§ 7.41 p.m.
§ Lord Grimond rose to ask Her Majesty's Government whether they are satisfied that the new proposals for the control and management of financial and investment services in the City of London, set out in their White Paper (Cmnd. 9432), will promote the interests of individual small shareholders.
§ The noble Lord said: My Lords, I rise to ask the Question which stands in my name on the Order Paper. Before doing so, I should like to thank the noble Lords who have indicated that they may take part in this debate. They know a great deal more about the subject than I do. I should also like to thank various people in the City who have been kind enough to answer some of my very elementary questions, in particular Mr. Nicholas Baring. However, I want to make it clear that they are in no way responsible for the opinions which I express.
§ The City of London is possibly the only British institution which has actually improved its international standing over the last 50 years. It earns us a great deal of money and its financial services are of great and increasing importance to the economy. Of course it has its critics. It has been argued that it has done better in making money for itself than in financing industry. Some people say that Germany and Japan seem to get on well without its equivalent.
§ However one views it, the City and the changes within the City must be of prime importance to us all. These changes deserve your Lordships' consideration from many angles. Tonight I am asking about their effect on the individual investor and to some extent on the small business. I speak as a long-time advocate of spreading wealth. I do not believe that we shall achieve the most satisfactory and prosperous country possible until there is far more direct, personal ownership of wealth. One way of achieving this is clearly through a wider ownership of shares.
§ Will the Big Bang, as it is called, achieve this wider ownership? I know the City is determined to look after the small investor. It has been said that by increasing 806 competition and removing certain restrictions, especially on some forms of trust, the small, individual shareholder will benefit. But I think we must accept, as is made clear in certain documents from the City itself, that the changes in the City are not being brought about primarily by a desire to help the small investor. They are coming about to meet the demands of financial institutions frightened of losing out in a world where finance is becoming more and more large scale, international, and dependent upon information technology.
§ Two very important considerations have been the abolition of the minimum commission and the lack of capital among jobbers. As your Lordships know, when the Big Bang is finally over, many of the traditional divisions in the City will have vanished. Brokers, jobbers, investment advisers and investment managers of all kinds will become part of conglomerates in which banks—and not necessarily British banks—will play a leading role. Conflicts of interest, opportunities for insider dealing and fraud could greatly increase.
§ By the very title of their White Paper Cmnd. 9432, the Government accept that all this is of great concern to them. They hope to rely on self-regulation as far as possible but they are ultimately responsible and it is under their aegis that a tribunal and two boards to supervise the new framework in the City are being established.
§ I am afraid that I have a great many supplementary questions to ask in addition to my main Question. I have no less than four questions in relation to these boards. I refer to the Securities and Investment Board and the Marketing of Investment Board.
§ First, I am not entirely clear what sanctions other than a reprimand or withdrawal of a licence to trade will be available to these boards. I should have thought that some intermediate sanctions may well be needed. I should have thought, for instance, that it may well be that they will need to levy fines, but the fines will probably have to be of a large amount. I am not quite clear from the White Paper whether it is contemplated that they will have power to do this.
§ Secondly, I am not quite clear whether there will be any appeal from these boards to the ordinary courts of law. I suppose one cannot prevent people from going to law, but I do not know whether it is contemplated that they will. Thirdly, I take it that the boards will have no say over financial journalists, who are extremely influential in persuading people to invest money.
§ Fourthly, and most important of all, can we be assured that the sole responsibility of the board is to protect investors, that it owes a duty to the investor and to no one else? From the point of view of the small investor, one of the dangers in the new set-up is clearly fraud, insider dealing and improper influence. However, I think there is also another danger and that is the danger of bad service and bad results from the investment which he makes.
§ The most telling deterrent, to my mind, to individual investment in equities, and indeed in the Stock Exchange generally, is that since the war it has not paid off very well. Of course it depends what base date one takes and it depends what income one may receive. However, I believe that the Financial Times index 807 would have to be about 50 per cent. higher than it is now to make good the inflation if one starts from 1960 to 1970. If anyone doubts that he can look at the Financial Times for 19th January this year, which points out how the index has fallen behind inflation.
§ It may well be that property and objects have proved a better investment. The pension fund which bought a mediaeval candlestick base, and which I see today has bought a fragment of a mediaeval manuscript, may very well know what it is doing. On top of inflation you have the incentives to other forms of investment and you have the tax, and in particular the disincentive of the capital gains tax.
§ It seems to me that in this situation the best friend of the small, independent investor is a stockbroker in an independent reputable firm, whom he trusts and who will take a personal interest in his affairs. In my experience stockbrokers are willing to take an interest in quite small portfolios and to give of their very best to very humble clients. I do not suggest that the stockbroker will make such an investor a millionaire but I think he will be his best protection against fraud. He will give free and independent advice and allow the client to do better than he would on his own.
§ Am I right in thinking that such stockbrokers may be seriously reduced in number after the Big Bang has taken place? Three questions arise in regard to the Big Bang. First, is it healthy for either the small investor or for the small British business that the City should be dominated by large conglomerates, some of which will be foreign owned? I find it hard to believe that such conglomerates will take as much trouble with small clients as do brokers today. I am apprehensive about what will happen to provincial brokers. I know it is said that there may be an extension of branch offices from London, but I am not at all clear that that is going to happen.
§ I ask the Government whether they expect the Big Bang and its aftermath to bring capital to this country or to drain it off. I am not convinced that a conglomerate owned, say, in Japan or Saudi Arabia and dealing in millions of pounds will necessarily increase the capital available to British industry, at least to small British industry. I hope I am wrong. Of course it may be that the Government are going to rely upon other sources such as investment in industry.
