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Lord Chesham: My Lords, there is no question of negotiation with Russia about NATO enlargement. However, it is right not to ignore Russian security concerns. NATO does need a close and trusting relationship with Russia.
Lord Jenkins of Putney: My Lords, can the Minister say whether there has been any discussion to the possible end that Russia itself should acquire membership of NATO? Would that be acceptable to NATO? Further, has the matter been considered by Russia?
Lord Chesham: My Lords, at present Russia continues with an anti-enlargement line in public. However, the Russians now seem willing to work with NATO on developing some form of relationship. I do not believe that we are anywhere near the situation where it would be considered appropriate by this Government, or indeed by Russia, that Russia should become a full member of NATO.
Lord Quinton: My Lords, will my noble friend the Minister agree that the raison d'etre of an alliance is a common enemy; indeed, something to be against? Surely the obvious candidate is China, the last one of the three great mass murdering despotisms of the 20th century. Has not Russia as great an interest as the existing members of NATO--perhaps a greater one--in standing up firmly to Chinese aggression and preparing for it?
Lord Chesham: My Lords, that is a matter for Russia rather than for us. We continue to observe what is going on all around the world.
Lord Carver: My Lords, does the Minister agree that the Government and NATO have their priorities wrong? Should they not give priority to establishing a satisfactory security relationship with Russia over the enlargement of NATO?
Lord Chesham: My Lords, I thank the noble and gallant Lord for that question. However, I do not think I agree with him in this situation.
Baroness Blackstone: My Lords, following the question by the noble and gallant Lord, can the Minister say whether the Government support invitations to the Czech Republic, Hungary and Poland to join NATO, which I understand are likely to be made at the NATO summit in Madrid this summer? Can the noble Lord say whether the Government support such invitations, despite Russian concern? Further, can the noble Lord tell the House what the implications of their membership would be for the defence budget? For example, would the additional costs be covered by the defence budget or would other programmes have to be cut in order to accommodate them?
Lord Chesham: My Lords, it is too early to be discussing individual countries which may or may not receive such an invitation as a result of discussions at a meeting which is to take place on 8th and 9th July in Madrid. Therefore, to pre-suppose whether certain countries will receive an invitation is wrong. Finally, I do not have details on the costings involved, but I shall write to the noble Baroness in that respect.
Lord Mackie of Benshie: My Lords, can the Minister say how a close relationship with Russia can be established without negotiation?
Lord Chesham: My Lords, I have not suggested that there is no negotiation; indeed, negotiations are going on with Russia and the Secretary-General of NATO at present. However, they are not negotiating whether Russia will be joining NATO.
The Earl of Lauderdale: My Lords, can my noble friend the Minister say whether the project to enlarge NATO eastwards will be overshadowed by the different national interests of Germany and Russia, particularly the Oder-Neisse Line?
Lord Chesham: No, my Lords; I do not believe that that is an appropriate question for today.
Lord Bruce of Donington: My Lords, can the Minister say to what extent Her Majesty's Government have been able to evaluate the extent to which vast amounts of Russian armaments are under the direct control of the Russian Government? Is the Minister satisfied that negotiations can proceed on a satisfactory basis without such an evaluation being made, particularly in the light of press reports? I do not know the accuracy of such reports but the noble Lord probably does. Such reports suggest that there are very considerable amounts of armaments in Russia which are being sold abroad without the apparent consent of the Russian Government.
Lord Chesham: My Lords, I do not have details with me on the latest situation regarding armaments within Russia. I suppose that a response might be that if such items are being sold abroad without Russian Government knowledge--and I have no knowledge whether they are--it is unlikely that we would be receiving such information. However, it also means that there are less arms in Russia.
Lord Hylton: My Lords, the Minister mentioned a framework for co-operation with Russia. Will the noble Lord accept that one of the first tasks for such a body should be to provide help for clearing obsolete Russian nuclear submarines adjoining the Arctic Ocean?
Lord Chesham: My Lords, it is for Russia to ask for help on that matter if she wishes. We cannot force help onto Russia.
Lord Pearson of Rannoch: My Lords, does my noble friend agree that NATO has been a hugely successful organisation--certainly more successful than the European Union? Can he say whether NATO has ever had to resort to the qualified majority vote to achieve any of its decisions, and whether it is likely to have to do so in the Question as posed?
Lord Chesham: My Lords, that, again, is wide of the mark. However, I am not privy to decisions made within NATO.
Lord Wallace of Saltaire: My Lords, is the noble Lord aware that the latest NATO review contained an opinion poll on American attitudes to NATO enlargement which indicated that 52 per cent. are in favour of NATO enlargement to Russia, and a rather larger proportion say they are in favour of enlargement to several other central and east European countries? Does the noble Lord also agree that NATO works differently from the European Union because the Americans run NATO and tell us all what to do, and that is perhaps not the way we wish to do things in the European Union?
Lord Chesham: My Lords, I am not sure I agree that NATO jumps when America decides what it wants it to do; but there is no US influence on the EU.
The Earl of Sandwich: My Lords, does the noble Lord accept that the enlargement of European institutions, both NATO and the European Union, is just as important a question as integration in monetary affairs and monetary union? Why do the political parties and the Government not take a lead in informing public opinion on their position in these matters?
Lord Chesham: My Lords, there is a little confusion whether we are talking about the EU or NATO. We are talking about NATO and not the EU, which was the subject of the first Question. However, considerable overlap between membership of the two bodies is likely. It would be totally wrong to insist that countries must
be members of both the EU and NATO, or of neither. That would risk creating exactly the new dividing lines that we are trying so hard to avoid.Business of the House: Debate this Day
The Lord Privy Seal (Viscount Cranborne): My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the debate on the Motion in the name of the Earl of Gowrie set down for today shall be limited to 3½ hours and that in the name of the Lord Campbell of Alloway to 2½ hours.--(Viscount Cranborne.)
On Question, Motion agreed to.
The City of London
3.13 p.m.
The Earl of Gowrie rose to call attention to the economic value of the international work of the City of London and to the case for City firms establishing systems of corporate governance which can maintain confidence throughout the world; and to move for Papers.
The noble Earl said: My Lords, I am delighted that my noble friend Lord MacLaurin has chosen this debate for his maiden speech and that so many on all sides of the House with City experience have put down their names. I want to set out some parameters for our discussion, which is an ecumenical one. The value to the British economy of the financial trading and services industry, generically called the City--although Edinburgh is also very important--is now common ground between the political parties. That is welcome. Even rhetorically political threats undermine confidence at home and abroad. Confidence makes the lives of Chancellors of the Exchequer a lot easier.
The House will have noticed that I seek principally to draw attention to the international value of the City. I do not underestimate the importance of the City to our domestic economy, but London is, with New York, the twin capital of the open societies financially. Therefore its health is vital to the international economy on which we all depend.
