Motion made, and Question proposed, That this House do now adjourn. (Mr. Neubert 1
This is the second opportunity that the House will have had in nine months to debate matters concerning the financial services industry, the protection of investors and the City of London. Last July the House debated the Gower report. Today, we have before us the Government's White PaperIt is remarkable how both the financial markets and perceptions of the requirements of investor protection have been changing since Professor Gower started his work. The scene is still changing, but our objectives remain the same: first, to enable the financial services industry to provide services to industry and commerce, private investors and the Government in the most efficient and economic way; secondly, to stimulate and encourage innovation; thirdly, to inspire confidence in issuers and investors by ensuring that the financial services sector is, and is seen to be, a clean place in which to do business; fourthly, to ensure that the system of investor protection is flexible enough not to cramp structural and other changes in the industry and not to be overrun by events. The White Paper which I published in late January is aimed at those objectives. The legislation which I hope to bring forward in the next Session will be designed to create a regulatory system powerful enough to deliver the objectives, but flexible enough to remain effective during further periods of rapid change It is change which has characterised the City in recent times, especially since July 1983. It was then that my right hon. Friend the Member for Hertsmere (Mr. Parkinson), then Secretary of State for Trade and Industry, told the House that the Stock Exchange had put forward proposals which were an adequate basis for legislation to stop the case brought by the Director General of Fair Trading against the exchange in the Restrictive Practices Court Of course, the ill-informed and the prejudiced described that as a sell-out and claimed that it would leave the status quo unchanged. Indeed, some of the well-informed and unprejudiced also questioned my right hon. Friend's judgment. They were of course wrong. Change has gone on apace since then. Many stockbroking or stockjobbing firms have formed links with banks or other institutions outside the exchange Stock Exchange members are now considering constitutional changes which could lead to corporate membership. New trading systems for both equities and gilts are planned for 1986, in time for the end-year deadline set by the Government for the abolition of minimum dealing commissions The shape of the City is changing, in response both to the growing internationalisation of markets, to new developments in information technology and to the need for fresh sources of capital to exploit those opportunities. There is no lack of urgency in the City. Indeed, the emergence of firms willing to trade in listed securities outside the Stock Exchange emphasises the need for swift completion of the reforms I believe that the changes in the City are serving to enhance the status of the United Kingdom as one of the primary financial centres of the world. The flexibility and expertise of practitioners providing a wide range of financial services have long been and will continue to be among the principal factors in our favour. The removal of restrictions such as exchange control has given the markets a liberal environment in which competitiveness between businesses and between our market and those abroad is enhanced The White Paper proposes a new regulatory structure to maintain and improve that spirit of competition, ensuring that it will meet the needs of those dealing in the market and thus consolidate the United Kingdom's international standing. As I have said, subject to the parliamentary timetable, I plan to present in the next Session legislation to implement the White Paper proposals The general reaction to the White Paper proposals has been favourable. The basic approach of self-regulation within a statutory framework has received widespread support, as indeed have the main elements in our proposals. We have also received many constructive and helpful comments and suggestions The drafting of the legislation is proceeding on schedule, but many details remain to be worked out, so in many cases further comments, from whatever standpoint, can still be taken into account. Indeed, this debate comes in time for the House to make its views known Before I go on to consider the White Paper proposals, I should again pay tribute to the work of Professor Gower, who has been responsible for so much of the change in thinking that has taken place in recent years. His report and the many discussions and consultations leading up to it have made an invaluable contribution to the thinking on this subject. Indeed, as I have said they have profoundly changed the thinking and played a key role in developing a new regulatory structure able to command the support and respect of both the financial community and investors Much of the interest in the White Paper has centred on the institutional framework that it proposes. I decided not to uproot the system which has served so well in the past but to build on it, to strengthen it, to repair its faults, to bring it up to date and to provide for future developments. Let there be no doubt, however, about the extent of the changes which the White Paper proposes The powers to regulate are to be granted by Parliament to the Secretary of State for Trade and Industry, and only at his discretion will those powers be delegated to bodies meeting the criteria of the legislation and his approval. Those powers will be granted to the bodies only so long as they are properly used, and the Secretary of State will retain the power to withdraw the powers from a body or bodies and grant them to another, or indeed to wield those powers himself It would be an unwise Secretary of State who took such action except in circumstances which, I believe, are so unlikely as to be almost beyond reasonable speculation, but I do not believe that Parliament would be prepared to grant the necessary powers "freehold" to the new authorities
I understand that, although the Secretary of State will retain power to alter things, he will need the agreement of the Bank of England to appoint the chairman. It would certainly be unwise not to consult, but: constitutionally it would be a great weakness to give any outside body the power to overrule the Secretary of State, and thus the House. In my view, although it is clearly right to discuss the matter with the Bank of England, handing over a power of veto is a constitutional outrage to which the House should not agree. The power should stay here and not be handed over to anyone else
I hope that my hon. Friend will not be unduly outraged. I believe that there is a place for the influence of the Governor of the Bank of England and for the influence of the Secretary of State. As my hon. Friend knows, in the area in which the Department has been the traditional regulator—the area to be covered by the marketing of investments board—the Secretary of State will appoint all the members. In the area which has traditionally been governed to some extent by the Bank of England as well as by the Secretary of State, there is a joint approach embodied in our proposals for the appointment of members of the securities and investments board. I think that it is overstating the case to refer to that as a constitutional outrage. In my view, it is a practical way of handling the problem of dual oversight of some markets.
My hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) is not alone. There is great concern that the proposals for the SIB, as opposed to the MIB, effectively give a power of veto to the Governor of the Bank of England because in this case his agreement is required, whereas for the MIB only consultation is required, as with other sections of the industry. Many of us are concerned about the steady encroachment of the Bank of England in this area. We trust the judgment of my right hon. Friend the Secretary of State in the appointment of the chairman of the SIB, and we do not want the role of the Bank of England to be extended in that way
I am grateful to my hon. Friend for the kind way in which he has suggested that he trusts my judgment, perhaps even more than that of the Governor of the Bank of England, in this respect, and no doubt I shall remain Secretary of State for a long time—but not for ever. At some time, a Secretary of State whose views are not so understanding of the City may have these powers. Many people in the City feel that it is a nice balance to have the influence of both the Bank of England and the Secretary of State in this respect
As the right hon. Gentleman has referred to a future Secretary of State, perhaps he will allow me to intervene. He has suggested that the purpose of the Bank of England veto, which is understandably criticised by his hon. Friends, is to guard against what a Labour Secretary of State might do. Will he explain why the Secretary of State in a Government accountable to Parliament should permit an appointment suggested by him to be vetoed by an official of the state? It is a monstrous proposition, given that the right hon. Gentleman, for all his faults, is accountable to the House, whereas the Governor of the Bank of England is not
I am prepared to take criticism on this from my hon. Friends, but I am certainly not prepared to take it from a man who served under a Prime Minister whose motto was, "Find out what the trade unions want and give it to them." If any Government allowed the proposals of Parliament to be vetoed by outside bodies, it was the Government in which the right hon. and learned Gentleman served.I am trying to deal with a perfectly practical problem, to find the best way to set up a self-regulatory agency under the statutory powers to be delegated to it. There is a strong body of opinion in the City to the effect that it is no bad thing to have the influence of professional City opinion alongside that of politicians, of whatever party, in this matter.
The City will have a veto
The right hon. and learned Gentleman constantly calls it a veto, but we consult and then reach a conclusion. The Secretary of State also has a profound influence over the appointment of the board members, who are in the majority. It is a nicely balanced arrangement. The right hon. and learned Member for Monklands, East (Mr. Smith) is trying to make bricks without much straw
Does my right hon. Friend agree that the criticism of my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beamont-Dark) might be more forceful but for the nationalisation of the Bank of England? The Governor is now, as the right hon. Member for Monklands, East (Mr. Smith) said, not an independent figure. He may wish to appear independent, but he is a servant of the state, and to that extent subordinate to the Government
Chancellors have in the past occasionally suggested that the Governor was too independent. My hon. Friend's point is interesting, but this is not a matter of great constitutional propriety. My hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) may feel that it is, but his colleagues in the City may not share his view about the practicality of these matters
This is an important issue. My right hon. Friend says that some of my friends in the City may not share my view. I speak as an elected Member of this House. In the end, those who are elected to this House are answerable to the House, not to the City. Cannot my right hon. Friend see the difference between being in the City and being elected to this House? My right hon. Friend keeps using the word "consultation". If the Bill were to stipulate that we must consult the Governor of the Bank of England, that would be right. If it refers to agreement, there is a veto. For the House to agree to a veto is a constitutional outrage
My hon. Friend has already made that point. I am aware of the difference between being a Member of this House — or, more particularly, a Minister—and being in the City. For a start, we earn much lessWe are trying to design a practical system of regulation which has the confidence of investors and practitioners in the City. That is why I say that my hon. Friend might consider consulting those who are to operate the scheme in the City, and those who use the services of the City. He will find that the general mood is one of support for my proposal, rather than one of outrage at what I do not believe is a constitutional issue
Can the Secretary of State tell us how many other instances there are in which the appointee of one Minister exercises a veto over the appointment rights of another Minister?
I cannot. I am not especially concerned about that matter. I am concerned with constructing a practical system that will work. No doubt we shall be able to dredge through the records and eventually find a precedent— [Interruption.] The right hon. Gentleman should not be so contemptuous of officials of the Department. He should have more respect for themThere is a long tradition — overwhelmingly an honourable tradition—of self-regulation in the City, but markets are changing at a remarkable pace. New products, new services and new traders are coming into the markets and some wide gaps are showing between the regulated areas as well as weaknesses within them. The Government have concluded that regulatory coverage should be extended to cover all investment business. To that end, both investment and investment business will be defined in the legislation As the House knows, it is proposed to delegate power to the two new proposed bodies, the securities and investments board and the marketing of investments board. It will be for those bodies to draw up rules for the authorisation of investment business and the conduct of business. These rules will have to give effect to the principles described in the White Paper; safeguards against conflicts of interest, compensation proposals, protection of clients' assets and disclosure, and so on. Clearly, I shall have to be convinced that the rules are adequate and will be effectively enforced before I delegate powers Practitioner-based regulation will not be a soft option. Since the bodies will involve both practitioners and users of financial services as well as market regulators, the identification and response to rule-breaking or new forms of misconduct can be rapid and flexible. They will be up with or ahead of the play in a way which an undelegated system could not hope to be The task of the boards will not be easy, so I am particularly pleased that Sir Kenneth Berrill and Mr. Mark Weinberg have agreed to take charge of the preparations to set them up, and that Mr. Martin Jacomb has agreed to act as Sir Kenneth's deputy chairman. I am sure that the House will agree with me that the willingness of men of such calibre to serve is a good omen indeed, and reflects well on the system of finding such men
The composition of Mr. Weinberg's committee has already been announced and it has met. It has put it to me that its work would be assisted by the appointment of a person with knowledge of building societies. I have accepted that advice and hope to make an appointment shortly. The names of Sir Kenneth's other colleagues will be announced quite soon.There has been criticism of the White Paper's proposal of two boards rather than one. It has been suggested that one board would be a tidier arrangement. The background to the proposal lies in the advice received from the Governor of the Bank of England and a group of insurance and unit trust representatives. It is not a point on which my mind has finally been made up. Sir Kenneth and Mr. Weinberg and their colleagues will have views. The House will have views. I shall certainly not insist on there being two boards, if no advantage is seen in this arrangement There is ample work to be done by the two organising committees in preparing for the implementation of the new system
Sir Kenneth Berrill is reported to have said, on his appointment, that he did not see himself as a policeman. Given that one of the underlying principles of the White Paper is crime prevention, surely that is precisely what he ought to be.
My hon. Friend may have misunderstood Sir Kenneth's point. What he meant was that his job as a regulator will not so much be to track down crime as to prevent crime and to make sure that the City is a clean place in which to operate. Sir Kenneth lays great stress on that aspect of his workBefore leaving the question of structure, I should say that I am mildly surprised that there should be any doubt about how the costs of regulation should be met. It will fall to the beneficiaries — those who use the financial markets I want now to consider the objectives of the new regulatory framework as a whole and how the Government's proposals will achieve these objectives in relation to each of the main groups of interests involved — investors, those seeking to raise finance and practitioners First, I should like to say a word about the small investor. Believing in the benefits of wider share ownership, the Government have acted to encourage the spread of share ownership through the halving of stamp duty, the abolition of investment income surcharge and within the privatisation programme. Although large investors and professional institutions have access to the expertise needed to assess the merits of investment proposals and advice, the small investor needs more help and protection and will benefit from the Government's proposals As I have said, there will be a new and comprehensive definition of what constitutes investment and investment business and it will be an offence to carry on such business without authorisation. The investor dealing with an authorised business will know that that business is regarded as being "fit and proper" to undertake investment activities and is subject to rules designed to ensure the proper conduct of those activities. There will be rules requiring disclosure of the information an investor needs to make up his mind about an investment, and the definition of investment business will include the giving of investment advice Advisers will be under a duty of skill and care, requiring them to take account of the circumstances of each client and to disclose their interests in any investments which they might recommend. Many small investors depend on professional advice, and these provisions will help to ensure that it should be unbiased and relevant to their financial needs and interests The principles governing the conduct of business rules will ensure that the boards make rules requiring investment businesses to segregate funds belonging to their clients and to have adequate compensation arrangements in the event of loss arising from fraud, negligence or failure to comply with the requirements for the protection of clients' assets. Some of the comments that we have received on the White Paper suggest that our proposals on these points go too far and will be unduly costly. We shall consider these comments, but it remains our objective that there should be full segregation and full compensation for private investors in the circumstances which I have described Of course, many small investors prefer to invest in "collective" forms of investment, such as unit trusts or life assurance policies, which offer a wide spread of holdings and the benefit of professional management. We propose to avoid over-regulation of unit trusts so as to enhance the range of schemes available, while maintaining essential safeguards. The legislation will also extend the mainstream investor protection system to cover life assurance policies for the first time Standards for the selling of life assurance have much improved and the profession's status has been raised—for example, through the establishment of the Insurance Brokers Registration Council—but the proposals in the White Paper go further
(Harrow, West): The Insurance Brokers (Registration) Act 1977, which is known more intimately nationally and internationally as the Page Act, will be amended, and I wonder whether, when my right hon. Friend amends it, he will think of extending it to cover a wider range of insurance intermediaries
I note what my hon. Friend says. I pay tribute to his part in that legislation. If I can, I shall endeavour to take a page out of his book. I suppose that that is the right expression. I propose that, unless intermediaries are tied to an insurance company which takes full responsibility for them, those who sell life assurance will in future need authorisation and be subject to conduct of business rules about, for example, avoidance of conflict of interest and the protection of clients' funds, which will ensure protection similar to that available to those who buy unit trust and other securitiesThe White Paper, and the Bill that will follow it, are about the protection of investors and investments. In such a measure it would not be right to cover non-investment aspects of insurance. That different area of activity might or might not need attention in due course, but this is not the right vehicle for any changes All of the measures that I have described will be of considerable benefit to the small investor and will, I believe, help to encourage more people to invest directly or indirectly in shares and similar investments
While discussing the interests of small investors, will the Government apply to themselves the same standards as they propose to apply to others when offering investment vehicles? My right hon. Friend might recall a poster which depicted the beatific scene of a clergyman radiating confidence in the financial aftermath of buying national savings certificates. Does my right hon. Friend agree that inflation is the worst fraud that can be perpetrated on the public? Will he deplore that and bear such considerations in mind?
I have frequently described inflation as the most unjust form of taxation that has yet been devised. I stand by that view. I do not know who the beatific clergyman in that advertisement was, but perhaps we could sponsor a contest for who to put in the next oneHowever well regulated the system, and however adequate the disclosure of relevant facts, there will always be people who make bad decisions or who take a risk that goes wrong. The responsibility on the individual for his own decisions on how he invests will in no way be diminished, nor should it be The larger individual investor and the professional investor will also benefit from the investor protection measures which I have outlined. The professional investor is, however, in a better position to assess risks for himself, so we propose to continue to allow certain circulars and other offers of investment to be sent to professional investors, even though they may not be sent to other investors, and to allow certain information requirements to be dispensed with in their case We also propose to widen the definition of eligible professionals to include those dealing extensively in futures, and we propose to allow authorised business to pass information about less orthodox investments to clients who, although not professionals, are sufficiently expert to understand the risks involved There has been some criticism of this proposal, but I believe that it is a desirable recognition of the differing needs of different groups of investors and the need to avoid over-regulation and nannying of those well able to take care of themselves Those who talk about the financial markets often seem to forget the needs of those who want to raise capital. They too will benefit by the removal of restrictions and the promotion of competition, which will ensure a wide choice of methods of raising capital in the cheapest possible way The White Paper proposes changes in the law on prospectuses to standardise rules governing civil and criminal liabilities for omissions and mis-statements in offer documents and to bring the content of all offer documents within a single set of provisions. The law on this subject is now out of date and complex. Clearer provisions will help companies wanting to raise finance as well as investors trying to understand offer documents We do not intend to impose unnecessary requirements on companies. Indeed, smaller companies will be able to take advantage of the proposal that offers of securities in a company made to fewer than 40 people will no longer be regarded as offers to the public and will not be subject to the full prospectus requirements. This should facilitate the raising of capital for small companies. The choice of 40 as the permitted number of recipients of such offers is of course somewhat arbitrary, and I would welcome views on the matter I have already said something about practitioners. Our aim is to strike a reasonable balance between investor protection and over-regulation which would be likely to stifle new developments and increase the costs. It has been argued that the cost of regulation will make the United Kingdom a less competitive place in which to do business, but if investors believe that their interests will not be adequately protected they will take their business elsewhere. Over-regulation would also be damaging and we are determined to avoid it, but a clean well-regulated market will attract more business to the United Kingdom The growth of financial conglomerates and the growing amount of international business raise new problems for regulators. Many of the new financial conglomerates will undertake a much wider range of activities than those covered by the financial services White Paper, but reform is going on apace The White Paper and the subsequent legislation are but one aspect of the modernisation of the laws and regulatory arrangements in this area. Company law has, at long last, been consolidated, although I fear that it will not be many years before another companies Act comes along The Government are drawing up legislation on building societies. A review of banking legislation is currently under way. A consultative document on personal pensions has been published. When all these exercises have been completed, we shall have a modern legislative framework On the enforcement side, the new fraud investigation group has been set up to facilitate the investigation and prosecution of major fraud, and Lord Roskill's committee is considering the conduct of criminal proceedings arising from fraud. Whatever regulatory framework we design, however, financial conglomerates, by their very nature, will be subject to more than one regulatory regime in respect of their different activities Our regulators will have to work closely together to avoid unnecessary duplication of requirements and to ensure that there are no gaps in the regulatory system, and that the overall financial and technical resources of a business are adequate for the whole range of its activities. Naturally, we shall also continue to develop close relationships with those concerned with investment supervision overseas both to facilitate co-operation against international fraud and to encourage the opening up of overseas markets to British firms My hon. Friend the Parliamentary Under-Secretary of State with responsibility for corporate affairs has recently returned from visits to other European capitals and to the United States for some talks on these subjects, and he will no doubt say something about them later in this debate if he has the good fortune to catch your eye, Mr. Deputy Speaker During my own recent visit to Japan I stressed the importance which we attach to the liberalisation of Japanese financial markets. Some results are beginning to be seen. The granting of branch licences to United Kingdom firms to deal in securities has begun, and I hope that more liberalisation will be forthcoming. I also emphasised the potential benefits to Japanese investors and those seeking capital of using the City of London's unmatched expertise in investment management and financial advice Over recent months the Government have received plenty of advice of these matters of investor protection and market reform. Much though not all of that advice has been well considered and well informed. However, even within that category there have been widely differing views In principle, we have rejected both the nostalgic extreme views on self-regulation and the demands for bureaucratic state or neo-state regulation. On that matter the Government's position is absolutely firm. Equally, we believe that the pattern of self-regulation under delegated powers set out in the White Paper forms a coherent response to the needs of the City and its customers There are, of course, details on which my mind is not finally set, and I have referred to some of these in my speech. I would welcome the views of the House particularly, and of others outside. There is no supreme single everlasting right answer to many of the problems that we face in regulating these markets. It is in that spirit that I commend the White Paper to the House
I am grateful for the way in which the Secretary of State ended his speech, which seemed to indicate a disposition on the part of the Government to listen to observations that will be made during the debate. As the Secretary of State indicated, this is not the first opportunity that the House has had to discuss part one of Professor Gower's report "Review of Investor Protection". If there were a conclusion to be drawn from the debate of 16 July 1984, I think it would be that the message of the House was that a minimalist solution to the problems of the City was not enough, and something more would have to be done. I think that it would be fair to say that this is not a minimalist solutionI shall criticise some of the Government's proposals. They are criticisms designed to elicit a response from the Government rather than being merely of a denunciatory character I think that there could be unanimity on a number of matters. First, I think that it was widely perceived by the House and by many other commentators that the existing law and its means of securing investor protection have become very deficient in the market place as it has developed. I am thinking particularly of technological innovation, the increasing internationalisation of markets and the number of events that have not brought credit to the City or to financial institutions It is a matter of concern for us all, and not only those who practise in the financial markets, that there have been major scandals. There is a widely perceived view that a number of people have been able to get away with things which, in a properly organised system, they ought not to have been able to. That is alarming both to the public and to those who practise in the City, and it is bad for the City' s international reputation. In so far as these measures go some way to remedy that problem, we of course welcome them There is another reason why that change is necessary. It is that other changes will take place in the organisation of the City, most of which emanate from a decision of the present Secretary of State's predecessor to do a deal with the Stock Exchange in return for the Stock Exchange not being referred to the Restrictive Practices Court. I am not sure whether the changes that were found acceptable by the previous Secretary of State will have either the effects that are proposed or the advantages that are sometimes canvassed for them. However, they are going ahead. In a sense, they have been anticipated almost before the event. One suspects that changes have been made in anticipation of them which might be even greater than those that might be made as a result of them. But, whatever happens, whether for good or for ill, a new situation will obtain quite different from that which has obtained in much of the recent past. In that circumstance, this seems a desirable time for us to review the way in which the law is framed and enforced We have had a valuable report by Professor Gower. I was glad that the Secretary of State paid a handsome tribute to him. If I may say so by way of minor criticism, I thought that the White Paper did less than justice to Professor Gower's contribution by saying that the Government were greatly indebted to him. I am glad that the Secretary of State took the opportunity to express it today in more handsome terms. We owe a great debt to Professor Gower not only for proposing an intelligent way in which the law should be framed — and I draw a distinction between the law and the way in which it will be enforced—but, as I think the Secretary of State said, almost for changing the nature and tenor of the debate that has taken place among those who have considered the matter since the report. We have the White Paper, and we shall of course be moving to legislation The Opposition's judgment is that the proposed framework of the law is broadly correct. It is largely what was in the Gower report. The notion of having a fit and proper test for all those who wish to practise in the financial markets, and the notion that these should be licensed by the state before being permitted to do so, is one that we endorse So far as I can see, although this is a matter at which we require to look carefully when the legislation is presented to the House, the rules for the conduct of businesses seem to have a good deal of sense in them, particularly those parts dealing with the principles which should be applied, the way in which conflicts of interest should be managed and the importance of compensation for the victims of any malfeasance or fraud by those who practise in the financial markets At this stage, I raise one point of detail on the question of compensation. In dealing with compensation, at page 21 the White Paper states, I think properly, that the aim should be for the private investor to receive full compensation. That is, of course, a feature of quite a lot of professional obligations. For example, a solicitor undertakes to pay in full for any client of a solicitor who is the victim of defalcation in respect of an individual solicitor. The White Paper states in paragraph 7.12:
That "could" should be changed to "should". I can think of no reason why it should be left in the air or why there should be no obligation on those who practise to take out insurance against professional negligence. It would round off a system of protection for the investor. I hope that the Secretary of State will give sympathetic consideration to that proposal"As far as negligence is concerned, professional indemnity insurance could be made a requirement."