§ My second major question relates to conflicts of interest. It is accepted, for instance, in the admirable report by the City itself, "Comments on the Financial Services White Paper", produced by a committee presided over by Mr. Baring, that such conflicts will arise. Indeed, they arise to some extent already. But the argument in that committee report is that although they will arise, they need not lead to any malpractice. Nevertheless, I believe that the single capacity broker had his advantages. I would not personally employ, for instance, an insurance broker who was wholly owned by an insurance company. But the Government tell us in paragraph 7.4 of the White Paper that they themselves are not convinced that total reliance can be placed on Chinese Walls. Nor am I convinced that Chinese Walls will necessarily be totally effective.
I do not think that I am impressed either by the Government's further suggestions, one of which is
disclosure. Disclosure is very necessary; but by declaring an interest you do not necessarily purge yourself of all sin. As for monitoring, that, again, is very necessary. But do the Government really believe that these boards, even with all modern equipment, can monitor the countless transactions that take place every day in the City of London? According to paragraph 6.1 of the White Paper:
The key safeguard … will be the application of a 'fit and proper' test to all investment businesses".
§ But can this mean anything more than that a licence will not be given to an investment business if it has already been in trouble? Should not investors be warned that because some firm passes this test it is not necessarily a wise counsellor? Presumably, it will not undergo the sort of period of examination that precedes, say, entry into the Catholic priesthood. It is merely a guarantee, I understand, that it has not so far been caught out. I must mention, in passing, that I seem to remember a Stock Exchange joke about how no one who was a fit and proper person could possibly be a stockbroker. As it is their own joke, I feel able to repeat it.
§ The real protection will surely be the internal procedures and monitoring enforced by senior partners or directors in each firm. That, again, is going to become difficult as firms become very large. In the light of what has been going on at Lloyd's, there must surely be some doubt over self-regulation. Those doubts must have increased since the Secretary of State for Industry spoke in the Commons on the 24th April. Therefore, I ask again and emphasise the question that I have already put. Is it quite clear that these boards and the tribunal will really be responsible to the investors? It seems to me that part of the trouble at Lloyd's is that there is a dual responsibility and some conflict of responsibility between the names, the brokers, and the other departments of Lloyd's.
§ I come now to the third question, commissions. The Chancellor told us in his Macmillan lecture that to judge from American experience small investors will gain, and commissions will fall. He also spoke of cheaper, no-frills deals. The noble Lord, Lord Terrington, has drawn my attention to two articles in the Financial Times which categorically contradict this. They say that some banks have already increased their commissions and that there is no reason from American experience to believe that they will fall. I therefore ask the Government whether they still believe that they will fall so far as the small investor is concerned. Personally, I have some doubt whether he is going to gain very much from modern technology. He is not the kind of man who dodges in and out of the market.
§ I come now to the last and fundamental question. The Government have told us that they want to encourage direct investment by small investors in equities. Are they sure that they are going the right way to get it? I hope very much that they are. There was the Telecom issue but there are still great tax advantages in corporate investment. Years ago, I seem to remember that the stockbrokers Rowe Swann published a circular called, I think, "The Euthanasia of the Small Investor". And, sure enough, before the Telecom issue, small investors had been reduced to 4 per cent. of the adult population. Perhaps we have to look more 809 and more to pension funds, trusts and suchlike. But if the Government are attracted by that road, I hope that they will look at John Plender's "That's the way the money goes" which deals with the performance of investment funds. As for trusts, the trust movement seems to have done a great deal of good. But unit trusts are now proliferating at a rate that makes one think that some of them must be set up chiefly for the benefit of those who have floated them. Investment trusts frequently stand so far below their asset value that it might be in the interests of the shareholders to break them up. I, for my part, still believe that direct investment by individuals is valuable. I still believe that the small investor needs a stockbroker who will take an interest in his affairs and if possible from an independent standpoint.
§ I accept that the Big Bang is upon us. I accept that it will do great good. I accept that the City wants to protect and encourage individual investors. I hope very much that it will improve even further its international standing. I hope that the Government, for their part, will examine again their proposals in the White Paper to make sure that the framework outlined there and being put into operation is effective particularly in the light of Lloyd's. I hope that they will keep an eye on commissions. I hope that they will put direct investment on a par with corporate investment and that they will encourage such single capacity brokers as may stay in the business.
§ 7.57 p.m.
§ Lord Bruce-Gardyne
My Lords, I should like to congratulate the noble Lord, Lord Grimond, for raising what I entirely agree with him is a matter of great importance. I am sure that all your Lordships will agree with what he had to say about the achievements of the City of London over the years and the vital importance of the role that the City has played and should play in the future as an attractor of resources for this country. I am sure therefore that all your Lordships must be grateful to the noble Lord for raising this matter and the Government's White Paper tonight.
I should perhaps declare an interest of sorts in the sense that I scribble in the City pages of a national Sunday newspaper although I hasten to assure your Lordships that I would never dare to have the cheek to try to advise readers into which particular equities they should put their savings. Nevertheless, I suppose, in theory, the place in which I write at any rate could come within the ambit of the White Paper. I am in a good deal of agreement with the measured scepticism expressed by the noble Lord about the prospects for the small investor after the Big Bang. I was told some months ago that my right honourable friend the Chancellor was planning to comment to the City, at some function he was addressing, that the trouble with Chinese Walls was that they were full of chinks, but that the Foreign Office advised that this phrase should be deleted in order not to damage international relations. I am bound to say that the Chancellor assures me that this is not true. Nevertheless, I believe that that degree of scepticism is eminently understandable. I am afraid that it seems to me to be highly probable, to put it mildly, that the legendary Aunt 810 Ednas of Plymouth are likely to have to pay more, not less, for the services of their stockbroker after the Big Bang than they have paid up to now. In all honesty one must recognise that the possibility of them being taken for a ride is also likely to increase.
