House of Commons Hansard Debates for 13 Dec 1990

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Mr. Crowther : I agree, and the whole Committee was unanimous on that issue. I hope that it will be taken up by those responsible for carrying out investigations and bringing matters to the courts. Most alarming throughout our inquiry was the complacency, indeed inertia, of the then Secretary of State, the right hon. Member for Cirencester and Tewkesbury (Mr. Ridley). From his laid-back attitude, one might imagine that there was no problem and that any difficulties that did exist were not worth bothering about. His attitude was exemplified by his almost incredible refusal to take any action against the people whose reprehensible conduct was graphically described in the House of Fraser report. It was almost unbelievable that no action was taken at the end of it all.

That general feeling that there is not a lot to worry about comes through in the Government's response to our report. It does not apply as seriously as it did to the attitude of the then Secretary of State, for the Government admit that there is a problem, but they are not taking it as seriously as they should, and I do not find in their response the sense of urgency that the Committee tried to bring to the attention of the Government.

I hope that the present Secretary of State will adopt a more realistic attitude. As a former Treasury Minister, perhaps he understands more clearly the need for absolute probity in financial dealings. I agree with the hon. Member for Hasting and Rye that, if the City of London is to retain its place as the greatest financial centre of the western world, those who besmirch its reputation by criminal acts must be relentlessly pursued and severely punished when they are caught.

4.52 pm

Mr. Robin Maxwell-Hyslop (Tiverton) : I cannot reasonably, in the short time we have for this debate, cover the whole spectrum of this immensely important report. I express at the start my disappointment that the new Secretary of State did not think that the response to this very major report which is being debated--which is not an Adjournment debate, to which a Parliamentary Secretary or Under-Secretary of State is the appropriate replier for the Government--was one that warranted his presence in the House. I think that is a matter of regret. I am bound to balance that comment by saying that I am equally disappointed that my colleagues on both sides of the House do not also regard it as a matter which ought to require their attendance in the House.

If you look, Madam Deputy Speaker, at the number of questions that there have been on the Order Paper in the last nine months on the matters covered by this report, I think it is a matter of shame that the hon. Members who asked those questions did not think it necessary to be here today to listen to, or participate in, this debate. This is not a matter of criticism merely of hon. Members or Ministers ; it is of both.

I direct my particular attention to recommendations which I will read out. Number 23 :

"We recommend that company law be amended to provide that (1) if inspectors report that directors have given false information to them, the Secretary of State should automatically apply to the court for their disqualification".

That has not been done in the case of the House of Fraser, where knowingly lying statements were made to the inspectors.

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I am not a lawyer, but I have little doubt that the provision of the Perjury Act 1911, I think section 6, which makes it a criminal offence knowingly to make an untrue statement, which is materially untrue, before a court or tribunal, even though not under oath, constitutes perjury, where the person concerned has a duty to do so. I understand that in the case of the Al Fayeds, the only question which perplexed the mind of the Director of Public Prosecutions was the extent to which they had a duty to make the--untrue--statements which they made. But untrue they were, and that is known. Whether the fate of a grandiose firm of grocers and haberdashers should be a matter of concern to this House I beg leave to doubt. That is not a great matter to us, however Harrods may describe itself. But it happens to embody a bank, Harrods bank, and the regulatory organisation for banks is the Governor of the Bank of England, and it is that to which I intend to turn my main remarks today.

For most regulatory organisations there is a Minister answerable to this House, or else there is a court of law. But here we have the Governor of the Bank of England who is the regulator of banks with very clear duties laid on him by statute, and among those are whether the persons running a bank or controlling it are fit and proper persons.

How it can be held that somebody who has lied in a major degree to a company inspector is a fit and proper person to control the Harrods bank passes my understanding. So the first thing that is relevant for us to consider is whether the Governor of the Bank of England, who was invited to give private evidence to the Committee but declined to do so, has discharged his duty properly. If he does not discharge it properly in the case of Harrods bank, are we--and we are the Select Committee on Trade and Industry upstairs, and we are Members of the House of Commons here in this debate--entitled to assume, or dare we assume, that he does perform those functions properly when the Government--the Minister responding to our recommendations--have given no satisfactory reply to our recommendations?

Why does it matter if a fishmonger, butcher and haberdasher with a bank attached has a corrupt ownership, because the corrupt ownership is also the shareholders? So in law the shareholders are not at risk except by the same corrupt ownership. It matters for this reason. The whole of that pyramid enterprise is enormously in debt, and its debts extend in a large degree to the weakest of the three great banks in this country, whose own stability is not out of question at this moment.

