§ 3.25 p.m.
§ Lord Young of Graffham
My Lords, I wish to make a statement on Barlow Clowes.
Many people have been badly affected by the collapse of the Barlow Clowes operations. The extent of the suffering and distress has been fully set out in the letters I and my colleagues have received from Members of both Houses and direct from those concerned. We share the deep concern expressed on all sides and sympathise with those who have suffered loss.
The story is very complex: it stretches over many years and involves many different participants.
The House will recall that, following my Statement on 13th June, I appointed Sir Godfray Le Quesne, QC, to prepare an independent report to me on the facts of my department's handling of this matter. I am today publishing Sir Godfray's account, subject to minor deletions made on legal advice in order to avoid possible prejudice to criminal proceedings. His report is one of the most open and exhaustive ever volunteered by a department of state into its handling of a matter of this kind. It contains a full account of my department's role.
I should make it clear to the House that, while the Government attaches importance to maintaining the normal rule that officials' confidential advice to Ministers should not be made public, I have decided that, in the quite exceptional circumstances of this case, it is in the public interest to include the submissions to Ministers and other material which 1256 would not normally be published. In accordance with normal practice the names of officials involved have been excluded.
I am extremely grateful to Sir Godfray Le Quesne for the thoroughness and speed with which he produced his report. In accordance with his terms of reference, the report is purely factual. The Government have studied it with great care and have taken legal advice including that of leading counsel; and I should now like to set out to the House the key events and our conclusions.
It is only possible to judge the events that occurred in the light of the regulatory system in place at the time. The legislative framework within which all but the final events of this case took place was based on an Act of 1939 which was consolidated in the Prevention of Fraud (Investments) Act 1958. There was very little change in the way it operated until 1983. Then, against the background of Professor Gower's much broader review of investor protection, commissioned in 1981, the Government introduced new regulations. These regulations required, among other things, first, much more information about prospective licence holders; secondly, a certificate from a qualified auditor as to the firm's ability to operate as a going concern during the lifetime of the licence; and thirdly, regular financial monitoring returns, verified by a qualified auditor. covering the proper holding of client money and investments. The regulations were designed to enable the department to rely on the verification of prescribed information by qualified auditors and solicitors.
Sir Godfray's report shows that Barlow Clowes first came to the department's attention in 1975–76. It received advice which due to a misunderstanding within the department did not adequately cover the point at issue and it did not then apply for a licence to deal in securities. The consequences of this have been carefully examined. Had it applied in 1975–76 it is almost certain that a licence would have been granted, given the practice at that time. If Barlow Clowes had received a licence in 1975–76, the first monitoring return of the sort I have described would have been required by the end of December 1984. In the event, Spicer and Pegler certified in July 1985 that it had obtained verification of the clients' investments and cash, and that the statement of clients' funds gave a true and fair view of their composition as at 28th December 1984. There is no reason to think that the fact that Barlow Clowes was not licensed in 1975 had any material effect on the course of subsequent events.
The partnership again came to the department's attention in late 1983. The review and tightening up of the system in 1983 had brought large numbers of unlicensed dealers to light. Wholesale prosecutions would have been unjustified, and as Sir Godfray's report explains, it was the policy to bring unlicensed firms into the regulatory net and to take other action only where there was evidence of wrongdoing or that investors' funds were at risk. The department originally believed that the partnership was applying for membership of NASDIM, which would have meant that it did not need to be licensed directly by the department. When it became apparent that the 1257 partnership was not doing so, the effective choice open to the department lay between prosecution of Barlow Clowes for not holding a licence (the only sanction provided by the legislation) and licensing the firm if it could meet the regulatory requirements. As Barlow Clowes was a partnership, the department—even where grounds existed—had no powers to investigate it nor to apply for a winding-up order. Nor was there any provision for intervening to protect investors' funds if a licence were refused.
