Financial Services

– in the House of Commons at 6:31 pm on 15th February 1994.

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Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester 6:31 pm, 15th February 1994

I beg to move,

That the draft Auditors (Financial Services Act 1986) Rules 1994, which were laid before this House on 15th December, be approved.

Photo of Miss Janet Fookes Miss Janet Fookes , Plymouth Drake

I understand that with this it will be convenient to discuss at the same time the following motions: That the draft Accountants (Banking Act 1987) Regulations 1994, which were laid before this House on 15th December, be approved.That the draft Building Societies (Auditors) Order 1994, which was laid before this House on 15th December, be approved.That the draft Auditors (Insurance Companies Act 1982) Regulations 1994, which were laid before this House on 14th January, be approved.

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

The House will recall that Sir Thomas Bingham's report on his inquiry into the supervision of the Bank of Credit and Commerce International was published in October 1992. It concerned perhaps the largest fraud in the history of banking. When BCCI collapsed in 1991, it left behind it a trail of deception and criminality on an epic scale. Sir Thomas Bingham drew some clear lessons from his inquiry and set out a list of recommendations. When he introduced the report in the House, my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) made it clear that he accepted them all and that the Government were committed to carrying them out.

In a subsequent debate on the report on 6 November 1992, I spelled out in some detail how the Government intended to fulfil that commitment. One of the regulations before the House represents the culmination of our actions to give effect to one of Sir Thomas's recommendations—that the existing right, in section 47 of the Banking Act 1987, for auditors to report relevant information to the Bank of England should become a statutory duty.

As hon. Members will recall, Sir Thomas was persuaded to that view by, in part, a conclusion of the Select Committee on the Treasury and Civil Service which stated: although the existing permissive nature of Section 47 has worked well … it seems desirable to tighten the wording of the Act so that there can be no doubt, either from the point of view of the auditor, his client or the regulator, as to an auditor's duty to report. In announcing the Government's intention, I also made it clear that my right hon. Friend the Member for Kingston upon Thames had decided that a similar duty should be introduced for auditors of building societies and financial service companies and that my right hon. Friend the President of the Board of Trade would want the approach extended to the auditors of insurance companies—hence the four statutory instruments before us.

In his speech in that debate, the hon. Member for Edinburgh, Central (Mr. Darling) welcomed the Government's acceptance of the recommendations of Sir Thomas and the Select Committee recommendations and agreed that it was important … that the statutory duty of auditors ought to be clear so that"— to use the hon. Gentleman's colourful phrase— if whistles are to be blown they are blown without doubt"—[Official Report, 6 November 1992; Vol. 213, c. 541.] Since that debate, the Government have taken the decision to introduce the duty into a fifth regulated sector—friendly societies—and a negative resolution order, under the Friendly Societies Act 1992, is also currently before the House.

There are a number of reasons for taking action across that wide front. First, and most important, the relevant provisions in the various Acts are similar and if we are to bolster the arrangements for banks, we should do the same for the other sectors entrusted with the public's investments, or with insuring their daily risks. It would be difficult for me or for any other Minister to have to defend leaving things unchanged in those other areas if the effect of having done so were subsequently to lead to a case of fraud in an investment firm, building society or insurance company, which the existence of the duty would have helped to prevent.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

It is good to see that the Government are at last acknowledging the justice of the amendments and doing exactly what was proposed in Committees on Bills such as the Building Societies Bill and the Banking Bill when they were discussed in the 1980s. However, Sir Thomas Bingham also said: Determination of the correct relationship between client, auditor and supervisor raises an issue of policy more appropriate for decision by Parliament than by the Bank and the accounting profession". In view of that clear recommendation that Parliament should decide those matters, why has the Minister left regulation of that duty to the Auditing Practices Board—a non-statutory body?

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

The hon. Gentleman is right to say that those matters were considered during the passage of those Bills. However, it is also true that in the Bingham report there was a broad acceptance that the present system for the supervision of banks should continue. The hon. Gentleman will know, because he has corresponded with me on the subject, that it is the view of the Government that the recognised professional body—the Institute of Chartered Accountants in England and Wales—is best placed to supervise that sector of auditors.

An argument may be mounted against that view and, no doubt, the hon. Gentleman may seek to use the debate to do just that and to say that it should be subject to some direct rule from Whitehall. That is neither the history nor the practice of our professional system, not only for accountants, but for the legal system as well. The system has stood the test of the time.

The hon. Gentleman will know that there is a procedure called the joint disciplinary scheme which enables the institute to investigate whether there has been compliance by member firms with the standards promulgated by the Auditing Practices Board. That seems to be the right way forward, but we shall return to those matters if the hon. Gentleman raises them further in the course of the debate.

Having determined the scope of the duty, the Government published a consultation document at the beginning of March. That made it clear that it was not the Government's objective to alter fundamentally the relationship between auditor and client. Nor were we looking to increase the costs of audit. Our objective was the same as Sir Thomas Bingham's—to clarify and strengthen the position of the auditor, not to change it. So the Government held back from imposing a duty on auditors to seek out fraud, malpractice and wrongdoing. That would have meant straying too far from the auditors' traditional role.

The responses that we received to the consultation document were considered carefully and my officials discussed the issues raised with the Auditing Practices Board and with other interested parties in the regulated sectors. Some comments could be dealt with readily by changes to the draft statutory instruments, but others were not so easy to resolve as they raised more fundamental questions. In those cases, my officials were able to explore with the Auditing Practices Board whether issues could be more easily addressed in the statement of auditing standards, which was being developed to accompany the legislation, than in the statutory instruments.

I should like to take this opportunity to pay tribute to the helpful and co-operative attitude that the Auditing Practices Board displayed in what were often long and complex discussions and to thank it for the clear and helpful statement which it shortly plans to issue to accompany the orders and bring them into practical effect.

Photo of Anthony Steen Anthony Steen , South Hams

Is the board a new quango or is it a SEFRA—a self-financing regulatory authority—which has powers to issue rules and regulations and to charge for the job that it does?

