§ 12.10 p.m.
§ Second Reading debate resumed.
Lord Bruce of Donington
My Lords, we on this side of the House are most grateful to the noble and learned Lord, Lord Cameron of Lochbroom, for having introduced the Financial Services Bill into your Lordships House. Perhaps I may say immediately that we on these Benches shall do our utmost to secure a speedy passage for the Bill, because we are in agreement with the general thrust that lies behind it. We ought perhaps to say that the Bill that is now before us differs quite significantly from the original Bill that was introduced in another place; and that by a cross-party effort helped by my honourable friend Mr. Bryan Gould (who, I think it is generally agreed, did a magnificent job on the Bill) and some Conservative colleagues in the other place, we succeeded in improving the Bill significantly.
We understand that further amendments are to come from the Government together with complete explanatory memoranda dealing with the new clauses, which are largely in implementation of undertakings given to meet representations that had been made to them from Members in another place and also from outside bodies. Of course, this may prolong the passage of the Bill but not, I hope, to an extent that will necessitate your Lordships exceeding the normal period of time allotted to such a Bill or so that it may be compared with what has been inflicted on many of your Lordships by the Gas Bill. Moreover, we note that among the speakers today are a number of people eminent in the City whose contributions noble Lords on both sides of the House will value very much and which we hope will aid us in dealing with the somewhat tortuous clauses of the Bill when it comes to Committee.
It is about 55 years since I first began to experience the City of London, when as a callow articled clerk I peered out of my window and gazed down on the scene in Queen Victoria Street, through which in those days at approximately 4 o'clock in the afternoon marched the Grenadier Guards going to take up their positions in the Bank of England. Those were comparatively balmy days—I use the word "balmy", not "barmy"—when, despite periods of considerable excitement, the work of the City's institutions proceeded quite placidly, serenely, and one might also say with some dignity—apart from an occasional outburst of activity on the Stock Exchange which sometimes resulted in some conduct which noble Lords might even now regard as a little unseemly.
Nevertheless, in those days the City sought to serve the commercial, trade and industrial interests of the country, and did so remarkably well so far as one can judge. It seems a long time ago but those were the days when a man's word in the City was his bond and if his word was broken then he, or his interest, was speedily made aware of the fact and he would not find his future career enhanced to any considerable degree. We live in different times. In the old days the cranes in the river below London Bridge were still swinging day by day and the river was a hive of physical activity in trade and commerce. Now it is not so. The cranes no 597 longer sway about. They lie abandoned and derelict all the way down river to the entrance of the estuary.
The activity in the City, however, has increased very considerably. I do not think I am being unduly controversial when I say that the transactions accomplished in the City of London, which are greater than those taking place in New York and Tokyo combined, if measured in money terms across the exchanges are in currency volume about twenty times what would be required to sustain normal trade between ourselves and the outside world. Nor can it be denied that the City's institutions, and many of the bodies to whom reference has been made by the noble and learned Lord and to whom detailed reference will be made by my noble friend Lord Williams of Elvel when he comes to reply, still sustain services to our manufacturing industry, and in particular service in the growing realms of insurance and unit trusts and the like.
They still perform those functions, but much of their activity today is concerned with making money out of money, and it is a matter for some serious consideration whether this process of "froth creation"—the creation of money out of money rather than using money to make an effective contribution to the material wealth of the country, its manufacturing output and the service output that is directly connected with these activities—can long be sustained.
Another point that we have to bear in mind—and I shall try to be perfectly fair and say that there is an "up" side—is that the City as a whole at this time is generally concerned by the rash of takeovers that have occurred over the past few years. These takeovers involve a terrific amount of service activity and speculation but it is something that in fact does not add at all to the material wealth of the country, and in many ways it actually decreases it. We are all familiar with the instances of leverage takeovers that have taken place where people or interests without adequate resources have taken over quite prosperous existing companies on the basis of money that has been borrowed and after the acquisition, in order to repay that money, they have sold off and sometimes closed off parts of the undertakings involved.
It will not have escaped the attention of your Lordships—and I say this not as a matter of controversy but as a plain matter of fact—that many of the activities of the City have been concerned in the privatisation programme, out of which the City has earned very lush profits in terms of underwriting fees, commissions, advice and the rest of it. Those have not added one bit to the productive capacity of the country. It is for consideration as to how long that aspect of the City's activities can be continued.
Perhaps it is proper for me to say from these Benches (without any hostility at all to the very hard-working men and women who work within the square mile and, indeed, outside it) that on assuming power, as we must surely do within a measurable period of time, we shall require a more co-operative attitude from the City generally towards the real production and social needs of the United Kingdom. We do not think that unreasonable. Indeed, we have already had indications that that co-operation will be extended.
598 The noble and learned Lord himself drew attention to the unfortunate incidents that have taken place during the past few years in connection with fraud. Those frauds cost some billions of pounds in terms of the money that is taken from people or misspent. The amount is indeed considerable. It is to be hoped that this Bill will assist the authorities and that the activities of the SROs will result in the activities of these malefactors being ended or at any rate substantially reduced.
I do not make this point in any political way and I would not wish anything I have said in this regard to indicate that in our view fraud is widespread and all pervasive in the City of London. The City of London and its institutions are, in the main, conducted by honourable people who seek to earn their living honestly and to give square deals to their clients. I would not wish undue attention to be given to that aspect. Nevertheless, it is a matter that has to be tackled and I hope that with the provisions of this Bill, extensive as they are, the Government will heed the request that I have repeatedly made from these Benches for the offices of the Director of Public Prosecutions and of the Fraud Squad to be increased both in number and in technical component, to enable the provisions not only of this Bill but of other Bills to be carried into effect.
The noble and learned Lord said that one of the purposes of the Bill—indeed, the main purpose—is to protect individual investors. We agree that that is absolutely necessary. At the same time, we should perhaps bear in mind that individual investors occupy a comparatively small segment of our society. Recent estimates have been made as to the percentage of the adult population which is comprised of individual shareholders. One of the latest figures is some 14 per cent. There have been earlier figures produced by the Treasury showing 6 per cent. and 8.5 per cent. But even on the assumption that 14 per cent. of the adult population are individual shareholders, we should bear in mind that there are still, even on that most optimistic basis, some 36 million adult citizens in our country to whom this Bill can be of but little interest.
When considering the interests of the individual shareholders it should be a salutary reminder within the context of the remarks that I made to your Lordships a few moments ago, before I embarked upon this section of my speech, that those individual shareholders are not likely to be found among the bottom 50 per cent. of the adult population who between them own under 4 per cent. of the total disposable assets in the country. Nor are they likely to be found among the 7 million of our people who at the moment are at or below supplementary benefit level.
I say that not to make a political point but to emphasise that there are other citizens in the United Kingdom apart from those who have the privilege of investing and saving their money. Incidentally, most of it is savings rather than carrying any measure of control. Moreover, we should also remember that some of these individual shareholders—particularly those on lower incomes; and there are many with lower incomes who do have savings within the limits I have suggested—also face certain credit problems. At the moment, some £27 billion is outstanding in consumer credit and part of that outstanding credit is 599 undoubtedly due, to a certain degree, to investment in shares. But, again, it is not something which should in any way detract from our determination to ensure that the protection sought by this Bill should be given to all investors, regardless of whether they are rich or poor, because it is fair and right that we should do so.
The noble and learned Lord did not go through the list of the various self-regulatory bodies which will be responsible to the SIB and I shall not repeat the list here so as to save time, and for most of your Lordships repeating it is unnecessary. However, I venture to draw attention to one point. I think we agree that there is going to be a very large overseas interest in the Big Bang and, indeed, well before it. Many international firms of high repute, particularly from the United States and Japan, are already establishing themselves here within the SRO framework.
I should like to emphasise one point. It is bound to be the case that some of the less reputable characters who are probably known to quite a number of people in the City may seek, under a respectable cover in the United Kingdom, to establish themselves indirectly within the SROs and therefore within the City structure. We therefore emphasise at this stage our anxiety that the SROs should undertake the most stringent tests and make the most stringent inquiries to trace the ownership of firms who apply to become members of one or more of the SROs; otherwise we shall find that the same troubles which this Bill is designed to prevent and correct will arise again.
There are many technical aspects of the Bill which will come under our surveillance and which will cause much technical argument from all sides of the House, including the nature of the SIB itself. There is no unanimity of view even within the City that it should be a non-statutory body. There is the question of the machinery to be adopted for the possible changes of SRO rules.
There is also the question that will undoubtedly interest those of your Lordships who are concerned with the legal profession, which arises from empowering non-governmental bodies to originate what amounts to secondary legislation. That subject will also be of some interest to us. I shall not touch on the role of auditors because, having a special interest in that subject, it will be better if I leave that until Committee stage.
The topic of insider dealing will take a good deal of our time. I have in mind the fact that even though the Stock Exchange reported 87 cases of what it considered to be insider dealing to the Director of Public Prosecutions, only five prosecutions have eventuated. We shall have to give those parts of this Bill concerned with insider dealing considerable attention, in order that that situation may be dealt with.
The final detailed point to which I shall refer concerns investment advice. I am bound to say, although I am open to argument, as are my colleagues, that I cannot understand why newspapers should be taken out of the field of regulation for investment advice. If it is our wish, as I am sure it is, to protect Aunt Agatha of Weston-super-Mare, then one can bet one's life that Aunt Agatha does not rely on the advice 600 of stockbrokers, investment analysts or tip sheets. She tends to rely on the financial correspondents of the newspapers that she happens to read. I suggest that that is the case with the bulk of small investors. I am not talking here about the more sophisticated investors, many of whom may be in your Lordships' House, who probably have their own staff of investment analysts. I am talking now of the ordinary investors of small amounts who mainly obtain their tips from the press. At this stage, I can see no reason why the press should not be brought into the Bill.
Finally, as an overview of the Bill as a whole, I am sure your Lordships will agree that the Bill itself—and I pay tribute to much of its contents—has been brought into Westminster at a time when there is a bull market. However, the bull market will not go on forever. One must ensure that the Bill will stand up to the situation that may arise when the going gets tough. That is when the real stresses will emerge at SRO level, at investor level, at SIB level, and—if I may dare say so in the presence of so many eminent bankers—at the bankers' level also.
My colleagues will be dealing with many of the technical aspects of this Bill of which I am not myself technically qualified to take an authoritative view. However, I say once again on behalf of Her Majesty's Opposition that we welcome the Bill and we shall make every constructive effort to ensure that, where it can be improved, it will be improved.
§ 12.34 p.m.
§ Viscount Chandos
My Lords, the noble and learned Lord, Lord Cameron of Lochbroom, has introduced this important and complex Bill to your Lordships' House with great skill and clarity, which I am sure your Lordships' House will appreciate. I am certain that the House will in turn follow the same high standards throughout not only the Second Reading but also the later stages of the Bill that stretch out ahead of us.
The noble Lord, Lord Bruce of Donington, whose healthy scepticism of the establishment I much admire, has on this occasion, perhaps, opened the proceedings in a slightly more destructive style than the subject warrants; the rhetorical equivalent of saturation bombing, when I believe that what is required is something altogether more accurate and carefully-targeted. However, like the noble Lord, Lord Bruce, I should like to take your Lordships' time today to try to examine the overall purpose of the Bill and the context in which it must be judged, rather than provide a trailer in Technicolour detail of individual points that will be extensively debated during the Committee stage later in the month.
In recent weeks I have, I feel, reminded your Lordships often enough of my position as a director of a bank that is active in many of the areas covered by the Bill. I will only add on this occasion that I am particularly concerned in my working life in the markets in international securities and in transactions covered under the definitions of contracts for differences.
It is almost exactly three years ago since your Lordships' House heard the noble Lord, Lord Cockfield, announce the agreement reached between 601 the then Secretary of State for Trade and Industry and the chairman of the Stock Exchange. Although interest in, and concern about, the conduct of investment businesses was already high by that stage, and the Gower Report already commissioned, there can be no doubt that the final resolution that that agreement represented, for the referral of the Stock Exchange to the restrictive practices court by the previous Labour Government, was the inevitable trigger for the major review of legislation contained in the Bill.
In that the original referral of the Stock Exchange under the restrictive practices Act took place in 1976, your Lordships might justifiably feel that 10 years have been invested in the creation of a new framework for the securities and investment businesses, and that a heavy responsibility lies on Parliament to create an effective and long-lasting regulatory environment against the challenge of complex and rapidly changing markets.
The effect of the agreement between the Secretary of State and the chairman of the Stock Exchange, and the rapid and radical reshaping of the UK capital markets and the intermediaries involved in them, was both inevitable in the light of international developments and desirable from the point of view of fundraisers as well as investors, and from the standpoint of trying to ensure that British firms, and London as a centre, maintained a prominent position in the international financial markets.
That said, I still regret that no inquiry by the Monopolies and Mergers Commission or by any other body was substituted for the hearing that would have taken place in the restrictive practices court had the settlement not taken place, since an official and comprehensive forum would have been invaluable for the discussion of the many difficult and controversial points that have arisen from the whole process of financial deregulation.
I believe that the Government themselves would have found that both the areas covered by this Bill and the many other aspects on which the financial markets impinge would have been more easily and better considered with the assistance of such an inquiry. On the day that the settlement with the Stock Exchange was announced to your Lordships' House, the Minister stated that it remained to be seen whether or not dual capacity was an inevitable consequence of the agreement to abolish minimum commissions which I suggest, not just with the benefit of hindsight, showed that the Government had thrown not only the map but also the compass out of the window before embarking on such a long and difficult journey.
The role of the financial markets is to provide a safe and fruitful vehicle for individual savers and all other investors on the one hand, and, on the other hand, to be an efficient and resourceful supplier of capital to productive enterprises and to the Government themselves—even with a Government such as the present one, who have with great determination attempted to reduce the Government's direct role in many areas of the economy.
Inadequate investor protection could clearly lead to investors suffering losses. whether through fraud or negligence, and that in turn through a widespread loss 602 of confidence in the system, to an increase in the cost of capital to all industry or parts of industry, and even to extreme difficulty in raising funds on any terms at all.
On the other hand, excessively protective legislation, while maximising the security of savers' investments, could unduly depress the potential returns due to them and at the same time impose unacceptable handicaps on British industry through uncompetitive financing costs, as well as adding even to the cost of the Government's own landing programme. I believe that it is most important that your Lordships' House bears constantly in mind that there is a potential conflict between investor protection and the promotion of efficient, modern and sophisticated capital markets and that we should be failing British industry most of all if we considered this Bill with too narrow a focus on investor protection. without being ready to strike a correct balance with the interests of other users of the financial markets.
The noble Lord, Lord Bruce of Donington, and others concerned by the apparent distancing of the City from industry and other areas of society which have not enjoyed equivalent prosperity, may believe that the changes and development in the market which this Bill is designed to contend with are too self-serving and self-interested. Although I too believe most strongly that the City and all who work in it must constantly return to the concept that the City and the financial markets should be the servants of the rest of society and not an end in themselves, realistically we cannot impose or encourage artificial constraints on the development of the City without ultimately diminishing its potential contribution to industry and the rest of the economy.
The consequences of the continuing rapid development of the City, particularly in an international context and under the influence of competitive pressures from overseas, will give rise to awkward and sensitive problems such as pay differentials with other jobs in industry, the professions or the public sector, as is the case in many other developed countries. But these must be faced, resolved or reconciled, while still allowing the financial institu-tions in this country to maintain and, it should be admitted, to regain a leading position in the development and refinement of financial technology. If, in turn, exceptional pay and other conditions in the City are thereby tolerated by the rest of society, the City, as the noble Lord, Lord Bruce said, must ensure that this financial sophistication in the capital markets is fully and ruthlessly exploited in the interests of British industry.
The stimulus for the development of the new technology in the financial markets is competition, and aggressive competition at that; that is the wider justification for the deregulation that was set in train by the agreement with the Stock Exchange three years ago. That, in turn, is why it has been essential to see the regulatory arrangements for the financial markets reviewed and amended, in order to establish a system which is strong enough to contain the hugely increased competitive pressures. Your Lordships' House must therefore ask whether the Bill is man enough to do that.
603 I believe that all practitioners in these markets understandably start off predisposed towards the principle of self-regulation, and there can be no doubt, as the noble and learned Lord, Lord Cameron, said, that in the past self-regulation has served investors well, at least in the principal, mainstream markets in securities. We must not underestimate, however, the scale and implications of the changes now in train in many markets and we must examine most critically any assumptions made about the future based on the markets and the practices of the past. Is there, for instance, a fundamental inconsistency between deregulating the markets in order to allow the strong blast of increased competition to promote greater efficiency and innovation and continuing to rely on self-regulation and the self-restraint which that implies?
In a significant ruling by the takeover panel a number of years ago, it was stated that under a self-regulatory system a bank must owe its first allegiance to the system itself, rather than to the interests even of its client, in considering matters such as confidentiality. Although a statutory system of regulation does not remove the responsibility of participants in the markets for making often fine judgments of this sort, might not self-regulation in fact impose an unnecessary and unacceptable additional burden on firms striving to prosper in a rapidly changing and much more competitive world?
Those questions elicit answers that vary, not on a consistent basis among different political parties or between the City and the rest of the community, but substantially among individuals within those broad categories. What is more, a simplistic differentiation between statutory and self-regulatory systems is not relevant, since statutory-based systems in other countries involve significant degrees of delegated self-regulation, while, on the other hand, there is a clear statutory foundation to the self-regulatory system being proposed by the Government in this Bill. Indeed, it has been suggested that it is only really a semantic difference whether this Bill institutes a system of self-regulation with statutory backing or a statutory system with extensive and specified delegation of powers to self-regulatory bodies.