The department therefore decided to seek to bring the partnership within the regulatory framework. In doing so it had four main aims: the first was to subject the partnership to the conduct of business rules (strengthened in 1983); the second to secure examination of its affairs by qualified auditors; and the third to persuade the firm to incorporate a limited company so that the powers available under the Companies Acts would be available. Fourthly, it was also necessary for Barlow Clowes to make arrangements which satisfied the Bank of England that the partnership was not in breach of the Banking Act 1979. When all these objectives had been met, licences were issued in October 1985 to the partnership and the company. In issuing the licences the department made clear to the Barlow Clowes's solicitors that it had been heavily influenced by the assurances received from or through them. The department also took full account of the report from Spicer and Pegler on clients' funds as at December 1984.
In 1986 new licences were issued to Barlow Clowes after it had submitted applications accompanied by the verifications and auditors' certificates required by the legislation. Although the majority of the powers under the Financial Services Act 1986 did not come into force until 29th April 1988, stronger and wider powers of investigation contained in that Act became available on 18th December 1986. By the time of Barlow Clowes's licence applications in 1987, the department had received material from the Stock Exchange and others that caused concern about Barlow Clowes's UK business. The department did not at that time have the power to apply for a winding-up without first conducting a statutory investigation. Even if there had been such a power, there was not at that stage sufficient evidence to be confident that an application to wind up the company would he successful.
The department had three courses open to it. It could refuse the licence. This would have stopped the company from lawfully taking on new business. But because the department could not apply for a winding-up, there would have been no way of securing existing investors' assets. This action could therefore have precipitated a disorderly collapse of the businsss which would have damaged existing investors' interests. The second course was to grant a licence but immediately to issue notice of intention to revoke it. The company could have referred this to the Licensed Dealers Tribunal, which would have meant that it could carry on trading until the tribunal and decided the case.
The department therefore adopted the third possible course. This was to institute an investigation 1258 under the powers newly available under the Financial Services Act and to issue a new licence, subject to review, pending the outcome of that investigation. The investigation proceeded but even six months later, in April 1988, with all the information the investigators had by then uncovered, there were legal doubts whether sufficient grounds existed for a winding-up petition to succeed. By May 1988, the combination of the investigation and new information on the company's solvency had yielded enough information to secure a winding-up order.
I am informed by the liquidators of Barlow Clowes Gilt Managers that on current information investors are likely to receive in excess of 75p in the pound and they are hoping to make a substantial distribution before Christmas.
I now turn to Barlow Clowes International. This company was based in Gibraltar and was not licensed. Any offshore company dealing with expatriates and not holding itself out as dealing in securities in the United Kingdom would not need a licence. The question therefore is whether the department had reason to believe that BCI required a licence. As Sir Godfray's report shows, no firm evidence came to the department indicating that this was so, and the information provided by the United Kingdom company from 1984 to 1987 indicated that BCI serviced expatriates and non-residents. During this entire period there were no complaints from investors, no question about whether BCI was licensed, no approaches from intermediaries that would have revealed that BCI was dealing with United Kingdom residents.
From 1984 the department decided that as part of its licensing function it would adopt a policy of sample monitoring of advertising in the national and financial press. No advertisements from BCI came to light as a result of this monitoring. Subsequently it has emerged that a single advertisement was placed by BCI in one general supplement of The Times devoted to Gibraltar. This was not picked up by the sampling system. It has since transpired that BCI received business as a result of advertisements placed by authorised intermediaries, not in the general or financial press. These advertisements did not mention BCI, which was only named in subsequent private correspondence. No example of such correspondence was referred to the department before the Barlow Clowes collapse.
The liquidators of Barlow Clowes International predict that there will be sufficient funds realised to make a distribution in excess of 30p in the pound. The complications in BCI will take some considerable time to resolve but the liquidators arc hoping to make a small interim distribution early in 1989.
Perhaps I may now turn to the main conclusion the Government draw from Sir Godfray Le Quesne's report. Within the constraints of the old legislation and the information available to the department at the time, the department's general handling of the licensing of Barlow Clowes and Partners and Barlow Clowes Gilt Managers Ltd. was careful and considered and its actions reasonable. Barlow Clowes International had no licence: only since the company 1259 collapsed has it emerged that its activities were such that it probably should not have operated without one. Sir Godfray's report shows that my department did not have reason to know this.
