House of Fraser Holdings plc: Report

HL Deb 28 March 1990 vol 517 cc916-48

5.41 p.m.

Lord Jenkins of Hillhead rose to call attention to the inspectors' report on House of Fraser Holdings plc; and to move for Papers.

The noble Lord said: My Lords, it is three weeks since the DTI inspectors' report on the House of Fraser was published and since the Government, in the person of Mr. Ridley, declined to do anything about it. Since then the Government have presented us with plenty of diversionary events. Mrs. Thatcher, Mr. Rifkind, Mr. Major, Mr. Charles Prior in Mid-Staffordshire, and even Mr. Heseltine and Mr. Lawson, have all done their loyal best to distract our minds on to other things; yet I do not think they have entirely succeeded in putting the report into a quiet grave.

I am entirely neutral in the battle between Lonrho and the Fayeds. Ironically the situation can in my view be summed up by saying that the report is the most devastating by DTI inspectors since one published in 1976—and that was into the affairs of Lonrho. In one important respect, indeed, I am more concerned about Mr. Rowland than I am about the activities of the Fayed brothers. I do not much care who owns Harrods. I get along without the services of that emporium; even if I were to use it, I doubt whether I would find the merchandise contaminated by the moral quality of the proprietors.

I do, however, care much more about the Observer with which I have been fairly closely associated as a contributor for more than 30 years since the early days of Mr. David Astor's notable proprietorship and editorship. I deeply regretted the decision last year of that newspaper to publish a special midweek edition devoted to the dispute with the House of Fraser. That was not appropriate for a great national newspaper. I do not, however, think that it was in any way a corrupt decision by the editor and those close to him. One of the things that Mr. Rowland and the Fayed brothers appear to have in common is a capacity to fill those working close to them with a kind of spontaneous fury of battle. The Observer published a special number, while the House of Fraser's public relations officer behaved like a dancing Dervish in his denunciations of the DTI inspectors.

Mr. Ridley, whatever else he can be accused of, has not behaved like a dancing Dervish. He has been more like a recumbent pasha. But his handling of the issue has not served the nation or the Government well. His main argument for doing nothing appears to be that he should only use his powers of disqualification to protect the shareholders of a particular company, and that if the directors complained of have by their behaviour eliminated all the shareholders other than themselves they have achieved immunity from disqualification for anything they may have done on the way. That is precisely the argument put by Mr. Ridley. It is of course nonsense to suggest that the fitness or otherwise of the Fayed brothers to be directors is a matter of concern only to the shareholders of the House of Fraser. The flip logic on which Mr. Ridley based the central part of his argument contains much of the reason why, although a man of high intelligence and disdainful courage, he is sometimes a discreditable Minister.

There has also been an unsatisfactory shuffling around of responsibility, designed to avoid any collective government duty for an overall response and to enable the Prime Minister to distance herself from the whole affair. Prosecution, we are told, is exclusively a matter for the Attorney-General; the right of residence is exclusively one for the Home Secretary; any action against the solicitors involved in the case must be left to the Law Society, which we know will take no action; and there is no action against the merchant bankers to the Bank of England, which is suddenly elevated to a totally independent status wholly at variance with the Government's recent rejection of giving it a status more equivalent to that of the Bundesbank or the Federal Reserve on more important matters. The old game of passing the parcel has been played with a new speed and determination.

Furthermore, the Secretary of State himself has been proclaimed by the Prime Minister to be acting not politically as a member of the Cabinet but quasi-judicially. This, with respect, is constitutional nonsense. I am particularly indebted to the noble and learned Lord, Lord Simon of Glaisdale, for his advice on this matter. Ministers should very rarely take refuge in quasi-judicial status. If judicial decisions are required, it is better to go to the judiciary for them. Ministers are political, answerable to Parliament, and are part of a Cabinet collectivity. The Home Secretary may have a little corner of his responsibilities, particularly relating to the use of the prerogative of mercy, when detached non-political decisions are called for, but this should be carefully circumscribed and indeed has often in the past not been observed at all. I discovered some time ago, to my surprise I must admit, that 75 year; ago the question of the execution of Sir Roger Casement went four times to the Cabinet. The fact that it reached an unwise decision does not invalidate the point that individual quasi-judicial action had been thrown out of the window.

The fact that I believe Mr. Ridley's decision should be seen as political, and not judicial, and part of the policy of the Government as a whole, does not mean that I found convincing theories of a vast conspiracy involving the Prime Minister, Eastern potentates and £5 billion of support for sterling going across the exchanges. It is no part of my case to ask this House to accept such phantasmagoria. However, I think it is the case that a good deal of sleaziness has been uncovered, that the Government —and not merely at ministerial level but also at official and at Office of Fair Trading level —have handled matters badly and have left Mr. Rowland with a certain legitimate grievance that there was a lack of even-handedness in the treatment of his bids for the House of Fraser compared with that given to the bids of the Fayeds. I suspect that he was his own worst enemy and that his accusatory hectoring of honest officials made them too eager to see almost anyone else in control of Harrods.

However, the consequences go much wider. As business becomes more internationalised, as the sums of money involved and the fees paid rise to dizzying heights, as the lines of professional responsibility become increasingly blurred, as amalgamations destroy the pride in probity which goes with a distinct and limited identity, so the preservation of standards in business and in the City of London becomes increasingly difficult. Even the Governor of the Bank of England becomes a little like a schoolmistress hockey referee trying to control a particularly nasty world cup match. Some of those difficulties are inherent, but they are considerably increased if the Government signal, via Mr. Ridley, that they do not much care what people do or how they behave.

The City of London is a major national asset, especially at a time when the invisible balance is not only swamped by the massive visible deficit but is also losing its own buoyancy. Yet the Government, with the appalling touch of death which seems to have overtaken them, are determined to deal it two damaging blows. First, they pursue a foot-dragging general policy which guarantees that Frankfurt and not London will become the official banking capital of Europe. Secondly, they assist a similar migration of private financial transactions by allowing the City to undermine its great remaining asset of high, even austere, integrity and respect for truth and straightforward dealing.

We live in a society which is increasingly awash with money. I grow ever more sceptical of the alleged economic achievements of this Government. Curing inflation was supposed to be the centrepiece, but our exceptionally high rate is now pointed to almost with pride—certainly with awe—by the Prime Minister as a still compelling reason for not entering the ERM. Paying our way in the world is certainly not something to which we can point with pride. Thrift was made the theme of the recent Budget. But if that is the desideratum, the Government have presided over a decade of disaster. Savings have collapsed and have been far more than outweighed by erecting the maximum use of personal indebtedness into a socially compelling way of life. The core of the achievement, such as it is, is that this Government have made some people rich and, as some of them are articulate and grateful, they have elevated this into a national triumph.

But there are dangers as well as indulgences in an excessively money-oriented society. One of the points I noted with dismay in the House of Fraser propaganda is the suggestion that because the Fayeds have made charitable donations their deceits should be regarded as irrelevant. The present state of affairs in which nearly every public institution of worth and note has to spend a large part of its time raising money through private generosity does of course greatly increase the status of those who have money to spare. But if that were to be given the additional twist of saying that it should grant them an immunity for any misdeeds, past or present, it would certainly not be desirable.

The Government's reaction to the report has so far been inadequate and has been widely perceived as such. There are many questions still left unanswered and many responses which we need and which have not been given. Those deficiences can still be corrected, but it should be done quickly. I beg to move for Papers.

5.55 p.m.

Lord Diamond

My Lords, it is a very great pleasure for me to follow the noble Lord, Lord Jenkins of Hillhead, once again and I am sure that I am expressing the views of the whole House when I thank him for bringing this important and contentious matter to our attention in the form of the debate which is taking place today. In the short time which is available to me I do not think that I can do more than explain why I find myself in the very unhappy position of not only having to disagree slightly with some of the remarks made by the noble Lord but also having to agree with the Secretary of State in his decision to take no further action in the matter.

In short, the report concerns the buying and selling of shares in the House of Fraser. The first to benefit from those transactions was the Lonrho company which had a large stake in the group and which made £70 million profit. The company then built up a smaller stake which it again sold, thereby making a further £10 million profit. Therefore, the company had made £80 million in pursuing its decision to be a seller—and I repeat the word "seller"—of House of Fraser shares. However, the company seems to have changed its mind and wished that it had been a buyer and had made a bid for the House of Fraser. No one stopped the company; indeed, it could have made a bid and, at one time, it was thought that the company would do so.

It is not open to anyone to walk at one and the same time both due North and due South and thereby make some progress. What the company did as a result of making no progress is what most of us do when we make no progress: we get very cross and see who we can blame for the situation. The company blamed the Fayed brothers on two main scores. First, that they had misrepresented their origins and grossly exaggerated the kind of importance that their families held in some distant parts. I can only say in relation to that fact that there must be many people in the world today who wish that someone would come along and grossly misrepresent his antecedents and present them with a profit of £80 million in cash. That was the first major complaint.

The second major complaint was that the Fayeds claimed that the money was their own personal property, whereas in fact there is some doubt as to whether it belonged to them or whether it belonged to either Dubai or the Sultan of Brunei. As to the second suggestion, there is, if I may say so, no dubiety at all because the Sultan has stated, and written officially to the effect, that it was not his money. My comment on all this is that I really cannot understand why there should be so much fuss on that aspect of the matter. It is never the bidder's own money that is involved when he is making a huge bid of such dimensions; it is money with which the banks have promised to support him, or money from institutions or financial corporations of one kind or another. It must have been astonishing—a great surprise —that anybody should allege that they were walking around with two-thirds of a billion pounds in cash, ready to support a bid for shares in a particular company.