I question whether any great material purpose is served by lamenting that this change should come upon us. To my mind it is rather like lamenting the passing of the chaperon and the arrival of the permissive age. There is no doubt that life was a great deal more ordered, discreet and, perhaps, sweeter-smelling in the days of the chaperon. However, the chaperon has gone and will not return. The fact is that unless the City had moved to negotiated commissions and, as I see it, inevitably to the ending of single capacity, the business would simply have passed it by. Indeed, it was already doing so. We are watching the internationalisation of the market. It is no good lamenting it: it is a fact of life.
We must also bear in mind that surely the essential purpose of the financial market is not to provide a casino in which the Aunt Ednas can try a flutter on their fancy or even invest their bottom drawer. The essential purpose of the market is to enable quoted businesses, both domestic and international, and also sovereign Governments, not least our own, to raise capital and to borrow on the most competitive terms to which their records and performance entitle them. It is essentially from that angle that one must look at what the Big Bang might portend.
It is slightly in that respect that I believe that there are some grounds, at any rate, for concern in two areas. First, there is the question, which the noble Lord touched upon, of the medium-size business—the quoted company with a successful track record, making good profits and with good performance, but not the type of company which has a cat's chance in hell of being quoted on the big board in New York or in Tokyo. No one would dispute that the ICIs of this world will enjoy the benefits of much more competitive commission rates and a much more highly competitive environment for their capital-raising operations and for the trading of their shares. The real question is what will happen to the medium-size equity which cannot hope to achieve that kind of multi-national status. In this connection I must say that I have been told by all my eminent stockbroking friends that there is no need to worry and that there will be plenty of market-makers in these companies. I hope that is the case, because it would be greatly to the disadvantage of the British commercial and industrial environment if such firms were to encounter considerable difficulty in capital raising.
My second anxiety is perhaps rather more fundamental. It concerns the Government's ability to borrow. We now have the spectacle of 29 recognised primary dealers dealing in the gilt-edged market in place of two. I am bound to say that in my view there will be a certain amount of blood on the floor. When the carnage clears, what will be left? Is it not possible that what will be left will be some of the giant players from the other side of the Atlantic and precious little else? What would happen if those giant players from the other side of the Atlantic were to wake up one day and read an opinion poll which suggested that there was at least a chance of the Labour Party coming to 811 power committed to the immediate reintroduction of exchange controls and perhaps measures for the repatriation of capital? Are we absolutely satisfied that, under those circumstances, the distinguished, new American punters in the gilt-edged market would not pick up their coats and run for the exit? If they did so, are we certain that the Government broker would still find willing takers for his paper around the market-place? If we are not certain, then we could face a gilt-edged strike to end all strikes. Those, to my mind, are the two biggest concerns which arise from the prospect of the Big Bang and what lies thereafter.
As for the position of the small shareholder, I must say that I share wholeheartedly the noble Lord's enthusiasm for an individual shareholding democracy. However, I doubt whether we can do a great deal to achieve that or to safeguard progress in that direction by a more vigorous and effective policing of the new type of marketplace. We must look at great new privatisation issues, like British Telecom or British Gas for that matter, or the TSBs (in which I am involved), and even possibly face some of the consequences of monopoly which in certain cases might flow therefrom, rather than believe that we can somehow in the new environment guarantee that there will be equal treatment and a fair place for the individual shareholders.
I note what the White Paper says about the importance of information. You can sometimes have too much information. I do not know whether my noble friend has ever studied a prospectus submitted to the SEC in the United States. When I was investigating the affairs of that great entrepreneur, Mr. De Lorean, I came upon a draft prospectus which he had produced for the SEC. I said to my chums, "One thing is certain: nobody but nobody would dream of investing in that"; because it was not covered in health warnings, it was covered in death warnings. Then, a little while later, I saw a prospectus which was being submitted to the SEC for an absolutely blue-chip American company. The death warnings were just as strong as they had been in the case of De Lorean. The Americans have achieved a situation in which the lawyers insist that every potential shareholder is inundated with information, and so the consequence is that they all ignore it. One can actually have too much of a good thing in that respect.
The noble Lord, Lord Grimond, commented on the question of the sanctions which these self-regulatory bodies would be able to apply. I comment in passing that it is perhaps not only a question of sanctions; it is also a question of what happens when it is apparent that the law has been breached. It is a question of what follow-up occurs. It is not a very good example to learn that, in the case of some of the little problems that have arisen in the Lloyd's market, the DPP has apparently been unable to come up with a single prosecution as regards matters which have been before it for anything up to seven years. It is all very well to have fine new laws, but if, apparently, the DPP is unable to advance prosecutions in cases where it is reasonably apparent that there are prima facie reasons for believing that the law has been severely breached and fraud committed, the statute book serves only a limited purpose.