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

Although I am not entirely familiar with such jargon, I think that it falls within the latter rather than the former definition. The Auditing Practices Board is riot a body set up by statute, but it is certainly recognised as responsible. Indeed, under tax law and in various other ways its promulgations and the standards that it sets are generally regarded as acceptable. However, such matters are of course kept under review.

One of the difficulties dealt with during the consultation exercise was that neither the term "auditor" nor the phrase in his capacity as auditor was defined in the banking statutory instrument or in the Banking Act itself. The Government are mindful of the need to clarify who will be placed under a duty by the statutory instruments and in what circumstances the duty will apply.

Although it is ultimately a question for the courts, we take the view that the duty clearly covers any auditor of a bank appointed under United Kingdom company law, which means any auditor of an authorised institution incorporated in the United Kingdom. It also covers auditors of authorised institutions whose place of incorporation is outside the European Community and whose initial authorisation has been granted by another regulator, even though such auditors may be appointed under a foreign law. The Government also believe that the duty applies to United Kingdom accountants acting as agents of the appointed foreign auditors.

As for the circumstances in which an auditor might come under a duty to report, the Banking Act, as well as the Financial Services Act and the Insurance Companies Act, uses the phrase in his capacity as auditor". Again, we have no powers to clarify the phrase in the regulations. If any greater certainty could be given, it could be done only by an unacceptable narrowing of the duty to restrict it to a part of the auditor's responsibilities. We were also concerned that to do so could have potentially wide-ranging implications for the scope of auditors' functions more generally. It may, however, be helpful if I seek to clarify when an individual auditor is operating in his capacity as such and whether a partner in an auditing practice who is not involved in auditing the regulated institutions is nevertheless deemed to be operating in his capacity as auditor.

In our view, it is reasonable to expect an individual who is conducting an audit to consider information relevant to an audit which is obtained in the course of other work for the same client. It seems realistic to expect the auditor to take such information into account in his review of the audit. The person, acting as auditor, also needs to be aware of other non-audit work on his client—for example, tax work—that partners in his firm may be doing and they, in turn, should consider whether any information that may arise from their work is relevant to the conduct of the audit. If it is, they should also consider whether it is relevant to the duty to report to the regulator. The partner carrying out the audit should also, if possible, discuss it with his client.

In the case of information relating to client A which is obtained by the auditor while auditing client B, the auditor should, as a matter of sound practice, usually use the information to make further inquiries for the purpose of the audit of A. These interpretations have been set out more fully in the statement of auditing standards and the professional guidance issued by the Auditing Practices Board that will accompany this legislation. As a matter of courtesy to the House, I have asked for a copy to be placed in the Library.

Once the extensive consultation process was over, the Government circulated amended versions of the draft statutory instruments for a second, more limited, round before setting them in their final form. In producing the drafts, we bore firmly in mind the fact that if this duty on auditors is to be effective, it is vital that auditors can continue to rely on the trust of their clients. We have therefore tried to set the duty at a level which makes it clear to those who seek to commit financial crime that they are more likely to be caught but which does not impose additional reporting burdens on costs on those who conduct their business honestly. That is a most important balance to strike.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

I am grateful to the Minister for his patience. It could be argued, however, that it is no good having a duty to report fraud unless there is also a duty to detect fraud. The Auditing Practices Board's proposals are for passive auditing, but the auditing profession argues that it is difficult to detect fraud. The Local Government Finance Act 1982 places a duty on local authority auditors to search for unlawful acts and report them. If that is good for the local authority goose, why is it not good for the banking gander when so much more money is involved?

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

As always, the hon. Gentleman makes more than a debating point. He has raised a serious matter that deserves to be considered. It is not our intention that the orders should turn auditors into snoopers or narks. To do so would run the serious risk of undermining the relationship between auditors and their clients and imposing substantial additional cost burdens on auditors, which would have to be borne by companies and, ultimately, by their clients.

In addition, in the example that the hon. Gentleman cited, there must be some difference—I put it no more strongly than that—between public and private money, although I acknowledge that, in certain cases, we are talking about the trusteeship of public deposits and funds. There are difficulties but if we were to adopt the hon. Gentleman's suggestion, we should need to introduce primary legislation because orders introduced under the relevant legislation would not suffice. It is a matter to be discussed another day.

Photo of Anthony Steen Anthony Steen , South Hams

I am grateful to the Minister for giving way and making it two-all. He said that the costs of the statutory instrument and of the guidelines, rules, regulations and orders that flow from it will not impact on small businesses, which is the key to the Deregulation and Contracting Out Bill. Has the issue been considered and is the deregulation unit satisfied that additional costs will not be imposed on small enterprises?

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

My hon. Friend, who is a prime champion of small businesses, makes an important point. The answer is yes, it has been considered by those dealing with deregulation. In fact, my hon. Friend the Under-Secretary of State for Corporate Affairs, who is responsible for deregulation, has sponsored one of the orders that we are debating—that relating to insurance companies. It is our intention that the costs should be negligible or nil and not go beyond what is already required or possible by way of a right to report.

In this case, we are imposing a duty to report but it should not impose any greater costs on auditors. It should, however, bolster the ability of auditors to insist that their client companies are forthcoming and open and, where necessary, enable them to correct problems that might otherwise bring their authorised status into question. That is the crucial point. The order is therefore a welcome enhancement and toughening of the law without imposing additional costs, about which my hon. Friend the Member for South Hams (Mr. Steen) is rightly worried.

Before I conclude, I should mention that there is a European dimension to the issue. In November 1992, the Vice-President of the EC Commission, Sir Leon Brittan, sketched out some general proposals for Community legislation in response to the BCCI affair. The proposals were subsequently turned into a Commission proposal for a directive, one element of which requires member states to impose a duty on auditors of financial undertakings to report breaches of laws or regulations, or other adverse circumstances, to supervisors.