The Lonrho Company was the first to benefit. The second to benefit was the general body of shareholders who sold at about 400 pence shares that were quoted at about 250 pence. They sold all their shares. Why? Because Lonrho sold its stake and the shareholders followed the lead, believing that Lonrho ought to know the right thing to do. Lonrho sold its second stake and the body of shareholders followed suit. All in one day the Fayed brothers' brokers were enabled to acquire the necessary 50 per cent, by nightfall. That is, shortly, what happened.

What should the Government have done about all that on receipt of the report? First, they could have decided to tighten the law with regard to relevant and important misrepresentation of the kind alleged. The point made by the noble Lord, Lord Jenkins of Hillhead, is that they certainly could have done that. The story goes further. The Government have done that. The provision has been included in the subsequent Companies Act, so there is nothing further for the Secretary of State to do in that respect.

The Government could have taken criminal proceedings, but a government who do not take the advice of the DPP after he has investigated for 18 months the possibility of bringing criminal proceedings and who do not take the advice of the Serious Fraud Office after it has carried out a similar investigation would act in an unusual and irresponsible fashion. Having regard to the view of both those bodies, based on careful investigation over a long period, that no criminal proceedings were possible, the Secretary of State decided that no further action could be taken in that regard.

The Secretary of State could also have taken proceedings to terminate the directorships of the Fayed brothers on the grounds not of their conduct at the time of the bid but their subsequent conduct in the management of the affairs of the company of which they were directors. Obviously one must take note of that. If people become directors and show by their actions and their words that they are perhaps not suitable, on becoming shareholders and owners of the company, to be directors and managers of it, one has to go further and see what has happened regarding the management of the company.

The report covers those points fully. I agree with it that it was not outside the terms of reference that the inspectors should pursue this point. They have done so and have reported that the management with the Fayed brothers as directors was up to the standard required and expected of directors of large companies. There again I do not think there was much that the Secretary of State could do in that regard.

Unlikely as it seems, he could have gone to the other extreme and condoned the conduct of the Fayed brothers. That he specifically did not do—quite the contrary. Obviously it is in the best interests both of the City and of the economy of the country that the standards of individual behaviour should be raised to what they were 50 years ago, but from which alas I believe they have fallen.

Finally, the Government could have decided to go against the previous policy of government-assisted self- regulation of financial bodies and instead they could have loaded the statute book with a new and large series of criminal offences for the policing of which the Government would be responsible. Wisely, they decided that the function of the Government is to provide a general framework, not to be a nanny, finding out what little Willie is up to and telling him not to.

6.5 p.m.

Lord Rees

My Lords, the noble Lord, Lord Jenkins of Hillhead, introduced the debate with a character istically agreeable speech. I find it a little surprising to see him cast himself in the role of Savonarola. There are no doubt many facets to his character.

His speech was far-ranging. I hope he will forgive me if I do not follow him in all the interesting byways through which he took us. I find myself in agreement with him about our adherence to the exchange rate mechanism. However, I feel that it might be slightly out of order if I followed that route tonight.

Like other noble Lords, I am grateful to the noble Lord for initiating this debate. It has compelled us to study the 752 pages of the inspectors' report. It was a thorough, investigative work and I wish to offer them my respectful congratulations. The debate also gives us a chance to express a view on what was an undeniably seamy chapter of a rather long-running saga. As with other noble Lords, over not months but years my breakfast table has been overloaded with missives from both sides in this long contest. My only regret is that the government of the day should have been drawn into what seemed essentially to have become a private vendetta.

I do not wish to follow the noble Lord through the whole sweep of his survey of the morality of the conduct of the City, the economy, and so on. Like the noble Lord, Lord Diamond, whose speech I followed with keen interest and with whose conclusions I find myself very much in agreement, I wish to narrow my gaze to the issues posed by the report. I should declare a modest interest in that until quite recently I possessed a small holding in Lonrho. I hope that the House will not feel that that is in any way unsuitable. Noble Lords can judge that when they have heard my intervention and the conclusions which I reach.

In order to express a view on the case it is necessary to consider two questions which have been posed by the inspectors at page 25 of the report. The first is: were the Fayeds—or should one call them the A1-Fayeds?; I learnt with surprise that "A1" is the Egyptian equivalent of the particule nobiliaire; that is one of the interesting pieces of information which one derives from a study of the report —what they claimed to be by origin?

The second question is: were the funds they used to acquire the House of Fraser their own? The inspectors established to their satisfaction that the Fayeds were not born to the commercial purple in some Alexandrian palace but were of modest academic stock, bom in a Cairene back street. In these egalitarian days and in the circles in which they moved or aspired to move that was probably not more than a harmless vanity. However, the inspectors placed some weight on it and said that it was a material consideration in regard to the people who were called on to consider their bid. I suspect that this attributes to the directors of the House of Fraser, for example, who had to consider their bid a naiveté which I doubt they possessed.

As regards their wealth, by many people's standards they were wealthy. A list of their assets, including the Ritz, Place Vendôeme, is not unimpressive. I am ready to concede that they were not wealthy enough, on the basis at least of that list of assets, to have acquired the House of Fraser unaided. Equally, as the noble Lord, Lord Diamond, pointed out, many people on the way up are unable always to acquire the assets on which they wish to form their economic base entirely with their own resources. However, it is always possible to borrow. That fact seems to have been slightly overlooked by the inspectors, and perhaps even by the noble Lord, Lord Jenkins.

It is not suggested that the Al-Fayeds were front men acting for others. That might have been a material consideration. However, it has been suggested that they used or abused a power of attorney that was given to them by an oriental potentate. That potentate has made no complaint of which I am aware. However, perhaps that is not a matter that we need pursue. It may be that the temporary use of funds that were not their own enabled the Al-Fayeds to acquire 100 per cent, of the shares of the House of Fraser for cash, and that this has enabled them in turn to refinance the acquisition by more orthodox loans. They presumably hope to repay those either out of the profits of the House of Fraser or, more realistically, out of the proceeds of disposals of some of the House of Eraser's assets.

One comes therefore to the question of who has been or might have been prejudiced by this operation. It is certainly not the former shareholders because they were paid in cash. Possibly the employees may have been prejudiced in that they may now be working for a less soundly based organisation. However, that can, regrettably, be a consequence of many takeovers. The inspectors have reported no adverse finding on the question of competition. After all, the central issue in most of these cases is competition. There is no suggestion that the House of Fraser, in the hands of the Al-Fayeds, is likely to diminish seriously competition in the retail sector.

Unattractive though the whole episode may appear under the inspectors' microscope, I do not believe that anything of great moment has emerged. Therefore, one comes to the next question which I believe the noble Lord, Lord Diamond, has answered extremely satisfactorily. What action could or should be taken, and by whom? The question of a criminal prosecution must be dismissed for the reason that the noble Lord has advanced. It is not for Ministers of the Crown to go off on their own on some frolic in the courts. They must take the advice of those who are best qualified to give them advice in this field.

Therefore we come to the question of whether the A1-Fayeds should be divested of their shares in the House of Fraser. I know of no power which would or could have been invoked in this case to deprive them of their shares. Therefore we ask: should the Al-Fayeds have been debarred from acting as directors of the House of Fraser? The Company Directors Disqualification Act was enacted in 1986, following a variety of takeovers where one or two unattractive facets could be detected. I believe that any Minister who is called upon to act responsibly in this field should have recourse to that Act. It must of course be emphasised that the matter does not rest with the Minister concerned. This is not a question of executive action. The Minister may initiate action, but the ultimate decision, as a judicial decision, is taken by the courts. The circumstances in which the courts can debar a person from acting as a director are fairly precisely defined. I cannot find any particular provision in that Act which I believe could have been invoked in this case against the Al-Fayeds.

Perhaps nimbler minds than mine could give your Lordships different advice. We have not had any from the noble Lord, Lord Jenkins of Hillhead, but perhaps other noble Lords will be able to fill the lacuna in the case which he deployed. However, I doubt myself whether anything turned up by the inspectors' report would provide material for the disqualification of the Al-Fayeds by the courts under the terms of that Act. In any event, what would the practical consequences of disqualification have been? As the Al-Fayeds own 100 per cent, of the ordinary share capital of the House of Fraser, the most that could happen would be that they could put in men of straw to act as directors in their absence who could be easily manipulated by them. I find that a more unattractive situation than the one we face today. It is much better that those who have the responsibility for the conduct of a company's affairs are visible and can take full responsibility in the public eye.

However, it is said that Harrods has a bank and that the Al-Fayeds are not fit to be directors of even the smallest bank. Without wishing to sound patronising, Harrods Bank is not, at any rate in my view, a leviathan in this field. However, I am not certain whether the Al-Fayeds are directors of the bank. If they are, it rests with the Bank of England to consider what action should be taken. The noble Lord, Lord Jenkins, made a telling point about the status of the Bank of England. I believe the Bank of England should have a measure of autonomy, particularly as regards its regulatory role in the City. That is perhaps a little more doubtful as regards input in economic affairs. So far as I can recall, the noble Lord, Lord Jenkins, was possibly a Member of the government who nationalised the Bank of England. However, that may have been before his time. At any rate, that matter opens up an interesting field which perhaps offers opportunities for a debate on another occasion.

Can it really be said that any depositor or client of Harrods Bank is at risk in the present situation?