The modern-day success of the City was founded by a Labour Government, as it happens. In the mid-1970s my noble friend Lord Richardson of Duntisbourne, then plain Governor Gordon, persuaded the late Lord Wilson of Rievaulx, then plain Prime Minister Harold, to undercut European and American practices, notably the United States equalisation tax which then paid dollar deposits net, not gross. Would that successive administrations had liberalised fund management as well. Britain now manages a third of all funds managed in Europe but we are starting to lose out to Luxembourg and to my own dear native Dublin, which pay gross, not net. The Eurodollar market was born; other trades thrived. Under the benign regime of my noble friend Lady Thatcher the financial sector grew hugely and
now employs over a million people. It contributed over £20 billion in 1995--a poor vintage year--to our balance of payments and it represents more than 3.5 per cent. of GDP. In my view, Britain must remain a low tax, liberal, partially offshore service economy; nor should we frighten foreign residents and investors whose capital we will never get our hands on in tax terms in any case.That said, over the past few years a number of unfortunate incidents and scandals has started to worry people at home and abroad. They are small against the scale of City activity. However, we live in a world of mass communications. The public, in public relations terms, are now global. I shall not deal with cases in any depth. However, it would be wrong to ignore danger signals. If people feel problems are not being addressed, there will be a real threat to the City's health. We have experienced the Lloyd's disaster, BCCI, Maxwell, the fall of Barings, the copper scandal and, most recently, two helpings of trouble--however, I think only one of them is serious--at Morgan Grenfell.
With the exception of Lloyd's, those troubles are relatively minor, and nor is London unique. There have been great difficulties in Sweden; a damaging banking incident--Herstatt--in Germany; the Credit Lyonnais affair in France; and huge dents in confidence on Wall Street, notably the Savings and Loan, junk bond and Salomon Brothers upheavals. There have been political, financial and even Church scandals in Italy; serious questions about Switzerland now that more information about the years immediately after the war is coming to light; and dangerous continuing shocks in Japan. In general, Britain comes out of a period of unprecedented change very well. Our present regulatory framework, both statutory and voluntary, shows that we are prepared to move quickly. However, vigilance is a 24-hour cafe and vigilance is what we are here, as I see it, to discuss.
The legislative and self-governing framework is the corporate governance, so to say, of the sector as a whole. There is overlap with corporate governance in its usual sense: the habits and practices of individual firms in respect to their reputation and the interest and confidence of those who buy shares in them. At firm level, corporate governance is important for domestic confidence and public relations. Declaring my interest as one who earns his living as a non-executive chairman of a quoted company, Development Securities, and who sits on the boards of several others, I believe that good corporate governance is critical to the reputation and health of the City generally.
I recognise that financial regulation is different from corporate governance. Nor will good corporate governance always prevent intelligent but corrupt individuals from pitting their wits, sometimes successfully, against the system. The aim is to load the dice against them. Laws, as we well know, do not prevent crime just as religions do not stop sin. However, it is a moral and political duty to load the dice in favour of good.
The present legislative framework was introduced by the previous Conservative administration shortly after I left it. I hasten to say there was no connection between
these great events. The Financial Services Act 1986 quite rightly leaned heavily on the concept of self-regulation. It was also concerned with protections for many new individual investors, particularly the PEPs generation which has succeeded the Pepsi generation, so to say. Acronyms rose like tower blocks over the City. The Act created the SIB, or Securities and Investment Board, funded by and with regulatory responsibilities over the industry. Smaller tower blocks on the SIB estate are: the SFA, or Securities and Futures Authority, which nannies stockbrokers and dealers in financial futures and derivatives; and IMRO, the Investment Management Regulatory Organisation--not to be confused with an earlier IMRO this century, the International Macedonian Revolutionary Organisation. Alas, the Balkans are ever with us. IMRO regulates fund managers themselves.There is also PIA, or the Personal Investment Authority, the tallest of all the blocks. The PIA regulates the sale of financial products, large and small, to the general public. It includes products sold by insurance companies, the big clearing banks, and, increasingly and very interestingly, the big supermarket chains. The clearers and all the banks are under the supervision of the Bank of England. As a director of a merchant bank, Guinness Mahon, owning fund management and stockbroking businesses, I was rightly vetted by the Bank. The Financial Services Act decided not to cover general insurance, which still comes under the Department of Trade and Industry.
In general, and so long as we are ever vigilant in monitoring a fast-changing international financial culture, I am very much in favour of as much self-regulation as possible. It is faster than bringing in legislation. Consultative processes and the parliamentary timetable, we know, mean delays. Legislation also has a tendency to bolt stable doors after horses have fled. In my younger days, clumsy legislative reactions to the disgraceful practices of a bad-hat landlord called Rachman led to the effective destruction of the small, privately rented, housing sector. Think what that has implied for job mobility in our economy, my Lords! Codes of practice and "ombudspeople" are surely a better way. There is also the problem, as we have seen in a number of financial cases recently, of securing convictions, or consent to prosecutions, in respect of financial misdeeds of great complexity. Civil prosecutions involving compensation would in my view be a more effective method of seeking redress. But there must be a legislative underpinning, as is the case, to a system of self-regulation if it is to put on muscle. We also need a lot less of what Mr. H.R. Haldemann of Watergate fame called "situation ethics". Human beings require moral codes and disciplines as well as legal sanctions against misbehaviour. R. H. Tawney's great book Religion and the Rise of Capitalism deserves re-reading in this context.
There are also fair trading issues. Perhaps the noble Lord, Lord Borrie, will draw on his great experience when he comes to speak. The American Securities and Exchange Commission (SEC) is still, with the Federal Reserve Bank, the twin peak of US regulation. It has big teeth. Here, perhaps too many bodies cause
jurisdictional or cross-boundary difficulties, leading to delays. We must monitor our own structure closely. Sir Ronnie Hampel's committee is considering important aspects at present, as well as revisiting the often inflammatory pay issues originally considered by the Greenbury Committee. But the structure needs time--and Sir Ronnie is reported as taking this view--to settle down. Then again, malpractices which have been averted do not hit the headlines, a sure sign that the system is working.I should like to see the SIB and the PIA market themselves and their work more aggressively here and abroad. The City has an interest in funding them to do so. I am not against collective bodies like the TUC and the CBI. But the regulatory bodies are nowadays more important. Their heads need to become household names: people respected, and, like the Fed's boss, Mr. Greenspan, a little feared.
I believe that sometimes it may be necessary for Ministers and the regulatory authorities to work together speedily in order to defend overriding national interests. Lloyd's was too pervasive a difficulty for that to apply. It had to put its own house in order and I think that Sir David Rowland has done a very good job. Maxwell revealed simply the dangers that lie in a concentration of powers and the weakness of his board of directors. The Cadbury Inquiry made recommendations about the division of power. These are now widely observed and in any case are under review. Maxwell also revealed in effect the expense and folly of trying to bring criminal charges against the horse when it not only has bolted but died in the bolting. BCCI was a clear failure on the part of the Bank of England, but there is evidence that it has learned from it.
Barings is to my mind the case where the Ken and Eddie squad should have moved, and moved fast. It would have been intolerable for taxpayers to pick up Mr. Leeson's devastating bill or cover up any shortcomings by his supervisors with taxpayers' money. But Barings was the City's big brand name in the tiger economies. We all need credibility on the Pacific Rim. Frankly, our name is now mud and our French, German and American competitors are smiling. I do not believe that the Chancellor and the Governor could not have waved a few fiscal sticks and a few financial carrots at the clearing banks with the purpose of achieving purchase or rescue. Sanctions on individuals would still have obtained.