As the House will know, following discussions in Brussels, political agreement has been reached in the Council on an amended draft directive which, if implemented in its present form, would impose on auditors a slightly wider duty to report than that contained in the regulations that we are debating. However, the proposed European directive has a number of further hurdles to be negotiated before it can be finalised and, even when it is, it is unlikely to be implemented before 1996.

Even though some minor changes may subsequently be necessary in order to conform with the directive, the Government do not want to risk a further period of delay before bringing these necessary measures into effect. In view of the widespread support from both parties for Sir Thomas's recommendations, the Government believe that we should now act promptly to pass the changes into law.

I conclude by expressing my gratitude to the Auditing Practices Board and the many other professional organisations which have been involved in considering the legislation legislation. We believe that the measures will greatly strengthen and clarify the position of the auditor and represent an important step forward in the fight against financial wrongdoing. I commend them to the House.

Photo of Alistair Darling Alistair Darling Shadow Spokesperson (Treasury) 6:49 pm, 15th February 1994

As the Minister said, the measures impose a new statutory duty on auditors and, as he rightly reminded us, it is something that we welcomed when we held the debate on the Bingham report in Novermber 1992, about 15 months ago. I think that it is fair to say that although we welcomed that recommendation by Sir Thomas Bingham, we did not say that that was all that was required. Although the measures are welcome they are only a start in the battle against fraud and other crimes of dishonesty.

Action was promised, as the Minister said, in October 1992, by the former Chancellor of the Exchequer when the Bingham report was published, but I believe that the proposals before us are timid and are the bare minimum that was requested by Sir Thomas Bingham. They hardly live up to the Minister's announcement at the beginning of his speech; indeed, they are being introduced only after much discussion and some opposition from the auditing profession.

Although the Minister, understandably, pays tribute to those people who have spent considerable time and effort in getting the practice notes right and responding to the Government's proposals, it is fair to say that many people—not only people in the auditing industry but people who represent the companies that are audited—have expressed worries. The Minister has mentioned some of those worries—the relationship with clients, for example, bears closer examination. Many people believe that the relationship between client and auditor can be too close and that there ought to be a respectable distance between them. There is a question of professional indemnity, to which I shall return shortly because it might be helpful if the Minister said something about that.

The measures do not pay any attention to a number of matters that are in what I would regard as the public interest. Although the Minister has, rightly. Paid tribute to the involvement of professional organizations in the process, we must never forget that we are here to represent the public interest and not just specific professional interests that may be relevant in each case. Indeed, in the light of what has happened in enforcement during the past two years, the Minister must be aware that the public require higher standards of commercial probity.

The Government should have conducted a proper and wide review of the role and duty of auditors, not only the sector covered by the measures but throughout industry. I understand that various professional organizations in accountancy are doing so, but the Government should also do so, because we are worried about the probity of financial institutions and about the auditing of other commercial concerns.

It seems to me that in this case the public interest has taken second place to the Government's wish to do as little as possible. Yet again, the Minister said in the debate, in response to a question asked by my hon. Friend the Member for Great Grimsby (Mr. Mitchell), that if we were to do anything further it would need primary legislation. So what? That is what the House is here for: it is here to introduce primary legislation if we need it, and in my view we need it in this sector. It is high time that the Government recognised that. They should not be afraid to take action simply because primary legislation is required.

The Government have, for example, nothing to say about a central enforcement organization, which should be part and parcel of a proper and focused attack on crimes of dishonesty in financial institutions. The Government have said nothing about the need to end the fiction of self-regulation and to replace it with efficient, effective and cheaper direct regulation.

We need to tackle several questions specifically relating to the measures. The first question is what exactly the auditor's duty is. I notice that the phraseology adopted in each of the four measures is different. It is clear from the regulations relating to insurance and the order relating to building societies that the auditor has to act in his capacity as auditor.

The Minister said that he thought that the proper interpretation in respect of all the measures was fairly wide. If so, why do the measures relating to insurance and building societies specifically say that the auditor must be working in his capacity as auditor, whereas in the measures relating to banks and banking and financial services it may be implicit that the auditor is working in his capacity as auditor but that is not explicitly stated because the phraseology is different?

The Minister went far wider. He seemed to imply that there was not simply a duty on the accountant acting in his capacity as an auditor, but that the accountant would have the same duty if acting as an accountant or tax adviser or in any other capacity. That is to paint a picture of a far wider duty than I had thought. Indeed, people who follow those matters have suggested that that is a wider duty than the secondary legislation provides for.

Obviously, that will be crucial in any court proceedings. Because the court will have to decide whether an auditor was in breach of his or her duty, having regard to what is on the face of the statute. I know, following a fairly recent case in the House of Lords, that the courts are entitled to rely on what Ministers say in debate, but perhaps the Minister would spell out a little more clearly the apparent discrepancy between what he said in his speech and what is in the measures and why the phraseology in the measures relating to banks and banking and financial services differes from that used in those relating to insurance and building societies.

It could be something to do with the regulatory regime. Banks are supervised by the Bank of England and the financial services regime is supervised by the Securities and Investments Board plc. That may be a reason why it is not explicitly stated that the account has to be acting in his capacity as auditor. The Minister should clarify that point because in may be crucial not only to the industry but to the public interest, and the public will want to know the position.

The Chartered Association of Certified Accountants wrote to me recently asking what the position was. Its letter stated: Firms of accountants are quite likely to be engaged by the same client to perform services other than the statutory audit The letter lists financial planning, and so on. If the Minister is right, a partner or assistant in a firm acting as a tax adviser or financial planner might come across something that, if he were acting as auditor, he would be bound to report. As I understand it, the Minister's position is that the partner or assistant would be bound to refer that matter to the partner responsible for audit, and that partner would be put on notice that he ought to report it to the relevant authority. If that is correct, perhaps the Minister will say so in clear and explicit terms, because it is important.