812 In conclusion, I hope that we shall bear in mind that we must tread a tightrope (as I think, on balance, this White Paper does) between, on the one hand, the danger of strangling the market through excessive regulation, in the belief that we can somehow achieve the perfect elimination of the obligation upon the buyer, the investor, to show some common sense occasionally, and, on the other hand, allowing a market to be created which, frankly, frightens the horses. That, to my mind, is the side we have to watch.
I think there have been occasions in the past, perhaps, where the Lloyd's market has almost begun to scare away the international investor. It would be disastrous if we allowed that to occur in the City of London. On the other hand, we must not overwhelm the market—the brave new market—in a cocoon of legislation. Perhaps we should also reflect that legislation is not always the perfect answer to human unwisdom. I am bound to conclude by wondering whether we are really wise to believe that by passing another banking Act we shall avoid having another Johnson Matthey.
§ 8.11 p.m.
§ Lord Ezra
My Lords, my noble friend Lord Grimond has given us the opportunity of discussing an important White Paper issued at a time of momentous change in the nature of the financial services of this country. I am glad that time has been provided for consideration of this document. I am glad too that the Government, in introducing their proposals, have made it clear that they recognise that this is a subject for careful study, and that they have also recognised that the old provisions of caveat emptor are not enough in these new circumstances, and that, as they write on page 7 of the White Paper:For investors to have the confidence to venture into the market, measures are needed to reduce the likelihood of fraud and to encourage high standards in the conduct of investment business.This White Paper attempts to do something that has never been attempted before; namely, to provide regulation for the whole of the investment industry, which is now a widespread and sophisticated industry and which is also going to become much more comprehensive as time goes on. Hitherto I suppose that the greatest degree of self-regulation has been within the Stock Exchange, but there are many other ways in which people can invest, and it is to cover all these ways that I take it that this White Paper has been drafted.
What we therefore have to consider before coming to the specific point about the small investor raised by my noble friend is whether the proposals made fit in with the requirements indicated in the beginning of the White Paper. The major proposal of course is the creation of the two boards which will be self-regulatory within a statutory framework, as is stated in the White Paper.
This is a new device. It is a combination of a self-regulatory body in the sense that those who are in membership of it are practitioners, or drawn from the ranks of the practitioners, but it will have the force of law in its operations. Therefore it is something which is a halfway house and which will need to be considered carefully in its operations.
813 The question that immediately arises, and has been stated in the White Paper itself, is whether two bodies are required. I should like to ask the noble Lord, Lord Lucas, when he responds what has been the temperature of the water on this point. Those to whom I have spoken in the City and in industry have been almost unanimously of the view that there should be only one body.
Many of the newer financial organisations which will have to turn to these boards for authorisation of their operations will in fact have to turn to both of them. It therefore seems that before long there could well be some confusion or duplication in their operations. It might be worth while sorting this out before they are brought into operation rather than after a trial period.
The question of conflict of interest is bound to arise more strongly now that the Stock Exchange have changed their rules. However, as the noble Lord, Lord Bruce-Gardyne, and also my noble friend Lord Grimond said, this is not a new subject. Under existing financial practices there already is this problem of financial institutions which both handle corporate finance—mergers, take-overs, and so on—and have a separate department dealing with investment. Obviously the knowledge of any impending takeover will put the investment department in possession of important information.
But here we can see self-regulation as a matter of self interest. Any firm that was known to have done that—and it would obviously become evident very quickly that it had—would no longer command the support of its clients. Although I must say that it has not been a deep-seated inquiry, I have asked a number of representatives of City institutions whether they are aware of any cases where this has arisen: I have not been told of any, and for obvious reasons, as I have indicated.
I do not believe that the conflict of interest, even though the range of possible conflict has now been widened, is necessarily one that will not be overcome in practice, although I think it absolutely right that the White Paper draws attention to this and that the Government consider that this situation will have to be carefully watched. On a smaller point I should like to refer to what is said about life assurance on page 29 of the White Paper, where it is stated:The Government welcome the view expressed … that businesses authorised by the Marketing of Investments Board should be required to take total responsibility for sales by tied agents as well as their employees".This only applies to life policies, but it seems to me that it ought really to apply across the whole range of insurance activities. All forms of insurance, in a sense, are a form of investment, and therefore I wonder what the Government's response would be to that.
As to the small investor, who was the raison d'être of the Question put down by my noble friend, it is quite possible that with a freer market and no limits on commissions the smaller investor, simply because he is dealing in smaller quantities, will tend to pay higher commissions, and that the larger investor, because he is dealing in larger quantities—and investment is a commodity like any other—will tend to pay smaller commissions.
814 On the other hand, for the small investor who simply wants to buy or sell a share and has made up his mind what he wants and does not need any advice, it would seem desirable that the over-the-counter operation should be encouraged and further facilitated. For a simple service such as buying or selling a share there should be, in my opinion, a very small fee. If the investor requires advice, then obviously a fee should be charged for that consultation.
As to the ways in which the small investor can be protected against fraud and being misled, I should like to ask, how is he in fact going to be made aware of these new City institutions? Those of us who have some connection with the City are of course aware of what is going on, but are these new bodies going to be available for the small investor to turn to? Or who should he turn to if he feels that his situation has been prejudiced by suspected malpractice (apart, of course, from going to law, which is always available)? Is something to be done to make the small investor more aware of what is being provided in his interest other than the publication of this White Paper, which I believe is more for the expert than for the general reader?
§ 8.20 p.m.
