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Leigh, Edward (Gainsbor'gh)

Lord, Michael

Marland, Paul

Marlow, Tony

Mills, Iain

Moate, Roger

Oakes, Rt Hon Gordon

Page, Richard

Patnick, Irvine

Pawsey, James

Pendry, Tom

Porter, David (Waveney)

Redmond, Martin

Rhodes James, Robert

Riddick, Graham

Sayeed, Jonathan

Skeet, Sir Trevor

Skinner, Dennis

Smith, Sir Dudley (Warwick)

Stradling Thomas, Sir John

Summerson, Hugo

Tebbit, Rt Hon Norman

Thompson, Jack (Wansbeck)

Walden, George


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Walker, Bill (T'side North)

Warren, Kenneth

Watts, John

Wells, Bowen

Wiggin, Jerry

Wilkinson, John

Winterton, Mrs Ann

Tellers for the Noes

Mr. Roger Sale and

Mr. James Cram.

Question accordingly agreed to.

Resolved,

That this House agrees with the Select Committee on Televising of Proceedings of the House in its First Report (House of Commons Paper No. 141).


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Insider Trading

10.38 pm

The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. Francis Maude) : I beg to move

That this House takes note of European Community Documents Nos. 7310/87 and 8810/88 and the Supplementary Explanatory Memorandum submitted by the Department of Trade and Industry on 22nd May 1989 relating to insider trading ; and supports the Government's view that a practical and workable Directive would demonstrate Member States' common desire to take vigorous action against insider trading. The draft insider dealing directive has two principal purposes. First, it will require member states to make insider dealing unlawful. Secondly, it will require them to co-operate in obtaining and exchanging information for enforcement purposes.

The House will recollect that it was a Conservative Government who, in 1973, first brought forward legislation to make insider dealing illegal in the United Kingdom. It was this Government who, in 1980, saw the measure on to the statute book. Britain was among the leaders in Europe in legislating in this area. Since 1980 we have made further changes, in the Financial Services Act 1986, with the aim of intensifying the drive against insider dealing.

Both in the drafting of legislation and in its operation, insider dealing law is intensely difficult, as every country in the world which has enacted it has discovered. In the discussions on the directive, I have been keen to ensure that the directive reflects our considerable success in enforcing the law. Like other member states, we sought a measure that was precise, that was practical and that was enforceable. That was not the case with the original draft. But I believe that, as a result of detailed discussions in Brussels, we are very close to a text that achieves those aims.

I turn now to the text of the directive itself. At its centre are the definitions of primary and secondary insider, and the prohibition on trading on inside information. The proposals put forward last year were very broad and vague. They did not require, for example, a primary insider to know that the information that he had was inside information, but they would have caught as primary insiders people whom we regard as secondary insiders--or even not as insiders at all. The text simply prohibited the taking advantage of insider information in buying or selling any transferable securities. That all added up to a text that went very substantially beyond our law. The text was very wide ranging and in our judgment impossible to operate successfully. It would have greatly increased the area of uncertainty for honest people without making it any easier, and possibly much more difficult, to bring wrongdoers to book. As a result of lengthy and robust discussions in Brussels, we have now arrived at a text which reflects our own experience in this area of legislation.

Mr. William Cash (Stafford) : Will my hon. Friend say whether the Government intend to bring in criminal or civil sanctions with respect to the prohibitions included in the directive?

Mr. Maude : As my hon. Friend will know, our present law operates by way of criminal sanctions and, as I hope I am outlining, the directive, as it is emerging, will not go


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significantly beyond what our present law requires, save in one area to which I shall refer. In those circumstances, there will certainly be no need for us to contemplate legislating or enacting this by way of civil rather than criminal sanctions. However, there may quite independently of that be a case for considering whether some sort of civil sanctions provide a better and more flexible means of enforcing the law in that area.

At the same time as arriving at a text that reflects broadly our experience, it will involve a modest strengthening of our law to prohibit certain insider transactions that are not properly caught at present. The definition of primary insider reflecting our own experience is much more precise, practicable and enforceable. The primary insider is prohibited from taking advantage in full knowledge of the facts. It has a new definition of primary insider that is clear and more restrictive than the original draft, thus helping to restore the balance between primary and secondary insiders. The text now prohibits taking advantage of inside information in buying or selling transferable securities to which the information relates, and that rider was missing in the earlier text. Each of the three key problems here has been resolved.

Our present law has been much criticised from time to time for its complexity--for example, the prohibition on a primary insider dealing is more than 100 words long--and on some occasions that complexity has not been helpful in the pursuit of offenders.