So if the Governor of the Bank of England does not discharge his regulatory duty properly in the context of Harrods bank, and the whole edifice of which it is part comes tumbling down because it cannot meet the interest on its enormous loan of debt, that has an implication--I would not want to say a fatal one because it probably is not a fatal implication--for one of our three great clearing banks for which the Governor of the Bank of England has another enormous regulatory responsibility.

The House of Commons has, and it uses as its instrument, the Select Committees which have grown up, first, since 1971 ; and then--since the then Government refused to put the Procedure Committee's recommendations for reformation of them into practice, it had to wait

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until 1980--since 1980 we have had the much stronger Select Committees, in which the House reposes its trust for examining not only Government but other bodies which control our nation, in a manner directly or indirectly responsible to Ministers, who in turn are responsible to this House. And that is why this debate is so important. It is important because the banking system of our country is different from that of the United States of America, which may shortly be in cascade collapse through lack of proper regulation. We have to learn from the lessons of other countries, and within the United Kingdom we have a very imperfect system of banking regulation--imperfect if the Governor of the Bank of England either does not read evidence sent and addressed to him by first-hand witnesses--not tittle-tattle--or if he ignores such evidence because he finds it embarrassing. If he will not respond to the Select Committees of this House which have power to take evidence in strict confidence, then to whom is he answerable?

Mr. Warren : I am sure that my hon. Friend would want to make it clear that as yet we have not sought to send for the Governor, but that we have the right to do so.

Mr. Maxwell-Hyslop : We have communicated with the Governor. He has refused to give us information, and the moment of this debate was not of our choice. It was the choice of the Leader of the House, and I would have preferred it to have come later so that we could have had the Governor of the Bank of England, who, in response to our first inquiry, asked the wrong questions of his legal advisers. He did not ask whether he could tell the Committee the truth. He asked whether, outside the Committee, revealing information that we needed to discharge our obligations to this House would constitute a criminal offence.

This was not the question that the Governor needed to ask. I could have told him the answer to the question that was material : that proceedings in Parliament, which taking evidence from witnesses pursuant to the Order of the House most certainly is, are wholly outside the province of the criminal law of this country ; and any judge who heard an indictment on such a matter and who did not throw it out as outside his jurisdiction would open himself to dismissal by both Houses, not because of amour propre. The Houses of Parliament today only exert their privilege not as it has historically existed but in so far as it is strictly necessary for them to fulfil the trust that the House has reposed in them. That is the restriction in which privilege today is applied.

Can anybody believe that inquiring why the Governor of the Bank of England does not use his regulatory functions against admitted liars running a bank belonging to and secured on an organisation of doubtful capacity to meet its financial obligations and in debt to one of our major banks is not a matter on which this House has the proper right to inquire in confidence? Then the only way to deal with the situation--I repeat to the Minister of State, since the Secretary of State is not here--is to raise it tonight on the amendment--a very rare one indeed--to the proceedings today.

I add for the information of the House that I have sat on the Select Committee since it first existed in 1971. Unusually, this Committee has always sat mixed. It has not sat Government supporters on the right, Opposition on the left, and then voted on party lines. One of the

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greatest Chairmen under whom I have ever sat is the hon. Member for Sheffield, Attercliffe (Mr. Duffy). This Committee since 1971 not only has always sat mixed : it has always endeavoured to serve the House of Commons rather than the political parties from which its members are drawn. I wish that that could be said of all Select Committees.

In concentrating on the supervision of banking, which has to be one of the aspects that emerge from our report on company investigations, I do not wish to usurp the function of the Select Committee on Treasury and Civil Service. It is because in this case there is a bank which is embodied in a grocer, fishmonger and haberdasher that it comes within our remit. But if that--and here I rest my remarks--reveals a dangerous weakness in the control mechanism which is the personal responsibility of the Governor of the Bank of England, and he has declined either to justify his inaction or to report his action to the Committee charged by this House with supervising that immensely important aspect of our affairs, then he ought to call into consideration his own occupancy of that office.

5.9 pm

Mr. Doug Hoyle (Warrington, North) : First, I must declare an interest. I am the president of Manufacturing, Science, Finance, which has more than 80,000 members working in financial services. Secondly, I congratulate the Minister for Corporate Affairs on his promotion and look forward to his winding-up speech.