Lord Bruce of Donington
My Lords, we on this side of the House are grateful to the noble Lord, Lord Grimond, for having given us the opportunity of discussing this Motion tonight, which is essentially concerned, as the Unstarred Question on the Order Paper makes quite clear, with the promotion of the interests of the individual shareholders and, by implication—and I think that the noble Lord. Lord Bruce-Gardyne, will agree—that means, in common sense terms, shareholders in equities. Therefore, the narrow terms of the Unstarred Question on the Order Paper make it quite unnecessary—indeed, I would not wish to do so—to enlarge on the economic significance of the big City institutions, the way they benefit the country, the way that they operate, the degree of essentiality that they have to the economy as a whole. The comprehensive nature of the speech of the noble Lord, Lord Grimond, with which I very largely agree, enables me to avoid if only in the interests of time dealing with the matters with which he dealt so very clearly.
The noble Lord, Lord Bruce-Gardyne, if he will forgive me saying so, seemed to be full of gloom and doom this afternoon. He did not see very much hope for the individual equity shareholder at any rate. He seemed to be very apprehensive about the consequences of the Big Bang, and he uttered strong warnings (with which I am bound to say I heartily agree) about the control of the capital market as such passing largely into what he termed the very large conglomerates. With all these things, I am bound to say that I agree with him. I share his apprehensions. But of course a broader debate on this whole aspect of the matter as to what is going to happen to the structure and effect of the whole City of London institutions and their significance in the world, I think, ought to await the publication of the Government's Bill and the completion of the various arrangements upon which the Stock Exchange and the various other 815 institutions are still apparently locked in deep discussion, if not deep disagreement.
With your permission, my Lords, I will come back to the interests of the individual shareholders. Who are they? The number of individual shareholders in equities in this country are somewhere—as the noble Lord, Lord Grimond, put it—in the region of 4 per cent. of the adult population. That is not very big. It may well be that, owing to the privatisation measures that have taken place in recent years and upon which I have already commented and upon which I shall not enlarge, the number of shareholders in the country may have increased but slightly; bearing in mind the fact that those that have gone in for stagging purposes and have gone out with a quick profit are unlikely to re-enter the market, and also a good number of those who took up shares in these newly-privatised organisations were probably already individual shareholders in their own right.
§ Lord Bruce-Gardyne
My Lords, I apologise for interrupting the noble Lord but; in what he has just been saying, is he really allowing for the effect of British Telecom privatisation? The best estimates were that there were about 1.8 million individual shareholders who took up shares in British Telecom. Even if one accepts that there was an element of overlap with those who were already shareholders, and that some may have gone in for stagging purposes, the increase in the immediate shareholding population must have been very large in any case.
Lord Bruce of Donington
My Lords, yes, I accept the point which the noble Lord has made. We shall have to wait until the figures are available to show the degree of stagging that has taken place. But the noble Lord will be well aware that in previous privatisation issues, the stagging rate has been roughly 70 per cent. of the original applications. I do not know what is the stagging rate in the case of British Telecom, but I should imagine, in view of the very lush profits that became immediately available, there would be quite large numbers of investors who would be only too happy to get a profit. But even so, even on the assumption that they are all new shareholders, it is quite clear that the individual investor in this country, the individual shareholder, is a minority of the population—not that they are not important, as I shall endeavour to show.
But the fact of the matter is that some 96 per cent. of the disposable wealth of the country is owned by 50 per cent. of the country; some 4 per cent. by the remaining 50 per cent.; and it is fairly clear that even on the basis of 4 per cent. or 5 per cent. of the adult population being shareholders, they are going to belong to those in the main—not always—who have incomes above some £15,000 a year. I rely for these figures, I am happy to say, on the journals of my own bank, the National Westminster Bank, which they are pleased to send me every month or so; and I have the figures in front of me.
Certainly they do not justify the remarks of the noble Earl, Lord Gowrie, in the course of the debate on 5th June, when talking of privatisation, that it gives everyone—everyone!—an opportunity to own a real share in the nation's assets. That, to describe it in the 816 most polite terms—and I shall repeat it when next I have the opportunity of confronting the noble Earl, Lord Gowrie—is a lot of poppycock. The fact of the matter is that the shareholding population is a very small one and it cannot be assumed that we are even bordering upon that heaven of all heavens which is so frequently enlarged upon, with the euphoria of the Government Benches, as what they describe as a property-owning democracy. The bulk of the people of the country have no disposable property in the sense that gives them any sense of identity with the capital structure in the United Kingdom. The fact of the matter is that citizens of our country who are fortunate enough to be able to have the resources (after mortgage payments, not taking into account the amounts that they have on deposit with their building societies or elsewhere) are able to make investment in equities. And it is quite right and quite proper that these should be protected. We have to judge the Government's proposals within this rather narrow context as to how likely they are able to give the investors, albeit a restricted number of citizens of our country, that degree of protection to which they feel entitled.
Perhaps I ought to say too that, by and large, in the same way as the bulk of the citizens of the United Kingdom are decent, law-abiding people, so those that conduct our City institutions, the banks, the insurance companies, the investment trusts and so on, are honourable men. It is only a minority against which protection has to be afforded. I am bound to say that if a small investor wants to choose a stockbroker—if he is in that happy position and is not what we would call, rather loosely, the "professional amateur" with larger resources who can employ the services of his own accountant, his own lawyers, his own bankers, as the case may be—then the best thing to do is to get somebody who has been recommended to him. If one operates on the recommendation of an individual who has already had experience of a stockbroker, by and large that is likely to be the most effective way of choosing a stockbroker.