I believe that even a semantic difference such as this can be important. What I think this Bill proposes, to borrow the jargon of the investment world, is "bottom-up" self-regulation, with a number of self-regulatory bodies and systems, some established and some new, being brought under one overall system and one Act. An umbrella organisation in the shape of the SIB has been designed to try to encompass all the different foibles and quirks of the different SROs and their markets. The risk is that the result will be that the SIB will resemble that ugly and awkward animal the camel, or a horse designed by a committee. Many of the problems and conflicts that have already arisen (and may still arise to be discussed and resolved) with this Bill may have been exacerbated by this approach: the immunity of the SROs, the powers of the SIB over the SROs and their rules, the Secretary of State's reserve powers, and so on.
In contrast, a "top-down" approach to self-regulation, where a fully statutory body delegated 604 downwards on a self-regulatory basis, as the SEC has done in the United States, for instance, might have allowed a number of those problems to be resolved more easily or with less awkward legal precedents being created. If we had aimed not to emulate the SEC but to use the 50 years that have elapsed since its institution to design, like other countries such as Canada, a modern equivalent, I believe that the Committee stages of the Bill would have been less tortuous than I fear they will be, with a similar or better balance of statutory and self-regulation being achieved at the end.
That said, both I and my noble friends and allies believe that it is better to take a constructive approach to making this Bill as effective as possible within the broad framework that the Government have set and had foreshadowed in the White Paper, rather than to try to tackle this vast task starting from the opposite side of the semantic ring. We therefore welcome in principle the Government's commitment to establish-ing a comprehensive and powerful regulatory framework for all the securities and investment markets in the United Kingdom.
We believe that the Bill proposes a framework which is at least potentially workable, if not an ideal starting point, but it is one which at this stage requires substantial clarification and amendment in many areas. The passage of the Bill through the House of Commons so far has identified many of the major points of contention and resolved some. In Committee stage in this Chamber we shall try to find resolutions for those problems already identified, as well as ensuring that other potential problems are not overlooked.
As I have already said, I am not proposing to talk today about the specific details which will take so much time during the Committee stage, but I should briefly like to mention three points of particular importance.
First, the exemption of Lloyd's, although theoretically justifiable in the light of Sir Patrick Neill's inquiry and the existence of separate legislation dedicated to this market, still causes widespread and understandable concern. Secondly, the question of the SROs' legal immunity and the limitations on that immunity, while again causing understandable public concern is central to the effective working of the system being proposed. It will not be possible to chip away at that delicate and sensitive point without endangering the whole structure built around it.
Thirdly, the possibly more arcane and technical question of which categories of securities should be subject to concessions under the insider dealing clauses, to allow stabilisation of new issues, is extremely complex. That question strikes at the heart of the principle that I have tried to address, which is the need to establish a balance between the interests of the users of the capital markets, fund raisers as well as investors. Stabilisation of equity issues has been allowed in the United States by the SEC since the early 1940s on the primary grounds of the increased cost of capital to companies which would result from its prohibition. Furthermore, it is a moot point that even private and unsophisticated investors stand to be disadvantaged on balance by there being carefully defined permissions for general stabilisation.
605 We shall return to these and other points in Committee. I join with the noble Lord, Lord Bruce of Donington, in hoping only that the many amendments needed do not extend excessively the hours needed in Committee. In the meantime, I commend the Bill to your Lordships' House with some reservations but great determination to see an effective and fair result.
§ 12.52 p.m.
§ Lord O'Brien of Lothbury
My Lords, although sorely tempted, I do not propose to begin by doing battle with the noble Lord, Lord Bruce of Donington, about whether it is unworthy, if not improper, to make money out of the handling of money. I know that that is a view that is widely held on his side of the House. It is not a view which I share. I believe that it is an essential part of the sophisticated financial and capital market and it helps it to serve both the country in which it exists and the world at large. If I may be forgiven, I shall start by exercising the rare pleasure of taking the rise out of the noble Lord, Lord Bruce of Donington, by saying that in some 60 years, as against a new boy of 55 years, of gainful employment in the City of London, I have seen many changes in our financial institutions, but none to compare with the revolution among them which has taken place in the past year or so, and is still taking place, in preparation for the so-called Big Bang at the end of October next.
Many of the long-hallowed divisions in the old financial world have already disappeared or will soon do so. As a long-standing and privileged observer, I believe that the old institutions served this country well over a very long period during which their reputation for efficiency and integrity was second to none. I was glad that the noble Lord, Lord Bruce of Donington, paid tribute to that. I do not say that there have been no blemishes, indeed some recent ones have been painful; but, generally speaking, London's worldwide reputation as a financial market is one of which to be proud.
That reputation has rested largely on enlightened systems of self-regulation reinforced in varying degrees by statute. I have always been a strong supporter of self-regulation administered by an effective agency. When, some 20 years ago, the great spate of takeovers and mergers produced unseemly battles, despite the existing code intended to regulate them, I created the Takeover Panel, which thanks to those who ran it and to no one more than the noble and learned Lord, Lord Shawcross, has established itself as a highly respected and successful body. I am delighted that it is to continue its work as a proven instrument of self-regulation in the new world that we face.
That world is already in being, to a large extent. It is a world of financial institutions, which began nearly 25 years ago with the internationalisation of banking through the Eurodollar and other Eurocurrency markets. That has gone so far that some of the biggest banks in the world now earn a substantial part, if not most, of their profits outside their home countries.
Those banking changes originated in the United States of America, from whence so much innovation not unnaturally comes, given its devotion to freely competitive markets. In part at least, those and subsequent developments in the United States of America are responsible for the massive regrouping of 606 financial institutions in the United Kingdom which has taken place in preparation for the Big Bang. In saying that, I do not wish to seem to underestimate the great impetus given to those changes by Her Majesty's Government who commissioned the Gower Report, found that it was good, and acted upon it with commendable speed.
I am one of those who warmly welcome the Bill. As everyone has said, it is complex, but I hope that it will establish order from the outset in a financial world more radically changed than ever before, a world in which many of the old institutional dividing lines have been torn down. Some old hands like myself arc rather apprehensive. The all-purpose bank or finance house which does everything for everybody takes some getting used to. I know that it is well known in other parts of the world. Will the Chinese walls remain unsealed as they should? It all depends upon the quality and integrity of the people employed. we are told. It always did. We hope that the present inhabitants of the City will be equal to the challenge facing them. From long experience, I should be surprised if they are not.
The apprehension of an old inhabitant strengthens my support for a comprehensive framework of legislation covering the entire financial sector which will be provided by the Bill, added to the supervisory regimes for banking, building societies and insurance.
I strongly support the Government's decision that the Bill is not the place for Lloyd's. The troubles in Lloyd's largely preceded the passing of its own new Bill which gives it a more effective system of self-regulation. I believe that Lloyd's should be allowed to show that it can make it work. Unlike some other people, I welcome the fact that it is not to be included in the Bill.
I know that there are those who would prefer to the present Bill, a system governed entirely by statute, taking as a model the Securities and Exchange Commission in the United States of America. I am firmly opposed to any such alternative which would seriously prejudice the ability of United Kingdom financial institutions to conduct their business with the speed, informality and reliability for which they are world famous.
I believe that the Bill provides a sufficient statutory basis for the system of self-regulation which Her Majesty's Government have rightly preferred. It is a mistake to regard self-regulation as soft regulation. I should put more faith in a sector of the market alert to maintain among its members the high standards which its own regulations require than a sector trying to find out how far a detailed statutory incubus could be stretched. After all, the SIB—the authorised but non-governmental supervisor of the whole system—is there to ensure that the game is played according to the rules. Through that agency we have in effect a SEC without, I hope, the bureaucratic encumbrances and legal spider's web which I gather even the American model is at last to some extent trying to shed.
It is right in my view that the SIB should have power to secure changes in the self-governing rules of the SRO. I would not want to see this power exercised frequently or arbitrarily so as to make a sham of self-regulation. I am therefore glad to see that the SIB 607 would be required to consult with an SRO before requiring a rule change and that SROs may appeal to the courts against such orders.
The SIB, as the appointed agent of the Secretary of State, is given in the Bill legal immunity from suit for damages covering both board members and officials. I strongly believe that some similar protection should be given to board members and officers of SROs who act in good faith. Some said that SROs are insufficiently accountable to Parliament to warrant such protection. I beg to differ. The SROs will be implementing rules equivalent to those applied by the SIB and should, I believe, receive similar protection. As a practical matter, I see small chance otherwise of getting suitable recruits to SROs, which must jeopardise the whole system of self-regulation on which I set such great store. I therefore support Clause 156 which gives the protection I feel to be necessary.
I am glad to see, in Clause 150, that the Bill permits the exchange of information by the agencies established under it, the SIBs and the SROs, with other supervisory authorities responsible for the banking system, building societies and the insurance companies. This should help to make supervision of the whole financial sector more effective, coherent and economical. Similar exchanges of information are to be permitted with overseas authorities, which is clearly very desirable given the growing internationalisation of securities markets. As the Governor of the Bank of England has pointed out in recent months, this development makes it imperative that regulators should be equipped to co-operate internationally. Banking supervisors already do this through the medium of the Basle Committee and securities supervisors will have to do their best to emulate them.
I hope that in all essentials this Bill will survive the debates in Committee which are to follow. In some particulars it can undoubtedly be improved by amendments in this House. Indeed, as the noble Lord, Lord Cameron of Lochbroom has said, the Government, in response to representations from professional organisations, have amendments of their own to propose. I hope that these cover Parts IV and V of the Bill, the provisions of which seem to me at present unduly exacting and inflexible, and likely to drive business away from London. However, broadly speaking, the Bill in its present form adequately protects the investor while meeting, as far as can now be seen, the requirements of the new financial world that we face.
I do not expect that new world to dawn without difficulties and casualties. It is likely to take some years before it has settled down and before we can see whether the regulatory system now proposed has fulfilled our hopes. There is then time enough to make any radical amendments which may seem necessary, although the system proposed is sufficiently flexible to permit adjustments at any time.
§ 1.5 p.m.
§ Lord Boardman
My Lords, I start by declaring an interest as a chairman of a clearing bank. I am delighted to be following the noble Lord, Lord O'Brien of Lothbury, who has contributed so much to the 608 wisdom of the City and who reminded us of his introduction of the takeover panel which I believe is one of the great examples of practitioner regulation. I, like him, welcome this Bill, but like the noble Lord, I too recognized the dangers and pitfalls and that we must proceed with caution in operating it.
However, the concept of practitioner-based regulation is one which I certainly believe to be right, and the alternatives were unacceptable. Like the noble Lord, Lord O'Brien of Lothbury, I pay tribute to the systems which have served the financial world so long and so well over many decades. But those systems have had to change because of the international competition and the changed regulations and the like which were operating in other parts of the world and which forced us to adapt in order that we should retain our markets.
The market in London, has a number of natural advantages. It has the advantage of the time zone midway between the United States and Japan. It has the advantage of language because English is the languge of world finance. It has the advantage of a great tradition and reputation for integrity possessed by the City of London. It is essential, I believe, that we build on these, even though we no longer have one of the strongest currencies which at one time enabled London to benefit in a very considerable way. Nor do we have the currency of world trade. However, despite those trends, we have a considerable record of achieve-ment within the City of London. The growth over recent years has been very encouraging. In 1980 the City of London's earnings were £2.2 billion. In 1984 they were over £6 billion. I imagine that when the 1985 figures are produced there will be seen to have been further growth. These are very valuable additions to the balance of payments of our country.
I believe that this Bill can help to ensure that we retain—indeed I hope improve from—this position. It is essential that we get the balance right. My noble and learned friend referred to balancing the need to protect the investor and at the same time to create a free market governed by integrity. It has to be somewhere between the rigid statutory control that we do not want and the free-for-all which could be dangerous and leave unprotected those who need protecting. Much depends upon getting this right, not only in the Bill itself. A lot will depend on the attitudes of the members of the SIBS and the SROs. Much will depend, too, on the participants setting themselves the highest standards and also seeing that those who breach either the letter or the spirit of the rules of the game are both condemned and punished.
There will arise in Committee a number of matters where amendments to the Bill are considered to be essential. Perhaps I may put down a marker to my noble and learned friend on one or two of those. The first one which will cause great concern is with regard to the money market activities. My noble and learned friend in his opening speech referred to amendments which would be made to that. That I welcome, but the indications so far are that the such amendments, or the proposals likely to come forward, will not provide a satisfactory separation between the wholesale and the retail markets. It is a very complex issue, and on this I recognise the problems of drafting that the Government must face. However, unless there is some 609 satisfactory solution to this very important point, then it will be a bureaucratic nightmare. I am sure that I do not need to remind your Lordships that these markets about which we are talking are mobile. It would be sad if they moved from London to somewhere like Frankfurt.
My second marker is with regard to what I think is called client's money. Under the Bill there is no protection for banks. Where the authorised firm as required opens a separate client's account, and the authorised firm then mismanages the account, it appears that the banks will have a liability that is quite unreasonable and, I suggest, unacceptable. I believe that the Bill must be amended to give the kind of protection that applies with regard to solicitor-client's accounts.
The third point of importance—of which I am sure my noble and learned friend will be aware—is on "cold calling". That is contained in part in a definition in the Bill, Clause 51(8), but it is also included in draft regulations from the SIB. In effect this could prohibit someone, such as a bank manager, from discussing with or advising a customer on his affairs, with a very few exceptions, even on the bank's own premises. That is something which cannot really be intended, but the suggestions for amendments that have been made have so far been resisted. I hope that my noble and learned friend will look at this matter, and treat it on the lines contained in the Consumer Credit Act.
It also has a bearing on the Personal Equity Plan referred to by the Chancellor of the Exchequer in his Budget speech, and which is something which I am sure the Government are most anxious to encourage. The Bill as drafted would seriously impact upon that Government scheme, both as a result of the provisions of the collective investment scheme and as a consequence of the "cold calling" embargo, to which I have referred. Therefore, I ask the Government to look very carefully at that. It would be a pity if the Personal Equity Plan were to be sabotaged by something contained in this Bill.
I hope the Government will not say that many of these matters are such as can be dealt with by the SIB itself. I think that those which are central to the framework of the legislation should be incorporated in the Bill and that the Bill should be amended to take account of them. Of course, many other points will arise in Committee but, like noble Lords opposite, I hope that we can deal with them constructively and quickly and get the Bill through in a form which will be an encouragement to all concerned with financial services.
It is important that we avoid detailed, restrictive legislation or regulation, which could create a vast bureaucracy and which would hand over these markets to overseas countries, which are anxiously waiting to take whatever they can away from London. We must make sure that we do not put that great London market and the operations of the City of London at a disadvantage. As the noble Lord, Lord O'Brien, said, it will not be an easy time for anyone who is involved in these markets. It will be difficult. There will be considerable short-term risks, but I believe that there will also be very real long-term prizes for the economy of this country if we can get it right.
610 I believe that the City has the skills, the resources and, above all, the integrity and tradition which will ensure that we shall succeed in retaining, and growing in, this very important area for the British economy, and I wish this Bill well.
§ 1.13 p.m.
§ Lord Lever of Manchester
My Lords, embarrassingly, I, too, have to declare an interest. Some minor proportion of my time is spent in banking. I am a chairman of the London operations of the largest savings bank in Scandinavia; I am director of a discount house; I am chairman of another small bank; and, with one or two other Members of this House, I have the privilege of being on the international board of a leading Austrian bank. That having been declared, I should say that I am a little puzzled today because my noble friend Lord Bruce and the bankers are all largely agreed on welcoming this Bill. I have a certain discomfort. Why?
Clearly, it is the duty of all of us, so far as it is practicable, to reduce the amount of fraud and dishonesty in this area, or for that matter in any area. First, it is easy to exaggerate the proportion of fraud and dishonesty in this area. Judging from the attraction of our newpapers to misdeeds in this area one might think that in this part of the 20th century the banking community in London is the most infested with dangerous crime, and that that is where most of our attention is required. I think that the opposite is the case. I believe that it happens to be a singularly law-abiding area and a singularly honest area. Therefore, we should not exaggerate, but that does not mean we cannot improve it.
I do not want to stray outside the ambit of this Bill, as other Members, quite reasonably, have done, but if we want to improve the functioning of the City of London and of our banks and investment institutions, it should not be in the area of curbing the minor aspects of dishonesty there; it should be in trying to improve policy performance by government. For example, had we been as alert to policy issues in relation to the banking and financial community as we are to spectacular but minuscule misdeeds in relation to the total turnover, we would not have allowed the doctrinal obsessions of the Bank of England to lead us into the wholesale deregulation here and in other countries where a similar process has taken place.
What is required is not pettifogging regulation, but basic policy regulation in banking. Banking is one of the areas which we cannot wisely control by bankruptcy and insolvency; it can be adequately controlled only by policy regulation. The general condition that alarms me about banking in this and other countries is by no means the dishonesty of the participants but the lack of intelligent, central policy regulation in all countries of the world, including our own, in relation to the immense, necessary accretion of overseas trade and finance which the interdependent world requires for its prosperity.
I now turn to the Second Reading of this Bill. The object is to reduce and prevent fraud. There are broadly two ways of reducing and preventing crime. One is to deter it by increasing the likelihood of detection and punishment, and the other is to set up a regulatory framework which will strengthen the 611 possibility of deterring crime and punishing it. That applies especially here. We should bear in mind that to deter by reliable detection and conviction is overwhelmingly to be preferred. It deters the crook and it does not trouble the honest man. No one has to worry if we stiffen the detection power in regard to criminality in this or any other area and no one has to worry if we strengthen the machinery for convicting these people. However, if we set up a network of regulation, it is our duty to watch that we are not causing more anxiety and expense to honest men than we are to the crooks.
