Orders of the Day — Investment Advisers

– in the House of Commons at 1:30 am on 11 March 1987.

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Motion made, and Question proposed, That this House do now adjourn.—[Mr. Lennox-Boyd.]

Photo of Mr John Page Mr John Page , Harrow West 1:40, 11 March 1987

I am grateful to my hon. Friends for remaining here to listen to the debate. I am pleased to speak on a matter that is of vital importance to a small number of people and of great strategic significance to the Government and to the investing public.

For three reasons, I have a special interest in licensed financial dealers. First, constituents of mine have lost all or part of their savings because of the failure of licensed financial dealers to whom they had entrusted their money. Secondly, I have an interest as the promoter of the Insurance Brokers (Registration) Act 1977 which enshrines much of the philosophy of self-regulation in the insurance brokers' profession, which has been studied and in some ways followed by those who prepared the details of the Financial Services Act 1986 and in which I have been able to see the setting up and working of a compensation fund.

Thirdly, I speak as the chairman of the Savers Union. I do not have to declare an interest because this is a wholly honorary position. The union was set up about seven years ago on an all-party basis to be a supporters' club for people, mostly small savers, with money in national avings schemes, building societies and such organisations.

The chief enemy of the saver is inflation, and we in the Savers Union take a small dram of pride in the success that we have had in informing savers about the virtue of defeating inflation. The Savers Union has done a useful job, with a small and loyal membership. We may have a role in future looking after the interests of the small investor in the same way as the Automobile Association looks after the interests of the private motorist.

There is definitely a gap in consumer representation that needs to be filled quickly. I shall start the main part of my speech by talking about the problems of the small investor. In the last 10 years, the number of people holding shares has jumped from about 2 million to about 12 million. That is a staggering increase. Interestingly enough, of the present 12 million shareholders, more than half— about 7 million— hold shares in only one category, many of them in British Telecom or British Gas or in share schemes developed by companies for their employees. They are inexperienced investors and potential prey for sharp financial operators.

I was stung into action when two extremely nice constituents of mine visited me just before Christmas. They told me that they had an investment of £5,000 in Thames Television and that on one Friday they had taken their share certificates to one of the City Investment Centres offices—known in advertisements as CIC asking it to raise money on part of their shares, and to retain the other part for them in share certificates.

About 10 days later they again went along to the CIC office and found a notice on the door that said that the firm had had its licence to trade withdrawn by the Department of Trade and Industry. My constituents have no idea whether they will suffer a total loss or what percentage of their savings will be saved from the wreck.

I appreciate the Department's difficulties in having to withdraw a licence or close down a licencsed financial dealer. If the Department closes down a dealer too early, it may be considered that that action has caused loss to investors because the operators have not been given the time needed to get the business going properly. However, if the Department closes down a dealer too late, as many people feel happened with CIC, it means that more people's savings will be put at risk. That problem represents the kernel of the situation that I wish the House and the Minister to address.

An Adjournment debate on the subject of McDonald Wheeler Fund Management was initiated by the hon. Member for Thurrock (Dr. McDonald) on 17 November 1986. That debate— in common with this one— was answered by my hon. Friend the Under-Secretary of State for Trade and Industry. Therefore, there is no need for me to go over that ground again or the dubious role of Mr Wheeler. I also have constituents who have suffered at the hands of that firm. Another spectacular collapse concerned Prior Harwin shareholders, but as yet, none of my constituents have told me that they are involved in that disaster.

The good news is that the Government have already taken wise, positive steps in the Financial Services Act 1986 to take care of problems arising from failures similar to those I have mentioned. The most important aspect of that Act has been the establishment of a compensation scheme. Such a scheme also featured in the Insurance Brokers (Registration) Act 1977. In that instance, the scheme is also supported by professional indemnity cover.

Just as those who deal with registered insurance brokers are covered by a compensation fund, so in future those who deal with registered investment intermediaries will be covered by a compensation fund. However, regrettably, the regulations covering intermediaries will not take effect for about 12 months. Therefore, the compensation provisions and fund will not be effective. We must take steps to deal with the gap between now and when the new Act comes fully into operation.

I ask the House and my hon. and learned Friend to concentrate their minds on what is to happen next year. The Government and the House must find a way to safeguard investors during that period. We may not be able to lock the stable doors before some of the horses have left, as in the cases which I have mentioned, but we have a duty to put a new padlock on the doors to keep horses in until the new stable block has been built, under the auspices of the Securities and Investments Board, which the Financial Services Act will set up.

At present, there is a category of intermediary known as a licensed dealer. I regret that the licence appears to be worthless as a protection of the public. It would be better if it did not exist. Under the licensing scheme, there exists the Financial Intermediaries, Managers and Brokers Regulatory Association which admits dealers to membership. The most important part of the name is "Regulatory". When I was first involved in this problem, I was inclined to be extremely critical of FIMBRA, but I now believe that I was wrong. It is trying and has tried desperately hard to do the right thing by investors, but is not yet invested with the necessary powers to enable it to do the job which will be given to it when the Act is fully in place. The great mistake was to put FIMBRA into operation before the whole Act was in place. I am confident that that should not have been done. There is a danger that the public's faith in FIMBRA has been seriously harmed, although, if my outline plan is carried out, the wounds need not necessarily be fatal.