Thirdly, this is the first time that I have had the opportunity to follow my good friend the hon. Member for Tiverton, (Mr. Maxwell-Hyslop), to whom it is always worth listening. He has no interest of any kind to declare and is fearless and of independent mind. I do not always agree with his views, but I always listen to them in the Chamber or in Committee with great interest. All hon. Members have benefited from his forthright style in presenting his case. I agree with every word that he said about the Governor of the Bank of England. The Committee needs to ensure that the Governor appears before it and stops making feeble excuses and hiding behind legal opinion which, as the hon. Member for Tiverton has shown, does not stand up to scrutiny.

Like other hon. Members who have spoken, including the Chairman of the Select Committee on Trade and Industry, the hon. Member for Hastings and Rye (Mr. Warren), I shall refer to the House of Fraser. I am sure that you will be busy over Christmas, Madam Deputy Speaker, but if you can spare the time and have not already read the inspector's report, may I recommend that you do so because it is far better than any mystery novel. If a book were published containing events such as those that appear in that report, no one would believe that they had happened. The television serial "House of Cards" is more believable than some of the events that are recorded in the report.

The report is right in what it says about the people running the bank and the largest corner shop in the country. The report says that the Fayed brothers dishonestly misrepresented their origin, their wealth, their business interests and their resources to the Secretary of State, the Office of Fair Trading, the press, the House of Fraser board and shareholders and their own advisers. It is amazing that the Fayed brothers are still there.

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The report has shown deep flaws in our system of company investigation and in the role of the Department of Trade and Industry in protecting shareholders, consumers and, not least, the public interest. After six years and six Secretaries of State, and despite the catalogue of dishonesty and deceit outlined in the report, it is clear that no action will be taken against the Fayed brothers by the DTI, by any of the regulatory bodies or by the Governor of the Bank of England. There could not be a clearer indictment of the system as it stands.

Perhaps I may remind the House of the history of this case. In 1984-85 and amid some controversy, the Fayeds acquired House of Fraser Holdings. That gave them not only the ownership of the largest chain of department stores in Europe but, as the hon. Member for Tiverton said, status as bankers through Harrods bank. As the inspector's report shows, since then the Fayeds have systematically lied about their circumstances to prevent the authorities from intervening.

In 1985, the Office of Fair Trading and the Department of Trade and Industry were deliberately misled by the Fayeds about their assets and business interests. Their claims that they had widespread international interests in a number of businesses have since been shown to be false. Their interests in shipping, construction, oil, banking and other areas were minimal and their claims did not fit the facts that emerged.

The assets of the Fayeds were tiny and could not have generated anything like the capital that was used in the House of Fraser takeover. That has been satisfactorily illustrated in the inspector's report. Time after time the Fayeds failed to give a proper account of how they financed that takeover. People could speculate about that, but I do not intend to do so. The claims made on behalf of the Fayeds by Kleinwort Benson and by Herbert Smith have also been shown to be untrue.

Mr. Maxwell-Hyslop : False.

Mr. Hoyle : I thank the hon. Gentleman. False is a better word. There is a fine distinction in relation to Herbert Smith because it was not acting as advocate for the Fayeds at that time. We must take up the matter with the Law Society when it conducts an inquiry. Perhaps the House should return to the issue of how the firm of Herbert Smith discharged its duty in that respect. I am not completely satisfied about the way in which it was done. The hon. Member for Tiverton told me that what the Fayeds said to Kleinwort and to Herbert Smith was false.

The Fayeds' claim that they were worth several billion dollars was also false and they are not from an established family of Egyptian landowners. One genuine detail appears in the inspector's report, and it is about the conduct of Mohamed Fayed in the capital of Haiti in 1964. According to the report, he entered into a deal, using a false identity, to modernise the harbour, and subsequently absconded with up to $187,500 that belonged to the harbour authority.

Despite everything that we know, the Government have repeatedly refused to refer the takeover to the Monopolies and Mergers Commission and have not sought to disqualify the Fayeds as directors. It seems to be acceptable to the Government to have proven liars and at least one proven thief in control of a major company, the

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House of Fraser, and certainly in control of a bank. I am sure that that causes the Minister some concern and I shall listen with interest to what he says about it.

My hon. Friend the Member for Rotherham (Mr. Crowther) spoke about the previous Secretary of State for Trade and Industry, the right hon. Member for Cirencester and Tewkesbury (Mr. Ridley). From the beginning he was not only laid back but confused the issue in his statement to the House on 7 March. On the one hand he said that disqualification should be used as a means of protection for the public, and on the other that it should be used

"to protect the interests of shareholders."-- [Official Report, 7 March 1990 ; Vol. 168, c. 876.]