I doubt that very much. I see therefore little basis for action under the existing legislation. There is, however, an issue to which I hope we may return on other occasions. It is posed by this and other cases. Has the question of the public interest in relation to monopolies and mergers been adequately defined or redefined? I, like the noble Lord, Lord Diamond, and I believe the noble Lord, Lord Jenkins, suspect that Lonrho may have a legitimate grievance in that its first takeover bid in 1981 was blocked by the Monopolies and Mergers Commission on the grounds of public interest. Subsequently, however, the rules have been refined and the arguments that commended themselves on that occasion to the majority of members of the Monopolies and Mergers Commission would probably not be acceptable now.

The concept of the public interest was originally highly subjective, and it may still be so. I believe that it used to be said in the courts that the application of equity depended on the length of the Chancellor's foot. In this kind of case the public interest used to depend on the prejudices of a majority of the members of the Monopolies and Mergers Commission. I hope therefore that my right honourable friend the Secretary of State may consider whether the definition of the public interest in cases of this kind should be refined still further. That said, I doubt whether the public interest would really require a disqualification or a divestment of the interests of the Al-Fayeds in Harrods.

I am coming now to my conclusion. In a party democracy such as ours, the public often require a Minister to show action and concern, however spurious. This is a case where a measure of cool detachment by the Government is called for, and has been shown. On that basis, I hope that the sentiments of the noble Lord, however agreeably and elegantly expressed, will not commend themselves to the House.

6.18 p.m.

Lord Hatch of Lusby

My Lords, having listened to the noble Lords, Lord Diamond and Lord Rees, one would think that the compilation of this vast document and the extensive work of the inspectors had all been a waste of time. Surely a document of this kind should lead to some action. The inspectors could not have been more forthright in the phrases that they used to describe what happened during the time of the takeover of Fraser Holdings by the Al-Fayed brothers.

I am concerned solely with one issue this afternoon. I have raised it in this House twice before. I am concerned with the nature of the relationship between the Government, the Al-Fayeds and the Sultan of Brunei. When the Statement on this matter was first made on 7th March, the noble Lord, Lord Trefgame —I am sorry he is not in his place at the moment —when I suggested that there was a case to answer regarding the relationship between the Sultan of Brunei, the Government and the takeover of the House of Fraser, had this to say: I am quite ready to say that that accusation is quite without foundation".—[Official Report, 7/3/90; col. 1218.] That was unequivocal. The following day my honourable friend the Member for Bolsover put a similar question in another place. That was not contradicted although the Deputy Prime Minister had the opportunity to do so.

Since then, on 23rd March, I listed the facts of the case in a Question to the Government. I made no accusations, I asked them, if there is no connection between the visit of the Sultan of Brunei and the Fayeds to Downing Street, the payment of 5 billion dollars into sterling account and the very quick takeover of the House of Fraser immediately afterwards, to state that there is no such connection and explain the strange coincidence. On that occasion my Question was answered by the noble Earl, Lord Caithness. He did not deny that there was a connection. I find that lack of denial, after the noble Lord, Lord Trefgarne, had categorically denied my original suggestion, somewhat suspicious.

I should like to know from the Government tonight whether they say categorically that there was no connection between the visit of the Sultan of Brunei to London, and in particular to Downing Street, in January of 1985, the passing over of 5 billion dollars to prop up sterling in February and the acceptance by the DTI of the bid for Fraser Holdings by the Fayed brothers in March 1985.

I should also like to know why the Office of Fair Trading and the DTI were in such a hurry in March 1985. I believe that it took only 10 days for the bid to be approved. What was the hurry? In particular, why was it that at that time the Fayeds' advisers and bankers, Kleinwort Benson, were refused by the Government time to make further investigations? I am open to correction, but I believe that representatives of Kleinwort Benson asked to be allowed to go to Egypt in order to check the stories that they had been told by the Fayed brothers, which we now know to be totally untrue. The Government refused them the time to do so.

After the publication of the report, nobody can be left in any doubt as to the character of the Fayed brothers. Nor can they be in any doubt as to the great suspicions as to where their money came from. Yet no disqualification of the brothers as directors is apparently contemplated. No reference has been made to their position in the Harrods Bank.

To give a partial answer to the noble Lord, Lord Rees there was a time when the Government apparently took much more seriously the question of disqualification. One member of the Government had this to say: The Government confirms its determination to support the disqualification provisions as a major deterrent to unacceptable conduit by a minority of company directors". —[Official Report, Commons, 22/3/90; col. 1264.] Does the report show unacceptable conduct? Do the Government believe that it shows unacceptable conduct?

Another member of the Government said: The Act poses a real deterrent. It demonstrates our commitment to ensure that the public and shareholders are protected against a small minority of directors who are tempted to abuse their position".—[Official Report, Commons, 22/3/90; col. 1264.] Does the report show that the Fayed brothers have abused their position? What is the view of the Government? If the Government have changed their mind about how to apply disqualification let them say so. However, I should have thought that if their view remains as firm as those quotations suggest, there could be no clearer evidence than that produced by their own inspectors that improper actions have been taken and that that should lead to disqualification.

I do not know whether any Members of this House attended the Select Committee this morning when the Secretary of State for Trade and Industry gave evidence and was examined. It was a very strange experience. Under questioning no reasons were given for not taking the matter to court. Apparently the Secretary of State believes himself to be the defending counsel, the judge and the jury. Yet he went on to say that the report does not contain facts, they are only allegations; they are not facts because they have not been tested in court. How can they be tested in court if the Government are not prepared to take them to court? The courts could estabish whether those are facts or allegations. That is the byzantine form of argument used by the Secretary of State only this morning.

He went on to say that he did not know whether the Sultan of Brunei would be prepared to give evidence. It is time he found out. If the question was put in court to the Sultan of Brunei there would be a judicial judgment rather than a political judgment such as has been taken so far. All the way through the questioning in both Houses on the issue only one answer has been given by the Government: it would not be in the public interest to pursue the matter to disqualification or to charges in court. What is the public interest? This morning a DTI memo was produced by the Select Committee, much to the surprise I believe of the Secretary of State. That memo pointed out that the public interest included both past and present employees. Are they the concern of the Government?

Finally, I remember the then Chancellor of the Exchequer telling the committee chaired by the noble Lord, Lord Aldington, that we need not worry about the decline in manufacturing industry because it would automatically be replaced by invisibles. We have seen those invisibles become invisible over the past three months. We have seen a deficit on invisibles. If the Government show no more concern about the reputation of the City for financial probity, we shall not see those invisibles either replace manufacturing industry or do anything else to benefit the health of the financial institutions of this country and the economic health of Britain.

6.29 p.m.

Lord Rees-Mogg

My Lord, I should like first to express my thanks to the noble Lord, Lord Jenkins of Hillhead, for having brought this murky business before the House. It is a murky business and it is a business in which there has been great bitterness among the commercial competitors. I should like on that account to take an unusual step and to declare a non-interest. I have never, as far as I know, met Mr. Rowland. I have never met Mr. Fayed. I have once talked on the telephone to Mr. Rowland in order to check a fact—a practice which used to be common among journalists. I have never done business with Mr. Rowland and, with one exception, I have never done business with Mr. Fayed. That exception is that in March of last year I bought a Yorkshire terrier from Harrods for my youngest daughter's birthday. I am happy to be able to say that that transaction was a completely satisfactory one. The little dog is remarkably well-behaved which I put down to the fact that she is cared for by an English nanny—a benefit which the report shows that Mr. Fayed did not enjoy.

There seem to me to be two questions which need to be examined. The first is: did the inspectors get it right? I read their long report with great care-it took me 12 hours—and I have not the least doubt that it can be accepted with complete confidence. I should add that I have been sent documents from the House of Fraser this week making allegations against the conduct and integrity of the inspectors which I hope that the Government will reject with the contempt that those allegations deserve.

The central question —I felt that the noble Lords, Lord Diamond and Lord Rees, somewhat misdirected themselves on this—is surely: did the Fayeds obtain a great advantage by lying? That is what the report says. It is no good trying to say that their stories about their Egyptian past were mere fibs. They lied and lied and lied again in order to avoid having their bid for the House of Fraser referred to the Monopolies and Mergers Commission, and those lies succeeded.

When one reads the report, the conduct of Mr. Tebbit, who was then the Secretary of State, is made perfectly clear. He was worried about the allegations that surrounded the whole matter. He took the highly unusual step—perhaps unique for a Secretary of State—of personally telephoning the chairman of Kleinwort Benson, the merchant bank which represented the Fayeds. He received from it an assurance which was based on what the Fayeds had told Kleinwort Benson that, in effect, everything was all right. It was only then that he took the decision not to refer and in his statement he said that, in deciding not to refer, he was relying on the assurances that he had received. So we have an absolutely clear position in which Mr. Tebbit—an active and decisive Minister; in my view, a good Secretary of State—took a decision because he was deceived. That is what the inspectors say and I do not see that anyone who has read their report with' care could reasonably doubt that that was the fact.

We must now ask the question: have the Government been right to take no action on this report? I take the point that action at this stage has become very difficult. I have a certain amount of sympathy with the present Secretary of State. It seems to me that the actions that were left open to him on the legal advice that he had been given were limited and perhaps would have little effect. I think that he treated the whole matter with undue disdain. His answer in another place was very brief and not very convincing. He has a lacksadaisical, laid-back manner, a manner which one would call an aristocratic manner, probably better suited to this House than to the other place. I would say, having regard to his conduct in this case, that the sooner he comes here to be an ornament among us, the better it will be for all concerned. But I do not think that he was left in an at all enviable position.