I entirely take the right hon. and learned Gentleman's point and the manner in which he made it. The key sentence in paragraph 7.12 is:
The manner in which that is achieved will be the subject of a great deal of discussion, but I do not think that either of us has any differences about the aim"The aim should be for the private investor to receive full compensation."
I am grateful to the Secretary of State for that intervention. I quoted that because I consider it to be the key sentence. However, I am puzzled about why the qualification was inserted in the sentence which immediately follows. Having announced the aim to give full compensation, it would seem sensible to adopt the most intelligent way of doing so. So far as I can see, no other options are canvassed in the White Paper
If the right hon. and learned Gentleman reads the report carefully, he will see the comment upon the manner in which we might approach compensation for what is essentially a breach of propriety. The latter part of paragraph 7.12 deals with professional negligence as opposed to improprieties
I hope that we shall not get bogged down on this point, because I did not intend to say a great deal about it. The Secretary of State has taken my point, and I am grateful for the way in which he has responded. Ultimately, if there is a difference of opinion, we shall wait to see what the House decidesParagraph 7.21 refers to the possibility that because of technological advance we shall shortly move to the transfer and ownership of shares without physical documentation. I readily accept that that is within the range of technology, and I would be grateful if the Under-Secretary, when replying, could give some information on how this will be accomplished. The law will have to grapple with new technology, and I should welcome a glimpse of how the Government propose to deal with it in the forthcoming legislation. I am sure that many hon. Members will offer advice on how simple that will be, but I would prefer to wait until we see what the Government propose The Government may have placed too much emphasise on the notion that if competition is permitted and encouraged, that somehow has a regulatory effect. That does not necessarily follow. A distinction must be made between efficiency in the market place and protection for the investor. It may or may not be true that competition leads to greater efficiency, but it is disputable that it inevitably leads to greater protection. Indeed, cut-throat competition might stimulate abuse of the market place and, by its very existence, might require even greater protection by way of regulation. It is not good enough to take refuge in some theological position and to argue that releasing market forces somehow leads to greater protection for the investor We have more doubts about the regulatory system. That brings me immediately to whether or not there should be a self-standing commission. When Professor Gower looked at this he came to a fairly balanced view, and his report sets out the argument for and against. On reading the report, my impression is that Professor Gower was, if anything, inclined towards a self-standing commission, although he said that there were arguments on both sides. My own party made representations to him which he took into account In principle, there are three possible ways of approaching the matter. The first is that the Department itself should regulate. I am strongly against that. I do not think that the Department of Trade and Industry is likely to acquire a sufficient expertise or range of talents—I mean no disparagement because the Department has other work to do—to regulate the City effectively or to keep up to date with those who are operating on the edge of good practice. I am not sure whether that is the sort of thing which we should ask a Government Department to do Another view, which I am glad to say is receding in its attractiveness, is that this can be left to the professions and the practitioners —that we can rely on self-regulation and that the City will look after itself. Recent experience indicates that that cannot be relied upon. It would not be relied upon given the new circumstances in which the market will operate, given that it is becoming increasingly international and given that technology makes the speed of decision such that it is extremely difficult to keep pace with what is happening There is much merit in the self-standing commission approach. The Government have landed themselves somewhere between self-regulation and the self-standing commission. It can hardly be said that what they propose is self-regulation. I do not make that allegation, because the statutory framework is much more onerous on those who practise in the City than old-fashioned notions of self-regulation. However, I am puzzled as to why the Government held back from going as far as a self-standing commission. It could be that they want to propitiate opinion in the City, which has so far been hostile to it
I am just developing my argument, and I hope that the hon. Gentleman will contain himself for a momentThe opposition to a self-standing commission seems to relate almost entirely to the experience of the American system. It is felt that on the whole the Securities and Exchange Commission has been unsympathetic to people from this country who have come into contact with it It is said that it is an excessively legalistic and bureaucratic apparatus. There are reasons why that is so. The United States is a very complicated, legal world with a federal system and the laws of individual states. According to one's view, the United States is either a lawyer's paradise or a client's nightmare. It is certainly one of the most litigious countries in the world. The conflict between federal jurisdiction and the jurisdiction of the states is so easily exploited that the way in which to deal with it is very different from what would be necessary in this country. In addition, the size of the market is much greater, and what is suitable for a smaller market is not necessarily suitable for a larger one. As I have already said, the legalistic and litigious nature of United States society encourages such tendencies in an organisation which is set up to control the market place That need not happen here, and a self-standing commission in the United Kingdom need not apply the same deficiencies as those which occur in the United States In a speech in February this year, the chairman of the Stock Exchange almost anticipated a move towards an independent commission. In the president's lecture to the Insurance Institute of London, he said:
that is, the structure in the White Paper—"If the structure"—
That is simple reality, because one cannot go back to the previous self-regulation or to the Department. He continued:"does not work, there will be no alternative but to set up a statutory commission"
I would add, "under any Government." He went on:"Under this government the Department of Trade will have neither the political backing nor the resources to enable it to undertake the responsibility itself'.
we should note the word "immediately"—"A statutory commission is likely anyway to be our ultimate destination, but to set one up in the immediate future would be a worse situation. It would introduce immediately"—
Those sentences were carefully constructed, and seem to indicate a disposition on the part of Sir Nicholas Goodison, if no one else, to accept almost the inevitability of moving to a self-standing commission. They almost argue that it would be better to approach it by this careful route rather than to take it at one go. On the merits of having a self-standing commission, there is not exactly stout opposition from the chairman of the Stock Exchange That may be how things will develop and through that route we may end up with a self-standing commission. It might be better for us to move to that now. The city could swallow that just as well as it has swallowed recent changes. In the hybrid solution proposed by the Government of self-regulation within a statutory framework there is a danger that the simplicity and clarity that are necessary for any effective system will be lost A complicated system is proposed. The Secretary of State will get power from Parliament. He will then delegate that as he chooses, but he has announced that he will delegate it almost entirely to two separate bodies, the Securities and Investments Board and the Marketing of Investments Board. Under the SIB there will be other regulatory bodies. For example, the Stock Exchange will have regulatory capacities. In addition, there will be a tribunal to which those who have been denied a licence to practise can appeal. If a person appeals against a refusal of a licence by the Stock Exchange he will have to appeal also to the SIB before he can appeal to the tribunal because he cannot go straight from the Stock Exchange to the tribunal. We are already getting into considerable complications without going into the argument about whether there should be one board or two It would be much simpler and clearer to all involved, and certainly to the ordinary public, if we moved immediately towards a self-standing commission. I argue that on the basis that it is inevitable anyway, and that we might as well get there now and set it up properly so that it may last for a fairly long period. In the present circumstances, that seems to me not so much a revolutionary proposal as almost simple common sense"into regulation a legalistic dimension which could do harm to Britain's competitiveness, and it would be unhappily devised without any of the evolutionary experience which the present proposals offer"
Of course, the proposed system is complicated and it may not work, but if there is the will to make it work it will for two reasons be infinitely preferable to what the right hon. and learned Gentleman proposes. First, it will have considerable flexibility, which his self-standing commission would not have, and, secondly, it would build on existing foundations
I am not persuaded, with respect to the hon. Gentleman's point of view, that there would be arty greater flexibility under either model. It depends on the view taken by those who have to administer the law. The law will be the same whether we have a self-standing commission or these bodies. The crucial matter will be the view taken by those responsible, whether they are in the commission or in the hybrid bodies. On the whole, having considered the arguments over a period, I think that the arguments against a self-standing commission have become less compelling as time has gone by. I judge that they are being put forward with less passion now. It is almost as if the markets are coming round to an acceptance of that point of viewOn the question of two boards, I was glad to note that the Secretary of State did not nail his colours too firmly to the mast. Opinion is moving very heavily in favour of the common sense conclusion that there is little point in having two boards when one could do the job perfectly well. Indeed, it becomes ridiculous when one understands that the majority of people will have to register under both the SIB and the MIB because the merging of different functions is such that, according to the White Paper, there will have to be provision for the exchange of information between the two boards. Therefore, a person may give information to one board or the other and they will be busy exchanging the information I can imagine what the Secretary of State would say if this were a Labour proposal. If the Labour party had made such a proposal we would have had to accept mocking sarcasm about such a Socialist solution — setting up boards, not even statutory boards, that were obliged by law to exchange information. I can well imagine the sort of speech that the Secretary of State might have made. When he goes home tonight perhaps he should reflect on what he might have been saying if I were the Secretary of State making these proposals. He might find that the most compelling argument of all that he has listened to in the long period since the Gower report came out In regard to enforcement, however we devise the law and however brilliant it seems, if it is not enforced it is not worth having. In the proposals which the Secretary of State makes new sanctions are produced. I welcome some of them. The revocation of authorisation is a very important and obvious one. I worry a little about it because it is a nuclear weapon. Will it not be a sanction that those responsible would be reluctant to operate? I am not so sure about some of the civil remedies that are proposed. We will have to examine them in detail because they are not articulated all that clearly in the White Paper. I am not complaining about that because one cannot include all the detail in a White Paper but we shall need to consider these with some care The background to all this is a worry amongst the public that fraud in the City is not pursued or prosecuted properly by the authorities of the state. That point has been put to me with some force by people in the legal profession and by people who operate in the City, and I take it seriously. If an official of the Post Office steals money from a letter, he is likely to be visited with the full wrath of the law, to be prosecuted, to go to gaol and to lose his job. Of course, there is nothing wrong with that. But if a person deals in fraud on a much larger scale and runs off with £200 million to £300 million, the chances of him being brought to book are much less I am afraid that that is true and is perceived to be true. The reason is that those who deal in larger fraud have more resources and skill in avoiding the reach of the law. They are able to have much more elaborate and expensive defences. Worst of all, they are able sometimes either to avoid the jurisdiction easily or to create such apprehension in the minds of those pursuing them that they come to the conclusion that it is not worth continuing the pursuit. That is thoroughly bad. The Government, as a matter of urgency, should take on board the whole matter It is not just a simple question of having a jury. In some cases that is a side issue and we are in danger of going up a cul-de-sac in considering it. The question is whether the country is prepared to put the necessary resources behind investigating authorities and prosecuting authorities to ensure that major fraud is prosecuted with the same rigour and diligence as minor fraud. That is a slightly different issue, but it needs to be tackled by the Government
The right hon. and learned Gentleman is, of course, right in saying that large-scale financial fraud is a most difficult crime to bring home and to secure a conviction on, not least because so often it is internaional in its nature and there is a reluctance of witnesses who are outside our national jurisdiction to attend court. There are problems here which are probably much more those of the law than they are of resources, although certainly we have managed to increase the resources and reorganise them recently in a way that I hope will make them more effective
The Secretary of State is referring to the fraud investigation group which was established recently. I think that may be a useful exercise in co-ordination, but he will forgive me if I am slightly sceptical about Governments saying that they will co-ordinate their activities. I have been involved in so-called co-ordinating activities so often in the past that I am sceptical that coordination always achieves its objective. The immediate reaction in Whitehall to any interdepartmental problem is to propose greater co-ordination. We shall be persuaded that something is being done when there are major prosecutions and when major criminals are brought to book instead of laughing at this country from the havens to which they have escaped. They have brought the sense of fairness in British society into scepticismI was about to move on to the international dimension that the Secretary of State mentioned. Professor Gower drew our attention to the international dimension when he referred on page 176 of the report to the new phenomenon of international white collar crime. He argued for much greater international co-ordination. I wonder if we have done enough about that. I do not think that enough is said in the White Paper about the offshore problem. It needs greater attention by the Government There may be ways of doing something about it. Why cannot those who beam their activity to the British market from abroad, from Amsterdam or wherever, be penalised in relation to their other activities in Britain? If we could find some way of doing that it would be extremely useful I do not have an easy answer to what is a complicated problem. My impression is that not enough attention has been given to it. It is clear that there are problems of international law and national jurisdiction. We should pay more attention to the problem and see if there is a way, for example, to tackle people who have activities in this country and who indulge in activities from offshore havens, one being connected with the other. We should not enable them to have a free run in Britain, as it were, while cocking a snook at our laws from a haven elsewhere
I am anxious not to interrupt the right hon. and learned Gentleman too much; I do not want to make this a debate between him and me. If persons were operating in that way, both outside the United Kingdom and had an operation here, that might lead the boards to the conclusion that they were not fit and proper persons
It is helpful to have that remark on the record. If the Secretary of State thinks that it would be important to bring into consideration the question of authorisation, or the withdrawal of it, if unpalatable activities from an offshore haven had an impact on United Kingdom activities, that is a useful idea. That is not quite said in the White Paper. It would be a view for the regulating authorities to take, and no doubt they are able to take a step for a hint. I hope that that was what the right hon. Gentleman was givingOther activities are encompassed in the quite wide definition of what is marketed in the financial world. For example, franchising is developing greatly in this country. It might be argued that that is outwith the scope of the measure—that we are not dealing with investment when we are dealing with franchising—but I suggest that it is getting near the line when people are dealing with a product and are almost licensed to distribute it. I raise that as a minor point which might be considered; perhaps some protection should be given in that respect The Opposition are not slow to criticise the City when it needs to be criticised. We have often said that it is inadequate in dealing with the problem of financing British industry. I am glad to say that that view is no longer held exclusively by those on these Benches. Indeed, members of the Government sometimes express it. In a recent eloquent speech, the Secretary of State for Wales berated the City for the inadequate way in which it approached industrial investment in Britain. [Interruption.] I hear some muttering from Conservative Members. I think they are showing that they do not take the Secretary of State for Wales seriously. I am sure that my hon. Friends who represent. Welsh constituencies will bear that in mind I note that the Secretary of State for Trade and Industry has been careful to keep a straight face; I can see his face, whereas his hon. Friends behind him cannot. He has been careful not to betray the confidence of a colleague. I was under the impression that when a Cabinet Minister made a serious and important speech, a speech obviously considered carefully in advance, he spoke on behalf of the whole Government and not just for himself.
How can the right hon. and learned Gentleman say that?
:I believe that the Secretary of State is telling me from a sedentary position that I should not operate on that assumption. Where, then, is collective responsibility?
:I was wondering how the right hon. and learned Gentleman of all people, having served in a Labour Government, could say that with a straight face
I gave way to the Secretary of State because I thought it only fair to enable him to announce once again the doctrine of collective responsibility. I noticed with care that he avoided that opportunity. But, then, having regard to his colleagues, he was probably wise to do so
Is it fair for us on these Benches to assume that the right hon. and learned Gentleman accepts collective responsibility for the recent remarks made, and reports put out, by his hon. Friend the Member for Oldham, West (Mr. Meacher)?
I have been in the House long enough not to rise to the most obvious lures, especially from Conservative Members. I should be delighted to answer such questions if I thought that I could do so without breaching the rules of the House. I need only comment that the doctrine of collective responsibility is noticed in its absence rather than in its fulfilment by some members of the GovernmentWhile there are serious deficiencies in the way in which the City serves British industry, it is important—there will be unanimity about this — for us to have an efficient, internationally competitive and fair-dealing system of financial markets in this country. It is in the national interest and in the interest of the prosperity of our trade and industry that it be maintained, particularly as the City of London is now under intense foreign competition I end on that note. An approach to this matter that guarantees fair dealing in the City is also the best way in which we can advance its efficiency and competitiveness. It is not just a method of protecting investors. It is a way of offering a guarantee to those who deal with it—both in this country and from abroad—that they can expect honest and fair dealing in Britain. We shall have differences of approach, but if we keep that principle in mind we shall achieve something good for the nation at the end of this whole process
I agreed with much of what the right hon. and learned Member for Monklands, East (Mr. Smith) said, in particular his concluding words. He made an admirable speech and the whole House appreciated its constructive nature. He was right to say that we should now be considering updating the lawI am only one of many who take part in debates of this kind, inside and outside the House, and who give a warm welcome to the general principles of the White Paper. It is timely and well done. My right hon. Friend said he thought that it had had a unanimously successful press. I had not noticed that. I thought it did not have as good a press as it deserved. It is an excellent and constructive piece of work, and any criticisms of mine are more in the nature of anxieties about the detail rather than the direction in which my right hon. Friend intends to move, which I strongly support I have an interest to declare. I have been involved for many years in the unit trust, insurance and banking industries in Britain. I am the chairman of a unit trust management company. I was one of the sponsors of the Insurance Brokers (Registration) Act 1977, which was introduced by my hon. Friend the Member for Harrow, West (Sir J.Page) and which has been most successful. I am also a vice-president of the British Insurance Brokers Association I have therefore been a practitioner in these spheres for many years. Indeed, I have been involved not only in practice but in regulation, both as a Minister and as a member of various bodies. I speak from that standpoint That lifetime's experience leads me to say that the White Paper provides a desirable and practical framework for protecting the interests of the investor, and it should help to ensure the healthy development of this fast-growing financial services sector of the economy. It is not only fast-growing. As the Secretary of State and the right hon. and learned Member for Monklands, East said, it is fast changing, too. I am not sure that I approve of all the changes that I see Generalism is all very well, but the City of London has grown and prospered and has brought great strength and wealth to the nation because of its concentration largely on specialist skills. Anything that mitigates its effectiveness would be a pity. The financial services industry has been a great employer. It employs 1 million people. It has provided a great service to our fellow citizens at all levels. In other words, it is a great national asset. It has an important social and economic purpose, not least because of its £4 billion a year overseas earnings My right hon. Friend is therefore right to say, as he writes in the White Paper, that his first purpose as a responsible Minister must be to provide the public, the nation, with protection against deceivers, both the deliberate ones to whom the right hon. and learned Member for Monklands, East referred—I agree with him that the methods of international protection against deceit need to be sharpened because they are pitifully weak—and those who are careless. My right hon. Friend is right also when he says that disclosure has to be the norm, so that a man who is undertaking an investment knows exactly what he will obtain. At the same time, my right hon. Friend says—again I believe that he is right—that caveat emptor must remain the rule. The House has no business protecting people from their own folly or greed In choosing self-regulation as the means for achieving these objectives, the Government are giving this sector of our economy the opportunity to devise a detailed scheme to achieve a high standard of conduct by practitioners, an adequate level of competence within the industry and a proper protection for the consumer, and that too is right. There have been precedents at various levels for doing this. For instance, there has been the gentle discipline of the Association of Unit Trust Managers, of which I was one of the founders. That has been very effective. Now, with legislation, Lloyds is doing a powerful job in ensuring that the best practices are conducted there. This applies also to other aspects of the broking industry The House will remember that, through the Insurance Brokers (Registration) Act 1977, all intermediaries who chose to call themselves insurance brokers have, since December 1981, been regulated, and are required to observe a code of conduct that ensures their independence and requires that the interests of the client are always their first consideration. They have to meet tests on financial solvency. They are required to take out their own indemnity insurance to allow for compensation to the client if they are negligent in conducting his business. Here then is a system by which, under a general code of law, the consumer has been well protected and the industry is well self-regulated It is all very well establishing the idea of self-regulation, but in the end this depends on those who are doing the work of regulation. Everything is people. In insurance broking, we have been enormously lucky to find excellent people to do this work. I cannot pay a high enough tribute—some hon. Member should—to Mr. Francis Perkins, who was the chairman of the committee that brought together the four associations in broking and turned them into one. His successors, Mr. Findlay and now the excellent present man, Mr. Alexander, are also devoted people. They, and others, not least the chairmen of the registration councils and the like, and all their supporters, have done some marvellous work. My right hon. Friend will have to exercise all his ingenuity and persuasive powers to make certain that their example is followed in other respects. It is important to get the right people if self-regulation is to be made to work Self-regulation in the intermediaries sector anticipated my right hon. Friend's White Paper by a number of years, but it is effective only for those who have volunteered to use the title "insurance broker". Someone who wants to call himself an insurance consultant or an insurance adviser can practise as an insurance adviser without any control. This, contrary to the principles laid down by my right hon. Friend's admirable White Paper, has impeded the raising of standards. There is no doubt about that—this is a matter of fact. The fact that there is a cost of registration as an insurance broker has penalised those who wish to practise professionally and ensure proper protection for the insurance buying client We should be foolish to perpetuate that situation. My view, which I think is the view of the profession as well, is that one major shortcoming in the White Paper is the failure to provide for proper regulation of all insurance intermediaries. Life assurance policies, as long-term investments, will be covered by the proposed legislation and those who market them by the new self-regulatory system. However, non-life insurance policies —household and contents insurance, motor car policies, travel insurance and so on—are omitted altogether. As I understand it—this was confirmed by my right hon. Friend—it is because they are not commonly regarded as an investment. I do not accept or agree with that view. This is a serious omission, and I hope that my right hon. Friend will be willing to think again The private individual can suffer catastrophic loss just as much from inadequate or incompetent advice, or even from fraud, on his home insurance, for instance, as on a life policy. The White Paper could make this more likely, as those insurance advisers who fail to achieve the necessary standards to become authorised to market life policies will be able to switch their attention to the other general sector of insurance. Furthermore, the ability to opt out will inhibit the general raising of standards I go so far as to say that, if we do not include all intermediaries in the way that I suggest, much of the work that we have tried to do in the British Insurance Brokers Association may be valueless. What is the point of bothering to be a member of that institution and meeting its high standards and conforming with the requirements of the registration council and the rest if somebody can go down the road and do what the devil he likes? Unless the Government bring in control of intermediaries offering advice on general insurance, we shall be losing a great opportunity. The present deficiency will not only be perpetuated but even accentuated by the new system for regulation of life assurance. It is the function of the insurance broker that needs to be controlled, not just the title of insurance broker In an intervention, my hon. Friend the Member for Harrow, West referred to the part of the White Paper that says that the Government propose amendments to the Insurance Brokers (Registration) Act to fit the Insurance Brokers Registration Council for its new role in the self-regulatory structure. They should extend those amendments to provide for a proper regulation of anyone wishing to offer independent advice on insurance. If anyone is unable or unwilling to comply with the requisite standards, he could continue to trade as agent of an insurance company, provided that it is willing to take responsibility for his actions I am sure that my right hon. Friend the Secretary of State and my hon. Friend the Under-Secretary, who is to wind up, will have seen that there is early-day motion 460 on the Order Paper, entitled "Protection for Policy Holders". It proposes the changes that I have outlined. Without any canvassing for signatures, it has attracted signatures from some 67 hon. Members from both sides of the House. That goes to show not only that what I have attempted to talk about is a matter of wide concern in the House, but that the remedy for it has wide agreement also I move on to the White Paper as it affects life insurance. It asserts that the law and the regulatory system must be fair and not create artificial distinctions between services competing in the same markets. I am sure that that is the right policy. Unfortunately, it fails to achieve that objective in one major sector. It exempts what are known as tied agents from the duty to disclose their remuneration to potential clients. In so doing, it does not serve the consumer interest and it runs the risk of diminishing the sources of impartial advice available to the public We have heard a lot about Gower this afternoon. In his report on investor protection, Professor Gower recommended that the regulation of commission payments should apply to all intermediaries, whether independent or tied. That was his plain recommendation. I am aware that this is the view of many responsible companies, including almost all leading assurance companies in the market The White Paper requires only that the independent intermediary should be so regulated. But the tied agent working for an insurance company owes his first duty to the insurer and not to the purchaser of the policy. He receives commission from that company and other financial support such as office rents, phone bills and other indirect payments. Thus the White Paper's proposals create an artificial distinction and do not meet the White Paper's principle that there should be "equivalence of treatment" between services competing in the same market I do not think that that distinction is right. It means that the purchaser will know how much he is paying for independent advice, but not how much the tied agent is receiving. The consequence could be a diminution in the independent broker market and thereby an undesirable restriction on the comsumer's access to independent advice. That would be a pity, and it would be wrong to put the man who offers independent advice at a competitive disadvantage. Therefore, I hope that my hon. Friend the Minister will be able to say that this matter will receive further consideration. If there is to be any requirement to disclose commission and other payments, it should be fairly and universally applied. That is the best way to avoid market distortion and an unnecessary and undesirable commissions war There is another aspect of the White Paper where "equivalence" appears not to have been observed. The White Paper proposes that certain professions, such as accountants and solicitors, should be exempt from the regulations, provided that investment business is not a "significant" part of their activities and provided that their professional bodies have standards that offer equivalent safeguards to the investor. Great care will have to be exercised over what is to be regarded as "significant", since this could be a loophole through which large professional practices, which handle much more business than small insurance brokerages, could slip with, again, a potential distortion of market forces. If one group of people is obliged to disclose, everyone should be obliged to do so. That is my plain view.