Therefore, I hope that I am not too much the "other man out", with the noble Lords, Lord O'Brien and Lord Boardman, and my noble friend Lord Bruce all broadly giving the Bill a critical welcome. I can only rely on Mark Twain, who said:When everybody agrees, everybody is wrong".I would not otherwise have the effrontery to press my point upon your Lordships.
I would welcome limited and intelligent improvement in regulation and intelligent and effective enforcement of existing law which if it were effective, is quite adequate to cover almost every case of misdeed in the City in my lifetime. I know that very little legal ingenuity would be required if we could effectively enforce the existing law. However, I also welcome and recognise the need for an improvement in regulation. It seems to me that the Bill does little or nothing to improve detection and punishment of crime, and is overwhelmingly concerned with regulation. In short, I believe that on balance it will cause more problems and expense for honest people than serious additional problems for fraudulent people.
This lopsided approach to prevent misdeed by regulation always tends to come about if you do not bring into the initiation of the proposals sufficient practical experience. We always start with lawyers. The noble Lord, Lord O'Brien, said that he was glad that the lawyers were kept out of the Bill. It would not have been a bad idea if we had kept them out of the inspiration of the Bill, but unfortunately that was not the case. Professor Gower is the inspiration and guide of the Government and of the Bill. Every page of the Gower Report is luminous with his legal skill, immense erudition and good intentions.
Lawyers in this sort of area—and I ought to say that I am a lawyer myself—always tend to be over-endowed with ineffective good intentions, and are usually entirely unencumbered with any practical experience or knowledge of the areas to which their perfectionist approach is directed. I find that some of that criticism may be directed to Professor Gower.
Let me quote briefly from his report, which reveals the trouble and confirms my view. On page 29 of the report he does not tell us that he is going to improve convictions for dishonesty and fraud. No. What he says is:prosecuting for commercial fraud is locking the door after the horse has escaped and under our present criminal procedure the horse will probably get clean away. A regulatory offence is much easier and cheaper to establish and, if it puts the culprit out of business early enough, is a more effective preventative".612 The objective of the regulations is not to convict for fraud; it is to convict the people who are in breach of regulations.
That is not my purpose. I would welcome a Bill which improved the prospects of getting a genuine conviction for fraud, and punishing accordingly. One of the things I dislike about the lopsided approach to regulation that we have in this Bill is that you will be able to convict people, sometimes perfectly honest people, for minor regulatory offences, but they will be convicted and punished in an atmosphere of prejudice in which the judge will follow Professor Gower in saying, "It is a pity I cannot get the real evidence about his possible fraud. I had better hit him hard between the eyes on this regulatory offence". That is not the objective.
The proof that Professor Gower shares my doubts on the value of the regulatory approach is amusingly illustrated in another page of his report. I can summarise it to save reading, as time is getting short. He says that his first feeling was—and it would be amusing if I had the time to read the whole paragraph to the House—that having established this network of regulation to create a new criminal offence he should forbid that anybody who is registered should be able to boast that he is registered and announce that he is registered. "Why not?" he says. It is because that would give the misleading impression that in some sense the government department has approved of his activities. But the whole purpose of the regulation is to give the assurance to the man in the street that the Government have investigated the guy thoroughly and now have let him loose upon us, and we do not have to watch out.
But Professor Gower says, "My first instinct was that, in order to avoid the absurd impression that the purpose of the Bill was being fulfilled, I wanted to make it a crime for a licensed dealer to announce that he is a licensed dealer". That is a strange attitude, but in the end he comes to the reluctant conclusion that on the notepaper he will have to allow him to announce that he is a licensed dealer to make it easier to detect people who are not licensed dealers. And so it goes on.
I want to take a minute or two more on other aspects of the abstract perfectionism which lie behind the whole lopsidedness of this approach. At page 158 of the Gower Report you will see Professor Gower's unlimited enthusiasm for punishing reckless forecasting. He wants to incorporate that into the criminal law even more effectively than the patter which is there on the subject earlier. Of course all forecasting is pretty well reckless. If this were defined carefully it would be interesting to see a year later the Treasury officials who produce the annual economic forecasts, because of the forecasts that I read nearly all of them are wrong. Such is the human situation.
I know of no forecasts that have proved more wildly wrong in the City than the forecasts which come out from the Treasury. It may be they will not be prosecuted. I do not want to alarm your Lordships. The House of Commons passed a law some time ago which compels the Treasury to publish these reckless forecasts, so they are unlikely to be prosecuted for doing so.
The other point on page 152 is well worth looking at. There you see the usual claptrap about insider 613 dealings. Insider dealings, in my recollection—I certainly will add to my education—amount to pretty well nothing at all in total of the City's activities. Here and there somebody's secretary's husband gets prosecuted and fined for picking up an illicit £1,000. You are not dealing in the market like in America. You had under the old system a jobber system whereby it was almost impossible for large-scale insider operations to take place. Certainly if they have taken place in my lifetime, I have hardly heard of them.
Do not think that Professor Gower does not share the popular enthusiasm for punishing this form of malefaction. He carries it to a point where he is worried about Treasury officials. Maybe we have stopped them from gambling in gilt-edged, but we have not made any rule about them gambling in life futures on the strength of their inside knowledge. You had better make that a criminal offence too.
Professor Gower cites two devastating examples, both of which occurred in my lifetime. One was in 1956 and the other in 1936–30 and 50 years ago respectively. One was when J. H. Thomas got himself engaged in betting on changing the sugar tax in 1936. It was not of great financial significance for the world. The other was in 1956, the famous bank rate tribunal which, so far as I can tell, does not bear the slightest relationship to any of the matters that Professor Gower was considering. But he cites them as the two conclusive pieces of evidence of the need to take further action to prevent insider trading.
I conclude by saying that my discomfort is caused by the fact that there is little to improve the early prevention or detection of fraud, and much to harass the honest. I should like to see the regulatory system improved. I should like to see some of the problems of prosecution in the modern world of complicated financial offences looked at again. I am not enthusiastic for the rather shallow comment on the subject by Professor Gower, and I have not been completely convinced by the noble Lord, Lord Roskill. The matter needs looking at again. In short I utter a certain amount of what I hope will not look too eccentric a warning to the House: beware the road to a large and ineffective bureaucracy is always paved with perfectionist good intentions.
§ 1.30 p.m.
§ Lord Roll of Ipsden
My Lords, I also must begin by declaring an interest. I am a merchant banker and so part of an industry which is to be regulated by this Bill. I also apologise to the House if I am unable to be here for the whole of the debate owing to an inescapable earlier commitment.
I should like to make just a few remarks on some general aspects of this Bill and then refer also to two specific provisions which seem to me to be worthy of being mentioned in a Second Reading debate. As has already been said several times, this is a very important piece of legislation. It covers a wide range of activities and together with other legislation will for the first time in our history provide a comprehensive regulatory framework for the whole of the financial services industry.
It may seem paradoxical that an extensive period of financial deregulation should be about to end with an 614 attempt to provide a comprehensive system of financial regulation. But I think this is only a superficial paradox for with few exceptions—to my mind the most important being the abolition of exchange control—the past deregulation and what is still to come with Big Bang on 27th October have related to the separation of different financial activities mainly self-imposed and mainly based on tradition.
Now that markets are to be completely unified before very long the need for a regulatory framework has become evident. It is right to recall, as did the noble Lord who introduced this debate, that the impetus for this legislation has come very largely from concern for the protection of the investor and as he pointed out, its origins lie in the reports on this subject by Professor Gower.
I do not know whether Professor Gower will regard the Bill as it now is, or as it will be when it reaches the statute book, as reflecting adequately his own recommendations. But notwithstanding the witty sallies of my noble friend—if I may use this term outside parliamentary usage about Lord Lever—I believe that it is right to recall the path-breaking work of Professor Gower in this very important field of the economy and of the law. I think that Lord Lever might perhaps credit Professor Gower with a proportion of the sense of humour that he has himself displayed. I suspect that some of the things in Professor Gower's reports were very deliberately tongue in cheek.
While on the subject of consumer protection I refer in passing to a point made by the noble Lord, Lord Bruce of Donington, when he contrasted the very small number of shareholders with the enormous number of people who are not shareholders. I entirely take his point and I have the utmost sympathy with the spirit in which this point was made and the context in which it was made. I hope he will agree that this should not lead to the view that the need for an efficiently functioning and properly regulated financial services industry is not of very great concern to the vast bulk of our fellow citizens who are not and perhaps never will be individual shareholders, not only because of the pervasive influence of financial services over the whole economy but because they have an indirect interest in proper investment and properly regulated investment through pension funds, insurance policies, and so forth.
One of the main arguments concerning this legislation has been over the precise balance between what is to be achieved by statute and what is to be left to self-regulation. I do not share the views of those who totally reject the statutory approach. I believe, with great respect to my noble friend Lord O'Brien, that much of the criticism, perhaps not all, of the American system with its Securities and Exchange Commission is exaggerated.
Nevertheless, we have to recognise that self-regulation has very deep roots in our society not only in this area but throughout the whole of society and on the whole, as has already been pointed out from all sides of the House, it has an honourable history. Therefore, I am convinced that it was right to seek a solution which assigned an important role of self-regulation but put it on a foundation: the Securities Investment Board with statutory powers which are, and in the end will be even more so, not dissimilar to 615 those of the Securities and Exchange Commission. Let us be frank about it and recognise that. It should therefore, given the framework of law within which self-regulation will operate, remove any sense that this very important part of the economic activities of our society are under the cosy control of self-governing gilts.
I think the balance that has been achieved between the traditional way in which these matters have for so long been handled in London and a régime that is, can be seen to be, more secure from abuse (a régime that the very much larger market with many more participants and much more sophisticated techniques requires) presents a reasonable compromise, at least so far as it can be achieved on paper. A full assessment of its viability will only be possible after some years of practical experience.
There will no doubt be many details of this Bill to be closely scrutinised in Committee. Quite apart from the provisions of the legislation, much of the effectiveness of the new regime will also depend on future regulations and on the rules and practices of the SIB and the SROs.
One of the two specific matters to which I should like to refer—one of them has already been referred to in this debate as it now is in the Bill—is to grant immunity from damages not only to the SIB as originally proposed, but also to the SROs. I think that this extension is justified. Much learned legal argument has preceded the Government's decision to grant it. To me the decisive argument, as already mentioned by my noble friend Lord O'Brien, is the practical one. I think it would not be possible to recruit to the SROs practitioners of the right experience and standing if they did not have this immunity. There are provisions in the Bill for suitable complaints procedure. It may be that we can look more closely at this in Committee to see if it can be improved, and, in the last resort, civil action is also available.
My second point concerns one provision of the Bill which will require amendment at the Committee stage but which is important enough to be mentioned now. It relates to a practice known as stabilisation, particu-larly in the case of new issues in the Eurobond market which is affected by Clause 44(2) and by Clause 45. The objective of stabilisation is to smooth out price fluctuations during a period when by reason of an offering the market is unsettled. It is standard practice in the United States, and it has been all along for these twenty-odd years since the market has existed, standard practice in the Eurobond market. It is fair to say that so far from constituting improper manipulation to create a false market it is designed to ensure a more perfect working of the market.
Clause 45 authorises the Secretary of State to make rules permitting stabilisation of international securities. In that event the practice of stabilisation would not fall under the punitive provisions of Clause 44(2). However, the definition in the Bill of international securities is itself highly restrictive for it excludes equities and debt instruments with any equity element in them. It is confined to securities dealt in only by professionals.
616 This is a very important restriction particularly at a time when every day the proportion of securities coming onto the market that contain an equity element or are equities is increasing very fast indeed.
I do not wish to weary your Lordships in this Second Reading debate with examples of transactions which are now of daily occurrence but which would in practice become impossible under the present terms of the Bill. Nor is this the occasion to suggest how the scope of stabilisation might, subject to regulation, be widened or how any residual concern for protecting the unwary private investor might be met.
However, a change is, in my view, essential. Without it, there is a very real danger that an extremely important area of financial business, which started in London in 1962 and for which London remains far and away the most important world centre, might be drived to other centres where such restrictions do not exist, to the detriment not only of the financial community but to our whole economy. It may well be that the simplest way to deal with this point is to widen the powers of the Secretary of State, to permit stabilisation of securities generally, but to make them subject to such regulations as he may think fit to impose. It will then be up to the financial services industry to satisfy the Secretary of State as to what should be allowed and under what safeguards.
§ 1.40 p.m.
§ Lord Wolfson
My Lords, it is never easy to follow such distinguished and knowledgeable speakers, and I do so with great humility and as a businessman with financial interests—not with great technical knowledge of the matters in the Bill but with a certain degree of knowledge after 40 years of the practical implications of such legislation.
The Financial Services Bill recognises the contribution that the industry is making to the economy in terms of employment, in providing funds for trade and industry, and in making a very substan-tial contribution to the balance of payments—£6 billion has been mentioned.
There is implicit recognition also of the very competitive nature of the international financial markets in which we have to operate. It is as a businessman that I welcome measures which encourage soundly-based innovation, enterprise and competition and at the same time also those that provide strong safeguards for investors, together with responsible guidelines for transacting business.
As your Lordships know, there will be inevitably a minority of unsoundly based transactions, and therefore your Lordships will be giving careful consideration to further effective safeguards for investors as the Bill progresses through the House, as has been indicated by some noble Lords who have spoken previously. In particular, I hope that the Government will have regular consultations with the professional accountancy bodies on the question of monitoring and, where appropriate, strengthening the quality of existing accountancy standards, for together with responsible banking practices prudent account-ancy is at the heart of a healthy financial system—an essential ingredient for investor confidence.
617 As examples, I have in mind the need for the best accountancy standards relating to depreciation of fixed assets and intangibles, capitalisation of interest, adequate debt and stock provisions, currency translations—which are particularly important in today's volatile exchange market—and reviewing the present definition of above-the-line and below-the-line items, including property and high value fixed asset disposals.
I feel that existing audits for computer-based transactions, which are growing all the time, should be more frequently carried out as an additional protection against the possibility of fraud, a serious potential problem for computer users. Further thought also needs to be given to acquisition and merger accounting, to off-balance-sheet finance, and sensible parameters for leveraged transactions, which may have the appearance in good times of seeming attractive. However, if affairs go the other way—and, as your Lordships know, trade is subject to cyclical and other fluctuations—then, in Professor Galbraith's telling phrase, "the magic of leverage can work in reverse".
A substantial part of the serious international debt problem is clearly attributable to the unsound preponderance of borrowings to equity; and this is both a lesson and a warning for the future. It is clear that banking regulations must ensure responsible lending policies.
I hope that your Lordships will not mind my reading a short extract from the Financial Times, in a section on the United States of America, which I think is very apposite:United States regulators are well aware that the forces reshaping the US financial system have increased the level of potential risk.A shock which starts in one market may spread quickly along a network of linkages until it finds a weakness in some seemingly unrelated place.For this reason the recent volatility apparent in the US financial markets—and the perceptions it creates in investors—must be of concern.This explains why the regulators have been paying attention to the impact of computer-driven program trading, which has led to unprecedented daily swings in the market indices in recent months".That was in an article in the 25th June issue. This is all very relevant to both investors and businessmen in this country.
Speculative excesses that can damage confidence in the fabric of genuine business activities have to be foreseen and rigorously curbed by the regulatory authorities that are to be set up under the Bill. So-called creative accountancy can look good in the short term, but in the long term it will be destructive because it encourages management makebelieve and, above all, saps the cash flow that has to pay the costs, the taxes and the dividends arising from profits that have been shown but not actually made. A classic example was the capitalisation of R & D by Rolls-Royce, which was an important factor in its own cash flow crisis in 1971. It is essential for the investor that accountancy standards represent the highest common factor. These may temper the forecast profit expectations of early years, but help to make the later results more durable.
Good quality analysis and commentary are also of significant importance to investors to guide them in a well balanced manner—and we are fortunate in having 618 an excellent variety from which to choose. In my view, however, there is a need to examine the practice of highlighting pre-tax profit, a method that reflected a period of high nominal tax rates, alleviated by numerous allowances, now replaced by a more competitive and lower rate of corporation tax with limited allowances.
Provided the tax charge is normal, the emphasis should be on current earnings, dividends, and net tangible asset value per share, as well as on cash flow. These are the main criteria for judging business success, and are used extensively by the majority of overseas countries. They are, of course, used in this country but the highlighting of the pre-tax profit is, I think, the wrong emphasis.
Turning to the practical aspects of investment, the institutions, of course, are the most important factor, representing, as they do, much of the nation's savings through pension funds, insurance companies, investment trusts and unit trust funds. On the whole, investors have benefited substantially from their acumen; but the judgment and ability of fund managers to take a longer-term view are important to the progress of the economy and the steady creation of wealth. Short-term comparisons in portfolio performance can only be a very inadequate indicator—a numbers game. Experience has shown that capital appreciation is likely to be greater in long-term investment. Most fund managers, of course, think long term, and I hope that they will further expand and publicise this aspect of their policy; for to succeed management needs a reasonable continuity of investment and, in return, has to demonstrate that it is alert and progressive in seeking sustainable and profitable growth for its stockholders. Real wealth is created by business enterprises over time, though technological change and customer preferences can alter perspectives.
An area in which I have an interest, which is not really covered in terms of the Bill but in which I hope there will be a measured increase of institutional venture capital, is for applied technological research in universities, where there is potential for application in British industry and commerce. It can provide the seed corn from which many new businesses and industries have sprung. Entrepreneurs very often act as a powerful catalyst and have the ability to make several blades of grass grow where one existed previously. Their creative ability can be vital to a dynamic economy.
It is still too early to assess the impact of the current fashion for megadeals, whether they are now on the wane or are in the process of being restructured. There is a growing awareness of the effects on consumer choice of over-geared capital structures, and perhaps the realisation that at some stage there are limits to even the best top management capacity and creativity.