Increasingly, many firms act in both capacities. Indeed, many of us are aware of the difficulty that now arises for the large firms, in that there are only half a dozen very large accountancy firms that are capable of providing accounting and auditing services. Most were beneficiaries of the Government's largesse in awarding public service contracts to a surprising degree. The Government must, therefore, be well aware of the problem.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

The problem is that the centres of accountancy power, the large accountancy firms—I think the big six—are pretty well uncontrolled. They dominate the institutions that are meant to regulate them. When it comes to international affairs, partners do not exchange information with one another. When the Senate inquired into the audit performance of Price Waterhouse, the British partners of Price Waterhouse claimed that they were an entirely separate organisation, that they had no obligation to give information to the Senate and nothing was effectively passed on. An inquiry was therefore conducted there without Price Waterhouse's partners in the United Kingdom co-operating in any way.

Photo of Alistair Darling Alistair Darling Shadow Spokesperson (Treasury)

My hon. Friend mentions an interesting point. When I studied the law relating to partnerships, I learned that one of the basic principles was the personal relationship between partners. When one looks at the headed notepaper of the big multinational accountancy firms, sometimes the names of partners cover most of the letter and there is little room left for the message, and one wonders how on earth they speak to one another, or if they even know who the others are or where their offices are. There is not the personal relationship that one might expect to find in the normal concept of a legal firm.

We could leave the point and have a discussion as to whether a partnership is a suitable legal entity under which those people should trade. That raises an important matter, because in the Bank of Credit and Commerce International inquiry it was obvious that parts of Price Waterhouse were not fully aware of what other parts were doing. Worse still, in fairness to Price Waterhouse, some of the regulators in different parts of the world did not know what the other regulators were doing. The only people who knew what was happening were the principals behind BCCI, who exploited that situation.

Obviously, that is a matter for the accountancy profession, but there is also the problem that Price Waterhouse operating in the United States presumably comes within the jurisdiction of the accountancy profession in the United States. That is something to which the Government will have to address themselves. It is already accepted in money laundering, for example, that fraud is an international crime. It would be interesting to hear what steps the Minister proposes to take to look at the problem that was undoubtedly raised in the BCCI report.

Before I leave this particular part of my criticism, and in case the Minister does not accept what I am saying, perhaps I can quote the words of the right hon. Member for Henley (Mr. Heseltine) who, writing before he was President of the Board of Trade, in his book "Where There's a Will" said: Accountancy firms ought, I believe, to be debarred from doing any other work for a company for which they act as auditors. In a number of other countries there are laws which circumscribe the auditors in this way to prevent any possible conflict of interest. This discipline should be extended across the publicly quoted private sector. That was certainly the view of the President of the Board of Trade before he returned to the Cabinet. I am not sure if he has now departed from it, but it is worthy of some weight. I acknowledge that there are problems but, as a general principle, that matter needs to be looked at.

The Minister has said that many of these matters will be dealt with by a statement of practice. He was asked by the hon. Member for South Hams (Mr. Steen) what the status of these people was. To me, it does not matter very much. This is a matter of public interest; it should not be just a matter of professional interest. For those reasons, the Government should take a rather livelier interest than perhaps they do.

The question of the rotation of auditors has often been canvassed. Is it wise to have the same firm of auditors year in, year out? We are all familiar with the last item at an annual general meeting, a motion to propose the re-election of the auditors. I can understand the question of expense, but there is also the question of transparency and efficiency. Firms ought to look at audit as a useful discipline. It is not a matter of snoopers or narks, as the Minister said. Audit is an essential function to provide for the efficiency of a firm as well as for the protection of the public.

To whom is the duty of care owed? As I understand it, the present law is clear: the auditors owe a duty of care to the shareholders collectively, not to individual shareholders or to what are called stakeholders—employees, for example. Nor do they have a general duty as regards the public interest. That aspect needs examination. If the Government were prepared to embark on a review of auditing generally, there would be some useful point in pursuing that further.

Bingham examined that point at paragraph 3.39 in his report. It is interesting that he had a long paragraph discussing those matters and, in the end, did not come to a concluded view, although he acknowledged that there were many people—for example, depositors, shareholders and employees—who might have an interest in a particular company. In paragraph 3.40 he went on to point out that the law, which was then recently established, was that auditors owed a duty of care to their client company and to the whole body of shareholders but not to individual shareholders and not to non-shareholding depositors. He was talking in the context of a bank.

The Government need to look at that matter. Given the nature of multinational companies or even publicly quoted or private companies in this country, where there is a public interest not just in efficiency but in probity, it is time that we looked at the role of auditors to see whether they should have a wider duty. We do not have a concluded view on the matter, but we need to look at it.

There is also substantial merit in the point put in an intervention by my hon. Friend the Member for Great Grimsby on the duty of auditors. He drew attention to the fact that, under the Local Government Finance Act 1982, auditors have a far wider duty than is proposed in the measures before us because the duty is to detect fraud. To my mind, that is not a question of being a snooper, a nark or even a policeman. It is interesting to see the words used in section 15 of the Local Government Finance Act 1982. The auditor is under a duty, among other things, to see that the accounts are prepared in accordance with regulations made under the Act, to see that "proper practices" are followed and to see that the body whose accounts are being audited has made proper arrangements for securing enconomy, efficiency and effectiveness in its use of resources. That, particularly the last point, is something at which the audit committees which are established in most efficient companies want to look.

I come back to the point that audit ought to be regarded as something that assists a company in being efficient as well as being a mechanism for detecting fraud. The Government do not appear to be examining that point. They seem to be saying that it is entirely a matter for the profession. I should have thought that it was in the Government's interest to promote efficiency and it is certainly in their interest to maintain the public interest with regard to fraud or other wrong-doing. If there was a proper inquiry, that matter ought to be examined.

I note that reference is made in the measures to information that may be of material significance. It would be interesting to know how the Minister proposes to define material significance. Who will issue guidance on this point? Will it be the professional associations? Will the Government turn their mind to that? What does it mean?

