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Mr. Forman: The hon. Gentleman will notice that I paid tribute to Edinburgh in my speech. He should avoid the danger of being complacent about the point of regulatory competition. Evidence has come before the Committee, and we know from other sources, that large multinational conglomerate financial institutions are placing an increasing part of their firepower--if I can call it that--in countries such as India, where there are educated and competent people who are well able to do the job, and communist China. Over the horizon lies the prospect of Shanghai becoming a booming financial centre in its own right. In addition, these places do not recognise western versions of intellectual property.
Mr. Darling: I appreciate what the hon. Gentleman says, but I made the point that we should not get carried away. There are those--I have not heard any of them tonight--who argue that we should have a minimal level of regulation to compete. I intend to return to this point shortly, and I am conscious of the fact that there are problems which must be dealt with. As the hon. Gentleman will find out, the thrust of what I have to say is that it is necessary not just to simplify the structure of regulation but to revisit the nature of regulation because this country is going down the wrong path and a change of direction is necessary. That has been the Opposition's belief for some time. I caution those who would say that the best thing would be to try to compete with those countries where there is no regulation whatsoever. No hon. Member from either side of the House has said that, but the view exists and it must be dealt with.
The Select Committee covered a wide range of subjects, and I shall touch on one or two before I return directly to the Bank of England and to the SIB regime which have dominated our discussion tonight. I agree in general terms with much of what the Select Committee had to say, but I wish to look at a couple of points briefly.
The first is the question of Lloyd's. We agree that external regulations are overdue and should be put in place. That view is not unique to the Opposition-- Conservative Members have mentioned it, and the council of Lloyd's happens to take that view. I hate to inject a note of controversy into the debate, but it is matter of
regret that the former President of the Board of Trade-- now the Deputy Prime Minister and First Secretary, or whatever he calls himself--told the council of Lloyd's that the Government would not sanction legislation. The reason for that was perfectly obvious to Opposition Members--it was because of the political embarrassment in which the Government would have found themselves. At least 49 Conservative Members are members of Lloyd's, many of whom are in the Cabinet.
The House may remember the last time we debated financial services in the House. The Opposition started off with a general review of what was happening, but very soon two Conservative Members--one who had lost a lot of money and one who was a member of the council of Lloyd's--started saying things to each other in such a way that outsiders would have found it hard to believe that they were in the same party. I can well understand why the President--as he then was--took the view that the Government wanted nothing to do with the matter.
It is intolerable that the interests of Lloyd's and of the reputation of the insurance market in Britain should take second place to the political embarrassment that the Government would endure if they introduced a further Lloyd's Bill to allow for external regulation. We believe that external regulation is essential and at an appropriate opportunity we intend to give Lloyd's that assistance. That would also help Lloyd's to make the recovery on which it is embarking. I acknowledge, as other hon. Members have done, the work that Lloyd's has been doing.
Mr. John Butterfill (Bournemouth, West):
I am a little puzzled by the point that the hon. Gentleman makes. Before I go further, I remind the House of my declared interest in the matter. The hon. Gentleman admits clearly that the council of Lloyd's would be happy to co-operate with any legislation that might be introduced. How might that be embarrassing to the Government?
Mr. Darling:
The council of Lloyd's was keen for legislation to be introduced. I cannot remember whether the hon. Gentleman was present for the earlier discussion on Lloyd's. He will know that whether it is a matter of controversy to his colleagues depends on where they stand on Lloyd's. It was good of the hon. Gentleman to declare his interest. He might also declare that he has just walked into the Chamber. He may have missed the introduction to the debate.
A section of the report dealt with plea bargaining and enforcement. I caution hon. Members to be careful before institutionalising plea bargaining as a way of resolving problems in the City. The Securities and Exchange Commission in the United States uses it, but its modus operandi is different. I argue strongly against buying from the United States an off-the-shelf solution to our problems. That is not to denigrate the SEC. It is an American creation for the American market. I declare an interest as a Scots lawyer. I am wary of importing American legal methods into this country unless there is good justification for doing so.
I want the Select Committee to do some more work to find out whether the regulatory system could be used to better effect in matters such as insider dealing. The law on
insider dealing has fallen into disrepute. There has been a handful of prosecutions in the past 10 years. A number of recent cases, to which I shall not refer, for the sake of brevity, have led the public to believe that the law on insider dealing is not enforced. People who work in the industry will tell anyone who cares to listen that there needs to be a change. Perhaps the regulatory system could help; the criminal law is not working. If there were an effective deterrent, instances of insider dealing would be greatly reduced because people would believe that they had every chance of being caught.