Section 8(1) of the Company Directors Disqualification Act 1986 allows the Secretary of State to apply for the disqualification of an individual when he considers it to be

"expedient in the public interest".

Under section 8(2) the court would then disqualify a director if "it is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of a company." In what sense can the public interest possibly be protected by taking no action? Why were not the courts asked to make their own judgment on the conduct of the Fayeds and their fitness to run the House of Fraser?

Even more disgraceful was the former Secretary of State's attitude when he appeared before the Select Committee. He refused to give reasons for his failure to take any action that would have led to disqualification. I still do not know why he did not go to court. That is still a mystery to me. He gave us no explanation for it. The Government's conduct during the entire episode has been negligent. They failed to conduct a proper investigation during the takeover, and once the facts were known they failed either to refer the takeover to the Monopolies and Mergers Commission or to take steps to have the Fayeds disqualified as directors.

If we can have no faith in the Government's willingness to clamp down on shady business practices, we cannot have much more faith in the regulatory bodies that have been set up.

The hon. Member for Tiverton expressed the case exceedingly well in his forthright manner when he said that the Governor of the Bank of England has so far refused to come before the Select Committee. The Bank of England will not tell us what it intends to do, but it is obvious that it intends to do nothing.

The Securities and Investments Board has completely washed its hands of the issue. The Financial Intermediaries, Managers and Brokers Regulatory Association is waiting to see what everyone else will do. That is not its only failure. It also failed to act in the public interest with regard to the Levitt group where 18,000 investors are in some difficulty. In the light of what the Select Committee had to say about auditors, it is interesting that Levitt's auditors, Stoy Hayward, were also accountants for Polly Peck. It is a matter of great concern that FIMBRA has done nothing about that. As I said earlier, the Law Society cleared Herbert Smith on the ground that it was a referee in the affair, despite the fact that it was used by the Fayeds to provide false information to the authorities.

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It is perfectly clear that the structure of company investigations in Britain is a bureaucratic nightmare. Because there are so many bodies, the buck can be passed from one authority to another, and often the wrongdoers manage to slip away. We have far too many bodies and the knife should be taken to them. Their streamlining is long overdue. While we have so many bodies, it is not surprising that the crime that was described by my hon. Friend the Member for Rotherham is taking place to the extent that it is.

I hope that there will be some action on many of the Select Committee's recommendations. In particular, I would like a central clearing house to provide comprehensive co-ordination of the regulatory regime to be established without delay. The Department of Trade and Industry should more closely monitor the workings of the regulatory bodies and develop its own permanent staff of qualified investigators.

In addition, the broader public interest and the way in which it is applied should be more clearly enshrined in company law. Intermediaries should be under an obligation to ensure that they do not facilitate dishonest business practices. Finally, providing false information to inspectors should become a criminal offence and should lead to automatic referral for disqualification from directorship. That is essential.

I agree with the hon. Member for Hastings and Rye (Mr. Warren) and my hon. Friend the Member for Rotherham that we must not be complacent about the position of the City of London. That we are the greatest trading financial centre in western Europe gives me no grounds for complacency. We are looking at a Europe, whether we like it or not, in which the deutschmark dominates and the Bundesbank is becoming more and more powerful. Unless something is done to clean up our act, to clean up the City of London once and for all, in years to come the centre of financial dealing will move from here to Frankfurt or Berlin. Let us do all that we can to prevent that from happening. 5.27 pm

Mr. Douglas French (Gloucester) : I am grateful to have the opportunity to speak in the debate. I did not have the privilege of serving on the Select Committee on Trade and Industry when it prepared its report. I congratulate the Select Committee on a comprehensive, extremely interesting and effective report. Having listened to my hon. Friends the Members for Hastings and Rye (Mr. Warren) and for Tiverton (Mr. Maxwell- Hyslop), I realise that not having participated in those proceedings was a privilege forgone. However, it means that I have not formed any entrenched views on the matter of the House of Fraser, so I shall leave others to speak about that.

I want to focus my remarks on some of the Select Committee's other recommendations, in particular recommendation 21, which received a reply on page 15 of the Government's response. That recommendation says :

"We recommend that the DTI monitors closely the performance of the SIB and SROs in discharging their investigatory duties and reports annually to Parliament."