For instance, if an auditor were looking at the Maxwell accounts, what would be a matter of material significance? Would it be materially significant that just about everyone to whom one spoke at the time thought that Maxwell was a crook, although, interstingly, that was not apparently the view of the regulators directly responsible for those matters? Even before Maxwell was exposed for the crook that he was, many people knew it from his conduct. The Department of Trade and Industry itself had said that he was a manifestly unsuitable person to be in charge of a company. Is that an example of what might be information of material significance? It would be helpful if the Government would say something about that.

There is another matter of broader significance. Although the measures cover certain financial institutions, they do not cover others. They do not cover Lloyd's of London, as far as I can see. I had half-expected to see the hon. Member for Gloucestershire, West (Mr. Marland) in his place to pursue his campaign—apparently, he is unable to be here—and to see others who sit on the Government Benches and who lost large sums of money at Lloyd's. They might have had something to say about it.

It seems odd that Lloyd's is not covered. No doubt the Minister will say that primary legislation is needed. I am sure that the Government would move heaven and earth not to introduce another Lloyd's Bill because of the problems that that would cause. But I wish that the Minister would tell us why Lloyd's is not covered and why, in particular, non-United Kingdom banks with branches in this country are not covered either. I may be wrong about that, but perhaps the Minister will address himself specifically to that point, and also to pension schemes. They may be covered by other legislation, but they are matters of some concern.

The Government have already accepted, with the introduction of provisions on money laundering in the Criminal Justice Act 1993, that there are far wider interests and implications than there have ever been before. The Government need to do a little more to show that they are aware of the international implications and of the sheer scale of what we are dealing with.

I touched on indemnity earlier. Perhaps the Minister will specifically address that point. I note that section 109 of the Financial Services Act 1986 explicitly provides an indemnity. What is the position with regard to auditors in this case? What is the indemnity? I assume that if they can bring themselves within the terms of the measures they will be indemnified. But if they can bring themselves only within the words used by the Minister, will they be protected?

I am thinking of the case of, say, a young accountant advising on financial management who finds something odd and perhaps reports it direct to the authorities. Will he be covered or will he have to go through some procedure to bring himself under that protection? That is important because, if the suspicion turns out to have been reasonable but not to bear further examination, an accountant could find himself in great pecuniary and professional difficulty. The Minister needs to look at that matter.

There are two substantial points that the House ought to address. I have mentioned the first again and again in debates such as this: the lack of a central enforcement agency. It has been brought to my attention on a number of occasions by reputable bodies such as the stock exchange that, because of the multiplicity of regulations, the complex nature of the legislation and the comparatively large number of regulatory or supervisory bodies, and because there are so many differences and standards, there is a need for a central enforcement body to bring together whatever evidence is available so that these matters may be prosecuted, if I may use that general term.

Photo of Anthony Steen Anthony Steen , South Hams

That is a mistaken view. The hon. Gentleman is probably right to believe that, because of the proliferation of rules and regulations, another quango or organisation is needed. That may not have an effect, but Conservative Members are saying, although not loudly enough, that we must reduce the number of rules and regulations, so avoiding the need for another organisation. we do not want another organisation to be set up as a result of rules and regulations; we want to reduce the number of rules and regulations

Photo of Alistair Darling Alistair Darling Shadow Spokesperson (Treasury)

I agree with the hon. Gentleman to some extent. As he knows, we would scrap the self-regulatory system and make the Securities and Investments Board responsible for the regulation of industry. In time, we would merge the SIB with a banking regulatory organisation, which answers one of his arguments. The SIB could also be responsible for the enforcement of such matters—an extra quango would not be needed.

The hon. Gentleman is probably aware of the financial fraud information network which consists of a group of regulators and about which the Chancellor of the Exchequer made an announcement. It would be far better to have a streamlined regulatory system that would be much cheaper and more efficient. I am glad that the hon. Gentleman seems to agree. Perhaps he will try to persuade his hon. Friend the Economic Secretary to the Treasury that primary legislation is needed.

Photo of Anthony Steen Anthony Steen , South Hams

I am working on it.

Photo of Alistair Darling Alistair Darling Shadow Spokesperson (Treasury)

I am glad to hear it.

I am not sure that I would agree with the hon. Gentleman that the best way to solve the problem is to have fewer regulations. I agree with the general thrust of what he might mean—it would help if the regulatory system concentrated on promoting higher professional standards and placed less emphasis on rules and regulations. To deal with fraud, as we are, there must be regulations and primary legislation. I am not the only who says that: the stock exchange and the SIB believe that we need a single enforcement organisation to consider such matters. Perhaps the Minister accepts that, but the Government should do so, too.

There is a feeling that, without such an organisation, many people who defraud the system or commit other crimes can exploit the different rules and regulations because they know that they will never be caught and there will be little chance of prosecution. They know that, even if they are prosecuted, the chances of conviction are remote. The judicial system shows that, even if they are convicted, the worst that they can expect is a few hours mowing the grass in front of an old folks' home or perhaps a few months in a country residence, albeit one owned by Her Majesty. The Government need to consider that issue, which goes hand in hand with the need to overhaul the regulatory system. Although I have often mentioned that subject before, I have no hesitation in doing so again.

There is a feeling abroad in the country that an audit certificate is rather like an MOT certificate: it is good for the minute when it is granted, but useless thereafter. That feeling must be dispelled. It is for those reasons that the Government need to turn their attention a little more to the issues that I have raised.

I refer the Minister to the Bank of England's memorandum, which was included in the report of the Treasury and Civil Service Select Committee. Page 185 of that report, which was published on 8 December last year, draws attention to the European directives to which the Minister referred. I understand that the proposal has run into difficulty, but I urge the Minister to press the Commission to get a move on, because the problem affects not only this country but Europe, particularly the European Union, and the rest of the world.

The problem needs international action. We in this country had a bitter experience with the Bank of Credit and Commerce International. Not only did it give a knock to the regulatory system, but—as I hardly need remind hon. Members—thousands of people lost all that they had. Many of those people believe that the House has not taken their concerns seriously. The Minister must give an assurance that the Government are willing to pursue the matter, even if it means introducing primary legislation.