No one is asking for more regulation. I have a great deal of sympathy with the hon. Member for Carshalton and Wallington. We do not need more regulation. We are talking about effective regulation and fewer rules that work. Four rules that work are worth far more than 400 that do not. I agree with the hon. Member for Gordon (Mr. Bruce) that we have an innovative industry. That is why we and everyone else have shied away from notions of supervision or authorisation of products. That would be stifling and unnecessary.
Talking of fewer rules that work, let me return to Europe. Many companies and institutions now face the problem that, in addition to having to deal with the United Kingdom domestic regulatory regime, they have to deal with an increasing number of regulations from Europe as well as meet their international obligations. As we have heard, most institutions in Britain trade throughout the world. Compliance officers frequently have to deal with three or four different regimes. Usually, none of them tries to do the same thing. They are often contradictory and do not always fully equate with the business practice of the company.
One of the reasons why we argue that we ought to be at the heart of Europe is that it is high time that our influence was felt more when regulations are formulated. The European Commission has a tendency to regulate for an industry that does not exist as such across Europe. The structure of the United Kingdom industry is very different from that of the industry in Germany, Italy and other European countries. It is important that the British Government fight for British companies and argue the British corner and that we do not allow ourselves to be lumbered with regulations that impose a burden on our country.
The United Kingdom industry has a sophistication that is not always reflected elsewhere. Our companies and institutions will be at a competitive disadvantage if they face rules and regulations that were never designed for the United Kingdom industry. I am not a Euro-sceptic, despite what I have just said, but the Government could do more.
The Committee examined regulation and supervision. I should like to make a few remarks that I hope will encourage the Committee to look further at certain issues. Such work provides a useful basis for policy formulation by the Government, I hope, and certainly by the Opposition.
When we pose the question, "What are supervision and regulation?", we cannot make the distinction often enough that the City of London--our financial services industry-- is many different industries, so a generalised approach to regulation simply will not do. We have to distinguish between supervisory requirements, where we are guarding against systemic failure, and regulation, where we are
dealing with the conduct of business. We must recognise the difference between what is required at the wholesale end of the market, where we are dealing with relations between institutions and the doctrine of caveat emptor can apply more or less unencumbered, and what is required at the retail end, where we are dealing far more with customer protection and that doctrine must apply.
The object of the regulatory system must be geared not only to protecting members of the public from unscrupulous selling techniques or bad advice but to enabling them to make a genuine and informed choice. I would slightly temper the doctrine of caveat emptor because the object of the regulatory system, particularly at the retail end, must be to put buyer and seller on an equal footing.
I must say a word or to about supervision and prudential supervision with particular reference to the banks. On Barings, suffice it to say that we know that it collapsed because of incompetent management. How can a bank shift its entire capital out of the country with no one asking what is going wrong? How could Sir Peter Baring, within a couple of days of the collapse, say that it was all the work of a competitor? I cannot imagine that any competitor could do as much as the company managed to do to itself.
The people who run Barings now should think long and hard about paying bonuses to those who were involved in the collapse of the bank. It sends the wrong signals around the world. Just as we in the House have to think about how others see us, so corporate institutions must do the same. Barings might like to reflect on that and a bit of humility would not go amiss.
The real lessons that we have to learn are for the Bank of England and other regulators. As has been said, Barings was the third major failure with which the Bank had to contend. The Board of Banking Supervision produced a good, but damning, report that should cause us some concern. We were particularly struck by the board's observation in paragraph 14.35 of that report:
I also find it difficult to understand why the Governor of the Bank of England is so defensive towards those of us who have been critical. Our criticism has in many ways been remarkably restrained. In the summer preceding the collapse of Barings, the Governor said that there was no need to worry about derivatives because, "These chaps know what they are doing." Those of us outside and who, in whatever capacity, are charged with deciding what supervisory regimes are appropriate are bound to have regard to what the Governor said then and what happened subsequently when Barings collapsed.
The culture of the Bank of England and its attitude to supervision need to change. A new executive director responsible for regulation is to be appointed next week. The Select Committee might want to have that individual before it at an early stage, to find out whether there will be a change of emphasis.
We have heard references to the Arthur Andersen report. Perhaps the Minister will take the opportunity to deal with two matters. I strongly believe that any system is only as good as the people who employ it--that is crucial in supervision and regulation. We have spent some considerable time exploring opinion on the matter and it has been put to me that one of the problems in the Bank of England might be the difficulty that it has in attracting and keeping appropriately qualified staff. There may be pay and status implications. Clearly, the Bank can do a certain amount by finding resources from within itself, in the obvious way, but the Government may have to face up to the fact that it may be necessary to consider the pay structure and the structure of the Bank itself, if it is to deal with an increasingly complex area. Leaving aside whether the Bank has to do so in the long term, in the short term the Government may have to face up to that problem.