Let me close with a brief word about the role of non-executive directors. Our absolute responsibility is directed not at the management, however close we become to it, but at the interests of the individual and collective shareholders of the business. These take precedence. I am sometimes depressed at the pervasive unanimity of resistance by some boards to takeover. If I were convinced that the taking over of a firm where I worked was in the interest, other than a very short-term interest only, of shareholders I would say so and take my chances with the management if the bid failed. Non-executives should be vetted by the SIB; we are not. Fund managers and investment trusts should exercise more influence on boards. Often they do not do so because their parent or agent merchant banks want business from those same boards. I have even negotiated
with most of my firms that they pay a fee to a vetted outsider who is given access to financial information but reports only to me. This is common in the US and I recommend it. The regulatory body with shark's teeth is the Gaming Board. When I was a director of Ladbroke's, the firm applied for and won a casino operating licence. The personal disclosures that I and others had to make were terrifyingly extensive, but I was all for them. This is because non-executives have a role in maintaining credibility and acceptability in the ecology of legislation, regulation and good practice which I have sought to describe. The system may appear remote from the concerns of most people. But indirectly it touches each and every one of us in our pocket. The system lies at the core of our economy, our international credibility, and this afternoon's debate. I beg to move for Papers.3.27 p.m.
Lord Eatwell: My Lords, the whole House is grateful to the noble Earl, Lord Gowrie, for having introduced this important debate. The prosperity and success of the financial services industry in this country are a vital component of the prosperity and success of the British economy as a whole. And the continuing success of the financial services industry rests to a degree greater than in any other industry on its reputation--not just the reputation of individual firms, but of the industry as a whole. A few bad apples can indeed spoil the whole crop.
That is why there is a clear collective interest within the industry, and an equally clear public interest in prudential management, transparency and accountability, whether it be in investor protection, in the maintenance of confidence, in the integrity of markets or, most important of all, in the management of systemic risk.
Today we are faced by a considerable challenge, for the very factors which are behind the enormous success of much of the financial services industry over the past decade are exactly the same factors which pose the greatest threats to its future prosperity.
Liberalisation at home and abroad has resulted in a veritable avalanche of financial innovations: old boundaries have been broken down; the distinctions between markets, institutions and products have become blurred and even disappeared. Today highly geared derivative instruments blend product markets and national markets which were previously totally distinct. Markets are more integrated, and yet at the same time more varied and more complex. While that has occurred, the scale and speed of trading have grown exponentially.
These changes have created great opportunities and the City of London has been highly effective in grasping those opportunities. They have also created massive risks. In intensely competitive markets in which the pace of innovation is swift and accelerating, the fear of being left behind can easily undermine even the best prudential practice.
As familiar markets stagnate and old products wilt, the fear of being left behind can easily undermine even the best prudential practice. As familiar markets stagnate
and old products wilt there is an insistent demand to move into new, unfamiliar territory. The more rapid the process, the more likely it is that the maintenance of high standards will be lost in the quest for high performance. Ill-judged risks will seem to be necessities in the struggle to keep ahead.Sir Andrew Large, chairman of the SIB, argued in a speech last October that firms competing in such an environment can suffer what he calls cultural dislocation. The ethical principles that permeate good firms can come under extreme pressure in the pursuit of good performance.
We all know what can happen: astronomic salaries for so-called "stars" that end in the creation of perverse incentives to behave in a manner that is ultimately damaging to the long run interest of the firm; rushes into high-performing funds which result in the discovery that they are indeed "too good to be true"; and commitments made to individuals who claim the Midas touch, with little understanding on the part of the management of the true risks involved.
So in today's rapidly changing financial world more than ever there is a vital industry interest, and a clear public interest, in the maintenance of good practice. That is why an effective and flexible system of regulation is vital to the future success of the financial services industry.
But regulation is the second line of prudential defence, not the first. It is the management of the firms themselves which has prime responsibility for ensuring that proper practices are maintained. It is indeed striking that some of the most spectacular problems in recent years have involved management failure as well as regulatory failure. In the case of Barings, for example, the management did not understand, perhaps did not even care, what was happening in its own business; and the Bank of England did not understand the business that it was supposed to be regulating. In the disgraceful and terribly sad case of the mis-selling of pensions, irresponsible management was egged on by an irresponsible Tory Government.
Sound corporate practice and effective regulation should be two parts of the same seamless process. We may say that corporate governance and effective regulation are the two pillars on which the strength of the financial services industry is built. If management is irresponsible, if it is not transparent, and is imprudent, then of necessity regulatory processes become intrusive, prescriptive, rigid and expensive. If management sees its role as working with the regulatory authorities in an open and responsible manner, then regulation can be flexible and can contain a modicum of sound judgment rather than mechanical rules and regulations.
The need for a ceaseless dialogue demands that a clear and well-defined balance be maintained between the responsibilities of the regulators and the responsibilities and interests of the regulated. I believe that everyone would agree that one of the great strengths of the regulatory system that has evolved under the terms of the Financial Services Act has been practitioner involvement. The expertise and commitment of
practitioner-regulators has played a vital role in developing regulatory expertise and spreading best practice.However, I do not believe that there is any benefit in maintaining the present distinction between the SIB and the SROs. The regulator should not be a membership organisation operating by contract. Instead, the SIB should be directly responsible for the regulatory system covered by the 1986 Act.
Within the reformed structure the SIB should continue to be a free-standing agency, established by statute. And it is vital that the blend of public interest and practitioner influence should be retained on its board, and on the boards responsible for particular parts of the industry. These evolutionary changes will enable Britain's regulatory system to adapt more effectively to new market structures, eliminate duplication and provide the simplified structure of regulation for which the industry has called.
In a rapidly changing world, an efficient regulatory system should be flexible, non-discriminatory, and deliver value for money. As I have said, that is possible only if the industry itself is committed to supporting the regulatory regime, and also if the regulator is well informed and up to date.
If the regulator is to be capable of exercising judgment and not simply applying mechanical rules, regulatory staff must be of the highest quality: they, like practitioners, must be at the cutting edge. They, perhaps even more than the practitioners, must understand the dimensions of market and systemic risk involved in the latest innovations.
That is a tall order when many chief executives have considerable difficulty in keeping up with what is happening in their companies. The notion that we can have the very best staff in regulatory organisations is difficult to achieve. However, a proposal of considerable benefit might be for it to become customary for high-flying staff to spend periods on secondment to the regulatory authorities. In other words, a period working for the regulator should be regarded as part of the normal career pattern of the very best in the industry.
The obvious objection to that proposal is that it will be expensive; that the best talents should be making money for themselves and their firms, rather than playing gamekeeper. But consider the cost to the industry of a regulator staffed with other than the best; consider the cost in consumer confidence, in market integrity and even systemic risk. The mutuality of interest demands a mutuality of commitment.
