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Surrender Rule: International Securities

Volume 385: debated on Thursday 14 July 1977

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

6.57 p.m.

rose to ask Her Majesty's Government whether they will now reconsider their position regarding the 25 per cent. Surrender Rule, hearing in mind the importance, in the national interest, of maintaining London as a major centre for the international securities industry. The noble Lord said: My Lords, I beg leave to ask the Question standing in my name on the Order Paper. This is by no means the first time that I have raised this matter in your Lordships' House. As recently as July of last year, the noble Lord, Lord Cullen of Ashbourne, and I gave notice during the Second Reading of the Stock Exchange (Completion of Bargains) Bill that we intended to return to the subject in due course. In the past, I have sought a relaxation of the 25 per cent. Surrender Rule for the sole purpose of encouraging more effective management of the United Kingdom portfolio of foreign securities and, although this remains an important matter, my purpose in asking this Question today is to draw attention to the much wider issue of London's future in the international securities industry. What really concerns me—and here I must, of course, declare my interest as a member of a City partnership—is the growing evidence that the existing London market in foreign currency securities is in such a precarious state that some form of early relaxation in the rules is necessary to ensure its continued existence.

I feel sure that it is not difficult to appreciate that to be successful an international market must be large, liquid, continuous and readily accessible to all potential investors, and my aim during my brief speech this evening is to show that the present Surrender Rules are operating against these important prerequisites. Perhaps the simplest way of making my point would be, first, to say something about the present market situation in foreign currency securities and then to describe in some detail the adverse implications of the Surrender Rule as it now operates.

Naturally, the bulk of the business transacted in the Stock Exchange is in domestic securities, although outside the Stock Exchange there are more than 60 overseas firms dealing mainly in foreign securities. They transact most of their business for clients resident outside the United Kingdom. These firms operate in London because of the attraction of the City as a major financial centre with its pool of skilled labour and excellent communications. Moreover, they produce considerable benefits for us in the form of employment, services and prestige as well as some benefit to foreign currency earnings.

The first point I want to make, therefore, is the danger that any significant sign of a change in the attractions of the City as an international centre could well result in these firms moving their operations closer to their clients—in other words, to one of the Continental centres. My second point, which is closely related to my first, concerns the possibility of expanding business here in London in foreign currency securities by developing an active market for Europe centralised in London in these particular stocks. The object of doing this would be to provide a credible facility in the European time zone for business to be executed while the domestic markets are closed. In this way the United Kingdom could attract to itself some of the substantial currency earnings from the handling of this business.

The achievement of this however, has been shown to be impossible in the present circumstances. Those who have been examining the subject for a long time have determined that, unless the enormous untapped potential business in the home market is in some way freed to provide the basis of a European market, then such a market will not be established at least not in London. When I say "untapped potential business in the home market", I am of course referring to the United Kingdom's holdings of foreign portfolio investments, which I claim are largely sterilised by the present surrender requirements of 25 per cent. Surveys have shown that over 75 per cent. of the trading in US stocks in Europe is already executed in Switzerland. This is business which used to be done in London and might, if the Government act quickly, be done in London again. But if there are any further delays, then I am afraid that the Government will be responsible for exporting permanently earnings, jobs and prestige to our Continental competitors.

So, my Lords, we come to the 25 per cent. Surrender Rule itself, which over the years has so seriously reduced the domestic turnover in foreign securities and has resulted in a major decline in market-making capacity and a considerable worsening in service capability in London. This surrender requirement was first introduced in 1965, as a so-called temporary measure. During the last few years neither successive Governments nor the Treasury have suffered from any lack of advice and exhortation on the subject.

I myself have raised the matter on two occasions during debates in your Lordships' House on invisible exports, as well as by Questions for Written Answers. Various interested bodies have frequently pointed out the extent to which the surrender requirement militates against the proper management of our overseas portfolios. Some recognition of this fact appeared when the authorities allowed institutional fund managers to arrange what are known as "back to back" loans, but even this well-intentioned concession proved to be a disaster for those who chose to use it at the then level of sterling. The fact remains that the surrender requirement is still with us in its original form, and it is quite clearly not a tax but a confiscation of assets. What bothers me, my Lords—and I choose my words carefully here—is that this does not appear to cause any great moral disquiet in official circles.

Now as to the future, which is really the purpose of my Question. It seems to me that we either accept a continuation of the present unfortunate trend and recognise that London's position will be further undermined—possibly at an accelerating pace—or we do something to help to form the required home base on which to develop what will essentially be an "exporting" central market in Europe. I believe there are a number of alternatives worthy of examination for ameliorating the surrender requirement while at the same time protecting the contribution to the reserves.

I should now like briefly to put forward one specific suggestion for consideration by Her Majesty's Government. Of course I realise that certain complications arise in establishing the benefit to the reserves, since the transfer of currency is simply a function of the total sales of premium-worthy assets, or, to put it another way, the sale of 100 million premium dollars will produce 25 million dollars for the reserves, irrespective of the amount of the premium or the exchange rate of the currency involved.

On the other hand, translated into sterling, the exchange rate into the currency sold becomes vital. Whereas the 25 million dollars transferred in 1976 at an exchange rate of, say, 1·60 dollars to the pound would add £15½ million to the reserves, a similar transaction in 1972 at 2·60 dollars to the pound would have added only £9½ million. However, ignoring the exceptional year of 1974, when the sales of overseas sterling area stocks— cum the newly introduced premium—greatly inflated the surrender, it would seem that the benefit to the reserves falls within the 250 million to 350 million dollar bracket on an annual basis, and the average since 1971, even including 1974, is around £174 million.

These figures have been arrived at by using the published figures for transfers to the reserves factored by an average of prevailing exchange rates against the dollar, and they provide a useful basis for considering an alternative scheme. The first point I would stress is that, in my view, a sizeable reduction in the surrender requirement would quite obviously stimulate the volume of business executed and thus bring in sufficient additional overseas earnings to help preserve the benefit to the reserves.

Furthermore, I would point out that, whether investors switch or sell, the reserves still benefit, and naturally this benefit is related to the level of activity. I would therefore submit that from the point of view of the authorities greater benefit is derived from a greater volume of business; but from the investors' point of view activity is determined by the level of the premium since the 25 per cent. surrender is a direct function of this level.

Before leaving this point, my Lords, I can assure the House that I speak with many years' experience as a manager of American portfolios when I say that an impost of up to 10 per cent. of an investment on realisation so inhibits new investment (as well as switching) that it really makes it impossible to manage our foreign investments to the best advantage. At the present time I understand that the turnover in United Kingdom securities subject to stamp duty is of the order of 40 per cent. of market capitalisation, whereas in Government securities free of stamp duty the turnover is more than 200 per cent. of capitalisation. Against this, in foreign securities, where the penalty is the Surrender Rule, the turnover is only some 20 per cent.

What I am now going to suggest therefore is that a reduction in the surrender requirement from 25 per cent. to, say, 10 per cent. could well double the volume of business carried out in the United Kingdom overseas portfolio, and my inquiries in well-informed quarters strongly support this view. The indications are that the volume of business in the overseas portfolio could amount to some 40 per cent. of market capitalisation, or, based on the 1976 estimate of the total of overseas investments, a turnover of some £3,200 million. If half the volume is sales and all sales were subject to only 10 per cent. surrender, this would provide somewhere around £160 million for the reserve.

But, my Lords, that is only part of the story. First of all, this reduction would certainly encourage more efficient and active management of United Kingdom foreign portfolios, resulting in the much needed increase in market liquidity. Secondly, this much improved home market would attract business from overseas investors buying securities from, or selling them to, United Kingdom investors.

with a consequent increase in the volume of business in London to the advantage of our invisible exports. Indeed, unofficial estimates are that this would result in potential earnings, fees and services from the international market to show an increase of some £30 million a year. If we add this figure to the £160 million referred to earlier, we are in fact in a position to earn more than the £174 million at the present time.

This is one suggestion for dealing with an urgent problem and I believe it to be a perfectly feasible proposition, although there may well be other possibilities which could be discussed between the Treasury and the appropriate City organisations. The important thing is to get some discussions going. Of one thing I am quite sure, and that is that we can no longer afford to sit around and do nothing if we wish, as I do, to see London's position maintained as a major centre for the international securities industry, to the advantage of the national economy. All I am asking for is the help of the Government to bring this about before it is too late, and I hope that I am not once again going to he disappointed in the reply I receive from the Government Front Bench.