Perhaps I can reassure my right hon. Friend on that point. Disclosure would be among the requirements that I would expect in the professions' codes governing these matters.
I am very pleased to hear that, and congratulate my right hon. Friend on having thought through the logic of this matterI have three other general points to make. First, we have already had some discussion about whether we should have one or two boards. The right hon. and learned Member for Monklands, East had something to say about that. I can see the reasons that probably prompted my right hon. Friend the Secretary of State to start with the idea of two boards. In theory, marketing is probably a different aspect from the management of investments, but in practice it would be very inconvenient to have two boards. However, if my right hon. Friend thinks it right to start like that, perhaps I can invite him to have in mind the bringing together of those boards into a single board at the earliest possible moment. On the other hand, if he reconsiders the matter, he may come to the conclusion that one board now would be better than two Second, I know how difficult this is, but I urge my right hon. Friend the Secretary of State to beware of overregulation. It is easy to believe that one has to regulate, and that one has to dot every "i" and cross every "t". But free markets—which is what the White Paper is all about—require maximum freedom. I hope that my right hon. Friend will go for the minimum rather than the maximum amount of regulation. Third, we have had some jokes about my right hon. Friend's successors in office in a hundred years' time, but I hope that he and his successors will bear in mind the great need for flexibility in the systems that we establish. As my right hon. Friend rightly said, the scene is changing. The right hon. and learned Member for Monklands, East said exactly the same thing, and it is true My lifetime's experience in the financial and other worlds tells me that the accepted wisdom of today is generally wrong. We need to provide for innovation, as my right hon. Friend the Secretary of State has suggested. If anyone had planned the City as it is today, he would probably not have given money markets the latitude that they have had or the possibility of success. One cannot plan exactly what will happen Perhaps I can share a memory with the House. When I, with my colleagues, started the modern unit trust industry in this country in 1957, and introduced the equity-linked life assurance concept, the City establishment bitterly attacked us. The chief actuary of a celebrated and significant life assurance company even wrote an article in Policy Holder magazine saying that what we were doing was dishonest. That was the sort of disdainful attitude that was displayed If we had had to go to a conservative City group and say, "This is what we propose to do," we would have been turned down out of hand. Whoever is responsible for supervision—it may well be right to have a practitioner-based supervision—we should ensure that it is not just a cosy City affair and that we get in independent people I am not just talking about the statutory woman, black man or trade unionist. Let us get in people of imagination. Things are changing quickly. Let us lay down guidelines by all means, but let us give those who will pioneer new ideas a proper opportunity I congratulate my right hon. Friend the Secretary of State warmly on what he is doing. The catalogue of events about which he spoke, together with the White Paper and ancillary things which the Government are proposing, are all intended to make financial services more generally available to the British public and to make them a continuing source of wealth and employment in our society I wish success to those associated with my right hon. Friend in what he is trying to do. Of course, it is a large job and it is being attempted in a short space of time. What happens and what is decided will have far-reaching consequences for a major and highly successful industry, which we hope will continue to be successful Consequently, it is all the more important to ensure that we get things right—although it is easy enough to say that—and that the general principles that my right hon. Friend the Secretary of State has enunciated, which doubtless have universal support, are implemented fairly and in the widest possible interests of the industry and the public. All those who heard my right hon. Friend's speech will have greatly appreciated his readiness to listen to suggestions and ideas. I hope that those that I have been able to offer the House will be of help
I listened to the Secretary of State's speech, and he seemed to be trying to be at his least offensive to the City and to be kind and humane I wish that on occasion he would show such sentiments to other people. He appeared to be saying that we must get away with the least regulation possible. I agree that a little regulation is better than none, but the right hon. Gentleman will not be too surprised to find that we do not quite agree with all that he said, and that we want to go much furtherPerhaps I could suggest that the right hon. Member for Taunton (Sir E. du Cann) looks at early-day motion 460. We all agree that life insurance is important, but there is also car insurance, household insurance, insurance covering legal liabilities, and so on. All of them are equally important. Those who purchase those policies should also be protected. It is important that things should be taken more widely than at present. Indeed, I agree with the sentiments that have already been expressed on that point People have had their fingers burnt over offshore companies. More should be done to protect investors. We all know about the collapse of Signal Insurance. The problem is caused by advice being given to people who are looking for a good return on their money, and sometimes an excessive return. Those who give that advice should be responsible for it, and some action should be taken against them I agree with everything said by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) I do not believe that the City should be allowed to regulate itself. There should be statutory regulation along the lines of the United States Securities and Exchange Commission. The individuals on the committee to organise the Marketing of Investments Board have been praised, but there is only one consumer representative on that committee. If we follow that pattern in setting up boards, we are asking burglars to police themselves. I believe that consumer interests should be represented more strongly I have no firm views on whether there should be one or two boards. We must consider what voluntary regulation involves. Recently, the voluntary licensing of life assurance salesmen has suffered some setbacks. Attempts have been made to examine the voluntary regulation of commission payments to independent intermediaries since the collapse in 1982 of the Life Offices Association agreement. The key task is to consider whether the regulation of investments should be carried out by the Marketing of Investments Board separate from the Securities and Investments Board I understand the argument in favour of just one board, because there would be less bureaucracy. Opinion is divided—the insurance industry wants two boards and the City wants one. The City does not want a supervisory body to be set up over which it has no control, and that may be the reason for its reluctance to support the setting up of two boards. Separate boards would mean that City institutions would have to obey board rules when they are allowed to sell portable pensions. I believe that the Secretary of State favours the formation of one board. The Department asked for advice, but the organising committee did not include one assurance company chairman who recommended setting up two boards Much has been said about Professor Gower's report. I echo the point made by my right hon. and learned Friend the Member for Monklands, East, that the Government have taken a timid approach to Professor Gower's recommendations. We must never forget that Gower aimed to protect the investors. A self-regulating body will not be successful. Such a body would be successful only if those involved in it were determined to make it a success The Government's mind may be concentrated by the knowledge that there is increasing demand for regulation. Without self-regulation, there will have to be statutory regulation. The confidence of all investors—large and small — must be gained, because they are equally important. Investors must be protected. I am extremely critical of the way in which the organising committee for the Marketing of Investments Board has been set up A complaints procedure should be established, providing opportunities to individuals to make good any losses without undertaking lengthy legal proceedings. A complaints board should initiate action on behalf of individuals and pay compensation to them. That presupposes investigation by the board to establish a claim's validity My right hon. and learned Friend the Member for Monklands, East said that compensation should be available and referred to paragraph 7.12 of the White Paper. We must consider the type of compensation that will be available — whether there should be a funded compensation scheme, or insurance. I am in favour of funded compensation along the lines of the levy that was charged under the Policyholders Protection Act 1975. The drawback to an insurance compensation system is that insurers would be unwilling to pay out unless a court decided in favour of compensation Changes are taking place rapidly, and a periodic review is therefore needed. I welcome the move towards statutory authorisation of the investment business. I believe that a uniform approach should be taken to the authorisation and regulation of all financial services, taking the "best practice" as a guide. A rationalisation of the plethora of self-regulatory organisations is required, so that companies need deal with only one organisation. That would be more efficient This White Paper is only the first step, albeit a step in the right direction. The setting up of a statutory board would be an even better step. I do not believe that the City would have many objections to setting up a statutory board. Stronger medicine is needed, as can be seen from the City's record in the recent past. The Government should have taken more radical action. I welcome the move to protect investors, although it does not go far enough. Sooner, rather than later, we shall all recognise that statutory regulation is required
I think that the House has been at its best this afternoon, in stark contrast to the horrors of yesterday afternoon. This afternoon the House has been looking, in a relatively nonpartisan way, at the problems of the City and how the City can best be regulated. That must be to the advantage of all of usI should like, first, to say a word to those of my hon. Friends who have criticised the role of the Governor of the Bank of England and the fact that he is to have a veto over appointments. It is, in a sense, a novel idea. I should like to put one reflection into the balance against that criticism. When other regulations and burdens were imposed on business over the past 30 or 40 years, if the interested parties themselves had been consulted to a greater extent at the time when the regulations were dreamt up by Parliament, perhaps some of the regulations would have proved to be less burdensome to business as a whole There is the debating point that the Governor is responsible to the Chancellor of the Exchequer. There is also the possibility that we shall achieve a slightly better and more realistic approach to the regulation of the City by bringing the Governor into the process of consultation On 29 January, when my right hon. Friend the Secretary of State for Trade and Industry made his announcement concerning the White Paper, my hon. Friend the Member for Horsham (Mr. Hordern)—who, unfortunately, is not able to be here this afternoon—was the first to point out that the need of the City to have the investor protected as much as possible was paramount, and that the City's reputation completely depended on that. From the debate so far—and I am sure that it is true generally—the House of Commons appears to agree with that view. I strongly agree with it. Against that very important need, we should also balance what my right hon. Friend said in his statement. He emphasised that it is very important to have a framework capable of
My right hon. Friend the Member for Taunton (Sir E. du Cann) reminded the House of his experience over many decades and reflected on the time when he was dealing with and innovating the unit trust business. He said that that innovation could easily have been stifled at that time. Therefore, my right hon. Friend the Member for Taunton this afternoon reflected what the Secretary of State said on 29 January—that it is crucial that the framework should allow innovation to take place if the City is to maintain its position in the world. I should prefer to use the word "regain", because we should not delude ourselves. Some parts of the City, like some parts of British industry, have slipped behind the rest of the world and fallen behind other financial centres. Therefore, it is crucial to be able to innovate The hon. Member for Warrington, North (Mr. Hoyle) said that he wanted to see a tighter regulatory framework, and that may be necessary in the future, but not many of us can look round that corner at the moment. I hope the hon. Gentleman will agree that it is important that the regulations should not grow so much that they stifle the sort of innovation that the City needs About three weeks ago the Government published a report called "The Burdens on Industry". In that report it was stated that anyone starting a business and wishing to avoid all the possible pitfalls, and wishing to avoid tripping over various laws and regulations, would need to read 270,000 words—a task that would take 24 hours. There is a lesson to be learnt from that. We must not allow the regulatory process in the City to grow to such an extent that that sort of thing could happen In proposing the legislation, my right hon. Friend has walked a tightrope between over-regulation and under-regulation. As far as we can see at present, he has probably got it about right. It is impossible to be sure, as he would be the first to say; indeed, he implied in his speech that he would listen to comments. If it proves necessary to tighten the scheme in the future, that will have to be done The rules and regulations should be clear, so that they can be understood by everyone. If that happens, we are much more likely to have a flexible and competitive climate in which we can encourage.new firms to come into the City In recent weeks a great deal has been written about mergers in the City, with giant firms, merchant banks arid stockbroking firms being created. But surely we need a regulatory system to allow for new entrants with new ideas. We should allow new firms to innovate, thus ensuring that the City keeps up with other financial institutions throughout the world When my right hon. Friend the Secretary of State said that he hoped that arrangements in the City for the new system would enable the raising of finance to be done more efficiently for the smaller business, that was music to my ears. I have in mind the larger private business and the smaller private company. At present, such businesses are not all that well accommodated by the City in the raising of finance. Perhaps new entrants can make a contribution in that respect If we have the regulatory system right, as I believe we have, there will be freer competition; there will be competition that protects the investor. As I said at the beginning of my speech, that is crucial. Above all, we should be hopeful—as I am—that the proposals in the White Paper will allow the City not only to innovate but to grow and to regain its position as the most important financial centre in the world. If we have got it right, that can happen. As I believe that we have got it right, I hope very much that it will happen"accommodating rather than stifling innovation". — [Official Report, 29 January 1985; Vol. 72, c. 157.]
When the right hon. Member for Taunton (Sir E. du Cann) looked back into his own history and mentioned the establishment of unit trusts, he reminded many of us who have worked in the City, or have had contact with financial institutions, how much things have moved over the past 20 years—and nowhere more than in the great debate that has been going on for many years about the supervision of the City. There have been great debates within different parties about how that should best be carried outI am very pleased that we have moved as far as we have in the White Paper and have at last the sort of framework of supervision that some of us have wanted to see for many years. It has always been difficult to get a consensus on what that supervision should be. Although they may not be perfect yet, the proposals in the White Paper mark a welcome step forward I agree with other hon. Members who have spoken—and with a good deal of opinion in the City—that the major flaw in the present proposals is that there are to be two bodies. The most important change that the Government should make is to bring them together into one body. There is an overwhelming case for having a statutory body in the long term. That does not horrify me in the way that it horrifies some people. However, on the other hand, it is important to carry the City along with the proposals. The marrying together of a statutory framework and umbrella with self-regulation is a good way to do that Therefore, my colleagues and I will support the thrust of the Government's proposals. The idea of a statutory commission is not as horrific to me as it is to some people
As no one else is likely to do so, will the hon. Gentleman tell us why a statutory commission is such a great thing?
If the Minister looks at the experience in many other places, in many international financial markets in the world, places as free, open and entrepreneurial as Hong Kong, and as far afield as Canada, Australia and many other countries, he will find that statutory commissions have been operating successfully for many years. Financial markets and institutions throughout the world fully understand the operation of statutory bodies supervising markets. Therefore, I do not think that the international financial world found that proposition as horrific as some people in this country didPeople in the City have moved forward tremendously. As I said, I welcome that. I do not want to press the idea of a statutory commission, because I believe that what the Government are proposing constitutes a combination of statutory framework and self-regulation. I believe that it is best to suck it and see with this one and hope that it succeeds, but, if it is necessary, we should move further in the direction of a statutory body if the proposal does not work
I should like the hon. Gentleman to clarify what he is saying, because I am sure that I am very much in support of it. I understand the hon. Gentleman to be in favour of one body instead of two. There will be one body — whether one calls it a board, a commission or an authority is just nomenclature. At the end of 1986 the legislation should come into effect. If, in a securities Bill next Session, the board is given various powers over the self-regulatory authorities underneath it, it will be the equivalent of a securities commission. There should be no disagreement on that. Why is the hon. Gentleman saying, "Let's suck it and see."? If he is in favour of one board, he should have the courage of his convictions and argue the case
I do not believe that if the Government brought together the two bodies that would constitute the sort of statutory body that exists in other parts of the world or the sort of statutory body that other people have envisaged or proposed. It would certainly be a single body, but it would not have the powers that the Secretary of State is retaining unto himself. However, I hope that that will make it unnecessary to go down the road of giving it the complete independence and statutory authority that such a securities and exchange commission has in other countries
I, too, am following with great interest what the hon. Gentleman is saying. I agree with him that the key question is what statutory powers—whether delegated or otherwise does not matter —that single body will have. I wonder what powers the hon. Gentleman thinks that the body contemplated in the White Paper would lack in comparison with the statutory commission that he has advocated
As I said, it may well be found that if, when the body starts operating, it does not have sufficient powers under the present proposals—which the two boards have—satisfactorily to supervise the self-regulatory bodies and different sectors of the City, it will have to be given statutory powersWe need to look at the provisions that will be in the Bill. We need to judge the strength of those powers when they are laid out in the Bill. I do not see the need to go fully down that road at present. I want to see what the Government put in the Bill. All I know is that there is an overwhelming case for not having two separate bodies. I hope that combining them will provide a satisfactory arrangement I should like to refer to the operation of the boards as proposed, and reflect some of the criticisms that others have made. The new arrangements will have to contend with substantial changes that are taking place in the City. I hope that they will not be inhibited. In previous debates on this matter, I have welcomed the changes that are coming. They have been criticised — wrongly — by Conservative Members. I am glad that the changes are taking place, because they will help to make the City a more competitive environment. It was beginning to slip back. The markets in New York and other parts of the world were growing, but London was dropping back in some spheres. The increased competition in the City, particularly on the Stock Exchange, is wholly welcome. I hope that it will not be inhibited by the new arrangements that are being introduced in the White Paper One particlar change will take place after the so-called big bang in 1986 that I find rather worrying. I am not sure whether it will be adequately covered by the proposals in the White Paper. It is the problem of the so-called Chinese wall within financial institutions and the conflict of interests that will inevitably be perceived by investors and customers in large financial conglomerates. I do not have the perfect answer to the problem. Various provisions can be made, with funds being kept separate in separate accounts and so on. Various proposals have been made, but I am not sure that when the investors see the new conglomerates operating and when the new system comes into force they will be satisfied that they are operating in the best interests of the investors and not of the institutions themselves As I said, I do not have an instant solution to that problem, but I see it coming down the track. When the system starts operating, it will cause great anxiety. All that I say to City institutions is that they will have to be aware of the suspicions that will be engendered when the proposal comes into operation. They will have to bend over backwards to reassure their customers and the public that that conflict of interest does not work to the disadvantage of the customers whom the institutions are supposed to serve I should like to refer to the role of the Bank of England. I agree with the comments made earlier about the proposed role for the Governor. I do not accept the reply that the Secretary of State gave to criticisms of the role of the Governor. For too long, the Bank of England has been in the curious position of being both spokesman and friend of the City, and supervisor of the City. It should be one or the other; it cannot be both. I do not like it having a supervisory role. Its predominant job is to act as a central bank, and it should get on with it. The responsibility for supervising the banking system has been put on to its shoulders. I suppose that it is now too late to remove that from its orbit. However, I believe that the Bank of England should not have the role that is envisaged in the White Paper. I hope that the Government will make that change before they introduce their Bill I also agree that there should be more independent members on the bodies. If the supervisory system is to obtain the confidence of the public, there will need to be a much stronger element of independent people on the boards—respected people who are not seen to have an interest in the City I am not sure why the test of competence has been omitted from the White Paper. I hope that the City institutions will wish to ensure that companies, partnerships and bodies are truly professional and that before they are able to operate they pass the test of competence. I hope that this will be one of the responsibilities of those who work the system I hope that the White Paper's proposals will be given a fair wind and that the Government will note that an increasing body of opinion believes that the two boards should be merged. I strongly support that principle. I hope that the Secretary of State will respond to the comments and criticisms and that the new system will help the City to be increasingly successful and more competitive so that it can serve well both its customers and the interests of the country. The City is undoubtedly of great benefit to this country. The new supervisory system will, I hope, benefit both the City and investors and the whole of this country by making the City a more respected and successful financial centre
I thought that the exchanges during the speech of the hon. Member for Stockton, South (Mr. Wrigglesworth) vividly illustrated the consensus on this subject. During the last 12 or 18 months the differences between the two sides of the House seem to have narrowed. When the hon. Member for Stockton, South was asked by the hon. Member for Dagenham (Mr. Gould) what powers he wanted to be given to the Securities and Investments Board that it would not already have, all he said was that we should have to wait and seeIf the two bodies were to be merged, there would effectively be an independent commission, so we seem to have arrived at a consensus. I welcome that. It underlines the value of the way in which the Government have sought to develop policy. We have been looking at this question for about four years and it is valuable that we have spent this amount of time upon it. It would have been impossible to legislate earlier because of the new Stock Exchange arrangements. The consensus will mean that there is a much better chance of the proposals working in practice It is important to remember the kind of financial scandal that the White Paper is intended to combat. People are still prepared to cut out a small coupon from a Sunday newspaper and send off a cheque for £1,000 to an organisation about which they know nothing, except for the details given in the coupon. To me that is incredible, but so long as the practice continues there will need to be very strict regulation. People are still being ripped off. Only yesterday I received a letter from a constituent who told me:
That is still going on and the White Paper is trying to combat it The White Paper envisages the right balance between statutory control and self-regulation. It seeks to secure the best of both worlds—the protection that the statute will provide and the flexibility of self-regulation to which I referred earlier when I intervened during the speech of the right hon. and learned Member for Monklands, East (Mr. Smith) Confidence and flexibility are two of the stated objectives of the White Paper, as are efficiency and competitiveness. I support all four of those objectives. I support also the principles which will underlie the new system. However, the most important principle of all is that of equivalence of treatment, to which reference has already been made. It will be very important that all those who operate in this area should be treated on as equal a basis as is practicable and possible. I would add one more principle to the six that are listed in the White Paper—disclosure of information. It is very important that the maximum amount of information should be disclosed to potential investors so that they have the maximum amount of information upon which to base investment decisions It is right that the definition of an investment should be wide, although it must at the same time be specific. I regret that I have to disagree with my right hon. Friend the Member for Taunton, (Sir E. du Cann) about nor-life insurance. I do not believe that motor insurance can be described as an investment. An amount of money is paid for a 12-month period, after which none of it is left. One is simply taking out insurance cover for a restricted period As for the institutional structure, it is agreed that there should be one body rather than two. This will provide three advantages. Under the existing arrangements there is the problem of either an overlap or a gap between the two bodies. Secondly, two bodies are bound to involve additional cost. Thirdly, as was mentioned by the Opposition Front Bench spokesman, exchange of information will be necessary if there are two bodies. For those reasons, I believe that there should be one body rather than two I am glad to note the recognition by the Government in the White Paper of the important contribution to self-regulation which has already been made by a number of organisations. I referred to that fact in my intervention. A great deal of pioneering work has been done, in particular by the National Association of Security Dealers and Investment Managers, to which I am the political adviser During the last few months and years NASDIM has introduced a fit and proper test of membership. It has strict separate client account rules, adequate financial resources rules, compulsory professional indemnity insurance cover, annual renewal of membership, random checks on member firms and a proper complaints and disciplinary procedure, with the right of appeal to an outside tribunal. NASDIM is also in the process of introducing a compensation fund. Therefore, it already meets many of the criteria set out in the White Paper and should fit well into the future framework that is envisaged by the White Paper Chapter 6 deals with the fit and proper test. I support the White Paper statement that the test will be applied to all investment businesses. However, it will not apparently be applied to individuals within those businesses. We need to think about what that means. It contrasts with the existing law. Section 15(4) of the Prevention of Fraud (Investments) Act 1958 requires a recognised body to be able to furnish the Department of Trade and Industry with a list of the persons who are for the time being authorised by a member to deal in securities on his behalf. Surely, therefore, the White Paper proposals ought to include a requirement in law that individuals authorised to handle investment business on behalf of registered businesses should be adequately recorded and monitored. I may have misunderstood the import of paragraph 6·3, but I am inclined to think that it does not go far enough Chapter 7 deals with the rules for the conduct of business. In some respects it is not tough enough. First, on compensation, I agree with what was said by the right hon. and learned Member for Monklands, East. Paragraph 7.12 refers to professional indemnity insurance and says that it could be made a requirement. I believe that it should be made a requirement. That point was made by the Consumers Association in its submission On the disclosure of terms of investment business, paragraph 7.15 says that"In August 1982 my financial advisers put the balance of my savings (at that time nearly £17,000) into a very high-risk fund on the Commodity Futures market, without properly consulting me or—even when I asked about it—giving me information on the security of the fund. (I had originally asked only about pensions and then Eurobonds, which had been highly recommended and in which that money was placed at my request). In the end I lost £6,000 and consulted my solicitor and then Counsel. They said that the company had been guilty of professional negligence and deception on four counts (and there were similarities to the LHW Futures scandal, now in the hands of the Fraud Squad.) However it was not worth taking the matter to Court and the company state that further correspondence is `too expensive' for them!"