I also inform the House that the legal advice the Government have received on the question of liability to investors with all these businesses is clear. The Government have no legal liability. In view of the hardship that has been caused, the Government have considered very carefully whether there is a case for ex gratia compensation. The facts set out in Sir Godfray's report in the Government's view provide no grounds for concluding that my department's handling of the matter was unreasonable or caused the losses experienced by investors, and therefore provide no justification for using taxpayers' money to fund compensation.
I am aware that the Parliamentary Commissioner for Administration has said he is considering whether to investigate complaints of maladministration in my department's handling of the matter. I have today sent him a copy of Sir Godfray Le Quesne's report. If he decides in the light of that to carry out an investigation the Government will of course co-operate fully with him and will consider carefully any report he may make. I am also sending copies of Sir Godfray's report to the Institute of Chartered Accountants in England and Wales, the Securities and Investments Board and FIMBRA for them to see whether there are matters for them to consider.
It is all too clear from the account of events in Sir Godfray Le Quesne's report and from the points I have made so far that there were a number of significant weaknesses in the legislative framework of the Prevention of Fraud (Investments) Act 1958 even after the regulations were greatly tightened in 1983. There were no provisions for injunctions to stop unauthorised businesses or breaches of the rules, nor powers to restrict business, safeguard assets or appoint trustees. Nor was it possible to investigate unincorporated investment businesses. The Government have acted to correct these weaknesses in the Financial Services Act 1986, whose main provisions came into effect in April this year. These improvements do not mean that the present system of investor protection is completely risk-free. No regulatory system can eliminate fraud or guarantee investors against loss. But the legislative framework has been radically revised and strengthened since the chain of events covered by Sir Godfray's report took place.
§ Lord Williams of Elvel
My Lords, the House will be grateful to the Secretary of State for making that Statement but I am afraid that we on this side find it wholly unsatisfactory. It will come as no comfort at all to those thousands of investors, many of them elderly, who have put their life savings into Barlow Clowes funds.
The Secretary of State said that the report of Sir Godfray Le Quesne is purely factual; but were not the facts largely known? Did we all not know that it was a complex matter stretching back over years? Did we all not know that officials in the licensing section of 1260 the DTI were stretched, overworked and undersupervised, and had to rely on outside information for granting licences? Did we all not know that after the grant of the licence in October 1985 the DTI failed to insist on more regular reports than the annual monitoring returns, relying again on outside representations? Did we all not know that this situation persisted right through to the collapse, even during the noble Lord's tenure of office, right up to May of this year during an investigation by the Department of Trade and Industry? Did we all not know that the auditors of the company had acted with a certain degree of incompetence in their failure to conduct a proper examination of the returns made by Barlow Clowes to the department? Finally, did we all not know that there was a distinction between the offshore and the onshore business but that it was a distinction which could not be appreciated by those United Kingdom residents who, as the noble Lord said in his Statement, were dealing through intermediaries with BCI?
The noble Lord's Statement was purely factual. The report of Sir Godfray Le Quesne is purely factual. The noble Lord gave the Government's view of what was the Government's responsibility in the light of the facts revealed by Sir Godfray in his report. However, when the noble Lord made his Statement on 13th June of this year he said in response to my probing, and I quote from col. 11 of the Official Report of that day:This is an inquiry to determine the facts of what actually happened within the department and to determine whether or not the department is to blame in any way Jr whether procedures could be improved in the future".In other words, this independent inquiry was to determine whether the department was to blame in any way. It was not to establish the facts, and then for the Government to take a view. It was an independent inquiry which would take that view. That is perfectly clear from what the noble Lord said on that day.
We are entitled to rely on ministerial assurances about the content of an inquiry, assurances given to this House, and those who have invested their funds in Barlow Clowes are also entitled to rely on those assurances. Therefore I ask the noble Lord directly: what was the opinion of Sir Godfray Le Quesne, the independent inquirer, on whether the department was in any way to blame? Until that question is answered fully and fairly in this House we on this side will continue to return to the matter and will continue to insist that the Government have not done their job properly.
§ 3.45 p.m.