Ultimately, the reputation and success of the financial services industry depend on creating an open, accountable culture of good corporate governance, allied with a knowledgeable, flexible, highly skilled and creative regulatory structure. Neither is possible without the other.
3.36 p.m.
Lord MacLaurin of Knebworth: My Lords, the day of my introduction to this House was one of the most remarkable experiences of my life. I felt a sense of real humility being among so many noble and learned Lords
who have contributed so much to our society. I hope that in turn I can make a small contribution to the deliberations in this House on those issues of which I have some experience.I should like to use this opportunity to say how conscious I am of the many kindnesses already shown to me by officers of the House and by noble Lords. I am very grateful for the advice and encouragement that I have received, which is helping me to overcome my natural nervousness when making this, my maiden speech.
I know that my remarks should not be particularly contentious or controversial. I cannot promise that any contributions I may make on industry and the economy in the future will always follow that precedent.
As some noble Lords may know, I have recently been given responsibility in connection with the other Lord's in an area of great importance to our country, if on a somewhat different level from this House. I have been appointed chairman of the newly formed England and Wales Cricket Board. I am sure your Lordships will join with me in wishing our team every good fortune in the forthcoming Test series in New Zealand. I can assure cricket lovers present that I intend dedicating a great deal of energy in the future to both "Lords".
My noble friend Lord Gowrie has chosen for debate an issue that is crucial to our international reputation and economic wellbeing; namely, that of the economic value of the City of London and the integrity of the people who hold power within the City.
In recent months there has been much discussion on the issue of corporate governance. The Cadbury, Greenbury and Hempel Committees have worked to examine the issue in a thoughtful way. I do not want to dwell too much on their work now. I merely observe that we must be careful to ensure that we do not draft overly-bureaucratic procedures which create too much paperwork and prove counter-productive.
I know that my own company has benefited considerably from avoiding too much bureaucracy. It is, of course, all a question of the right balance. We need flexibility. The best of British industry manages to combine flexibility with accountability and corporate governance. My experience at Tesco and as a non-executive director of the National Westminster Bank, Guinness, Vodafone and Enterprise Oil makes me believe that it can be achieved and has been achieved by many companies.
The skills of British retailers now create economic value throughout the world. Tesco, the company with which I have spent most of my adult life and of which I am chairman until June of this year, now also operates stores in Hungary, Poland, the Slovak and Czech republics, as well as in France. Such expansion would not have been possible without the combination of flexibility, accountability and good corporate governance.
I believe that we need light but effective regulation, driven by those at the top of an organisation. As so often in life, responsibility must rest at the top; that includes chairmen and chief executives and, of course, non-executive directors.
I believe the role of all directors, including non-executive directors, to be very important to good governance. Well informed and well resourced non-executives can, and do, add real value to companies. I believe that they perform a similar role in City institutions. It is, of course, important that there is transparency of appointment. Non-executive directors should not be appointed on the basis of old friendships; they must be qualified for the job in hand.
Well resourced and well informed non-executive directors help to foster understanding between sectors and emphasise that much of our industry is a chain. Economic value can be created by this interdependency. I have always encouraged colleagues to take on other directorships. If those appointments are in the public sector or perhaps in a small business, so much the better.
I believe that such an approach will help to confirm Britain's position as the enterprise centre of Europe, which is a goal that I hope we can all share. I believe that the City of London has already played a real role in helping to bring this to reality and that non-executive directors have a role to play now and perhaps an even greater role to play in the future. Those at the top of organisations have a responsibility to make sure that good corporate governance is strongly reinforced.
3.42 p.m.
Lord Haskel: My Lords, perhaps I may, on behalf of the whole House, congratulate the noble Lord, Lord MacLaurin, on his thoughtful maiden speech. What he said demonstrated not only his successful business career but an important business career. He joined Tesco in 1959 when it was a modest business and spent his working life building it up to the major international business that it is today. I am sure that all noble Lords will join me in welcoming this breadth of experience to your Lordships' House. We look forward to hearing the noble Lord in the future, perhaps when we are debating the important matter of cricket!
Today we are debating the Motion of the noble Earl, Lord Gowrie. Perhaps I may also welcome the conversion of the noble Earl to the cause of corporate governance. I congratulate him on introducing this debate. It has always seemed to me that the City consists of two sectors. One provides business and industry worldwide with valuable and important banking, insurance and financial services and an orderly market for shares, currencies, shipping and commodities and managing risk; the other is the facility which the City provides for speculation and gambling. I certainly join the noble Earl in applauding the first sector; and I am glad that he joins me in condemning the damage inflicted on business, industry and society by the errors and excesses of the second. The line between risk and speculation is a fine one; good corporate governance helps to control the risk and to avoid the speculation.
The noble Earl, Lord Gowrie, spoke of corporate governance being about vigilance. I believe that corporate governance must also be concerned with encouraging companies to be competitive in today's markets. Businesses should be about building and
creating, not just about accounting and short-term profits. Corporate governance must encourage creativity and innovation; it must encourage businesses to invest in people, markets and technology. Directors must build up long-term relationships with employees, investors, suppliers and customers and the society within which they operate. In short, they should create what the RSA recently referred to as the inclusive company.All companies, not just City firms, should practise that kind of corporate behaviour because it creates good companies which are the building blocks of our competitive economy. By providing financial services and helping to manage risk, the City contributes towards those building blocks, and that I applaud. The speculative sector of the City contributes towards the destruction of those building blocks by encouraging dishonesty, sharp practice and incompetence, and that I denounce.
The noble Earl mentioned Rachman. A more modern example is pensions. Providing and managing pensions is of great value in creating inclusive companies and organisations; mis-selling pensions by cowboy and opportunistic behaviour helps to destroy them.
Another example is the London Metal Exchange. I was under the impression that the purpose of the metal exchange was to provide an ordinary market in basic metals; but obviously that has become corrupted into a market for speculating in metals. The laxity of control in the market is such that one trader was able to lose 2.6 billion dollars in unauthorised trading. The irrelevance of the exchange to the real economy is surely proved by the fact that those huge losses remained undiscovered for several years. Indeed many actual producers and users of metals in the real economy trade outside the exchange.
The recent SIB report on the London Metal Exchange makes it clear that the concept of corporate governance is entirely alien to the board. Virtually all board members had a conflict of interest; they allowed themselves excessive credit, light regulation and obviously little supervision. That was partly explained in the name of self-regulation. The Prime Minister was obviously not entirely unhappy with that as the chairman of the exchange was honoured in the New Year's honours' list. I also look forward to welcoming him to your Lordships' House.
I agree with the noble Earl, Lord Gowrie. Good corporate governance would have made all the difference. Good corporate governance requires not only that there should be outside non-executive directors but also independent non-executive directors. There is a difference, as the noble Earl and the noble Lord, Lord MacLaurin, pointed out.
There should be an audit committee made up of those directors who, together with the accountants, keep a sharp eye on the internal financial controls and pay special attention to the risk of clients losing money due to speculation. The accountants and all the directors--executive and non-executive, independent and those with a conflict of interest--should be scrutinised not only from the point of view of what they do but also from the point of view of what they fail to do.
