Skip to main content

New Clause 12

Volume 979: debated on Tuesday 26 February 1980

The text on this page has been created from Hansard archive content, it may contain typographical errors.

Insider Dealing On A Recognised Stock Exchange: Investigations, Etc

'(1) If it appears to the Secretary of State that there are circumstances suggesting that there may have been a contravention of sections 65, 66 or 67 above, he may appoint one or more competent inspectors to carry out such investigations as are requisite to establish whether or not any such contravention has occurred and to report the results of their investigations to him.

(2) The appointment under this section of an inspector may limit the period to which his investigation is to extend or confine it to particular matters.

(3) If the inspectors consider that a person to whom this subsection applies is or may be able to give information concerning any matter relevant for establishing whether or not any suspected contravention of section 65, 66 or 67 above in relation to securities of any company has occurred, they may require that person—

  • (a) to produce to them any books or documents in his custody or power relating to the company or its securities;
  • (b) to attend before them; and
  • (c) otherwise to give them all assistance in connection with the investigation that he is reasonably able to give;
  • and it shall be the duty of that person to comply with that requirement.

    (4) Subsection (3) above applies to any person who—

  • (a) is connected with the company in relation to whose securities the contravention is suspected to have occurred or was connected with it at the time of the suspected contravention or at any time during the preceding six months; or
  • (b) is connected with one of two companies (one of which is the company in relation to whose securities the contravention is suspected to have occurred) or was so connected at the time of the suspected contravention or at any time during the preceding six months and in the opinion of the inspectors would while so connected have had information relating to a transaction (actual or contemplated) involving both companies or involving one of them and the securities of the other.
  • (c) if the suspected contravention is of section 66 above, is or, at the time of that contravention, was holding office under or employed by the Crown;
  • (d) is a member of a recognised stock exchange or of a recognised association of dealers in securities who is an individual, or an officer (past as well as present) of a member of such an exchange or association who is a body corporate; or
  • (e) is the holder of a licence granted under section 3 of the Prevention of Fraud (Investments) Act 1958 who is an individual, or an officer (past as well as present) or the holder of a licence so granted who is a body corporate; or
  • (f) is an individual declared by an order of the Secretary of State for the time being in force to be an exempted dealer for the purposes of that Act and to an officer (past as well as present) of any body corporate so declared to be such a dealer; or
  • (g) is an officer (past as well as present) of in investment exchange.
  • (5) An inspector may examine on oath any person to whom subsection (3) above applies in relation to any matter relevant for establishing whether or not any suspected contravention has occurred and may administer an oath accordingly.

    (6) If any person to whom subsection (3) above applies—

  • (a) refuses to produce to the inspectors any book or document which it is his duty under this section so to produce;
  • (b) refuses to attend before the inspectors when required to do so; or
  • (c) refuses to answer any question which is put to him by the inspectors with respect to any matter relevant for establishing whether or not any susected contravention has occurred, the inspectors may certify the refusal tinder their hand to the court, and the court may thereupon inquire into the case, and, after hearing any witnesses who may be produced against or on behalf of the alleged offender and after hearing any statement which may be offered in defence, punish the offender in like manner as if he had been guilty of contempt of the court.
  • (7) Subsections (4), (5) and (6) of section 32 of the 1967 Act (interim and final reports of inspectors, printing and publication of reports, and saving for solicitors and bankers) and section 167(4) of the 1948 Act (examination of persons whom inspector has no power to examine on oath) shall apply in relation to an investigation under this section as they apply in relation to an investigation under the said section 32 or under sections 164 to 166 of the 1948 Act, as the case may be.'.—[ Mr. Clinton Davis.]

    Brought up, and read the First time.

    I beg to move, That the clause be read a Second time.

    It is abundantly plain from the remarks that have already been adduced by my hon. Friend the Member for Swansea, East (Mr. Anderson) that the task of establishing that the criminal offence of insider dealing has been committed will be immensely difficult. It follows that the task of investigating the alleged offence will be immensely difficult, too. That is why my right hon. Friend the former Secretary of State—my right hon. Friend the Member for Lanarkshire, North (Mr. Smith)—and I believed that it was right that those invested with the task of seeking to detect such offences should have an expertise that was acquired because they were dealing with the specific matter and that was additional to that which is already provided by the companies investigation branch. That is in no way to deride the activities of the branch. It has multifarious duties to undertake. It is a hard-working branch of the Department of Trade, and it needs the extra assistance.