I very much regret the fact, which I am sure is due to some engagement that cannot be broken, that the noble Lord, Lord Young, who was the Secretary of State at the time the report was received, has not come here to intervene in the debate because only he can tell us what we really need to know; namely, why he behaved as he did when the report came to him. First of all, he thought that the report was important and that he should publish it as quickly as he could. That was his first reaction. His second reaction was that it was even more important, serious and grave and that there were prima facie grounds for supposing that serious fraud had occurred. So he referred the matter, quite rightly, to the Serious Fraud Office.

The noble Lord must have done that thinking that something very serious indeed had occurred. He did not do that because he took the light-hearted view that some people seem to take of the character of the report and of what it tended to show. He decided that the risk of having to deal with a major fraud prosecution was so great that he could not publish the report at that time. He took every precaution to ensure that it would be possible to bring such a prosecution to a successful conclusion if such a prosecution proved to be justified. Then he omitted and refused, and refused again, to take the one step which could have done any good; namely, to refer the matter back to the Monopolies and Mergers Commission.

There is a simple principle. If a man obtains a benefit by a trick, by dishonest pretences, that benefit should be taken away from him. In this case, the benefit was a benefit of non-reference to the Monopolies and Mergers Commission. The commission would have been entitled to take into account in judging the suitability of the Fayeds as the owners of Harrods—a matter which it would then have had power to determine—the consistent string of lies which were shown conclusively in the inspectors' report.

For some reason—and perhaps we shall never know the reason unless the Minister in his reply will be so kind as to enlighten us —the Secretary of State at that time—the noble Lord, Lord Young—reached this decision. On the one hand, the situation was so desperately serious that it was a matter of fraud to be investigated by the Serious Fraud Office, a fraud so serious that there should not be the slightest risk that the Fayeds might escape prosecution because of a premature publication of the report. On the other hand, he took a determined stand to see that, even if that proved to be true, even if the fraud were proved and they were charged, arraigned and convicted, they would still be able to retain their ill-gotten gains. That is the question that the Government must answer and a question to which I hope we shall receive an answer tonight.

6.39 p.m.

Lord Donoughue

My Lords, this is long-running and messy saga and we are quite rightly anxious as to the matters of genuine concern. For myself, as for some other noble Lords who have spoken, I do not think it is of any great public concern who owns Harrods. It is a commercial bazaar like any other, and owners from the Middle East are as appropriate as any others, assuming that they do not use it illegally. In addition, there are no victims, so far as I can see, of public injustice here. The shareholders received a fair price. We may have private reservations about either of the main parties in this battle—and, personally, I would have reservations about any of them marrying any of my daughters, though the dowry might come in useful.

However, it is not of public concern whether or not Lonrho was misled or was outmanoeuvred there. I am also open-minded about whether there should be prosecution or disqualification. That is a technical question, and very serious points have been made against taking either of those procedures. What is of public concern is the role of the Department of Trade and Industry during the takeover and in reaction to the inspectors' report. To start with, as has been said, it has never been explained why the DTI was in such a hurry to pass the House of Fraser on to the A1-Fayeds; and perhaps the Minister in his reply will explain in simple terms—a lot of people believe in conspiracy theories, but we just do not know—what was the rush.

In lelation to that rushed procedure, I should also like to ask him about the advice which the Department received from its advisers. In the Secretary of State's statement on the inspectors' report—and, more explicitly, in the Minister's replies to questions in this House at the time—it was implied in a laid-back and lackadaisical way that it was nothing to do with the department. The department was a totally innocent party in approving the Fayed brothers because they were fully investigated and approved after due diligence by the merchant bank advisers. The noble Lord, Lord Rees-Mogg, has referred to the telephone call: but I wonder whether that is the whole truth.

The merchant bank was given very little time. Did they have time to take "due diligence"? Did they warn the department that they had not had time to carry out full investigations and therefore could not and did not give a full stamp of approval? I urge the Minister to answer that question fully and frankly this evening. If Kleinwort Benson expressed reservations owing to lack of time, then the department should honestly and openly admit that. That would mean that the department and the Secretary of State took some of the initiative and took the gamble on the Al-Fayeds, knowing that they had not been fully investigated. In that case the department should not make its brief statement of "nothing to do with us" but should take responsibility. It would be unworthy to try to hide by putting the finger on others.

I hope that the Minister will reply clearly to that question. If he fudges it, we shall suspect that there is something to hide; and I hope that it is not the case. I should make clear, as I did when he made his Statement, that although I was once a director of Kleinwort Benson, I was not there at the time of these events.

There is another and more general point relating to the Secretary of State's bland and negative reactions to the report. I hope that the Prime Minister does not too quickly follow the advice of the noble Lord, Lord Rees-Mogg, in sending him here. That bland reaction raises the question of whether the Government are, as they appear, morally neutral on financial matters. Do they care at all about behaviour in the City? This is something different from whether you prosecute or disqualify. This House has commented frequently on the apparent lassitude and inactivity in the field in insider trading. Here we have a report from eminent lawyers, referring to what is frankly appalling behaviour by some of the participants in this sleazy affair. Perjury appears to be one of the sins.

Does the Minister not have a view on that? Is this just a question of whether some subsection of a regulatory handbook has been breached? I think not. This is the unacceptable face of the financial jungle, and the Minister would be most helpful this evening if he would say so. He may have good reasons for not applying disqualification or pursuing prosecution, but does he not have a view on this kind of behaviour? He knows that there are many decent, honest, hardworking and honourable people in the City. They do not like this kind of behaviour and the Government should give them a lead and show which side of the moral fence they are on.

6.46 p.m.

Lord Lyell

My Lords, I, along with many others of your Lordships, rise with considerable diffidence tonight to take part in this debate amid speakers of the calibre of, for example, the noble Lord, Lord Jenkins of Hillhead, Treasury and ex-Treasury Ministers and, if I may say so, following a particularly welcome and distinguished contribution from the noble Lord, Lord Rees-Mogg. I have to begin, rather like my noble friend Lord Rees, by declaring an interest, in that I understand at the last check I had a minute holding in Lonrho. However, I hope your Lordships will not think that anything I might say tonight will be at that company's behest, let alone at the behest of anyone else. The views expressed will be my own, gleaned after extensive study of what I regard as an interesting, illuminating and particularly instructive report. I join those of your Lordships who have congratulated these two inspectors, and particularly my colleague, Mr. Aldous, the chartered accountant half of the inspection team.

In this report we have to stand logic upon its head and start with the conclusions, which I find most interesting, in chapter 2. We start with the problem about the Al-Fayed brothers. It was clear that they had to show that they were, as the City says, good for what they wished to purchase: in other words, the House of Fraser. I do not know whether the regulations would be laid down in the takeover code or what is referred to tactfully later in the report in chapter 25 of the Yellow Book, neither of which I am familiar with. Perhaps we can also learn that it was only by a recommended bid that the brothers were likely to succeed in their objective. Together with the interesting details and the discussions upon the personalities, wealth and other more scurrilous information about the brothers, there was a great deal of detail which was researched by both inspectors. Considerable research was done.

One or two of the report's chapters are particularly interesting. If we look at 3.1.4, it is stated quite clearly that the advisers—the merchant bank, Kleinwort Benson, together with Herbert Smith, the firm of solicitors, both of whom uphold the high standards that we have come to expect in the City of London and which have been referred to so clearly by the noble Lord, Lord Donoughue —were willing to believe their clients, the Al-Fayeds. Of course that is the case: that is the only way in which the City of London can work, in which it has worked in the past and in which it ought to work in the future.

However, it is worth glancing at 3.2.29. We ought to take on board what is said in that particular paragraph about the responsibility of the advisers to the lay public—that is to say, Members of your Lordships' House, and those who are not lawyers, accountants or City practitioners.

There is a fascinating paragraph at 3.4.30 which I refer to as the garden path paragraph. In other words, were the advisers, the inspectors, the Office of Fair Trading and Department of Trade and Industry, in some way, passively or impassively, led up the garden path? The Office of Fair Trading and officials from the Department of Trade and Industry, refer to this aspect. A particular merchant bank gave assurances, three separate times. Noble Lords will find reference to that in Chapter 7. It is stated that they must have had considerable confidence in what they were saying. I believe that that is absolutely right. It is the only basis upon which the City can work.

In Chapter 7 we read three times that assurances were given that the money for this bid—a considerable bid, even by City standards—belonged to the purchasers. When such assurances are given by the City of London, I believe all of us would accept that they are well founded. However, one or two doubts entered my mind (even after considering Chapter 7) on reading Chapter 12 of the report. There is reference to the Office of Fair Trading memorandum which was presented by the purchasers to the Office of Fair Trading. It was apparent that they had claimed to have over 1 billion dollars worth of funds available for the purchase. However, in Chapter 12 the inspectors proceed to consider item by item the parts of the memorandum stated by the Fayeds. Such wealth none of us in our wildest dreams would imagine. We see that the trademark of the Ritz Hotel in Paris is said to be worth 300 million dollars. Yet, as paragraph 12.2.18 points out, the cost was only £9 million sterling in 1979. There is a further interesting paragraph about 75 Rockefeller Plaza in New York. That was again said to be worth 200 million dollars. Yet in paragraph 12.3.8 it is apparent that the value is 30 million dollars.