I support that statement. However, paragraphs 10.10 and 10.11 propose one of two routes for the disclosure of commissions to prospective investors. Either specific details of the amount and nature of the commission to be paid should be given or there should be an undertaking that it is within the limits prescribed by a voluntary agreement within the industry. I do not think that that is good enough. I assume that all those within the voluntary agreement will charge the maximum. If not, they will presumably inform investors of it as an advantage. I believe that specific details should be provided in every case. In Stock Exchange transactions, every contract note shows all the associated costs in detail. I see no reason to depart from that. Indeed, I believe that the principle of equivalence of treatment would not be met if that were not so The White Paper sets out a framework for investment protection and describes the parameters of the legislation. Naturally, it does not go into great detail, so some questions of detail remain unanswered. It may not be the easiest thing to contrive, but it would be most helpful if the Government could publish draft clauses or a draft Bill before the legislation is introduced in November or December. I realise that the constraints of the timetable may make that difficult. The Government have had difficulties with the Insolvency Bill because, although the White Paper set out the principles, there was no opportunity to comment on the details until the Bill appeared. In this case it is almost more important to get things right because the success of the legislation will depend so much on the goodwill and co-operation of those being asked to operate it"An investment business should disclose the full terms of business dealing to actual and prospective customers"
I very much agree with that suggestion. The hon. Gentleman will be aware that Professor Gower intended to publish a part 2 to his report which would have taken the form of a draft Bill. Does the hon. Gentleman agree that it is a pity that Professor Gower was dissuaded from taking that course?
Frankly, I had forgotten about part 2, having given up asking parliamentary questions about when it was to be published. I shall be interested to hear from my hon. Friend the Minister whether and when it is to be published. He may well reply, of course, that that draft Bill would have been based on the Gower report and that we have moved on since then. In any event, it would be helpful to have draft clauses or a draft Bill because I believe that the proposals will work well only if the financial services industry is kept fully informed
My hon. Friend might also consider the alternative or additional possibility of using the procedure now established in the House for legislation to be submitted at an early stage to a Special Standing Committee for detailed and careful examination, during which people in the industry could give evidence and have it considered far away from the usual party battles
That is a most constructive suggestion. I believe that proposals of this kind, on which there is a consensus, are especially well suited to the Special Standing Committee procedure. That would be a useful additional process. I am anxious that there should be the maximum scope for consultation before the legislation is published. I hope that my hon. Friend the Minister will be able to respond to that
welcome the atmosphere of harmony and consensus which has characterised the debate so far—perhaps yesterday's dreadful scenes had a cathartic effect—and I do not intend to disturb itThe Secretary of State seemed to have most difficulty with questions about the appointment of the chairman of the Securities and Investments Board. He said that the Bill aimed to establish confidence both within the industry and among the consumers. I believe that the legislation must also secure the confidence of the British people, no doubt expressed through this House, in one of our greatest institutions which has brought us great advantage in terms of its invisible earnings and its standing in the world. The right hon. Member for Taunton (Sir E. du Cann) said that the people on the boards are everything, and he is absolutely right. They must be people in whom we can repose our confidence. The Secretary of State said that one of the advantages of legislation along the lines set out in the White Paper would be to give a sense of accountability, through himself and through Parliament, to the regulation of affairs on the Stock Exchange. In many ways that is the important principle in relation to the appointment of the SIB chairman The present proposals will give the Governor of the Bank of England a veto. I can find no other word. The Secretary of State is known for fairly pungent and plain speaking, but if it is not a veto, I do not know what it is. If the Governor of the Bank of England puts in a caveat, and adheres to it, he will be able to prevent an appointment, whatever the wishes of the Secretary of State. In the final analysis, an objection from the Governor of the Bank of England will have a determining effect. If that is not a veto, I do not know what is The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark, who is also known for pungent speaking, referred to this veto as a constitutional outrage. That may be overstating the case a little, but it is certainly a matter of constitutional concern that the Secretary of State should be giving a veto of that nature to a public servant. The Secretary of State ended by saying that he wanted the House to give its views and that those views would be taken fully into account. I hope that he will recognise the strength of feeling on this in all parts of the House, not least on the Conservative Back Benches, and perhaps think again According to the Secretary of State, the White Paper has two aims—to make the Stock Exchange a clean place in which to do business, as he put it, and to fit the City out for the future. The first may be easier to achieve than the second, although it is no less important. Whether the White Paper should be supported will depend on the conclusions that we reach about those two aims Members in all parts of the House have recognised that the Stock Exchange is going through profound changes, due to technological developments, the forces liberated in recent years with the restructuring of various organs of the Stock Exchange and because the whole business has become more intensely international in character. In those circumstances, as the Secretary of State has said, some flexibility is needed. We have no crystal ball to tell us exactly how this will turn out, but if I criticise this aspect of the White Paper it is on the ground that too much flexibility may not be the best option. International operators need to have a clear idea of the general framework through which they are to make their investments and the rules within which they must operate. Too much flexibility could lead to a sense of chaos or continual change On the proposals for the two boards, I suspect from what the Secretary of State has said that we are pushing at a half-open door. The proposed boards will be hybrid in nature, complicated and bureaucratic and, some believe, in many ways unworkable. Damage may well result if the Secretary of State sticks to the present proposals
The hon. Member should not confuse flexibility with clarity. The flexibility which I seek is that of legislating for a system capable of changing to meet future demands which we cannot at the moment foresee. However, I agree with the hon. Gentleman that the regulations should be clear, and of course they should not constantly change
I hear what the right hon. Gentleman says. In my view, there is a lack of clarity in the White Paper about what the Secretary of State perceives to be the ultimate destination. As the Gower report made plain, the right hon. Gentleman had three options. He could. have allowed the situation to be totally self-regulatory. We all welcome the fact that he decided not to pursue that option. No doubt he acted in the light both of his own views and of the debate in the House last year in which the opinion was widely expressed that a totally self-regulatory system would be inadequate. The second option was that of a balance between self-regulation and a statutory framework. That is the option which the right hon. Gentleman has chosen, and which Professor Gower predicted in his report would be adopted. The third option—and here I see a lack of clarity—was that of an independent commission. That was the option preferred by many peopleWe do not know exactly where we are going. The Secretary of State says that it may be a question of two boards, or of one. The Minister says that there is not much difference between a single board and an independent commission. That view is broadly shared. Which of the two solutions is it to be? Is it not important for the Secretary of State to give to the House, the industry, the Stock Exchange and the international investors a clearer idea of his view of the ultimate destination? I welcome the move from self-regulation to what one might perhaps call a halfway house. No doubt the Secretary of State has been tempted—as we all might be in his position—by the advantages of a gradualist, evolutionary approach, of flexibility, and of the need to build on the present characteristics and nature of the industry. However, the conficence of the industry, especially internationally, would be greatly reinforced, both now and when the scheme is given legislative form, if we had a clearer idea from the Secretary of State of the ultimate destination. From that point of view, it would have been better to take a larger and more courageous step and to say exactly what we want. Would one board really be equivalent to an independent commission? I do not know. It is important that we should have a clearer idea The right hon. Member for Taunton referred to insurance. Like others, I welcome the safeguards and protection for the purchasers of life insurance. However, I share the right hon. Gentleman's view that we must recognise that people can be damaged to a significant extent by non-life insurance too I know that my hon. Friend the Member for Stockton, South (Mr. Wrigglesworth), like me, agrees with the right hon. Gentleman that there is a need to broaden the ambit of the protections so that they will cover others too
I agree with the hon. Gentleman that this is a very difficult line to draw. However, his point applies to almost any business transaction. People can be damaged by any foolish purchase. Where would the hon. Gentleman draw the line?
That is a fair point, but the insurance industry stands alone. It is clearly defined. It would not be difficult, or excessively regulatory, to treat it as a whole. The point made by the hon. Member for Dagenham (Mr. Gould) about damage is valid, but it seems to me that we are taking only half a step when we could take a whole one. We are separating off a portion of the industry and providing safeguards only for those within itThe White Paper must be judged by the two criteria set by the Secretary of State himself. First, will it ensure that the City is clean, and, secondly, will it fit the City for the future? There is some doubt whether these proposals will do the first of those jobs. An article in The Times on 30 January 1985 resorted to hyperbole uncharacteristic of that paper, saying:
I would not necessarily associate myself with that phraseology, but there is concern that the regulations suggested in the White Paper may well not be strong enough Will the proposals fit the City for the future? The White Paper is a transitional one rather than one which delineates the ultimate destination. It would be improved by a larger amount of what the Secretary of State has himself referred to—clarity. I welcome its general direction, as did my hon. Friend the Member for Stockton, South. The document contains useful proposals, but perhaps it does not do enough or go far enough The Secretary of State had an opportunity to create the framework for the future of the Stock Exchange. Unhappily, in my view, he has not wholly done so. He has made a beginning, but the framework is skimpy. Additions will have to be made to it. Others more knowledgeable than I have made the same prediction. The proposals in the White Paper, if they are enacted, will be deficient, although the general direction is welcome. The White Paper, to that extent, represents a lost opportunity The Secretary of State says that he will be flexible in taking account of the views of the House. I hope that he will be. The White Paper is more a signpost for the future than a clear delineation of a destination. We hope that in framing the legislation the right hon. Gentleman will take into account the opinions that have been expressed, and that the legislation will provide an effective structure for the future rather than a general direction"It is impossible to avoid the conclusion that if legislation is enacted on the basis of the White Paper, financial vermin will still be allowed to scamper unhampered through the sewers"
I join others in welcoming the consensus in the House on this important White Paper, and the opportunity that we have been given to lay down some guidelines before the legislation is introduced next SessionThe White Paper marks an important step towards improving investor protection. New markets and new technology bring benefits, but they also bring problems. There is no doubt that the emergence of new markets, such as the unlisted securities market and the financial futures market, have provided new opportunities both within the City and outside it. Easier access to those markets provides new investment opportunities for many people, and information technology enhances the opportunities presented to many people who take advantage of those markets. Many advantages also arise from the increasing competitiveness in the marketing techniques that many financial companies, and many markets themselves, have operated in recent years However, those welcome factors have one undesirable consequence. Investors have become more vulnerable. The scandalous fraud cases such as have been referred to by my hon. Friend the Member for Beaconsfield (Mr. Smith) have tainted the reputations not just of individual firms but also of long-established markets. Public and international confidence in the City as a free and fair market is in danger of being undermined unless an effective regulatory system is introduced and the law brought up to date I also pay tribute to Professor Gower, who has stimulated public debate and made recommendations. In his carefully judged interim and final reports, he tried sensitively to bring the Government forward in what they were prepared to accept and propose I think that I can say on behalf of many hon. Members, and without immodesty, that the House has also played its part in the process and encouraged them to be prepared to do what they might not have been prepared to do a few years ago. Gower and hon. Members have played their part. I hope that my right hon. Friend and his predecessors accept that There is an urgent need for a new framework of protection. Rapid changes in the City make that desirable with the arrival of financial conglomerates and because scandals, failures and uncovered positions are more prevalent in bear markets. Although I have faith that the resurgence of our economy will continue indefinitely, when it comes to investing my own money, I am prepared to bet that, sooner or later, there will be a bear market I know from experience that, in bear markets, uncovered situations and unscrupulous operators are found out and Joe Public suffers a substantial loss. It is the business of the House to try to protect the public from that eventuality. That is why I emphasise that the matter is urgent The White Paper admits that there will be no legislation before the next parliamentary Session. Such legislation will not be enacted before July next year and it will probably not come into effect until January 1987, unless the bodies are operating beforehand on a non-statutory basis I am pleased to see my right hon. Friend the Secretary of State nodding and thereby seeming to agree that he wants to put the proposals into effect as soon as possible. Many of us would like there to be a regulatory framework sooner rather than later We must frame laws and a regulatory system, but not just in response to identifiable problems that have arisen. Some fraud cases have already been referred to today. We should provide a durable and flexible regime—those adjectives are not incompatible. Much of the legislation that governs sectors of the financial market has been passed in response to crises or problems and have not proved durable or appropriate. The Banking Act 1979 was rightly passed in response to problems in the banking sector in the early 1970s, but it is now too restrictive and does not allow sufficient competition. It does not allow successful banking companies to build up their status within the classifications of banking set out in that Act Conversely, the Lloyd's Act 1982 was passed slightly before there was a major scandal on the insurance markets. That scandal showed that legislation was necessary. The House should therefore have confidence in its ability to discuss these issues. It should have confidence in its judgment and status and not leave these matters to the City on the assumption that it always knows best. The initial Lloyd's Bill was resented and objected to because it was thought that it would destroy Lloyd's as we had known it. Amendments were made about divestment and conflict of interest, and they were hotly resented by Lloyd's. Nevertheless, the House passed them and, in the light of events, those changes proved absolutely right. We have since heard some objections from Lloyd's about the Act, but the House was quite right to pass such legislation. However, times change and we should not introduce legislation just to redress the problems of the past. We should try to make it endure
I thoroughly agree with my hon. Friend. I wonder whether he is aware that the very first Companies Act was introduced in 1696 and dealt with the abuses of stockbroking
My hon. Friend has provided an interesting and persuasive anecdote, but he will know that there have been many Companies Acts since thenThe Prevention of Fraud (Investments) Act 1958 was passed when markets were much simpler and more stable. In the 1950s, when we had nil or relatively low levels of inflation and therefore much lower levels of interest, there was a much clearer and simpler distinction between an equity and a bond. An equity was regarded as a risk investment whereas a bond was regarded as a fixed investment with an assured maturity and an assured rate of interest. Whether the interest was paid or the bond was redeemed depended substantially on the view of the quality of the person issuing it. Irrespective of whether it was a gilt-edged security or a corporate bond, there was a much simpler division between debt liabilities and equity liabilities. That division has been broken down, largely because of higher levels of inflation and the increasing volatility of exchange rates Bond or debt issues are now regarded as much the same as a security or equity issue. One has to make many of the same judgments about a bond or fixed interest issue as about an equity issue. That judgment has to be about currency movements, inflation rates and comparative inflation rates. The fact that a range of debt instruments are now being marketed here and in the United States, where there is a secondary market in mortgages, shows how we have moved on since the 1950s Against that background, the White Paper rightly makes the case for proper investor protection, while trying to maintain the vitality of the United Kingdom as the world's principal financial market. We should not forget that it generates some £7 billion of foreign earnings, about 2 million jobs and about 7 per cent. of our national income. It should be the House's responsibility to ensure that that prosperity is maintained and the protection of investors improved The Government have done much to promote the City's international competitiveness already. We have removed exchange controls, dividend controls and price controls and there has been a significant reduction in stamp duty and an extension of private ownership through the privatisation programme. By no means least, the welcome changes announced by my right hon. Friend the Chancellor on capital gains tax on the futures markets will be influential in promoting the resurgence of those markets One of the problems of the futures markets is that, since their setting up, and in particular since the setting up of the London international financial futures exchange, there has been a lack of liquidity in the market and a lack of the speculator who performs an essential and indispensable role in the futures market. A substantial reason was the tax restraints on operations in that market which, as I understand it, have now been removed by the Chancellor's statement and will be incorporated in the Finance Bill. I hope that this change will bring about a substantial increase in the turnover, the opportunities and the attraction of the London financial futures markets of all sorts in years to come I believe that it is essential for the House to recognise the significant role that the speculator plays in providing liquidity to these markets, and the importance of the futures markets to the City of London and our financial system generally. Some have regarded these new arrivals as rather garnish and esoteric, but in my view there will come a time, especially if volatile international economic situations prevail, when corporate treasurers will be judged culpable if they have not considered defraying their liabilities through use of the futures markets. I believe that it is viable, essential and responsible for industrial and financial companies to consider using those markets
I agree that there has been a shortage of liquidity in these markets. Would the hon. Gentleman accept that a natural limit may be reached at some point to the amount of money available for speculating in the markets, and that the more financial futures markets proliferate in London and elsewhere, perhaps the closer we will get to that limit?
No, I would not agree with the hon. Gentleman, although I understand the point that he is trying to make. I believe that the London futures markets are ideally placed not only to grow in their own right in the organic way that I have suggested in trying to attract new business from corporate and other clients, but also to take substantial amounts of business from other international markets. If one considers the enormous growth of the Chicago mercantile exchange and, more recently, the establishment of the financial futures market in Singapore, one observes that in the American and Pacific basins there is already an enormous use of these marketsWe in this country are well placed to make specialist markets. One example is the Baltic exchange and the other is the gold market where the world price is established every day. We are ideally placed internationally to take advantage of business that arrives on the financial futures exchanges. One of the most used aspects of the futures markets in the United States is the stock index market, which enables managers of investment portfolios to defray risks of adverse movements in the portfolios under their control by hedging their risks on the stock index futures market. That has been widely used, and is very attractive and profitable in Chicago. That is exactly the sort of thing that we should be doing already in this country. We are well placed to do it now, and the sooner we can bring this about, the better. I believe that the removal of tax restraints on this aspect of business will allow great prospects for the development of these markets One of the principal aspects of the debate is whether we should have one board or two in control of the self-regulatory authorities and broadly in overall control of the financial markets in the City. As I have said in the House on previous occasions, in my judgment the arguments for two boards, or indeed more, are shallow and unsustainable. The White Paper admits that no new framework can be legislated for before 1987. In the meantime, two bodies will be developed—the Securities and Investment Board and the Marketing of Investments Board—to the stage where authority can be delegated to them. This may have been implicit in the appointment of the Martin Jacombe and Marshall Field groups, but no argument, other than saying that the bodies will be "function-based", as the White Paper asserts, is adduced in favour of two boards rather than one board There is, I believe, a suspicion that the underlying reason behind continuing to promulgate the case for two boards is a paranoia about creating any body that could be comparable to, or turned into, an American-style Securities and Exchange Commission. I believe that the reasons for this that were put forward by the right hon. and learned Member for Monklands, East are most unlikely to be valid In this country, the system of self-regulation is quite different—particularly, for example, in takeovers—and there should and could be no reasonable fear that, were we to establish one body, it would take on the nature of a securities and exchange commission I believe that there are strong arguments for one board as opposed to two as proposed in the White Paper. First, as the White Paper admits, financial conglomerates encompass marketing and investment business. It would be anomalous and unnecessarily confusing to have two boards. Secondly, the Government recognise that there will be overlapping regulatory responsibilities. Indeed, the White Paper states in paragraph 3·2:
Such an assertion in my judgment is quite inconsistent with the later admission that there would be overlapping regulatory responsiblities and that anomalies would inevitably arise Thirdly, and by no means least important, there shall be all-party support for the setting up of the board. This is important not only to avoid future uncertainty over the structure and, therefore, the authority of the regulatory system, but also to ensure that the new board gets off to a good start, that it enjoys some certainty about its future continuation and that it has the confidence of all political parties in the House One is led to the view again, perhaps for clever political and tactical reasons, that the Government have wanted to be seen to be dragged into the position where they agree to having one board rather than asserting it from the beginning. In the gentlest and most constructive way, I have to say to my right hon. and hon. Friends that the House made this view clear a long time ago. It should have been obvious from the views expressed on both sides of the House at that time that that was what the House would wear and that was the inevitable course of events. The Government should have recognised that this is going to be the political reality and that we are not going to wear a different system in law. Therefore, it should have been encompassed in the White Paper The only reason that I can see for not doing that is either the paranoia to which I have referred—that we are terrified of a Securities and Exchange Commission; or that it might be a Trojan horse which, perish the thought, some future Government of a different complexion might turn into a much more powerful controlling body. But that might happen anyway. One cannot stop those eventualities. Surely it is better to judge on the basis of fact now, consensus and what is desirable, have the courage of one's convictions and state what is right. If the whole House has agreed with and asked for it, why should the Government be seen to be resisting that advice? Therefore, I express some concern that the Government in producing the White Paper have not responded as fully as I think they should have done to the views that the House expressed. The writing was clearly on the wall in the earlier debate. Why are we now presented with a White Paper that proposes two bodies when it is clear that the House is not going to wear them and that there will eventually be one body? As many hon. Members have said, many parts of the City are themselves reconciled not only to one body, but to the possibility of that one body eventually having substantially greater supervisory powers I believe that there are narrow conceptual differences between offering and providing an investment service. What is the difference, let us say, between a merchant bank which offers its services generally to people who want to have their investments managed and place their investments with that merchant bank, which promptly puts the investments into a house equity investment fund that is exactly the same as a unit trust—that happens widely in the City—and another situation in which a unit trust actively markets its units to the public? Both are exactly the same, yet under the proposals one would come under the ambit of the Securities and Investments Board and the other under the Marketing of Investments Board. That would be anomalous and undesirable I too share the reservations about the White Paper's proposals for the Secretary of State to appoint the chairman of the Securities and Investments Board with the agreement of the Governor of the Bank of England—effectively it would be his veto—while the board members would be appointed by the Governor, presumably with the agreement of the Secretary of State. Interestingly enough, and conversely in the case of the MIB, the chairman and members would be appointed by the Secretary of State, not specifically with the agreement of the Governor of the Bank of England but generally with that of the financial sectors involved"If the law and the regulatory system are to be clear and fair there must so far as this is possible be equivalence of treatment between products and services competing in the same market."