    If the Government's provisions for meeting insider dealing are to be taken seriously—I am not sure that they are—I think that the Government must establish that they are providing the resources and legislative powers to give effect to that intention. Ministers have not been convincing in that respect. We shall be dealing with the offence in much more detail on Report.

    The Minister says, in relation to the powers that appeared in the Labour Government's Companies Bill, that he does not think it right to provide such far-reaching powers which, as he puts it, can threaten individual rights. Therefore, he proposes to do nothing. He argues that if such powers are not generally needed for the investigation of crime they should not be needed in this area. I cannot believe that that was the advice tendered to the Minister for effecting detection and for the policing of these provisions by his officials, who at one stage felt that the Department and the police needed backup powers. I should like to know from the Minister whether the advice has changed and why he feels that extra legislative powers are no longer necessary.

    It cannot be that to recruit a small body of extra staff would impose a public expenditure burden. The Government have not found it impossible to recruit 1,000 inspectors to deal with allegations of fraud on the Department of Health and Social Security. On a liberal estimate, they can turn up with another £50 million over three years, to cite the Minister who is dealing with that matter.

    It is interesting that in respect of that kind of abuse the Government are full of activity, but in the case of abuses in the City and offences of the character that we are currently considering the Government are strangely inert. There are special powers. There are 1,000 extra inspectors to deal with social security abuses. I do not say that that is not important. Social security abuse is an offence. It must be dealt with. But why is there this disparity of approach between the two kinds of offence? We know that the Government are making substantial cuts in the staff dealing with Inland Revenue matters, and Customs and Excise cargo and passenger controls, but on the matter that we are discussing the Government are strangely inert.

    Does the hon. Gentleman agree that the Opposition seem to be minimising the gravity of the penalties that we are discussing? Surely the existence of a criminal offence is the most powerful deterrent.

    I agree with that. The law must be capable of being implemented, or it will be regarded as unworkable and will no longer operate as a deterrent. Is not that correct? I do not see the hon. Gentleman seeking to disagree with that conclusion.

    The Government must establish that what they seek to do in this area is workable. I want it to be so. That was the purpose of our previous proposals. The Government have made them inordinately more complex. We are now dealing not simply with the offence but with the ability to detect the offence. Here the Government show a strange reticence. I do not think that they have a new-found reticence about civil liberties, but they are selective about that subject.

    It is not right to appoint 1,000 new people—with the Minister for Social Security as the new virility symbol—as the scourge of the people committing the abuse, who mostly come from the bottom pile of society. They are mostly deprived and neglected people. They are mostly carrying out frauds of insubstantial amounts. They are to be dealt with and subjected to the full rigour of the criminal law. A substantial amount of public expenditure is to be committed to deal with their offences. However, when it comes to the offences that we are discussing there will be nothing.

    I hope that the Minister will not say, as he did in Committee, that this is unimportant and that he can rely totally on the ability of the companies investigation branch. We are dealing with a new branch of the criminal law. The branch does not have expertise. No doubt it will acquire it. Special attention should be paid to the matter, especially in the initial stages of the implementation of the proposals, These resources must be made available to the Government. It will help to bolster the Government's credibility in seeking to implement these proposals in a sensible way.

    I hope that the Government will not pursue the line that they pursued in Committee, will recognise that there is a case for the proposal, and will not show their previous selectivity of approach.

    The hon. Gentleman raised a serious point. He asked whether the Government were serious in wishing to enforce these criminal sanctions. It has seemed to me, since I first thought about the idea of criminal sanctions against insider trading, that it raised important questions about what were the condition precedents before Parliament created a criminal offence.