§ Baroness Seear
My Lords, we on these Benches are grateful to the Secretary of State for making this Statement, but we are handicapped by the fact that we have not seen the actual report and have only the Statement—no doubt a correct Statement but we do not know how full a Statement—from the Secretary of State. We understand that the report will be fully published although there is a reference to certain omissions for legal reasons. We should like to know how extensive those omissions will be when the 1261 report is made public and therefore can be more fully discussed if necessary in your Lordships' House.
The gravamen of the case that the noble Lord puts forward is that the Department of Trade and Industry was in no way incompetent in that it did not have the powers to do the kind of investigation that was needed. That may or may not be the case, but in the report he has given us there are at least two references which lead one to have doubts at least about the efficiency with which the matters were handled. We are told at one point that there was a misunderstanding within the department. Paragraph 7 of the Statement says:They received advice which due to a misunderstanding within the department, did not adequately cover the point".We are told in paragraph 8 that the department,originally believed that the partnership was applying for membership of NASDIM",and then found that there was another misunderstanding. These references in the report to misunderstandings lead us to wonder how many other misunderstandings there were.
It may indeed be the case that the powers for protecting investors were at that time totally inadequate in that we had to rely on the Department of Trade and Industry, which we are told did not have the legal powers to do the job that was necessary. It can be argued that this is borne out by the fact that subsequently a very much more extensive and thorough system has been introduced under the Financial Services Act. However, the very fact that the Department of Trade and Industry was handling these matters must have led to a false sense of security among investors. A government department was seen to be investigating matters of the greatest possible concern. Although it was inadequately equipped to do it in terms of its legal powers, people must have been led to believe that they were better protected than in fact they were.
It is very much to be hoped that if this is indeed the case, the Government in considering compensation will not hide behind narrow legalities and make the case that they have no responsibility but will accept the argument— and we on these Benches hope that the Parliamentary Ombudsman will pursue his inquiries to establish these facts—that the public were under a misunderstanding about the security that was being offered at the time and that that fact in itself gives some moral claim to compensation which we very much hope the Government will be prepared to honour.
The report raises the question of whether the Department of Trade and Industry is staffed in such a way that it is capable of dealing with the highly professional people in the financial world, both those of a high level of integrity and those who are not of a high level of integrity, who are in the professional game of investment. All through the report the message comes out that they had to refer to professionals outside in the hope presumably that from that advice, which they were not themselves professionally competent to assess, they would be able to make an adequate decision as to what ought to be done. It raises the question of the staffing of the department when undertaking these extremely intricate and professionally demanding jobs.
§ Lord Young of Graffham
My Lords, I am grateful to the noble Lord, Lord Williams of Elvel, for what he said, but I can only assume—I expect all in your Lordships' House are in the same position— that he has not had the opportunity to read this most detailed report. I must apologise to all Members of your Lordships' House for that, but it is because of the parliamentary procedure under which the report is published, which is by notice of Motion for an unopposed return in the other place. Moreover, because it is not a government White Paper but an outside report, it would only formally become available to anyone from half-past three this afternoon. Nonetheless I hope that all Members of your Lordships' House will take advantage of looking at and reading the report, and will then see that it is unparallelled in terms of openness.
There is everything in the report to show exactly what my department did all the way through. It is a full disclosure of the facts. Indeed, it is what I promised your Lordships' House when I came here last June.
It is not for anyone, no matter how distinguished, to act as judge in this case; there are legal procedures. What Sir Godfray Le Quesne has done is to go through all the papers in my department. He had access to all the civil servants involved so that he could see exactly what my department has done over the period of many years. I am sure that when any noble Lord, or any investor, has the opportunity to read the report, he will see that my department has not been negligent in carrying out its duties and that it has gone to a great deal of trouble in order to do so.
The noble Lord, Lord Williams of Elvel, would have me extend this matter so that we should leave it to the opinion of Sir Godfray Le Quesne and then be bound by his opinion. However, we have many other ways of determining whether the department is liable. We have taken advice from leading counsel. Indeed, leading counsel have informed me that the Government are not liable in this instance. However there are methods in that connection which are being tested. No doubt those who wish to dispute that decision can put it to the test.