Is not this likely to be a very similar sort of agreement to that which is required when bishops are appointed, where the appointment is by the Crown but with the appearance of agreement by other bodies? The Governor is now the servant of the state. He is a high civil servant and no longer an independent functionary. It is impossible to envisage that he would refuse his agreement in any formal way
With great respect, I am not sure whether my hon. Friend advances his case by drawing on that precedent. While the Governor may be more tied than he has been in the past, it is evident to many people who have tried to follow these matters that in recent years, for the reasons I gave earlier, just as the prudential role of the Bank of England in terms of covering the fiduciary issue and the monetary aspects of banking control has extended substantially into the equity sector, so the remit of the Governor and the Bank of England has extended in an unlegislated and unenvisaged way into the scrutiny and control of the investment marketsI am suspicious of the role of the Bank of England in these matters. I have the greatest confidence, as I hope all hon. Members have, in the present Governor and his very able deputy, Mr. Walker. But that is not the point. We are not making judgments about the ability of individuals—we are talking about the long-term future and the proper role of scrutiny. In my judgment, there is a basic distinction between looking after the banking and prudential requirements of the City of London and making much more judgmental decisions about investment markets, fit and proper rules, and the sort of organisations which should be involved in investment, insurance and so on. The Bank of England has a wholly proper responsibility in fiduciary matters under the Banking Act, but not in the investments sphere, which is much more judgmental, where the public is far more exposed, where political aspects come much more into play, and where this House, through the Secretary of State, has a responsibility to make the appointments to these relevant boards
Is not all this a fuss about nothing, and is not my hon. Friend to some extent belittling the role of the Bank of England? There are few enough people capable of taking an independent and informed view of these matters. My hon. Friend mentioned several individuals presently associated with the Bank of England. Surely they have made an important and constructive contribution to the measures that we are debating
I agree with my hon. Friend. I do not wish for a moment to underestimate or decry the great ability, experience and contribution which members of the Bank of England have brought to prudential supervision of the banking and investment sectors. However, the new investment and futures markets, and the new international aspects of those markets, are of quite a different order. As well as deserving separate supervision, they require different criteria in supervision from those which apply to the banking sectorThere have recently been problems in the United States with the Government bond market. I understand that those problems arose because of inadequacies in the supervisory system in assessing the capital adequacy of the companies involved in the secondary gilt markets. This is relevant because the White Paper makes certain recommendations about the gilt markets. If the same body looks at the capital adequacy requirements of the banks and the capital adequacy of a range of investment institutions which may deal in these bonds, there is a danger that the simple application of rules which may be relevant and prudential to the banking sector will be wholly deficient for the range of international, small and varied groups which deal in the investment sector. For this and other reasons, a differentiation is required between the financial, prudential responsibility of the Bank of England and investment and equity interests which should be supervised separately under a board or boards, as the White Paper proposes The White Paper identifies a number of duties for all investment businesses which could protect investors more adequately, such as fair dealing, fit and proper rules and disclosure. The abuses which arise from conflicts of interest within investment businesses have been commented upon and are worthy of some deliberation by this House. In my judgment, no reliance can be placed on the so-called Chinese walls—the practice of trying to keep private one part of a business from another part, of that business When one looks at the agglomeration of financial businesses over recent years — particularly the acquisition of stock broking and stock jobbing firms by merchant banks and investment companies—one sees that the opportunities for breaching these Chinese wails are infinitely greater than in the past. Anyone with experience of working in merchant banks or the financial sector will, to say the least, know that there is great opportunity for breaching so-called Chinese walls where underwriting is involved. For example, a major company could accept to underwrite a new shares issue on an acquisition, but subsequently all the clients of the Investment division could find that the next day their portfolios are stuffed with the shares of that company, supposedly for the very best of reasons, although coincidentally that investment judgment is made on the very same day as an underwriting issue is made. That happens all the time As the White Paper recognises, very little reliance should, and can, be placed on Chinese walls. There is all the more need for independent scrutiny, fair dealing and a complaints procedure which is open to investors There should be a stronger duty on all involved in the investment markets to disclose their activities. However, disclosure should not extend necessarily to naming clients in all the markets. It is important to recognise that in some markets—for example, the metal markets—confidentiality is important. Where major countries are dealing on those markets, the disclosure of identity could prove a major inhibition There will be some problems in implementing the segregation of funds as proposed in the White Paper, especially in markets which require margin payments. The principle is sound. The White Paper also refers to compensation proposals and says that one or more of three possibilities should be considered to provide compensation to investors. One is the funded compensation scheme; the second is the transferred liability scheme; and the third is insurance. Unlike the right hon. and learned Member for Monklands, East (Mr. Smith), I am much more circumspect about the funded compensation scheme. I do not think that the examples of travel agencies or insurance have necessarily been happy or proper ones. I would place much greater reliance on statutory insurance responsibilities and requirements on operating companies and also on transferred liability schemes whereby the liabilities of individual companies could be assumed forcibly by their holding companies if they were found liable it any action that was brought There is a need for much tougher penalties in regard to fraud than the White Paper proposes, particularly for individuals and not just companies. The threat of revocation of authorisation to carry on a business is not in itself a sufficient deterrent to some unscrupulous operators, and it should not be seen as the ultimate deterrent. We have to identify and hammer the individuals involved I very much support the establishment and work of the fraud investigation group, which has heavy and difficult responsibilities. I hope that Lord Roskill will come up with a more effective procedure in criminal cases of this kind. The Opposition parties should approach the recommendations of the Roskill committee with an open mind. The House has a common responsibility to find a more effective way of dealing with outrageous cases of fraud which up to now have proved exceedingly difficult to prosecute. Even when they have been prosecuted, they have involved an inordinate amount of time and public money. We should consider with an open mind any new procedures. Although the White Paper proposes certain fundamental changes in jury or other systems which Opposition Members and some of my hon. Friends find unpalatable, we have a serious responsibility, given the prevalence of substantial and harmful fraud cases in recent years, to consider radical reforms A small but significant proposal in the White Paper is the establishment of open-ended investment trusts. The corollary would be a geared unit trust—that is to say, a unit trust which can borrow money. There is a need for the public to be notified clearly what sort of fund they are investing in; they need to know when the risks are commensurately higher In regard to pensions, the House recognises that there is a need to safeguard the more than £100 billion that is invested in occupational pension schemes. Changes in trust law may be needed. The changes proposed in the Social Security Bill for accounting on the disposal of assets are welcome As to whether the pension management business of insurance companies should be treated as insurance, as it is at present, or as investments, I believe, as did Professor Gower, that logically it should be the latter. If it is not possible to bring it within that ambit, the proposal in the White Paper that it be brought within the ambit of the board should suffice My hon. Friend may be able to tell us when he is winding up whether there is a need to qualify the rules on issues and takeovers in statute law. I understand that this may be necessary under an EEC directive. The City Panel on Takeovers and Mergers has done a good job. If my hon. Friend is considering statutory changes, particularly to section 209 of the Companies Act 1948 on the compulsory acquisition of minority interests, I hope he will bear uppermost in his mind the need to protect minority interests and also the need to ensure that some of the worst practices of so-called golden parachutes — whereby directors of companies that are being taken over carve out for themselves enormous redundancy or service contract payments—are stopped once and for all. Such practices bring the City into disrepute and add further to lack of confidence With those comments, which I hope my hon. Friend will regard as being specifically constructive rather than critical, I join others in giving the White Paper a broad welcome. I wish my hon. Friend a great deal of luck, which he will need in framing legislation to satisfy the desires of the House
My hon. Friend the Member for Chichester (Mr. Nelson) has shown how skills and experience acquired outside the House can be used for its benefit. The main thrust of the White Paper that we are debating today is that rigorous self-regulation with a full range of powers will provide a fresh climate for the operation of financial services in the United Kingdom. By and large, this is a correct approach and, indeed, the only viable approach, and I am happy to support itDespite this approach to the problem, the White Paper acknowledges that things can go wrong and properly devotes a chapter to enforcement. It faces up in a somewhat limited way to the question of enforcing the new structure upon those who seek to exploit it by way of fraud. As the hon. Member for Yeovil (Mr. Ashdown) put it in The Times, they are like vermin scamping through a sewer Responsibility for the pursuit and prosecution of those suspected of criminal offences under the legislation is to be given to the Department of Trade and Industry and the prosecution authorities, which we are left to assume will be the Department of the Director of Public Prosecutions. I should like to wish them well. My only criticism—a constructive criticism—of the White Paper is that it has not faced up to the restrictions and limitations, particularly of an international nature, under which those agencies will have to operate. The Secretary of State, in an intervention in the speech of the right hon. and learned Member for Monklands, East (Mr. Smith), said that it was a matter of the law rather than resources, but I think that it is both The major commercial frauds of the '70s and '80s have shown up alarming deficiencies in our criminal codes which were drawn up before the explosion of modern technology, particularly in communications, and which have been found to be woefully inadequate to bring offenders to trial and to ensure that justice is done and is seen to be done The White Paper says in paragraph 3.2:
The difficulty in this country is that in combating the international criminal there is little preventive work of the kind that we see in other areas of crime. The reason is that the crimes are sophisticated and international. There needs to be a high degree of expertise in combating the commercial fraudster and, not surprisingly, it is not always available at local police force level The most welcome development in this country, in response to pressure for a more aggressive attitude in combating commercial frauds, was the creation by the Government of the fraud investigation group to concentrate more on the large fraud cases. The combination of experts from the Department of Trade and Industry and the Department of the Director of Public Prosecutions should sharpen some of the weaker aspects of prosecution policy, but several limitations remain Although it is not admitted officially, it is a policy of the DPP not to bring actions against criminals where the person engaged in fraud is a foreign national and where his victims are also foreign nationals. Furthermore, the criminal may also escape the risk of prosecution in the country where his victims live because that country may not have jurisdiction to deal with a crime committed in this country It has also been reported that the police do not intervene when money involved in an overseas fraud is in a United Kingdom bank. In an unofficial response the DPP did not deny such suggestions but pointed out the difficulty of getting witnesses to come from abroad and the cost of doing so. In one case the DPP paid a witness to attend a fraud trial in this country. It put him up in the best hotel at great expense, only to find that the witness withdrew his allegations against the criminal. It transpired that the criminal had returned the money of which he had defrauded the witness and the witness, being satisfied, flew back to Germany. It is obvious, therefore, that having trials with overseas witnesses will cost a lot of money. Governments must be prepared to increase their budgets for prosecutions if it is their wish to make progress in this matter Notwithstanding the introduction of the fraud investigation group, the great fear on the limitation of prosecution policy is that not only will the lack of prosecutions attract criminals to Britain, especially to London and the City of London, but that their uninterrupted operations will eventually damage the probity of British financial institutions Some police officers believe that those engaged in international fraud are already aware of the situation and are preparing to capitalise on it. Anyone would be free to come to the United Kingdom, buy a company for a minimal sum, issue innumerable cheques and commit any other type of financial crime as long as no British residents suffered any loss. There is great fear that this country has already become a haven for such criminals What justification is there for this country to spend more money prosecuting other nations' criminals? The financial services in this country make a substantial contribution to the economy, contributing more than £4 billion a year to the balance of payments and employing a million people. Accordingly, I believe that the price for receiving such a tremendous benefit to the economy is that these areas of operations, particularly in the marine world, must be more thoroughly policed and that some of the resources derived from them should be put back into the policing of them Hon. Members may have read recently in the press that the notorious fraud which evolved around the sale of cargo of the Salem N and its subsequent scuttling recently came to a head when some of the perpetrators of the fraud were prosecuted in the United States. As one of the intended victims was a United Kingdom company, it is clear that the United States is prepared to prosecute perpetrators of fraud in this country, and we should adopt a similar attitude to other countries' criminals Many steps can be taken to help the prosecuting agencies in this country. There are loopholes in our law of jurisdiction. If two people operating in this country conspire to commit a fraud which takes effect wholly overseas, they have committed no offence over which the United Kingdom courts have jurisdiction. I am pleased to say that this point is now being investigated by the Law Commission Furthermore, if the country in which the crime was carried out has no extradition agreement with this country, the perpetrators of the fraud can cheerfully carry on with their business in Britain without fear of extradition or prosecution. However, our poor image in the extradition world is now being reviewed in the recently issued Home Office Green Paper on the subject of extradition On an international level, there are positive moves afoot, primarily by the United Nations committee for trade and development, which is considering sponsoring international conventions for jurisdiction and extradition to cope with the epidemic of marine fraud which is prevalent Only by true international co-operation will the international criminal be foiled. Sadly, there is no true international police network which can get to grips with combating the international criminal. There is, however, a glimmer of hope. Interpol, despite its glamorous image, has been little more than a communications link between national police forces. It was prevented from being anything other than that by French law, which prohibited the keeping of records. This law has recently been relaxed and it is now open to Interpol to develop an international rogues' gallery. I understand that it is proposed to instal a computer to handle such information. This is a substantial step forward in creating a greater degree of international co-operation in this sphere I hope that Government Departments, and particularly the Department of Trade and Industry, will make a positive thrust in all these initiatives to protect the investor. It is not enough to say, "If the victim or perpetrator of a fraud is a foreigner, it is not our responsibility". We operate in a truly international climate and there must be a much greater effort if we are to comply with the sentence in paragraph 1.2 of the White Paper, which says:"Prevention is better than cure."
It adds that people should know that this is"All should know that they are doing business within a system which is properly regulated, where fraudulent or dishonest conduct is prohibited"
We still have some way to go before we can, with honesty, proclaim that. We are one of the, if not the, leading financial centres of the world and we must put our house in order"a clean place in which to do business."
When the House first debated this subject, on 22 November 1983 on the Second Reading of the Restrictive Trade Practices (S tock Exchange) Bill, many hon. Members, some of whom are taking part in today's debate, expressed grave reservations about the substantial changes that were taking place in the CityThe financial revolution had already started, even at that time. The development of financial supermarkets was already going on, and the technical divisions between the services which had traditionally been provided in the City by separate bodies were being broken down. The new technology had been with us for a long time and had established a completely different world in the transaction of international business New markets and services were being set up I shall refer to only two. The unlisted securities market was already successful, although it was not a particularly regulated market. There has since been established the international financial futures exchange, which provides an essential service to traders, enabling them to hedge against fluctuating interest and exchange rates With those changes came the need for improved regulation. The introduction of dual capacity, or even treble or quadruple capacity, was creating a completely new situation, and never was there a time when improved regulation was more needed in the City Such regulation, in its purest form, just about worked when single brokers, single jobbers and single fund managers dealt with one another. If one broke the rules, more often than not the others would take action. Each had his own axe to grind, and if somebody else tried to blunt it the law of the jungle would usually provide the remedy; and there is nothing wrong with the law of the jungle in that type of situation. It works well. But how could such a system of regulation work if the broker was also the jobber, the fund manager and the bank? Clearly, it could not. Something new was required Until this week, the small broking houses alone appeared to have been complaining about what was happening, while their better-heeled big brothers had been signing up with the new financial conglomerates beneficial conditional sell-out contracts. This week, Barclays De Zoete Wedd, in embryo—because that firm does not yet exist—declared its hand, not because it was concerned about the future of the minnows but because, perhaps we should say, it was honest enough to declare that, in its view, the conflicts of interest with which the White Paper was concerned simply could not be avoided The Chinese walls, whatever they were, have already started to fall down. Indeed, I wonder whether they ever existed. Whatever they were, anything less like the great wall of China would be difficult to imagine. When the insurance market at Lloyd's has, for its own protection and that of its reputation, moved towards single capacity, and when the Prime Minister has said that she is implacably opposed to dual capacity in the legal profession—that is, between solicitors and barristers—if the financial services industry wishes to move irrevocably in the opposite direction, as it clearly does, it is indeed time for improved regulation My right hon. Friend the Secretary of State is on record as saying that that is best done by allowing market forces to operate responsibly, without unnecessary restraints and in a way which promotes efficient and competitive business. A prerequisite, he said, for an internationally competitive industry was a clear, regulatory framework within which practitioners could deal with confidence and — the most important point — which safeguarded the interests of investors My right hon. Friend said on Second Reading of the Restrictive Trade Practices (Stock Exchange) Bill:
Having read the White Paper, and having heard my right hon. Friend, we must tonight consider whether provision is being made for maximum openness and transparency in dealings. The White Paper is good on general principles, but the detailed rules are still to be settled because they are to be drawn up by the two new regulatory boards There are four main parts of the White Paper to which I particularly wish to draw the attention of the House. The first and most important is the duty on any investment business to disclose in advance any material interests. We have yet to settle what a material interest is, as a material interest to Merrill Lynch might not be one to the owner of 800 shares in British Telecom Secondly, the investment business must subordinate its own interests to that of its client. Thirdly, there must always be an adequate and reasonable basis for the making of investment recommendations. Fourthly, the failure by omission or mistake will be made the subject of criminal and civil liability and lead to the withdrawal of the right to trade. That latter point is important. The right hon. and learned Member for Monklands, East (Mr. Smith) described it as a draconian remedy, but it is one which the bodies concerned must be prepared to exercise, because if they are not the measure will become weaker than it would otherwise be Can we be sure, in the new world of financial conglomerates in which we shall have to live, that those close to the market are best able to ensure high standards of business conduct? I hope that they can, but we must not assume that they will. I note that the big investment businesses will have the right to appeal to an independent tribunal on disciplinary issues. I urge that a similar right be granted to those of their aggrieved clients who are not satisfied with the decision of the regulators I welcome the terms of reference of the Roskill committee which is examining whether trial by jury and the rule of evidence are appropriate for dealing with complex financial fraud cases. This has already been alluded to by my hon. Friend the Member for Nottingham, North (Mr. Ottaway). In cases of financially complex fraud, I wonder whether the traditional concept of the man who is charged being presumed to be innocent until he is proved guilty is appropriate. This is a fundamental matter, but the Roskill committee might consider it. In such cases, the defendants are usually well-heeled individuals, and it would not be a terrible thing if the onus of proof were shifted more on to their shoulders than it is Criticisms of the White Paper are coming thick and fast, and I am concerned about them. The chartered accountancy bodies in England, Wales, Northern Ireland and Scotland have recently said that they are worried about there being too much regulation. They have said that there must be a clearer definition of an investment business than there is now. Many firms of accountants are forming themselves into mini-financial conglomerates, and I wonder what their true motives are for questioning that aspect of the matter. I think that I can suspect what they are The British Insurance Brokers Association is concerned about the disclosure of commission. It is saying not that that should not happen, but that it will mislead the client as to the quality of the policies that it is selling. I should not have thought that this was an insurmountable problem. Surely it is not beyond the wit of the efficient salesmen whom the insurance brokers employ to explain to their clients what they are selling, while not detracting from that by admitting that there is a good commission in it for them at the same time. As a solicitor, I have never been faced with this problem, and my profession has always had the rule that if we receive a commission or another benefit from somebody as a result of recommending business of some sort to a client, we have to account to the client for it as part of our financial arrangements with him The arguments of Barclays De Zoete Wedd have to be tackled head-on. It has argued that the proposals are unworkable. It is clearly suggesting that the projected rules should he diluted so that the rule that a company should act in the best interest of a client is qualified in some way. As a solicitor, I find that extraordinary. Should people be relieved of the responsibility to act in their client's best interest, which is what Barclays De Zoete Wedd seem to be suggesting? Should they be relieved of the responsibility to disclose to clients what commission and other benefits they may obtain from a principal in broking? Should they seek to pretend that they are not really carrying on investment businesses when that is what they are doing? Whatever the views of my right hon. Friend the Secretary of State about lawyers—and I know that he has some views, which he has expressed from time to time—I know that, as an honest man, he will accept that the legal profession has something to offer. Lawyers recognise a conflict of interest when they see it. It is clear enough. The concept of the conflict of interest has to be grappled with, and the financial services industry must be made to recognise it and accept that it is something with which it will have to deal. Therefore, I urge my right hon. Friend the Secretary of State to resist the lobbying of the special interest groups which want him to water down the commendable principles set out in his White Paper and to ensure that those principles are clearly reflected in the detailed regulations when they come into force I am concerned about the small specialist broker. He suffers many disadvantages compared with the financial conglomerates which are springing up all over the place, but he can provide the personal services which clients have come to expect. He has few difficulties with conflicts of interest, because he operates in a simple world and can see them clearly. If the conglomerates anticipate problems for themselves, perhaps this will enable the small man to compete more easily with them, and this would be no bad thing I know that my right hon. Friend the Secretary of State is in favour of competition. The maintenance of competition is another reason for the imposition of effective regulations on the financial services industry. Financial supermarkets must be made to conform and to conduct their affairs properly, as decent professional people have done for hundreds of years. Whatever changes have already taken place, and are still to take place, they must not and cannot relieve these institutions of their basic social responsibility"It is essential that if single capacity goes it is replaced by other protections, and probably the maximum openness and transparency … in dealings would essentially be among them". — [Official Report, 22 November 1983; Vol. 491, c. 190.]
I was interested by the speech of my hon. Friend the Member for Dewsbury (Mr. Whitfield)Normally, I find consensuses of the kind that we are seeing tonight deeply worrying because they usually mean that something is wrong. It may have arisen on this occasion because only one Labour Back-Bench Member has spoken so far
Do not encourage them
I shall not do thatI wish to apply to the White Paper one particular test that has not yet been applied — whether it assists to promote the development of the share-owning democracy. This process started in the 1950s, when many people of relatively small means became excited about the buying of shares, and became investors. The process came to a halt under the advances of high inflation, but it is now slowly on the move again, thanks to lower inflation and tax incentives introduced by the Government. The British Telecom share issue will have an effect as well. A system of practitioner-based regulation within a statutory framework is capable of assisting the process However, the rules must be clear and comprehensive and must be enforced firmly. I caution hon. Members against a system that is infested with lawyers because it will be too expensive and will definitely operate against the interests of the small investor. That is one reason why criminal penalties are necessary, and why self-regulation by self-regulatory bodies is also required We have discussed at length the two regulatory bodies proposed in the White Paper. I dissent from what seems to be the general view about that. After all, the two boards mentioned have different functions. Although they may be in the same building and although there may be some minor overlapping in their administration, I can see an advantage to the consumer in having boards or regulatory bodies that are closer to the affairs that they are supervising. In the balancing act that has to be performed between self-regulation and a central statutory control, I come down in favour of self-regulation and of more rather than fewer bodies. I was singularly unimpressed by the case put for having one body. The case adds up to it being tidier to have one body and easier for the public because they will know who to write to. Both of those things may be true but that is not a sufficient reason In practical and political terms, one such body is more likely to lead to an SEC. I was sorry that my hon. Friend the Member for Chichester (Mr. Nelson), who spoke with great experience, did not make it clear whether he was in favour of an SEC or of just one central regulatory body. There is a difference. If anyone wants to see what power an SEC operates, he should look at the system in the United States. An enormous corpus of rules, a massive amount of paperwork and a huge bureaucracy are involved. The work for lawyers is phenomenal. As part of that, there is the supervision of the courts, which is very expensive and heavyweight. If it can be avoided, and if proper protection can be achieved for the investor, it is in the investor's interest that that should be done I understand from my right hon. Friend the Secretary of State that the Government have given us an assurance that they do not intend to go down the SEC road. I hope that that is so. But I also caution hon. Members against thinking that malpractices will not occur
Perhaps I can press the hon. Gentleman further on that point. Like him, I gained the impression that the Secretary of State said that the Government did not wish to go down the SEC road. Yet even the Minister, when he questioned my hon. Friend the Member for Stockton, South (Mr. Wrigglesworth), seemed to think that a single board—which the Secretary of State has said that he would consider and might even grant—was the same thing. Is there not a good deal of confusion? On the one hand, it is said that a single board is the same thing as an SEC and, on the other, it is said that we do not want an SEC. Should not the confusion be cleared up?