    10.45 pm

    The first necessity is widespread public consent for the proposition that the mischief at which the criminal offence is aimed should be designated by Parliament as a criminal offence. Although now, at this late stage, agreement has been reached between the Front Benches that insider trading should be a criminal offence, that agreement has been noticeably absent for many years. Indeed, the Tory Party has only recently become reconciled to the idea of there being a criminal offence of insider trading.

    To say that we are now all agreed is to disregard the fact that until recently the stock exchange and the professional bodies of the City were opposed to the idea of there being a criminal offence against insider trading. They took the view that it was likely to inhibit trading by directors in the shares of their own company and that it would once again be a distortion against risk-taking in particular fields of commercial activity.

    Perhaps a second consideration before Parliament makes a certain mischief a criminal offence is to ask whether it is enforceable. The hon. Member for Hackney Central (Mr. Davis) says that the Government are not serious in enforcing these provisions. Perhaps he is right. It may be the case—I do not know, and I am sure that the Government would not tell me—that the Government regard these criminal sanctions as no more than cosmetic. I hope not, very much. If these are brought forward as mere sanctions they do not merely damage this Bill; they damage the criminal law generally.

    It is exactly the same case as for those who persistently support legislation such as that on race relations, which they know to be unenforceable, in the main, but which they bring forward as a way of demonstrating public opinion generally. It is a most dangerous and damaging way to fiddle around with the criminal law. The essence of the criminal law is that it should be easily and clearly enforceable.

    A third criteria that I respectfully suggest should be applied before Parliament makes a certain mischief a criminal offence is that it should be capable of being precisely defined. For a mischief to be precisely defined, it is necessary to have a relatively static state of affairs to which the criteria can be applied. This is a serious problem in relation to the activities of the City. Those activities are immensely mobile, entrepreneurial and highly fluid, and involve going into markets and out of markets and changing methods of dealing overnight. For instance, two years beforehand no one could have foreseen the market that arose in Euro-currencies. No one could have foreseen that there would be activities in the Euro-markets that might be regarded by some as potential activities in respect of which criminal sanctions could be applied.

    So it is that there cannot be those stable circumstances that would allow Parliament to consider City activities carefully and slowly and, if necessary, change the law to make a new mischief a criminal offence.

    We shall have to choose between general legislation—which will be uncertain and therefore lack the public support that it should have—and rigid legislation, which will allow certain mischiefs to go unattacked by the criminal law. I suspect that the result will be that we shall undermine general respect for the criminal law by producing a political cosmetic and, more seriously perhaps, distorting the process of risk-taking in our capital markets.

    Some entrepreneurs who wish to be both managers and investors in their companies will say that they do not mind managing a company but are not prepared to hold a substantial shareholding in a public company if there is a risk, albeit an outside risk, that they might be subject to the sanctions of the criminal law if, for the sake of argument, they have to sell a large shareholding to become a Member of Parliament or, to take an extreme example, to become the Deputy Speaker of the House of Commons.

    There are people who will not be prepared to invest their money in a large public company and at the same time be a director of that company. I suspect that it will be another way of distorting capital markets unintentionally to make it more advantageous for people to invest in private companies. I fear that these measures may be cosmetic. If they are, I much regret them.

    The clause in effect gives teeth to the action against insider dealing. It is widely accepted that insider dealing is wrong and should be penalised. The size of the reports on Peachey Properties, certain investment corporations, banks and other companies shows the extent of the investigations that had to be made.

    The discussion in the Chamber and in Committee has shown the difficulty in defining exactly what is insider dealing. In the United States of America it is put quite simply that an insider is one who has insider information.

    It is obvious that the problem cannot be left to self-regulation by the City. The fact that the problem still exists shows that the City has not been able to deal with it in the past.

    There is a lack of inspectors to deal with the problem, which costs individuals and the public purse hundreds of millions of pounds. We should have inspectors to safeguard both the public and public funds. It has already been said that we are prepared to engage 1,000 investigators to sort out £3 million worth of frauds in the DHSS. Even greater frauds are perpetrated as a result of insider dealing. We ought not to consider excluding certain categories of persons, such as shareholders, stock exchange jobbers, or trustees.