7.9 p.m.

My Lords, I believe this is the first time this subject has been debated, either in your Lordships' House or in another place, in isolation. It has been raised by the noble Lord, Lord Terrington, and other noble Lords in debates about invisible earnings, first in 1968, when no reply was forthcoming from the Minister, and secondly in 1973 in a debate about the importance of invisible earnings in the EEC, when the reply from the Government was as follows:

"I can remind the House of the time-scale which governs our transitional arrangements. It is this, in accordance with our treaty undertakings: that by the end of 1974 there will be an end to the premium on direct investment; by the middle of 1975 there will be an end to it as regards personal capital movements; and by the end of 1977 there will be an end to it in regard to portfolio investment. These dates are final dates".—[Official Report, 16/5/73; col. 898.]
This statement was relatively encouraging. There was to be a definite time limit.

But what has happened since then? A start was made in the 1972 Budget and controls on direct investment below £1 million were lifted. But in March 1974 not only were these controls reimposed but the EEC Commission agreed to an application for postponement of the deadline. Then it agreed to a further extension in 1976, and earlier this month yet again agreed to a continuation of the controls. However, this time it stressed that it would take another look before the end of 1977. This may perhaps be significant as it is then that controls on portfolio investment are due to come to an end. Perhaps when the noble and learned Lord comes to reply he will be able to say what really is going to happen.

It would seem from remarks made by the Prime Minister that we can look forward to a surplus on our balance of payments next year, continuing for a period of years. Others take a similar view, as the following extract from an article from Brussels in last week's Economist confirms:
"Britain is doing nicely on the external payments front. Its official reserves in June rose by 1,671 million dollars to a record 11,572 million dollars and its balance of payments is moving into the black as North Sea oil begins to flow. The trouble is that all this rather undermines Britain's case for keeping on its controls on capital outflows to other EEC countries. By the end of 1977 the other eight may put pressure on Britain to liberalise its present rules. If they succeed British shareholders will be able to invest anywhere in the EEC without paying the dollar premium".
If the dollar premium does come to an end in the EEC it really would be an extraordinary position if it were still to be maintained in the overseas sterling area, and even more extraordinary if the surrender rule continued there.

Noble Lords will remember that the dollar premium was imposed on OSA securities in 1972 and the Surrender Rule was further imposed in 1974. These impositions took place suddenly owing to serious national economic difficulties. Now that the position looks so much bettter, does the noble and learned Lord not think that these crisis measures should be rescinded, or is it intended that investment in the sterling area should be especially penalised?

Reverting to the much wider question raised by the noble Lord, Lord Terrington, is not this the perfect opportunity of doing something about the 25 per cent.

surrender on all overseas investments? It is widely recognised that our developments in the North Sea provide a wonderful opportunity to invest in up-to-date plant and equipment for manufacturing industry. Is it not also an opportunity to do all that we can to remove shackles on our service industries, which have been responsible for the outstanding record of the invisible earnings of the country over the last 200 years? Does it make sense to put any obstacles in the path of those who produce over a third of our total foreign earnings, equivalent to nearly half of our import bill? All these earnings are absolutely vital for a nation which has to import, among many other things, half of its food.

The noble Lord, Lord Terrington, has made out a strong case for the reduction from 25 per cent. to 10 per cent. in the Surrender Rule. This I wish to support, but I do so as a halfway house towards abolition and I cannot help thinking that abolition would he preferable. I hope, therefore, that the Government will either decide in favour of abolition or agree to a reduction to 10 per cent. at this stage followed by abolition when a further improvement in the economy of the country has taken place. I know for a fact that the Association of Investment Trusts, who are by far the biggest managers of overseas portfolios, have pressed for many years for total abolition and continue to do so. Surely, it is high time that some notice is taken of the opinion of these professional people.

Perhaps it would be helpful at this stage if I gave an example of the inhibiting effect of the Surrender Rule on the making of decisions by institutional investors. Let us say that an institution invests half a million dollars in a US dollar stock. Having held it for two or three years the value of the investment increases to 1 million dollars. Before the Surrender Rule was introduced the investment would have been sold at a profit of half a million dollars, capital gains tax of 150,000 dollars would have been paid and 850,000 dollars reinvested. However, because of the Surrender Rule—costing 80,000 dollars—no action is taken and in due course the profit disappears. So the Revenue does not receive 150,000 dollars and the stock of investment dollars does not increase by half a million dollars.

I wonder to what extent the Government, or for that matter the Treasury, are aware of the crippling influence of the Surrender Rule on the volume of transactions in overseas securities in London. Personally I have no doubt that a reduction in the rate to 10 per cent. would double the volume, as Lord Terrington suggested, and this could well be a conservative judgment. So great has been the decline in activity that United Kingdom brokers have no incentive to spend money on research and dealing facilities since the rewards are so low. Nor is there any incentive to open offices in the USA, though some 30 firms of US brokers have opened offices in London and have captured almost all the institutional business in US securities. The noble Lord, Lord Terrington, has painted, quite fairly, a depressing picture of the present state of overseas securities business and the likelihood of its demise in the near future unless something is quickly done. Not just a patching up operation, but to clear away obstacles to the development of an international market which could be very large indeed, as I shall hope to show.

Recently the New York Stock Exchange released some staggering figures on overseas turnover in US stocks. Foreign purchases and sales account for about 9 per cent. of the value of all shares traded on the US exchanges. In 1976 the gross foreign transactions totalled 33·6 billion dollars, nearly 50 per cent. of which came from Germany, France, the Netherlands and Switzerland. Foreign source commissions to US brokers totalled 144 million dollars in 1975. In addition, a further 6.6 per cent. of turnover of the New York Stock Exchange took place in non-US exchanges. The point I am trying to make is that this huge volume of business is almost all done by non-United Kingdom firms, many of them with offices in London; so United Kingdom firms could and would compete for this business if their hands were not tied behind their backs. United Kingdom holdings of US stocks amount to some 8·7 billion dollars, or about 90 per cent. of the Swiss holdings of 9.7 billion dollars. The United Kingdom volume is negligible and no longer profitable. The Swiss volume is vast. So unless the Treasury or the Government prefer for some obscure reason that all this business and the invisible earnings resulting should go elsewhere, let us have an end to this Surrender Rule, or at least a major reduction in the rate.

The noble Lord, Lord Terrington, reminded us, not for the first time, that the Surrender Rule was introduced in 1965 as a temporary measure. It has now survived for 12 years during both Socialist and Conservative Administrations, so this is no Party matter. Evidently the Treasury has dug its toes in and I suspect that it blinded with science succeeding Ministers and persuaded them that this method of confiscation is necessary. I hope, therefore, that the noble and learned Lord, Lord McCluskey, will take a longer-term view than his predecessors have taken, and that he will be able today to give encouragement to those who are concerned with dealing in overseas securities.

I earnestly ask the noble and learned Lord to make the position clear. If, to our chagrin, it is intended that the Surrender Rule is to be permanent, would he kindly say so? If it is to be reduced or abolished in the near future, would he indicate when that is likely to be? I know that he will appreciate how important this information will be for those concerned, to make their longer-term plans with respect to staff and staff training, accommodation, communications, the sophisticated equipment that is necessary, and so on.

In case it should be thought that my noble friend Lord Terrington and I are exaggerating, noble Lords may be interested to know that Merrill Lynch, that exceedingly large firm of United States brokers commonly known as the "Thundering Herd", is in process of moving its administrative operations from London to Dublin where it proposes to engage 600 people. It will be even more disturbing if firms move their whole operations to other financial centres in the EEC. It is also true, unfortunately, that there is clear evidence that business in South African securities has suffered a similar fate to that of American securities. In less than four years since the Surrender Rule was extended to South African securities, business has declined by 80 per cent. and has been lost to New York, Johannesburg and Paris. Perhaps nobody will shed tears over the loss of business concerned with South Africa, but that is an example of what has been happening and it may well extend to Australian, Hong Kong and other overseas sterling area securities. We must keep a sense of proportion over this matter. On the one hand, we are talking about a mere £174 million even if the Surrender Rule were totally abolished. On the other hand, on the reduced scale proposed by my noble friend, Lord Terrington, it is probable that no loss at all to the reserves will take place.

