HL Deb 25 November 1985 vol 468 cc777-82

6.14 p.m.

Lord Williams of Elvel rose to ask Her Majesty's Government whether, in view of the continuing crisis in the London Metal Exchange (LME) as a result of the suspension of tin trading on 24th October, they will make urgent inquiries into both the LME trading practices and the events leading up to that suspension.

The noble Lord said: My Lords, I am most grateful to the noble Lord, Lord Lucas, for his courtesy in agreeing to respond to the Unstarred Question which I am putting before your Lordships' House. The noble Lord has already had an arduous afternoon and he now finds himself having to grapple with problems which are technically just as difficult as information technology, but fraught with much greater danger and, if I may say so, much more pressing.

I wish to make it wholly clear at the outset that it is not my wish to prejudice in any way negotiations that are taking place between the International Tin Council, the London Metal Exchange and the creditor banks. The Government have our full support in their attempts to ensure that the member governments of the International Tin Council recognise that, whatever the legal complexities of the situation or of their own particular positions, there is both a moral and a political necessity that the Tin Council's obligations be met in full. A contract is a contract, and no amount of weasel words can avoid that fact. Good faith in commercial dealings requires no more and no less than that fact to be recognised.

It is not only a matter of legal principle—it is a matter of commercial reality. It is the commercial reality that makes it essential for the Tin Council to discharge the debts contracted on its behalf, since for it not to do so would undermine the whole basis of international trade, not only on the London Metal Exchange but on other markets as well.

We must also support the efforts of all involved to ensure a "soft landing" rather than a "free fall", once trading is resumed on the Metal Exchange. It is clear that the price of tin must reach an equilibrium level below, and perhaps well below, the price at which dealings were suspended. To reach that equilibrium in an orderly manner, without a chaotic market, without causing bankruptcies among metal dealers and perhaps a domino effect into other financial markets, will certainly require great skill as well as financial support. But such an operation must succeed if the London Metal Exchange is to survive in anything like its present form, or with anything like the predominant position that it has hitherto held in metal futures markets internationally. There are plenty of international interests who would be glad to see that position destroyed.

Nevertheless, and having made those (I hope) very firm statements in support of the Government's present course of action, I believe that inquiries into this whole affair are now a necessity. Your Lordships are entitled to an explanation of how we got into this unholy mess in the first place. Furthermore, I believe that the kind of inquiries for which I am pressing are an essential precondition for restoring confidence in the London Metal Exchange, assuming its survival. Thirdly, I believe that from this whole unfortunate

affair the Government can draw some important lessons, not just for the future of the London Metal Exchange but for the future regulation of financial markets generally in the City of London.

Let me take those three points in that order How did we get into this mess? To me—and to many others, I am afraid—the answer to the question is far from obvious, but the areas which should be inquired into seem to be quite clear. The first concerns the practices and procedures of the London Metal Exchange itself. Are they fully adapted to modern trading conditions? Could the exchange have avoided this crisis if it had been a member of the International Commodities Clearing House, which provides a central clearing system for the soft commodities markets? Why has the exchange persistently refused invitations to join the clearing house? Is it right that dealings outside the exchange and in contracts of more than three months—both sectors in which the Tin Council dealt in substantial volumes—are largely uncontrolled by the exchange? Are the credit control procedures of member firms on the exchange adequate?

How could it happen that a member, a subsidiary of Phillip Brothers, stopped trading with the Tin Council 18 months ago, and that recently a spokesman for that company said, "We were wrong: he survived longer than we thought", but that 14 out of 28 full members were still doing a large volume of business with the Tin Council at the time of suspension?

Did not the Metal Exchange itself know of the precarious position of the Tin Council, and if so. why did the exchange not take action? Perhaps most serious of all, why did the British Government, themselves a member of the International Tin Council and therefore presumably knowing the exact financial position of the council, not raise the alarm about the dealings that were being undertaken on the Tin Council's behalf?

The second area to be looked into must be the dealings of the Tin Council itself in the weeks and months leading up to the suspension of trading The International Tin Agreement is nearly 30 years' old. It was set up, by producer and consumer countries, to stabilise the price of tin within a band; in other words, to keep the price below a fixed ceiling and above a fixed floor. To do this the International Tin Council, set up under the agreement, operated a buffer stock, selling out of it if the tin price got too high and buying into it if the price fell below the floor. The buffer stock manager had to deal in the futures market—the London Metal Exchange—as well as the spot market, since the price of metal 90 days hence is inextricably linked to the price of the metal today.