Perhaps I may say in passing that I am encouraged by how, in recent years, I have come across some firms of accountants and some company secretaries who do an excellent job of advising and assisting audit committees by making them aware of, and helping them to carry out, those responsibilities. That is of even greater importance when there is self-regulation.
The ethos of corporate governance needs to be established in the many markets within the City: the currency market, the Stock Exchange, the commodities markets and most especially the derivatives market. Those markets seem to operate in a world of their own away from the real economy, and it is the real economy that matters.
So I congratulate the noble Earl, Lord Gowrie, and join him in calling attention to the economic value of the City of London when it is working in co-operation and partnership and sharing risks with the real economy. Good corporate governance will only enhance that.
3.50 p.m.
Lord Stewartby: My Lords, I ought to begin by declaring some interests. In recent years I have found myself in certain different roles which enable me to come to this subject from a number of different angles. Wearing one hat, I am chairman of the audit committee of an international bank; I am also a member of the Securities and Investments Board; and a few years ago I was the Minister responsible for introducing the Banking Act and the Building Societies Act in another place.
I think it is unquestioned that London is and remains the leading financial centre in Europe and one of the leading financial centres--if not the leading financial centre--in the world. Equally, I have no doubt that that is very substantially due to the fact that it is an open marketplace. It is not shackled by unnecessary restrictions and is not hampered by unnecessary distortions of free market processes. I see no reason why that should not continue, provided that we have the balance between regulation and flexibility in the markets as they change and continue even now to change so rapidly.
There is no question but that a formal structure of regulation and supervision needs to be in place in financial markets. I have no doubt of that, either as a regulator or a practitioner. When one looks at what happened at Lloyd's, where there was an inability to identify a conflict of interest, let alone deal with it, one realises that unrestricted self-regulation is no longer appropriate in today's financial world.
But it is also important that regulation and supervision should not be too intrusive. I very much agreed with my noble friend Lord MacLaurin when he said in his excellent maiden speech that regulation must not become too bureaucratic. If regulators and supervisors feel drawn into concentrating on detail, the chances are that they will give insufficient attention to the overall quality of governance and accountability of companies in the field. They must satisfy themselves that businesses are properly run. I agree very much--I was pleased to note that the noble Lord, Lord Eatwell,
endorsed it--that regulation and supervision must involve a blend of practitioners' experience and professionals exercising the public interest.But that is not an easy balance to achieve. We need to be constantly vigilant about how it is done. I believe that there will be a need for some revision of the legislation before too long. That is no criticism of what was put in place 10 years ago because the markets have changed dramatically in that time. It is one reason why the law needs to set out general principles and not become too detailed about specific requirements. I know that your Lordships sometimes become uneasy about Henry VIII clauses. But if it is impossible to update legislation with secondary legislation when there are changes--when new derivatives are invented and structural changes occur in the market place--and do it quickly and one has to resort to primary legislation all the time, the processes will be hindered.
But the general framework needs to concentrate in particular on the way in which companies are run. It is not the role of regulators or supervisors to tell companies what to do and in effect try to take commercial decisions by proxy. It is their duty to see that companies are properly run and that their governance is effective and suitable for the type of business that they conduct. That is the natural bridge to the other part of this argument, which is the responsibility of management itself. Any substantial company needs to have lines of accountability clearly understood within the organisation. Responsibilities need to be carefully defined and high level controls need to be put in place and monitored by the board and by the audit committee as well.
I regard the greater prominence of audit committees which has followed the Cadbury recommendations as one of the major developments in corporate governance in recent years. It is absolutely essential and is working reasonably well in practice in most cases. As chairman of an audit committee, I can say that it has greatly increased the degree of responsibility and the amount of time which needs to be devoted to the tasks, but it is essential.
We have to ensure that non-executive directors, who generally should carry out those tasks, remain independent but at the same time do not separate themselves from their Companies Act responsibilities to ensure that the companies on whose boards they sit are effective commercial enterprises. Unless a business is successful and profitable, it does not have the financial stability which is one of the great protections against systemic problems and, indeed, against abuse of process with customers.
I believe that the greater prominence of non-executive directors is not without problems. The people required to do those tasks need to be very experienced and if they are very experienced, they are likely to be very busy. Whether in fact there is a sufficient supply yet--it is a process which has only been developing over the past five years or so--I am not convinced at the moment. I believe that non-executive directors have a fundamental role in ensuring that processes of corporate governance are correctly established. They will thereby
undoubtedly make a contribution to the profitability of the enterprises. If bad organisation exists or if controls are inadequate, the first intelligent, dishonest person who reaches any position of responsibility in that organisation will take advantage of that laxity. Therefore, the contribution of those who ensure that controls and processes are properly exercised makes a positive contribution to the business itself.My last word on this matter will be that we have to be not only vigilant within the processes of regulation and supervision and in running companies but vigilant and flexible in the way in which in Parliament we address these issues and keep the framework up to date. For example, in the Financial Services Act, the Securities and Investments Board is not given all the powers that it needs to carry out its overall responsibility for the regulatory system. Anomalies of that kind have become apparent as that Act has been seen to work in practice. But, generally, I believe that it is the right foundation on which to build.
I conclude by thanking my noble friend Lord Gowrie for having raised this extremely important subject at a very topical time.
3.59 p.m.
Lord Clark of Kempston: My Lords, I congratulate and thank my noble friend Lord Gowrie for introducing this debate. I have felt for a long time--I am sure that some of your Lordships will agree with me--that the City is sometimes overlooked in regard to our economy. The City and invisibles are just as important as manufacture trading abroad. In 1993 invisibles from the City amounted to £2.7 billion. This past year, the figure is likely to be £12 billion. That shows the scope and the increased value of the City in relation to our economy.
As my noble friend Lord Stewartby has just said, we are an international centre. Thirty-six per cent. of world foreign exchange dealings are conducted in the City--more than in New York and Tokyo put together. I do not intend to say much about the single currency but we must keep it at the back of our minds that trading in European foreign exchange amounts to only 4 per cent. of our foreign exchange dealings. The red herring of the single currency should be put into perspective.
My noble friend Lord Gowrie referred to the assets in the City. He mentioned Lloyd's. Some time ago there was controversy as to whether Lloyd's was trading properly. I can tell your Lordships that the finance committee of another place initiated an independent inquiry into Lloyd's under the chairmanship of Sir David Walker. I happened to be a member of that committee. Many of your Lordships will have read the report. The committee found that there was no question of criminal activity and its recommendations were immediately implemented by the Lloyd's Council.
In the City, we have legal expertise, accountancy expertise and financial consultancy expertise. Those are some of the reasons why there is so much inward investment into this country. There was some £23 billion of inward investment last year. That is a tribute to our expertise in the City. Why should this
country, through the City's expertise and so on, attract so much European inward investment? We get investment from the United States, from the Far East and from the European Union. One must realise that 98 of the 100 top companies in the world are in this country. That is the extent of the confidence foreign investors have in Britain.Why do these foreign investors come to this country? I am sure your Lordships will agree with me that the labour on costs in this country are much lower, our corporation tax is far lower and personal taxation at the moment is much lower. Dealings in domestic equity are three times as high as they are in Paris and Frankfurt. One must not overlook the fact that there is a certain amount of envy on the part of Paris and Frankfurt of the City of London. We have to guard against trying to blacken the name of the City. The City's name for integrity and so on must be paramount.