Finally, I well remember that when we debated the pros and cons of joining the EEC, one of the aspects on which there was universal agreement was that there would be a great opportunity to increase our invisible earnings. There exists in the City a unique concentration of facilities and skills which have attracted many foreign banks to open branches here. Let those who think unimportant the demise of foreign security business, ponder the effect of chipping off even a small component part of that structure. Surely it would be better to remove all constraints on our service industries and to build on the foundations of the past, expanding international markets of every kind. There may be a difference of opinion as to the proper treatment of lame ducks, but surely we have all been taught not to kill the goose that lays the golden eggs.

I have asked the noble and learned Lord, Lord McCluskey, several questions and I gave him a note of them before the debate. First of all, is the premium on portfolio investment in the EEC to end on 31st December 1977, as stated in column 898 of Hansard of 16th May 1973? Secondly, in view of the rapidly improving balance of payments, can we not now dispense with the Surrender Rule altogether? If not, can we now reduce it to 10 per cent. and abolish it, say, 12 months later? Furthermore, can we now abolish it in respect of OSA securities on which it was suddenly imposed at a time of crisis in 1974? Lastly, is it, in fact, intended that the Surrender Rule should be permanent or semi-permanent? If not, when is it intended that it should be abolished or reduced?

It will not surprise me if the noble and learned Lord, Lord McCluskey, is unable to give precise answers to all those questions, but I earnestly hope that the outcome of this short debate today will be that Her Majesty's Government will consult with the appropriate organisations in the City and seriously listen to the arguments that they, much better than I, will be able to put forward on this complex subject. After that, I trust that the Treasury will, at long last, surrender.

7.26 p.m.

My Lords, I am delighted that the noble Lord, Lord Terrington, has given us the opportunity to discuss the issue of the Surrender Rule. The noble Lord, Lord Cullen of Ashbourne, and the noble Lord, Lord Terrington, who have spoken tonight, with the noble Earl, Lord Limerick, who has not yet spoken, but who spoke in the 1968 debate and other debates which I have read, have, between them, succinctly raised some cogent questions. As the Minister wishes to go to Scotland tonight I shall cut my speech in half, because there is no point in repeating the cogency of experts. However, I also have something to contribute. I must declare an interest because I am interested in the platinum market and I know how it works. I am chairman of a small group, and there are probably only three of us in the London Platinum market. Having declared my interest, I shall link it to this debate as pregnantly and cogently as I can in the short time that I have allotted myself.

My Lords, what are we talking about? How can we make the issue of the Surrender Rule more clear to the layman? Let us look for a moment at the history between 1939 and 1945, when this country, sometimes alone, courageously sold its assets overseas and asked those investors who had dollar and hard currency overseas to sell those assets to win the War, which we did. I hope that many people will realise that our so-called difficulties were created by that terrific struggle. Having done all that, it was necessary for the Government to hold as much of their hard currencies as possible. Both during and after the war British subjects, including famous companies, were asked to get rid of their remaining dollar investments and pass them over to the Government. Nevertheless, in the interim—and I must pay a tribute here—by astute management and know-how, as exemplified by noble Lords in the Chamber tonight and by men who have been in the business for years, we have been recouping.

I should like to draw an analogy with coal mining. If one were talking of digging a new pit in Selby, or trying to find a new seam of coal in Kent and elsewhere, one would need thousands of miners. However, if the mining industry dwindles, so will the families of miners, and one will not find men with the physique, know-how and courage needed for that type of employment. It may seem far-fetched, but if the money market and the City with all its know-how and practical knowledge outside books on industrial history, economics or anything else, dies, these people may emigrate and Britain will lose a great asset. The asset, and its size, I shall explain in a moment.

It is just over 50 years since Winston Churchill raided the Road Fund. All Governments, not just Labour Governments, have raided the funds when they have been in power, and I can see former Chancellors of the Exchequer spreading themselves comfortably here in the Chamber. It had to be done. What has happened to us now? A rule ultimately was made that when a holder of an investment bought with premium dollars, sold it, one quarter of the proceeds had to be exchanged into sterling to help our balance of payments. That is simply the advantage there. That is simplified. But what are the consequences? The first is that one quarter of the premium is surrendered, and the arithmetic of it was explained. But it hampered portfolio management; it hampered the liquidity and the freedom of investment; and therefore it hampered our balance of payments.

Now I will go a little broader. It is really astonishing. There was a letter in The Times the day before yesterday from Mr. N. O. Taube dealing with this.

He says, after other securities were mentioned, that
"… governmental securities totalling a further £9,277 million …"
were issued. That money has helped our trading. Everybody in this House knows the Stock Exchange report of 1968, and knows that all our trading has been balanced through the years by 35 per cent. to 40 per cent. through the work of the City balancing with vast sums like that.

Let me show the vastness of that. I have a little computer here. I have been working on it. If at the day of the Norman Conquest we had a cricketer knocking one run a minute, and rich Members opposite plus poor ones on this side of the House decided to give him £1 a minute for every run he ran up, and he ran that run up one a minute for 1,000 years as from then, the days of the Norman Conquest, my little computer, while noble Lords were speaking, tells me that today we should have to give him £52,560,000. People do not know what a million means. They talk about a million, but they have no concept of it. It is £52,560,000 that would have to be paid to that Welsh cricketer. It could only be a Welsh cricketer who would do it, who would be daft enough to try it.

Compare that with the £9,000 million odd earned in one way and another by the City, and the people in and around the City, in one year. Whatever kind of Government are in power, be it Liberal, Labour, Conservative or whatever, that type of machinery is needed for Britain to live in the modern world. The Treasury must realise it, and Governments must realise it. It was the noble Earl, Lord Limerick, who said in 1968 that he seemed to be the Cinderella never invited to the ball. But it is not quite like that. I think now we have been a little too lugubrious. We are mourning a little too much. I think, like the wise virgins, our lamps are gradually getting filled with oil and we can go to the wedding feast smiling. It is worth the Treasury, and whatever Government, taking a little risk that way.

I will put in a warning, and I do not want to make a Party point to spoil this constructive atmosphere. The Reddaway Report said that we must look at Government overseas expenditure. Whatever Government are in power, our problems are not going to be solved if we think that we can live like Imperial Britain up to the war or in Victorian times. We must adjust ourselves. I have not the slightest doubt that once again we can recapture leadership. I have been speaking for eight minutes. I think I will take about two minutes more.

Most Members of this Chamber know that only seven times in 170 years have we ever balanced our physical trade. In other words, we have depended upon the City, and the men and women working in the City with know-how and investment and on banking, insurance, shipping, tourism, and hotels to balance our trade. Looking around London this week I should think that all the world is coming here. If we are that depressed and miserable, I do not know why so many holidaymakers come here. The official figures are that last year 10,100,000 overseas visitors came to Britain; that is 14 per cent. more than in 1975. When those who went out to Spain and those who came in to spend here were all balanced up, we made £620 million surplus on our tourist trade. People do not come to a country that is dead; people do not come to a country that is finished. They come to a country because there is something there attracting them. Despite the Common Market, and despite some of the setbacks, I have not the slightest doubt that we can recapture our position.

I am going to finish with this example in my own field. We have three firms, more or less: Ayrton Metals, Montagu's, and Argos, in which I am interested—three small firms which, on three or four occasions in the last four or five years, have brought to Britain from all over the world people dealing only in platinum. Today, by the way, it is £86 an ounce. We brought them from all over the world and established a certain leadership. When we had a meeting not so very long ago in one of the famous hotels here, we learned the importance of London, which has been built up in three years as one of the centres of the platinum market. We now have warrants; we now have a hallmark; and we have twice daily quotes, and of course the possibility is growing for dealing in futures in this metal.

To finish with, Milton F. Rosenthal, President of Engelhard Minerals and Chemicals Corporation, paid a tribute to British enterprise. He said:
"It is beyond dispute, however, that here in England Dr. William Brownrigg, Charles Wood and Sir William Watson carried out the first constructive investigations of"
the properties of platinum. Today platinum is known in the chemical industry, and is a great catalyst against pollution in the car industry. That is just a small group of firms. There are many small enterprises making that kind of contribution.