There are two aspects regarding the individual shareholder which need to be taken into account. First, he needs to have reliable information on which to base his judgment. Advice from friends in that connection is not always advice that one can take much account of. I personally make it a rule never to give a person a tip about a horse or an investment: that is the finest way of losing friends.
But information there has to be. I observed with some pleasure that the Government intend to take action in regard to tip sheets. Tip sheets tend to be very persuasive. They come through the post to a selected number of individuals, and occasionally I get one myself. I am bound to say that very often their accuracy can be called into question. I am quite sure that a large number of people may well place undue reliance on them. So I welcome the intention of the Government, when it comes to legislation—at least, that is what is put forward in the White Paper—that the publishers of tip sheets will have to be authorised. In that connection, I should like to ask the noble Lord what will be the criteria by which such approvals will be authorised and under what conditions.
I am a little worried about the exclusion of newspapers and periodicals from this form of control 817 which the Government propose to take. There have been many cases in the past where very persuasive articles have appeared in newspapers, advocating the purchase of this or that share which has not proved all that reliable. There have been cases, which I think may be within the recollection of those of your Lordships who have studied this subject in the press during the last 10 years or so, where subsequently a rather strong connection has been found between the author, the tipster in the newspaper, and the company concerned or some of the leading investors involved. Therefore I would suggest to the noble Lord that the Government should take another look at this.
In regard to the professional advice that is given, I welcome also the Government's intention to do something about the licensing of those who are entitled to enter into what they call the investment business. They include people such as lawyers, professional accountants and so on. I gather that certain rules are going to be made, for example, in the case of a firm of practising accountants. If a large part of their business consists of investment advice, there are going to be certain special procedures, special undertakings and certain special steps that will have to be taken.
I could not agree more with the noble Lord, Lord Bruce-Gardyne, who referred to published prospectuses in the United States. I am bound to say that complete compliance with the Stock Exchange regulations has produced a form of prospectus which contains, for reasons of space, some very small type, which makes very tedious reading, and a person is supposed to read that before making up his mind on an investment. One has a suspicion that this small type is less for the information of the prospective investor, who in the end will rely on his own hunch, than to be in strict compliance with the Stock Exchange regulations.
However, that must not be taken as being any criticism of the Stock Exchange regulations. If all companies, whether the placing were private or public—and I am talking now particularly of private places—were to adhere in their presentation to the requirements of the Stock Exchange, there would be far less fraud and far less violence done to the interests of individual investors. Information, therefore, has to be accurate and there must be some way in which the Government can protect the ordinary citizens, or those 3 million or so who feel inclined to invest or who can afford to do so, by keeping the particulars accurate.
One way of investing, as I have said before, is to choose a stockbroker on a personal recommendation, because that normally means that they have had a good experience. I shall not deal with the whole question of Chinese Walls, which was touched upon by the noble Lord, Lord Grimond, save only to say that I agree with him. The Government have themselves, quite rightly, cast some doubt in their report upon the ultimate effectiveness here. However, I am not sure whether their own way of going about it will be very much better, because they have enunciated certain principles which they regard as being absolutely cardinal to any regulation which is ultimately agreed by the Stock Exchange and by the City generally. The principles which have been 818 outlined are very admirable but, with the noble Lord, Lord Grimond, I am bothered about the enforcement. I hope that in the wider interests of the City—and of course that goes far beyond the question of the small individual investor to which, quite rightly, the noble Lord, Lord Grimond, has given such emphasis—the regulations which are published will be effective.
May I also underline again the point that if there is to be a law governing this and governing the framework, then it is no good, as in the case of the insurance Act of 1982, publishing the law but not making it an offence to break it. That is one of the things that may have lain behind a good deal of what has happened at Lloyd's recently.
I am hopeful that as a result of all the discussions taking place much good will come out of this. However, I should like to disabuse the noble Lord, Lord Bruce-Gardyne, of one of his beliefs, if he will forgive me. In the only party political observation that he was kind enough to make, he envisaged a kind of flight from the pound if there was a change of Government. There will undoubtedly be a change of Government, but I can assure your Lordships that the world at large will have far greater confidence in a Government who take steps to ensure that all the factors of production, human and mechanical, are used than in a Government who have promoted a situation where there are 4 million unemployed and where a vast amount of equipment is left idle and rotting.
§ 8.39 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)
My Lords, I really am most grateful to the noble Lord, Lord Grimond, for providing us with the first opportunity we have had of discussing in your Lordships' House this White Paper. Perhaps I could also say that I am personally grateful to him because when we discussed this matter shortly after the publication of the White Paper, it was his intention to put down a Question at that time. I asked him if he would be kind enough to delay it because I felt that we would have a better response generally throughout the country if it were delayed. So I am doubly indebted to him for this opportunity. It does of course also give me the opportunity at the same time to pay tribute to the work of Professor Gower, upon whose report so much of the White Paper is based.
The modernisation of the law on investor protection, and more effective enforcement, has become more important in the face of the many new and major changes that are taking place in the City. I believe that these changes will help to ensure that Britain remains one of the main financial centres of the world, and that British firms can compete effectively internationally.
All the noble Lords who have made their contributions this evening have paid tribute, I think quite properly, to the City in general terms; to the way they conduct their business and the value to our nation of the work that is done. Nevertheless, the changes that are occurring will create new problems and certainly new conflicts of interest, so that there will have to be new rules and methods of regulation to ensure that these changes are dealt with properly and that 819 investors' interests, whether they be large or small, are properly protected.