At the end of the chapter, after very considerable work by both inspectors, the total wealth appears to be in the region of 250 to 300 million dollars. As a student of creative accountancy, I think that that provides a very interesting lesson that we shall be able to pursue. Certainly I shall be able to do so later this evening. It certainly takes my breath away.

Chapter 13 deals with the oil trading of the Fayed brothers, the purchasers. It is very interesting that the assets that they claimed were worth 200 million dollars at the end of 1978 were, they believed and stated, worth 500 million dollars at the end of 1984. The inspectors are quite kind in attempting to find some rational explanation for that.

Those are just two germane chapters of the report. Certainly the most interesting aspects of the report appear in Chapter 25, rightly headed "Lessons from the case". First, we consider the problem of demarcations. The inspectors point out one particular aspect concerning advisers. Quite rightly, the inspectors say that no advisers can carry out what they class as Pinkerton style inquiries. They say that certainly the Office of Fair Trading and officials from the Department of Trade and Industry were left with the clear impression that assurances given by sundry persons in the City were indeed well based and well founded. Yet any study of Chapter 12 of the report gives, I believe, just a little room for doubt.

Also, under "lessons from the case" in Chapter 25, there is a very interesting section classified, "Knowledge of one's client". Reference to my noble friend Lord Rockley appears quite frequently in the report. Paragraph 25.3.1 reports that he said to the inspectors that he was genuinely surprised a problem had arisen since in his considerable experience merchant bankers are accustomed to using their judgment in such matters; and, verification would not be appropriate in the fast moving situation which was apparent in this case. I certainly agree with him on that. That is ripe stuff since the noble Lord, Lord Rockley, 38 years ago, did not give me the benefit of those two attitudes when he, together with others, beat me at school.

In conclusion, Chapter 25 has some useful principles for takeovers. It recommends one or two loopholes in the City code that should be examined so far as concerns corporate and incorporate purchasers. The report is long. It is never boring. It provides very valuable lessons for all of us. I believe that it also provides a valuable lesson for the City of London which each and every one of us wishes to see retain its position, along with that great motto, nil satis nisi optimum. I can tell your Lordships that you cannot buy that for £9 million or a great deal more.

6.57 p.m.

Lord Brocket

My Lords, I do not wish to say much on this rather emotive and complicated subject except to make an overall observation on a rather different aspect.

We are all fully aware and accept that parliamentary privilege has to exist within both Houses of Parliament in order for a full debate to be possible and for all the facts to be brought out into the open. To extend parliamentary privilege outside Parliament, in a written form, and for all the world to see, is totally unforgivable and against all democratic values that we hold. Regardless of the facts in this case—and I stress that—to libel other people, to give them no chance to answer the libel, to publish the libel and to be totally immune from court action, is deplorable.

The normal course of action in such a case is for the facts—not hearsay—to be ascertained and, if sufficient grounds exist for a prosecution, for the facts to be put before a court of law and for the Government to act if necessary. We suddenly find that a report is published where a report would never normally be published as no case existed against the subject in question and that the report is based largely on hearsay. It is hearsay that is, coincidentally, inadmissible in a court of law. Furthermore, the Fayeds' response to the allegations in the form of a 500-page report is conveniently ignored.

It leads me to suspect that some skullduggery existed to ensure the publication of the report, since government action was extremely unlikely and uncalled for, and the report would therefore not normally be published. It may well be that in this country we put up with such a position but I seriously doubt whether the European Court would hold the same view if the matter were put before it.

Let us imagine the effect on large companies if this tool, weapon or procedure—call it what one will—was used on a wider scale to affect share prices or takeover bids. It would be a very powerful weapon indeed. As the report states, the Fayeds have not broken any laws and have not committed any offences.

Despite having done a fair hatchet job on the Fayeds the report was obliged to conclude: Their relationships with the Stock Exchange, the revenue authori;ies and auditors have been properly and responsibly conducted, and the dealings of this company as regards the substantial borrowings and the renewals of borrowing have all been proper and beyond criticism". The report further states: They find no evidence that the conduct of the Fayeds in any of these matters has fallen short of the conduct to be expected of directors of large and important companies". It may well be that a rosier picture was painted of their wealth But which one of us has not at some time ciscouraged our bank from believing that our assets are a little greater than they are? It is only a question of degree.

Noble Lords

Oh!

Lord Brocket

My Lords, if the City does not like what the Fayeds have done it has only itself to blame because it was the City's rules by which the Fayeds played. I am a little sad that in Britain a legalised form of personal and corporate libel seems to have popped up that has no form of redress. I am even sadder that the whole business has so damaged the City.

7.1 p.m.

The Earl of Longford

My Lords, the noble Lord, Lord Brocket, will forgive me if I do not follow him along that line. I believe that a lie is a lie, and if you lie for a period of time you are a discredited person. However, I shall leave that topic because I have only a few minutes in which to speak.

I am grateful to the noble Lord, Lord Jenkins, for opening the debate in a characteristically cogent and convincing manner. There have been other notable contributions. I hope that the noble Lord, Lord Rees-Mogg, will not think me impertinent if I say that I hope we shall hear from him more often. His speech was one of his most powerful interventions.

I have disagreed with the noble Lord, Lord Diamond, only seldom, if ever. Today I thought that he was barking up the wrong tree. However, he made an important point, which was followed up by my noble friend Lord Donoughue, in referring to the decline in morals in the City. It is an arguable matter but I shall spend my few minutes discussing the question of the moral climate in the City and the fashionable standards which have made such frightful occurrences possible.

From 1955 to 1963 I was chairman of one of the smaller clearing banks. I believe that I am the only socialist ever to hold such a position. There may have been a few secret sympathisers, but, if so, they kept their opinions to themselves. I remember that during those years a high sense of public responsibility was possessed by the leaders of the banking world who to a greater or lesser extent spread themselves throughout the City.

I found a particular mentor in Mr. Anthony Tuke, who was for many years chairman of Barclays. He was kind enough to take me under his wing as a novice and he taught me many useful things. One of the many comments he made was, "You must remember that high interest rates are always good for bankers. But that does not mean that they are necessarily good for the country". He insisted that I should keep the distinction clear. I learnt from him the various obligations of the banker to the depositors, shareholders and staff. I also learnt the overriding obligation to the community as a whole. The question is whether today such an obligation is felt to anything like the same extent.

During my eight years as chairman there were six Conservative Chancellors of the Exchequer. Time prevents me spelling out their names, but I am glad to be able to say that one of them is still with us, the noble Lord, Lord Thorneycroft. By coincidence, for six of those eight years we were asked to restrain lending and not to go the whole way in the search for maximum profit. We were asked to act according to the interests of the country as interpreted by the government of the day and conveyed to us through the Governor of the Bank of England. We complied as a matter of course. We did so reluctantly and with a certain amount of grumbling but we assumed that our duty was to act in the way in which the public interest was interpreted by the elected government. That was how it was in those days.

We are now told by some people that in these days of market forces, which should be allowed to run their course without intervention any kind of credit controls are unworkable. If that is so it is only because of certain assumptions which are made about the present attitude of the leading bankers. They are the people who create the credit. If their attitude was the same as those of my leading colleagues at that time they would be no more unworkable than they were during those eight years of Conservative government when I was chairman of a bank.

Today we are undoubtedly faced with various sordid happenings. I hold no brief for any of the parties, except that I am a devout reader of the Observer. I cannot afford to shop in Harrods; otherwise no doubt I should be its faithful servant. I hold no brief for either party. In spite of what the last speaker said, we all know that the report represents the irresistible truth. There was lying on a large scale and that was allowed to happen because of the decline in standards. I am afraid that that is due to today's emphasis on market values and forgetfulness of the public interest which in those days was stood for by men such as Mr. Anthony Tuke and many others in the City. I can hope only that those days will return.

7.7 p.m.

Lord Ezra

My Lords, in the light of the brief Statement that was made about the voluminous detail of the report of the inspectors I believe that my noble friend Lord Jenkins of Hillhead was totally justified in tabling this Motion for debate. I am convinced that had the Statement been more detailed the raison d'etre for the debate might not have existed. My noble friend rightly said that the report raises many questions which remain unanswered. During the course of today's debate many noble Lords raised those questions and attempts were made to answer them.

I wish to concentrate on four aspects, although there are many others. First, I wish to talk about the inspectors' report. A question was cogently put by the noble Lord, Lord Mishcon, when the Statement was repeated in this House. The report prepared by the inspectors on the House of Eraser was extremely condemnatory. As was pointed out by the noble Lord, Lord Mishcon, if that condemnation was justified it was virtually inevitable that some kind of action should be taken. If action was not taken it would appear to be implied that the condemnation was not justified.

I am slightly worried about the inspectors' report when I compare it with the Select Committee procedures in your Lordships' House. Not only do we show the conclusions reached by the Select Committee but all the evidence is published. It would have been helpful to have in a second volume all the evidence given to the inspectors. In spite of the fact that the first volume is large it would have been helpful to have all the evidence and reached our own conclusions. That would have been more effective than seeing the situation through the eyes of the inspectors alone. Therefore, I raise a query on that very much along the lines of what the noble Lord, Lord Mishcon, pointed out, and the noble Lord, Lord Brocket, raised similar questions.

Secondly, there is the role of the advisers to which much attention has been drawn. Should advisers who are employed by a particular party in a takeover acquisition operation be wholly supportive of their cause or do they have a duty to satisfy themselves that what they are told by their client is justified? As yet, that does not seem to me to be very clearly decided.