As the House will know, under section 114 of the Financial Services Act 1986, the Secretary of State has transferred most of his powers under that Act to the SIB, including investigations and enforcement powers. The Secretary of State has the responsibility of ensuring that those transferred powers are properly carried out.

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I wish to address some remarks to the respective costs and effectiveness of self-regulation compared with statutory regulation, particularly as it applies to financial services. In particular, I want to refer to the Government's response on page 15. The Government clearly believe that the new arrangements under the Financial Services Act 1986 need a period of stability, to bed down and to demonstrate the Act's full effectiveness. That period of bedding down is fast running out. It will not be long before the Government must decide whether they are to introduce further legislation to amend the 1986 Act's operation, or should consider alternative solutions to the problems that remain under that legislation.

I do not want to see statutory regulation of financial services. That would result in substantial extra costs for everyone, which would affect the level of funding that we are debating tonight. Also, best business practice in the financial services sector is much more likely to be the route to satisfactory results than a legal jungle of the kind that is to be found in other countries, notably the United States. Having said that, it is essential that the work of FIMBRA, the SIB and the other SROs is made more effective. If that means providing them with additional funding through the DTI--though admittedly the SROs do not receive that at present--or, as The Economist put it recently, beefing them up with taxpayers' money, so be it.

I believe that the Securities and Investments Board is fairly conscious of the need to watch costs. I expect that, when its chairman meets the Select Committee on 19 December, he will show that the board is cost-conscious. There has been some misguided criticism of the SIB, with references to its luxurious new offices and its staffing levels, but much more important is the extent to which the board recognises when it is appropriate to deploy its full statutory powers in making an investigation, or when its objectives can be readily achieved by less formal and expensive means. Its judgment in that respect has generally been sound. However, I remain of the opinion that the SIB is not as effective as it should be--particularly in its relationship with the different SROs, and with FIMBRA in particular.

FIMBRA has some considerable operating strengths. I spent some time at its headquarters examining its procedures, and reached the conclusion that it has great strengths, particularly in the collection and collation of material about offenders and would-be offenders. That part of its operation is efficiently and carefully run, and secures most of the information it needs. None the less, FIMBRA remains a victim of its own rule book. In the public's perception, there is a gap between what FIMBRA should do and what it is able to do. There is a gap also between the point at which FIMBRA's responsibilities and powers end and those of the SIB begin, which gives rise to much misunderstanding and ambiguity. Consequently, certain practices have a tendency to fall between two stools. That is particularly evident in cases where FIMBRA decides to terminate a company's membership. From that moment, FIMBRA ceases to have responsibility for the ex-member's conduct, and the SIB assumes it. In my experience, the board has shown some reluctance to pursue ex-FIMBRA members in respect of misconduct during their period of membership of FIMBRA, even though the SIB has responsibility for monitoring them. That gap urgently needs plugging.

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There is something of a gap also between the SIB's responsibilities and those of the Department of Trade and Industry, which devolves to the board the bulk of its monitoring responsibilities. However, I know of cases in which, when a point has been put to the SIB, it has responded that it is powerless to act, or has passed responsibility to the DTI. But when the same point is taken up with the DTI, it argues that the matter remains the responsibility of the board. That is a nightmare for people pursuing important inquiries.

Mr. Maxwell-Hyslop : It is unacceptable.

Mr. French : I agree with my hon. Friend that it is absolutely unacceptable. I urge my hon. Friend the Minister to tighten up the lacuna between the DTI's responsibilities and those devolved to the SIB. Members of the general public and others wanting to undertake serious inquiries do not want to be shuffled off from one Government body to another.

I take the view that, in financial services, as in other consumer areas, the principle of caveat emptor remains extremely sound. That does not mean that the public should take a total risk. The public may be expected to do so in respect of the quality of an investment, and that risk cannot be removed from them. However, whereas one can make a judgment at the time of purchase about the quality of a pair of shoes, it is not reasonable to expect an individual investor to make a judgment as to whether or not the company in which he is investing his funds is honest and correctly administered. The individual investor does not have sufficient information on which to form a view and to make a proper judgment.

Nevertheless, if an investor is called upon to judge the integrity, honesty or administrative competence of a financial institution or intermediary, he should not be hampered in his attempt to do so by the presence of a FIMBRA imprimatur, as displayed in the literature or on the premises of the firm in question. Such an imprimatur, if it conveys anything at all, conveys the message that the company has been judged as honest and one with which the investor may reasonably do business. That is what the FIMBRA imprimatur conveys to the majority of the investing public : that the organisation's integrity has already been screened. When FIMBRA membership is withdrawn without proper publicity and public knowledge, as has happened, the investor is being perfectly reasonable when he protests that he thought that FIMBRA's stamp would provide him with some safeguard.

