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8.23 pm
Mr. Nigel Forman (Carshalton and Wallington): I declare my interests as they are registered in the Register of Members' Interests. They are in some way relevant to the debate in the sense that they give me a background in these matters that is slightly more knowledgeable than it
would otherwise be. From that point of view, there is no harm in Members of Parliament having openly declared outside interests.
I congratulate my hon. Friend the Member for Hazel Grove (Sir T. Arnold) not only on the compelling way in which he spoke, but on the highly competent way in which he chaired our Committee through this long set of hearings. He managed with his usual subtlety to produce a well-balanced report and one with which, broadly speaking, I found myself in agreement, even though-- alas--I was not able to be present at the final voting sessions on the report.
It is good that the House had the opportunity to listen to my hon. Friend the Member for Gloucester (Mr. French). Although what he said might not have been flavour of the month with all Opposition Members, it needed to be said. There is another point of view on these matters, which was well reflected in my hon. Friend's speech. I commend him for the way in which he put his case.
I remind the House of the vital importance of financial services to our national economy--both now and in the future--especially services in the City of London, which is almost a form of shorthand for them. I hasten to add, though, that many other financial centres are growing where offices and so on cost less, which are very important. I think of Edinburgh, Brighton, Cheltenham and a number of other places.
First, it is perhaps not widely known that financial services represent about one sixth of our national economy--and the proportion is growing all the time. Secondly, the City of London itself has an unduly-- or perhaps I should say very strikingly--high proportion of global equity and bond trading, of foreign exchange transactions, of derivatives trading, of marine, life and non-life insurance and of fund management. That is not just because we are the widely acknowledged leader in our time zone, as it is called, but, I can say quite dogmatically, it is because in certain specialty areas there is no financial centre in the world to match the City of London. Long may that remain. It is a vital national interest that it should be so.
I would like to comment on the collapse of Barings, which has been mentioned in the debate. With the wisdom of 20-20 hindsight, the collapse of Barings may not have been such a bad thing; it was sad, but salutary. I say that because it was large enough to trigger a major review and shake-up of the necessary controls, especially on derivatives and rocket scientists' instruments, but it was small enough not to threaten a systemic collapse either of our financial system or of the global financial system. From that point of view, again with 20-20 hindsight, it has served not only our interests but the wider interests rather well.
Looking at some of the main issues in our report, I should like to say a word or two about first principles. First, the protection of investors and consumers is obviously the main concern of the House of Commons in financial services, and rightly so. Indeed, it was the Committee's main concern. But that protection and general safeguarding of their interests should not be taken to the extent, as my hon. Friend the Member for Gloucester has already said, of removing all need for caveat emptor and of removing all moral hazards. After
all, people are expected to be grown up in most other areas of their life, so why should financial services be a notable exception?
Secondly, it would not be wise for us to over-burden the sector with excessive rules and costs, as my hon. Friend the Member for Gloucester also said. Thirdly, one must recall that all jurisdictions these days--tax and regulatory--are in fact involved in a form of international global competition. It was not always like that, but it is now, in a world of footloose capital and mobile individuals. As a result of that, we have to take account, as must the Treasury, of the danger of driving lucrative and lawful business offshore if our regulatory and tax climate were to become too intrusive.
Fourthly, if we move, broadly speaking, from trust to contract, which is a brief soundbite describing what has been going on over the past 10 years, we must recognise that we are being driven in a more and more legalistic direction. One has only to look across the water to the United States to see the downside of that if it is allowed to be taken too far. Therefore, while protection of the consumer and the investor must be absolutely important, it must be balanced by the rather commonsense factors that I have just mentioned.
My second theme is the structure of regulation, with which the Committee's report is largely concerned. I remind the House, not that it needs to be reminded, that the current structure traces itself back to the free concordat between Lord Parkinson--who is now in another place but who was then Secretary of State for Trade and Industry--and Sir Nicholas Goodison.
The deal was done essentially in relation to the stock exchange. It eventually found its way through to the Financial Services Act 1986. It gave birth to what the hon. Member for North Durham (Mr. Radice) has described as self-regulation. That is a misnomer in today's world. More appropriate would be the term practitioner-influenced regulation. That is what it is and that is what it should be. In other words, it is regulation by consent based upon what is practicable.
We may write as many elaborate rule books as we like--there were some signs that the Securities and Investments Board would do that in the days of Sir Kenneth Berrill--but that merely creates extra problems rather than new solutions. I am delighted that the trend of the SIB was pulled back to some extent by subsequent chairmen. Mr. Large is doing an excellent job and getting the balance about right.
It is worth saying that good regulation is in the market interests of the regulated. That is important. In responsible and reputable markets such as those based in London and other cities in the United Kingdom, practitioners see good regulation as being in their market interests. They want a good regulatory structure within which to operate and they wish to abide by its regulations. Enormously adverse publicity is attracted to any financial institution if it gets things wrong or steps on the wrong side of the line. That demonstrates the strength of my argument.
Paragraph 26 of the Government's response takes up the argument whether there are too many layers of regulation. In the Select Committee, Opposition Members, especially the hon. Member for North Warwickshire (Mr. O'Brien), expressed the view that there are. They argued that rather than having the departmental level, the SIB level and the self-regulatory
organisation level, we should have two rather than three. It was suggested that at the departmental level the Treasury should have sole responsibility.
I quibble only about the desire of the hon. Member for North Warwickshire and his hon. Friends to make three layers into two. On reflection, I think that the three-layer system is satisfactory and, by international standards, is working pretty well. I agree, however, with Opposition Members in their keenness to give the Treasury sole and therefore lead responsibility within Whitehall for arrangements at departmental level. That makes good sense. I happen to know that the Treasury is becoming increasingly geared up for that purpose and is attracting many well-qualified people to its ranks to undertake supervisory functions in so far as they belong in a Department of Government.
If I had to justify the continuation of three layers, which is what I favour, I would argue that the top layer, the Treasury, would provide the necessary public accountability through Ministers to the House for the framework of law and for the broad lines within which the structure operates. The middle layer, which is represented by the SIB, would be there to regulate the regulators. That is the way in which Mr. Large describes his main role. The bottom layer, in a hands-on and day-to-day way, would administer regulation and ensure that wherever possible it was done with the intelligent and active co-operation of the regulated.
As I have said, the regulated recognise that it is in their interests to co-operate and to be on the right side of any line. On my quick reading of the Government's response, which I accept took place only this evening, I was glad to read the concluding sentence in paragraph 35, which states:
I support the idea of the Treasury being given the sole and consequently key departmental role in the three-layer structure, but I would like to hear from my hon. Friend the Minister, when she replies, a little more about the Government's thinking. As set out in the Government's response, it is delphic. Paragraph 26 reads that the Government are quite warm to the idea of having the Treasury as the main Department involved, but adds that
The present structure is, broadly, working rather well and needs to be left well alone. We should not spend all our time in this place pulling up plants to see how the roots are getting on. There is no decisive advantage in fundamental change. That is the point that I made in some of the friendly arguments that I had with the hon. Member for North Warwickshire when in Select Committee. We used to cross swords on the issue.
"The Government considers that the review mentioned by the Committee would be destabilising for an industry which has already seen considerable change and therefore is urging all regulatory bodies to ensure that such a review will not be necessary."
I agree with that sentiment and I hope that my hon. Friend the Minister will adhere to it.
"wider issues . . . will need careful consideration".
The House deserves to know what some of those wider issues are. It is unfortunate if the Minister has to be coy. If that is the position, we might have to pursue the matter elsewhere at a higher level.
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