There has been much talk about the structure of the regulatory system and it would be appropriate to say a word or two about our view of whether the Bank of England should be the supervisory body. For the sake of completeness, for those who follow our proceedings outside the House, the Financial Times published an interview with me on 10 November which is wholly accurate and which summarises the state of our thinking.
I made several points in that interview. The argument about whether the Bank of England should be the supervisor is finely balanced and we have not reached a conclusion. There are arguments for and against making a change. For making a change is the fact that major structural exchanges are taking place in the industry. The neat distinctions between banks, building societies and insurance companies are disappearing. Indeed, the Building Societies Commission may find that the number of bodies for which it is responsible will diminish quite sharply. It is expected that most major building societies will have moved over to the Bank of England's supervision because of conversion in the fairly near future.
In the light of that, one is bound to ask whether it is appropriate to have the Bank of England, the Building Societies Commission, the DTI and others all concerned with prudential supervision. My guess is that, in the not-too-distant future, it will be appropriate, for that reason if for no other, to revisit the issue of who should be responsible for prudential supervision. At the moment, it is historical accident as to whether an institution comes under the supervision of the Bank of England, the Building Societies Commission or the DTI.
The second argument was touched upon by my hon. Friend the Member for North Durham. If there was a body such as, for example, a banking commission, fully focused on regulation, it might improve the quality of regulation. That was raised by Lord Justice Bingham in the Bank of Credit and Commerce International report and is a model followed in other parts of the world. I accept that there is an argument for that. Against that, the most important feature of supervision and regulation is the quality of people involved; changing, or removing to another office, the brass plate does not resolve the problem. At the end of the day, it is the people who matter.
Despite what hon. Members have said about the reputation of the Bank of England, it still enjoys a formidable reputation and can still attract staff because of its status. More important, it is recognised to have a formidable reputation around the world. We should be
careful about lightly interfering with it until the case is made for change. The argument is finely balanced and we are keeping it under review. We certainly do not want to throw out the good work that has been done by, say, the Building Societies Commission.
Hon. Members referred to the need for international co-operation. One thing that will have caused hon. Members some concern is that when the Singapore authorities published their report into the collapse of Barings, one got the impression that there was an attempt to knock the ball out of the Singapore court, preferably into the court of the Bank of England. In the Barings collapse, there was an obvious dispute between Simex in Singapore and the Osaka authorities in Japan. Such regulatory competition is thoroughly unhelpful.
Hon. Members have said that they are depressed about the turf war between regulators in this country. More worrying, in some ways, is the turf war that results when markets, and therefore regulators, are in competition. The Government need to take the lead because it is Governments who operate in that area.
The Securities and Investments Board met its international counterparts earlier this year. The concluding document was entitled the "Windsor declaration"--strangely enough, because the meeting took place in Windsor. Such co-operation is essential. I agree with what was said about the need to have a lead regulator in the case of each institution. Again, the BCCI case highlighted that need. The hon. Member for Hazel Grove made the point that, in international terms, having one regulator is important. That was supported by Christopher Sharples--who did good work at the Securities and Futures Authority before he moved on--in his evidence to the Select Committee. That again points to the desirability of having one regulator of international standing.
I want to consider the SIB regime, which has been the subject of much discussion tonight. There are two parts to the matter. One involves structure, the other the nature of regulation. The structure needs to be changed as the present system is cumbersome and full of duplication. The view that it needs to be simplified commands increasing support within the industry.
We propose to make the SIB directly responsible for the regime broadly covered by the 1986 Act. We do not want to create a Securities and Exchange Commission and we shall not create a bureaucracy. I do not want an organisation run by lawyers. I can say that because I am a lawyer and I know what happens when organisations are run by lawyers. We no longer need a distinction between SROs and the SIB, as that is expensive. One can see the difficulties with pension transfers, for example, on which both the SIB and the Personal Investment Authority make parallel rules.
"We believe the Bank should explore ways of increasing its understanding of the non-banking businesses (particularly financial services businesses) undertaken by those banking groups for which it is responsible".
Again, one has to wonder how the Bank of England did not understand the broader financial services activities of the banks that it regulated, given that so much of their profits now come from that source. I trust that the Bank is now doing so.
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