I turn now to the remarks made by the noble Baroness, Lady Seear. The misunderstanding of the department was back in 1975, even before I arrived in the department. It was one, as we went to great pains to point out in the Statement, which was possibly due to incorrect advice given to Barlow Clowes at the time, and the company should perhaps have been licensed then. As the Statement points out, it was the practice of the department to license almost anyone who asked. Therefore it is quite likely that the company would have been licensed. If it had been licensed, it would have been liable to send a return as at the end of 1984, which as events subsequently transpired it did.
The noble Baroness queried the quality of the staff in my department over the period of years when they were supervising the matter. I must inform her that the whole of government works in almost every instance upon the basis of accepting the audit reports, the audit certificates and the undertakings of reputable, professional people. If we did not accept 1263 the auditors' certificate on accounts, on income tax returns and on many other matters, indeed it would be impossible for our society to operate.
However, I am sure that if the noble Baroness, or any other Member of your Lordships' House, has an opportunity of studying the report it will be seen that time and time again the staff in my department had assurances from very reputable bodies; namely, from accountants, solicitors, banks and many others. That is the only basis upon which the system of licensing operated at that time.
The noble Lord, Lord Williams of Elvel, wishes us to say that we will pay out of sympathy. I have considerable sympathy for those who have suffered. My boxes at night have been accompanied for week after week with perhaps a hundred letters a night from individuals who have suffered. The tales those letters contain are indeed harrowing. Many people who have retired are actually put into great financial stress in the last stages of their lives. I have every possible sympathy with them.
However, I have another responsibility: I must judge the matter from the point of view of taxpayers generally and particular sections of our society. I must then say that if it is the responsibility of the Government, the Government should pay. But the report discloses that my department carried out its duties and proceeded correctly. Moreover, even until the company actually collapsed we did not have the kind of complaints which, if it was as widely known as the noble Lord, Lord Williams of Elvel, surmises, we would have been entitled to have.
I commend all Members of your Lordships' House to read the report with great diligence. If then any noble Lords think that my department has been found wanting I shall be happy to return to the House to answer that charge.
§ Lord Marsh
My Lords, does the Minister accept that no one in the House will be at all surprised to find that no legal liability rests with the Government in this respect? The report—which we have not had the opportunity to read—is purely factual. I ask the noble Lord whether he agrees with this. What is at issue here is the moral responsibility of the Government, who introduced and administered a licensing system which small investors, quite understandably, saw as a good housekeeping seal of approval. However, it failed to protect the investor, and indeed virtually encouraged people to invest on a basis upon which they should never have done. Does the noble Lord agree that it is not a question of sympathy, nor of the law? Many people believe that the Government—and the taxpayer generally who is behind the Government—have a moral responsibility for this failure.
§ Lord Young of Graffham
My Lord, I am most grateful to the noble Lord, but I think we must be careful as to how far we take that principle. After all, just because the Department of Transport issues driving licences that does not mean to say that it has any moral responsibility in a road accident. I am being most careful in what I say here. It is not the principle of licensing itself; it is what is carried out.
1264 We have two separate cases in issue here. We have Barlow Clowes UK where licences were issued, and my department received auditors certificates each year certifying that the funds were correct and properly handled. No complaints were received until the very end when we were looking for legal ways by which we could wind up the company. As regards the other instance, we had no knowledge, and nor does Sir Godfray Le Quesne think we should have had, that the company was actually trading and raising money in this country. That is a different matter.
It is true that in the first instance the company was licensed. It is true, whether or not it is because of the licence, that the loss happily appears to be far less in this country. However, we can do not more than rely upon the system which we have and upon the auditors' certificates which we receive and then see how we can act in order to save the position within the law.
I am happy to say that the position is far better under the law today because, if an intermediary wishes to solicit funds for an offshore investment, investors will be warned of the dangers involved, the fact that it will not be covered by the compensation fund and that they must be aware of the risks which are often run in those circumstances.