The proposals in the White Paper for a new framework for investor protection have been generally welcomed. I have pages and pages of notations from interested parties who have responded to our invitation to consult. In the main, I can tell your Lordships that they are favourable comments. Certainly all those comments—and indeed all the comments that have been made tonight by noble Lords—will be taken into account in drafting the legislation, which my right honourable friend the Secretary of State for Industry hopes to be able to introduce in the next Session. Then no doubt we shall return to some of the more detailed points that have been made tonight.
The noble Lord, Lord Grimond, asks in his Question whether the Government are satisfied that the proposals in the White Paper will promote the interests of individual small shareholders. I take this opportunity to assure him that it is their interests that were very much in mind when the proposals were prepared.
The promotion of wider share ownership, about which the noble Lord, Lord Bruce of Donington, was somewhat sceptical, is a cause which the Government warmly support, as I know does the noble Lord, Lord Grimond. As my noble friend Lord Brabazon of Tara said in February of this year when he was responding to a debate on wider share ownership:The Government hope that the extension of private property ownership will enhance and emphasise the responsibility of the individual for both his own welfare and the welfare of his fellow citizens. It is part of the process of shifting power and responsibility from the State to the individual and, as such, is fundamental to the Government's basic philosophical approach to the job of government".In particular, my noble friend went on to say,a wider spread of share ownership develops a community of interest in economic matters".—[Official Report, 20/2/85; col. 660.]I do not dissent from what my noble friend said on that day and I shall repeat it in answer to the remarks that the noble Lord, Lord Bruce of Donington, made with regard to a democracy which has a share in the wealth of the country. It is this Government's policies that have enabled this to move somewhat faster in recent years than in previous years.
But of course individuals will not invest unless they are quite confident that they will get a fair deal. This is particularly important for a small investor with limited financial resources who may himself not be an expert. I may say also that the National Westminster Bank look after a small portion of my small amounts of money. I think that I might probably argue with their base figure of £15,000 because I do know people who have subscribed—notably to the National Freight Corporation, to British Telecom and to others—who have considerably less earning power than that. So I do not think it is a point on which to take great issue. Nevertheless it is people with such limited incomes who need the greater help.
Certainly one of the Government's principal objectives is to devise a regulatory system which ensures that the financial services sector in the United 820 Kingdom is a fair place in which to do business, and where the small investor can confidently expect that his business will be handled with competence, honesty and regard for his individual circumstances.
However, I would underline that, as the White Paper emphasises, no regulatory system can, or indeed I think should, relieve the investor from exercising his own judgment and care in deciding how to invest his money. The Government's proposals are not intended as a substitute for the exercise of proper judgment and responsibility by the investor. The proposals are, however, to ensure that that judgment is reasonably and properly informed. If he makes a foolish decision on the basis of adequate disclosure, venturing all his savings in a high-risk proposition which fails for straightforward commercial reasons, he should certainly not look to any agency or Government department to make good the losses.
The central provision of the legislation will be a new and comprehensive definition of what constitutes investment and investment business. It will be an offence to carry on such business without authorisation, so that the investor who is dealing with an authorised business will know that that business is regarded as being "fit and proper" to undertake investment activities and will be subject to rules designed to ensure the proper conduct of those activities. There will be rules requiring disclosure of the information that an investor will need to make a decision, and the definition of investment business will include the giving of investment advice. In the proposed legislation, advisers will be under a duty of skill and care. They will also be under a duty to take account of the circumstances of each client and to dislose their own interests.
The principles governing the conduct of business rules will ensure that the boards make rules requiring investment business to segregate funds belonging to their clients and to have adequate compensation arrangements in the event of loss arising from fraud, negligence or failure to comply with the requirements for the protection of clients' assets.
Some of the comments that we have received on the White Paper suggest that our proposals on these points go too far and will be unduly costly. All I can say at this stage is that of course we will have to consider those comments; but it remains our objective that there will be full segregation and full compensation for private investors in the circumstances which I have just described. It will be for the Boards to work out the details of the segregation and compensation arrangements; but the Government will be required to be satisfied that those arrangements provide the kind of protection that I have just described. The new bodies—the Securities and Investment Board and the Marketing of Investments Board—have a key role to play in the new arrangements. It is for them to draw up rules for the authorisation of investment businesses and the conduct of business. The business rules will have to cater satisfactorily for the principles described in the White Paper which cover the subject of safeguards against conflicts of interests, compensation, and, as I say, protection of clients' assets. The boards will have to convince the Secretary of State that their proposed rules provide adequate investor protection before they receive delegated powers from the 821 Secretary of State. The boards will then—and I think that this is the point which the noble Lord, Lord Grimond, asked me about—have a duty to monitor and enforce those rules and, if necessary, to update them.
One of the main advantages of the system of self-regulation within a statutory framework is that the regulation will be undertaken by bodies on which both practitioners and users of financial services are represented, and which can identify and respond quickly to any changes. I should perhaps say, because I think that the noble Lord, Lord Ezra, is particularly concerned with consumer matters—I am sure he will know, but it is worth while underlining it—that the chairman of the Consumers' Association is a member of both boards, so there is a consumer representation. This has been raised in a number of comments which we have received.
I want to turn now to some of the main questions that have arisen and I should like to begin with the question of the noble Lord, Lord Grimond, on sanctions. The boards will be able to reprimand, to impose conditions on doing business, to prevent the taking on of new business and to take other measures to protect investors in the event of a company being unfit or not proper. They will also have the power to withdraw authorisation to practice. That is, in itself, a fairly heavy sanction. That duty is commensurate with their overriding duty to protect investors, but, at the same time, they, have to ensure, alongside that responsibility, that an efficient United Kingdom financial services industry is sustained.