I have welcomed the opportunity presented by the Brussels discussions of going for rather more clarity and simplicity and at the same time a modest strengthening of our law to prohibit certain insider transactions that are not properly caught at present. I cannot stress too much that it is extremely important that the prohibition on insider trading does not unintentionally and accidentally forbid such ordinary and proper business practices as a takeover, or any large purchase or sale of securities, but, at one stage, the draft text did this. I can tell the House that those practical problems, together with others relating to analysts, to market markers, and to permitted stabilisation activities, have all been resolved.

The second of the directive's strands is increased international co- operation. Insider dealing, like other financial frauds, is no respecter of frontiers. It is about as easy to insider deal on the London stock exchange from Paris as it is, for instance, from Norwich. International co-operation between regulators is already, in general, good. Again, Britain is among the leaders in Europe in that respect. The Companies Bill currently being considered in Committee contains special provisions for my Department to assist overseas regulators.

I should also mention one thing that is not in the directive. At one stage considerable, and justified, anxiety was created among companies at the suggestion that the directive would require them to release much more information. They might, absurdly enough, have had to announce that they had begun to think about making a decision before being in a position to take that decision or to act upon it. That would simply have flooded the market with useless information, while harming the ability of companies to conduct their own business in a sensible and practical manner. A proper flow of information to the market is, of course, vital, but it should be meaningful information.


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I am glad to tell the House that the directive now contains a provision that, while it may modestly increase the flow of information to the market, does so in a sensible and contained way. I should also tell the House that I propose, in implementing the directive, to redeem a pledge made by this Government in 1985 : that insider dealing will be made an offence in all securities, not just corporate securities and options and futures based on them. That will bring within the scope of the legislation gilts and other securities.

The motion invites the House to support the Government's view that a practical and workable directive would demonstrate member states' common desire to take vigorous action against insider trading. I believe that this is such a directive. We are and remain determined to take vigorous action against insider dealing. I commend the motion to the House.

10.45 pm

Ms. Joyce Quin (Gateshead, East) : There should be no doubt that insider dealing is a major crime. Many have claimed that there are no real victims and that prices are merely driven up--that is a natural operation of capital involving the necessary winners and losers. They suggest that the principles of the free market allow for people to take advantage of such a situation to gain profit. Fortunately, however, increasingly that view is held by the minority. The majority has concluded--I believe that it is the opinion of the House--that insider dealing is a form of theft. The victims sell shares, for example, on a false basis to people in possession of privileged information that will clearly affect the price of the share. The crime also involves a betrayal of trust, in that people use secret information to deceive and to enrich themselves. On many occasions the loser, as we know, is the investor representing the interests of ordinary people--perhaps he looks after the savings, assurances or small shareholdings of such people. Those buying and selling shares without access to such secret information are often at the mercy of their opponents. Over a short time chain reactions can occur, often across national frontiers, as a result of the electronic, internationalised market, which causes great damage to unsuspecting individuals and firms.

Given the scale of insider trading scandals in the United Kingdom in recent years, it was right to take action. The Government introduced legislation in 1980 and that was consolidated in the Company Securities (Insider Dealing) Act 1985 when criminal sanctions were introduced. Since then the maximum prison sentence for insider trading has increased from two to seven years, although the number of prosecutions for insider trading has been small despite the existence, in theory, of those penalties. I shall return to that issue later. We believe that the practical control and punishment of insider dealing is far from satisfactory currently.

We welcome the EEC directive and we shall not divide the House on it. It would be rather hard to take exception to the carefully worded motion on the Order Paper. It is important that in the large European market that is supposed to become a reality in 1992 there should be systems to control and to punish insider trading.


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We welcome both the co-ordination of rules and the obligation to exchange information. It would also be highly unsatisfactory if we were trying to bring successful prosecutions for insider dealing in the large European market when much securities trading was being done across the national boundaries of national authorities which had weaker rules or did not regard insider trading as a serious offence. It is clear that if standards are more lax elsewhere there may be a temptation for people to do business in other financial centres, which could mean a move towards a general reduction in standards rather than the improvement which we wish to see.

It is also worrying that some other EC countries do not have adequate rules on insider trading at present. As I understand it, in addition to the United Kingdom, only Denmark and France penalise insider trading. Will the Minister tell us a little more about the attitude of other countries towards the directive? He seemed to indicate that agreement was likely and that many of the difficulties had been sorted out. Have any of the member countries any serious objections and are those which, to date, have not had rules on insider trading happy at the prospect of an EC directive on the issue?