The task of maintaining the price in face of falling demand and expanded production has been becoming progressively more difficult. The buffer stock manager apparently repeatedly warned council members that he was running out of money. At a recent meeting in Canberra of the Association of Tin Producing Countries a further £60 million was in principle committed to the buffer stock operations, but it was a drop in the ocean. The buffer stock manager already owed more than that to his banks.

But it is the post-Canberra dealings of the buffer stock manager that must be looked into. Is it true that he dealt in the enormous volumes that have been alleged, building up huge obligations to members of the Metal Exchange, perhaps £400 million to full members and a further £ 150 million to traders outside the exchange? Did he himself know, or was he ignorant of, the buffer stock's financial position? Was he just reckless, or was he unaware? Was he acting under instruction, or on his own personal initiative?

I hope I have asked enough questions to persuade the Government that inquiries are needed into all the circumstances of this affair. But they are not only needed for a better understanding of what went wrong. I believe too, as I have said, that the London Metal Exchange itself would benefit. It is no secret that trading on the exchange has suffered badly as a result of the tin crisis. Obviously, outside operators are very cautious in dealing with members of the exchange when they do not know how many, and which, are likely to survive. There has already been a demand for the suspension of nickel trading, and small, uncontrolled markets have apparently sprung up elsewhere. And the longer the suspension, the more confidence breaks down. The air, my Lords, needs clearing, and the only means of clearing the air is through a full and open disclosure of what has happened. In my view that is the quickest and best way to ensure that confidence is rebuilt.

Thirdly, my Lords, we must not neglect the lessons that can and should be learned from this affair when we come to debate the proposed Financial Services Bill. Is the London Metal Exchange a good advertisement for self-regulation? Would a different constitution, different procedures, different arrangements have enabled the crisis to be avoided?

Let me illustrate this wider point with an even more serious thought. The London Metal Exchange is a principals' market with no clearing system. In other words, full members of the exchange deal with one another not as agents but by using their own resources, and do not, as in New York or Chicago, clear their transactions through a central mechanism which acts as an intermediary in deals between traders, protecting other traders from the failure of one. In London the failure of one full member of the London Metal Exchange causes major problems for those of the rest who have been dealing with the failed member, but the failure of two or more members would lose so much for the rest that the whole edifice could come crashing down. This is the situation which faces the exchange today.

But this is exactly the situation which will prevail in the other financial markets after the "big bang" in October of next year. There, too, we will have a principals' market. There, too, no central clearing mechanism will exist. And there, too, we will have the same potential for a "domino" effect on other institutions in the event of the failure of a dealer. This is why inquiries into the Tin Council affair have to be made, not only to establish whether there has been recklessness or incompetence, not just to restore confidence in the London Metal Exchange, but to point up the lessons and to make the future regulatory proposals more judicious and more soundly based.

We have been surprised at the reaction of our partners in the European Economic Community to the tin crisis. They regard it as a United Kingdom problem, and specifically a City problem. My Lords, their reaction to the tin crisis will be as nothing if something goes badly wrong in the London financial markets under the new dispensation. It is vital to put our house in order, and be seen to do so.

I have taken up enough of your Lordships' time in putting my Question. But we are dealing with one of the major financial markets in the City of London. It has recently celebrated its 108th anniversary. We are dealing with a market which earns for the United Kingdom as much as £300 million per annum in foreign exchange, and which has hitherto been the world leader in its sector, unchallenged by New York or Chicago, Kuala Lumpur, or Zurich.

This market is in danger of collapse, with unforeseeable consequences across the whole of the financial sector of the City of London. I believe that the Government, as the ultimate custodian of the health of our financial markets, have a duty to inform your Lordships—urgently—about the origin and nature of the present crisis. I believe furthermore that the Government can only bring benefit to the London Metal Exchange by making the inquiries I suggest, and might, I venture to hope, learn some useful lessons themselves in the process, not least in their ambitions to make London the financial centre of Europe.

But, my Lords, one point is paramount: time is not on our side. Time is not on the side of the London Metal Exchange, and it is not on the side of the Government either in their role as guardian of the London Metal Exchange, or indeed in their role as prime mover of a new system of regulation throughout the City. Your Lordships must know the truth about what has happened, and must know it as soon as possible after the conclusion of the present negotiations so as to ensure that, when legislation comes before your Lordships' House on these matters, as it soon will, the proper decisions are taken to avoid such fiascos occurring again.