Diversified investment requires a diversity of management talent. The 1990s might well see a growing era of demerging, leading to the entry of fresh entrepreneurs to cater for new or revived consumer choice. Indeed, only recently a giant US firm, Dart and Kraft, has proposed a demerger after only two years, because it felt that the two parts of the firm would be more dynamic run independently. The restructuring 619 of ITT, which is the largest conglomerate of all, is well known in a similar context.
The service industries overall have become a major source of growth and employment prospects. They epitomise the second industrial revolution. Recent surveys of our two major competitors show that in Hong Kong the sector now constitutes 73 per cent. of the economy, as compared to 63 per cent. in 1971, while in New York the city's fortunes have been transformed since its problems in the 1970s, with over 300,000 new financial and other service jobs having been added. The world trend is clear and, happily, the financial and other service industries in this country have the talent and the experience to rival any other country.
The City of London has made its name famous throughout the world for integrity and skill, and will welcome this Bill's proposals to strengthen investor safeguards and tighten the regulations against insider dealing and other undesirable practices. The combina-tion of self-regulation and statutory powers will require time to see how effectively it is working. But it is an intelligent arrangement and should be given a chance to work. As the noble Lord the Minister has said, there is sufficient flexibility to make changes, if necessary. We must ensure that enterprise and competition are encouraged, that speculative excesses are both anticipated and severely curbed and that the provision of the most effective degree of investor protection is maintained and monitored on a regular basis.
The legislation before us should be so framed as to encourage a healthy spread of the benefits of free enterprise—the economic system that more than any other has enhanced the living standards of the great majority and in which more and more individuals have a growing personal stake.
§ 1.53 p.m.
§ Baroness Turner of Camden
My Lords, I welcome the opportunity to participate in this Second Reading debate on the Financial Services Bill. I have several reasons for wishing to do so and I had better declare my interests to your Lordships. First, I am assistant general secretary of ASTMS, a trade union that has one-third of its members employed in one area or another of the financial services sector. A number of these members are employed as insurance agents. Secondly, I am, and have been for some years, one of the lay non-specialist members of the Insurance Brokers Registration Council. Thirdly, I have a particular interest in pensions provision as a member of the Occupational Pensions Board.
Let me say at the outset that I am completely in favour of investor protection. I have no doubt whatsoever about its importance or about the necessity for it. Perhaps it has never been more important. Unfortunately, there are now large numbers of people who are made redundant, often in later life. The sums that they collect by way of redundancy payments are often all that stand between them and a lifetime of sub-standard living on state benefits. All too often, they have very little idea of how to make the most of these sums and yet they have an overwhelming need to do so. I know of examples of 620 investment that have led to losses as a result of incompetent advice, and the effect on an ageing individual living in an area of high unemployment, where he knows he cannot get another job, can be devastating.
However, doubts arise as to whether the system of controls envisaged in the Bill will be adequate to the task. The system proposed is a self-regulatory one with a number of self-regulating organisations, SROs, with a board at the top of the tree which will recognise SROs or withdraw recognition. I believe that it would have been better to have a fully independent statutory agency, which would have been representative of all those with interests in the industry and consumer interests, and with wider powers than those of the Securities and Investments Board. It should also be responsible for a statutory complaints procedure for dealing with investors' complaints against investment businesses, rather than the system that is proposed. The noble Lord the Minister said that the self-regulating organisations will not degenerate into cosy clubs. We must all hope that he is right.
I said earlier that my union has numbers of members who earn their living as insurance agents. We believe in a system of the licensing of agents. Indeed, the unions in the industry and the employers put forward proposals, through the Licensing Consultative Group, for a licensing scheme, a revised code of conduct and competence tests, but these were apparently rejected by the Secretary of State. Nevertheless, there should be statutory backing for better training, competence tests and a tougher code of conduct. However, we are against the total prohibition of unsolicited or cold canvassing. We believe that there should be rules about it, so that people are not contacted at inconvenient times of the day and are not subjected to intimidating behaviour. However, some agents would find it difficult to carry out their business if banned altogether from cold canvassing.
Clause 54 of the Bill introduces the concept of a black list and, although a tribunal can hear appeals against being placed on the list and applications to be removed, a direction under Clause 54 is exempt from the provisions of the Rehabilitation of Offenders Act 1974. An individual could therefore remain on the black list for the rest of his life and thus be prevented from working again. We think that this is unfair and possibly an over-reaction to pressure for consumer protection.
This is a highly competitive business. The insurance salesman is often under pressure from his company to sell and to achieve targets. It is therefore essential that there are rules of conduct and that these rules are seen to apply to everyone. However, Clause 46 of the Bill allows the Secretary of State, or the SIB, to alter the requirements so as to adapt them to the circumstances of the person, if compliance with the requirements would be unduly burdensome. The waiver of rules is unlikely to apply to major insurance companies. Indeed, the Government's ideological obsession with lifting the burdens from small employers may well operate here to permit less principled sellers of investments to operate in ways which consumers thought this Bill would outlaw. It may very well license the cowboy operator.
621 I said earlier that I am a member of the Insurance Brokers Registration Council. This body was established in the mid-1970s under its own Act of Parliament, with the object of regulating the conduct of broking intermediaries. Since it has been in existence, it has done its best to raise standards and improve the status and standing of the profession. There were, however, flaws in the original legislation. A broker could be deregistered, but could still continue to operate by calling himself something else—a consultant, a purveyor of insurance services or whatever. Indeed, there have been such instances.
In the Bill, the Government have sought to remedy this but only in connection with investment business, so the result could be a lowering of standards for general insurance business—motor, household, personal accident and so on. There is very real concern that those insurance intermediaries which cannot, or will not, achieve authorisation as investment business under the Financial Services Bill will gravitate to the non-life side. Furthermore, since existing registered insurance brokers have, additionally, to seek authorisation as investment intermediaries, why continue to incur the cost and inconvenience of being registered as brokers for general insurance business, when authorisation under the Financial Services Bill will endow them with status in the eyes of the consumer public? What an irony it would be, if standards on the non-life side were to fall as a result of improved regulations on investment and life business! There is thus a case for extending the Insurance Brokers Registration Act to require all independent intermediaries dealing in general business to register as insurance brokers, whatever they call themselves. I hope the Government will take note of that.
Perhaps I may briefly refer to the Government's evident desire, expressed through other legislation, to encourage the growth of personal private pensions. Deregulation will mean that any operator in the industry will be able to sell those policies—of all areas one where customer protection is most vital. There are already certain controls with regard to insurance companies. There is the DTI, the Insurance Companies Act and, in the final analysis, the Policy Holders Protection Act. The industry itself is levied to pay for the Policy Holders Protection Act. People purchasing pensions cover elsewhere will not have the same level of protection, yet this is one area where it is vital that they should have. There is also the position of pension fund trustees. Will they be regarded as authorised within the terms of this legislation? That still remains unclear.
Finally, we are having to debate this Bill before we see the full effects of large-scale deregulation referred to several times in the debate today, before the Big Bang which everyone knows is timed to go off on 27th October this year. There is clearly going to be more need for protection after that date than before it. We may find ourselves needing to return to the whole matter of consumer protection in this area when we have seen the results of these developments.
§ 2.1 p.m.
§ Lord Terrington
My Lords, as I have spent most of my working life in the securities industry, both in London and New York, I thought it might be 622 appropriate if I were to say a very few words about this Bill. As has already been said, it is a substantial Bill covering a wide range of important matters. I should like to confine myself to just two particular points which have been the subject of a good deal of discussion in recent times. But before going any further I think I ought to declare that while I am no longer an active member of my City partnership I am still an executive member of the Wider Share Ownership Council. That council is actively concerned with encouraging individual savers to invest at least a part of their savings in the shares of British industrial and commercial undertakings, as indeed are Her Majesty's Government.
I am therefore a firm supporter of the general principle of this Bill, because in my view the small investor needs and deserves protection through regulation; otherwise the promotion of a wider spread of share ownership would clearly be irresponsible. In fact, I believe the smaller investor has an even greater need for protection in the future than he had in the past, for one very good reason; that is, the regrettable but it would seem inevitable abandonment of single capacity operations on the Stock Exchange. I say "regrettable" because the existing system of separation of the function of principal and agent, to which I have been accustomed for many years, is itself a major source of protection for the small investor; and the jobbing system provides him with the all-important liquidity of the market place. However, as I have already said, the move towards dual capacity appears to be inevitable after the so-called Big Bang. I should therefore like to say a word about the type of regulation which is going to be employed under this Bill.
This has been the subject of a great deal of discussion, but from my own personal experience I am firmly convinced that the Government have it right. I so agree with my noble friend Lord O'Brien that self-regulation within a statutory framework is the correct method. I say that because after many years of working on Wall Street I am convinced that a securities and exchange commission operating on American lines is far too legalistic and bureaucratic for our purpose. I can quite understand the need for an SEC originating in the United States because it has a federal structure and therefore Washington requires an agency to apply federal rules and regulations. But our situation is entirely different and in my view self-regulation will suit us much better.
In any case, it seems to me that the range of powers in this Bill, coupled with criminal backing, is just as great as those available to the SEC in America; and, furthermore, I think the Government have been wise to set up a single regulatory authority—the Securities and Investments Board.
I wish to be brief in what I have to say. The only other point on which I really want to touch—and I do so with some trepidation—is the question of immunity for SROs. I am certainly no lawyer, but from a practical working point of view it seems to me that the Government have come to the right decision. As pointed out by the noble Lord, Lord O'Brien, it should now be possible to attract individuals of appropriate character, including I hope an adequate number of non-practitioners—I emphasise that point—to serve 623 on the governing bodies of the SROs. That is of the greatest importance because investors' interests are surely best served when markets are regulated by those who can perform their duties quite fearlessly.
I should like to make one final point. It should not be thought that SRO immunity removes all legal remedies of the investor, because in most cases clients who suffer loss are likely to make a claim against the member firm responsible. The situation where an SRO is involved is far less likely to occur. Moreover, in this connection it should be noted that the Stock Exchange has very recently announced its decision to appoint an ombudsman to mediate in disputes which may arise between investors and Stock Exchange practitioners. I understand that the terms of reference for this new scheme, which replaces the present one of monitoring by the two deputy chairmen of the Stock Exchange, have yet to be decided in detail. But it is intended that the ombudsman will assume his responsibilities before the market is restructured in October.
I believe that this appointment will play an important role as an alternative to lengthy and expensive litigation. On that note, I shall conclude by saying that I see this Bill doing much to protect the individual investor under a new market procedure which is now going to take place.
§ The Earl of Limerick
My Lords, I rise to give a warm general welcome to this Bill. When I arrived here, I had no idea that I should be in the majority in so doing. In expressing what are essentially my own views, I see the Bill from two points of view. The first is that of a practitioner, although compared with the noble Lords, Lord Bruce of Donington and Lord O'Brien, I was a late starter. I have for only 33 years been concerned with the City as an accountant and as a banker. I see it from the point of view of the deputy chairman of a City merchant bank. I have to express my regret that on that account I may have to depart before this debate is concluded, if it is protracted. I see the City also from the point of view of a director of a listed, though unconnected, investment trust.
My second perspective is from the chairmanship of the British Invisible Exports Council, whereby I have a general concern for the continuation and increase in the major contribution that the financial services sector makes to our economy. I should like to place a little emphasis on that point.
London is universally recognised as one of the world's great financial centres. I should like to say unequivocally that London is the greatest financial centre of the world. That is not an idle boast. Twenty-five per cent. of the world's banking transactions are conducted through London, compared with 15 per cent. through New York; which is the second centre. The highest turnover in foreign exchange is in London—25 per cent. higher than in New York. There are 470 foreign banks represented in London, and we enjoy reminding our American friends that there are more American banks in London than there are in New York.
The result is that the financial services sector produces a net revenue, as has already been cited, of around £6 billion out of a total of £9 billion, being the 624 net surplus attributable to the country's tradeable services. The contribution within that £6 billion of the banks alone is approaching £2 billion. In insurance, where London takes 20 per cent. of the world's premium income, the contribution exceeds £ 1½ billion.
The whole financial sector services sector is now subject to major and rapid change. The services are provided on an increasingly international basis. They are provided against the background of mind-boggling advances in technology for information dissemination, for settlement, and for dealing. They are provided through the rapid spread of securitisation; that is, the substitution of marketable instruments for bank-funded debt. They are provided through changing roles for the financial services institutions themselves, whereby the banks are becoming less bank-like by moving from risk retention as lenders towards risk distribution as agents and/or as market makers, in the securities industries, while other institutions such as the major store groups are becoming more bank-like in their dealings with the public, but are not subject to regulation.
Those financial services are also being provided at a time of particularly rapid structural change in the City of London itself, which will culminate in October in the Big Bang. For all those and other reasons, a thorough overhaul of the system of supervision and regulation was thought essential.
The Government had two main options: full regulation by legislation, on the United States model, or the development and extension of the present system of self-regulation under statutory authority. The Government chose the latter. That alone would make the Bill welcome, because it is under a self-regulatory system that our financial institutions have grown and prospered. It is now necessary to balance that situation with a proper, perceived measure of protection for the client—the consumer.
The Government consulted widely in their preparations. Granted the complexity of the issues and the diversity and potential conflicts of interest involved, not everyone can be satisfied. The Bill is not perfect. Which or what in this world is perfect? Several important questions remain to be resolved, and useful amendments can and doubtless will be made. But in essentials, I firmly believe that the approach taken by the Bill is the right one.
For clients of our financial institutions the result should be a wider choice, at lower price, under regimes for the conduct of transactions which ensure the safe and proper execution of those transactions. For many of the financial institutions it is first of all, and I say this advisedly, a matter of survival. In some sectors, notably that of international security dealing, London's market practices had been seen to be increasingly uncompetitive. London's international competitors, notably the giant investment banks in New York and the even more gigantic security houses in Tokyo, were all too eager to take any part of London's market share; as were our opposite numbers from Paris, Frankfurt, Zurich and other centres.
In those circumstances it may seem perverse to open London's market place, notably by the ending of single capacity, to those foreign giants who have demonstrated their power in their own market 625 patches. Realistically, there was no alternative. London, of all financial centres, could least afford to reply on restrictive practice. Our prosperity has been built on the converse: that is, by encouraging foreign competitors to establish themselves within our City and to offer their services on equal terms. That has been greatly to our advantage over the decades. It will be further to our advantage in the future.
I believe that many of the critics of self-regulation understandably fall into the trap of taking the term to mean what it says. It means no such thing. It is not a question of filing one's own tax return. It is not a question of self-audit, though it causes practitioners to monitor their own dealings by compliance procedures. This is not a question of finding out what has gone wrong but of ensuring that laws, regulations and codes are not breached, however inadvertently. Prevention is always better than cure.
This so-called self-regulation must be seen to work quickly and decisively. It is all about the willingness of practitioners to subject themselves to the harshest of tribunals: that is, composed of their own peers and armed with draconian powers. If the system is to work—and if it does not we shall certainly see a form of direct statutory control which we have philosophically rejected—these draconian powers of the SROs must be invoked and used as the occasion demands.
This self-regulation process is enormously more speedy and flexible than that of statute law. Typically, it might take two years in the case of suspected major fraud to amass the evidence and assemble an acceptable basis for prosecution. Thereafter, a further year could elapse before there is court determination. In cases of the complexity that we would see the reaction of the jury is always uncertain. Meanwhile—and this is the point—a malefactor could pursue his business unchecked.
On the other hand, self-regulatory organisations with some teeth can check such practices in their tracks. The effective sanction is the threat of loss or, in extreme cases, the actual and immediate loss of the licence to practice in that particular market place, without which the malpractice cannot continue. This is the justification for statutory immunity from prosecution for the SROs which I believe to be necessary.
What are the risks inherent in the route of self-regulation of SIB and SRO? I am not referring here to the undoubted commercial risks but the risks inherent in the system of regulation which the Bill establishes. First, there is the risk that capital requirements for new forms of dealing will be under-assessed. Secondly, there is the risk that the new risks inherent in these new business areas themselves will not be properly assessed, probably because they are inadequately understood. Only time can answer that and only time can refine the assessment.
The third risk is that the regulators get it wrong. Too much regulation will raise costs, unduly restrain the use of capital, stifle initiative and drive business from the market place. Too little regulation will permit bad practice, open the prospect of avoidable business failures, reduce confidence—and drive business from the market place. Hence comes the relevance of active practitioner involvement in the self-regulatory 626 organisations, with a strong incentive to ensure that the regulators get it right. I understand that there will be a problem of staffing these organisations: experience is scarce and they do not offer the most glamorous of careers. However, get it right we must.
The forthcoming transition will bring substantial upheaval. It will be bruising for most, painful for many and probably fatal for a few. Yet at the end I believe that we shall have a stronger and more durably and robustly competitive system, which will be to the benefit alike of clients worldwide and of those providing the services.
§ 2.20 p.m.
§ Lord Morton of Shuna
My Lords, in adding my voice to those who extend a general welcome to this Bill, I wish to raise certain matters of purely Scottish interest. I also apologise to the House because another commitment will probably make it necessary that I cannot stay for the conclusion of the debate.
When the Bill was first published it appeared almost as though the department had forgotten that Scotland had a different legal system, different courts and provided financial services. Fortunately, in another place the Government brought forward amendments that have dealt with many of these problems. However, some of them remain. More fortunately, the noble and learned Lord the Lord Advocate is here to take part in our discussions and to ensure that the Scottish interest is adequately considered. The first point to which I should like to draw the attention of your Lordships is the composition of the Financial Services Tribunal as set out in Clause 83. It is essential that there should be sufficient Scottish representation on this panel and, if the tribunal is to sit in Scotland to consider a Scottish case, that the chairman should be someone who is qualified in Scottish law.