I read in the newspapers today that there has been criticism of the fact that these measures are being taken on the Floor of the House, but they are serious matters and should be discussed here. Perhaps the debate will not be as lively and controversial as the one that we arranged to have on insider dealing, but it is important because auditing not only provides assistance to companies but reassures the public, who need great reassurance that the financial services industry and industry generally are being properly looked after. Although we support the measures, we have no hesitation in ensuring that they are debated properly and are not simply passed on the nod.

Photo of Anthony Steen Anthony Steen , South Hams 7:14 pm, 15th February 1994

As you, Madam Deputy Speaker, have kindly called me, I shall try to make the debate a little more lively, although I am not sure that I shall be controversial. Last week I made a speech about the significance of the Deregulation and Contracting Out Bill. I said: The Bill is so important because it is the first major attempt by the Government to slay the red tape dragon. The maxim that man learns nothing from history is often proved true, but the Bill shows the Government learning from history. Throughout the ages Governments have repealed legislation. There is nothing new about repealing legislation. It is repealed either because it has proved unworkable or because it has simply outlived its shelf life.In the new world in which we live, legislation has grown like Topsy and thus requires more drastic pruning. Those in the House who are gardeners know that shrubs grow irregularly. To keep trees and shrubs in prime condition, pruning is essential. I continued: In 1989 there were five times more pages of legislation than in 1979. Brussels churned out five volumes of legislation before we joined the European Community. It now churns out 37 volumes each year. However, the cause is not simply too many Eurocrats in Brussels. Directives from the Commission are often sensible and come to Britain suggesting a simple way of dealing with the problem. Once the directive hits Whitehall, bevies of officials are stirred into action, taking time and effort to interpret and rewrite the directive."—[Official Report, 8 February 1994; Vol. 237, c. 191–92.] Throughout my speech last week, whenever I said anything about deregulation, I won approval from the Front-Bench team and approving nods, winks and cries of "Hear, hear" from my colleagues. The President of the Board of Trade made a stirring speech, stating that the 440 proposals that resulted from the booklet "Cutting Red Tape" were either being implemented or under active consideration. He talked about the explanatory guide to the Bill and the new security committees that might be set up in each House. He spoke about the business task forces that had made more than 600 recommendations.

I thought that the debate heralded a new age in which over-zealous officialdom would be a thing of the past and Whitehall mandarins would be sat on, especially those who over-interpreted general directives from Brussels. I am told that Conservative Members have been jostling for position to win a place on the Standing Committee which is about to start consideration of the Bill. The aim of the Bill is to cut rules and regulations and to reduce the number of statutory instruments, which in 1992 reached the record level of 3,359. Today we are debating banks—

Photo of Miss Janet Fookes Miss Janet Fookes , Plymouth Drake

Order. Is the hon. Gentleman treating us to a re-run of the speech he made recently? It would be more appropriate if we were to discuss the orders. If he does not do so, there will be a bit of pruning from the Chair.

Photo of Anthony Steen Anthony Steen , South Hams

There will be no need for any pruning from the Chair. I just mentioned the word "banks" when you, Madam Deputy Speaker, rose to your feet. I assure you that pruning would not be in order. We are debating banks and banking regulations, building society orders, auditors' regulations and financial services rules. I did not mention those matters in the speech that I made last week, which was so warmly received by the House.

My colleagues are rushing upstairs with great enthusiasm and diving into the Committee Room anxious to start work on curbing the ever-growing number of rules and regulations. While they merrily start to do so upstairs, we downstairs pass more regulations, which we say we do not want.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

In his pursuit of deregulation, is the hon. Gentleman in favour of scrapping all regulations and controls on fraud, and all attempts to stop it? Will his deregulation be a fraudsters' fun day?

Photo of Anthony Steen Anthony Steen , South Hams

That is the problem. There is always a good reason for passing every regulation that the House passes. If it is anything to do with safety, hygiene, security or fraud there will always, rightly, be a pressure group or an interest group to push for the regulation. I do not for a moment suggest that some rules and regulations are not needed. The trouble is that there is always an excuse, and usually a good reason, for all the rules and regulations passed by the House. That is the problem that the Government face.

Clearly the Treasury, too, faced that problem when it produced the statutory instruments before us. No one can disagree with the idea that fraud must be stamped out. I simply say that unfortunately, while we have a deregulation Bill in Committee going ahead at full speed with dozens of clauses and new rules to try to reduce the number of regulations, here we are on the Floor of the House passing—perhaps for good reasons—more rules and regulations. So tonight there will be four more sets of rules.

I believe that in every Department a Minister has been especially appointed to keep an eye on deregulation. The Minister said that the Department of Trade and Industry Minister responsible for deregulation has considered the statutory instruments, but is there a Minister in the Treasury responsible for deregulation, or is the Treasury above deregulation? I had the impression that every Department would have a deregulation Minister, and it would be useful to know who the deregulation Minister in the Treasury is.

Unless we are careful, deregulation could become simply another layer of bureaucracy, with a whole new subculture of civil servants being consulted on whether something should be deregulated, gloriously oblivious of what is going on next door. There could be a huge sub-structure, and deregulation would be the new in thing. There would be a new quango, a new self-financing regulatory body—a SEFRA—with a Minister and a lot of civil servants. We have already seen the deregulation unit. I am worried that we may all be being hoodwinked into believing that the Deregulation and Contracting Out Bill is opening a new chapter in our legislative history, when deregulation may be no more than a weasel word, describing one thing while something else is really happening.

I am sure that the Minister has a good reason why the four statutory instruments are necessary, and I am sure that hon. Members on both sides of the House recognise that reason. However, I have sat on an immense number of Committees on statutory instruments, and hon. Members always say that the new rules are greatly needed. They usually say that because they want to leave in three or four minutes; 10.30 arrives, and by 10.35 they have all gone.