The noble Lord asked me, as did the noble Lord, Lord Ezra, about the matter of conflicts of interest. We recognise that there may well be more conflicts of interest and it will be the boards' duty to devise rules which prevent abuse in such conflicts, and the Government will have to be quite satisfied that those rules are adequate. Until the Secretary of State is satisfied, his powers will not be delegated to the boards.
We believe that there will be a continuing role for brokers providing personal service for individual small investors. Provided that that service is efficiently run, I am quite sure that there will be people willing and able to meet the demand of the smaller investor. Those companies will enjoy, and be able to pass on, the benefits of the advance of IT and modern technology and communications systems. It will probably be competition which will, at the end of the day, determine the level of commission chargeable to small investors.
I cannot predict whether commissions will rise or fall, but I would certainly expect a service enabling investors to choose between paying for a package of advice and dealing services, or as now paying rather less for a deal-only service. The Stock Exchange itself has set up an advisory committee to consider how to assist its members to be more accessible to the small investor and how to handle small commissions.
The noble Lords, Lord Grimond and Lord Bruce of Donington, as well as my noble friend Lord BruceGardyne, spoke about tip sheets. Certainly, tip sheets will be required to be authorised, and I would expect the SIB to draw up a code of practice for share tipsters 822 which will need to make provision for adequate disclosure of interest in any share recommendation. The bona fide newspaper or magazine will not—certainly on current thinking—be required to be authorised, but we would expect that on a voluntary basis they will insist on their financial journalists observing the same code.
The noble Lord, Lord Bruce of Donington, raised in this context a number of points with regard to financial correspondents and the advice that they give. I should like to look further into that matter, rather than respond tonight. I feel sure that when we come to deal with the Bill he will want some detailed answers, if we have not already provided them, but I should like to do it then.
The noble Lord, Lord Ezra, spoke about life assurance. The White Paper states:Non-life insurance policies are not commonly regarded as investments and would not be treated as such in the proposed legislation.I take note of what he says, and of course, we will consider that. I should also want to consider further the general position that is now obtaining, since the life assurance industry is developing licensing and, to some extent, those proposals were drawn up to deal with marketing issues to which the White Paper is addressed. It is largely a matter for the industry and the organising committees to decide how best to restructure those proposed licensing arrangements in the light of the White Paper.
My noble friend Lord Bruce-Gardyne and the noble Lord, Lord Ezra, both asked how complaints were to be dealt with. It is proposed that the boards will be responsible for investigating complaints about authorised business. The Department of Trade and Industry will be responsible for enforcing the criminal law; but, essentially, it is for the boards to work out sensible procedures for handling complaints. We shall have to see exactly what their proposals are in that direction—
§ Lord Lucas of Chilworth
My Lords, I think that I can give the noble Lord, Lord Ezra, an assurance that those dealing on behalf of the small investor will be under an obligation to point out his rights. Exactly how it will be done I do not know, but I think that the noble Lord may rest assured on that point.
The noble Lord, Lord Bruce of Donington, touched upon the accounting profession. I know that it is so very near and dear to his heart, and I should like to say this to him. The importance of the auditors' watchdog role in the new system to be set up under the proposed Financial Services Bill cannot be over-emphasised. Legislation to strengthen their position might very well be included in the Bill if we thought it was necessary, and we are, of course, talking with them as to the necessity of that.
My noble friend Lord Bruce-Gardyne expressed some little scepticism in his opening remarks, and I shall not join him and the noble Lord, Lord Bruce of 823 Donington, with regard to the flight of the pound in the event of certain totally hypothetical circumstances occurring. I myself cannot foresee them. But what I would say to my noble friend is, yes, there are moneymakers for raising capital, and I would point to the huge success of, for example, the unlisted market. I should not particulary want to quarrel with the figures that the noble Lord, Lord Bruce of Donington, mentioned with regard to the proportion of people being share owners. What I would say is that a very large number of initial shareholders in BT are still shareholders today. We shall see what the proportions are in two years' time. But let us not forget that more than 90 per cent. of the original shareholders in the National Freight Corporation still have shares. I believe that as people understand more about share owning, its risks as well as its advantages, more people will buy shares. More people will therefore need the services that are outlined in the White Paper.
The proposals are of particular benefit to the small investor. The institutional investor, the professional investor and the rich normally have either their own knowledge or their own expertise, but certainly they have the ability to buy the best advice. It is the small investor, the person thinking of investing in securities perhaps for the first time, who may need more guidance. The proposed legislation as outlined in the White Paper which we have been discussing this evening will help in this respect. It will give them the confidence that they will not suffer unfairly from their relative inexperience. They will be able to obtain the information and advice they need, and that will encourage them to invest more widely.
Finally, and perhaps at the risk of repetition, I emphasise that we in the Government recognise that it is the first-time and smaller investors who are most vulnerable in this field. It is their interests that the proposals in the White Paper are designed to protect.
§ Lord Lucas of Chilworth
My Lords, the Government have a fairly open mind still as to whether there should be one or two. One has to remember—this is not to prejudge any issue—that the chairman of SIB is on the MIBOC, and vice versa. There is a lot of cross-fertilisation. The chief executive and the secretariat serve both boards. In effect, one might say there is one. If, as we go along in these next few months, both boards decide that the functions could better be arranged and undertaken under a single named board, the Government would be quite sympathetic to any suggestion put to them.