There may, indeed, be some confusion. Some of those who support the idea of one board think that they are supporting a self-regulatory board, while others think that they are really supporting an SEC now, or in a few months time. I hope that my hon. Friend the Minister will clear up that point, because it needs to be clarifiedMalpractices will occur in any system. I was interested in what my hon. Friend the Member for Chichester said about the Lloyd's Bill, which I promoted. I shudder to think of the sort of Lloyd's Bill that we would have produced if we had been working in the hysteria of all the scandals that took place after the Bill had come into force. Nevertheless, I believe that the framework introduced by that Bill was sufficient to give people in Lloyd's the equipment with which to deal with the skeletons that have come out of the cupboard The system set out in the White Paper promotes a share-owning democracy, and so I give it a reserved welcome. I practise as solicitor, and therefore should declare that I have an interest in that my firm practises in this general area. The principle of a professional closed shop is essential to investor protection. We rightly do not like closed shops, but that principle is necessary in order to protect investors who do not know the ramifications of the investment that they are dealing with Investors can be protected by drawing a ring around a group of trades and requiring qualifications, in return for which those professionals are granted the privilege of earning their living within that ring. I agree with my right hon. Friend the Member for Taunton (Sir E. du Cann) that the quality of the people involved is critical. I believe that the Stock Exchange is still an example of such a ring. When looking at the reforms that have taken place in the Stock Exchange, it is important that we do what we can to preserve the central market as an essential ingredient in investor protection. There is a danger of fragmenting that central market if the liquidity of the market is not maintained, especially in the run up to October 1986, when the Stock Exchange changes come into force I have some brief points to make on the White Paper, and I hope that my hon. Friend the Minister will deal with some of them. First, will my hon. Friend give us some idea of the costs involved in the regulatory bodies? Secondly, I should like some clarification of the nature of the two boards or the one board, which he might be tempted to substitute if he listens to many of my hon. Friends. Will the board or boards be licensing or regulatory bodies? I hope that they will be licensing bodies. However, the White Paper is not very clear on that point Thirdly, page 10 implies that newspapers that talk about tips for shares will not require authorisation when they recommend share transactions. Although I am a great admirer of the press and yield to no one in that, I see no reason why it should be excluded. Perhaps my hon. Friend the Minister will consider altering that. Fourthly, there is a reference to information technology. My hon. Friend the Member for Nottingham, North (Mr. Ottaway) has already made an important speech about fraud. As information technology grows, so the types of fraud and the opportunities for fraud will increase. We do not have any idea of the widespread nature of fraud in the computer world as there is a lot of hushing up for reasons that concern, in particular, the banks and other institutions affected by them Finally, I should be interested to know how the City Panel on Takeovers and Mergers, which is a most effective body and perfectly capable of dispensing swift and informal justice, will relate to the boards set out in the White Paper. The City wants to be established as the financial centre of the world, and I see it as the nucleus of the development of the share-owning democracy that we all want to see
I declare an interest in this subject as an adviser to a merchant bankLike other hon. Members, I support the approach in the White Paper. The document aims sensibly at a balance between statutory and self-regulation. If I make some observations on possible difficulties, it will be very much against a background of warm support for the White Paper's overall principle The Government are right to build on the success of self-regulation. It is right, too, that hon. Members should record their praise of the City's record in self-regulation. Of course there have been abuses—the City contains the same mixture of human frailty and virtue as is to be found in any other group of people in any other walk of life. Abuses are deplorable, but it is fair to observe that the City has a successful record in self-regulation. This is ultimately because practitioners in the City understand that it is in their best interests for the City to have a good reputation and to be regarded as a clean place in which to do business I believe that the majority of the scandals that have come to light in recent years have been in areas where the Department of Trade and Industry was responsible for policing— scandals with respect to Eurobond dealing, commodity trading and licensed deposit takers, all of which have taken place where self-regulation has been undeveloped in the City. The charge that the Department has too often been reluctant and slow to investigate suspicious circumstances may not be without foundation The White Paper acknowledges that there is a great deal to be said for self-regulation. Practitioners who belong to the culture understand the markets in a way that hon. Members or civil servants in a Whitehall Department cannot possibly do. In paragraph 5.2 the White Paper observes:
That has already been demonstrated to be right I should like to put in a good word for Chinese walls. I am not sure whether that has been done so far in this debate. It is critical that we should protect investors from abuses arising from conflicts of interest. We must recognise that the developments that are taking place in the City, especially the emergence of new types of financial conglomerates, increase the ways in which conflicts of interest occur. The wording of paragraph 7.4—"iv practitioners are best equipped to stop breaches of the rules and take swift and effective enforcement action"
seems, however, to betray some unrealism. That statement implies that conflicts of interest can be reduced. I believe that we have to choose—we must either accept that we shall have financial businesses which are diversified and, therefore, carry with them potential conflicts of interest, or say that, for the sake of achieving a system in which the possibility of chicanery is substantially reduced, we shall not have such diversified financial institutions If we say the latter, we are going along with the policies set out in the NEC document produced some time ago by the Labour party, entitled "The Financial Institutions". We would be waving good-bye not only to the new types of so-called financial supermarkets which are emerging, but to the long-established merchant banks which for many years have combined under the same roof businesses dealing in corporate finance and in investment management and which have maintained stout and effective Chinese walls within their premises The task must be to ensure that the conflicts of interest, which could be removed only at the price of losing the benefit to investors and our national economy of having diversified financial institutions in the City, are clearly recognised, that appropriate standards of conduct are defined and observed and that effective sanctions are established. We must have Chinese walls, and we must ensure that they are high, strong and impermeable. The City has a great deal of experience in operating with Chinese walls. We should not disparage what has been achieved The chief executives of our financial institutions recognise that one of their most important responsibilities involves preserving the effectiveness of Chinese walls. No doubt, chief executives will increasingly be served by compliance officers, following the American pattern. That may be a good development. Those chief executives should also be supported in the execution of this key responsibility of external monitoring by the regulatory system which we are debating The wrong way, however, for the regulations to proceed in this is put forward in paragraph 7.5. iii of the White Paper, which refers to:"The Government are not convinced that total reliance can be placed on Chinese Walls because they restrict flows of information and not the conflicts of interest themselves"—
and says:"a duty to disclose"
Such disclosures would break the existing Chinese walls and be completely impractical, because the market will not wait while such a rigmarole is carried out. It is better to have a Chinese wall and to make it work. We must remember that it is in the interests of the financial services to have a reputation for probity. That is the best guarantee I should like to refer to the structure which is adumbrated in the White Paper. Like other hon. Members, I hope that the idea of having two boards will be dropped. I suspect the the White Paper proposes two boards because the Government were responding to the City's lead last year. It is now fairly clear that the City realises that it made a mistake There are points of difference between the securities and investments side and the marketing of prepackaged investment vehicles. The concerns in common to both sides far outweigh, however, those points of difference. If there are two bodies, there will be problems of demarcation, duplication of staff and information bases and gaps of coverage and problems of reconciliation. The White Paper proposes that authorised unit trusts should be approved by both the SIB and the MIB. It is conceivable that those two bodies might operate differing criteria and standards so that it would not be possible completely to reconcile their dual requirements. I believe that it is sensible to bring the two boards together There will be problems in attracting sufficient high quality staff who understand the markets. The problem with secondments is that firms are commonly unwilling to send their best people on secondment; the problem with having permanent staff is that those staff will not be so closely in touch with markets as practitioners. Those people will be, not poachers, but people who have turned into gamekeepers Hon. Members have referred to the problems involved in securing effective lay and consumer representation. No doubt it will be possible to persuade senior business men to serve on these bodies as representatives of consumers. But it is far more difficult to see how the small investor can be represented. How can that be achieved in an effective way? Much thought must be given to the substructure of self-regulatory organisations subordinated to the SIB. This is a matter for the SIB to work out. If, as I am sure we should, we are to establish the SIB, it is only right that it should have the time to work out those problems. I simply draw attention to some of the problems with which I think Sir Kenneth Ben-ill and his colleagues will have to grapple To those hon. Members who say that the policy of the White Paper leans too far towards self-regulation, I would observe that the White Paper leaves a very large role remaining for the Department of Trade and Industry and for other state bodies. The Department, for example, is to keep a check, via the Office of Fair Trading, on rule changes. Indeed, I wonder whether what is set out in the White Paper in that respect may not be fairly cumbrous. The Department is to check the practices of other countries and to make sure that we are in line with them in appropriate ways. The Secretary of State himself will lay down very specific conditions under which unit trusts are to operate, as described in paragraph 9.7 There is to be a regulatory web which will consist not only of the Department of Trade and Industry but of the Office of Fair Trading, EEC institutions, the tribunal, the SIB and perhaps the MIB, self-regulatory organisations, other bodies associated with other legislation, and the courts I do not criticise the complexity of the structure, because I can see the case for incorporating each of the bits in the jigsaw. I would only say that here is a lot of supervision, many points of reference, and many sources of monitoring. Here is plenty of scope for institutional and bureaucratic rivalry, and here will undoubtedly arise not insignificant compliance costs. While I do not criticise, I certainly would not agree if anybody suggested that this is a laissez faire regime; it is not We should consider, while we are debating the White Paper, what sorts of firms and organisations will be subject to its provisions. The White Paper rightly states the importance of the principle of equivalence of treatment. Paragraph 3. 2.vi states:"This would, for example, require an investment business to disclose in advance any material interest which it had in a proposed transacton, the capacity in which it would act, the fees which it would charge, the remuneration which it might receive from other parties interested in the transaction and any connection which it might have with other parties interested in the transaction."
I agree with that. However, the White Paper then goes on to exclude — unless I have misread it — some very important categories of investment management from the general approach set out in the White Paper Among the categories excluded are self-managed investment trust companies, self-managed occupational pension schemes—chapter 11, on pensions, seems to be quite the weakest in the White Paper — and the investment management activities of companies engaged in long-term insurance business. Those are important anomalies, because those are institutions which loom large in the market, and they should not escape the net. Those who are employed in investment activities within such entities are no different from and are as much subject to the frailties of mankind and exposed to the same temptations in their dealings with the markets as those who will fall within the scope of the legislation as it is proposed I believe that there should not be pockets of exemption or privilege. The people concerned should be brought fairly within the ambit of the SIB's authority, and the practical way for such entities to proceed may be to form subsidiary investment management companies which themselves would be fully subject to the SIB With regard to enforcement and sanctions, the White Paper states that the boards will be enabled to make rules with the force of law and to ensure that businesses comply with them. Stress is laid on how the boards are expected to monitor and enforce observance, and on the point that enforcement should be vigorous, but the only sanction specifically referred to in the White Paper is the refusal or withdrawal of authorisation I suggest that there needs to be a middle range of sanctions; indeed, the White Paper says that. In paragraph 15.1 it talks of the boards having power to impose sanctions up to and including the revocation of authorisation, and there is reference to civil penalties for breach of the rules of the board. But the question of the middle range of sanctions—of penalties less draconian than the revocation of authorisation—is not explored or elaborated There may be legal and constitutional problems in empowering a body such as the SIB to impose fines. Possibly that difficulty could be met by making authorisation by the SIB subject to a contractual commitment by the firm authorised to accept a range of possible penalties. However it is to be achieved, it is important in practice that it should be addressed The tribunal is cursorily introduced in paragraph 5.11, yet it is obviously a very important part of the whole structure. It is described, indeed, as a "final determinant". Its powers are said to be analogous to those of the courts. But the status, the nature and the role of the tribunal are not discussed in that one short paragraph, and I hope that my hon. Friend, in winding up the debate, will be prepared to enlarge a little on what part the tribunal should play Still in the field of enforcement and sanctions, I should like to mention the takeover panel. The White Paper invites the comments of the City. It seems to me that the takeover panel should be praised for the success that it has had in its history in exercising what has been a moral rather than a legal authority. At the same time, we should note that it is operating in a fast-changing world. That is why we have the White Paper. The code is now under almost continuous review, and the approach of the takeover panel is becoming increasingly legalistic. We should also note the modern tendency of aggressive advisers and principals involved in take-overs to hit first and take rather lightly the panel's reprimands There are obvious difficulties in doing so, but I wonder whether we should now incorporate the takeover panel in the new regulatory structure, backed by statute, while seeking to preserve its flexibility and the speed of response which has been a good part of the reason for its success It is right to provide this opportunity for self-regulation. The City knows that if it fails to take the opportunity now being held out to it, a heavier handed approach by the Government will be inevitable. The City has its chance, and I believe that it will take it. We should also do well to recognise that there will be no bouquets for anyone on the political side. The absence of abuse and scandal will create no sensation, but if we can maintain the absence of abuse and scandal, and create a framework of circumstances in which financial services in the City can continue to prosper and enhance their reputation and their contribution to our national well-being, that will be sufficient reward"If the law and the regulatory system are to be clear and fair there must be so far as this is possible equivalence of treatment between products and services competing in the same market. The law should not create artificial distinctions."
I want to make a single, wide and perhaps political point, as opposed to dealing with important points of detailI have a couple of interests to declare. I am a provincial barrister, so I am a parasite on the back of provincial solicitors I am also married to a solicitor who intermittently practises as a conveyancer. I say that because I want to look for a moment or two at the large financial conglomerates that will be created after the big bang My right hon. Friend the Secretary of State for Trade and Industry said that there had been many changes and that we had come a long way. Indeed, we have come a long way On 27 July 1983, when my right hon. Friend the Member for Hertsmere (Mr. Parkinson) announced the agreement in principle between himself and Sir Nicholas Goodison, he said that he intended to safeguard the position of investors by the separation of the functions of brokers and jobbers, and he said that the Stock Exchange would continue the rules prescribing the separation of capacity of brokers and jobbers. Yes, we have come a very long way, and I want to say a few words about protecting the small investor, and particularly the provincial investor It is now quite obvious that there is a consensus trying to put forward the argument that the problems of conflicts of interest are exaggerated and can be overcome. On the one hand, there is the ministerial argument, the loyal, necessary ministerial argument, explaining that, While the Government were previously a firm supporter of the separation of capacity, they now believe that, by various rules, it will be possible to overcome the conflicts of interest. On the other hand, within the City, whereas before 27 July 1983 everybody explained that, from the point of view of the investor, the stockbroker was more a professional than an entrepreneur, and certainly more a professional than a bureaucrat, now it will be possible to achieve the advantages of all three worlds without the investor being troubled in any way It has to be said that the advocates of that new view had substantial inducements to persuade their audiences. There is hardly a person connected with the City who is not in some way involved in the changing status of the stock market. The big institutions are purchasers of parts of stockbroking firms, and they are purchasers at very substantial capital sums. The big stockbroking firms are all sellers and, again, they are sellers at very substantial sums. I have no doubt that if I had a million quid perilously near to going into my back pocket, I would become, if not a more persuasive advocate, at least a very persistent one. Indeed, they are very persistent. They keep arguing that those conflicts of interest can be overcome by a system of Chinese walls. They may be right—I do not know. As I said, I am putting forward this argument from the point of view of wishing to safeguard the position of the small provincial investor on the Stock Exchange My hon. Friend the Member for Chichester (Mr. Nelson) knows a good deal about the details of the way in which the markets are organised. He rather doubts whether Chinese walls will work. My right hon. Friend the Member for Taunton (Sir E. du Cann) spoke rather guardedly about the advantages of specialisation, which I took to mean that he was also saying that he rather doubted whether Chinese walls would work. My hon. Friend the Member for Dewsbury (Mr. Whitfield) is firm in his view that Chinese walls will not work. He is supported by the report in yesterday's edition of The Times, in the section devoted to finance and industry, in which we find that the proposed firm of Barclays de Zoete Wedd, which is a splendid amalgamation of a clearing bank, a stockbroker and a stock jobber, says that the proposals for Chinese walls are unworkable. As The Times said, the firm is busy getting in there to make sure that the rules are changed so that it can get the advantages of either weaker or lower Chinese walls I do not know whether all this is going to work out, but plainly the Government must be taking a bit of a risk. After all, they authorised the initial move — the deal that pulled the crucial few bricks out of the dam on 27 July 1983. The Government are desperately trying to reassure everybody that that initial move, which was refused by previous Secretaries of State, is wise. Let us hope that the risk comes off. There will be great reorganisations in the City. Perhaps the new rules will work. Perhaps the new rules for some form of self-regulation within a statutory framework will work. Let us hope that they do Those institutions will have severe problems. Let us take for a moment this tripartite body Barclays de Zoete Wedd. Everybody knows the nature of the clearing banks. They are largely bureaucratic organisations. On the whole, they lend money and carry out their services according to bureaucratic rules that are handed down through the regional offices to the branches. There is nothing wrong with that, but they are neither entrepreneurial nor professional bodies. Anyone who deals with them knows that he is not dealing with the same sort of animal as the stockbroker who may have been advising his family for two or three generations, and who knows a good deal about his background and the risks that he wants to take In the same way, de Zoete and Wedd are quite different organisations. Even more different will be those organisations that are now dominated by foreign money, with different attitudes towards business and different national attitudes towards the handling of money. Those institutions will take a bit of time to settle down. Let us hope that the Government are right in saying that there will not be major scandals or problems. However, it is a risk There is an institution in our society that provides some independent advice to the Widow Twankey — the perhaps ignorant provincial investor. That person giving the advice is, on the whole, the much maligned provincial solicitor. That person used to have a theoretically indefensible conveyancing cartel. Understandably, that was attacked by the Government. They have been successful in that attack. It was not primarily the Government who broke the solicitor's conveyancing cartel. What happened was that there was an over-supply of solicitors, because it is relatively cheap to educate a solicitor. As a result, the cartel was breaking anyway. It has now broken. I am informed that in the past two years conveyancing costs have fallen by 30 per cent How could this factor of independence — the provincial solicitor—have his position further eroded? It could be severely eroded if banks and building societies were able to undertake conveyancing not only on behalf of themselves but on behalf of their clients, the customers. I do not wish to offend the manager of Barclays bank in Wolverhampton, but I shall use him as an example for the sake of argument. The manager of Barclays bank in Wolverhampton could be organising the mortgage and conveyancing for both the purchaser and the seller of the house. For instance, Lloyds bank in the Midlands also has its own estate agency, the Black Horse estate agency. There would be an inevitable and serious conflict of interest because, when solicitors do the conveyancing, they warn people about the legal problems, but they also act as an independent source of financial advice. If the work of solicitors, particularly provincial solicitors, is taken over by about 15 of those mega-institutions, an important source of independent advice will go. That is most important to the small investor If the mega-institutions rip off some of the other institutional investors, they will not rip them off more than about twice. The institutional investors have plenty of ways to check the quality of the advice and service that they receive but the small provincial investor does not. I invite my right hon. Friend the Secretary of State for Trade and Industry to read what I thought was a very good leader in last Monday's edition of the Financial Times. It dealt very well with this point When these mega-institutions have settled down. it is possible that different arguments will act upon my right hon. Friend's mind. Everybody knows that there was a dispute in the Cabinet about the conveyancing done by solicitors when the matter last came before the House. It is well known that my right hon. Friend the Secretary of State for Trade and Industry was on the side, as he saw it, of radical reform and more competition. He may wish to advance that case again. However, these very new institutions, with their untried system of regulation, ought to be allowed to settle down Although it may not be the most efficient system in the world, this independent professional advice is much valued by the small investor. The 7,500 principally provincial firms of solicitors act as a wonderful counterbalance to these large and untried mega-organisations. If we make the mistake of undermining the centres of independence represented by this large number of solicitors, I believe that we shall reap a terrible harvest if the City becomes infected with serious fraud. By the decision that they announced on 27 July 1983, the Tory Administration started all these changes and did not anticipate all that would happen. It would be very much in the Tory tradition to go slow on this issue and to make sure that we get it right before we put in train yet further changes
I apologise to the House for the fact that I shall be unable to be present throughout the debate, although I understand that my position is shared by some hon. MembersThere are possibly two good recommendations in the White Paper. I would not put it higher than that. Paragraph 10.9 says:
Paragraph 10.11 says:"an insurance broker entitled to commission from an insurance company for a particular policy should disclose that payment".
when he is representing a company. Such provisions are useful However, I share the views of the hon. Member for Wolverhampton, South-West (Mr. Budgen) who drew to the attention of the House the difficulties and problems posed by financial conglomerates in whose hands there has been a vast concentration of financial power during the past 150 years. I believe that at the time when Ricardo was a Member of Parliament there were 350 independent retail banks. There are now four major banks which account for about 85 per cent. of all business. The attention of the House has been drawn to the difficulties and conflicts of interest which would arise if they were to handle conveyancing for both buyers and sellers in individual transactions I believe that the White Paper is inadequate. The Secretary of State could have done better if he had acted in association with his right hon. Friend the Chancellor of the Exchequer. If we address ourselves to the wider implications of a framework for investor protection, it will involve a securities and exchange commission. I note that a claim is made in paragraph 5.2 on page 13 of the White Paper that:"it should be made clear to the purchaser in every case that the agent is not holding himself out as offering impartial advice"
"The main advantages of a system of self-regulation within a statutory framework are as follows:
The American market is hardly regarded as uncompetitive or as one which is not innovative. Risk capital in the United States is more readily available than it is in this country. That is not only because of the dynamism of the large internal market; it relates also to the financial institutions in the United States. Those institutions are subject to a Securities and Exchange Commission which has far more specific powers than the Government's proposals. They amount not only to a statutory framework but to the equivalent of what we call statutory powers. I believe that my hon. Friend will be dealing with this issue, upon which he has my support On the concentration of financial power, it is not simply a matter of what is happening between big and small financial institutions. The recent figures from UNCTAD show that 200 service companies — these are mainly financial service companies—account for one third of the world's gross domestic product. We are referring to financial institutions which are literally global in reach, just as the London stock market, the London insurance market and Lloyd's are global in reach. We should be operating not only within a framework of national or Community legislation but within a wider international framework within which the basic issues can be addressed and where savings — whether they be unit trusts or pensions—can be translated into investment, rather than simply providing a framework whereby money is made from more money on the speculative assumption that the growth of output and productivity in the world economy or in the British economy will ensure that those investments are safely based When these matters come back in the form of specific legislative proposals, I believe that it should be possible for there to be not only protection in the case of pension funds for individuals but a protection that is wider than the bland reference to caveat emptor or to the buyer protecting himself or herself. The Government should make it possible for local authorities or for trade unions to invest either the whole or a proportion of their pension funds in this country so as to create jobs here.One has to consider the spreading of risk. It would not be a sound financial investment for employees to invest only in their own companies, even if those companies enjoyed the stability of Imperial Chemical Industries or the General Electric Company. At metropolitan authority level it is not only wise but a very sound investment in one's own future to ensure that a proportion of the savings from one's earnings are invested in the regeneration of industry in some of our inner city areas. The Government have not dealt with this issue. I lament the fact that the Government's provisions make it extremely difficult for local authorities to ensure the investment of pension funds in their own enterprise boards or in the promotion of industrial activities which could regenerate inner city areas I support the remarks of the right hon. Member for Taunton (Sir E. du Cann) who regretted that household insurance is not dealt with in the White Paper. There have been reports of major commercial insurance companies red-lining inner city areas where burglary and theft rates are higher than the national average. That is a matter of grave concern. Giant financial conglomerates, as the hon. Member for Wolverhampton, South-West described them, can spread their risks across the country as a whole. If there is any justification for the domination of the market by companies such as Commercial Union, Royal Exchange, and so on, it should be that by spreading the risks they also spread the cost to themselves rather than imposing higher rates on people living in inner city areas. Many people in areas such as mine simply cannot meet the ever-increasing rates for reinsurance Some leading insurance companies are also delaying payment of claims in inner city areas for considerable periods. I have been told that a person putting his foot through a garage roof in Surrey can expect to receive a cheque probably within 48 hours and certainly within a week without any inspector calling whereas claims from residents in inner city areas are subjected to evaluations, re-evaluations, delays and procrastination. Caveat emptor may be very well, but the buyer is in a very unequal situation vis-a-vis the major insurance companies. Buyers cannot bargain with the companies about the terms on which the service is to be provided—I understand that one leading company has simply decided to reduce if not fail to renew certain types of inner city insurance—but the companies are bargaining about the terms and the times within which the service will be provided Finally, on pension funds and investment, I urge the Government to bear in mind the effect of the liberalisation of exchange controls, to which they so casually and even flippantly refer at the beginning of the documnent as "a boon". Paragraph 2.6 states:i. it offers the best possibility of combining adequate investor protection with a competitive and innovative market."