However, in all seriousness, I have to say that, had it not been for the aura of respectability given to some intermediaries by being able to say in their letters and advertisements, "We are dealers authorised to operate by FIMBRA," my constituents have told me that they, and I believe others, would not have dreamed of giving those dealers that confidence. I therefore challenge the wisdom of operating FIMBRA before its compensation fund has been put in place.

Taking this background into consideration, what action should the Government take to safeguard the small investor during the vital next 12 months? I suggest that the following steps should be taken. First, FIMBRA should immediately instruct its members, except those such as registered insurance brokers who are already covered by a compensation scheme, not to use its logo until the Act is in place, or there should be a Government financial health warning ensuring that FIMBRA members in their advertisements and correspondence clearly state that there is no compensation fund or insurance unless theirs are specifically in existence. However, I have reluctantly been persuaded that it is not possible for retrospective compensation to be arranged to help those who have already suffered loss, and I deeply regret the loss and distress which they have suffered.

Secondly, all current investors who are not fully experienced in financial dealing should at once write to their bank managers, or call on them, to ask whether those who are handling their finances are covered by compensation schemes or other insurance policies, as are stockbrokers, registered insurance brokers and other professional advisers. They should then accept their bank managers' recommendations whether to continue or not with their present dealers.

Thirdly—this is the crux of my argument—I ask the Government to enter into earnest discussions with FIMBRA to persuade it immediately to put a compensation scheme in place such as it will need to do when the Act is fully in operation. The Government should be ready and willing to make a loan to FIMBRA of an appropriate sum—I do not know what that figure might be, but let us say £5 million—to be repaid in full after four or five years, when FIMBRA's own scheme of compensation is in operation. This will mean that the investing public will instantly be given the safeguards which they need and, which I believe they thought they had already. We cannot sit in this place with folded hands and watch calmly while further calamities befall our unsuspecting constituents.

Finally, I urge my hon. and learned Friend the Minister, who is wise, well informed and sympathetic, to talk to his right hon. Friend the Secretary of State and to FIMBRA about that which I have suggested. By adopting it, he will prove that the Government are determined to protect and encourage the new army of small shareholders whom their policies have rendered willing volunteers in the investment scene.

Photo of Michael Howard Michael Howard Parliamentary Under-Secretary (Department of Trade and Industry) 1:57, 11 March 1987

I congratulate my hon. Friend the Member for Harrow, West (Sir J. Page) on securing the Adjournment debate, and I am grateful to him for the way in which he has raised an important subject. There is, in my view rightly, a deep concern on both sides of the House that investors should be properly protected, and my hon. Friend has drawn attention to a number of important elements in any system of investor protection. My hon. Friend's record in championing the interestes of investors through the Savers' Union and the promotion of the Act which is colloquially known by his name, the Insurance Brokers (Registration) Act 1977, is one that needs no embellishment.

I should perhaps start by reminding the House that we are now in something of a transitional phase. The Government recognised some time ago that the existing system of investor protection was inadequate. The Financial Services Act 1986, which received Royal Assent in November, seeks to replace the existing system with a comprehensive new system of investor protection, drawing on the advantages of practitioner-based regulation but giving it firm statutory backing, and introducing also a range of new powers. I am grateful to my hon. Friend for his commendation of the legislation. We are determined to bring the new system into effect as soon as possible, but it will inevitably take a little while.

The Securities and Investments Board has applied recently to have powers under the Act transferred to it. In support of the application, the board submitted its draft rules and other relevant material, and these documents are being studied to ascertain whether they satisfy the requirements of the Act. My hon. Friend will be aware that the Act lays down a twofold test for the designated agency's rules. They must provide an adequate level of investor protection, but any significant anti-competitive effects must be limited to those that are necessary in the interests of investors.

If the rules satisfy the requirements of the Act, the next stage will be to lay an order before both Houses transferring powers to the board. I hope that that will be possible in the spring, and it will of course be debated then. Once powers have been transferred, it will be possible for the board to start recognising self-regulating organisations and authorising those applicants who prefer direct authorisation by the board.

All this is bound to take a little time, especially as the Act will extend the regulatory system to a number of new areas, and practitioners in those areas will need time to apply for and obtain authorisation. Nevertheless, it should be possible to bring into force the central provisions of the Act, including those which will make it an offence to carry on investment business without authorisation, by the end of the year.

As my hon. Friend has said, one of the most important features of the new regulatory system will be the provision that is made for compensating investors who lose money as a result of the misconduct of investment businesses. A regrettably large number of cases in recent months have highlighted the importance of such a scheme. Like my hon. Friend and many other hon. Members, I, too, have constituents who have suffered at the hands of some of those against whom regulators have taken action. Even though most investment businesses are perfectly reputable, I am sure that everyone would agree that the consequences of this kind of episode are such that there should be proper arrangements for compensation, funded by the industry as a whole.