My noble friend Lord MacLaurin referred in his excellent maiden speech to regulation. I was in another place, as were many of your Lordships, when the Financial Services Act was passed in 1986. Some of us sounded the alarm bells that we had to avoid over-regulation of the City. Let us consider the amount of regulation. There is FIMBRA, LAUTRO, IMRO, the SIB and the PIA. Many of those organisations overlap and that overlapping means that in some cases compliance costs are penal. I happen to be a consultant to the Life Assurance Association. It is pressing for a financial services council so that organisations such as the SIB, the PIA and so on can come together and try to work as a unified body.
I remind the House that some years ago the Stock Exchange abolished the unquoted securities market. The market provided capital for small but growing companies. When the USM was being abolished a committee was set up in the City. It was called CISCO. As a result of the activities of CISCO we got the alternative investment market. I must declare an interest as president of CISCO.
Our competitors would like a share of the world trading carried out in the City. What we have to do--I am sure your Lordships will agree with me--is to speak of the City's achievements, because the City is the jewel in Britain's economy.
4.6 p.m.
Baroness O'Cathain: My Lords, the Motion states:
- "To call attention to the economic value of the international work of the City of London".
First, no fewer than 500 overseas banks have thought fit to establish themselves in the City of London. If we were seen as a failure-oriented country, I am sure that
would not happen. Secondly, there is a massive turnover in the City of London. It brings huge earnings to the economy. The figures are so mind boggling that they are measured in trillions, although I am not quite sure what a trillion is. Thirdly, perhaps I may share with the House a little gem of information. The London International Financial Futures Exchange--LIFFE--has a greater share of the German bond market than Frankfurt. The banking and financial services in the City are world leaders. There is also the insurance industry, which is regarded as a City of London institution. When we talk about the European single market, I sometimes wonder whether we realise that there is no such thing as a European single market, because our insurance industry is still prohibited from playing a proper active role in the European insurance market. With its great expertise, I guess that if it played that role it would probably meet great resistance from the insurance markets of other European countries, which would suffer in the comparison.I fell into something of a trap when I was preparing my notes for this debate by concentrating all the time on corporate governance. I wish to make three points. First, the City works remarkably well. That is not to say that there have not been problems from time to time, but, on balance, the culture of good practice is there. For centuries the City has operated on the slogan, "My word is my bond". That works. In any organisation, be it a company, a university or a local authority, there will always be the recalcitrants. However, whatever draconian measures of regulation, surveillance and monitoring are suggested to deal with such miscreants, the occasional unacceptable situation will arise. That is what we have to accept. It is human life.
Secondly, I firmly believe that the regulatory processes in place, albeit for the most part self-regulatory, with non-statutory codes of conduct or acceptance of 19 of the 20 Cadbury recommendations, should be allowed time to settle down, to become accepted practice and, in effect, to become second nature to all involved in the running of the City until we overload still further with more regulation.
Just as an aside, the adoption of the Cadbury recommendations has spawned a whole new industry of consultants offering all types of advice; lawyers running corporate governance seminars; acres of printed matter purporting to give advice to chairmen, executive directors and non-executive directors, company secretaries and legal advisers all of whom have been getting huge mail bags telling them how to do it.
What I am sure business and the City do not want is an increase in all this activity. Any such increase could lead to really massive indigestion and also tend to take the eyes of the operators off the goal that they should be fixed on; namely, to increase our activity trading both in the City and elsewhere and particularly on the international financial markets.
My third and final point is this. I have already referred to the fact that there will always be some who will misbehave anywhere. But if that should happen, may I make a plea that the subsequent investigations are speedy. Any delay brings a huge area of uncertainty.
It causes reputations to fall. In fact, it is a great opportunity for the press to castigate both institutions and individuals. With the City's position as a leader in the world of international finance we really cannot afford that. It is quite unacceptable that an investigation into a certain well-known case involving City institutions started in December 1986. I believe that the investigation has been completed, but certainly the results have not been published. During that period all the uncertainty has been compounded. That is not good.To recap: self-regulation is working. It has engendered a culture of the recognition of the need for compliance. Let us not forget that the City is a very worthwhile economic feature in this nation. It has a huge international reputation and let us not sell it down the river.
4.12 p.m.
Lord Ashburton: My Lords, this is a broadly drafted Motion on which it would be all too easy to speak for 20 minutes. It is peculiarly difficult to speak for eight minutes. There is also the ever present danger that one may be only repeating what has already been said by previous speakers. I should like to add my congratulations to the noble Lord, Lord MacLaurin, on an admirable maiden speech. Perhaps I may also congratulate the noble Earl, Lord Gowrie, with whose speech I found very little to disagree.
I also found a great deal to agree with in the speech of the noble Lord, Lord Eatwell. I am sorry that he is no longer in his place because there was something that I was extremely sorry to hear him say. He did in fact cast what I thought was a most unworthy aspersion on the management of Barings in saying that he was not aware whether it actually even cared about the business. I stopped being chairman of Barings seven years ago or so. I remained a non-executive director but ceased being one some time before the disaster happened. I can assure him and other noble Lords that I do not believe there was a management in the City of London that cared more strongly about the sort of business it did than the management of Barings.
The danger of trying to cover too much ground is particularly great for somebody like me who spent the best part of 40 years in the merchant banking world, and who was for a time particularly involved in the setting up of the arrangements for what became colloquially known as Big Bang. The House also has the opportunity of hearing from a number of individuals who have been involved, or who are still involved, in the affairs of the City whose views are by definition much more up to date than mine.
At the time I first became involved in the City few would have confidently foretold that the earnings of their activities collectively would become such an enormous asset to this country. But it has so become and it is perhaps worth a glance to see why. I believe that the consensus has it that London has provided a particularly attractive environment for international financial activity. Its legal system, as it relates to commercial activity, has proved to be better than those of other places and particularly adapted to
international trade. We work of course in English, which largely because of its use by the USA and the ex-Commonwealth countries, is widely accepted nowadays as most people's second language. And shaming it is to compare the linguistic ability of most British people with the idiomatic fluency that one now encounters in others. We are neatly placed between Far Eastern and American time zones and we had, and still have, a relatively lightly regulated financial system. It is too light, I hear, in the eyes of some. I was interested in the noble Lord, Lord Haskel, trying to make a distinction between speculative and legitimate activity. I tried during all my life in the City to discern where the dividing line was. I do not believe that it is actually discernible.Some of these advantages, it seems to me, will endure. The legal system, the language, the time zone even if its utility is somewhat eroded by the breakneck advances in global IT. Of course, London remains at least as pleasant and safe a place to live for expatriates as any of its competitors.
But there is no guarantee that in such a fast changing world as we now inhabit the economic asset that the City represents will remain uneroded. If we want it to survive--and I suggest that it would be sensible, nationally, to want that--there is probably little that we can do in respect of what one might term cataclysmic events--fundamental changes probably affecting financial activities worldwide. But against the more foreseeable threats I believe that we can be vigilant.