The present position in the Bill is that persons with a legal qualification are to be appointed by the Lord Chancellor after consultation with the Lord Advocate; but it is not required that the panel should include persons qualified in Scottish law. The provision is similar to that relating to the Special Commissioners under the Taxes Act. Problems have frequently arisen where the Special Commissioners sit in Scotland, because lack of the necessary knowledge in areas such as trust where Scottish law is different from English law has meant that the commissioners sitting do not know the branch of the law with which they have to deal.
As a subsidiary point, it would seem desirable that Schedule 4, which covers the working of the tribunal, should have a similar saving clause relating to confidentiality as is contained in Clause 92(6). Clause 168 in general provides that proceedings should not be instituted in England and Wales or in Northern Ireland without the consent of the Secretary of State or the appropriate Director of Public Prosecutions. There is no similar provision for Scotland. Is the Lord Advocate's consent in Scotland to be regarded as necessary or unnecessary? What is the position to be? It is a matter that should be clarified.
As regards the question of registers, Clause 89 of the Bill provides that the Secretary of State is to keep a register of authorised persons and recognised organisations. Clause 90 provides for the inspection of 627 the register and also that the information shall be open for inspection:only at such times and places as the Secretary of State may appoint".I hope that we shall be given an assurance that at least one such place will be in Scotland.
I also wish to raise the position of overseas companies with a place of business in Scotland in relation to Clause 133. By that clause such a company is required to register any prospectus with the Registrar of Companies in England and Wales, even if it has no place of business there and its place of business is in Scotland. That is surely the wrong approach, especially as under Sections 696 and 424 of the Companies Act 1985 such an overseas company with a place of business in Scotland has to deliver documents, including its constitution, a list of directors and details of any charges credited or required, to the Registrar of Companies in Scotland. It is clearly inconvenient that documents relating to one company have to be delivered to different places for different purposes. It would be much more appropriate that the treatment under the Companies Act and under this Bill should be the same, and that a company which has a place of business in Scotland should be required to deliver all the necessary documents to the registrar in Scotland.
Lastly, there is a difficulty under Schedule 10 and Clause 142 relating to takeovers. The whole structure of Schedule 10 is to deal exclusively with takeover offers. The procedure goes on the basis that every such transaction will be carried out by an offer and an acceptance. Unfortunately, in Scotland it is quite common, especially in relation to private companies, for the seller and purchaser of shares to enter into an agreement to acquire shares, which, had they been acquired by an offer and acceptance, would have actuated the compulsory acqusition of the outstanding shares and would be covered by Schedule 10. But as the schedule deals exclusively with the offer, it would surely be wrong—and I hope that it is not the Government's intention—that one could elide the rules by making a sale purchase agreement rather than an offer and acceptance. I hope that the Government will be able to put that right by amendment. Both the rights of the minority shareholders and the rights of the purchasing company would be severely affected if the position remained as it was.
I seem to have delayed your Lordships for rather less than some noble Lords who have spoken, but I do not apologise for that. I hope that these points, which are important in the Scottish context, can be put right at later stages of the Bill in this House.
§ 2.28 p.m.
§ Lord Shaughnessy
My Lords, with a suitable degree of trepidation I join this debate following a galaxy of noble Lords of unequalled distinction and experience in the world of banking and finance. But, as the noble Lord, Lord Wolfson, said, perhaps there is still room for the views of a businessman and an investor.
What is happening in the financial world has been compared to the Industrial Revolution, and no doubt there are many points of comparison to support that 628 view. But the engine of change in world financial markets has been a parallel evolution of information and communications technology, the limits of which have not been reached, and hence the evolutionary process will continue.
The technical implications of the Bill appear to be vast. Its effects upon London as an international finance centre can only be conjectured upon at this time and the process of innovation and adjustment will continue long after the much heralded day in October when its operation is due to begin.
In the public debate that has ensued since the publication of Professor Gower's recommendations in January 1984 and the Government White Paper in January 1985 the emphasis has been on the method and the degree of investor protection that is necessary or desirable; and of course a broad range of views and opinions have been expressed. I shall not be foolhardly enough to voice any dogmatic opinion of my own in that regard. The Government have decided to rely upon self-regulation through a series of monitoring agencies rather than to establish a statutory authority similar to the Securities and Exchange Commission in the United States. Obviously that decision was not taken lightly and was a natural result of Professor Gower's recommendations. I shall not pass judgment on the merits of that decision but, as my noble friend Lord Roll has suggested, whether it will bring about the desired result remains to be seen and will do so for some years.
Among the White Paper's declared objectives is to create a system that will provide adequate investor protection without unacceptable restriction operating in an atmosphere which is, and is seen to be, competitive. Those obectives are entirely laudable but only time will tell whether they can be achieved through the medium of this Bill and the complicated structure it proposes to erect.
I hope that one of the key elements of the prospective regime—competition—will not be stifled within the new and elaborate framework that is in prospect. As the White Paper clearly stated, the doctrine of caveat emptor will continue to be pre-eminent no matter what mechanisms for the protection of the buyer are put in place.
I am one of those who believe wholeheartedly that the best protection of all is the requirement for prompt and complete disclosure of all material information in the most readily understandable form to guide the potential investor in his choice. In short, there will always be scoundrels in the financial business, as there are in any other business, and the more information they are compelled to reveal, the more difficult their fraudulent ambitions will be to achieve. In so far as the Bill can promote that end, it will go a long way towards achieving its purpose.
I have two other concerns about what the enactment of this Bill will do for the future development of our financial and industrial societies. Fears have been expressed by the investment practitioners about the potential ongoing high cost of this regulatory edifice and the attendant dangers of increasing the cost of doing business. The noble Viscount, Lord Chandos, mentioned that point.
629 The Government, as we have heard repeatedly in this House, are committed to a policy of broadening the investor base to include those who have not heretofore bought equity securities. It seems to me that if significant built-in higher costs were created by the proposed regime the private investor would be bound to obtain less real value for each unit of his investment. As a corollary, the small- or medium-sized business-man, attempting to expand his enterprise by raising more capital, could face prohibitive expenses—and these are already high—in seeking access to the capital markets.
My second concern relates to the social objectives, which have been mentioned by several noble Lords including the noble Lord, Lord Bruce of Donington. In a recently published book entitled The Financial Revolution Mr. Adrian Hamilton, a prominent financial journalist and now industrial editor of the Observer examines the background and implications of the radical changes which have occurred, and continue to develop, in international finance. Mr. Hamilton raises the question of whether the new world will be safer than the old and whether it will be conducive to economic welfare. With your Lordships' indulgence I should like to quote what he says as follows:The old structures directed funds from savings into employment and housing remarkably effectively, whatever the shortcomings in efficiency of old-style compartmentalised finance. The new world of finance is efficient. It has brought considerable advantages to the investor and the investing institution. What we have still to see is whether it will help to create jobs, to create growth and to develop trade".I think this is a question which should be pondered very seriously as the further consideration of this important Bill proceeds.
§ 2.36 p.m.
§ Lord Denning
My Lords, I hope your Lordships will forgive me if I have to go a little earlier than other noble Lords. First, I should like to pay a tribute to my very learned friend Professor Gower—the most learned in this land in the field under discussion. His reports have been masterpieces. In addition, I should like almost to congratulate Her Majesty's Government for proceeding with such speed and excellence in the preparation of this Bill and its presentation to your Lordships.
It is very timely. The crisis—if I may call it so—arose out of those proceedings before the Restrictive Practices Court when the Stock Exchange was brought there to account for its actions. It was not rendered fully accountable because the case was settled after many years. This is how Professor Gower comments on it:The log-jam which had been frozen for five years was suddenly broken and the pent-up flood waters have engulfed the City. It is now clear that single capacity, minimum commissions, and the present restrictions on outside ownership and participation in management will be scrapped by, at the latest, the end of 1986. The result has been a rush by Stock Exchange member firms and by merchant banks and other financial institutions, British and foreign, to form links which will enable them to offer a full range of financial services".That is what has happened. That is the Big Bang which is going to happen towards the end of the year.
I have never participated in the markets, as have so many of those who have spoken to your Lordships. I 630 do not like gambling on the markets. But I have seen it all. From my judicial seat they have all come before me: the buyers and the sellers, the brokers and the dealers, the investors, the public institutions and the private ones. They have all come before me and, for the most part, they have well upheld the City of London's great traditions of integrity, honesty, fair dealing, and, above all, the tradition of "my word is my bond". That is the integrity, the character, of the City of London which has done so much to make it. as it is even now, the greatest financial centre of the whole world.
However, in the other courts and sometimes before me there came the others—the rogues and the vagabonds, the tricksters and the fraudsters. They came, too. They must be disciplined, as they arc in other areas. Perhaps I may tell your Lordships about the market town of Devizes. About 200 years ago a lady dealer was accused of cheating. She said, "Oh, may God strike me dead if I have cheated in this way"—and He did. To this very day in the market town of Devizes you can see the monument erected to the lady who was struck dead for cheating in the market.
There must be discipline in our markets. That Stock Exchange case showed that the market must be regulated. Clause 3 of the Bill expresses the principle that must and should always apply. It states:No person shall carry on, or purport to carry on, investment business in the United Kingdom unless he is an authorised person".There the whole structure to secure proper authorisation is set down for the rest of the Bill. As far as I can see, it has been done well. The structure is there for authorisation, for people to be authorised before they can enter the market, according to the rules. If they infringe the rules or do not go straight they can be cut off and no longer authorised. That is the fundamental principle. The structure seems to be a very good one.
The Securities and Investments Board is not statutorily run but is practitioner-run, and beneath it are the self-regulating authorities. They will regulate themselves by having their own rules; they will admit members; they will discipline and ensure that people conduct themselves properly. That is the system of regulation under this Bill, which seems to me to be of the first quality.
I shall deal only with one particular matter, which has been the subject of much discussion. If a self-regulating body, for instance, strikes off a member and revokes his authorisation and does so wrongly, so that the member loses his business, can he bring an action against this self-regulating body? Alternatively, if the body fails to suspend him and an investor is defrauded by that very man, can he recover against the body? There was a great deal of opinion in the other place that the self-regulating bodies should be liable for negligence and damage themselves. I am very glad to say, and to see, that at a very late stage in the other place Clause 156 was included, which states that no self-regulating organisation shall be liable in damages for negligence unless they have acted in bad faith. That is a crucial clause. It has been suggested that that is a retrograde step. Although I was concerned in many cases where the courts extended time after time 631 liability in damages for negligence, it can be carried too far.
The analogy that I would put—and I think it is right and correct—is the other body of people who are not liable in actions for negligence: judges, magistrates, even barristers, tribunals and arbitrators. They are not liable for negligence by our common law, and for the reason that they should be able to do their work promptly without any fear of anyone stabbing them in the back.
I tried to express the principle when we considered the position of judges, magistrates and so on in a case called Sirros v. Moore, reported in 1975 Queen's Bench Division reports at page 136:Every judge of this land from the highest to the lowest should be protected from an action for damages. Each should be able to do his work in complete independence and free from fear. He should not have to turn the pages of his books with trembling fingers, asking himself, 'If I do this, shall I be liable in damages?' So long as he does his work in the honest belief that it is within his jurisdiction, he is not liable to an action.".So also with these self-regulating bodies. If they are to do their work independently and free from fear, they, too, should be exempt from liability for damages unless they act in bad faith, as Clause 156 provides.
That should be a cardinal principle. In that way no one should have any hesitation. I hope not necessarily practitioners, but experienced people also should be on the Securities and Investments Board and the self-regulating authorities. They should be independent people with expertise; knowing the market; able to lay down the rules of conduct; able to suspend those who go wrong, and to punish them. They should be exempt from liability for damages, remembering also that if an investor has been tricked by a member that investor can sue the member. He can get his damages against him, and there is a compensation fund under the Bill to which recourse can be had in case of need.
I would say—and this is a matter of principle in the Bill—that when setting up this structure it is right to exempt the members of these new, important regulatory bodies from liability for damages for negligence. I shall not go into the further details of this Bill. So far as I can see at the moment it is first-class. It may be amended in detail, but it is a first-class Bill which I hope will go through as speedily as possible.
§ 2.49 p.m.
§ Lord Graham of Edmonton
My Lords, not for the first time, I rise to follow the noble and learned Lord, Lord Denning. Events as recent as last night prove that on occasion we are a winning team, and I look forward to working closely with him on many of the matters covered in the Bill.
I rise to follow my noble friend Lord Bruce of Donington and other Members on this side of the House who have welcomed the Bill. I do so primarily as a politician who, all his life, has striven to improve the lot of consumers—ordinary and sometimes very vulnerable men and women. As my noble friend Lady Turner said, they are often more in need of protection than many other sectors of the community. In this instance, it is my firm belief that the consumer of our financial services will be among the prime beneficiaries of this legislation. But not just the consumer: all round 632 the financial world we hear cries of welcome. We should not lose sight of why there is universal acclaim for the relief that will be provided by this Bill.
As the noble and learned Lord the Lord Advocate said in introducing this Bill, it has been awaited for a very long time indeed. I believe he mentioned that as far back as the 1930s there began to emerge a need for something of this kind. I believe also that we should not lose sight of the fact that a nasty situation has developed over the past four of five years concerning fraud, deceit, sharp practice and chicanery in certain individuals within sectors of the financial world. Unless this Bill had been produced, the very stability of our financial nexus was certainly under threat. Fraud was not general, but it was growing. It was tolerated. It was defrauding millions of small investors of their savings.
When I was researching for my speech I was interested to read the Gower Report. I was struck by a section on page 6 which comes from the Commissioner for the City of London Police in his annual report for 1981. He said:The result is that the Fraud Squad has been called upon to investigate the failure of investment companies whose financial difficulties could have been observed at a much earlier stage by a competent authority making standard supervisory checks, e.g. examination of audited accounts. The problem is likely to remain with us until legislation, regulation and control is made more effective".That is what we have now.
The report continues:In the Commissioner's Report for 1982 he states that reports of fraud in the City increased by 42 per cent. on the 1981 figure and that at the end of the year 96 substantial cases with losses totalling some £ 100 million were under investigation by his Fraud Squad".That was the situation four or five years ago. It certainly has not improved. I believe that the Government, to their credit, have persevered and have brought forward a Bill which will be of benefit to many.
A plethora of interests is affected. I was staggered to see in the Gower Report the glossary of abbreviations and acronyms: the ACT, the AFBD, AHC, AIBD, ASC and ALSO, and all kinds of others. There might be initial mistakes; I am not too certain about that. I came across another last night when I was invited to a briefing by a body called the ISRA, which is the International Securities Regulating Authority. I was astounded, and I professed my ignorance. I had never heard of the body or its function, but when I looked at its brief I was told (and I believe it) that at the end of the day, with the increases it envisages, it could be involved with the employment of 400,000 people directly and indirectly. That is a significant factor.
I also came across matters such as interest rate swaps, currency swaps, floating rate notes, revolving underwriting facilities, note issuance facilities, Eurocommercial paper and international equity issues. To someone who is a layman in such matters, this is indeed a swamp and a jungle. It simply indicates, because these bodies are entitled to protect their interests, that the Committee stage of the Bill will be extremely interesting.
I declare two direct interests: first, the friendly societies movement, and, in particular, the Ancient Order of Foresters. I understand that constructive 633 discussions are proceeding so that the full significance of Clause 22, which is the one that covers friendly societies, can be understood and given effect to. My understanding is that the friendly societies movement welcomes the need for the Bill and will be as anxious as any of the others affected to protect its members and its investors from the dangers in handling other people's money which can grow apace in modern times. It is small but vital and very important.
Secondy, as the House is aware, I have a long and deep association with the co-operative movement, and in particular with the Co-operative Insurance Society. The insurance world is one that has been little mentioned in the debate up to now, but there have been enormous implications for all sectors of the insurance business. More people in Britain have personal insurance with the CIS than with any other insurance company except the Prudential. It has over 13 million life, household and motor policies in force and it is estimated that it insures three and a half million families, one family in six in the United Kingdom. As a co-operative organisation, it trades solely for the benefit of its policyholders who are entitled to the whole of its profits. I also note that it has invested insurance funds which are approximately £4 billion; so that, as one company—and it is only one, but a major one—we can see the size of the matters we are talking about. What we are talking about at this stage is the setting of a framework within which organisations and institutions can grow, dealing fairly with the public for the benefit of their shareholders and in strengthening the reputation of Britain as a well-organised and secure financial sector.
Even within an industry like the insurance industry there are differing interests. My noble friend Lady Turner quite properly raised an issue which engaged the attention of the committee in another place; and that is the matter of a central register of those who are insurance salesmen. I read those proceedings with particular care and appreciated that this is a matter which is ongoing and which was not taken forward in the other place. Proposals were made, the Minister pointed out that there were real problems, and it was accepted in the light of what will happen in future that the matter could be opened again. I noticed that MIBOC made a proposal along those lines that Sir Kenneth Berrill, as the head of SIB, favoured; but the Minister declined to go down that route.
I believe that he was wise to do that at this time and I certainly want to tell the House why I believe that was right and proper. Any firm transacting investment business must be an authorised person subject to rules which will provide for training, supervision, recruitment and disciplinary procedures to be monitored. Such a firm must take responsibility for the activities of its sales force. In addition, Clause 54 of the Bill provides for the disqualification of specific individuals who are not fit and proper persons to transact the business.
I welcome all these provisions and believe that they will raise standards among salesmen, especially in the minority of cases where this is most needed. By contrast, an additional system of regulation applies to individual representatives involving competence testing; and the maintenance of a comprehensive central register of all tradesmen would be expensive for 634 the consumer though adding little or nothing to the protection that he or she obtains.