The deregulation Bill may not affect the number of statutory instruments going through the House, but I believe that the City would still continue without the statutory instruments, and the country would still be a able to go on if we had not passed the regulations. Will those four statutory instruments really help to run the country more effectively? We are imposing duties on auditors and regulators in the Securities and Investments Board, another quango. Do we need all that?

The insurance regulations have a compliance cost assessment. Have the other statutory instruments had an assessment, too? Apparently the consultees found it difficult to assess the extent of any additional costs arising from the regulations. First there was a regulation, then there was a compliance cost assessment, and employed people were consulted on whether the statutory instrument would cost more. I wonder how much that cost. It could all become a dangerous industry, which could get out of hand.

We seem to live in gobbledegook land. We seem to be able to argue vigorously and passionately about anything and then, on reflection, to argue equally passionately that we did not really need the rule or regulation in the first place. As a nation we are now obsessed to the point of paralysis with rules and regulations. It is surprising that one can move without some rule impinging on one's freedom, so concerned is the state about issues of welfare, hygiene, security and safety.

Photo of Miss Janet Fookes Miss Janet Fookes , Plymouth Drake

Order. The hon. Gentleman seems to have forgotten my previous warning. We are not discussing all manner of rules and regulations. We have four statutory instruments before us, and he must address himself to those.

Photo of Anthony Steen Anthony Steen , South Hams

I hear what you say, Madam Deputy Speaker, but those four regulations stand in the framework of the whole Government policy towards rules and regulations. One may try, but one cannot separate them from all the other rules and regulations that we are passing all over the place.

I am questioning the wisdom of introducing more rules and regulations, but every time that I try to raise the issue, whether in Standing Committee or on the Floor of the House, the Chairman, Speaker or Deputy Speaker, understandably, says that I am going beyond the rules arid regulations under consideration. The result is that one can never challenge the general principle. Every time that one tries to do so one is picked up—that is a symptom of the disease facing the country.

Photo of Miss Janet Fookes Miss Janet Fookes , Plymouth Drake

Order. I remind the hon. Gentleman that there is no reason why he should not tear the four statutory instruments to pieces, if that is what he wishes—but that is what he must do. He must not deal with all the others.

Photo of Anthony Steen Anthony Steen , South Hams

I am grateful for that ruling, Madam Deputy Speaker. In my own way, although not as clearly as some hon. Members, that is what I was doing. I was pointing out that the statutory instruments before us are better than most, although perhaps we could have done without them.

I was about to give an example of what I am talking about, but perhaps I shall tell the House about it on another occasion, because I should prefer not to be prevented from telling you, Madam Deputy Speaker, the most vivid story illustrating what I am talking about—and clearly this is not the right time and place. In fact, I am never sure what is the right time, but it certainly does not appear to be now.

With reference to the statutory instruments before us, I have already asked the Minister about the drain on the private sector every time that a rule or regulation is passed. It was reassuring to learn that the rules and regulations before us would not impact upon private enterprise. It would be bad news for the country if we were to witness another fight between the private sector and the state. I hope that in the "rules and regulations industry v. the public" story we shall not see a repeat of the final fight between Moriarty and Sherlock Holmes, never knowing who wins in the end.

I intended to make a short speech, and I shall return to the subject from time to time, because it is a perennial annual problem. Every time that the Minister introduces a rule or regulation we understand that it is extremely useful. How can one say that regulations on fraud are not useful? However, the culture of our country seems to have been besieged by rules and regulations, and I am surprised that anyone can make a profit or do business, with all the weight of officialdom and all the rules and regulations that prevent anything from getting off the ground.

That is my message, and I am sure that the Economic Secretary to the Treasury has heard it. I apologise if I have laboured the point, but I shall continue my argument until we cease to pass more rules and regulations which all the legislation that comes before the House is designed to repeal, and we do not need fresh legislation but simply repeal what we introduced before because it was not helpful to the prosperity of this country.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby 7:27 pm, 15th February 1994

I shall not attempt to follow the hon. Member for South Hams (Mr. Steen), with his re-run of the speech that he made last week on the Deregulation and Contracting Out Bill, except to note that now that my right hon. Friend the Member for Chesterfield (Mr. Benn) is issuing his former speeches as a video, it is a bit cheap to come and repeat one's former speeches in the Chamber, rather than publishing them for public consumption.

There are appropriate places in which the hon. Gentleman could repeat speeches such as the one that he has just made, but unfortunately the Government are closing most of them down and sending the inhabitants out into the community. The hon. Gentleman's speech was not relevant to the subject with which we are dealing.

Talking of re-runs, I feel as if I am involved in a series of re-runs with the Minister. In a series of Standing Committees in the 1980s, such as those on the Building Societies Act 1986, the Financial Services Act 1986 and the Banking Act 1987, he spoke in favour of more effective regulation, and sought the votes of Opposition Members for the kind of policies he is introducing today. Then he spoke in favour, but now—regrettably, because he is well informed on such subjects, and made a powerful and effective contribution to those Committees—we find ourselves on opposite sides.

As we are on opposite sides, I must say that what the Minister is introducing now is too little and far too late. It is inadequate. Indeed, it creates the impression that the Government are in favour of fraud, because they are doing too little. These rules are too little to stop fraud. Are the fraudsters the only people in society who will vote for the Tories at the next election? The reputation of the City of London is going down all the time because of the squalid frauds that are being perpetrated, and the Government are lagging behind in providing an effective regulatory framework to deal with them.

These rules are not the way to regulate on a major issue. We have not had an inquiry. The rules are not based on a thorough inquiry into the way in which audits of financial institutions are conducted. There has not been a thorough inquiry into what happened in the Bank of Credit and Commerce International case. We cannot regulate without a thorough inquiry, yet rules have been introduced without inquiry. The rules will not fit into any framework of stronger structures to back the proposals before us.