6.29 p.m.

Lord Lucas of Chilworth

My Lords, first may I congratulate the noble Lord, Lord Williams of Elvel, on his appearance on the Front Bench opposite. I am sorry, as I think he is, that on his first appearance on that Bench he should have to raise a Question of such delicacy yet at the same time such importance. In answering him this evening—and I should like to assure all noble Lords of this—I recognise the experience and eminence in the field of banking of the noble Lord, Lord Williams, and indeed his experience in matters pertaining to the London Metal Exchange. Of course I noted from the Order Paper his call for inquiries into some aspects of this question. I shall try to attempt to answer his points, but I must make it clear from the outset that the Government's overriding concern is to restore orderly trading in tin. This, of course, implies agreement between the International Tin Council and its creditors on a way of settling the council's outstanding obligations. Her Majesty's Government are involved in discussions with all interested parties. I feel quite sure your Lordships will understand our concern that these discussions are not in any way prejudiced by what is said here today. I shall therefore, note most carefully all the points that the noble Lord has made, but I hope that he will forgive me if I decline to comment in detail on some of them.

The noble Lord raised first the question of the legal position, without going into any detail. He accepts that the position with regard to the International Tin Council's commitment is extremely complex. I can assure him that the Government continue to study this aspect of the matter with urgency. It would be inappropriate for me to comment further at a time when discussions may be taking place between all the parties involved. However, Her Majesty's Government have made it perfectly clear that they will stand by their commitment to 4 per cent. of the Sixth International Tin Agreement and they expect other sovereign governments to do likewise. The cost of that commitment cannot be quantified at present.

The noble Lord called for an inquiry into events leading up to the suspension of trading. The immediate cause of that suspension is well known. On 24th October, The International Tin Council announced that the buffer stock manager no longer had the resources to support the price of tin. Since that time the Government's efforts have been concentrated on securing an early return to orderly trading in tin.

The council, in its turn, has announced that it will meet again on 2nd December and will remain in session until definitive decisions have been taken. I very much hope that all member countries will adopt a positive and constructive approach to those discussions and that, in particular, they will follow the lead of the United Kingdom by announcing their readiness to meet their share of the commitments.

I noted also that the noble Lord called for an inquiry into the trading practices of the London Metal Exchange. I ought to make it quite clear at this time that these are matters for the board and committee of the exchange itself and I am sure that those bodies will be considering carefully the implications of recent events.

I noted what the noble Lord said about the merits of introducing a clearing house system into the Metal Exchange. But again that is a matter for the authorities of the exchange to consider. I do not think that we should lightly ignore the fact that the exchange has contributed hundreds of millions of pounds to this country's overseas earnings and that there are issues other than tin to be considered when they themselves inquire into their own trading practices.

The noble Lord spoke quite shortly about the forthcoming financial services Bill. That Bill has yet to be printed, as I replied in answer to a question from the noble Lord, Lord Bruce of Donington, last week. We anticipate that the Bill will be printed at the end of this year. I do not think your Lordships would expect me to comment on the proposals which it will contain. Events and consultations in that area are being taken note of and are being considered very carefully. We in this House in our turn will in due course have ample opportunity to discuss the merits of the Government's proposals and their scope as set out in the financial services Bill.

I thought I heard the noble Lord, Lord Williams, say towards the end of his remarks that he would expect inquiries of the nature he has outlined to be undertaken as soon as the present negotiations are completed. From that, I gather that he is not expecting me this evening to say, "Yes on such and such a date" or, "No". We aim to help to get the exchange back working properly. I accept then that it may be appropriate to look into the circumstances surrounding the difficulties. There may be (probably there will be) important lessons to be learned; but, as I have said, for the present we must devote our efforts to resolving the immediate problems of the ITC's debts and the problems of the suspension of orderly trading in tin.

Lord Williams of Elvel

My Lords, before the noble Lord sits down, do I understand that he is prepared to concede the principle of an inquiry or inquiries after the negotiations have been completed? I deliberately put that phrase in because, as I said earlier in my speech, I do not wish to complicate the process of negotiation. Once that has been done I think the House would like to see an inquiry go ahead.

Lord Lucas of Chilworth

My Lords, once these negotiations are completed and there is a return to orderly trading, we shall then have the benefit of the advice of the board and its committee and can make a judgment on that question at that time.

House adjourned at twenty-three minutes before seven o'clock.