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Mr. Nick Hawkins (Blackpool, South): Does my hon. Friend agree that, despite the valuable work that the Committee has done on this subject, members of the industry are still concerned--I am aware of that concern as deputy chairman of the all-party group on insurance and financial services--that regulation is too often targeted on bureaucratic form filling and not enough on catching criminals who prey on our constituents?
Sir Thomas Arnold: I shall have something to say about criminals later. I sympathise with what my hon. Friend says. It is important to note that Mr. Andrew Large, for example, of the Securities and Investments Board recently said that he would be in favour of moving, when and where possible, towards reducing bureaucracy and form filling, provided that greater transparency and disclosure by the firms with which he deals can be
assured. He believes that a trade-off may prove possible. I welcome that and hope that he will explore the matter further.
I shall refer to just one or two specific matters in the report without trying to be exhaustive. I draw the House's attention to paragraphs 60 and 61. The Committee felt that the time had come to review the Financial Services Act 1986 not because we did not believe that the Act was flexible--clearly, it is--but because it may be deficient in some respects. Paragraph 60 says:
That theme is taken up again in paragraph 66 of our report, where we draw attention to the plethora of regulators in the United Kingdom. The evidence from Mr. Sharples of the Securities and Futures Authority was particularly impressive. He said of international regulatory conferences:
When my hon. Friend the Member for Blackpool, South (Mr. Hawkins) intervened, he talked about crooks and other such problems. The collapse of Barings bank took place during the course of the Committee's inquiry. That led us to reflect deeply on the problems of international co-operation and the need to have clear demarcation lines in terms of regulation. Mr. Sharples' evidence was very much in our mind when we considered the collapse of Barings and its consequences.
The Committee's report went into some detail on the nature of regulation and supervision. I do not propose to rehearse those arguments. In compiling the report, the Committee was concerned to provide not merely opinions but a quarry of useful evidence and advice from distinguished outsiders that could be used in future by the Government, the Opposition and other parties, regulators and the City. I hope that we shall achieve that objective because I am sure that the papers and library of evidence that we have built up will help greatly in that process.
It is clear that there have been and continue to be some tensions and difficulties between the SIB and the self-regulatory organisations. I do not find that altogether surprising because, over time, the SROs, and the SIB above them, have gradually become more accustomed to using the Financial Services Act, and have therefore enhanced and developed their roles. They have become much more proactive. As Mr. Large put it in paragraph 92 of our report:
I recognise that the tensions between the SIB and the SROs will not disappear overnight, but with patience and the passage of time, and given the hard work taking place now, I am sure that some of those difficulties will be overcome.
I should like to refer to Barings and the position of the Bank of England in some detail. One reason why the Committee is so keen for the Treasury to take full responsibility for the regulation of financial services in our country is that, in addition to the work on which we spent a great deal of time--all the operations of the Financial Services Act--we recognised that the Bank of England, as the lead supervisor and regulator for the banking industry, and responsible as it is to the Treasury, also, in practice, must have dealings with other financial institutions, some of which are not regulated by the Treasury.
The Committee has had plenty of difficulties and scandals with which to deal, Barings being the most recent. In the past decade three serious scandals have affected the Bank of England--Johnson Matthey, the Bank of Credit and Commerce International and Barings. Each time, the Committee has been given assurances that lessons had been learnt and that improvements have been made. That information is most welcome, but life does not stand still and in our fast-moving world the pace of events seems to dictate that, sooner or later, another batch of problems and another crooked deal comes to pass and the result is a catastrophe.
The collapse of Barings was a catastrophe, and most people recognise it as such. As I said in Committee to Mr. George, the Governor of the Bank of England, the Committee is not engaged in a witch hunt against the supervisory staff of the Bank of England--far from it. We recognise the long hours and the hard work that they put in, but we are entitled to question the apparent discrepancy between the report of the Board of Banking Supervision into the collapse of Barings and that which the Committee has now received from the inspectors appointed by the Minister of Finance in Singapore, in which a different tale apparently emerges. For that reason we will want to take further evidence in the new year to try to get to the bottom of what happened.
We all welcome the review of the Bank's supervisory functions that is now being undertaken by Arthur Andersen. The Minister referred to that report in her reply to the Committee's report. She specifically stated that before committing herself to a further review of the Bank's supervisory functions by the Treasury and the Government, she would want to take into account the report from Arthur Andersen and the Committee's future report into the details surrounding the collapse of Barings.
As the House knows, the Committee took a great deal of evidence on Lloyd's. I do not propose to dwell too much on it beyond saying that, once again, we were of the opinion that events as they unfolded showed the need for a greater concentration of effort within the Treasury and the need for external regulation. When all is said and done, we were not of the opinion that confidence could be fully restored in Lloyd's by the current regulatory arrangements. I know that there are those in the market who find that irritating, but that is the judgment that we reached on the evidence that we heard, and it continues to be our view.
"The problems faced by the regulatory system in dealing with products which do not fall clearly within the remit of one regulator come to the heart of difficulties rooted within the Act itself . . . The key exclusion from the Act is lending."
An example of that which probably struck the Committee more than any other was the fact that mortgage choice is not regulated under the Financial Services Act. The Committee took evidence in respect of a difficult problem with home income plans, which caused us a great deal of distress and anxiety. We certainly do not want to see that happen again. It was an unfortunate and, in some ways, deplorable affair, which caused us a great deal of upset. It is for those reasons, again based upon evidence, that we felt that the time had come to look again at the Financial Services Act, and to consider whether it is sufficient to deal with the rapidly changing market.
"I have always been embarrassed because we sit round this table and there are two from France, there may be a couple from Germany, three from the United States and usually about ten from Britain: the Bank of England, the Treasury, the SIB, the SFA and so on."
That is why the Committee concluded:
"The implication is that regulatory diversity in the UK means that it is unclear who the lead regulator is in a particular area or for a particular institution."
Such confusion occurs from time to time. We went on to state:
"This confusion is not conducive to the formation of a coherent international approach, where a clear vision of developments in the market and the appropriate regulatory response is essential."
"Yes, the SROs have become stronger frontline regulators and I think we should regard that as a success rather than a failure. It is exactly what we all intended."
His judgment was and is correct. The SIB has also increased its role in a manner that I welcome.
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