Mr. Tim Smith : I agree with my hon. Friend's remarks, but a difficulty arises because there is an expectation gap--I say that as FIMBRA's adviser. The FIMBRA imprimatur gives some investors the impression that they have a total guarantee, and caveat emptor appears to have gone completely out of the window.

Mr. French : I accept my hon. Friend's argument, and I should not want investors to imagine that the FIMBRA imprimatur provided them with a total guarantee.

Mr. Maxwell-Hyslop : My hon. Friends have used the phrase "total guarantee". Can we distinguish between a guarantee against criminal conduct and a guarantee of profitability? If an investment yields no profits, it is a bad investment and the result of bad judgment. The point that my hon. Friend the Member for Gloucester (Mr. French)

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is making--quite rightly--is that FIMBRA membership should not be taken to relate to profitability ; it is to do with policing against criminal dishonesty in the running of businesses.

Mr. French : That is exactly the point that I was trying to make. I would not seek to protect an individual investor against the investment ability of the firm into which he was putting his money ; that is a risk that he must take. There can never be any guarantee in that regard : there will be good investment companies and there will be bad ones, and we must accept the position as it is. If the FIMBRA imprimatur is to mean anything, however, it should mean that a company is adjudged to be an honest company that administers its affairs correctly. At present, the public are confusing the two issues, believing that the one is the equivalent of the other.

Mr. Maxwell-Hyslop : Which it is not.

Mr. French : Which it is not.

If an investor loses his money in circumstances in which compensation is due, he will encounter significant weaknesses in the present compensation scheme. Since August 1988, under the Financial Services Act, compensation for a loss of up to £30,000 has stood at 100 per cent. It stands at 90 per cent. for a further loss of up to £20,000, with a maximum of £48,000. The scheme is run by a separate company, but financed by levies from the SROs. The payments, however, are not guaranteed : compensation will depend on the number of claims presented in any given year.

Thus, someone unfortunate enough to make his claim in the wrong part of the year, however valid that claim, may not receive the compensation that he might have received had the claim been made earlier in the calendar cycle. That, surely, is unsatisfactory : if there is to be a compensation scheme, it must of necessity be open-ended to the extent that it is not time- limited.

Mr. Jim Cousins (Newcastle upon Tyne, Central) : I have a good deal of sympathy with the hon. Gentleman's arguments. Does he not agree, however, that difficulties are caused to people who may be faced with a bewildering array of investor compensation schemes? Those dealing with other bodies covered by the Financial Services Act--such as the recognised professional bodies--may find themselves in a very different position from those using companies covered by the self-regulatory organisations created specifically by the Act.

Mr. French : That is certainly a problem, and I think that much more clarification is needed. It may be simply a question of communication, but I suspect that it goes rather further, and that a tightening of the system will be necessary to enable people to understand fully the circumstances in which they would receive compensation and the precise source of that compensation. If that requires additional public expenditure, we can no doubt make savings elsewhere to cover it.

Mr. Maxwell-Hyslop : My hon. Friend has taught me something this evening. I have studied the matter with some assiduity, but I did not know that the pathetic guarantee which replaced the £100,000 stock exchange guarantee, and which has not been adjusted in accordance

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with inflation and the cost-of-living index in the two and a half or three years since its introduction, tapered off as the year went by. Will my hon. Friend comment on that lack of indexation, and on the difference between the payment now made if a stockbroker defaults and the previous £100,000 guarantee--or was it an unlimited guarantee?

Mr. French : The compensation to which I was referring does not relate to matters connected with stockbroking firms ; it relates to personal investors, and would apply, for example, to an investor who lost money as a result of investing with a FIMBRA member. Over a period, the compensation funds available run out, so that, at the end of the cycle, an investor may run the risk of not receiving the compensation that he might legitimately expect to receive earlier in the cycle.

Ms. Mowlam : The hon. Gentleman said that he would welcome the use of public funds if an increase in the scheme was necessary, and implied that he was sure that the Minister could find such funds. Has he any suggestions about where the Minister could find them--bearing in mind the fact that the Minister took the Barlow Clowes compensation funds from the budget for small businesses, research and innovation and the regions, as reported in the estimates?