These are views that are held not only by me; I note, for instance, that the Office of Fair Trading has said in respect of a central register that there is no evidence of widespread consumer detriment in the selling of life policies and unit trusts on a scale sufficient to justify registration of individuals. The Consumers' Association said that the more it considered the proposals for registration and testing, the less attractive it found the proposals to be. The Committee of London and Scottish Bankers said:We are in favour of a list of rogue salesmen, but not a huge index of reputable ones".The Building Societies Association said that it is opposed to the introduction of any such scheme. The National Consumer Council said:A statutory comprehensive registration scheme is not necessary to ensure high standards of competence or probity or relevant to the bulk of problems consumers experience with the marketing of life insurance".In general, I certainly support those wise views, though not with a completely closed mind.
May I touch very briefly upon the issue of the disclosure of commissions. MIBOC made some interesting proposals about life insurance, unit trusts and the investor, and said that salesmen fall into two categories: first, fully independent intermediaries acting as the agent of the investor and selling the products of a wide range of companies; and, secondly, company representatives able to sell the products of one company only and indistinguishable in their sales activities from company employees. There are some real reasons why one needs to treat the disclosure of commissions, and indeed of other information, very cautiously, but at this stage I believe that the Bill has got it about right and the MIBOC proposals are about right, too.
The other point that I want to mention is the disclosure of expenses in general. MIBOC regards the investor's main need as clear information about how the with-profits system works. It then goes on to say why there are some real snags when the Bill refers to such information, as to the nature of the investment, and the financial implications of the transaction, as will enable someone to make an informed decision.
The proportion of premiums taken in expenses varies widely between differing types and this was appreciated by MIBOC. To give a true picture, that part of a company's expenses covered out of investment margins, which is the difference between interest obtained on investment and interest credited to the original clients, would have to be taken into account, which raises enormous practical difficulties.
Finally, Sir Kenneth Berrill has a task of great complexity and terrifying importance, not least for those employed in the financial services industry, as well as for millions of investors. He and I share the privilege of serving the interests of the Open University and I can simply say from my knowledge that he will not only bring to this great task his undoubted skills in financial matters, but also the skills required to reach consensus wherever possible, and firm decisions for progress whenever that is required. I was heartened to read that he intends to use the powers in Clause 54 in 635 a rigorous manner, and that is as it should be. I wish him and the Securities and Investments Board every success in their difficult task.
§ 3.4 p.m.
§ Lord Tryon
My Lords, I think I should properly start, as a number of other noble Lords have done, by declaring an interest in the Bill. Most other noble Lords who have done this are so distinguished and well-known that it was hardly necessary. I am less so, so I must do it. I was for 20 years working in a major merchant bank and finished up as a director in charge of investment management activities. I am now something of a Jack-of-all-trades, but several of these are deeply into the investment world. I am a director of seven different companies in the City and chairman of a small investment management company, which very much comes under the ambit of this Bill. However, I hope your Lordships will see all this as a qualification arising from years of practical experience in this field, and not as something that will lead me later in my speech into any special pleading.
It is on the practicalities of some of the measures in this Bill that I want to concentrate today. We have heard a lot about the general principles—they have been almost exhausted so far as I am concerned—and I have nothing to add to what has been said on them. I shall try not to make Committee comments but I want to put down some markers for the future where I see practical problems with some of these measures.
It seems to me that the most important objectives of the Bill (and it seems so to other noble Lords) are to protect investors, to maintain the good name of the City, to strengthen financial markets and to catch or deter crooks. To do all this requires some pretty fine balances over which we are going to need to be very careful. The noble Lord, Lord Lever, put his finger on this problem in saying that to catch or deter the very small dishonest minority we must not make life absolutely impossible for the honest majority.
At present, parts of this Bill may not achieve the objectives they set out to do, and may indeed in some cases have precisely the opposite effect. For example, on the question of catching or deterring crooks, without wishing to be chauvinistic it seems to me that foreign financial operators should not be put in an easier position than their United Kingdom competitors. But as I understand it, this is what Schedule 1, paragraph 24, seems to do. Assuming that everyone in the investment business is honest, it is hardly fair that what the Bill calls "overseas persons" should be given softer rules in dealing with United Kingdom investors than their United Kingdom counterparts. Furthermore, in the unhappy cases where dishonesty does occur, the overseas person is obviously much harder to catch and prosecute than the one based in the United Kingdom.
Another area where I think the practicalities are going astray is the cooling-off period for the purchase of unit trusts. I shall need a lot of convincing that this is not a complete nonsense. Unit trusts are just like any other security and are utterly different from life assurance policies. No one has ever suggested a cooling-off period for buying shares—no market would work under such a regime. Unit trusts with the 636 spread of risk that they offer are somewhat less risky, I suggest, than ordinary shares in individual companies. They are also only a little different from investment trusts although somewhat inferior, in my biased view as chairman of one investment trust and a director of about four others. Yet no one has suggested similar arrangements for investment trusts, and I hope they never do. My fear in this area is that, in an attempt to protect potential investors, existing investors could suffer. I am in danger of getting to a Committee stage point here and I shall say no more on that at the moment.
Another example of where the balance may be wrong is in the endless provisions against cold calling, where I understand it is going to become almost impossible for private owners to have any sort of useful conversation with some of their traditional advisers. This bothered the noble Lord, Lord Boardman, and I strongly support what he said. I believe that even their local bank manager is not going to be able to suggest a particular investment unless the client mentions it first. This seems quite extraordinary—
§ Lord Tryon
Preferably in writing, I hear, my Lords. Truly independent advice on a variety of financial alternatives open to people is going to be harder to find. Financial intermediaries like insurance brokers, unless operating on a huge scale capable of monitoring the whole field of investments available to people, are going to find themselves having to ally with one life assurance company or one investment manager. The noble Lord, Lord Graham, commented on that aspect. Independent advice must be a major part of investment protection, but I cannot see that as being anything but stifled in the Bill, which encourages what I believe is called polarisation.
As an ex-banker a second worry occurs to me, and I was not surprised that the noble Lord, Lord Boardman, raised this point as well. Clause 50 of the Bill enables regulations to be made to protect the money of investment management companies' clients. That is clearly an admirable objective, but I ask myself how on earth the banks will be able to satisfy themselves that transactions over the clients' accounts of an investment manager are properly required by the client.
To persuade the banks to act as policeman over the activities of investment managers must be an attractive option for the Government but I cannot see it working in that form, and if I were a banker still, I would have serious doubts about the wisdom of taking on accounts on that basis, without any of the kind of protection that is given to solicitors in respect of their clients' accounts. I just do not see that provision working.
My final point concerns a matter that is not in the Bill at present but which could and should be added. I am unhappy on the question of confidentiality of information within the various SROs that will be created below the SIB. It is perfectly clear that anyone in the investment advisory or investment management business will have officials of the various SROs 637 crawling all over their offices, with access to all kinds of confidential client information. People come and go—headhunting is rife—and I should like to see some safeguard in the Bill for confidentiality of information gained by SROs in their role of monitoring the activities of their members.
I have made a number of critical points and I could have made numerous minor ones. However, I am not against the overall objectives of the Bill. Nor am I against the principle of self-regulation of the various markets. But I believe that some of the practicalities are still weak. We have been told that there will be a number of amendments from the Government, and I hope that they will cover some of the points on which I have put down markers. In my view, we have a long way to go before the Bill is in proper shape to reach the laudable objectives that it sets out to achieve.
§ 3.13 p.m.
§ Viscount Hampden
My Lords, it is a pleasure to follow my noble friend Lord Tryon, in that for many years he looked after my own family's investments. He did that extraordinarily well. It is the practice in your Lordships' House for one to declare any interest before speaking. I am in some difficulty because at this moment of time I have no interest but by the time this debate is reported and is in your Lordships' hands, I almost certainly will have an interest. I hope your Lordships will not ask me to elaborate because I could be accused of giving your Lordships price-sensitive information. Although the Stock Exchange has another 16 minutes before it closes this afternoon, I should hate to be responsible for a Stock Exchange inquiry into your Lordships' dealing habits in the Second Reading of this Bill.
I spent some 30 years in the City (I do not work there any longer) starting in 1957, which was the year of the bank rate tribunal. Then, self-regulation was very well summed up by the late Lord Kindersley to the tribunal when he said that when things were getting difficult in the City he would put his hat on, walk up Old Broad Street to see his friend Lord Bicester, and would say to him: "Rufie, I think things ought to stop, don't you?" and Rufie would reply, "Hugh, I quite agree with you", and things stopped. We have come a long way since those days 30 years ago.
My particular concern with this Bill is the protection for private investors, partly because I spent four years in a stockbroker's office looking after private clients and am therefore well aware of the problems they have (every client is different) and certainly in view of the fact that the Government are committed to wider share ownership—a very laudable aim. Secondly, with the Big Bang there will be a tremendous demand and impetus for financial institutions to spread their net—I think this is already happening—to obtain more clients who probably have very little or no experience of financial matters. As the noble Baroness, Lady Turner, said, there are now many people in the country who, for sad reasons, have money and who do not know what to do with it.
Thirdly—and I think this was mentioned by the noble Lord, Lord Bruce of Donington, although no one else has mentioned it—people have forgotten what it is like to be in a bear market. It is 12 years since the market started to rise, and memories are very short. I 638 can remember working in the City in 1974 when the firm for which I worked suddenly decimated its staff because it had no business. We had clients asking, "Why on earth are we losing so much money?" Certainly when clients came to me the first thing I asked was whether they could afford to lose any of the money. If they said they could not I always told them to go elsewhere, to a building society, and not to come to a stockbroker.
The worry is that as the climate becomes more competitive, and possibly with difficult markets, there is always the inherent conflict—at least, I found it so when I was involved—between the executive in the financial institution and his client. The executive always had his employer on to him saying, "Why are you not earning more money?" That happened to me, and perhaps that is why I do not do it any more. We had very happy clients and a very unhappy employer. With difficult markets and that sort of pressure it can happen—I do not think it happens very often, but it could occur in difficult situations—that executives are what is called "churning" portfolios. They find clients who, on the whole, do not understand what is going on and in order to earn commission and pay their own salaries they keep on turning over the portfolio and earning commission, to the detriment of the client.
I believe that the Bill goes a long way towards improving the situation, and I therefore conclude by welcoming it. I hope that it will go through your Lordships' House amended in such a way as to protect private investors.
§ 3.18 p.m.
The Earl of Buchan
My Lords, I should like to address your Lordships this afternoon very briefly on one point. I begin by congratulating the Government on bringing forward this Bill. The Bill suffers from being slightly obscure and this is due to a matter raised by the noble Lord, Lord Graham of Edmonton. There is a proliferation of acronyms. I counted them myself and it came well into double figures. I have a practical proposal for your Lordships later on this subject.
I speak today on behalf of the Stock Exchange and in its capacity as something known as a recognised investment exchange—RITE for short. In fact, this is a useful acronym in this case as it fixes the Stock Exchange as a market in the general order of things. RITE: right, correct, useful and proper, rather than wrong. But the particular concern of the Stock Exchange, which I think is accepted as a careful and caring body whose main interests are running an efficient and honest market, is the dissemination of information. It may not think that it could easily continue to run an efficient, unfragmented and honest market if it were compelled by statute to provide its own prices to operators of commercial information networks.
I shall not go into any more detail lest I lead your Lordships down the acronym route again to something called a Stock Exchange automated quotations service—SEAQ. Thinking about the matter in principle, I believe that your Lordships should consider the question: "Why should the market"—in this case our Stock Exchange—"be put by statute at the mercy of more powerful templars in Wall Street? Why should this price information be given, for 639 instance, to Tokyo traders who preach loudly of the advantages of competition but reserve their real prayers for a grim little shrine marked 'No entry; no reciprocity here'?"
To end on the subject of acronyms, I wonder whether any Members of your Lordships' House would like to join my society: the House of Lords Abolition of Acronyms Society—HOLAAS.
§ 3.20 p.m.
§ Lord Hacking
My Lords, I begin my few words to this House by apologising to the noble and learned Lord the Lord Advocate, who opened this debate in the latter part of the morning, and also to a number of your Lordships who made speeches during the course of the Second Reading debate which I have been unable to hear. I much regret having been unable to come to your Lordship's House any earlier and I wish to extend my apologies to the noble and learned Lord the Lord Advocate and other noble Lords.
I thought it would be helpful if I made a few comments on this matter because, like many other noble Lords who no doubt have received represent-ations from a number of quarters, I have received representations from the Joint Exchanges Committee which represents a number of the commodity exchange and financial exchange bodies in the City of London. I have also received representations from my own parent body, the Law Society. It may therefore be helpful if I make a few comments concerning the representations which have been made to me from those two quarters.
On the commodities front (I fear other noble Lords may already have said this, so I shall not trample on ground which may have been walked over already) there is concern over the definition of investments and the investment business and, particularly so far as it relates to commodities, the concern is that "futures" should quite clearly be separated in the definition from physical commodities; or to put it the other way round—and more accurately—that physical commodities should not fall under the Bill as clearly separated from "futures", which are part of investment and fall under the terms of the Bill.
There is also concern in this quarter over the structure of the Securities and Investments Board and that it should be outside the structural constraints of the Civil Service. Some of your Lordships may have read yesterday's business section of the The Times and seen some of the figures that have been produced by the SIB on the working costs of running that body. Thus your Lordships may have seen that there is already evidence of the concern which was expressed to me before the publication of The Times yesterday.
Lord Bruce of Donington
My Lords, I hope the noble Lord will forgive me. Does the noble Lord know that The Times unfortunately was somewhat incorrect as to the amount by which the SIB was alleged to be in the red? If the noble Lord looks at The Times, he will see that the SIB was in the red to the tune of £1,427 million, whereas in fact of course the figure should have been £1,427,000.
§ Lord Hacking
My Lords, indeed, when I read the report I thought that those were outstandingly high figures for a body which had only been in existence for a few months.
§ Lord Hacking
My Lords, I am a little relieved to hear that the indebtedness is not quite so large as was recorded in The Times. The voice that came to me from the noble Lord sitting near me, the noble Lord, Lord Lever, just now remarked that we shall just have to give them a little time. I fear that this kind of debt will build up rapidly until they can get some cash flow in. That is why there is concern that the structure of the SIB should be outside the structural constraints of the Civil Service.
There is also concern, and I am sure that other noble Lords have expressed it, about the strong emphasis on the protection of the private investor. He should be protected. That goes to the heart of the measures in the Bill. But to set out too detailed regulations in an attempt to protect him will have an adverse effect upon the corporate clients in the business and it may not serve in the end to protect the private investor.
I now turn to the concerns of the Law Society. Let me first record its gratitude to the Department of Trade and Industry, the department of the Minister who is to sum up the debate, for its willingness to hear representations from the Law Society, as I am sure it has been willing to hear representations from a number of other bodies. Thus far the department has shown sympathy and understanding to the Law Society's representations and exhibited flexibility in drafting the Bill. I can do nothing but applaud.
I was recently labouring hard in your Lordships' House on a technical Bill, the Latent Damage Bill. I shall not identify the department, but as the noble Lord, Lord Bruce, knows, that department did not demonstrate much flexibility. Thus it is rewarding to have the attitude of the department of the noble Lord the Minister on this Bill.
Departments and Ministers often say that they want to get the measure right and that they require assistance. But when there are discussions with the department or when your Lordships move amendments during a Bill's passage, somehow that flexibility withers away and one does not have the co-operation that one was led to believe would be forthcoming. I say that to encourage the noble Lord to be flexible and, if I may say so, to use to the full the skill and expertise available in your Lordships' House so that we may continue to work on the Bill in a co-operative exercise in order to make it a better Bill.
It is out of that co-operation that some of the concerns of the Law Society have already been met or partly met. There was concern by the Law Society, as in other quarters, about the definition of "investment". There have been intimations that the Government intend to look again at the definition and to seek to improve it. A new awful phrase has been introduced into the Bill which comes under the term "incidentality". I think that the word used in the Bill is "incidentally", but it has now come into the abstract noun "incidentality".
641 Quite apart from this awful invention of yet another new abstract noun, there was considerable concern about what it meant and about what it meant in a solicitor's practice, when they are working on matters incidental to investment. I understand that the department is prepared to look again at the structure of that part of the Bill and intends to present as a government amendment a new clause to replace it. I think that it is Clause 18, the clause concerning recognised professional bodies. The noble Lord nods, and so I have some confidence that my memory is right.
Having given those words of thanks and I hope of encouragement for continued flexibility, let me draw your Lordships' attention to a matter of particular concern to the Law Society—immunity from suit. As I understand it, it is proposed that SROs will be immune from suit. I think that in another place the Secretary of State stated why he believes that it is appropriate they should be immune from civil suit. If that decision has been made, the question then turns to recognised professional bodies such as the Law Society. The Law Society is, as are other professional bodies, concerned that it should have immunity from suit. It will be necessary for RPBs to take decisions upon grants or withdrawals of investment business certificates to firms, without being influenced by the risk of large claims for damages.
Although professional bodies are not otherwise exempt from actions for damages, the responsibilities which the Bill will place on them are not only new but have financial implications greater than those to which their present regulatory functions give rise. That is because certification for investment business is to be by firm and not by individual partner. The refusal to grant a certificate or the withdrawal of a certificate will prevent a whole firm, not merely a partner, from carrying on investment business.
Given the nature of the professional work of the Law Society, that will in effect put a firm out of business as it will be impractical for most firms to carry on the normal practice of a solicitor's business if unable to do the kinds of investment business defined in the Bill.
It is for that reason, which I have tried to spell out in a little detail, that the Law Society is concerned that it should be accorded the same immunity from suit that it is proposed, as I understand it, to be accorded to SROs. The noble Lord, Lord Williams, who was keeping the long vigil in your Lordships' House late last night and late on Friday afternoons, is unfortunately not here. I understand that he will be coming back shortly. He may remember that I was standing in this very place late last night arguing to the Committee on the Building Societies Bill, that whatever other criticims are made against the Law Society—criticisms are made from time to time—it is not criticised for not being a properly disciplined professional body.
