investments Board's proposals. It is in general terms expected that life assurance, pension funds and so on will be treated in the same way as any other investment. I believe that I have covered the main points which have arisen from this exchange.
§ Lord Boyd-Carpenter
My Lords, is my noble friend aware that in asking one simple question I hope I shall not be charged by the noble Lord, Lord Bruce of Donington, with arrogant brevity? At least one element of that charge cannot be attributed to the noble Lord, Lord Bruce of Donington, himself. Is my noble friend aware that many people will consider that this announcement is particularly well timed, as, first, an indication of the Government's concern to preserve and develop the economically immensely important—never more important—activities of the City of London, and, secondly, as an encouragement to the hundreds of thousands of people who will, it is hoped, become shareholders in public companies for the first time and who will require rather more guidance through the complexities of investment than did the smaller number of more sophisticated investors in the past?
§ Lord Lucas of Chilworth
My Lords, I am grateful to my noble friend Lord Boyd-Carpenter for his question. I of course endorse his sentiments on the preservation and development of city financial institutions. It is very important that these financial services and other service industries are developed, because they are continuing to take a large share of our 588 overseas business, so making their contribution to our balance of payments.
In my response to the noble Lord, Lord Bruce of Donington, I referred to the new shareholder. It is interesting that, while we have been at pains over some years to protect buyers from faulty or unsafe goods, and so on, the Government now feel it proper that they should move into the area of finance. Many more people are taking an interest in investment and need very much more protection; indeed, not only protection but help. We believe that the provisions in the White Paper will enable the securities and insurance industries to provide both guidance which is easily understood and the framework for regulation which is necessary to protect people moving into the market perhaps for the first time.