The issue matters to us more than to many other countries because our securities market is by far the most important and is for us a much more important means of raising equity finance than it is in other EC countries. Therefore, although the treaty base being used for this is article 100A and although I fully understand that that article is used to govern internal market decisions, it would not be a good idea if we were outvoted on the directive because our interest is so great. Fortunately, that does not seem likely.

I note that there was a change of treaty base governing the directive. It has not been fully explained why it was necessary to change the base. Will the Minister tell us whether doing so has had any practical effect? As I understand it, both article 54 and article 100A rely on the majority voting system.

Will the Minister also give a few more details about the timetable, and how certain, if anything can be said to be certain, agreement is likely to be? I believe that there is to be a meeting of the Economic and Finance Ministers on 19 June at which this may be considered and that there is likely to be a meeting of officials before that. Will the Minister say whether that is so? Has there been ministerial representation at the various meetings to discuss the directive? How recent was that? Will there be ministerial, rather than merely official, representation when the subject is next discussed? The fact that we have the most experience of trying to tackle the problems of insider trading within the EC does not mean that we have been particularly successful. On recent evidence, we have been far from successful. I hope that the directive will be more effective than our existing provisions. The major weakness of our regime is its failure to bring prosecutions. We have the rules, authorities have powers, evidence often seems to be available, but people are not charged and convicted.

As has been mentioned by Opposition Members in previous debates on this subject, we have reason to believe that the practice is more widespread than is usually thought. To back that up, Opposition Front Bench spokesmen and women have pointed to the high proportion of takeover bids that are preceded by erratic movements in the share prices of the companies involved.


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Mr. Tim Smith (Beaconsfield) : I understand the hon. Lady's frustration at the lack of prosecutions in this area, but does she think it enough to say that there seems to be sufficient evidence? Is not the problem that often there is not sufficient evidence and that it is difficult to obtain hard evidence in support of a prosecution?

Ms. Quin : There is evidence, but it is often not hard enough to make a prosecution stick. A great deal of worry is expressed in the press and elsewhere about the small number of prosecutions, and there is a feeling that the problem is not really being t ackled. I refer the House to an article in The Independent of 16 November of last year :

"Despite the major play the DTI has made out of its campaign against insider dealing, the crackdown has in reality been unimpressive"--

Mr. Cash : The hon. Lady will also note that in that same article it was stated of the Opposition spokesman that he drew

"attention to what he believed to be 17 prima facie cases of insider dealing. His analysis of the problem, however, would certainly have caused some hilarity among professional insider dealers. He had taken 17 cases where a company's share price rose sharply ahead of a bid announcement. This, he said, was evidence of a leak and massive insider dealing."

In the part of the article to which the hon. Lady was not going to refer, the attitude of the Opposition spokesman was seriously criticised.

Ms. Quin : The hon. Gentleman must claim to be a mind reader. Since I had just begun to quote from the article, I do not know how he can say with such authority that I was not going to refer to a section that appeared later. I draw the hon. Gentleman's attention to the fact that The Independent article takes a line similar to one in the Evening Standard and to yet another in The Economist. The hon. Gentleman may be about to wave another sheaf of articles at me, but I assure him that I am not quoting an isolated instance. I am quoting several newspapers and journals--

Mr. Maude : Earlier, the hon. Lady referred to evidence of widespread unprosecuted insider dealing. Does she accept that the mere existence of a movement in shares shortly before a takeover bid is announced is by no means conclusive evidence of insider dealing? It may simply be evidence of the bidding company building up a platform for its bid in advance of announcing its offer. There is nothing improper in that.

Ms. Quin : I did not claim that there was. I claimed that there had been such a large number of such movements that it raised questions, which I am sure the Minister would concede.

Mr. Maude : I must press this. The hon. Lady said that there was evidence of widespread unprosecuted insider dealing. The only evidence she has referred to, apart from quoting a comment in a newspaper which persuaded none of us, was the movement of some shares before a bid. I have pointed out, and she seems tacitly to accept, that there is a perfectly plausible and proper explanation for that. I ask again : where is the evidence of this widespread unprosecuted insider dealing?

Ms. Quin : Has the Minister examined all such cases of movements and is he entirely satisfied that there have been no irregularities? Unless he has, I cannot be absolutely reassured by what he says.