Mr. French : I was not proposing to make any suggestion at this stage, although I shall have something to say about Barlow Clowes a little later. I do not believe that public funding is essential for such purposes ; it is one solution, but it would also be possible, within the existing framework, to raise more funds than are currently raised through a levy on the SROs, which derive their funds from subscribing members. If, however, the money cannot be raised through an extension of the existing arrangements, I would expect a small saving to be made somewhere in the DTI's budget. In the context of that entire budget, we are talking about a very small amount of cash.

We see under subheading (k) of class 4, vote 2 that the figure of £156 million is listed for 1989-90, relating to

"Special payments to the Government's agents in connection with Barlow Clowes".

That sum does not need to be included in this year's estimate as the Barlow Clowes affair is now behind us, but I believe that there are other special cases that come close to being in the same category.

Let me cite a constituency-related case. C. J. How, a company that operated in Gloucester, Cheltenham and Worcester, was a FIMBRA member, and accepted investments from many of my constituents as well as those of my right hon. Friend the Member for Worcester (Mr. Walker), my hon. Friend the Member for Cheltenham (Sir C. Irving) and, probably, others in that part of the world. Some of the investments amounted to £20,000 or more. The firm was suspended in April 1987 for failing to submit its accounts. In January 1988, its FIMBRA membership was formally withdrawn because of accounting problems, and at that point FIMBRA's responsibilities were ended.

The direct responsibilities of the SIB began in April 1988, which was when the relevant part of the Financial Services Act came into force. That meant that, between January and April 1988, the DTI was itself responsible for monitoring the affairs of this ex-FIMBRA member. By August 1989--some 16 months later--the DTI had stepped in and stopped C. J. How from running its

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business altogether. It then became clear, however, that, in the intervening period--after FIMBRA membership had been

withdrawn--particular categories of the firm's business had continued ; that unit trust companies and life assurance companies had continued to supply it with investment products ; and that investors had continued to invest.

One of the reasons for investors continuing to invest was that they had not been told about the termination of membership. Existing members reinvested and there were new investors because they did not know that C. J. How was no longer a member of FIMBRA. When asked about that, one of the reasons given by FIMBRA is that it has to restrain itself in the extent to which it publicises the withdrawal of membership in cases where there may be damage to the remaining part of the business that is unaffected by the withdrawal or, in extreme cases, where there might be a claim for defamation. FIMBRA makes announcements in trade papers, but such specialist papers are not read by ordinary investors who walk down the high street. It is essential, when membership is to be withdrawn, that a way should be found to let potential or existing investors know about it. It should be more effective than now and should not involve any problems of defamation or damage to the rest of the business. At the time of the withdrawal of membership, FIMBRA claimed to have no evidence of fraud or misappropriation. Clients were said not to have been complaining. At that time, no clients were seen to be at risk. However, in the event, many clients lost a substantial amount of money, and in that way it bears a close resemblance to the procedures in the Barlow Clowes affair. As the Barlow Clowes investors have received a substantial amount of compensation, as provided for in the estimates last year, at the very least the investors who lost money between January and April 1988 when the scrutiny of the company lay with the Department of Trade and Industry--it was no longer a member of FIMBRA, and the Securities and Investments Board was not responsible--the Department should accept some responsibility for the losses incurred, especially for those who invested in a company where the FIMBRA imprimatur was still in evidence.

I wish to comment on the remarks of the hon. Member for Warrington, North (Mr. Hoyle) and the remarks attributed yesterday--correctly, I hope--to the hon. Member for Redcar (Ms. Mowlam). The hon. Member for Redcar said that the Levitt company--that seems to be on everybody's mind this week--raises serious questions about how FIMBRA does its job and what protection is being provided for small investors. I agree that it does raise those issues.

Some of the events in the Levitt story are extremely similar to those involved in the cases of Barlow Clowes and C. J. How. It is about time that we began to learn from experience. FIMBRA became alarmed during a routine inspection of Levitt when it discovered invoices of £21 million appearing apparently from nowhere. Presumably, in this case, it was to get funds into the company rather than the other way around. That is a substantial sum of money. One must ask whether the discovery came about from one day to the next or whether it evolved over a period. If the latter is the case, it suggests that more regular routine inspections by FIMBRA should be the order of the day.

