FINANCIAL AND COMPANY INVESTIGATIONS: POWERS (Hansard, 11 May 1988)

§ Lord Young of Graffham

I have been reviewing the investigation powers and procedures under these Acts in the light of recent experience of operating them.

Fair and efficient markets depend on effective enforcement of the law and of self-regulatory requirements. Investigation powers have a key role to 1210WA play in this. Their purpose is to discover the facts so that, if there has been misconduct, appropriate prosecution or regulatory action can be taken. The value of the existing powers is demonstrated by the results obtained. In the past two years, for example, following investigations under the Companies Act, criminal proceedings were brought in 28 cases involving the management of 47 companies and leading to penalties ranging from fines to, in one instance, imprisonment for 15 years. In addition, 61 companies were wound up in the public interest and nine people were disqualified from acting as directors. In the relatively short time that the Financial Services Act investigation powers have been in force, two people have been convicted of insider dealing as a direct result of investigations by inspectors and legal proceedings are in train in two further cases.

These results demonstrate the contribution which the investigation powers make to the detection of malpractice. Their purpose is to find out the facts so that decisions can be taken on whether or not further action is needed. None of the investigation powers can be used unless there is a good reason. Some of the powers have higher thresholds. There is no question of the Secretary of State having the power to undertake witch hunts, as has been suggested. But when in my judgment the statutory criteria are met, I shall continue to use the powers when circumstances make it appropriate to do so. In exercising my discretion, I shall apply the same broad standards as my predecessors have done.

My department has recently completed a review of existing investigation powers and procedures with a view to ensuring that investigations are undertaken as effectively and quickly as is compatible with a thorough and fair inquiry.

This review concluded that in general the present range of powers matched the different purposes and circumstances of investigation required in the UK, but that there was a need for more scope and flexibility in the way they could be used and for clarification of some of the provisions to improve efficiency.

Accordingly, it is intended to introduce the proposed changes to the law at the next convenient opportunity:

(i) enabling the general powers of company investigation under Section 432 of the Companies Act also to be used in certain cases (broadly suspected fraud, misfeasance or misconduct) when the prime purpose is to consider the case for prosecution or regulatory action and there is no intention to publish a report;
(ii) strengthening various powers, including extending the existing powers to seek a search warrant for relevant books and papers and (subject to the Secretary of State's approval) to obtain information about relevant bank accounts, and tidying up the provisions on freezing share dealings;
(iii) extending the existing powers to recover the cost of investigations from persons who are convicted on a prosecution instituted as a result of an investigation;
(iv) enabling the Secretary of State to appoint outsiders to undertake inquiries under Section 447 of the Companies Act;
(v) simplifying the exchange of information between DTI investigators involved in different cases;
(vi) enabling the Secretary of State to terminate insider dealing investigations when no further purpose would be served by continuing and to terminate Companies Act inspections when it is more appropriate for further action to be handled by the Serious Fraud Office or, in Scotland, through the Lord Advocate.

The review also concluded that, because of growing international links in corporate activity, and to help improve mutual co-operation with other countries, it would be helpful if the UK could do more than at present to assist overseas regulators. We are therefore also considering whether to introduce provisions for the Secretary of State to exercise powers to assist overseas regulatory authorities in some situations in which he cannot at present, when he is satisfied there is good reason to do so. We will bring forward proposals in due course if we do decide to proceed.

Additionally, steps will be taken to ensure more guidance and support for outside inspectors, closer working between DTI staff and outside inspectors and more use of criminal lawyers in investigation work.

I have also reviewed the practice on announcing investigations. In the case of major investigations with a wider public interest, mounted under Sections 432 and 442 of the Companies Act, that normally lead to a published report, it is clearly right to announce these when they are set up. This is existing practice as regards investigations into public companies, and I propose to extend it to such investigations into private companies. Inquiries under Section 447 are much more limited in scope and are intended only to look at the books and papers of a company and seek explanations of them. It has never been the practice to announce these and I am satisfied that this should continue to be the case. Public announcement would undermine the effectiveness of the inquiries and would unduly damage the business of the companies concerned. I would consider confirming the existence of such an inquiry only if it had already been announced by the company concerned and no further prejudicial consequence was involved in such confirmation. The same applies to inquiries under Section 105 of the Financial Services Act.

Insider dealing investigations under Section 177 of the Financial Services Act involve independent inspectors but the reports are not published. The purpose is to ascertain whether there has been a contravention of the Company Securities (Insider Dealing) Act 1985 and in appropriate cases the investigation may lead to prosecution. I have decided that, in the main, the interests of efficiency and justice are best served by not normally announcing or confirming these investigations. However, I will consider making an announcement if it is in the public interest, for example, if public officials are thought to be involved or if there has already been 1212WA publicity for an investigation and I judge that it would be less damaging to the individuals or organisations concerned and appropriate in the circumstances if I were to acknowledge the existence of an investigation.

Finally, I have reviewed the resources available within my department for investigation and related work. Resources have been considerably increased over recent years and the results are now beginning to be seen as staff gain experience. I have concluded that a further increase in resources devoted to this work is needed in order to speed up the handling of the cases. I have also decided that to improve co-ordination, key enforcement activities of the department should be brought together in one division. These functions include decisions on cases where it is appropriate to undertake investigations under the powers in the Companies and Financial Services Acts; carrying out investigations under Section 447 of the Companies Act; liaison with outside inspectors; determination of appropriate action when reports are received; and the prosecution of offences for which the department has particular responsibility, including insider dealing and other offences under the companies legislation, and insolvency offences.