There is always a danger, particularly to those who are critical of the way financial markets operate, that those of us who have City backgrounds can sound far too uncritical. The City certainly has its blemishes. There is always room for improvement and to pretend otherwise is stupid and it can be offensive.
But what are the imperfections and blemishes and how big a threat do they represent? I do not propose to waste time on the question of very high earnings. Organisations which over-pay the wrong people soon find out and pay the price. There is a high degree of self-correction built into the system, as there is in the equally highly paid world of pop stars and top athletes. The subject nevertheless seems on occasion to obsess the media as do the shenanigans of those particularly highly paid when they lose their jobs. I regard the latter as being part and parcel of the trivial concern with personalities, which seems increasingly to obtrude in the press.
I do believe, however, that the regulatory regime is important. I also believe the effectiveness of the legal system in dealing with those who commit fraudulent acts has to be a part of any self-respecting financial system.
Because we believed it worked, we strove so far as possible in my day to maintain a self-regulatory system. It has since been refined and made a great deal more comprehensive. It clearly has shortcomings and I have always believed that the likelihood was that we would in the end, eventually, be pushed into a statutory system if only because of an increasing tendency to litigation.
I have no doubt that the City would live with such a system and it would certainly be different. But the big doubt in my mind is whether it would be better. It would certainly raise costs of doing business and slow activity down. It would certainly give a further boost to the legal profession and some would say it would be visibly more just. I wish that I was sure, but those who are still involved in the City will have clearer views.As far as fraud prosecution is concerned, all I can say is that I do not believe that the present position seems adequate. It is not for me to say whether the fact that so few of the prosecutions are successful is right or wrong, though I am amazed at the results. But the system does not seem to work consistently as between one case and another and reversals on appeal seem to make that aspect even worse. I should be very sorry to be told that things cannot be improved as I feel that it is important.
The last matter on which I want to touch is the importance of our membership--or otherwise--of economic and monetary union. I do not believe that the issue of whether we join EMU at the first opportunity is a matter of huge moment for the continued prosperity of the City. As I have said before in this House, the important thing is how we conduct our part in the setting up of that momentous step. It is, in my view, vital that we should not carp and that we should wish well those who decide to participate. However, if EMU comes into being and if its disciplines do not prove too difficult and divisive politically for its members and we continue to remain outside, I believe that the City's position would start to be eroded--and quite possibly very quickly.
I leave your Lordships with these three points: what I hope to see is the most pragmatic possible regulatory system; the swiftest possible bringing to book of those who commit fraud; and, finally, if EMU really takes off and succeeds, we must be a part of it.
4.20 p.m.
Lord Swaythling: My Lords, it goes without saying that the economic value of the international work of the City of London is immense for this country and one only has to look at the record of invisible earnings and those attributed to the City of London to know that that must be the case. My noble friend Lord Clark of Kempston discussed just that. But the debate calls for a discussion of the case for City firms establishing systems for corporate governance which will maintain confidence throughout the world and this in turn calls for a view as to whether the immense strides taken in this area have, in the first case, been adopted by responsible companies in the City of London and also whether they are in themselves adequate.
I believe that a further issue lies behind this discussion--this has been mentioned by enough noble Lords for me to be confirmed in my view--which is that people are concerned about whether the much publicised financial accidents of the past few years would have happened had corporate governance and best practices been more stringently observed or more emphatically stated. It is for that reason that I wanted to say a few words in this debate.
First of all, I believe that the financial services area of the City has welcomed and responded positively to the many recommendations both in the Cadbury report in 1992 and in the Greenbury report in 1995. As we all know there are many further initiatives which have also been welcomed in the main by the City of London and acted upon.
The unwritten question about whether financial accidents would have been prevented with a stricter code is somewhat more complex. One thing that a bank can never do is to protect itself 100 per cent. from fraud. The only thing that can be said is that the earlier that this fraud is detected the better, but that is an obvious platitude. If a dealer in the sophisticated range of financial instruments now available takes a view and is proved wrong and he compounds that view by hiding it from his superiors, if he is adroit he can enter into a series of transactions which increase the exposure of his employers to protect himself or, rather, to justify his judgment. If after the first transaction or even the second he had explained to his superiors what he had done and cut his losses, he would not have needed to embark on this dangerous path. Seldom are those actions taken for personal gain; they are nearly always a reflection of his conviction that his view of the market is right and that the market has got it wrong. Of course, some involve fraud for personal gain; but these acts are usually rarer than those I have described.
Would corporate governance, even if it were far more complex than we have today, have identified these problems earlier? I very much doubt it. There is a strong argument that the success of the City of London has been very largely due to the arrangements for self-regulation and the imposition of extremely tight and legally binding rules would dampen and ultimately damage the entrepreneurial and flexible management of companies within the financial sector. I would argue personally very strongly this case. That does not mean that I do not support and appreciate the changes which have been made.
The audit committee of a company and especially of those companies operating in financial services--Cadbury recommended that such a committee should be chaired by an independent, non-executive director--should be independently minded and able to take action supported by the executive management of the concern. I do not think that in the financial field there are people who still doubt the adoption of best practices and sound corporate governance in the case of UK financial institutions and I think at this stage to attempt to bring in more stringent and complex requirements might defeat the object. It would seem that a period of consolidation is called for.
I base my judgment on these matters on 40 years' experience as a banker--the same 40 years as those spent by my friend the noble Lord, Lord Ashburton--and the six and a half years that I was a member of the Board of Banking Supervision at the Bank of England. Those six and a half years covered both the collapse of BCCI and the tragic failures in Barings. It is always the job of senior management to be alert to things which are going wrong and they cannot unfortunately--or fortunately--escape the responsibility but, in the case of
the Barings situation, not enough attention was paid by the top management to the grotesque level of profits alleged to have been made in one offshore office. It was believed by management in London that those profits were being made from what was described as "risk-free arbitrage". There is no such thing as risk-free arbitrage. What might have been relatively risk-free would have not been so profitable--indeed, might have been barely worth doing for a very small return. Management in London should have been deeply suspicious of such profits and should have paid more heed to the recommendations of its own audit committee to separate the functions of the front and back offices in that offshore branch. But this is only a part of the story.The City of London will have great opportunities whether or not this country joins the single currency mechanism and should be helped to take advantage of these rather than be shackled with even further controls of corporate governance. I felt it important that these points were made in this interesting and worthwhile discussion which my noble friend Lord Gowrie has introduced at such a timely moment.
4.26 p.m.
Lord Selsdon: My Lords, it is with great pleasure that I follow my noble friend Lord Swaythling. I had the privilege of being a director of his family merchant bank for many years--sadly, after he had left. Many there wished that he had never left and I feel sure that we would have done better had he remained.
I remember looking with envy at the family bank of the noble Lord, Lord Ashburton. We admired it as a bank of utter credibility with a remarkable range of customers and great loyalty. I pay tribute to the services of the noble Lord in helping to promote the interests of the United Kingdom way outside the banking world.