    Insider dealing legislation, and making the present legal practices illegal, are major problems. To buy cheap and sell dear is quite legal. To make a profit is legal. To make massive profits is legal. To make oneself very rich and, as a consequence, others very poor is legal. After all, business is business.

    The Bill, if unamended, will ensure that the Government do not interfere too much with the rules of the game. Speculators buy and sell shares to make a quick profit. It is a case of catch-as-catchcan. The clause is essential to ensure that there are stricter investigations, more inspectors, and tighter controls.

    I am not too happy about the size of the penalties that will be inflicted. We talk of heavy and strong penalties. Others who commit lesser crimes in our society receive heavier penalties. The penalties are by no means too high. All these measures are needed to deal with the problem of insider dealing.

    I am sure that the hon. Member for Hackney, Central (Mr. Davis), like myself, has the feeling that we have been here before. In digging up this new clause—old clause 62 of the 1978 Bill—he was arguing a case in which he patently believes. Had he been the Minister he would have ensured that it was included in company law.

    He asked what has happened in the Department. If he thinks of where he used to sit and where he sits now he will understand what happened. There was a change of Government. The people decided that. The net result is that where there was a difference of opinion—and there were many differences of opinion made openly and honestly—we are now in a position to suggest that the way for which we argued in opposition is the way in which things should be done now that we are the Government. We believe then, as we believe now, that old clause 62 was ill-conceived.

    I say to my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) that we do not think that this part of the Bill is a cosmetic operation. We have taken a great deal of trouble with the definitions and clauses to try to make them effective. We believe that insider dealing is a crime and that those who indulge in it should be aware that they run the risk of going to gaol, and that they face substantial fines. There is nothing cosmetic about these clauses.

    11 pm

    There is no fundamental disagreement between the hon. Gentleman and myself about the way in which enforcement should be organised. We both feel that it should be carried out by people who are experienced in criminal investigation and in looking into allegations of a type similar to the allegations that will need to be investigated under this legislation. I believe that that work can effectively be carried out by the prosecutions branch of the Department of Trade and by the police, both of them working in close collaboration with the stock exchange, the takeover panel and others possessing the relevant information.

    Where we differ is over the question of special powers. If the hon. Gentleman had his way the investigators would be designated as inspectors and given the right to question specified categories of people, with the possibility of the court's requiring those people to answer any questions that they have not answered voluntarily. The court could also decide which questions must be answered by people falling outside the specified categories. As the House will appreciate, powers of that kind are far reaching. Because of their implications for the liberty of the individual, in existing legislation they have been confined to situations in which it was considered that they were absolutely necessary to the carrying out of an effective investigation. As the hon. Gentleman said, for the investigation of most criminal offences no such powers are available.

    I rise in support of what my hon. Friend has just said. He spoke of the wide powers given to inspectors to require people to answer questions. Does not he agree that powers that are as wide as that derogate from the fundamental proposition that people should not be required to answer questions that might incriminate them?

    I entirely agree with my hon. Friend. That is the basic point of argument between myself and the hon. Member for Hackney, Central. We believe that the people who will look into the questions raised by this new legislation will have sufficient powers. We believe that there is a strong argument that in some instances, where the far-reaching powers that the hon. Gentleman seeks have been given, there is a case for a re-examination of those powers.

    Of course, the hon. Gentleman has impeccable credentials as a person who has the scantest possible regard for the liberty of the subject. He was the cheerful supporter of a Government who gave tax inspectors the powers to break into the taxpayer's home and to question the wives and children of the taxpayers. He feels that anything that one does to the individual in one's search for what he would call "social justice" is entirely justifiable. Therefore, he is behaving entirely in character in seeking swingeing powers in this case.

    Does my hon. Friend also agree that the whole system of investigations is a concept that comes from Continental law rather than British law, with an equal fight between prosecution and defence and no element of quasi-judicial investigation?

    I should like notice of that question. I should like to have the opportunity of taking advice before answering it.

    If the hon. Gentleman is stuck for an answer, it might occur to him to tell his hon. Friend that there is no such thing as British law. Can I ask him to stop being a narrow Englishman?