§ Lord Hailsham of Saint Marylebone
My Lords, at the outset of the Statement my noble friend said, obviously rightly, that there were matters in the report which referred to the possibility of criminal proceedings. Can we know with whom the responsibility for bringing such proceedings or not bringing them will ultimately rest? Will it be the Director of Public Prosecutions, the Attorney—General or some other statutory body? Further, within what sort of time frame shall we know whether such proceedings are to be brought?
§ Lord Young of Graffham
My Lords, that is a matter for the Serious Fraud Office and for those authorities which look at such matters; it is not a matter for me.
§ Lord Diamond
My Lords, while all of us on these Benches are most grateful to the Secretary of State for having made the Statement, I think that I must preface my comments by saying that the main conclusion to be drawn from this sad affair is that it underlines what we already fully know. Anyone who invests has to invest with caution, and any investment which attracts above normal returns generally carries above normal risks. Further, anyone who invests should never put the whole of his eggs in one basket in any circumstances.
Having said that, is it not clear to all of us that as a result of the Government having given in general terms a stamp of respectability to the name of this partnership, they bear a measure of responsibility in looking after—I go no further than that—those who have suffered grievous losses?
Can the Secretary of State therefore tell us who—either the Government or an appropriate department—will ask the necessary questions of those intermediaries who, knowing the 1265 circumstances, or who should have known them if they were not negligent and liable therefore by being so negligent, advised clients to invest? They advised them not merely to invest but to invest the whole of their savings and to take such savings from a safe investment such as a building society and put them into this highly speculative venture. I cannot imagine any respectable intermediary doing that. What is happening about the further questioning of those individuals? As to the future, under the present so-called protective system of the investor, is the Secretary of State satisfied that, were those circumstances to repeat themselves, the losses would not occur, or would not occur to anything like the same extent?
§ 4 p.m.
§ Lord Young of Graffham
My Lords, I listened with great interest and understanding to the noble Lord, Lord Diamond. It is not for me to comment this afternoon upon the behaviour of the intermediaries, but I agree with much that the noble Lord said. Since the coming into full effect of the Financial Services Act the conduct of intermediaries has been under the care of their own self-regulatory body (FIMBRA). The chairman of that body is a Member of your Lordships' House, and he may be able to throw some light upon the matter.
Many things have changed since the passing of the Financial Services Act and so the same circumstances would not repeat themselves. In the case of doubts, it is now much easier to administer the funds for the general protection of the body of investors. We were in a difficult position. Under the then state of the law we were unable to take steps to protect those funds if the licences were withdrawn. Since August a compensation fund has been in operation and so people who invest in such funds know that to an extent they are obtaining cover. There is now a health warning in respect of those funds which are not covered by the compensation fund. The general principle remains the same. Investment for safety is something that should surely be spread above all that.
§ Lord Elton
My Lords, the noble Lord, Lord Diamond, referred to the organisation formerly known as NASDIM, of which in its present form I am now chairman. He asked who was to ask questions of those who had had dealings with the affair under the old provisions. The current responsibility lies with my association. I can assure your Lordships that the rules of the association and the provisions of the statute will be enforced on any member without fear or favour. However, I remind the noble Lord that we are talking about a system which no longer exists. The old PFI Act has been repealed and replaced by the Financial Services Act. Your Lordships will agree that recent events have shown that the need for that Act was paramount and urgent. There can be no doubt that it should have been passed. Under it, my association has much greater control over the behaviour of its members. It has nothing to do with the investment companies, which fall to another association, but it is responsible 1266 for intermediaries and has made a scale of categories corresponding to the scale of risks in the business dealt with.
We regard dealing with offshore funds as a very high category. There are much closer controls now than there were. May I in conclusion say—
§ Lord Elton
My Lords, may I in conclusion ask—in fact, the Procedure Committee recommended that Statements be dealt with only in the interrogative and your Lordships rejected that recommendation, but I shall however observe it—whether the noble Lord is aware that I share his and everyone else's concern for the victims of that collapse, and welcome the fact that there may be an early pay out for the onshore operation. Where individuals have substantial amounts invested in the offshore operation, and the liquidators can give a firm statement of what will eventually become due, I hope that the Government will recognise that the effects of having one's money frozen are exactly the same for the time being as having lost it all. If an arrangement could be made for an early payment on that side also, perhaps there could be a letter from the liquidators to the investor stating his expectation which could he presented to a clearing bank as evidence of money to come to hand. I hope that the liquidators recognise that many of the people involved have no financial experience and that they should be told that the letter should go to a clearing hank and not to a loan shark.