I must make my last point, and omit the other good ones because of the time factor. It is a pity, but we rush these debates. No, you have got to get home, boy! Today I put down a Question, to ask the Minister what has happened with Sir Harold Wilson's Committee. This was to be a high-powered committee. I looked at the members, and anybody here can find them without me reading them out. Sir Harold Wilson's Committee is dealing with financial institutions. The Wilson Committee is deeply concerned with Britain's industrial investment. It should be as much concerned with the City and invisible exports. I should like to know what chances there are of an interim report, and what place will the City and this question of the 25 per cent. surrender take in its assessments. If there is any possibility of an interim report, I hope that we can get it.

Those who read the exchange control documents by Jordan and Sons Limited will read on page 20:
"If the movement towards budgetary balance continues, and if the balance of payments swings into a continuing and increasing surplus sufficient to start repaying some of the massive existing external debt, it can be expected that there will he a fairly rapid programme of exchange control relaxation, beginning with EEC transactions".
I hope that note will be taken of this important little debate, and I am grateful to the noble Lord for raising these issues. I had now better bow to wisdom and sit down, despite the tendency to talk longer.

7.41 p.m.

My Lords, it is always a pleasure to speak following the noble Lord, Lord Davies of Leek. One always learns something from him; for example, I was quite unaware that the Welsh were playing cricket in 1066.

Evidently that is where it all started, my Lords. However, I will not yield to the temptation to follow him down his delightful Welsh byways and I think that even he would admit that if his batsmen had suffered confiscation of £1 in every £4 he might have been less inclined to proceed with the business of making runs. I have a slightly unusual interest to declare in this debate. Already my remarks have been twice quoted to me, first from 1966, when I made my maiden speech in a debate on invisible exports, and on a second occasion—reported in Hansard at col. 898 of 16th May 1973, when I could no longer describe myself as a maiden—when I was replying for the Government, again in a debate on invisible exports. I wish to associate myself with the first of the questions asked by my noble friend Lord Cullen of Ashbourne; namely, when it is we may look to an end to control on portfolio investment.

The information which I gave to the House in May 1973 concerning our Treaty obligations has already, I regret to say, failed to be realised in two of its three particulars, and the noble and learned Lord, Lord McCluskey, will understand well if I am inclined to press him rather hard, as the author of that statement, on the intentions of the Government concerning the third of these matters; namely, the liberalisation of portfolio investment which is due at the end of this year.

After the very well-researched speeches of the noble Lord, Lord Terrington, to whom we are greatly indebted for introducing this important subject this evening, and my noble friend Lord Cullen, I need not go into the background. However, I think it would be legitimate, while resisting the temptation to widen the debate and to speak about the City at large, to say a word about the place of invisibles and why this dollar premium matters so much in that context.

Broadly speaking, £1 in every £3 of our gross receipts from overseas trading in 1976 was derived from the invisible sector; to be precise, £12,856 million of invisibles as against £25.296 million of visibles. The net yield from these private invisibles in 1976 was £4,364 million. Even after deducting the public sector invisibles deficit, £2·2 billion, there remained a favourable balance of £2·2 billion, the same figure. I pause there to make a plea which has been made many times before, but which will persist until something happens; that in the statistics which are published there should be a distinction of the private from the public sector invisibles. Nobody argues about the necessity of the Government to spend money overseas maintaining Embassies, paying interest on debts and the other necessary expenditures, but those who are responsible for these private earnings are entitled to have them shown gross and before offset for the public invisible deficit.

This afternoon the figures were published for our trading in the month of June and these showed that there was a deficit on visible trade of £287 million. In the same month there was an estimated invisible surplus of £220 million, so the deficit on current account was £67 million. This is a slightly improving trend which we are all happy to see, but it underlines the place which invisibles play in this matter. In 1975 the earnings of the City were £1,218 million net. The reason I stress this is because the City of London is a complex of interlocking, international financial markets. It has held its pre-eminent position among international centres despite a decline, now a near eclipse, in the pound sterling as a reserve currency for a number of reasons. The first of these I continue to believe is the reliability and integrity of its dealings with those who have affairs with it; the second is the excellence of its communications; the third is its convenience; and the fourth is its completeness. It is a system in which each market depends in some way on the other markets; if you weaken one you weaken the whole. Therefore the strength of our securities market and its continuing pre-eminence among the securities markets of the world is of central importance to the functioning and efficiency of the City of London as a whole.

What then is the rationale of the dollar premium? Its intention was and is to limit the funds available for private outward investment by creating a closed pool and for reasons which we well understand. Within this limit it serves the purpose of rationing available currency between would-be users by a market price mechanism the dollar premium reflecting the balance of supply and demand between British buyers and British sellers of dollars which are available for this purpose and currently its level as has been mentioned is about 40 per cent. There would anyway be a steady upward pressure on that premium level even if the pool were of constant size, because the same volume as assets is made yearly more costly to maintain in dollar terms by the ravages of inflation. But the pool is not constant. It is subject to the drain of the 25 per cent. surrender and it is drained in this way every time a realisation takes place.

As to the surrender itself, what does it achieve? What it does not achieve is any extra revenue for the Treasury. When the holder of a foreign asset sells it, 75 per cent. of the dollars go to a buyer who is buying them at a premium rate for use for a comparable purpose, and 25 per cent. under this rules goes to another buyer, who is an official dealer in exchange at the official rate, and not to the Government. So the effect is that on each transaction 25 per cent. of the dollars compulsorily so surrendered at the official rate go to swell the United Kingdom reserves. What does it yield? I will quote the figures from 1970. In that year it was £87 million; in 1971, £128 million; 1972, £138 million; 1973, £158 million; 1974, £265 million; and in 1975 it was £180 million.

Do our reserves need this small annual addition? In the past, successive Governments thought that they did. But now, I would submit, the position is different. Reserves are at a record level of 11½ billion dollars, which my noble friend Lord Cullen of Ashbourne has already mentioned, and with forecasts of increasing balance-of-payments surpluses from North Sea oil it is hardly credible that this annual addition to the reserves is needed. Even if it is not needed, does it matter that it is taking place? Yes, my Lords, it does matter. Naturally, we are anxious to repay our crushing foreign debt as fast as we can but not, please not, at the price of impairing our ability to earn invisible income. I thought that the case made by the noble Lord, Lord Terrington, on the possible outcome of a reduction, or abolition, of this surrender was interesting and persuasive. I am sure that this would repay careful study. That is the effect that the 25 per cent. rule now has.

It has been pointed out that the surrender also inhibits the freedom of management discretion of those who are in charge of our portfolio funds, and it is a striking fact that for most of these funds the dollar premium, typically, is their largest single asset. So, faced with this constraint on the management of that largest single asset, it follows that their funds cannot be efficiently managed. Furthermore, when there is a rule of this kind there is always a temptation to find means of avoiding submitting to it. I have no evidence, and I wish to make no suggestion, that this is widespread, or indeed that it is happening at all, but evidently there must be a temptation to try to deal outside the rules of the surrender when it has such a penal effect.

The point, though, on which I should like to rely, and which has already been alluded to by others speaking before me, is the effect upon the institutions of the City of London. Certain institutions are being driven away, and certain types of dealing in certain markets are being driven away, and I might elaborate on an example which I think my noble friend Lord Cullen of Ashbourne may have had in mind regarding foreign share dealings. An association has grown up, the Association of International Bond Dealers, which is taking the opportunity of restrictions on dealing in London to deal in securities which are listed in more than one country. It happened recently that two of the London jobbers, who had been dealing over very many years in South African markets, gave up dealing in those securities because of the Treasury restrictions. If that tendency is multiplied it means not only that our traditional business conducted in London in shares of other countries—South Africa was the example here, but it would apply also, as my noble friend Lord Cullen mentioned, to Australian, Hong Kong, and American shares, which are responsible for a very large turnover —would leave London, but also that overseas business at present concentrated in London, in such internationally traded securities as BP, Shell, Unilever, Rank, EMI, to name some examples, could well drain away from our Stock Exchange.