That is why section 54 of the Financial Services Act 1986 allows the designated agency to establish a scheme for compensating investors who have a claim against an investment business which, perhaps because of insolvency, that business cannot meet. The board has published its proposals for such a scheme, which I am considering along with all the other material submitted. The proposed scheme is wide-ranging and will cover all kinds of investment businesses. The proposed limits on compensation are considerably higher than those applying to depositors with a bank or building society, and should ensure that full or at least adequate recompense is made in the most distressing cases involving relatively small investors.

Of course, I appreciate that the news of a better deal to come will be cold comfort to some of those who have suffered in some recent cases. My hon. Friend has asked whether the new compensation arrangements could be used to compensate these losses as well as any arising in the future. I much regret that the answer must be no. The Act does not make provision for compensation to be payable retrospectively, and there is a natural presumption against retrospective provision of that kind. Moreover, it is difficult to see how a scheme for retrospective compensation could be established on an equitable basis. It would, I suggest, be extremely unfair to penalise those prepared to submit to the new system of regulation by requiring them to pay for compensation for failures which occurred before the system came into force.

Similarly, I have to say to my hon. Friend that it will not be possible to accelerate the introduction of the compensation scheme independently of the implementation of the rest of the Act. The scheme relies on other provisions of the Act, especially those relating to authorisation, and cannot come into force in advance of them. But once the main provisions come into force there is no reason why the compensation scheme should be long delayed. The Act does not require a fund to be built up before compensation can be paid. Indeed, both the Act and the SIB's proposed rules envisage that a call on the scheme in its early years could be met by borrowing, to be repaid out of a subsequent levy on investment businesses. I think, therefore, that my hon. Friend's fears about the length of time before compensation becomes available may be misplaced.

My hon. Friend has also suggested that FIMBRA might introduce its own compensation scheme to cover the period between now and the coming into force of the Financial Services Act. There is no requirement under the Prevention of Fraud (Investments) Act 1958 for FIMBRA to have a compensation scheme, but equally there is no bar to it, and indeed the stock exchange has a compensation scheme. FIMBRA already requires its members to take out professional indemnity insurance but this, of course, provides no solution in cases where the principals of the business concerned act dishonestly.

If FIMBRA wanted to supplement this requirement with a compensation scheme, that would be a matter for it to decide. My hon. Friend also asked whether such a scheme could be financed by a long-term Government loan, and here I fear that I must again disappoint him. The compensation scheme to be established under the Financial Services Act will he financed by the industry itself and not the taxpayer, and I can see no grounds for departing from this principle for any extra-statutory scheme introduced as an interim measure. It is also noteworthy that the stock exchange scheme is not financed by Government.

In addition to the points that he raised about compensation, my hon. Friend made a number of interesting points about the powers of intervention available to regulators under the present scheme. In particular, he was concerned that existing investors may suffer when a regulator moves to restrict the business of or close down a business which has broken the rules. I fully accept this, and it is always a consideration which ranks high in the minds of regulators when deciding whether to take action. Nobody whose function it is to protect investors is liable to take lightly a step which is likely to damage severely the interests of a particular. group of investors. But in this as in other areas the regulator will have to strike a balance. It may well be damaging to existing investors to move against a business, but the damage that could he done if he were allowed to continue trading could be much greater. The damage caused to existing investors in such a case is regrettable, but it can be justified in the interests of the investing community as a whole.

None the less, we recognise that investors gain little comfort from the knowledge that their suffering is necessary to protect others from a similar fate. Under the system to be introduced under the Financial Services Act, existing investors will be in a much better position when a regulator takes action. There will be a much wider range of powers of intervention available to the regulator. Those powers are set out in chapter VI of part I of the Act. They include powers to restrict the investment business that a person may carry on, to prohibit a person from disposing of or dealing with specified assets to vest in a trustee assets of the business and assets belonging to investors, and to maintain assets of a specified value in the United Kingdom.

Such powers may be used in a variety of circumstances, and in particular in any case in which their exercise is desirable for the protection of investors. The effect will allow regulators to protect the interests of existing investors at the same time as taking action to protect potential investors.

Another protection that the Act will give to existing investors will be the requirement to segregate clients' money into a separate account. Taken with the rules that the Securities and Investments Board proposes to make about safeguarding of other assets, this should ensure that the assets of a business are distinguishable from those of investors.

I cannot pretend that the provisions will on their own be effective in every case in protecting investors. The clients' money rules, for instance, will protect investors only if they are kept, and the powers to vest assets in a trustee will be effective only if there are assets available to be seized. There is no guarantee in this world that can eliminate once and for all the danger of fraud that can redound to the disadvantage of investors, but standing behind the rules will be the compensation scheme, which will be a considerable protection for any investor who suffers as a result of a regulator's necessary action.

I conclude by again thanking my hon. Friend for raising these important matters tonight. I share his concern at the tribulations of those who have lost money dealing with unscrupulous investment businesses.

I regret that it is not possible, under existing legislation, to do more to help people in their unfortunate position. However, I hope that I have made it clear that the Financial Services Act will greatly improve the protection available to investors in similar circumstances in the future.

Question put and agreed to.

Adjourned accordingly at seven minutes past Two o'clock.