§ Lord Young of Graffham
My Lords, we are all concerned about the status of those who invested all their funds in either of the funds. I know that those who are now responsible for putting in order the affairs of both funds and for repaying the investors are equally aware of that. I am informed that there will be a substantial payout of the United Kingdom fund before Christmas. Alas, there cannot he a payout of the Barlow Clowes International fund until the New Year. I shall certainly pass that message on to the liquidators.
§ Lord Peston
My Lords, I am bound to say that the Secretary of State's Statement sounded as if he were much more concerned to protect the great department of state of which he is in charge than to protect investors. The investors in this case could at least ask the question: if the Department of Trade and Industry was not there to protect us, and if no one else was there to protect us, who was there to protect us? After all we are not dealing here—the Secretary of State should not make the point—with normal risks. The investors involved are not fools. They were perfectly aware of the fact that these things were risky. They are concerned about the misuse of funds and misinformation.
To be told either that we did the best we could or we did all that we could although it was not the best we could do, and it still ended this way, does not sound satisfactory to me and it will not sound satisfactory to the investors. It is all very well to express sympathy, but without 50p all the sympathy in the world will not buy one a cup of coffee.
§ Lord Young of Graffham
My Lords, I did not say that we did the best we could. I pointed out that we followed the law at that time. The basis of the system was that we relied upon annual returns supported by auditors' and other statements. We received those statements. When it started to come to light that the position was more serious, as I outlined in considerable detail in my Statement, we took such steps as were open to us at that time to try to resolve the position.
It was not until May 1988, when sufficient evidence was available, that we could go in to wind up the company. Those were difficult situations. The law is easier today than it was at that time. The liquidation of the company is being carried out under the present law. However, the law is not arbitrary. Before any department of state can move it must have the necessary evidence. The way this affair was conducted, especially the way the funds were raised for the Gibraltar company, raises considerable questions as to whether that was by accident or otherwise.
§ Lord Cledwyn of Penrhos
My Lords, I am sure that the noble Lord the Leader of the House will agree that there is a strong case for a debate. The exchanges thus far have underlined that need. I am sure that he will further agree that it would be best to have a debate after the matter has been considered by the ombudsman, if indeed it goes as far as the ombudsman. I am not pressing at this stage for a debate, which would in any event be a matter for the usual channels.
The Secretary of State urged us to read the full report. We shall of course do that now that it is available to us. At the moment, our exchange is based upon the Statement which the noble Lord made to the House. On the basis of that Statement, does the noble Lord at least agree that a very grave error of judgment was committed last November when Barlow Clowes was relicensed at a time when his department was investigating the firm's affairs against a long background, expecially since 1983 of dubiety about the firm?
The noble Lord's Statement refers to a possible collapse if the licence had not been granted in November. Does he not agree that even a collapse, had it occurred, would not have been as serious as the debacle which has now taken place with all the consequences for the small investors, to which the noble Lord, Lord Marsh, has referred?
Finally, one agrees that the law has changed and that the law today is better than it was before. However, will the noble Lord confirm that he, as Secretary of State, and his honourable friends the other Ministers were responsible for the licensed dealer system under the 1958 Act which was valid until the end of April this year?
§ Lord Young of Graffham
My Lords, I am very grateful to the noble Lord the Leader of the Opposition. I think that all Members of your Lordships' House will be able to assess the position of my department and will be all the better for reading the report. It is not an easy report to read. The noble Lord the Leader of the Opposition 1268 criticised my department for renewing the licence last November. My Statement made clear that we had two other alternatives. One was not to renew the licence. I said that that would have precipitated the disorderly collapse of the business. It is true that that is no less than the position that occurred a few months later. Once it was known that the business was no longer licensed, it would have collapsed. However, there is the great difference that we would not have been able to administer the funds, as we were able to in May of this year when we applied for the winding-up order. That was the time when we were able or the liquidators were able, to seize the funds and to ensure that they would then be liquidated and returned to investors. The report shows that at the time we could not have done that because we did not have the powers.