The recent findings of the Association of International Bond Dealers were that more transactions in South African shares now take place outside the Stock Exchange than inside. That is a direct loss to our invisible earnings. The market in securities will always lie where those securities are held. The reason why the market in South African shares was in London was that the mining finance houses in the City were large holders of those shares. The 25 per cent. Surrender Rule has made it virtually impossible for United Kingdom holders to switch, and has driven the market away from London. That, my Lords, is an example of what I mean.

In reiterating my question to the noble and learned Lord who is to reply as to whether he can guide us on the timetable here, I should say that we would dearly love to know what is the future for the dollar premium in relation to investment portfolio transactions. We should also like to know—and we are, I believe, entitled to know—what is the intention in regard to the Surrender Rule. I suggest to the noble and learned Lord that, although I cannot pretend that a reduction from 25 per cent. to 10 per cent. would be unwelcome, it is not the answer. If there is a reduction, one is left with the same amount of administrative work for a much smaller benefit, and, with the strength of our reserves, surely the time has come when this 25 per cent. surrender could be done away with root and branch.

7.55 p.m.

My Lords, it will have been noted that all the speakers in the debate so far have had an interest to declare. That means that they know what they are talking about. That means that they have experience outside merely being an advocate for a point of view in your Lordships' House. I hope that their expert opinion, which has been put in very clear terms, particularly by the noble Lord, Lord Terrington, and my noble friend Lord Cullen of Ashbourne, will be taken into account. I was rather interested in the declaration of interest. We even had the noble Lord, Lord Davies of Leek, with the humility of saying that the rich men are on this side of the Chamber and the poor on the other, having admitted little more than a second earlier being one of the three platinum tycoons who still exist.

The interest that I want to declare is in preserving a vital part of this country's economy at a time when the health of our economy means more than ever before, and is in a greater danger than ever before. Although the points that I want to put will be addressed to the noble and learned Lord, they are really points to be put to the Chancellor and to the Treasury, and I know that the noble and learned Lord will accept what I say in that spirit. Having heard the expert evidence, and the points of view from noble Lords who have spent a lifetime in amassing the expertise which they have shared with us, I want to ask at once whether the Chancellor of the Exchequer will view the appeal which has been made as just another Parliamentary moan from people who are arguing purely out of self-interest? Will that be his reaction, or will he recognise that he has had a warning from experts who are truly concerned at the increasing possiblility that the Treasury attitude as it exists at the moment—the attitude, in this instance, of grabbing the quick buck—is adding to the real risk that the City of London, and all that it means, will be losing its place in the financial world?

Those are the two choices, and I hope that it is the second one with which the noble and learned Lord, and the Chancellor, for whom he is speaking, will view the situation when they look at what has been said in the debate. As has already been made clear, we are not here talking about peanuts. We are talking about a very significant and important segment of this nation's wealth producing capacity. Other figures have been given, and I should like to give mine which seem to be slightly different from others mentioned. I take them from Annex 4 of the data on the United Kingdom balance of payments 1965–75, in which the details show that the City's overseas earnings for the last available six years period operate between £600 million and £980 million net. It is that part of our wealth producing capacity that we are talking about.

When I was thinking about what contribution I could make to the debate, I wondered whether I might be accused of exaggerating by speaking about this bigger framework in what is really a very narrow debate; it is technical, and expert, and important, but it is narrow. Does the existence of this 25 per cent. surrender carry the kind of risk that I have just been describing? I mean the risk of undermining the very existence of the City of London itself. I was comforted when I realised that it is not only me who thinks this. I found that the financial section of The Times dating back to 1976 stated:
"The Chancellor's assertion that he cannot accept that the decline in the gold share market weakens London's position as an international financial centre simply does not hold weight. To cut off one limb must ultimately weaken the whole body.
"Already there are growing fears that London's pivotal position in the commodity markets has been weakened … Confidence is extremely fragile in all the London financial markets at the moment and some easing of the surrender rule—which, after all, only brings in some £180 million to me balance of payments—would have been a welcome indication of the Government's intentions".
I do not think I am exaggerating when I can produce evidence like that.

In addition to that impressive expression of opinion, we also have factual evidence which backs it up: factual evidence which shows that, as a result of the 25 per cent. surrender policy, both business and influence have been driven from London to New York. There is no argument about it; it has happened. Since the 1974 Budget which extended the dollar premium surrender rule, the volume of dealings in gold mining finance shares has slumped to a sickening level in this country, as was pointed out by my noble friend Lord Limerick. At the minute, it is only 20 per cent. of what it was in 1973–74; and if this loss of four-fifths of the business—important, profitable business—is not sufficient to cause the Treasury to change their mind, then perhaps they will be impressed by the more important fact that we have seen the New York business overtaking the London market in the very areas that we originated and developed in the early stages. We invented it, we developed it, it was being made successful and worth while; and, because of this interference, which I think was a pointless interference, we now see that we as the inventors and the originators are very much below what New York is doing. We all know that New York has had aspirations for tens of years for the power, the influence and the wealth of the City of London to be taken there. They felt it ought to be there because they are so big. We shall ignore at our peril this clear indication that in this important field it is happening; and if we do not do something about it, then we shall be neglecting our duty.

If that is not sufficient as evidence—first of all, the expression of view on the financial page of The Times; secondly, the fact that we literally have lost business; and, thirdly, that we have seen New York overtaking London—perhaps the noble and learned Lord and the Chancellor will be swayed by the even more significant fact, again referred to by my noble friend Lord Limerick, as regards it affecting our long-term projects, that we have seen the withdrawal from the scene of leading jobbers in this field. They have made up their minds that the situation is such and the deterrents put in their way are so strong that they cannot carry on, and they have withdrawn from the field; and at a time when our jobbers are withdrawing, we have had, as my noble friend Lord Cullen has pointed out, others coming in, opening offices in London itself and taking on business that our rules have made it impossible for our own people to conduct. It is no wonder that the chairman of the Stock Exchange felt constrained to warn everyone not very long ago in very doleful terms indeed. The chairman of the Stock Exchange said:
"People wonder if London has the stature it once had".
What words to have to come from the chairman of the Stock Exchange, doing his duty in saying them! He then added:
"I am not gloomy about London as a financial centre but you are chipping away at the edifice".
My Lords, this example brought forward by the noble Lord, Lord Terrington, and my noble friend Lord Cullen is making it crystal clear that, unless we stop chipping away at the edifice by such rules as this 25 per cent. surrender, then whether or not the chairman of the Stock Exchange is gloomy about the future, I am, and many other people in a better position to form a judgment are gloomy indeed. Because we know that the City depends upon world confidence in order to exist at all. That is why it is there; that is why we have been the centre of finance in the world for so long—because of the confidence. Such confiscation—and this 25 per cent. surrender is confiscation; it takes away 25 per cent. of something which, under the normal contractual transaction, belongs to somebody else—is a certain way of exploding the vital confidence that the world must continue to have if the City is to remain the centre of things as it has been in the past.

It does not need anyone as insignificant as I am to say that confidence is a commodity which it is much harder to create than it is to destroy. It has taken centuries to build up the confidence that has put us in the position of such strength. It could be that a mistake of this sort, allowed to continue beyond a point where there is even the remotest excuse for it, could play a big part in destroying something which has been built up over the centuries.

Perhaps the factor most damaging to confidence—and this is a point which I should like the noble and learned Lord to keep in mind when he replies, if he can—is the transparent naivity of the reasons given by the Treasury in the past to justify this confiscation in the first place. It was supposed to be done to strengthen our national reserves, but this is a nonsense. The compulsory 25 per cent. surrender creates nothing new. So far as the nation's reserves are concerned, it was always there and it still remains. They are part of the nation's reserves whether they are privately owned or whether they are publicly owned.

I think it is worth having on the record the very telling words of the late Lord Tangley when he spoke in the debate in this House on the 11th December 1963, at cols. 561 and 562 of the Official Report. I think they ought to be repeated on this question. This is what the late Lord Tangley said:
"If this money goes into the reserves, the monthly statement of which, of course, is awaited all over the world with baited breath, all that has happened is what a trader would do if he took stock off his shelves in his storeroom and put them in the shop window. That is no addition to the stock. The trader would be guilty of self-delusion if he valued his stock in that way and thought that he had added to his assets"
by merely altering where it was placed.
"Certainly if he added to the value of his stock in that way for the purposes of a prospectus. I am afraid that the Director of Public Prosecutions would look upon him with a very jaundiced eye. If the Treasury utilises these sums for the repayment of debt, then they are using what is virtually confiscated capital to repay current debts. This, to echo the words of the noble Lord, Lord Cromer —repeated here today by the noble Viscount, Lord Watkinson—is eating the seed corn'";
and that is the result of practising such confiscation in this way.