In fact, since the controls on foreign exchange were ended £50 billion has left this country for investment abroad in the industrial modernisation of our competitors. That is some 10 times the amount of investment in British manufacturing industry in the same period. The White Paper is sub-titled"The Government have taken action to improve the climate for enterprise. Price controls have been ended. Controls over dividends, foreign exchange transactions and lending on hire purchase have been dismantled."
But the the ultimate framework for investor protection is a framework which protects our own investments by investing our own funds in our own industry and economy. If the Government do not address themselves to that, and if they cannot ensure that the financial institutions are really accountable to people in this country, they will pay more than a financial penalty when they come to the polls"A new framework for investor protection."
I congratulate my right hon. Friend the Secretary of State and his colleagues and also Professor Gower not just on the White Paper but on the excellent work behind it. The debate has been calm without any of the heat or games of musical chairs that occurred yesterday. Too often, the heat generated fails to serve the nation as we claim to serve it. Today's debate, however, has been almost as calm as some people regard company law. Some even regard it as boring. I disagree with that view, but I have to declare an interest as a company lawyer. The debate has also been a far cry from what Professor Clive Schmitthoff described as the panic-stricken Parliament which, early in the history of company law, repealed the South Sea Bubble legislationThe White Paper brings up to date our recognition of the sophistication of the modern city, its institutions and its new products as well as an appreciation of the dangers for the unwary or inexperienced investor. The Government have a duty in this area. They have done more perhaps than any other Government in history to promote individual investment, bringing millions of people into share ownership. Those holding investments for the first time may wonder what it is all about. One thinks of the people who perhaps fell prey to some of the clauses in the British Telecom prospectus because they did not read it carefully enough. Having offered people that temptation to invest, the Government must now lead and guide them in the ways of investment and of the City. There is nothing frightening about the City or the world of investment except ignorance. In that respect the White Paper does a great service, especially to new shareholders In today's world there is a greater interest in the world of investment and financial matters. Television programmes have never been better. The "Money Programme" has reached new highs of late because more people watch and criticise programmes of that kind and the television companies want to reach a wider audience. The Times Portfolio, too, has brought many people into daily contact with the Stock Exchange share list. Not having won a penny so far, I wonder about its usefulness in my area and I certainly have no interest to declare in that respect. The White Paper hits the nail right on the head when it states:
but that we need"Regulation cannot eliminate risk. Profits and risk run together. Investment … entails taking deliberately considered risks"
In that context, I welcome the requirement for increased publicity in many areas, especially in relation to the independence of advice, and particularly with regard to commissions. The hon. Member for Vauxhall (Mr. Holland) is absolutely right. We need to know about the independence of advice to assess whether it is tainted by the prospect of commission. It does not matter if an adviser receives a commission, so long as it is both disclosed in percentage terms and quantified in amount. That is a strong and very welcome provision in the White Paper Professor Gower, in his excellent and most readable book on modern company law, reminds us that publicity is the most potent safeguard against fraud. For the benefit of my colleagues in the alliance, I should point out that I believe that that observation was originally made by Gladstone. Nevertheless, it rings well in Professor Gower's book. Publicity is indeed the most potent safeguard against fraud. That is why the phrase "open and above board" means so much, especially for those who trust in self-regulation The main question, however, must be whether the White Paper has got it right. As a chartered accountant specialising in company law, I am often accused of wanting ever more company law. I am indeed a member of a small and passionate band of people who believe that a copy of the new consolidated Companies Act should be placed in every hotel bedroom, if only to encourage sleep. That is one of my little quirks. I believe that there is a need for guidance, not for too much legislation. Too much legislation leads to eradication of legislation through boredom and ignorance. If there is too much law people ignore it, and if it is too difficult and costly to ensure that the law is enforced people turn away from it The White Paper provides for a statutory framework within which professional self-regulatory bodies wall work. I believe that that is the right balance. It keeps the law to a minimum. I mentioned earlier that Parliament's first venture into company law was in 1696, against the abuses of stockbroking. That law was brought in because it was desperately needed. Law has been created as it has been required and not always in panic, as in the case of the South Sea Bubble. The process can go too far, but I believe that the White Paper creates the balance and the trust that is needed in self-regulatory bodies. I believe that that trust is well placed. I should declare an interest as a member of three self-regulatory bodies. All three happen to be exempted by these provisions. I am grateful to my right hon. Friend for that Self-regulation has stood the test of time. However, coupled with the trust that self-regulation has to command, there must be a rigorous enforcement of the regulations and a powerful and public back-up by the Government in the form of actions for personal compensation or even criminal behaviour There must be no quiet, gentlemanly deals when the regulations are breached. There must be full public exposure of those who break the responsibilities of trust which they have undertaken, and who lower the standing of their colleagues and damage the public's faith in them. The exempted bodies, too, if they breach the trust that we put in them, should be accountable Law is needed to give guidance to those seeking to invest, those who actually invest and those who seek to live off the proceeds of investment. Some people want more and tighter legislation. Some believe that the Stock Exchange is no more than a glorified betting shop, with better clothes and better accents. They are wrong, because they do not understand the benefits that derive from betting shops. Without on-course and off-course betting we would not have the bloodstock industry which is one of our great export earners. Without the Stock Exchange, there would be no encouragement for the private investment that is vital for a healthy economy"to reduce the scope for losses resulting from fraud, or from Ihe concealment of risk."
It is late at night, and my hon. Friend may be tired, if not somewhat temperamental. However, is he suggesting that the Stock Exchange is no more than a glorified betting shop? If so, as a chartered accountant, he should go back to his textbooks
It may be late, but I do not feel temperamental. Perhaps my hon. Friend is tired and that is why he did not quite hear what I said. I said that some people feel that there is little difference between the two institutions. I denied that suggestion vehemently. Without a healthy Stock Exchange, and healthy brokers and jobbers working within it, there would be a tremendous failure of private investment. We need private investment. We need a healthy and well-regulated Stock Exchange. I believe that the White Paper will create itI welcome many parts of the White Paper. I welcome the freeing of unit trust restrictions, separate clients' accounts for money and the disclosure of commissions. I do not share the fears about the two bodies, the Securities and Investments Board and the Marketing of Investments Board, which some hon. Members have expressed. In his excellent speech, my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth) outlined the problems of the two bodies. I believe, however, that setting up those two bodies will be the best way to get the regulatory process off the ground. The White Paper clearly allows for the two bodies to become one if the demand and the need are there. That admirable flexibility is a trait of the White Paper I have a few regrets. I am sorry that cold calling has not been banned. I believe that a cooling-off period is the best way of dealing with cold calling in matters such as hire purchase credit transactions, where the person at home can assess the value and the cost of the product, and the total liability. It is difficult to assess long-term undated investment contracts and I therefore think that cold calling in that sphere should be banned Unsolicited telephone dealings should also be banned. These are not mentioned in the White Paper. Telephone calls by those seeking to sell financial services are an intrusion in private life from which more and more people are suffering. At best, the practice is an annoyance; at worst, it is a personal threat I also regret the lack of wider lay representation within the regulatory framework. I regret the lack of an independent body to deal with complaints by investors. There should be, perhaps, an independent ombudsman or observer to deal with the many complaints that are bound to arise over the years. Many complaints from members of the public will not be the result of misdealing. The losses will be the result, not of deliberate fraud, but merely of the pitfalls of investment. The news that the investor has simply had bad luck might be better received if it came from an independent adviser rather than from someone directly involved in the investment business. There is no guaranteed profit in investment Despite those few regrets, I welcome the White Paper and the legislation that will flow from it. The legislation will be modest, but its importance will be great
I should declare a somewhat tenuous past interest. Many years ago I was a junior employee in the corporate finance department of a major merchant bank. Years later, I emerged as one of its smaller customers. The latter experience was considerably more enjoyableI welcome the White Paper as an imaginative and constructive initiative that will serve the City well if it aspires to continue as one of the world's foremost financial centres Like other hon. Members, I wish to talk about Chinese walls. Earlier in this Parliament, when my right hon. Friend was able to tell us that the council of the Stock Exchange had come to terms with the desire of the Director General of Fair Trading for fundamental reforms in the operation of the stock market, it was inevitable that the pace of change in the City would quicken. Minimum commissions would have to go, and dual capacity would become a fact of life; the number of mergers that crossed specialist City lines would increase and the foreign finance houses would rethink their strategy for the London market. There have already been many signs that the City is on the move Against that background, it was essential that there should be a thorough review of the changing structure of financial services and of the need to protect the private investor, the investment institution and the corporate trust market. In a state of rapid change, the City needs to demonstrate that a practical and effective regulation exists that has the confidence of its own practitioners, domestic and foreign, of all its customers and, of course, of Parliament The White Paper does much to point the way to an appropriate system of regulation. The Government's welcome intention to introduce legislation fits in well with the many other steps that they have taken since 1979 to improve the climate of enterprise and competition in this country. The White Paper has special credibility because it recognises the growing use of new technology in the City and the emergence of new market mechanisms such as the unlisted securities market and futures trading The day of the financial conglomerate, or financial supermarket, has arrived, bringing with it dual capacity. We must strike a careful balance between the dangers of over-regulation and those of leaving every investor vulnerable to market abuses One area of the White Paper requires further amplification. The White Paper touches only fleetingly on the core of one of the City's principal bases—merchant banking. I am thinking especially of the inter-relationship between the huge sums quoted in invested securities and the advice given by merchant banks to corporate customers whose securities are at least in part the object of that huge investment — in other words, Chinese walls. It is surprising that there is no attempt in the White Paper to highlight the modus operandi of the merchant banks. I do not think that the merchant banks are mentioned at all. The leading merchant banks, especially the acceptance houses, run billions of pounds worth of investors' money under their own management in the form of pension funds, unit trusts and private accounts. They also provide corporate financial advice, and many of them have active banking departments putting together commercial credits. They therefore fish with three or more lines in the same pond The new conglomerates will have even more lines in the pond. Some people in the City ask what would be the reaction of an investment institution — say a pension fund—if it was approached by the department of such a conglomerate which makes the price in, for example, ICI, and is persuaded by that department to take a line of 1 million shares, only to hear the next day that the same conglomerate's corporate finance section is announcing a rights issue for ICI. We shall see what happens—it is bound to happen sooner or later It is said that some 50 investment managers in the City now run 65 per cent. of all of the funds under management, and many of them are attached to major merchant banks. No doubt they are expert and responsible, but we cannot escape the fact that, Chinese walls or not, they come under the same parent company umbrella as the City's leading corporate finance practitioners. Although not every merchant bank with a large investment department is necessarily prominent in corporate finance, the converse is true. No merchant bank which takes a leading role in corporate finance does so without its own large investment department, and the placing power that such a department brings. For all the arm's-length arrangements which merchant banks might honourably devise, the influence that they can exert as lead underwriters is in direct proportion to their unquestioned ability to take a large piece of the underwriting in any market exercise. That is not necessarily a bad thing as we need the investment muscle of the large City underwritings — the recent example of British Telecom springs to mind Bearing in mind the fact that the price of a share on an offer for sale, or the price at which a rights issue is pitched, or the exit price of a share in a takeover offer—which is of real interest to every investor in those shares, small or large — is fixed by the corporate finance advisers in merchant banks which, very likely, have large equity positions of their own in the company concerned, it cannot be right to set aside the possible conflict of interest The White Paper acknowledges that problem implicitly in paragraph 7.4, and it is right that the subject has been given greater emphasis in today's debate. The White Paper also refers to the regularising of offer documents. I understand that, at the moment, there is no requirement on a merchant bank adviser to state in the notes to an offer document what number of shares that bank's investment department holds in the company which is the subject of that offer document, unless it holds more than 15 per cent. Nor is there any requirement, when fixing a merchant bank's fee for a corporate finance transaction, to throw any light on the bank's equity interest, directly or indirectly, in that client company I know that corporate finance fees are subject to their own magic formula. I suspect that it is simply a matter of what the market will bear. It boils down to the ability of that merchant bank to get an underwriting under way. That comes back to its placing power and therefore to its investment department. So much for Chinese walls. It should be remembered that all those fees are of at least indirect interest to every shareholder in the company concerned. My fear is that, unless forthcoming legislation probes more deeply into the potential conflict of interest between corporate finance advice and investment management in the same organisation, there will inevitably be circumstances in which the ordinary investor is given a raw deal by what amounts to the City's own brand of collectivism. That will lead to demands for an end to self-regulation, and the end of imposition of an SEC-style operation. That would be a retrograde step I should like to direct a question to my hon. Friend the Minister concerning paragraph 13.9 of the White Paper, which is about section 209 of the Companies Act 1948. The White Paper says:
As a principle, that makes a great deal of sense, but I should like to give an example. If a company acquires up to 14·9 per cent. of another company in the stock market and, acting in concert with other parties, builds up a stake of 29·9 per cent. and sits on it, when it bids for the offeree company, it will be bidding only for the outstanding 70·1 per cent. of that company as it has effectively previously taken the other 30 per cent. out of the trading arena for some time. If the proposed change means that the company must then bid for the 90 per cent. of the remaining 70 per cent.—another 63 per cent.—that will bring the acquired total to 93 per cent. of the company before section 209 can come into play If that is the right interpretation, my right hon. Friend is making an excellent proposal. However, I draw his attention to the subsequent interests of minority shareholders if they should wish to draw attention to affairs in the company by requisitioning an extraordinary general meeting. I understand that the Companies Act now requires that an extraordinary general meeting can be called only if 10 per cent. of the shareholders want it. If, as a result of changes in section 209, there will he an outstanding balance or minority of just 7 per cent. of the shareholders, does my hon. Friend think it right that they also should have the right to requisition an extraordinary general meeting if they want to highlight various aspects of the company's operations? I hope that my hon. Friend the Minister has borne with me during that rather convoluted question. I look forward to his answer. Like other hon. Members, I hope that he will think more carefully about Chinese walls"The objective is to ensure that the 90 per cent. majority whose assent to a take-over enables the minority's shares to be acquired is genuinely independent of the bidder"
I feel humble and grateful for being allowed, as the only stockbroker to have been in the House throughout this long day, to say a word on this financial paper which so affects the Stock Exchange. I am sure that it is proper that those who have discussed the matter first shall be the last to be consideredChanges are obviously necessary and we are living in a time of change. Lloyd's has been changed, as have estate agents, building societies and banks. Even solicitors are being asked to change. Needless to say, the sole group with a great interest and which affects the country and has not been asked to change is banisters. They are not being asked to change their habits, which are so expensive and which afflict and affect the country, because the House, and that other House along the corridor, is bulging with barristers. Perhaps they will be harried into a new world in due course, along with stockbrokers, solicitors and accountants. The sooner they are, the better, because it is there that the change is most needed if those people who seek justice are not first to court financial ruin in protecting their reputations or their businesses With the Government hurrying along because of promises rashly given about the future of the City and modern technology and communications now at the speed of light in a worldwide sense, it is right that the City of London, which in my view has always accepted change in the sense that it has usually led that change—and it is still the centre with the greatest name for integrity and inventiveness—is willing to join in the changes of the world. If the City of London does not compete, it will undoubtedly die, and, happily, it is in no mood for that We should be aware of some of the implications of the White Paper which the City as a whole and certainly I think has much to commend it. It is not a matter of the City being worried that commission rates will be changed. It is of course right in today's world that people should be able to challenge and to deal with a broker or an agent of their choice so that they can negotiate commission. I hope that when a Bill is presented there will be discussions with the Stock Exchange and the City in general of what is best for the people. This means the small investor. The big investors throughout history, like all big men, whether they be barons or landlords, have always been able to take care of themselves. When people like David Hopkinson of M & G, one of the greatest originators of the unit trust industry, and Cholmeley Messer of Save and Prosper—two great companies that have stood astride the growth of the unit trust business and for its small investors—say that they doubt whether any of the proposed changes, including the reconstitution of the Stock Exchange, are in the interests of the private investor, at our peril do we ignore the warning It is not just self-interest. If to be self-interested is to be at fault, the House would be ever silent and in darkness, for all hon. Members are in Parliament to comment upon one interest or another. The great interest that all hon. Members are here to debate is that of the people at large One matter that worries the Stock Exchange and the City is that the Government, in their anxiety to rush into the new world, are showing a complete lack of willingness to support the Stock Exchange against the fragmentation of the central market. They have refused, I think regrettably, to make sure that, when the change-over takes place, it happens in an orderly manner. I believe that it will be disastrous to the future stability of the market if the Secretary of State for Trade and Industry continues to stand on one side and does not allow an orderly transition to ensure a true stability in the market I believe that we are now entering a period of a framework that is made for the thundering herds of finance. It is not made for the small flocks. It is made for the great conglomerates and those who in my view will become a kind of supermarket of the financial world In the debate in January, I commented that, although one welcomes change, the worst outcome is that power might be concentrated in the end in a few great hands. We have now built up in the country a system of four great banks. As we are now proceeding, I believe that we are likely to end up with four great constitutions which will stand astride the financial world, and that people will be able to deal only through their grace and favour We are now entering a period of dual capacity. It cannot be right for a man to be able to act as an agent and a principal, because when times become difficult I do not see how integrity will survive that We can talk of Chinese walls, Hadrian's wall or any other walls. That can be done when markets rise, because everyone makes profits and everyone is happy, just like a children's party where everyone gets a prize. But markets will fall again. The whole basis of life is an ebb and flow of prosperity and division. When they fall 100 or 150 points, what price then our Chinese walls? They will be looked upon as walls of glass, because people are willing to believe only what is in their own best interests. If it applies to politicians, why not to those with their own financial interests? I prophesy that dual capacity will cause more trouble and heartaches, and that my betters who have paid ridiculously fancy prices for City firms and stockbrokers, when we have nothing to sell but our expertise and reputation, will find that they have paid too much for too little and that it will take them too long to recoup their losses Those who have sold will have to justify the prices which people have paid. That is how integrity will be endangered. How will the small investor be protected under such a system? The big man will be fine, because his feet will be firmly planted on the ground. But if the investment world is to mean anything, it should mean something for the small and average investor If a dual capacity firm is suddenly willing to sell shares, then, as with a man who protests his honesty, one should quickly hide the silver. Instead of a willingness to sell something, why not keep it to pass on to their clients? That can only lead to mistrust Many people believe that dual capacity is a great danger to the integrity of the City. They should wait until the next bad market and see how things stand then. It is all very well to be asked to keep to rules, but such rules should be made not of string but of steel wire. If the City is to retain its integrity, it must prove that such integrity is soundly based, as it has been up to now The passing of stock from one internal pocket to another must be unacceptable unless deals are declared there and then, from whom they are sold and for whom they are purchased. It is not that the City of London fears changes in commission, rather that one must be able to prove one's integrity. At present, one man is a dealer or agent and another is a principal. Now that all these conglomerates will come in, we must be much more careful that the rules are more solid and visible It now seems that the Government securities market will be part of this blancmange which we shall try to pin to a wall. In America, four firms have gone to the wall trying to give the so-called Government a so-called better deal. They thought that they had gone bust for $58 million, and were therefore bought in. In fact, the sum turned out to be $540 million, and they are still counting. Small movements of money make vast differences in profits. Hon. Members should think on that In the end, hon. Members are responsible to the people who elected them. When we start to create precedents it is like an earthquake causing cracks into which men can disappear. If we create the precedent of giving an outside body, however quasi-governmental it may be, the right to disagree with the House about an appointment, we will make a great mistake This is not personal. The present Governor of the Bank of England and I are friends and, I hope, will remain friends. I am concerned about the principle. Principals know no friends bar those that they represent. However much good may be in the proposed legislation, there should be a provision in it about consultation. There should not be a provision whereby the House gives to an outside body the right to say that unless it agrees the Government may not appoint Parliament is paramount. No man who is not elected should have the right to say nay to the House. Let us stick by that. Whatever else may be wrong with the proposals—and there is much right in them—what cannot be right is to surrender one ounce of power. Once Parliament makes one exception to the rule, another Parliament may say that, because the pass has already been sold, it can be done again and again. Outside bodies may consult as much as they wish but in the end only Parliament can consent
The debate has revealed a perhaps surprising degree of consensus about the White Paper. Although, as I hope to demonstrate, that does not preclude significant differences of emphasis and perhaps different conclusions, it is possible to give a guarded welcome to the White Paper, and I add my voice to those who have already done so. I believe that that is possible because both the Government and the City have moved substantially over the last year or two towards the position which I and my hon. Friends, and some other hon. Members, have held for some timeThe starting point for the debate, as I think was recognised by the hon. Member for Beaconsfield (Mr. Smith), was the concern about the level of fraud in the City. That concern prompted the invitation to Professor Gower to write his report. The concern was directed not only at the level of City fraud but at the consequences that it had on investor confidence in the City. It also raised major question marks over the satisfactory nature or otherwise of the supervision that was exercised in the City. We have seen one institution after another damaged. Lloyd's was one example. Perhaps the most recent example was the Bank of England as a result of the Johnson Matthey affair The Government may be in the process of grappling with these problems. Certainly they are trying to ensure that frauds are brought to the light of day and that the transgressors are properly dealt with and brought to court, but so far the record has been extremely discouraging. The Roskill committee may produce remedies for the admitted difficulties of bringing complicated matters to court for jury trial. The fraud investigation group may be more successful in obtaining evidence of fraud. I think that the Government Front Bench is at one with me—certainly replies to me suggest this—but in the meantime grave damage is still being done to the reputation of the City through the consistent failure to bring to court those who have clearly committed criminal offences of substantial dimensions I hope that I shall be forgiven for making the political point that many on the Labour Benches will contrast that ineffectiveness with the zeal—the excessive zeal, one could say—with which the Oxford police rounded up some of the most defenceless and vulnerable people in society to prosecute them for trivial social security frauds Given that we recognise the need for dealing with City fraud, we support both the Gower report and the White Paper in their attempt to provide a statutory framework for all those carrying out investment business Another major factor underlies what is happening in the City and should illuminate what is in the White Paper, and on this point I offer a more robust voice than has been heard so far today. Ever since Professor Gower was asked to write his report, a frantic degree of change has set in in the City. That degree of change can, for convenience sake, be said to have begun when the Secretary of State's predecessor did his deal with the chairman of the Stock Exchange I think that I have the support of the hon. Member for Wolverhampton, South-West (Mr. Budgen) in saying that that deal, when it was done, was seen as a means of buying time, of preserving the status quo, so that the institutions, in particular the Stock Exchange, could phase in what by then were recognised as inevitable changes. Nobody quite foresaw the speed with which the changes would suddenly materialise once it became clear that the keystone in the arch, the minimum commission, would be removed at a foreseeable and specific date.