I am holding the current guide to the professional conduct of solicitors. It is a thick tome. More than that, it contains rules that are truly enforced with representation on the Law Society disciplinary committee of lay members as well as professional members of the society.
642 When there are proposals to introduce a number of detailed regulations bringing the Law Society under the cover of the Act, and to add those details to the code that exists, that is to impose an unnecessary burden upon a professional body which is already doing its best to carry out its disciplinary duties.
The results will always be that more personnel will have to be employed, and there will be less efficiency in the conduct of its disciplinary matters. That would be a retrograde step. For that reason I make the general plea that the regulations which follow the Bill's worthy aims should not be so weighty, cumbersome and complicated that they lose their effectiveness. Those are all the observations I have to make. I have not been as brief as I intended, but I hope that I have been able to make a few helpful observations.
§ 3.35 p.m.
§ Lord Ezra
My Lords, like other noble Lords who have spoken in this debate I wish to declare certain interests in the City. I also happen to have a number of active interests in industry. I am hoping that one of the consequences of this important Bill will be that the links between financial services and industry will be strengthened and that the services rendered by the financial institutions to industry will become all the more extensive. This point was referred to by the noble Lords, Lord Bruce of Donington and Lord Wolfson, and by my noble friend Lord Chandos is his eloquent and well-constructed speech earlier today.
I am very glad that the noble Lord, Lord Graham of Edmonton, referred to Sir Kenneth Berrill, because I think that he has done a remarkable job in a very rapidly changing situation to prepare the ground for following through the legislation when it is introduced. I have been particularly struck by the various publications which the SIB has been putting out; in particular, the introduction to the recent accounts which it published under the name of Sir Kenneth and which contains I think a better description of what we are talking about than has so far been indicated. He says:The proposed new system is not one of self-regulation A far more accurate description is practitioner-based statute-backed regulation".That, indeed, is what is emerging from the Bill and from the various very constructive amendments, I believe, which have been introduced as a result of its passage through the other place. We should not minimise the extent of this operation.
The SIB has estimated that there are no fewer than some 15,000 different enterprises and organisations which would be likely to be affected by these measures. The noble Earl, Lord Limerick, who has contributed so much to exports—visibles and invisibles— reminded us of the enormous contribution that invisibles make to our overseas earnings. Not only is this going to be a vast operation in itself, but it links in with other legislation affecting this area. For example, the Building Societies Bill which is currently going through your Lordships' House touches on this. There is, I understand, shortly to be a new Banking Bill. We are therefore in the midst of a wide-ranging change in the way in which the financial affairs of the nation will be legislated for.
There have been two quite striking advantages in today's Second Reading debate. One is the virtual 643 unanimity which has emerged, not only on the importance of the Bill, but on the fact that, broadly speaking, it is going in the right direction. The other equally important contributions have been the specific points which noble Lords have mentioned to which no doubt they will be returning at Committee stage. It is this aspect which merits particular attention, as our common aim is to seek to improve the Bill before it leaves this House rather than to question its basic purposes.
I should like therefore to raise a few specific issues. The first concerns the SIB. This is a body which will be making application in November to become the designated agency. However, I should like to be clear about what its relationship will be thereafter with the Secretary of State. What has been stated—and the noble and learned Lord, Lord Cameron, made this clear in his opening remarks—is that the operations of the SIB will be reviewed annually on the occasion of its annual report. That report will be debated in Parliament. But are we to take it that the only relationship in the period between the Secretary of State and the SIB will be this annual review, or will there be some other way in which they work together?
Secondly, I turn to the SROs. Although this is not a part of the Bill, it is relevant to mention that it is very important that there should be the minimum possible number of SROs. There are organisations in the City which, because of the wide-ranging way in which they are now developing, will have to deal with more than one SRO. Quite a number will have to deal with all the SROs that may be set up.
I believe that negotiations are going on to try to limit the number of SROs to four, and I very much hope that they will be successful. The noble Lord, Lord Terrington, referred to the need to introduce a few non-practitioners in this practitioner-dominated regulatory system. I believe that that is well worth consideration, and I hope that it can be taken on board.
The question of immunity attracted much comment from many noble Lords, and I think that we shall have to deal with it very carefully because, although it is generally accepted that these bodies could not operate if their own members could bring actions against them, there is some concern about the position of private investors. I can quite see the difficulty of providing immunity in one case and not in another. One way of overcoming this is perhaps the intention of the SIB to set up an ombudsman system, like the one which the Stock Exchange is just setting up, to which the noble Lord, Lord Terrington, referred. Above all, the private investor will want to know how he can refer his complaints to a simple machinery and have them dealt with quickly, and I think that this could probably help in that respect.
There is also the question of enforcement, to which the noble Lord, Lord Lever, referred. Here, I think that we need to be absolutely clear how the enforcement of the regulations and their application will be carried out. The Stock Exchange has built up an extremely effective enforcement organisation over the years, but some of the new SROs will not have such bodies. Is it proposed that they should build up their 644 own, or is it intended that there should be some common enforcement agency which could serve the interests of all the SROs?
Then there is the question of cold calling, to which the noble Lord, Lord Boardman, and other noble Lords referred. In my opinion, this is a fairly fundamental issue because it raises the nature of the regulation vis-à-vis the specialist financial expert, on the one hand, and the generalist, on the other. I should have thought that in particular the position of the bank manager in the local branch needs to be protected. The relationship built up over the years between a local bank manager and his clientele is of great importance, and if there is too much of a polarisation of activities, that position could well be called into question.
My attention has been drawn to the position of insurance brokers. The situation here is that general insurance brokers have to be registered by their own Act, the Insurance Brokers Registration Act, but those who practise insurance broking but do not call themselves brokers do not require any such registration. It might be argued that this is not relevant to the present Bill, but it leaves a gap in the system of protection, and therefore I hope that the noble Lords opposite will be able to reassure us that that issue will be taken into account.
There is also the question of property investment. This was raised in an amendment by my honourable friend Mr. Paddy Ashdown in another place, but was rejected. However, property investment plays a very large part in the portfolio of institutions, pension funds, insurance funds, and so on, and it seems that that is a question that we should be investigating in rather more depth. I happen to know that the National Association of Pension Funds is very worried about this omission.
Finally, in these specific points I should like to refer to Parts IV and V of the Bill which cover prospectuses. The noble and learned Lord, Lord Cameron, said that the Government intend to introduce amendments which will modify the proposals in these parts. As they stand at the moment, however, a great deal of concern is felt by those financial institutions involved with new issues because the clauses in these parts lay down regulations which go noticeably beyond the EC regulations and could therefore chase quite a lot of useful business out of the City of London. Therefore, we await with interest the Government amendments in that area.
To conclude, it is clear from our debate today that there is virtually unanimous support for the aim and content of the Bill. There is equally unanimous determination on the part of noble Lords who have spoken to seek to improve it further in detail in the debates to come.
§ 3.46 p.m.
§ Lord Williams of Elvel
My Lords, I have to start, as other noble Lords have done, by declaring an interest. I am a director of a Spanish bank which has interests in London. I am also consultant to a major accounting firm which will no doubt be involved in this legislation as it goes through.
This has been an interesting debate on the Second Reading of this Bill. We have had a number of 645 distinguished contributions from all sides of the House. I think we have all profited from hearing what practitioners—if I may use that expression, people actually in the market at the moment—have to say. My noble friend Lord Bruce of Donington in his opening speech from these Benches put the Financial Services Bill into its political perspective. He did so with his customary verve and panache. Now it is my task to put the Bill into some technical perspective from these Benches and to indicate where some of our major questions are, and where we may be in conflict with noble Lords on the Government Front Bench.
The noble and learned Lord the Lord Advocate was kind enough to take us through the Bill. He did so carefully and clearly, and we are grateful to him for that. He also indicated—and I was glad to hear—that the Government had been listening over the past few months to informed opinion, and that he preserved himself a certain flexibility on matters, and that if proper arguments were made in the proper place and at the proper time the Government might be prepared to reconsider some of the points in the legislation in front of your Lordships' House.
Before I get to the Bill itself, I should like to make three general points. One refers to the point made by my noble friend Lord Lever of Manchester, which is the role of lawyers. We all have to recognise that practitioners in the financial markets of the future are going to rely much more on the law than they have hitherto. This is not simply because transactions have become more complex and demanding, and therefore disputes arise more often; nor is it simply that the number of players has become greater. But, as I think the noble and learned Lord, Lord Denning, pointed out in his story about the person who was struck dead in Devizes, the character of the players is changing. We have to take account of that.
Just as in the 1960s it was the major American commercial banks who took the lead in Euro-currency business in commercial banking, and in doing so imposed their own practices and customs in loan agreements and other things in that area, so in the 1990s the major American investment banks are going to be a prominent feature on the scene. Anybody who thinks that they are not going to be prominent on the scene is deceiving himself.
These investment banks can be, and are, extremely litigious. It is not uncommon for any major investment bank in New York to have 20 or 30 lawsuits outstanding at any one time. Indeed, a major investment bank of my acquaintance is at the moment being sued for something like half a billion pounds equivalent. That is not to say that they will have to settle or go to court. The problem is really more that since a lot of these merchant banks are owned by private stockholders with their quotation listed on the New York Stock Exchange, they find it necessary to go to court in order to satisfy their stockholders.
Indeed, I had a recent experience of a New York firm who refused to settle out of court a case involving many millions of dollars—not because they did not want to settle out of court or were unable to do so (and they said so) but because if they had settled out of court they would have been sued by their stockholders. They needed a court judgment to go to the 646 stockholders to say, "We have had a firm decision on this and therefore there can be no class action suit arising out of this". This is a problem which we shall encounter more as we come into the new era where these institutions will be a greater force. They had to demonstrate to their shareholders that they had fought the matter to the last ditch in the courts; otherwise they would have been at risk as directors from their shareholders.
Anybody who believes that when the US investment banks come into this market (they are already planning to come into the market on a major scale) they will not act in exactly the same way as they act in New York is, I am afraid, living in cloud-cuckoo-land. We have to accept that. That is the way things will be over here. If the law is used in that way it had better be right—right not only in domestic terms but in international terms.
That brings me to my second general point. Many of the markets dealt with in this Bill are international markets. Some people would use the words "global markets". That may be the correct expression. There is no escape from that. The noble Lord, Lord Terrington, regretted the disappearance of single capacity, but we cannot go back on that. That is now done, and all this is happening by itself with the development of rapid communications and the instant transmission of information.
In considering the provisions of the Bill, we are not here to consider only domestic affairs but we have to see what effects may be created in international terms on the global securities market. Whether the structures that are in place and will be put in place in the context of this Bill will be compatible with those that are there in, say, New York, Tokyo or indeed the European community we have yet to see.
Thirdly—a number of noble Lords have made this point—none of us really knows what will happen after 27th October. There is a great deal of speculation about what will be the effect of the Big Bang, who will do what, where and how. But I do not believe, rather as my noble friend Lord Lever of Manchester said about the Treasury forecasts, that anybody can make other than a reckless forecast about what the state of play will be once the Big Bang takes place. The future is quite unpredictable. The only thing I can say with confidence on that is that we are all in for a lot of surprises. What those surprises will be I simply cannot predict, but we shall be in for some surprises.
We must get the legislation right for all those reasons, even though to some extent it is like shooting at a moving target in the middle of the night. Perhaps it might have been better, as I think one noble Lord indicated, for the Government to wait to see what the effects of the Big Bang would be before introducing such legislation. I have a lot of sympathy with that view. Nevertheless, the Bill is in front of your Lordships today. We have to respond to it and make the best of what we have.
I turn specifically to the Bill and I wish to comment on some of our major concerns. In doing so, I should like to echo what my noble friend Lord Bruce of Donington said—that in our view the Bill has been substantially improved in its passage through another place. It comes to us in an improved form. 647 Nevertheless, we feel that there are some substantial problems that we still have with it.
Perhaps I may tackle the question of immunities, first of all, fairly head on; because the question of immunities applies both to the SIB and to the SROs and, as I think my noble friend Lord Bruce (and others and, I believe, Lord Hacking) made the point, perhaps they will be applied to recognised professional bodies. The problem with immunities is that they can be granted under United Kingdom jurisdiction in England, Wales and Scotland but, in the international context in which we are dealing, it is entirely unclear to me whether those immunities would be respected in foreign jurisdictions, given, as my noble friend Lord Graham said, when he was reciting what were the functions of Israel, that we are dealing in an international market, where a lot of securities are issued under jurisdictions which are not those of the United Kindom.
I take the example of Eurobonds. A large proportion of Eurobonds are issued under the jurisdiction of the State of New York. Let us take the point where we are concerned that an issue of securities or the conduct of an investment business in the USA is given statutory immunity under our law. The question is whether that immunity would be recognised by a foreign court. Anybody who believes, as I have said, that the SIB or the SROs are not going to be sued in foreign courts if the jurisdiction of the issue of securities is under the foreign courts, is living in cloud cuckooland. They will be sued. Will the foreign court recognise the immunities granted under our law? This is a difficult and controversial area. If the same principles are applied by the foreign court as would be applied by an English court, clearly it will be necessary first to inquire where the act being sued on took place. This might be the actual issue, or it might be some representation connected with the issue, or it might be some failure of control.
Assuming that this act were considered to have occurred abroad, then it seems on principle that a US court (to take an example) would not recognise the immunity granted under our statute. The act would be wrongful by law of the place where it was committed and would be sued on there. If the act were considered to have been done in England, then according to accepted doctrine it would not be sued on abroad, but I rather suspect (and my legal advisers rather suspect) that the US courts might find their way past this.
I raise this as an immensely important problem because it affects both the immunities granted to SIB and those granted to SROs. In the case of the SIB, the problem in our view can be solved quite easily by making the SIB a fully-fledged statutory commission. But, as a private company limited by guarantee, if the SIB is successfully sued in the US courts, which cannot enforce their judgment in England, Wales or Scotland, then, if Sir Kenneth Berrill arrives at Kennedy Airport one day in order to see his colleagues in the Securities Exchange Commission, he might find himself confronted with a bailiff and might find a writ attached to his shoulders saying, "You've got to pay so much damages because you are a private company which has been successfully sued in the US court".
648 That problem can be solved in the case of the SIB, but in the case of the SROs there is a problem which I do not think can be solved because we on this side do not wish to make the SROs statutory bodies. I come to the point that a number of noble Lords have raised. The impression appears to have got around that we on this side of the House wish to have a wholly statutory system. We do not wish to have a wholly statutory system. Indeed, if I may refer noble Lords to a document entitled A Socialist View of the City, produced in 1982, there was a chapter on the regulation of the City. Modesty forbids me from telling your Lordships who was the author of most of that chapter. Nevertheless, it envisaged a statutory system at the top with a statutory commission, with self-regulating organisations underneath it, and we are glad to see that the Government have moved quite a long way in our direction during the passage of this Bill in another place.
As I said, in the SIB case the immunity question can be solved, although it is a difficult one. In the SRO case, the Government need to give a lot more thought to how it would operate before giving these blanket immunities. As noble Lords will know, in another place the Labour Front Bench argued successfully in favour of some immunity for SROs. The Government started off with the position that there should be no immunity for the members of SROs and we argued—and, in the end, it was accepted by the Government—that there should be some immunity. What we were arguing for there was immunity from suit by members.
What the Government did was to go further than that, rightly or wrongly—I am not taking a particular view on that—and gave immunity to the members of SROs not only from suit from their members, but also from suit from outsiders. We are just raising a question there as to whether that is the right way to set about things and whether there should be some reconsideration of that thought.
Our further problem with the SIB, as it at present stands, is that, as the noble and learned Lord, Lord Cameron, said, it is a novel arrangement. Those were his words and I cannot disagree with them. We find the concept of a private company limited by guarantee, the guarantors of which are the members of the board of the SIB, a very odd concept indeed as a regulatory authority for the financial services industry under this Bill.
I am going to drop two stones into the pool that we have been talking about, where up to now, as the noble Lord, Lord Ezra, said, the atmosphere has been relatively calm. The noble Lord, Lord O'Brien, referred to the takeover panel and the role that he had played when he was governor of the Bank of England in setting up the panel and in encouraging it, and we must all recognise that the panel has performed a very valuable function over the years. The question that I am going to raise is whether the panel, as it is at present constituted, can continue to operate other than as a dependency of the Securities and Investments Board, if that is the designated agency.
A lot of my contacts, and indeed friends, in the City feel that the panel is being stretched almost to breaking point. It is making case law by itself and, as the noble Lord, Lord Boardman, pointed out, systems that may 649 well be sensible for a certain period may have to change when we come to different periods. I indicate to the noble Lord that that is an area which we shall want to explore.
The second stone that I should like to drop into the pool is the Chinese wall question. A number of noble Lords, including the noble Lord, Lord Roll of Ipsden, referred to the Chinese wall problem. We have a major problem on the question of portfolio management. The person, or persons, charged with the management of portfolios for third parties has a fiduciary duty to those third parties and, although I recognise that in the traditions of the City these fiduciary duties have, on the whole, taken precedence over the fact that the portfolio management operation was itself owned by a bank, or by a broker, we have a question as to whether this is a proper procedure for the future. If we are making legislation which has to stand the test of time, should we not be saying that portfolio management operations not only should be separate in a Chinese wall sense, but should be separate legally and should be under different ownership from that of those who are licensed to do other investment businesses under this Bill.
Furthermore, we have a problem about the exemption of Lloyd's. I do not think that this will come as any surprise to noble Lords opposite. We believe that the Lloyd's investment business, not the insurance business, should be within the ambit of the Bill. The noble and learned Lord, Lord Cameron, said that the Government's position on Lloyd's was simple. Our position is equally simple. We believe that the investment business of Lloyd's should be within the ambit of the Bill.