In that quote from the late Lord Tangley, the name of Lord Cromer is mentioned. Lord Cromer is an ex-Governor of the Bank of England—and now I come to the one question of which I should like the noble and learned Lord to make a note. If he can give me a reply, I should like it. It is a presumptuous question, but I think it could be helpful. The question I want to put to the noble and learned Lord is: is he in a position tonight to deny that the Bank of England, which has to operate this manoeuvre for the Treasury, has not itself recommended to the Chancellor that this iniquitous confiscation should now be ended, or at any rate mitigated? Can he deny that the advice tendered to the Treasury by the Bank of England itself is that what the noble Lord, Lord Terrington, is asking for is what, in its opinion, ought to be done?

I, personally, have reason to believe that that advice from the Bank of England has been given to the Treasury. It is advice which, no doubt, would have been given publicly if it had remained a free agent. This is perhaps another example of the danger which arises from nationalisation. It can have the effect of muzzling your watchdogs and stopping them from barking. This advice, which I suggest has been given privately, is sound advice. It is based on the type of evidence which has been produced by experts in this House tonight. It is advice which should be acted upon without delay; and we all ought to pray that in the meantime too much damage has not been done already.

8.10 p.m.

My Lords, the noble Lord, Lord Davies of Leek, father of platinum, the Andrew Carnegie of the platinum industry, said in the earlier part of his speech that, looking around the House, he could see former Chancellors of the Exchequer "scattered over the Benches". In my extreme old age my eyes are dim, but, peer as I might, I could not identify any of my ghostly colleagues here this evening.

The noble Lord, Lord Terrington, is an expert in these matters and, very properly, he declared an interest in the matter. My noble friend Lord Cullen of Ashbourne is another expert and my noble friend Lord Limerick is a third. I agree with what my noble friend Lord Harmar-Nicholls said when he said how fortunate we are in having numbers of people in this House who can speak from their own first-hand, expert knowledge on these complicated technical subjects. I hope very much that the Government will listen carefully to the cogent arguments and the cogent case that has been made for the abolition or, at the very least, the diminution of the level of the 25 per cent. Surrender Rule.

Have I an interest to declare myself? I suppose that, in a way, I have. I have a modest number of dollar investments. I only want to emphasise two aspects of this matter, quite briefly. First, this rule, a very rigid restriction, was imposed, as was said, as a temporary necessity at a time of severe dollar-sterling exchange trouble. It could only be justified by such circumstances. I cannot believe that the current condition of the sterling exchange any longer justifies such a relic of a siege economy. Indeed. I consider its existence must, in the long run, be counter-productive to the strengthening of sterling and of our reserves.

The second point I want to emphasise is the damage that such restrictions cause to the overseas currency earning capacity of the City of London. I thought that the tribute paid by the noble Lord, Lord Davies of Leek, was a very well-earned one. The City is vitally important to this country. It has a marvellous record of invisible export earnings. I thought that the figures quoted by my noble friend Lord Limerick were deeply impressive. But surely it is right to reinforce success, and with active encouragement the City could earn still more.

But if London is to be the most acceptable and the most utilised of international markets, it must be seen not to be handicapped in any way in relation to its international competitors who are only too keen to take advantage of any such handicaps from which the London market may be suffering. It is no good in these matters to attempt an arithmetical computation of the effects of any one restriction of this kind. It varies so tremendously according to the circumstances at the moment. But the existence of any restrictions are psychologically a barrier to the competitive success of London.

I remember once when I was at the Treasury—and the mention of the word "Treasury" reminds me of the one thing, and only thing, that my noble friend Lord Cullen of Ashborne said with which I did not agree. It was when he cried out, "Let the Treasury surrender !"

My Lords, the Treasury never surrender. They do not know the meaning of that word. They adjust their views to changing circumstances. I am sure that my noble friend will take the point that I am making.

When I was at the Treasury, years ago, admittedly, I remember trying to make up my mind whether our balance of payments enabled us to afford the removal of a particular restriction on the sterling exchange. It was quite a severe one. With some apprehension, we decided to end the restriction; and to our relief the balance of payments gained because our action enhanced the prestige of sterling. If restrictions are kept on unnecessarily, overseas holders will conclude that it has been done because Her Majesty's Government are apprehensive.

Now here we have a handicap from which our competitors are free. We are in no position to be reckless with our balance of payments or our reserves. I may say that by nature I am not a reckless character; but justifiable self-confidence breeds confidence in others. I think that in this case there is a very strong ground for this enforced Surrender Rule to be terminated—I would say absolutely terminated, but, at the very least, progressively reduced.

In this matter I think that the onus of proof is on the Government to explain why that is not possible. If it is not possible, then I hope that the noble and learned Lord will tell us under what conditions it would be possible, and why it is not possible at this present time. If the noble and learned Lord is going to tell us that the restrictions must remain, then I hope he will give his reasons very clearly indeed. Otherwise one must be tempted to feel that the Government are keeping it on because somehow they believe it is not doing any harm or even because they welcome it. For these reasons, I strongly support the case made by my noble friend Lord Terrington for the abolition of this Surrender Rule.

8.19 p.m.

My Lords, following a speaker who has previously held a high Ministerial post fills one always with a spirit of elation because one feels that one is temporarily elevated into a higher realm of reasoning. So I listened with the greatest interest to what my noble friend Lord Amory had to say. My intervention will be short, and intentionally so, because it is merely to add one more voice to the pleas which have been made following the speech of my noble friend Lord Terrington, who was timely in asking this Question now. He put it forward with lucidity and reasoning and with a wealth of figures. I feel that if anything could influence the situation, that, together with the reasoning by my noble friend Lord Cullen of Ashbourne and his supply of figures, should certainly ensure that the Minister is not short of figures as well as reasoning.

I have been bitterly against this Surrender Rule for a long time. When I read the Question on the Order Paper, I determined to attend and listen to what further, if any, new reasonings could be advanced for a plea to the Minister to accept a total abolition or at least a partial one. My noble friend Lord Cullen of Ashbourne suggested a temporary abolition until a complete abolition was made. Apart from what amounts to a disincentive, one is concerned whether the Government really are ready yet to make this obvious concession, or whether they are in the realm of things like the stupidity from many angles of their reasoning against profits. Without profits we all know that there can be no relief to unemployment. There are absurd policies, such as are recommended in some quarters, that there should be cessation of investment in South Africa. The one thing that would do harm and be a disservice to the African native would be to stop the flow of capital into South Africa.

I mention those matters because I recollect my own feelings on this subject when it was first instituted. I lived and was in business for quite a while in the United States. I went there for the purpose of making a profit, doubtless hoping it would ultimately come back to this country. This Surrender Rule of 25 per cent. is a disincentive. We know that it had good purpose in that it aimed to increase the reserves; but I feel that it added greatly to the disincentive. I suppose that the consideration was that there would be as little harm done to actual investment and the balance of payments as to building up the reserves.

There is an angle that I particularly want to speak to, and it involves capital gains. When it was first instituted we had a currency which was low compared with my recollection of getting more than six dollars to the pound in trade; but the pound has been debased with real force by the present Government. There is a loss of the withholding amount. There is the capital gains tax. It goes farther than that: in the case of a private firm, which had made profits and had obtained equities, if just before 1965 substantial losses occurred (which of course carried the tax loss carry forward advantage) and, for purposes of internal equity shareholder adjustments, there was a substantial writing down of assets, though they retained the tax loss carry forward advantage, there would be a calculation of profit attracting tax on the amounts by which ultimately the business, if it continued, would recapture the capital that had been written down by the tax loss carry forward, but it would involve a further capital gains calculation. That amounts factually to confiscation.