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FIMBRA declared itself dissatisfied with the company's accounting records. As the hon. Member for Warrington, North pointed out, it apparently relied upon assurances from the auditors of Polly Peck, if you please, that the client's assets were intact. As I understand it, FIMBRA did not make a formal announcement at that time because of potential effects on the liquidity of the company and the fact that it had no evidence of mismanagement or misappropriation of funds. Therefore, it kept its inquiry secret to avoid public panic. As I understand it, and on the basis of press reports over the past seven days, even now the company has not been formally suspended by the SIB but, rather strangely, it has been "effectively suspended". Perhaps my hon. Friend the Minister can tell us the difference between those two terms. What is more, FIMBRA pronounced that it considered that client money was not thought to be at risk. That was only a few days ago, yet this morning one sees that there are projected losses of up to £40 million. I wait to see how those two positions are reconciled. It may be that the £40 million has nothing to do with client funds. We do not know. But I suspect that the two sums have been muddled up.

Mr. Warren : I have before me a document published this afternoon by FIMBRA, and I have no doubt that my hon. Friend would like to take it into account. It says :

"FIMBRA's newly-appointed Chief Executive has praised FIMBRA's regulatory action in respect of The Levitt group Limited." Is that not a little self- congratulatory?

Mr. French : FIMBRA's new chief executive has been in his job for only a few days or weeks. I suspect that he was not in post when the earlier investigations should have been taking place. However, I agree that that comment seems rather more casual than is appropriate in the circumstances. I look forward with great interest to reading the full statement.

One key problem in the case involving the Levitt group is that there are no specific rules about the way in which financial services companies recognise receipts from long-term contracts, particularly from insurance commissions. The receipt of such commissions may be spread over a considerable time, but they may be brought into account the moment the policy or instrument has been sold. The Levitt group has admitted that the commissions were put into its accounts when the contracts were formally signed. That provides no allowance for subsequent cancellation of investments which frequently occurs in that type of personal investment. Therefore, the company is cashing in on the commission before it is in the bag. This is fundamentally unsatisfactory and a proper rule to address the problem should be set out by FIMBRA or the Life Assurance and Unit Trust Regulatory Organisation.

Section 447 of the Companies Act 1985 provides that Department of Trade and Industry staff can investigate where they have grounds for suspicion of fraud, misconduct or failure to provide shareholders with information that they may reasonably expect to have. I believe that there is a significant lack of enforcement of those provisions. I want to give an example. I am thinking of cases that also affect the stock exchange regulations, where undertakings are given to repay loan stock at a date in the future but where nothing is done at the date of maturity.

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For example, the Metropolitan water board B' stock was issued under the registration of the Bank of England in a prospectus going back as far as 1908. It was due for repayment in 1958. It was not repaid in 1958. The Metropolitan water board was taken over in 1974 by Thames Water, which was privatised in 1989. The flotation document contains a small paragraph on contingent liabilities, which says : "Thames Water has been informed that a holder of part of the loan stock considers such stock to have been overdue for a number of years prior to the establishment of Thames Water Authority and that such stock is immediately repayable together with an additional amount of interest at market rates. The Directors of the company have been advised that the principal amount of stock potentially involved is unlikely to exceed £3 million."

That reference to £3 million is relegated to a small paragraph in the flotation document.

Mr. Maxwell-Hyslop : Was not that a rather economical statement by the directors? Should not they have said whether or not their legal advice was that that amount, however much, was owing or not?

Mr. French : My hon. Friend takes the words out of my mouth. The loan stock holders who should have been repaid in 1958 have lost the value of that stock, which remains unpaid, and the interest on it. They have suffered from the fall in the value of the pound since 1958, which amounts to about 90 per cent. If all those factors are taken into account, far from it being a contingent liability of£3 million, it may easily be 10 times as much. If the fall of the pound is taken into account, it may be a further 10 times higher even than that.

Although I believe that that loan stock should be repaid, I accept that there may be some argument as to why it may not be due. But I cannot defend the failure to state clearly whether it will be repaid, and if not, why it will not be repaid. What hope is there for the small investor whose predecessors invested in that stock? Is he to take up the burden through the courts of reclaiming the amount that he believes to be due? If he is not to do so, could not he reasonably be expected to be told that he has no case? The position in the flotation document is ambiguous.

That situation is known to the Governor of the Bank of England--to the Treasury, to the stock exchange, to the directors of Thames Water, who are potentially, if not actually, in breach of the Companies Act, and to the Department of Trade and Industry. It has been known for some considerable time, yet no one has been willing to act. A regulatory system that permits that is inadequate and should be dealt with promptly.

6.3 pm

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