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Mr. Maude : Of course I have. The hon. Lady should inform herself a little better about these matters. If there is untoward movement in share prices or any evidence of dealing in advance of a bid, the stock exchange's insider dealing group conducts an investigation. If there is prima facie evidence of insider dealing, it is referred to my Department. There have been a great many such cases since the powers to appoint investigators under the Financial Services Act 1986 came into force. These inspectors have draconian powers--to quote the Opposition spokesman in the House of Lords--to gain evidence. I can assure the hon. Lady that all cases are properly investigated. If there is any evidence of impropriety it is pursued relentlessly.

Ms. Quin : I am certainly prepared to consider what the Minister has said. In preparing for this debate, I had to look back at the various debates that have taken place. I found that the Opposition did not seem to be satisfied with what seemed to be rather complacent comments by the Minister.

Perhaps I may continue to deal with the article in The Independent, even though that is proving difficult in view of the many interventions. The article claims :

"There are now 18 investigations under way and a further seven cases of suspected insider dealing under consideration. Some prominent City names are said to be involved. It is a fair bet, though, that few if any of these investigations will be addressing the real, endemic problem of insider dealing--that of the large-scale professional insider dealing rings. It is well known in the City that such rings, which often operate on an international scale covering a number of different markets, exist and they are big business : finding them and successfully prosecuting their members is another matter."

That seems to call for a clear system on an international level as well as on a national level. Presumably that is why most of us are in favour of the European directive.

Mr. Cash : Earlier the hon. Lady and the Minister said that the directive contains provisions to deal with matters relating to co-operation between member states and third party states as well. I do not understand the hon. Lady's point. Surely she understands that if the directive contains provisions dealing with the points raised in The Independent that ought to deal with the matter.

Ms. Quin : That assumes that the directive has been satisfactorily completed. I am raising matters that I hope will be taken into account in the final form of the directive. The directive has still not been completely agreed by the Council of Ministers and the debate is about putting forward ideas which we hope will be given due weight, whether or not they are actually printed in the directive at present. I hope that the directive will make the system simpler and clearer, that its provisions will be easy to enforce and that prosecutions will be easier.

There has been a mixed reaction to the directive. In the debate in the European Parliament, MEPs from Government and Opposition parties in the United Kingdom supported the directive. I pay tribute to my colleague, the MEP for Derbyshire, who presented the report on the subject and received widespread support from the other MEPs. There has been City anger at the European Community proposals which have been described as too wide and too far reaching.

I have received a brief from the Confederation of British Industry, as I am sure have other hon. Members. It


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deals with the proposed directive, and shows that the CBI feels that there are still considerable problems of definition. The CBI brief says :

"The CBI, therefore, asks Members to ensure that :

When the Directive is adopted--and it has to be written into UK law--there will not be any material alteration to the present UK law."

That does not seem to be a suggestion that I can support. If an alteration would mean an improvement, I do not see why there should not be a "material alteration" to the United Kingdom law.

Mr. Maude : Would the hon. Lady like to suggest the specific improvements that she would like to see us have embodied in the directive or passed into our own law?

Ms. Quin : There may be improved ways to get information and bring about prosecutions. The Government seem to be satisfied with the way things have worked out. Despite the barracking that I received when I referred to press accounts of this subject, I do not believe that all the articles in the press are unjustified or that the Government's complacency is justified.

Some final comments on the directive have been made by the Law Society, in particular in an article in the Law Society's Gazette of 2 June, which I wonder whether the Minister has seen. He is not responding, so I do not know whether he has. If he has not, I recommend that he does, because the submission from the Law Society makes valid points about the problems of definition and about the scope of the directive. It also makes points about the

extra-territorial implications of the directive, and the Law Society is concerned that the directive appears to contemplate only transactions in which the EEC territories are involved. It asks about what happens when the insider is within a member state, but the transaction is carried out in a non-member state. Has that aspect been considered in the EEC negotiations?

The Government's explanatory memorandum, submitted by the Department of Trade and Industry on 9 September 1987, says in point 20 :

"The provisions in the proposal which relate to co-operation between Member States will need to be considered in the light of other initiatives in this field--in particular, the possible convention of the Council of Europe."

What progress has there been in the Council of Europe? What implications will negotiations within the Council of Europe have for the passing of this directive?

The Government's explanatory memorandum also says that the United Kingdom has signed memoranda of understanding on the exchange of regulatory information in the financial services sector with the United States. Will that agreement extend to other EEC countries if the directive is agreed?

There remain problems about the directive that need to be sorted out. Of themselves, they do not negate the need for such a directive. The European national moves to stamp out insider trading are vital, but they also have to mean that our system becomes more rather than less effective. If this is the outcome of the negotiations in Brussels, we shall welcome the directive.


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11.7 pm


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