If the noble and learned Lord is not in a position to concede what the noble Lord, Lord Terrington, has asked for tonight, I hope that he will at least leave this Chamber convinced by the arguments that have been put forward on this matter, and will feel that there is substance in the reasoning that the rule amounts virtually to confiscation. It acts as a disincentive as against giving encouragement. One could go out of the country and make money which could be sent back to this country and our reserves could be built up in this way. But there are disincentives like this. I hope that the noble and learned Lord will leave this Chamber, having heard the figures which have been given and the other interesting, forceful speeches, with reason to give the matter greater consideration, and I hope he will do so.

8.26 p.m.

My Lords, after the many distinguished voices that we have heard this evening, I feel that I am going to play the part of that small and quiet wind that followed the storm, the fire and flood that we read so much about in the Old Testament. The whole House, and many thousands outside the House, will be grateful to the noble Lord, Lord Terrington, for raising this very vexed question once again tonight. I wish to add my plea to those of all the other speakers that the Government should reconsider both the level and the method in which the Surrender Rule is operating. Clearly it is intended to discourage investment in foreign securities by United Kingdom citizens. But the House will agree that 12 years is far too long for such a measure which was only intended to be temporary. During this time the United Kingdom have entered the EEC, and we heard from my noble friend Lord Limerick that the existence of the Surrender Rule is a breach of the Treaty of Rome. But this is tolerated by our European partners on a short-term basis. What concerns us on these Benches is the harm and hindrance provided by the rule to the jobs and prospects of those concerned with overseas securities.

Prior to 1965 many more institutions, banks, brokerage firms and dealers, took an active part in trading in overseas stocks. But after 12 years many of these concerns have run down their services to clients so far as these foreign securities are concerned. If the United Kingdom resident feels that for the time being a sure source of growth is to be found in foreign securities, as well as for reasons of overall portfolio balance, he has, in almost all cases, to deal with a London branch of an overseas firm which will specialise in such securities. Granted that any London branch will employ United Kingdom citizens, but, as with many branch operations, the full research capabilities are often away, outside the United Kingdom. Gradually and imperceptibly the business of investing in any securities other than United Kingdom stocks is more easily—or possibly more efficiently—performed abroad at any one of a number of financial centres, which would do much to take business from the City of London.

We believe it is already clear that almost all the firms which were prepared to give advice and do research on behalf of United Kingdom citizens can no longer carry out either of these tasks efficiently. It is still something of a mystery to many that the Government do not necessarily ban overseas investments for United Kingdom citizens, but merely place the Surrender Rule barrier in the way of allowing those citizens to invest in what to the rest of the Free World is indeed still a free market. Let us also remember that investment is carried out to the extent of approximately 85 per cent. in the London market by pension funds and similar institutions. The Surrender Rule of course inhibits their investment decisions far more than those of the private investor. I wonder whether the noble and learned Lord could tell us whether he considers that the present policy provides for efficiency in the security markets, with all the additional administrative work which is required? Also, does he not agree with the noble Earl, Lord Limerick, that when a small slice of the securities market has been lost to London, the whole of London's financial community is the loser?

The argument that the reserves benefited by £175 million, or the equivalent in dollars, is one that is normally quoted and it has been quoted tonight by the noble Lord, Lord Terrington. It is normally quoted in support of the rule's continuance. We wonder whether the Government continue to believe that no more efficient method of obtaining a similar sum exists without this continuing inhibiting effect of the Surrender Rule. It seems that once an investor has purchased dollars and made his investment, he is locked into that particular stock, for if he switches into a similar stock or another foreign stock he is penalised in exactly the same way as if he were to repatriate his funds for further investment in the United Kingdom.

The continuing saga of the investment rule has been very clearly and skilfully debated this evening. We are all looking forward to hearing the Government's case from the noble and learned Lord, Lord McCluskey, and we are all very grateful to the noble Lord, Lord Terrington, for once again raising the point this evening.

8.32 p.m.

My Lords, the question of abolishing the so-called 25 per cent. Surrender Rule is by no means unfamiliar to this House. The noble Lord, Lord Terrington, has been a pertinacious champion of the abolitionists and has taken several opportunities, as he has reminded us, to raise the matter in recent years. Tonight I would agree at once that he gave a new and forceful emphasis to his arguments. This is not the first time, either, that he has had the support of the noble Lord, Lord Cullen of Ashbourne; and I am grateful to both noble Lords, and indeed also to my noble friend Lord Davies of Leek, for having given me advance notice of the points they were going to make and of the questions they were going to ask.

We have had on at least one previous occasion the support of the noble Earl, Lord Limerick, who, in the course of the years, has undergone a slight transmogrification from being a poacher at the beginning to a kind of diffident gamekeeper in the middle, and has now returned to the role in which he is obviously happier. I also at breakfast-time read The Times newspaper. I usually start off with the sports pages, where I do not want to read about Welsh cricketers—I am sure if one had scored one run a minute since 1066 I would have discovered that there! But my breakfast-time reading has been somewhat distorted during the last few days by finding letters on this topic even before I got to the office. I shall refer to Mr. Taube's moderate and very interesting letter when I come to deal with that particular point.

The case for reconsidering the rule has been put tonight with great force, skill, passion and ingenuity. I would ask your Lordships' indulgence if I do not deal with the questions strictly in the order in which they have been raised. However, your Lordships may be sure that what I have to say is the fruit of careful consideration, and indeed the wording has been carefully chosen. I would not wish to say anything in an unguarded way which might have unfortunate effects in financial markets.

The 25 per cent. rule, as I shall call it, was introduced, as your Lordships know, under powers available in the Exchange Control Act 1947, at the time of the 1965 Budget, in order to help to strengthen sterling. It has been referred to repeatedly tonight as being a rule which was introduced as a temporary measure. If your Lordships care to look at the Budget Statement in 1965 you will find that no time limit was set for this measure when it was introduced; but it would be a rash prophet who would have said then, or who would say now, that it must inevitably remain a permanent feature of our financial landscape.

All aspects of exchange control are kept under continuous review. Successive Governments have reviewed this rule from time to time, taking account of representations such as have been made this evening. In that connection, I should like to say that reference has been made to the expertise which this House can bring to bear on such a problem. I freely acknowledge that: I have seen it in other debates, and again in this one. But I should not like outsiders to believe that it is only in this House that expertise exists on these matters. The Treasury, also, as I am sure the noble Viscount, Lord Amory, would confirm, has expertise in these matters, and I regret that the noble Lord, Lord Barnby, saw fit to use the word "stupidity" in this context. There is no stupidity in this context, but a balancing of the arguments; and I want to look at that balance.

Your Lordships have heard that since 1965 the total yield to the country's reserves—not to the revenue, because of course we are not talking about a tax—has been over £1½ billion. Since 1971 the average yield annually, including the year 1974—perhaps a higher than usual year—has been about £175 million. During a period when the country has seldom been free from balance-of-payments difficulties, that has been the crucial factor, regarded as outweighing the disadvantages of the rule. Indeed, it has been represented to the Government that the percentage should be increased in order to benefit the reserves even more. That is the principal reason. It is not a secret, and I hope that the noble Lord, Lord Cullen of Ashbourne, will permit me to say that it is not an obscure reason but a real and tangible one.

I must tell your Lordships without further delay that, having considered the matter, in present circumstances the Government do not judge it right at this stage to give up any of the yield to the reserves which is obtainable from the 25 per cent. rule. It has been urged that our balance of payments is now improving well enough for that benefit to be forgone. It is true that our current account is coming into healthy surplus, largely because of North Sea oil, but we are not there yet. I would emphasise that we are not yet out of our difficulties, and we have to consider the balance of payments as a whole, including the capital account. Noble Lords will need no reminder that there are large external debts to be repaid: not just large reserves, but large external debts. The difficulties as regards our balance of payments will not disappear just as soon as we move into surplus on current account.

It was suggested tonight by the noble Lord, Lord Terrington, that the same yield, or a comparable yield to the reserves, could be secured through an increase in turnover as a result of reducing the figure below 25 per cent. I ackknowledge that the size of the yield is indeed a function of the volume of sales, but it is necessarily very much a matter of subjective judgment as to how far a particular cut in percentage will increase turnover. It is impossible, therefore, to confirm or indeed to controvert the figures which the noble Lord, Lord Terrington, put before the House as estimates in this regard.