The report has been referred by the Secretary of State to the Bank of England and the Law Society in respect of the advisers in this case. I suggest that it would be most helpful to us all if, after those eminent institutions have considered the matter, there is a report on what conclusions they reached. I have the feeling that having been referred to them, that is the last we shall hear of it. They will take that material on board in the same way as they take on board much other material which comes their way.

Thirdly, there is the question of the public interest in mergers and takeovers, a point specifically referred to by the noble Lord, Lord Rees. I am rather concerned that the public interest should have been eliminated as a consideration in mergers and takeovers. Most of the references to the Monopolies and Mergers Commission cover very large concerns. Therefore, it is almost inevitable that a degree of public interest is involved. What was particularly disturbing in this long-running saga—as the noble Lord, Lord Rees, pointed out—was that the public interest was taken into account at a certain stage in the proceedings and was then eliminated at another stage. Therefore, the two contestants were being judged by the Secretary of State on two completely different bases. I believe that there is a strong case for taking public interest into account on takeovers and mergers when referred to the Monopolies and Mergers Commission.

Finally—and this is a point referred to by the noble Lord, Lord Lyell—there is the question of whether the City code on mergers and takeovers should be amended in order that the amount of information required from non-corporate offerers is brought into line with that required from corporate offerers. Having been involved in takeovers and mergers in one way or another in recent years on a corporate basis, I know how much detail you have to go into to justify your position vis a vis the people concerned with the City code. However, there seems to be a loophole in the case of non-corporate offerers.

Those are some of the issues which this case raises. I believe that it would be unfortunate in the extreme if this long and, indeed, eminently readable document were allowed just to remain on the shelves without our knowing what was eventually to be done about some of those major issues. I hope that as a result of this debate and as a result of the response which we shall have from the noble Lord, Lord Trefgarne, we may perhaps be reassured that we shall eventually have a document which will tell us exactly what has been done about the lessons learned from this case.

Lord Williams of Elvel

My Lords, the House will be grateful to the noble Lord, Lord Jenkins of Hillhead, for introducing this debate. Because this is the only intervention from this Dispatch Box and since we have made up a little time I hope that the House will excuse me if I speak for a little longer than ray ration of 10 minutes. Of course I still intend to allow the noble Lord, Lord Trefgarne, his full 20 minutes. I do not wish to detain the House too long but I :should like to give a considered view on these problems from the Opposition Front Bench.

I start by quoting again to your Lordships the conclusion of the report —and I am reading from our own Official Report at the time the noble Lord repeated the Statement made in another place. It states; The Fayeds dishonestly misrepresented their origins, their wealth, their business interests and their resources to the Secretary of State, the OFT, the Press, the HOF Board and HOF shareholders, and their own advisers". —[Official Report, 7/3/90; col. 1216.] That is our starting point.

The noble Lord, Lord Rees-Mogg, quite rightly raised the question: if that misrepresentation had not taken place, would the Fayeds have succeeded in taking over the House of Fraser? At the time that the noble Lord repeated the Statement made by his right honourable friend in another place, I gave a very clear answer, as I believe did the noble Lord, Lord Rees-Mogg. The answer is no. If it had been known that that misrepresentation had taken place, that transaction would not have gone through.

The second question which we have to ask ourselves is: what happens now? As the noble Lord, Lord Rees, pointed out certain options have been closed out. What can we do and what should the Government do to try to mark their disapproval, if they disapprove, of what has happened as described by the inspectors?

I respond to the noble Lord, Lord Diamond, in one respect. The Government have taken action in legislation to close some of the loopholes revealed by the inspectors in the report. The Companies Act 1989 is an example of that. The takeover code referred to by the noble Lord, Lord Ezra, is being studied at present and, as I understand it, amendments will be brought forward which will respond to the points made by the noble Lord, Lord Ezra.

Obviously there is a loud sound of stable doors clanging after the horse has bolted. Unfortunately, in these circumstances, one cannot help that. We have to make sure that the Government do not sit back and say that nothing else should be done. We must make sure that the Government do not simply sink into a state of spineless inertia. It is to that matter that I wish to address my remarks this evening.

What did the prosecuting authorities do? We heard that there was not enough evidence for a prosecution. Although the noble Lord, Lord Young of Graffham, told us that very serious matters were being studied by the Serious Fraud Office, there was not enough evidence for a prosecution.

In the report the inspectors took a very serious approach to the evidence which they received. I should like to quote from paragraph 1.21 of the report to show how serious their attitude was: When we considered disputes of fact we always looked for contemporary documentary evidence to help us resolve the dispute, and time and again the truth of the Fayeds' account was exploded by reliable contemporary documents". In Other words, the inspectors went to a great deal of trouble to support their conclusions. Those conclusions are related at paragraph 2.1.2: During the course of our investigations we received evidence from the Fayeds, under solemn affirmation and in written memoranda, which was false and which the Fayeds knew to be false. In addition, the Fayeds produced a set of documents they knew to be false. This false evidence related mainly, but not exclusively to their background, their past business activities and the way in which they came to be in control of enormous funds in the autumn of 1984 and the spring of 1985". Whatever the evidence or lack of evidence for fraud, there can be no doubt that there is a prima facie case of perjury. Are the prosecuting authorities not prepared to take action on the basis of that very considered evidence which the inspectors are putting forward? If they are not prepared to do so, then I can only say to them—and indeed to the Government through them —that they must say that they do not agree with that and that something is wrong. The inspectors got it wrong.

The Statement made by the Secretary of State earlier this month did not say that the Government rejected the inspectors' conclusions; far from it. It said that anybody can read the report and come to any conclusion they like. If the Government support the evidence brought forward by the inspectors, there must be a case for prosecution. I hope that the noble Lord, Lord Trefgarne, will address himself to that point when he replies.

The next issue concerns the response of the City. A number of noble Lords commented on that and I do not wish to dwell on it. The noble Lord, Lord Rees, made his point and my noble friend Lord Longford made a point about the ethic of business in the City. We hope that these things will be cleared up. I do not believe that the question of Harrods' bank is a material matter. It is a "minnow", as the noble Lord, Lord Rees, said; it is not very important. However, the question of the ethic of business in the City has to be addressed at some stage. I hope the Government will do everything in their power—I will explain what can be done —in order to encourage a return to what my noble friend Lord Longford called a "proper ethic" in banking.

The question remains of what we do now. What do the Government do now? The matter cannot simply be left where it is. I turn to the question of disqualification of directors. The Secretary of State announced that he is not prepared to take action on that front. The Company Directors Disqualifications Act 1986 is quite clear. Section 8 gives the Secretary of State authority to apply to the court for disqualification on grounds of public interest. I should have thought that perjury; deliberately false statements; misleading the competition authorities; misleading creditors and misleading employees certainly justifies a case on grounds of public interest. There is certainly a case on grounds of public interest to ensure that the City is cleaned up.

Unfortunately under the Act the court must make up its mind on the application on the basis of Schedule 1, which does not include public interest. The Secretary of State therefore can quite reasonably say —as he said to the trade and industry committee of another place this morning—"I could introduce all sorts of public interest grounds, but the court must make up its mind on the basis of Schedule 1". Part I of Schedule 1 confines itself to misfeasance or breach of any fiduciary or other duty by the director in relation to the company. That is the point at which the Secretary of State wriggles off the hook and says, "I will not try because I do not believe I will succeed in the court".

Under Section 9 of the Company Directors Disqualification Act 1986 the Secretary of State has power to modify Schedule 1. If he had made an order saying that public interest should be taken into account by the court, that he is modifying Schedule 1, then he would be able to move an application for disqualification and the court could treat it on the basis of public interest. I say to the noble Lord that if such an order were put forward by the Secretary of State it would not be opposed by us; it would not be prayed against by us. That is a way forward which the noble Lord might like to consider.

Lord Rees

My Lords, perhaps the noble Lord will give way on that point. I am grateful to him for his illuminating address on the question of the Act to which I also referred. Is he suggesting that the Secretary of State could introduce an order with retrospective effect, which would enable him to initiate action before the court—the decision is ultimately that of the court —against the Fayeds on the basis of what happened some years ago?

Lord Williams of Elvel

My Lords, I am speaking of the future. I am saying what we should do now and how we should get round the particular problem with which we are faced. I will respond very directly to the question of the noble Lord. If we consider what happened to the employees and the creditors, bearing in mind the fiduciary duty owed by the directors of a company to employees under Section 309 of the Companies Act 1985 and to creditors generally under various sections of the Companies Act, I suspect there would be a case to put before the court. That is a point I will not dispute because it is a question for the court to answer.

The problem we are left with cannot be allowed to go away. It is not merely a question of whether an application would or would not be successful. The Government must make an effort to show to the world and to the City that we really want to clean up the whole business. As the noble Lord, Lord Jenkins, pointed out, this is the strongest report that certainly I have read—indeed that he has read—since the Lonrho report in 1986. We cannot just let it go and say we will do nothing.

I hope that the lesson of this affair is that the Government will make a very strong statement —perhaps the noble Lord will make a very strong statement today —saying that they will amend the company disqualification schedule; that they disapprove of what happened; that they will explain why the prosecuting authorities did not take any action on the basis of what is clear evidence of a criminal offence, if we are to believe the inspectors; or saying that they do not believe the inspectors and that they will embark on an overhaul of the processes of government which led to this extraordinary shambles.