    I heard the right hon. Gentleman's sedentary intervention, but I did not think that it was worth repeating. I should like to wind up this short debate. There is a fundamental difference of approach between us. The hon. Member for Hackney, Central and I have aired this difference on a number of occasions. We believe that it would be wrong to give the investigators the wide powers that new clause 12 seeks to give them, and I urge my hon. Friends to resist it.

    The Minister is again being extraordinarily selective in his arguments. He waxes indignant about the offences that I am supposed to have created against civil liberties by supporting the previous Labour Government in the powers that were given to tax inspectors. His Government are appointing 1,000 additional inspectors. How does he justify that? Why does he not leave it to the police to investigate social security frauds? Do not those inspectors question neighbours and friends of people who are alleged to have committed offences? Do they not rely upon hearsay evidence?

    I should like to draw the attention of the hon. Member for Hackney, Central (Mr. Davis) to the considerable expertise that resides in the City of London fraud squad in investigating fraud. I should be happy to know that he feels confident in relying on that squad rather than on his new batch of inspectors.

    Of course, there is some expertise, but I do not believe that the Metropolitan Police have the resources and the expertise to the degree that the hon. Member for Dorset, North (Mr. Baker) claims. He will know from his experience that the delay that already occurs in prosecuting white-collar crime is intolerable. Apart from the fact that people have to wait so long to undergo their trial, it is intolerable from the point of view of the witnesses. There are massive delays in investigating that sort of offence.

    I believe that when a new and highly complex offence is introduced, it is necessary to recruit a new form of expertise. The Government seek to prosecute those people who abuse social security, but on matters that create infinitely more damage to the reputation of the City and to the commercial integrity of Britain they seem to think that it is no longer important. The proof of the pudding will be in the eating. It will remain to be seen whether the Government have been able to rely satisfactorily upon the expertise available.

    The Minister will be the first to agree that the Department of Trade's company investigation branch is a very small unit. It is already heavily over-worked. Now it is having to assume this additional work. The hon. Member for Wolverhampton, South-West (Mr. Budgen) has already poured scorn on the Government's proposals in their entirety. I do not go as far as that. However, I believe that we have a difficult series of new prosecutable offences and that they will require this additional expertise.

    The Minister says that there are far-reaching powers that threaten individual rights. There are also far-reaching powers in connection with the "fit and proper person" procedures under the insurance Acts. Does he intend to replace those Acts? Substantial powers are available to inspectors appointed by the Department under section 109 of the 1967 Act. Extensive powers are provided under sections 164 to 168 and 172 of the 1948 Act. These powers are invoked because it is felt necessary to provide inspectors with the ability to look swifty into the documents that may relate to various matters germane to their inquiries.

    Will the hon. Gentleman confirm that as a general proposition he is in favour of the police cautioning a person who is being questioned to the effect that he is not obliged to answer questions? If he is, will he explain why these rules and powers given to inspectors will not provide for an analogous warning being given to the person being inquired into?

    By and large, I agree, but I believe that there are exceptions. The hon. Gentleman may well have a point in connection with the criminal offences that we are considering. He will recognise that many Conservative Members are not in favour of the privileges of silence, which he obviously supports and, by and large, I support. It may be something in respect of which we should be prepared to make a concession. I am impressed by the hon. Gentleman's point.

    We must deal with the principle as well as the detail. The Government are throwing out the whole principle of having a special force with special powers to deal with the situation. They could have thrown out our proposals, but I believe that it was inept of them to throw out all proposals. I believe that they are making a mistake, but only time will tell.

    Revenue frauds have been mentioned. They were involved in the Rossminster matter. It is noteworthy that on 27 March last year, Sir William Pile, the chairman of the Inland Revenue, said that the total earnings that evade tax might amount to as much as 7½per cent. of the gross domestic product, which would be about £10 billion to £l1 billion at that time. That is a strong allegation, made by a reputable source, yet the Government are diminishing their powers by casting out some of the people involved in that form of inquiry and saying that they do not need them. I believe that that is a mistaken view. The selectivity of the argument is quite abhorrent.

    Question put and negatived.