My Lords, would the noble and learned Lord permit me to raise one quick point there? It is a fact, and one comes up against it constantly, that people are inhibited in making decisions currently because of the payment of premium on the assets they currently hold. There is a pent-up demand for switching investments which I should have thought, on any calculation, in the short term must yield a higher return from a lower rate of tax. I agree that once it has been done it cannot be repeated annually, but it might be looked at if there is a problem of bridging the time before we are in real balance-of-payments surplus.

My Lords, in relation to that, may I first respectfully correct the noble Earl? Of course, it is not a tax, and I am sure that that was an unguarded word on his part. Secondly, I acknowledge the force of what he said, and indeed of what the noble Lord, Lord Terrington, said, that one would expect a rise in volume, and because of the rise in volume there would be an increase in yield—not an absolute increase in yield, but the increase in volume would tend to raise the yield. What I was trying to say as precisely as I could was that one does not have evidence at the moment of exactly how far a particular cut in the percentage would increase the turnover. In the discussions which have taken place between the Treasury and the Bank of England, on the one hand, and Stock Exchange representatives on the other, convincing evidence on this point has not been produced. So one cannot say that there would be certainty of maintaining the yield that we think necessary.

Again, acknowledging the force of some of the arguments, the Government do not dispute the fact that the 25 per cent. rule probably does, to some extent, which I would not attempt to measure, inhibit the efficient management of overseas portfolios. It may, unfortunately, also have some adverse effect on the development of the London market in international securities. I acknowledge that as well. It operates gradually, as has been said, to deplete the overseas portfolio pool and to keep the investment currency premium higher than it might otherwise be.

But to look at some of the other arguments, reference was made to jobbers withdrawing from this field, and to a firm going to Ireland. But there are many complex factors at work in these areas of activity, and there is perhaps a tendency to put too much of the blame on to one single exchange control rule. In any case, so far as portfolio management is concerned, there is no impediment to switching between foreign currency securities where purchase has been allowed to be financed by foreign currency borrowing, under what are known as the "loan portfolio" arrangements for professional managers of securities. The estimated amount of such borrowing now outstanding is about £1,000 million.

Among the ideas which have been discussed—although it is not an idea which was developed tonight—with representatives of the Stock Exchange, is that switching free of the 25 per cent. rule should be permitted to professional managers of securities within a very limited period, such as, for example, 24 hours. The exchange control authorities, however, have not been satisfied that such a concession could be prevented from opening the door to avoiding the rule for virtually all transactions. More generally, I have to add that we have not been convinced that abolishing the rule would result over time in a sufficient increase in invisible earnings.

As to the wider effects on London as an international financial centre, there is clearly scope for the adaptability often shown by the City in the past. For example, I understand that bargains in certain OSA gold shares have lately started to be marked in dollars and exclusive of the investment currency premium. It is hard to believe that the problems created by the 25 per cent. rule are entirely beyond the expertise and skill of the City. More particularly, it is hard to believe that they are likely to have a serious "domino" effect, or an erosion effect, on the wide range of financial services which together do so much to help the country's invisible earnings.

In view of what has been said about the erosion of the City as a financial centre, it surely would not be inappropriate for me to quote a little from the letter which Mr. Taube wrote to The Times on Tuesday. I refer to the second paragraph of it where he said—and I will read it shortly—
"What is perhaps overlooked is that London has recaptured a position of preeminence as the world's most important market for most commodities."
He went on,
"and that London is the most important international foreign exchange market, the most important insurance market and the central shipping market of the world."
I accept that these are separate markets from the precise one about which we are talking, but I suggest he was right in his presentation and that picture is not quite consistent with London as a financial centre being eroded by such restrictions as exist within this comparatively limited market.

My Lords, one accepts that the figures reflect that it is still alive and very significant. But does not the noble and learned Lord take into account the growth in competitor cities which have been trying for years to get in on this? Their growth has been so much more than ours in an expanding situation.

Yes my Lords; I take that into account and I acknowledge it. But the point I was dealing with, and I think it was made by the noble Lord, Lord Harmar-Nicholls, was the suggestion that, because of a restriction in that sector that somehow spreads and has a debilitating effect upon other markets. I think one can meet that point in the way I have done.

The noble Lord, Lord Cullen of Ashbourne, has asked particularly whether the 25 per cent. rule could be abolished, at least in respect of OSA securities. Of course, the rule was not applied to them when exchange control was first extended to cover OSA transactions in June, 1972, but it has applied to them since March, 1974. The Government believe that, in general, the more favourable arrangements initially allowed in respect of the OSA are no longer justifiable. Investment in all foreign currency securities will therefore continue to be treated on the same basis, subject to our relevant EEC obligations. I am sorry if that is a dusty and disappointing answer, but it is an answer to one of the questions which the noble Lord asked me.

The noble Lord, Lord Cullen, also asked specifically about the position after 31st December, 1977, and of course many other noble Lords are interested in that matter. The noble Lord was referring to the time-scale governing our transitional arrangements in respect of capital movements under Article 124 of the Treaty of Accession to the EEC. This House was, as he said, reminded of these arrangements during a debate in which the subject of the 25 per cent. rule was raised in May 1973. Your Lordships have been informed accurately by the noble Lord, Lord Cullen, that, because of our balance of payments difficulties, the European Commission have given us authorisation under Article 108 of the EEC Treaty itself to maintain existing restrictions on outward direct investment and certain personal capital movements. As to the liberalisation of outward portfolio investment to the EEC, due from 1st January 1978 under Article 124 of the Accession Treaty, the Government will be consulting later this year with the Commission on whether the balance of payments safeguards in the EEC Treaty will need to be invoked in that respect. But I very much regret that at this stage there is nothing that I can say either way about what will happen after 31st December, 1977.

Before I leave that matter, may I just make this comment in relation to what the noble Lord, Lord Lyell, said?

There is no breach of the Treaty of Rome. There is a provision in the Treaty of Rome, and there are provisions which allow derogation from the appropriate articles, and we have derogation. There is therefore no breach, and I am sure that the noble Lord is acknowledging the accuracy of what I say in relation to that. We have had an appeal from the noble Lord, Lord Cullen, and from the noble Viscount, Lord Amory, that the Government and the Treasury should consult and listen. I can certainly say that the Government have consulted, the Government have listened, the Government will continue to consult, the Government will read the report of this debate and will continue to listen to representations that fall to be made. I can assure your Lordships on that.

I know that noble Lords who have spoken and who have attended this debate may well be disappointed by my reply. The Government will not regard this debate as a moan. The Government will regard this debate as an informed contribution to their consideration of this matter. I have tried to show to the House that the Government are not blind to the problems, but have, as in the past, had to make a balancing judgment and the judgment at the moment is that the 25 per cent. rule cannot at present be abolished, nor the percentage reduced. But I can assure the House that the question will be kept under review. Meantime, I can say no more, except to thank noble Lords for the courtesy and moderation with which their case has been pressed. One of the later speakers suggested that I should leave the House a little wiser. I am reminded of Lord Birkenhead, who as counsel addressed a judge for some time, at the end of which the judge said to him, "I am afraid, Mr. Smith, I am no wiser". F. E. Smith replied: "Not wiser perhaps, my Lord, but at least better informed". I cannot leave the House wiser, but certainly I leave the House better informed.

May I deal with two points which I omitted to mention. First, the Wilson Committee on Financial Institutions, which was chaired by Sir Harold Wilson, have yet to decide whether or not to issue an interim report. We cannot know what any report will contain, but the committee have announced their intention of concentrating in the first instance upon the supply of finance for industry and trade.

Secondly, I was asked specifically by the noble Lord, Lord Harmar-Nicholls, whether or not I could deny that the Bank of England had made a certain recommendation to the Treasury. I cannot disclose to the House what advice has been given to the Treasury by the Bank of England, and I should be surprised, frankly, if the Bank had disclosed any advice given to the Chancellor of the Exchequer on any matter of exchange control.

My Lords, before the noble and learned Lord sits down, I wonder whether he could assure us that he and his colleagues have given sufficient consideration to the attitude of foreigners when a restriction is taken off. When that is done, foreigners so often say, "Those fellows have confidence in themselves".

My Lords, the noble Viscount, in both his question to me and his speech, has made a sound point. Certainly it is one which the Government will take away from this debate.