I have had to say "Plus ca change" to myself in connection with this debate, because many years ago I had the privilege of moving a similar Motion to that moved today by my noble friend Lord Gowrie but on the subject of invisibles. My noble friend Lord Limerick was the Minister who replied to that debate. I think also of the remarkable man who was chairman of my noble friend's bank. I refer to Sir Cyril Kleinwort, who effectively started the Committee on Invisible Exports, and was the first to focus attention on the potential of the City of London as a foreign exchange earner.
One of the comments that one always heard when attending such meetings was, "We must always concentrate upon our integrity. Our image for honesty and integrity is far above any financial manipulation". I remember my pride when I was a member of the board of an accepting house. I remember also the nervousness that one felt at the possibility of being questioned by one's colleagues, or even the partners, about whether a particular company that one had taken on as a new client was the right sort of company for the bank to have as a customer. I remember with pride being introduced one day as a "financier"--we somehow thought that financiers were people who sailed too close to the wind. We thought that they were of doubtful origin.
My noble friends will recall that not so many years ago similar situations arose, with major bankruptcies occurring only a moment or so after the publication of the auditors' report or the annual report. I refer to Metal Traders, to Rolls-Royce and to the numerous scandals with investment funds. As I said, "Plus ca change". The problem was unfortunate. We suffered from success.
I have had the privilege of working for two merchant banks and for one of our clearing banks. The internal controls were positively frightening. Many of us thought that we could never have any growth business ever again. Those internal controls were good; and we were brought up to believe that there was one principle of banking, which was, "Know thy customer", and if you had the wrong customer that was your fault. If you had the chance of being a customer of a good bank, you would be proud if you were a customer of an accepting house. People were judged by the company they kept.
Now I fear, with regret, that the merging and the loss of accepting houses, the merging of brokers and the acquisitions by foreign banks have all reduced standards, not necessarily in the rush for growth, but because the changes are there and the morality has gone. The lawyers used to come in long after a deal had been consummated because we knew that we could not afford to pay for them; we still cannot afford to pay for them. But what worries me is not the success of the City of London, but the growing concern about liability.
I come to the question of corporate governance. It was right that one should know one's customer and, if one had a bad customer, one would be responsible for having taken him on. He too would be taken on by a stockbroker and an accountant and a lawyer. If a stockbroker resigned because he was not happy with a company, usually the shares would go down and there would almost be an internal investigation, asking what was wrong and wether there were adequate controls. Suddenly, people said, "You must have outside directors to control things". When I was in the banking world we were not allowed to be outside directors; we were not allowed to have an account outside the bank; we were not allowed to buy or sell a share other than within the bank. We were watched almost day and night, although I have to say that the days were much shorter than they are now. Perhaps when Big Bang came and internationalisation and the globalisation took place, it was not possible to control or to watch people 24 hours a day. However, I still believe that an employee has a responsibility to his employer and an employer has a responsibility to his employee.
These remarkable changes of units moving from one bank to another, solely in the cause of greed, gain and glory, are worrying. Glory? Many years ago public relations was not a major event of hitting the front page. In fact, if your bank was in the newspapers at all it was a matter for concern, and sometimes grave concern, because you were meant to be quiet and respectable.
The changes that have occurred lead me to wonder about what, if I remember rightly, Galbraith said--that banking may be a career from which no man really recovers. I have been and still am a director of public
companies. I worry rather when I am on a supervisory board of a bank and I find that no foreigner wants to be a director of a big British company. They are worried about the liabilities. It is interesting, too, that an awful lot of retired civil servants do not want to be a director of a public company.The remarkable speech of my noble friend Lord MacLaurin makes me think about a comment I heard the other day asking what is a non-executive director? Basically, I was advised that he is really a supermarket trolley that gets pushed in the direction the chairman wishes to go, occasionally going off course. One advantage, of course, is that he can hold more food and drink and another is that he will be blamed for the faults of others.
Today, a worry that I have concerns the liabilities that are facing accountants, lawyers, non-executive directors and all forms of adviser, in particular those in partnerships who have to incorporate within the costs or the fees that they charge not only over-expensive office buildings but the personal liabilities that can follow. Although it is undoubtedly a good idea to encourage the growth of the supervisory role of the non-executive director, as my noble friends and others have pointed out, one of his roles is to help expand the business in a respectable way. It is extraordinarily difficult to be able to keep an eye on all aspects of a company, not just the financial aspect or the remuneration committee, but on contracts which they may take which may suddenly go wrong. A bridge may collapse on the bus of a football team and the following litigation is out of all proportion to the damage caused.
It is a worrying time and I believe that, while growth in business is such that some form of greater control is necessary, I wonder very much about the trend that there is at the moment of trying to place too much responsibility upon the individual, who often lacks adequate protection.
4.35 p.m.
Lord Currie of Marylebone: My Lords, I am grateful to the noble Earl, Lord Gowrie, for introducing this debate on the City. Enough has probably been said about the dominant position of the City internationally, and that is to the great benefit of our country.
Having said that, one has to say that the competitive pressures are increasing. Hitherto, Paris and Frankfurt have not mounted any serious challenge to the position of the City, but Maastricht and the preparations for a single currency have spurred them to greater competitiveness. Yesterday I attended a conference organised by the Bank of England to discuss the preparations that the City has to make ahead of the introduction of the euro, whether the UK is in or out. It became quite clear that enormous work will be required for the City to be competitive in the future euro markets that are likely to develop. The representatives from the City were quietly confident that they were prepared, but they were under no illusion but that there was significant competition ahead.
The position of the City is not helped in that by some of the failures that have occurred over the past few years. I remember going to Spain on behalf of
British invisibles with Peter Baring to promote the City of London in the Spanish markets. We had a very good reception, but three weeks later the Barings collapse occurred, and I have no doubt that that was a thousand times more damaging than any promotional effect that we had.If one looks at the collapse it is natural to look at the regulator and point to regulatory failures, but that is not where the root of the problem lay. My noble friend Lord Eatwell was absolutely right to point the finger at the management and the management structure. The top people did not know their business. The noble Lord, Lord Swaythling, made the point that top management should have known that they could not make those enormous profits from the activities that were supposedly going on in the Far East. That was simple ignorance, and it is ignorance which is not excusable.
There is the additional point that the structure of the Barings equity arrangements created incentives for that collapse to happen: the bulk of the equity was owned in a non-voting form. Top management received a large part of their rewards in the form of bonuses. Their incentive was less concerned with looking after the future of the bank than with those large bonuses. I am not saying that people were consciously doing that, but the structure was such as to encourage poor management throughout the organisation, throughout the bank. Internal politics within the bank did not help.
Barings was an unusual case, but I have no doubt that similar problems, less acute, lie elsewhere. Management structures must be appropriately tightened and the auditory function enhanced in order to ensure that these difficulties do not arise. Management has to be enhanced. To plug a local interest of mine, management education in the City also has to be enhanced.
There was one element in the opening speech of the noble Earl, Lord Gowrie, with which I profoundly disagree. He suggested that the "Ken and Eddie show" should have come to the rescue in the Barings case, perhaps waving some taxpayers' money to rescue Barings.
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