Why did Lord Young not refer the matter to the Monopolies and Mergers Commission in 1988 when he had the report in front of him? Why did Mr. Tebbit wave it through so quickly in 1985? Why was the report not published? Instead we were told it had to be referred to the Serious Fraud Office. Lastly, does he not recognise that to do nothing at all is an affront to people both in the City and in the United Kingdom generally who wish to do business in an honest, sensible and sober manner? It is a matter which cannot go away. The Government are under the microscope on this point. The noble Lord must take this issue seriously and we await to see what the examination reveals.

7.25 p.m.

The Minister of State, Department of Trade and Industry (Lord Trefgarne)

My Lords, Your Lordships will be grateful to the noble Lord, Lord Jenkins of Hillhead, for having introduced this debate.

The publication of the inspectors' report on 7th March 1990 allows everybody to judge for themselves what they think of the conduct revealed in the report. It is a sorry tale. It gives rise to a large number of issues, many of which have been raised in this debate. I propose to concentrate on four main areas. These are competition policy; the criminal law; the law relating to disqualification of directors by the court and the powers of Companies Act inspectors.

I turn first to competition policy. The Fayeds' bid for the House of Fraser in 1985 was considered by the Director General of Fair Trading and my right honourable friend the then Secretary of State (Mr. Tebbit) in the light of the merger policy introduced in 1984. Since July 1984, references to the Monopolies and Mergers Commission (MMC) have been made primarily on competition grounds. That remains the Government's policy.

In accordance with the advice of the Director General of Fair Trading on the application of this policy, my right honourable friend Mr. Tebbit announced on 14th March 1985 his decision that there were no grounds for referring this merger to the MMC.

It is open to the Secretary of State as the noble Lord, Lord Williams, recognised, to reconsider a decision not to refer a merger within six months of new information affecting the merger coming to light. Accordingly, my noble friend Lord Young the then Secretary of State, reconsidered the earlier decision of his predecessor in the light of the inspectors' report submitted in July 1988. He announced in November 1988 that, again in accordance with the advice of the Director General of Far Trading, he had decided not to refer the merger to the MMC. The inspectors' report raised doubts about the source of the finance for the Fayeds' acquisition of House of Fraser.

The Office of Fair Trading considers the manner of financing a deal as it bears on the competition. In particular, it seeks to establish what competing interests are involved and to assess whether the financing might put the target company at risk of failure with a resultant loss of competition. But in this case, House of Fraser shareholders having been paid in full and in cash the OFT concluded that there were no new competition issues to investigate or other public interest issues of the sort which the MMC could usefully address. The other issues raised were more relevant to the functions and responsibilities of other authorities.

The Government are always seeking to learn from past experience in developing their merger control procedures, and have paid careful attention to the recommendations in the inspectors' report. The Government have now implemented, as the noble Lord, Lord Williams, recognised, a number of changes in their merger control procedures in line with the inspectors' recommendations. Let me summarise the four main points.

First, in their report the inspectors suggested that the Secretary of State's role be confined to decision making. The procedures for the Secretary of State to consider merger reference cases have been adjusted so as to avoid his being involved in the investigative and fact-finding stages. These are rightly matters for the OFT.

Secondly, the inspectors suggested that the Director General of Fair Trading may have been rushed into giving his advice to the Secretary of State in 1985. One or two noble Lords, including the noble Lord, Lord Williams, referred to that this evening. To this I would say that there is always a balance to be struck between having enough time to weigh up the facts and acting quickly to remove uncertainty. In this particular case there was considerable market uncertainty in the period before the Secretary of State's decision was announced. In any case—this is important —the OFT had been considering a merger of the Fayeds with the House of Fraser since November 1984 when the Fayeds acquired Lonrho's 20 per cent.

New procedures under the 1989 Companies Act are to come into force next week under which companies who voluntarily pre-notify mergers can usually expect a decision from the Secretary of State within 20 working days of notification. There are appropriate extension provisions to deal with particularly complex or difficult cases. The department's own procedures also ensure that the Secretary of State has time to consider the Director General of Fair Trading's advice carefully and to reflect before reaching decisions on reference.

Thirdly, the inspectors also recommended, in drawing attention to lessons for the future, that the OFT should issue a code of standards for advisers appearing before them. This is a matter for the Director General of Fair Trading. The OFT publishes and keeps up to date a guide on mergers procedures. It has told the department that it has decided not to include in this, or publish separately, a code of standards for advisers. It would be extremely difficult to make such a code exhaustive and it is in any case open to such advisers to note the issues raised in the inspectors' report.

Finally, however, in the 1989 Companies Act (Section 151), the Government have taken action to deter those who seek to deceive the competition authorities in the future by making it a specific criminal offence knowingly or recklessly to mislead the competition authorities. This comes into effect from 1st April this year. It will be for the prosecuting authorities to furnish the evidence needed to secure a conviction in the courts.

I turn now to the decision that there should be no criminal proceedings arising out of the matters dealt with in the inspectors' report. That decision was taken jointly by the Director of Public Prosecutions and the Director of the Serious Fraud Office, both of whom are independent public officers. I propose therefore to preface what I have to say about the decision in this particular case with some more general observations about the manner in which such decisions are taken and how those two independent officers are accountable to Parliament.

I emphasise two important principles. The first is the need for full equality before the law, and secondly the right of every citizen to expect consistency from the prosecuting authorities. It is therefore especially important when cases are controversial, or otherwise have a high profile, that the process of arriving at a decision as to whether or not to bring a prosecution should be no different than in any other case.

The criteria to be applied when considering institution or continuation of criminal proceedings are set out in the code for Crown prosecutors which was issued pursuant to Section 10 of the Prosecution of Offences Act 1985 and laid before Parliament. The very first question to be determined arises from paragraph 4 of that code which stipulates: A prosecution should not be started or continued unless the Crown Prosecutor is satisfied that there is admissible, substantial and reliable evidence that a criminal offence known to the law has been committed by an identifiable person. The Crown Prosecution Service does not support the proposition that a bare prima facie case is enough, but rather will apply the test of whether there is a realistic prospect of conviction.

Lord Mishcon

My Lords, perhaps the Minister can assist several Members of the House who have raised this point. He has just quoted paragraph 4 of the code. Is it really suggested that inspectors can make a finding of fact about lying upon oath and deliberately do so without having had prima facie evidence before them? If so, that is a scandal. If not, what does paragraph 4 mean other than that there should be a prosecution?

Lord Trefgarne

My Lords, the decision as to whether there should be a prosecution rests with the prosecuting authorities, as I have already said. There is a difference between what is right and proper in regard to launching a prosecution and what the inspectors say. There is a specific difference which I shall come to in a moment if the noble Lord will allow me.

The Royal Commission on Criminal Procedure also considered the relationship between the independent prosecuting authorities and Parliament. The Royal Commission endorsed the principles of openness and accountability in prosecution arrangements, and hence both the statutes creating the Crown Prosecution Service and the Serious Fraud Office provide for accountability by placing the two directors under the superintendence of the Attorney-General who answers to Parliament. The Royal Commission also noted the difficulties which might flow from making any Minister answerable for individual prosecution decisions.

What the Royal Commission said is very compelling, and it is for that reason that the invariable practice of the Law Officers is to confine themselves to explaining prosecution decisions in general terms rather than by reference to the details of the sometimes conflicting evidence.

The report of the inspectors was passed to the DPP and the director of the SFO in July 1988 because, at the very least, it disclosed what the then Secretary of State—my noble friend Lord Young—described as evidence of "wrong doing". The report and accompanying evidence were voluminous and required careful consideration. On 24th November 1988 the directors jointly referred the matter to the Metropolitan Police and asked for necessary inquiries to be carried out. In so doing, they were acting no differently than in any other case of its nature.

The investigations which were pursued were based on lines advised by lawyers within the SFO and the CPS and extended to every part of the world in which the inspectors' report had suggested they would be desirable. They were thorough and the fact that those inquiries involved several overseas jurisdictions inevitably made the process a lengthy one. The purpose of the investigation was to secure evidence which would be available and which was, above all, admissible in criminal proceedings in our jurisdiction.

The result of those inquiries was considered by the two directors who had the benefit of advice from senior Treasury counsel experienced in criminal matters. Having satisfied themselves that all lines of inquiry had been pursued, they concluded that the evidence available was insufficient to afford a realistic prospect of conviction for any criminal offence relating to any matter of substance raised in the report.

In taking the decision not to institute criminal proceedings, the two directors had treated this case no differently from any other case referred to them, and my right honourable and learned friend the Attorney-General, has authorised me to say that he is satisfied that the conclusion reached by the two directors was the correct one on the basis of the admissible and available evidence.

Lord Mishcon

My Lords, I promise the Minister that this is my last intervention; but this matter is most serious. Will the Minister please forget the A1 Fayeds for one moment and imagine that it is an ordinary citizen, Mr. Smith, who is blatantly accused in a report of having committed perjury? The prosecuting authorities take no action, so he cannot defend himself in a criminal court. He cannot bring an action for libel because the inspectors are covered by privilege. Will the Minister kindly indicate what the ordinary citizen does under this regime when he wishes to show that he is not guilty of what people have published officially as being his guilt of a criminal offence?

Lord Trefgarne

My Lords, the noble Lord raises a very important and proper point which I shall come to in a moment. I wish to say a little more about the inspectors' report and the difference between it, the evidence which they take into account and that which the prosecuting authorities also take into account. I shall say something further about these matters in a moment.