The other course was to grant the licence but immediately to issue a notice of intention to revoke it, which would have given us slightly stronger powers. However, under the state of the law at that time the company could have applied to the licensed dealers' tribunal and could have carried on trading until the tribunal had decided its case. That is something which often takes many months to determine.
The noble Lord has referred to the old legislation. We have been aware for a long time of the defects of that legislation. Professor Gower was asked by the Government to prepare a report in 1981. In the early 1980s that report came before your Lordships' House. In 1983 we made the regulations stronger. They were the first regulations that required the return of auditors' certificates and other verification in this field, and that was finally brought into the Financial Services Act 1986, where the law stands today. That is why I say that these precise circumstances will not recur. There are different remedies and different steps. That does not by any means suggest that fraud will never occur again.
§ Lord Merrivale
My Lords, perhaps I may ask Her Majesty's Government or the Secretary of State a question relating to Barlow Clowes International. Bearing in mind the Government of Gibraltar's keen interest in attracting investors to Gibraltar and the greater tax advantages in Gibraltar compared with those granted by the Channel Islands, damage could have been done to the image of Gibraltar as an offshore base. Therefore will the Secretary of State carefully consider compensation to those who invested in Barlow Clowes International, bearing in mind the final remarks of my noble friend Lord Elton? I feel that those elderly investors who invested in the Gibraltar area should be looked after.
§ Lord Young of Graffham
My Lords, I am grateful to my noble friend but I am not the Secretary of State for Gibraltar, which is outside our jurisdiction. The Government have been impressing upon the Government of Gibraltar that they should introduce legislation in order to ensure that the funds there are properly managed. Under an impending directive to come through from the European Community, if Gibraltar does not do so, I suspect that it will not be able to operate as freely within the Community. I do not believe that it is for me to take any measure of 1269 responsibility for those who go to Gibraltar for reasons which only they can give.
§ Lord Stoddart of Swindon
My Lords, can the noble Lord tell me whether Mr. Clowes is suffering the same financial hardship as the investors in his company? Is it true—as has been alleged—that Mr. Clowes is receiving from the liquidators in excess of £1,000 per week for his living expenses?
§ Lord Young of Graffham
My Lords, I can answer for much of your Lordships' House but not for Mr. Clowes. I am not in a position to answer for him. The arrangement to which the noble Lord refers is a matter between the liquidator and Mr. Clowes.
My Lords, is my noble friend the Secretary of State satisfied that the United Kingdom and European regulations deal adequately with the problems of disclosure caused by the exploitation of countries such as Gibraltar and Luxembourg for the registration of companies? We have seen this, for instance, in the case of Barlow Clowes and Minorco S.A.
§ Lord Young of Graffham
My Lords, these are two entirely different matters. Nobody was in any doubt about the ownership of the Barlow Clowes International shares. The issue with Minorco, which is a Luxembourg company, is disclosure of interests in shares. The European Community has recently adopted a common position which is just short of agreeing on a directive which, while it will not bring the rest of the Community up to our standards, is a very substantial improvement. Gibraltar will have to bring itself at least up to the standards of the European Community.
If we are looking at investment in Gibraltar in the future under the sort of circumstances we have been describing, investors, who only receive details of this investment, as I understand it, not by looking at advertisements but after responding to advertisements about nameless funds received in communications in writing from intermediaries, will have to be warned that if they invest in such funds they will not be eligible for the compensation fund. I should have thought that that should be a clear enough warning.
§ The Lord Privy Seal (Lord Belstead)
My Lords, perhaps we can make this the last question. I think we have had a good run round the course and if the noble Lord, Lord Diamond, will put his point, we can move on to the next business.
§ Lord Diamond
My Lords, I was merely going to ask the Secretary of State whether he is aware that I am most grateful to him for the hint that he gave to the noble Lord sitting behind him. I am particularly grateful to the noble Lord. Lord Elton, for the very useful series of non-question information he gave us.