I gather that the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) is also claiming prescience in this matter. As soon as that change was foreseen, it became clear that single capacity would go, that the rules against outside purchasers would go and that an immense rush for change would take placeWe are speaking, not of something in prospect, but of events which have taken place and are occurring now. I obtained from the Stock Exchange today a list of over 50 major members who have been subject to purchase from outside the Stock Exchange. Thus, it has already happened on a major scale, with outside purchasers buying jobbers or purchasers and, in some cases, both That impetus to change has been reinforced by the tremendous new activity of foreign institutions in the City of London. That, in turn, was produced by the removal of exchange controls in 1979. Whatever its merits or demerits, that factor alone has created a wide open capital market in London, and that is now just one part—one time-zoned part, as it were—of an international market In addition, we have had the technological changes to which hon. Members have referred. They have meant that, through electronic communications, information can be transmitted in seconds around the world. The result has been a huge change, which has not necessarily yet been grasped, even by those who are most directly affected by it We now have the prospect—positions have already been taken up in anticipation of what is to come—and even the certainty that the City of London will never be the same again. It will be dominated by huge international financial conglomerates which will do everything. As I say, they have already bought jobbers and brokers, they are themselves in the business of offering investment management and advice and they offer the whole range of financial services. As the hon. Member for Bexhill and Battle (Mr. Wardle) made clear, the possibilities for conflicts of interest within those conglomerates are immense, and I shall return to that point In addition to that element of change, as hon. Members have pointed out, all sorts of new business is being developed at a rapid pace in the City The hon. Member for Chichester (Mr. Nelson) paid particular attention to the futures markets. Even this week, the Baltic Exchange introduced a new futures market in international freight futures. There are prospects of futures markets in diamonds, ecu's and all sorts of things. In addition, there are new developments which are less welcome. Some attention is being paid to what are called boiler-room operations, operating out of centres such as Amsterdam, where hyped over-the-counter deals are being offered to British investors who, unless they are extremely careful, will be taken for a ride. There is little in the White Paper to suggest that we have got to grips with that problem, although it is a different one The nature of bodies such as the Stock Exchange will change fundamentally, both internally —I look forward with some interest to the outcome of the substantial battle to be resolved on 4 June — and in relation to other institutions and other operators in the market. That is because some major operators, if one is to take at face value what the Stock Exchange says, will be excluded —the major Japanese institutions, for example. Others will choose to be outside the Stock Exchange. We have already seen Robert Fleming making a market in electric shares and the Stock Exchange looking to the Department of Trade and Industry for some support in that matter
The Department told it to get lost
That shows that we are in a new ball game. If that is true of the Stock Exchange, how much more true is it of other potentially self-regulating organisations which are not as well-established as the Stock Exchange; for example, the National Association of Security Dealers and Investment Managers? I say that not to denigrate NASDIM but simply as a matter of fact. If the Stock Exchange is to be rocked to its foundations in this way, how will NASDIM and self-regulatory organisations yet to be established fare in the face of the massive changes?I do not believe that the Government, the White Paper, or even some elements in the City, have grasped the scale, the pace or the unpredictability of the change that is taking place. The old safeguards have gone. There is no point in looking back, as I suspect the hon. Member for Stratfordon-Avon (Mr. Howarth) was tempted to do, to the old clubby atmosphere, the old institutional safeguards and the old self-regulation, which passed, to the satisfaction of some, as adequate protection In a vast open international market, dominated by major institutions, all of which are competing fiercely with one another, with no loyalty to any interest other than their commercial interest, that old system is far less appropriate. In those circumstances, as the hon. Member for Selly Oak pointed out, the small private investor will simply be squeezed out To some extent, the City has not recognised that this new situation will change the whole nature of the business which the City institutions will be doing. In the past, the City offered expertise in a particular sector, different bits of information, continuing relations with clients, bits of gossip put out here and there; in other words, the ability to provide personalised, specialised advice to particular people in particular circumstances. That is no longer to be what the City should offer. If that is what it does offer, it will be swept away. What will now be at a premium in the City is speed, efficiency, the power of the institution, price competitiveness and the comprehensiveness of the services. All these are quite different from anything that the City has so far contemplated or seen itself as offering to its clients In those circumstances, the investor will no longer rely on his knowledge of the person with whom he is dealing, the relationship that he has built up or the assurances that he is given. What he needs above all, if he and his interests are to be protected and if his confidence is to be maintained, is to be able to identify legally enforceable rules, and the institutions and mechanisms that enforce those rules. That, therefore, requires the maximum amount of disclosure and transparency and the greatest possible separation of interests We are talking about increased competition, but, as my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, that is not to be regarded as an alternative to regulation. To some degree, the Governor of the Bank of England has featured in this debate, and he recently suggested that he saw competition as meeting the tasks which regulation might fulfil. I simply do not accept that. In the new situation which I have attempted to describe there is an even greater need for regulation In that highly competitive situation, the small investor in particular will need such protection. Self-denying ordinances, in-house guidelines and Chinese walls will not be enough. I have often asked about the origin of the term "Chinese wall". I have never been given a satisfactory answer, but it conjures up a picture of one of those self-standing partitions or silkscreens through which one cannot see but can hear everything. I rather doubt that that is adequate I have an example which illustrates what we may be faced with and how the City does not yet grasp what will be required of it. I tabled some questions concerning the allegation that members of the team at Kleinwort, Benson who handled the BT share issue had themselves dealt in those shares. I was eventually given an answer in which it was conceded that that had, indeed, happened. The Minister's explanation was that those involved were in a different position from civil servants. Some of the financial journalists said that, because of the limitation on the number of shares to be allotted, the most that any individual could make was a few hundred pounds, but that was an inadequate response We are concerned with a matter of principle and with a prime example of the sort of conflict of interest that will bedevil the City in future unless adequate steps are taken. I cannot accept the argument that a few hundred pounds is only a small amount and does not really matter. In future, Kleinwort, Benson, for example, may not be operating within those constraints when dealing with another share issue, and there may well be the real possibility of substantial sums of money being made. But that is not the real point. The point is that we have a City institution offering financial advice and expertise to a major client for a fee, while at the same time dealing in the market. That sort of thing gives rise to great unease and to justified scepticism about the extent to which self-regulation in the City will do the job required of it There is now a clear and pressing requirement for the utmost simplicity, clarity and directness. The White Paper has simply missed an opportunity. It is remarkable that it has gone as far as it has done. Assuming that there will be one board rather than two, I suspect that the White Paper sets up what ultimately looks like a statutory commission. In some ways it is a rather clever device for propitiating the City. Perhaps I am not doing the Secretary of State any favours by blowing his cover, but I think that that is what he is up to. Ultimately, even the cosmetics which may be involved get in the way of that overwhelming requirement for the maximum simplicity, directness and clarity To judge from the proposals in the White Paper, it is clear that to some degree we are offered, as my right hon. and learned Friend the Member for Monklands, East said, a hybrid structure and a muddled compromise. Almost every hon. Member who has spoken, and almost every institution in the City, has condemned the proposal for two boards. With one or two exceptions, people agree about dropping that idea in favour of one board, but even then we are left with a remarkably complex structure I should like to reinforce some of the telling points made by the hon. Member for Stratford-on-Avon. Let us consider the situation of an insurance company which also manages pension funds. It may well be required to obtain authorisation from the Securities and Investments Board or the Marketing of Investments Board. It will be under the supervision of the insurance division of the Department of Trade and Industry. It will have to be authorised in some respects by the self-regulatory organisation—whatever it will be—which will regulate that part of the industry. The company may wish to obtain direct authorisation from the one or two boards which will then exist. On top of that, there will be the appeal tribunal, the Office of Fair Trading, the EEC and all the other institutions and rule-making bodies to which the hon. Member for Stratford-onAvon referred. That is far too muddled, complicated and messy. It is certainly not what is required in the maelstrom of change with which we shall be confronted We entirely agree with the point made by the hon. Member for Selly Oak about the veto power of the Governor of the Bank of England. The hon. Gentleman referred to powers of appointment, especially in relation to the MIB. This illustrates yet another objection to the Bank of England's involvement in this matter. As some hon. Members have said, the Bank of England is hardly appropriate as a supervisor in any capacity. It is a major client of the City. It is already involved as an interested party. The Bank of England can hardly be expected to exercise major supervisory functions Hon. Members have referred to the number of lay or independent members of the board. I hope that the Secretary of State will read the debate and note that we hope that investors and consumers — not just professional practitioners — will be represented on the SIB. Appointments to that board have not yet been announced I believe that Professor Gower would wish to highlight another weakness in the structure proposed in the White Paper. The delegated powers which will be exercised by the boards will not, in turn, be available to the SROs. The control exercised over individual firms and practitioners will be extremely diffuse and indirect. That is an aspect which we shall want to examine carefully when the legislation comes forward When we see the detail of the legislation, we shall consider its scope, including the types of investments that will be covered. A rather curious recommendation in the White Paper would allow unrestricted unit trusts to be sold in certain circumstances to clients on a "know-your-customer" basis. That is an extremely dangerous provision, because of the element of subjectivity involved. Much will depend on the detail of what is meant by "operating as a business". That is of considerable interest to the trustees of pension funds and to accountants, as I am sure the hon. Member for Richmond and Barnes (Mr Hanley) would confirm How tight will the disclosure rules be? We already know that major problems arise from within the Stock Exchange. Reference has been made to Barclays de Zoete Wedd and Barclays' objections to the Stock Exchange's suggestions. This morning I telephoned Barclays and asked whether I could see a copy of its paper. To my surprise, I was told that, although the paper was widely reported in the newspapers, it was confidential and I could not see it. That hardly augurs well for the type of disclosure that one will expect from City institutions There are disputes about which insurance brokers should be required to disclose information about their commissions and what information should be disclosed. We shall need to see the details, but I alert the House to the fact that we start by supporting the right hon. Member for Taunton (Sir E. du Cann) in looking to equivalence of treatment. Strong arguments against that would need to be made before we would wish to displace that principle Aspects of the City often cause us great concern. The Opposition are often suspicious — this suspicion goes wider than this side of the House—that too often City institutions are more concerned with churning money rather than ensuring that that money is put in places where it will serve the national interest We in the Labour party are also extremely concerned that the internationalisation of the City will make it much more difficult to look to the City as an instrument which will serve the policy of a national Government. [Interruption.] Yes, of a Socialist Government, by all means. A Socialist Government—elected, as it will be, after the next election—will be a national Government We also believe that the City, as an influence on macroeconomic policy, often exercises a malign influence. It is not the City's fault. Its preponderance as an element in policy making gives it an unfortunate influence on the direction of that policy The Opposition want to see a City which prospers, which is efficient, and which is effective. If there is business to be done—and clearly there is a growing volume of business—let it be done in London. That is our position. We wish to see the City, in its own interests, functioning as effectively as it can. Therefore, in the interests of the investor—that is, of investor protection—and of the City itself, it is vital that we get an adequate structure in place. We believe that that requires us, in the end, to look very clearly and firmly at a statutory commission I believe that the Secretary of State will regret that he did not take the opportunity of going directly for what I think everybody concedes is the ultimate answer to the problem. It is inevitable that there will be City scandals over the next couple of years. Even on purely political grounds, I think that the Secretary of State will rue the fact that he failed to take the opportunity. Given that it is inevitable that we shall move to a statutory commission, it means that it will be left to the next Labour Government to put it in place
I am grateful to the hon. Member for Dagenham (Mr. Gould) for the guarded welcome that he has given the White Paper. I am not sure whether he takes a radical or a conservative view of the changes that are taking place in the City. I listened carefully to the hon. Gentleman. He was a bit happy on the one hand and a bit unhappy on the other, but it was cautious support for the White Paper. I shall deal later with his suggestion that he has blown our cover on the question of Securities and Exchange CommissionsThe right hon. and learned Member for Monklands, East (Mr. Smith), in his reply to my right hon. Friend the Secretary of State for Trade and Industry, said that he found unanimity on a number of matters and agreed with the framework of law that the White Paper is proposing. We welcome that. He mentioned particularly the fit and proper test, the question of licensing or authorisation of firms trading in financial services, the conduct of business rules, compensation for investors, and matters of that kind The right hon. and learned Gentleman and my right hon. Friend set the debate off on the right tone. It is clearly a matter of importance to the country and the economy as a whole, and I am glad that the House, in debating the White Paper, has taken the matter seriously and not in a particularly partisan way I was asked about the dematerialisation of shares—getting rid of the physical documentation. The White Paper, when it refers to this, talks about new technology developed by the Stock Exchange, code-named BETA. I could not say precisely what the letters stand for, but it has to do with the electronic transfer of stocks and shares. It will require changes in company law and in the Stock Transfer Act 1963. It will certainly provide a more efficient method that will suit many—if not most—people dealing in securities The right hon. and learned Gentleman referred to an important point in terms of investor protection, using the expression "beaming in" of advertisements or invitations from other countries into the United Kingdom. He will recollect from the White Paper that it will be an offence to advertise in this country, in any shape or form in any publication produced in this country or any radio broadcast in this country, financial services that are not authorised —in other words, that do not come under the investor protection provisions that the White Paper outlines The right hon. and learned Gentleman was the first to ask, "Why not have a commission?" Contrary to his remarks, I should like to say that the decision against the commission was based not on United States experience, but on our desire to build on our own strengths and the strengths of the existing institutions in this country. The United Kingdom generally has a good reputation on self-regulation, as my right hon. Friend the Secretary of State said, but the present system is not comprehensive. There are gaps. Some financial products are not included at the moment — for example, futures contracts. Hence the proposal for a new system, based on our own experience — but it will be comprehensive. The United States' experience is quite different, as is their constitution, their need for federal agencies to cover the whole of the United States, their legal system and, indeed, their experience of self-regulation and investor protection We are delighted to have the support of my right hon. Friend the Member for Taunton (Sir E. du Cann) for the White Paper. He was concerned about weaknesses in dealing with international fraud. That is a serious problem. It requires more and better international co-operation than at present. When my right hon. Friend the Secretary of State and I travel abroad and discuss these matters, we are conscious that Governments and agencies in other countries are seeking better co-operation with ourselves and trying to make sure that information about those who escape to other jurisdictions or those who think they can get insider information in California and phone a broker in Switzerland, who might place the order in London, can be passed from one jurisdiction to another Coming back to domestic matters, my right hon. Friend the Member for Taunton made a plea on behalf of the insurance brokers, I think in part for the protection of the word "broker", which is part of the Insurance Brokers Registration Council legislation. He also made a strong plea for the inclusion of non-life insurance to which my right hon. Friend the Secretary of State responded. We are concerned with this area but non-life insurance is not defined as an investment in the White Paper. In so far as irregularities with regard to non-life insurance may arise now and in the future, I suggest to my right hon. Friend that that market is not entirely in the hands of intermediaries. At the end of the day the insurance companies themselves underwrite the business. They control or have the capacity to control the market. They can lay down, in a form of self-regulation, and in cooperation with the IBRC and the British Insurance Brokers Association, rules of conduct copying as much of the White Paper as they please, but doing so on a voluntary, self-regulatory basis, remembering that the companies themselves do the underwriting If any broker in this country were to break rules that were agreed on a comprehensive basis by IBRC and by the companies, they would refuse to do business with him. That would bring him, if not exactly into line with the proposals in the White Paper, close to what we are trying to achieve for investments. Perhaps my right hon. Friend and others in the insurance business will consider such an approach
I am grateful to my hon. Friend for responding at such length to that point. The matter gives many people in the profession great anxiety. Will my hon. Friend be good enough to listen to further argument on it in due course? There is plenty of time before the Bill is drafted
I am happy to say that not only will my right hon. Friend the Secretary of State and I listen to argument but that the Marketing of Investments Board organising committee will. It is considering such matters and has as one of its members the chairman of BIBA, Mr. Alexander, who is very experienced in all those mattersMy right hon. Friend referred to tied agents. We are aware of the difficulties. We do not wish to be unfair as between tied agents and independent intermediaries on disclosure, but if there appears to be unfairness we shall consider the matter. For accountants, lawyers and others there will be a different kind of authorisation, but they will not be exempt from disclosure The hon. Member for Stockton, South (Mr. Wrigglesworth) wants a statutory commission but, despite my request. he was reluctant to press the case. I find that people want to "sloganise" about a statutory commission but nobody will say why there should be such a commission. It seemed to me that the hon. Member was talking about the commission in just the same way as he might talk about the alliance. Nobody presses its case and it remains two separate bodies
We shall have better liaison
My hon. Friend the Member for Beaconsfield (Mr. Smith) also referred to the existence of two bodies. The Marketing of Investments Board and the Securities and Investments Board, whatever marriage may take place in the future, will live together in the same premises and will share a common staff and common services. The chairman of the one will be a member of the other in order to ensure that there is a considerable degree of integrationMy hon. Friend also asked whether a draft Bill could be considered in a Special Standing Committee. The difficulty is the constraint upon time, but there has at least been consultation on the Gower report and the White Paper. This debate forms another method of consultation. During the preparation of the Bill we shall be more than willing to listen to ideas and suggestions. I wish that such a Bill could be discussed before it comes before the House, but one has to be realistic about the constraints upon time, in particular when we are dealing with such a large and significant Bill The hon. Member for Yeovil (Mr. Ashdown) suggested that the Government were uncertain about whether there should be self-regulation or a commission. Perhaps I should explain how the Government arrived at the proposed structure. I know that it will be of particular interest to my very alert Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark). The hon. Member for Dagenham might also be interested in this, in view of the fact that he thought he had blown our cover As to how the structure came into existence, in response to a request from my right hon. Friend the Secretary of State for Trade and Industry the financial sector considered the matter and expressed willingness to adopt self-regulation. However, it, like the Government, realised that self-regulation must be comprehensive, that it must cover the whole market from one end of the country to the other. For it to be made compulsory for traders statutory backing is required These boards are private sector bodies. Those proposing the Securities and Investments Board, though not the Marketing of Investments Board, asked the Governor of the Bank of England to appoint its members. This, as a private sector body with its own constitution, it was perfectly entitled to do. However, when it came to giving statutory backing to these private sector bodies, my right hon. Friend naturally and correctly said that a number of accountability matters must be considered before giving statutory backing. He did not believe it to be right to delegate statutory powers to a private sector body over which he had no powers of appointment. Therefore, rather than that the Governor should intervene in the actions of my right hon. Friend, the reverse is the case. My right hon. Friend is intervening by using his parliamentary powers to appoint the members of the board of a private sector body. Therefore, it is not the Governor who is referred to in the White Paper but the Secretary of State
The Minister should clear up the point whether a single board, if it should come into existence, will be a de facto commission. When he was questioned by the hon. Member for Stockton, South (Mr. Wrigglesworth) about his position, he seemed to suggest that he took the view, which was supported by many of his own Back Benchers, that that was the case. He cannot argue against the commission and then agree that it might de facto come about by means of a single board
I went into that explanation because it was being suggested that I somehow supported the idea of a commission, which I certainly do not. I was pressing the hon. Member for Stockton, South to make the case for a commission, but he either could not or would not do so. That aspect of the debate, however, will doubtless continueMy hon. Friend the Member for Chichester (Mr. Nelson), in an excellent speech, rightly stressed the importance of futures markets. He will know that the new self-regulatory Association of Futures Brokers and Dealers is preparing to operate in that area My hon. Friend the Member for Chichester and others mentioned the takeover panel. We are anxious to take advice on that. The panel is working extremely well and we have asked it to consider how it envisages its future, whether it can best work on its present self-regulating basis or whether in some respects it should come into the statutory framework that is being designed. It is a very delicate question and we are most anxious to get it right My hon. Friend the Member for Chichester also, I believe, referred to golden parachutes. That aspect is covered in paragraphs 13.9 and 13.10 of the White Paper My hon. Friend the Member for Dewsbury (Mr. Whitfield) was concerned about specialist brokers. I believe that there is a future for small, specialist firms and that many people, not least private investors, will still wish to deal with the local firms or individuals they know best. As for the larger firms, I assure my hon. Friend that no matter how big the dealers or the markets they will have to conform with the legislation My hon. Friend the Member for Dorset, North (Mr. Baker) asked about the cost of the board. The answer to that is that we do not know. The organising committees are working this out. The boards will certainly not be cheap, because they have a very important job to do. but as the market will also be paying for them I am sure that they will keep their costs reasonable My hon. Friend the Member for Stratford-on-Avon (Mr. Howarth) opened up the debate on Chinese walls in some detail. Happily, he began in a very constructive way by supporting the idea. He believes that they can and do work, whereas my hon Friend the Member for Bexhill and Battle (Mr. Wardle) is more sceptical. My hon Friend the Member for Bexhill and Battle asked a long question about the Companies Act to which I should like to reply in writing to ensure that I get it exactly right My hon Friend the Member for Wolverhampton, South-West (Mr. Budgen) rounded up that part of the debate about Chinese walls by making it clear that he was against them, which did not surprise me in the least. He also took the opportunity to defend the solicitors' monopoly and solicitors' rights in a number of ways. If any lobby is represented really well by my hon. Friend, it is the legal lobby, as we are all very much aware We are not saying that there will be no serious problems or malpractices, whatever system of self-regulation is adopted, but we believe that the boards will protect the investors, especially private investors, by means of compensation and that they will be able to move quickly — more quickly in our view than a commission — in clamping down on fraud and malpractice I was grateful to my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) for his expert support for the proposals in the White Paper My hon. Friend the Member for Selly Oak was kind enough to say that the White Paper had been well received. I am not surprised, however, that some people in the City and elsewhere—I refer not to my hon. Friend but to those to whom he referred—are not entirely enthusiastic about it. It would be an odd document if no one even uttered any words of caution about how the legislation may work My hon. Friend the Member for Selly Oak said that the Government were rushing the City into a new world. We have given the City three years in which to prepare for the changes that are taking place. The City and the chairman of the Stock Exchange assure us that they expect to be able to meet that programme of change and, indeed, to beat it by at least two or three months. That being so, my hon. Friend may have been somewhat too conservative about the ability of his own profession to meet these requirements
It is always comforting to hear Ministers talking in that way. However, the City is not encouraged if, when it asks for help in making sure that everything is orderly, the Government seem reluctant to stop the fragmentation that is doing so much damage. The Government love competition more than anything else—so do we all—but does not my hon. Friend agree that the fragmentation will be damaging?
It could be, but I do not believe that it will be. I accept my hon. Friend's point. What matters is that, until the new legislation is in place, the Stock Exchange should provide the main safeguards for the investors. Clearly, we would expect that the vast bulk of securities trading will continue to be done through the Stock Exchange. There is a small amount of off-market trading. That must not threaten the orderliness of change and the safeguards for investors
At the moment it does not threaten the changes that are taking place
Will the hon. Gentleman give way?
My hon. Friend asked me a question. We do not answer hypothetical questions, but we do not think that what he fears will happenThe hon. Member for Dagenham expressed the view that the small private investor was being squeezed out. He misses the main achievement of our policies Competition is a spur to change. Competition under a comprehensive system of investor protection is in the interests of the small private investor. It provides the proper investment climate. We are moving away from the time when only a tiny proportion of the population had the opportunity to buy or sell shares or to come into contact with stockbrokers. Already a number of large retail organisations, as well as banks and other institutions, are preparing to provide financial services from one end of the country to the other so that people will be able to buy shares and financial services in a way not envisaged a short time ago. We welcome this development as an aspect of wider share ownership and a way of making people more aware of how wealth is created, where jobs come from and what makes the economy tick It is because of the deregulation or revolution —whatever one chooses to call it—that is currently taking place in financial services that we think the financial services industry itself will benefit, that investors will benefit, and that the United Kingdom will take its true place beside New York and Tokyo as one of the premier financial and investment centres of the world
I beg to ask leave to withdraw the motionMotion, by leave, withdrawn.