As the noble Lord has said, there are those who have expressed surprise that evidence should be sufficient to justify such clear and firm conclusions as those reached by the inspectors, yet be regarded as insufficient to justify the institution of criminal proceedings. But there is no inconsistency here, and for this reason. In their report the inspectors, as they were entitled to do, not only made findings of fact but also drew conclusions from them and expressed views on the conduct of some of the people involved.

Inspectors appointed under the Companies Act 1985, who are independent of my department, are not required to apply a particular standard of proof The standard which they apply in making their findings should be flexible. The more serious the finding or criticism based on it, the higher the burden of proof that they should apply. That burden of proof is not directly comparable to that applied in civil or criminal cases. It is open to the inspectors to take account of the evidence that was hearsay if they think it reliable.

It is therefore both possible and proper—because the standard of proof in criminal cases is different and because they can take account of hearsay evidence—for inspectors to make findings on various matters, but at the same time for there to be insufficient evidence for criminal proceedings to be instituted and for there to be no realistic prospect of conviction in such proceedings.

Lord Brocket

My Lords, I apologise for interrupting the Minister. He says they are findings of fact, but that cannot be so. According to the inspectors, they are findings of fact and they have put them down as facts. However, they cannot be construed as facts until they are proven. The people in question happen to be the Fayeds at the moment, but they could be anyone. The facts cannot be proven until the people concerned have had the opportunity of answering the charges. Then it will be decided whether or not they are facts.

Lord Trefgarne

My Lords, I should explain to my noble friend that there are two opportunities for those criticised in a report in this way to make their views known at least to the authors of the report.

The first opportunity is, as I understand it, at the point when the report is being prepared. The victims (if that is the right word) are advised of what it is the inspectors have in mind to say about them in general terms. I understand that the Fayeds took advantage of the opportunity on this occasion and made representations to the inspectors as to their views on what was to be said about them. Most certainly the inspectors took those representations into account.

Secondly—and in this case uniquely—as I understand, the persons referred to in the report were given a copy of it in advance of publication. If they thought fit, they were entitled to take action to prevent publication of the report. I do not suggest that that is a total solution to the problem to which the noble Lord, Lord Mishcon, and my noble friend Lord Brocket have referred, but it is at least a partial solution.

Lord Williams of Elvel

My Lords, I apologise to the noble Lord for intervening. Can the Minister say how anyone concerned with this report or shown a copy of it could have prevented publication?

Lord Trefgarne

My Lords, he could have gone to the High Court and taken action to prevent publication.

Lord Mishcon

My Lords, I apologise to the Minister once again, but these are such vital matters for the citizen generally, quite apart from the people concerned in the report. I am sure that the Minister has been advised that the only way in which one can apply to the court for an injunction restraining publication would be either because a criminal charge is being brought, and therefore there would be prejudice, or, in the alternative, the report constituted a libel on which action could be taken. I repeat: the inspectors have qualified privilege and it is quite impossible to take such action. I hope that as a result of this discussion the Minister will consult with his colleagues about the fairness of this whole procedure.

Lord Trefgarne

My Lords, the noble Lord is much more learned in these matters than I. I am informed that, despite the qualified privilege which the noble Lord rightly says is attached to the contents of the report, it was open to the Fayed brothers, had they thought fit, to have taken action to prevent publication. I have taken advice on that point and that is the position.

Lord Mishcon

My Lords, on what grounds?

Lord Trefgarne

My Lords, I do not pretend to be an expert on legal detail on these matters; but I am advised that it was open to the Fayed brothers to take action if they thought fit in order to prevent publication. Evidently, they decided not to do so. The question of whether there were to be criminal charges was, as I have said, a matter for the prosecution authorities. However, it fell to my right honourable friend the present Secretary of State to consider whether he should make application to the courts for the disqualification of the Fayeds as directors.

Section 8 of the Company Directors Disqualification Act 1986 provides for the disqualification by the courts of directors in consequence, among other things, of a report made by inspectors under Section 437 of the Companies Act 1985. What is now Section 8 first appeared in the Insolvency Act of that year. The provision implements a recommendation of the Cork Committee on Insolvency Law and Practice which was intended to provide greater possibilities for ensuring that those whose conduct has shown them to be unfitted to manage the affairs of a company with limited liability should, for a specified period, be prevented from doing so. The provision was not intended as a punishment, but as a protection for the public.

Against this background it fell to my right honourable friend to decide under Section 8(1) of the Company Directors Disqualification Act 1986 whether it was expedient in the public interest that he should apply to the court to have a disqualification order made against the Fayeds. I should perhaps stress that he does not have the power to order their disqualification, as I suspect that the noble Lord, Lord Jenkins, may have thought, judging by his earlier remarks; but that is a detail.

Lord Jenkins of Hillhead

My Lords, surely he has power to initiate an application?

Lord Trefgarne

My Lords, the noble Lord is quite right. He has power to initiate an application, but not to order the disqualification himself This power is quite rightly left to the court. In deciding not to make an application, he took into account the fact that the court may make a disqualification order—I emphasise the word "may"—where it is satisfied that the conduct of the director in relation to the company—those are words which the noble Lord, Lord Williams, repeated—makes him unfit to be concerned in the management of the company. In making its decision, the court must have regard in particular to the matters mentioned in Part I of Schedule 1 of the 1986 Act though these are not exhaustive.

My right honourable friend took legal advice and gave very detailed consideration to the report before reaching his decision under Section 8. He also had regard to the nature of the conduct which is criticised by the inspectors, the present beneficial ownership of the House of Fraser Holdings, and the manner in which the Fayeds exercised control over and managed that group.

These were all factors which he took into account when exercising quasi-judicially the jurisdiction conferred on him by the 1986 Act which is intended to provide protection for all those whose interests may be prejudiced if companies are run by individuals who are unfit to manage them. Although the inspectors concluded that the Fayeds lied to the competition authorities at the time of the merger—I have no reason to believe that they were wrong, but it is for individuals to make up their own minds once they have read the report —the inspectors did not criticise the Fayeds for the way they were running the House of Fraser which they already owned and which cannot be taken away from them. In these circumstances, my right honourable friend considered that publication of the report, which would allow people to judge for themselves whether they wished to do business with the Fayeds, would be a severe blow to their reputation, as indeed I think it has proved. My right honourable friend is not bound in law to give reasons for his decision, which is of a quasi-judicial nature, and does not intend to do so.

There has been discussion lately about whether inspectors should make criticisms in reports or confine themselves to findings of fact. My right honourable friend gave evidence on this point when he appeared before the House of Commons Select Committee on Trade and Industry on 7th February. On that occasion he said that there were strong arguments both ways and that it is a very fine matter of judgment what the instructions to inspectors should be in relation to criticising the conduct of individuals. My right honourable friend made it clear that he had come to no final view and that he would be interested in the views of the committee, and indeed of Members of your Lordships' House, on this point.

Finally, the inspectors made a number of recommendations for changes in, or clarification of, company law in Chapter 1 of their report. Part III of the Companies Act 1989 introduced a number of changes to the investigation system, including a number recommended by the inspectors; for example, the ability of inspectors to get relevant information from personal bank accounts has been improved; and there has been a widening of the powers under which inspectors can require information and assistance relevant to the investigation. I can tell your Lordships that my right honourable friend the Secretary of State is satisfied that the present state of the law in this area, following the amendments introduced to companies legislation by the 1989 Act, meets the concerns expressed by the inspectors.

The noble Lord, Lord Hatch, referred in his speech to the assurance which I gave on an earlier occasion. I do not have the date in front of me but the noble Lord is aware of the occasion. I am happy to repeat the assurance I gave on that occasion in the terms that I then gave it. It related to the accusation made by the noble Lord, Lord Williams, on an earlier occasion, which the noble Lord repeated. I said then that the accusation was quite without foundation, and I repeat that assurance tonight.

I have dealt with the principal points arising from this complex and unusual investigation. Cases such as this do not occur every day. Indeed, I should be astonished if we were ever to see its like again. Nevertheless, lessons have been learnt and changes in practice and the law have been made. The inspectors' report has been published. Regulatory authorities, to whom copies have been passed, are considering whether any action should be taken by them. Although no prosecution has proved possible and my right honourable friend has decided not to seek to disqualify as directors anyone involved in this affair, I think it plain that publication of the report with all its findings has itself served a considerable public interest, allowing people to judge for themselves whether to do business with the Fayeds. That is the best protection the public can have in this case.

7.53 p.m.

Lord Jenkins of Hillhead

My Lords, I shall be brief because I am not a great believer in second speeches. I thank the Minister for his reply, which was courteous and detailed and up to a point comprehensive, although from my point of view he devoted rather too much time to the question of why there was no prosecution —I certainly never thought that the Secretary of State had any alternative but to accept the advice of the two inspectors on this matter—and substantially less time to the other issues, particularly the issue of possible disqualification.

I thank noble Lords who participated in the debate. In some ways the high point of the debate was in the middle when my noble friend Lord Diamond and the noble Lord, Lord Rees, both spoke cogently. The noble Lord, Lord Rees, spoke with great neatness and tautness and moved my mind a little on one or two issues. The noble Lord, Lord Rees-Mogg, spoke with great power and posed the central question: did the Fayeds obtain, by lying, a great advantage which they would not otherwise have obtained? To that central question we have not had a satisfactory answer. Until it has been answered satisfactorily I cannot be wholly satisfied that this issue has been dealt with well by the Government. I beg leave to withdraw my Motion.

Motion for Papers, by leave, withdrawn.