Securities and Investments Board (Hansard, 25 May 1993)

§ Mr. Lamont

The Maxwell affair—and in particular, the weaknesses identified in the supervision of the Maxwell companies—revealed a number of important shortcomings in the way that financial regulation had been conducted under the Financial Services Act. Accordingly, on 9 July last year, at columns 292 and 293. I informed the House that I had asked Andrew Large, the new chairman of the Securities and Investments Board (SIB), to conduct his own review of how SIB carries out its regulatory responsibilities, with a view to strengthening the implementation of regulatory standards in practice. My right hon. Friend the Secretary of State for Social Security had previously announced, on 8 June, at columns 19–21, that he has set up for the Pension Law Review Committee under the chairmanship of Professor Goode to carry out a review of the framework of law and regulation for occupational pension schemes.

Andrew Large has now presented his review. It is published today and I am placing a copy in the Library of the House. It is a thorough and professional analysis, drawing on a wide-ranging consultative exercise with providers, users and regulators of financial services, both in the United Kingdom and in other countries. I am grateful to Mr. Large and I accept his conclusions. The Government will give full support to the implementation of his recommendations. The result will be a significant improvement in investor protection—the primary objectives of any system of financial regulation.

Effective investor protection can be delivered by a range of regulatory structures. The two-tier structure laid down in the Financial Services Act—statutory-based regulation with a strong practitioner input—is not the only option. The review also looked at a unitary—fully statutory—system, but concluded that the case has not been made for taking such an extreme step at this stage. The Government accept this conclusion—another major upheavel with all its associated costs would be unwelcome both to firms and to investors, especially as the assumed benefits of a different structure are far from guaranteed.

But while the existing two-tier regulatory structure should be retained, investors have every right to expect effective delivery. To this end, the changes proposed by Andrew Large are significant and radical, yet evolutionary. In its early years, SIB was right to concentrate on establishing a code of regulations. But rules, regulations and procedures are only as valuable as the diligence and skill with which they are implemented. It is now time to focus on supervision and enforcement to see that appropriate standards are delivered.

We need regulation designed to protect investors, to catch and punish fraudsters and to tackle sharp practice; while at the same time paying due attention to the costs to firms and to investors of operating the system. The review tackles head on the cost of regulation and signals a determination, including through direct control of SIB's 540W resources and the setting up of a cost of compliance unit, to look at the justification of all regulatory costs. I welcome Andrew Large's proposals which should deliver increasing cost effectiveness hand in hand with effective regulation.

Reshaping regulatory effort in this way will require a partnership between SIB and all the bodies recognised under the Act. Each self-regulatory organisation, recognised investment exchange and recognised professional body has its separate and essential role to play. But the system must be driven and led by SIB as regulator of the regulators with a more active style of regulation, supervision and enforcement. I fully support the approach Andrew Large has recommended; SIB must set the standards expected of the front line regulators, supervise their delivery and ensure their enforcement. SI B's role and standing will be enhanced by its proposals for greater openness, cost effectiveness and public accountability giving investors and providers more confidence in the system.

Change is already in hand at Investment Management Regulatory Organisation, as foreshadowed in my statement of 9 July. SIB has been working with IMRO to rectify serious weaknesses in six main areas. A risk-based approach to monitoring has been developed to sharpen its focus and effectiveness, together with a significant increase in monitoring resources. There are new procedures for co-ordinating emergency cases and improvements to IM RO's admission procedures. New occupational pension scheme rules came into force in March and a revised code of practice of board members' interests was introduced in August. With the appointment of a new chairman and chief executive, these measures represent a vigourous response to the regulatory weaknesses at SIB and IMRO exposed by the Maxwell affair.

Improved investor protection will require full use of SIB's extensive powers, including the inherent powers derived from its powers to recognise the front-line regulators. Andrew Large believes that he will be able to achieve the major changes required within the current legislation. But in a number of areas he has indicated that if, despite expectations, SIB's powers prove inadequate to secure the required standards of investor protection when put fully to the test, he will not hesitate to seek legislative amendment.

I share the view that full use of SIB's powers should deliver the required improvements. The chairman of SIB has the Government's full backing in the use of these powers. I will, of course, keep this area under review and I will be prepared to take whatever action is necessary if experience shows existing powers to be inadequate. But such a development would be serious indeed because it would indicate that the co-operation needed between SIB and the front-line regulators to make the two-tier structure work effectively had not materialised.

I have asked the chairman of SIB to implement the recommendations of the review, in co-operation with the recognised bodies, and to keep me closely in touch with progress on implementation. As part of its plans for greater openness, cost effectiveness and public accountability, SIB will publish six monthly progress bulletins.

No regulator and no system of regulation an guarantee that all fraud will be prevented or identified. Nor can regulation replace the duty on investors to consider 541W carefully how they invest their money. But the Government are determined that all the lessons of the Maxwell affair must be fully learnt.