A number of noble Lords have commented on the whole question of conduct of business. I include in that unsolicited calling and the registration of agents. My noble friend Lady Turner made an important contribution in this respect, as did my noble friend Lord Graham of Edmonton. The noble Lord, Lord Boardman, pointed out what I regard as a major technical difficulty in the Bill as it presently stands for banks which seek to go about their business in a satisfactory and normal manner. We are to a certain extent agnostic on this problem. A number of factors are pulling us in different directions, and I am sure that they are pulling the Government in different directions. But we shall be scrutinising very carefully what are the Government's final proposals, and I understand that the SIB and MIBOC are in the process of redrafting some rules. I understand that further codes of practice are under study. We shall be looking very closely at these to see where they get us.
On insider dealing, I believe there is a substantial advance in the Bill. The Government have made a strong effort to try to meet many of the points that we were making in the debates in another place. In passing I note that we on our side of the House would support the proponents of the stabilisation issue. If we are going into a Big Bang where there are market-makers and where we do not have the jobber and broker system, it seems only right that we should have some form of stabilisation in equity type issues. Our problem is that if you have stabilisation in equity type issues internationally, it is very difficult not to have stabilisation in equity issues domestically. We shall be 650 looking to scrutinise the Government amendments that come forward on that topic. With regard to the listing particulars, the noble and learned Lord, Lord Cameron, said that a number of amendments would be coming forward from the Government. We shall simply be looking at these and scrutinising them as we will those on the auditors, to which the noble Lord, Lord Wolfson, referred.
On Scottish issues, who am I to argue with the noble and learned Lord the Lord Advocate, or indeed with my noble friend Lord Morton of Shuna? I am very glad to say that my noble friend Lord Morton will be joining us on the Front Bench for the Committee stage of the Bill when the Scottish issues will no doubt be debated in full. There is also the question of the financial services tribunal—a point made by my noble friend Lord Morton of Shuna, and which I think is quite an important one.
I am afraid that I have taken up quite a lot of your Lordships' time. I have gone through and have tried to indicate to noble Lords on the Government Front Bench our major concerns. But there are numerous points of detail which we shall wish to pursue. Noble Lords on all sides of the House have recognised that this will be an extremely complex and difficult Committee. It would be extremely complex and difficult, if I may say so, without the 250 Government amendments which have been promised to us. I hope we will get adequate time to discuss our amendments and the amendments which will come from all sides of the House so that we can make this Bill better when it leaves us.
Having said all that, I must come back to the position of my noble friend Lord Bruce of Donington and put the Bill in the perspective of the social and political climate of our time. Such points were made by my noble friend Lord Graham of Edmonton and by my noble friend Lady Turner of Camden. Indeed, I was glad to hear the noble Lord, Lord Shaughnessy, making this point. I do not suppose that there are many Labour votes in the City of London. I do not suppose that many hats will be thrown in the air if a Labour Government arrive in power. But the City and the whole of the financial services industry will have to realise that we are all part of the same society and that no one element can stand on its own and believe that its existence is quite separate from the rest. My right honourable friend, Mr. Roy Hattersley, the Shadow Chancellor, has indicated that we believe that the City must not be allowed to stand in the way of the programme of a future Labour Government. But the City, on its side, is entitled to ask us to take seriously, and to deal meticulously with, our considerable duty of scrutinising the Government's legislation. That we shall do, and it is in that constructive spirit that I give a welcome, albeit with some reservations, to the Bill.
§ 4.10 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)
My Lords, we have had a very interesting debate on this important and complex Bill. I should like at the outset to thank all noble Lords for their contributions. On balance, they add up to my having no fear whatsoever about the Bill proceding to its next stages.
651 I shall respond quickly to the noble Lord, Lord Hacking, who spoke about co-operation between various bodies and my department. I say to the noble Lord, and for the information of your Lordships, that Notes on Clauses should be available in the Printed Paper Office before the House rises this afternoon. Also, as there are a number of Government amendments, it is proposed that we shall provide notes on the intention of those amendments, in the hope that we may move a little more swiftly in the later stages of this Bill than perhaps has been the case with some others.
I believe that the noble Lord, Lord Roll, and certainly the noble and learned Lord, Lord Denning, welcomed the humour of Professor Gower and the contents of his report. His review has formed the basis of the Bill, because many of the Bill's provisions are directly based on Professor Gower's recommendations.
I do not propose to make a formal speech at this time. I believe that it would be more helpful to respond as best I may to the general and recurring points that noble Lords have made, so that we might have a better understanding of where the Government stand.
I shall begin with the opening speech by the noble Lord, Lord Bruce of Donington. As I look at the noble Lord, as I have done for some years now, I cannot conceive that he was ever a callow pupil sometime back in the 1930s. Certainly he does not strike one now as being callow, and I do not really believe that he was in those days, because he goes so much to the heart of matters. The noble Lord took the House on an interesting journey, starting in the 1930s, as he gave us a fairly wide-ranging commentary.
The noble Lord asked specifically whether the Bill would help so far as concerns fraud. Yes, it will. It includes several measures to help protect investors and to deter, detect, and punish fraud. It extends the requirement to be authorised to all kinds of investment. It will supplement both the Government's resources and the private sector resources of the designated agencies. The Bill will enable the designated agency to recruit the necessary number and quality of staff quite free from Government constraints. It will draw upon the expertise of practitioners. It will retain and extend existing criminal offences. It will place much greater reliance on civil sanctions, where the standard of proof is less demanding and the scope for action so much greater. So the answer to the noble Lord is, yes, the Bill will very definitely help in respect of combating fraud.
The noble Lord asked also about overseas businesses and practitioners being members of SROs. He has raised this matter during Questions on a number of occasions in the House, and perhaps I may say this to him. The SROs will need to satisfy the Securities and Investments Board that they have arrangements for ensuring that all their members, including overseas members, are fit and proper. That will apply to existing members as well as any new members after the enactment of this Bill. So I do not think the noble Lord should be quite as concerned as he sometimes expresses himself.
652 The noble Lord asked a number of questions on insider dealings, as indeed did the noble Lord, Lord Lever. The Bill will enable the Secretary of State to appoint inspectors to investigate suspected insider dealing with powers similar to those for inspectors appointed under the Companies Act to examine people, on oath, and to require them to produce papers and documents. If a person refuses to comply, he could be reported to the court and punished as if he were in contempt of the court.
The noble Lord, Lord Lever, suggested that perhaps we were taking investigation powers that could be an intolerable intrusion into the private affairs of people and into the affairs of those who may not be affected.
§ Lord Lever of Manchester
My Lords, I am sorry to intervene, but I blame myself for a misunderstanding. My objection was the elephantiasis of interest, popular and statutory, in what is a marginal and insignificant error and misdeed in financial dealings. I do not understand how a Government who neglect important policy decisions affecting the banking and investment industry have time to concentrate on such an absurd detail which has no substantial merit, but merely populistic merit. Of course, I am not suggesting that it is an oppression, where there is a genuine case of insider dealing that is worth investigating, to have it investigated. My objection is to the elephantiasis of populistic interest in an insignificant and rare occurrence.
§ Lord Lucas of Chilworth
My Lords, perhaps I should best answer that by saying that the significance or insignificance is relative to the point of view that one takes. There are those who differ with the noble Lord. The idea is that there will not be an elephantine bureaucratic set up because that is the very nature of the self-regulating process contained in the Bill.
We believe that the practitioner-based body will know about these things and can deal with them very much more quickly and effectively than the Government.
I now turn to the noble Viscount, Lord Chandos, who gave an overview. I can best say to him that I very much welcome his support for the SRO immunity provisions in the Bill. Indeed, the noble Lords, Lord O'Brien, Lord Roll and Lord Terrington and my noble friend Lord Limerick also expressed satisfaction in that area. I noted particularly what the noble Viscount had to say on stabilisation. We may very well want to pursue this in Committee. The noble Lord, Lord Roll, and the noble Lord, Lord Williams, also raised this point. I should like to explain that the Bill permits, subject to rules, the stabilisation of the price of international securities.
My honourable and learned friend in another place gave an assurance that he would look into any proposal to extend the list of investments whose price may be stabilised. I can tell noble Lords that the International Securities Regulatory Organisation has this week written to my honourable and learned friend setting out its proposals. My honourable and learned friend is considering those proposals and will shortly be responding. If those proposals are to be imple-mented—and I guess that there are a number of noble Lords who should like to see them implemented 653 —there will need to be several amendments made to the Bill. However, were we to do this, I can assure the House that the timing of our consideration of this issue will, in the light of our response, allow the subject to be considered quite properly in detail in Committee.
The noble Lord, Lord Chandos, finished by asking whether the Bill was man enough to do the job that he quite excitingly offers in prospect. We think so, because it is a practitioner-based policy, it is very near to where these exciting actions will take place and it is of a flexible nature. We therefore believe that it can meet the challenge that is seen by the noble Lord.
The noble Lord, Lord Chandos, welcomed the Bill generally. He asked in particular about the exchange of information with other regulators. I think we must agree that it will be increasingly important for supervisors to co-operate internationally, so as to ensure that business operating worldwide cannot exploit the differences and gaps between the national regulatory systems, as they might otherwise be able to do. I think that a number of other noble Lords raised this point in one form or another.
The noble Lord asked about Parts IV and V. Again, in another place the Government undertook during the Committee proceedings to give further thought to a number of points raised both through amendment and otherwise on Parts IV and V. I can assure noble Lords this afternoon that as a result of the quite widespread consultations which followed, the Government propose to put down a number of amendments. I do not think that this afternoon is quite the time to expand further on that reply.
My noble friend Lord Boardman was kind enough to say that he would put down a number of markers, and indeed he did. I am grateful to him and we shall of course have to debate some of them. Perhaps I could suggest to my noble friend just two matters, which relate to cold calling and the treatment of clients' money. I wonder whether the banks are not taking an unduly narrow view. Really, what one is offering the banks is a new product which they could in fact sell, because the Bill does not suggest how they should meet the new duties. If they are able to accept the duty as being fair and reasonable, there is no reason why they should not charge for such a service, as they do for any other banking service. Perhaps we could talk about this matter another time.
The noble Lord, Lord Lever, suggested that the Bill does little to increase the likelihood of detection. We believe that the Bill does make it easier to detect wrongdoing. For example, Clause 92 gives the Secretary of State powers to investigate investment businesses. These powers can be shared with the agency, and the agency and the self-regulating organisations will be required to devote resources to monitoring and enforcing the rules. We believe that this will lead to a greater chance of detection.
The noble Lord, Lord Wolfson, spoke interestingly of his views on accounting standards. What one might be able to say is that since the accountancy profession will be one of those recognised professional bodies with a responsibility under the Bill, one would expect that profession to pay due regard to its responsibilities, altering its practices as necessary. I think that the noble Lord can be quite assured on that point.
654 I am sorry that the noble Baroness, Lady Turner, is not present at the moment, but she raised in particular the point about the licensing of insurance salesmen, as did the noble Lord, Lord Graham, who suggested that this was an ongoing matter. We have made it fairly clear that we concluded that the benefits of a registration scheme would be outweighed by the costs. We have said that we shall keep the proposal in mind, but that is rather outside the confines of the Bill. The powers in the Bill that seek to regulate authorised businesses make them responsible for the conduct of their salesmen. We shall have to see how that works in practice. If it does not work we can come back to it.
The noble Lord, Lord Terrington, gave us the benefit of his experience both in London and overseas. I was glad to have his support for the Bill and for the two major issues, particularly the immunities clauses. I am grateful to my noble friend Lord Limerick for clearing up a misunderstanding of what is meant by self-regulation. His comments were followed by the noble and learned Lord, Lord Denning, who gave us the benefit of his considerable experience.
Let me turn briefly to the noble Lord, Lord Morton of Shuna. I do not wish to get involved in Scottish affairs, certainly with the Lord Advocate behind me. We are carefully considering the points made by Scottish organisations and several have already been met by amendments in another place. Perhaps I may leave it to the noble Lord and my noble and learned friend to deal with the matter at Committee stage.
The noble Lord, Lord Shaughnessy, raised a number of points. He mentioned that we should keep an eye on the cost of compliance. He felt that it should not be excessive. It is perhaps one of the benefits of self-regulation that practitioners will be able directly to influence the demands of the system and in effect keep their costs to the minimum, consistent with proper regulation.
The noble Lord, Lord Graham, reminded us of his interest in the friendly societies and the co-operative movement. I am grateful to him. I understand that officials in my department have today written to the friendly societies liasion committee concerning the authorisation of the business of branches of friendly societies, which was the point of concern. The letter seeks to assure them that Clause 22 authorises such business. No doubt if the noble Lord has further questions he will come back to us, perhaps directly rather than by way of amendment.
I was perhaps a little disappointed because, although the noble Lord, Lord Tryon, properly raised a number of points, I think in many instances he has attributed to them more importance than they deserved. Overseas investment business should not be subject to less regulation, and I do not believe that the Bill has that effect. I think it would be best if I wrote to him explaining why.
The noble Lord and others talked about cold calling. Clause 51 imposes a wide prohibition on cold calling, but it goes on to make clear that regulations can make exceptions to the rule. The SIB will carefully consider any proposals for exemptions. In those cases, we want to keep the provisions for a cooling-off period. But alongside that, we do not want to stifle proper provision of independent advice.
655 Noble Lords mentioned the subject of unit trusts. They are products which can easily be sold over the doorstep, as it were, without a direct request having been made by a potential purchaser. In that respect, as in many other consumer protection matters, we believe that the purchaser should have an opportunity to reflect in his own home, where the sale will have taken place, on what he has done. There is a difference where he goes into the shop to make an inquiry in a totally different environment. We shall look at that point further.
The noble Viscount, Lord Hampden, expressed some unhappiness about what is termed "churning". We should expect the SIB to pay regard to that when setting out its business rules just as we should expect it to pay regard to the points made by the noble Earl, Lord Buchan, in his short intervention. I am glad that I had the noble Lord's general support for the concept of reciprocity that is contained in the Bill. We have yet to discuss that matter in greater detail.
The noble Lord, Lord Hacking, raised a number of points. He mentioned business that is incidental to the main business. We shall be tabling new clauses by way of amendment on that subject, which I hope will clarify what we mean by "incidental". On immunities, I should like him to know that the limited range and scale of investment business that the recognised professional bodies will regulate means that they are less likely than recognised SROs to face a claim for damages. We have therefore concluded that there is no justification for extending immunity from damages to the recognised professional bodies, especially as they do not have it and do not appear to have needed it in relation to their members' main business in the past. No doubt the noble Lord may wish to return to that point.
Lord Bruce of Donington
My Lords, before the noble Lord leaves that point, will he be good enough to give the House an indication whether in that important respect we may regard the Government's mind as still open to argument?
§ Lord Lucas of Chilworth
My Lords, let me put it this way. I have set out our current thinking and it would need a good deal of very powerful persuasion to make us change our currently held view. Nevertheless, I should not say that the door was closed, but nor should I say that it was open. It is nominally ajar. If the matter would like to creep through one afternoon, I shall be happy to help.
The noble Lord, Lord Ezra, mentioned a number of points which he will recognise are largely Committee points. He asked about the relationship between the SIB and the Secretary of State. He will of course know that it is the Secretary of State, with the agreement of the governor of the Bank of England, who will nominate and appoint members of the SIB. In parenthesis, I shall add that it is intended that membership of the SIB shall include a small number of independent people. I believe that takes care of the point about the independent element in the SIB. The Secretary of State jointly with the governor is responsible for the appointments. The Secretary of State will also have some residual powers, including the power to withdraw functions if the SIB does not 656 live up to the required standards. He will be answerable to Parliament for the exercise of those powers.
Perhaps more importantly, on a day-to-day basis the SIB and the Secretary of State will have a common interest in the efficient regulation of investment business and in promoting competitive UK industry. I think there is enough inbuilt responsibility to ensure that there is close and regular contact between one and the other. The noble Lord asked about the need for non-practitioners to participate in a practitioner-based system. I have largely answered that point. The other points he raised are best left to Committee stage.
I turn lastly to matters raised by the noble Lord, Lord Williams. The noble Lord painted a rather extraordinary picture of American banks importing into the UK their habits, describing the scenario with regard to litigation and a number of other matters. All of these may be very true so far as I know, but the noble Lord painted the picture in support of his contention that we must get the legislation right. I agree with him there. Whether it is for those reasons or for any other reasons, we are in a very important area. It is the Government's wish to get this as right as we are able.
The noble Lord suggests that he would have preferred the Government to have waited to see the outcome of Big Bang before introducing this measure. No doubt in November, after Big Bang, or in the spring of next year, something else may have occurred and it would be prudent then for the Government to wait and take that into account. What is the "right time" for measures of this kind? This has been on the stocks for long enough. Much concern has been expressed. We do not believe that we have the timing right, but we believe that we must get this Bill on the statute book as fast as we can. We would therefore seek to meet as many points as we possibly can during the course of the Bill through your Lordships' House.
I should like to finish by reminding ourselves that the United Kingdom financial services sector plays an important part in our economic wellbeing. In the main the sector has enjoyed, and still enjoys, a high reputation. Effective self-regulation has hitherto helped maintain that reputation and has provided a high level of investor protection. This Bill is designed to secure that reputation by further developing, extending and supporting self-regulation, by building on the expertise and the commitment of practitioners, and by providing the statutory framework to ensure that self-regulation works. The Bill brings that system up-to-date. We want not only to defend the integrity of the City but to ensure that it is beyond any question, and at the same time that it is a competitive place in which business can be done. That is in the interests of investors, investment businesses and those who come to the markets to raise capital. I commend the Bill to your Lordships.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.