We have a confused and overlapping structure. The hon. Member for South Hams may be interested in how confused the structure is and how it can be simplified by agreeing with the proposals put forward by Labour Members. As there are so many overlapping authorities, it is not clear who is responsible for enforcement and compliance.

The regulatory area that we are dealing with today consists of the Bank of England, the Securities and Investments Board and the 24 organisations—the siblings—under it, the Building Societies Commission, the Serious Fraud Office, the Department of Trade and Industry, the stock exchange, Inland Revenue and five recognised supervisory bodies that deal with auditors. It is chaos. No one knows who is responsible for what. In that chaos, we get overlapping decisions and conflicting regulations. Everyone tries to insure themselves by regulating too much. The situation drastically needs simplification.

There are no proposals to make the framework more effective and back up the simple proposals before us. All we have is the Government tweaking the regulations from time to time, as they are doing here. We cannot rely, as the Government are doing in these rules, on auditors to be effective and the only police force of financial institutions. Auditors cannot be relied on as a guarantee of public interest and propriety as a counter against fraud because their powers, their role, their functions and the way in which they carry on their business are inadequate to deal with fraud.

Photo of Anthony Steen Anthony Steen , South Hams

I understand that the hon. Gentleman is saying that there is too much bureaucracy, which will prevent anyone from acting because it is all overlapping and, presumably, it is paid out of the public purse. An enormous number of public officials are preventing a clear, direct executive arm. Is that what the hon. Gentleman is saying?

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

I am saying that there are too many overlapping institutions; self-regulation has not worked, and has no adequate and firm base on which to work; and we can be effective against fraud only by replacing self-regulation with an independent, statutorily based regulator who has the power to strike hard, rather than obfuscating everything with the plethora of regulations in the financial sector.

We cannot rely on auditors to be the effective police force that will be required under these rules. We do not even have an effective definition of whom the auditors are responsible to. What the Government are proposing is the bare minimum. As it is so minimal, we must ask whether they are serious about dealing with the sort of fraud that has lead to this attempt to close the stable door after the horse has bolted.

Effectively, we know little about what went wrong with BCCI and especially the audit of it, because, in this country, we have not had an inquiry into what went wrong. That case is the justification for these rules. We do not know exactly what happened because the Government have not seen fit to institute an inquiry. We need the information.

When there was a banking crisis in the early 1970s, the last Labour Government instituted a series of inquiries. There were inquiries into London and Counties and London and Capital. The information from those inquiries was published. We knew what went wrong, so we knew how to deal with it. In this instance, there is nothing.

Lord Justice Bingham specifically said that he was not pursuing the matter of audits because it was not his responsibility. The Government should have repaired that omission by pursuing the matter and inquiring into what went wrong. Ministers say that the Serious Fraud Office is looking into the matter. However, that has not precluded inquiries into other cases such as London United Investments and Maxwell. There should be an inquiry into the audits of BCCI so that we know exactly what went wrong.

During debate on the Companies Bill in 1989, the Minister argued that for any system to be effective, there had to be a distance between the regulators and the regulated. However, the only people who have inquired into BCCI, is the Mafia regulating the Mafia. It is auditors trying to regulate auditors. There is not that distance which the Minister asked for in the Committee on which we both sat in 1989.

The only inquiry into BCCI has been the American one. That was handicapped because the British partners of Price Waterhouse did not pass either to that inquiry or to the American partners of Price Waterhouse their information on what had gone wrong. Therefore, the inquiry was inadequate; but it is the only one. What that inquiry found was appalling. The report states: BCCI's accountants failed to protect BCCI's innocent depositors and creditors from the consequences of poor practices at the bank of which the auditors were aware for years. That is a crashing indictment of the auditors BCCI provided loans and financial benefits to some of its auditors … Those benefits included loans to two Price Waterhouse partnerships in the Caribbean. In addition, there are serious questions concerning the acceptance of payments and possibly housing from BCCI or its affiliates by Price Waterhouse partners in the Grand Caymans, and possible acceptance of sexual favors"— the report is more interesting than the book written by the hon. Member for Derbyshire, South (Mrs. Currie), although it does not have as much sex— provided by BCCI officials to certain persons affiliated with the firm. That is an appalling situation. BCCI's books were certified by the auditors as a true and fair record from 31 December 1987 forward. That meant that people had confidence in BCCI. We are told that the auditors gave certificates as a true and fair view and, therefore, encouraged people to invest, yet before 1989 Price Waterhouse knew of gross irregularities in BCCI's handling of loans, especially to CCAH which was the holding company of First American Bank shares. All that was known to the auditors, but they did not spill the beans. Why have we not had an inquiry to reveal what happened in BCCI so that we can base proper and effective regulations on that inquiry?

The Government feel that they can rely on audit firms to protect the interests of shareholders, creditors and other stock holders. That reliance, which is strengthened by the rules before us, has always proved inadequate because poor auditing practices are always covered up. There is no way for anyone to know how good or bad an audit is as long as the company survives. We have not developed the proper institutional framework to regulate auditors effectively arid make them accountable. In debates on the Building Societies Bill and the Financial Services Bill, Labour Members proposed much stronger provisions on the detection of fraud.

These rules have been introduced much too late because the Government are continuing to rely on an industry and a framework which have a history of failure. They cannot rely on the auditors, who are, effectively, a replacement for regulations.

In the United States, state inspectors quite rightly visit and monitor banks. That is the only effective way in which we can know what is going on. There should be such a requirement in Britain instead of our relying—as we do by the statutory instruments—on the auditors themselves.

I mentioned earlier that Price Waterhouse partners in this country would not give evidence or provide information to Price Waterhouse partners in the United States. The Government can only deal with that by effective regulation of auditing, and by an effective independent regulator. A banking commission is needed to take those functions away from the Bank of England, which performed so poorly and was shown to have done so by the Bingham report.

My preference is for a securities and exchange commission, as in the United States. That would be an independent commission, with a banking commission and an accountancy commission under it. That would provide an effective framework of independent regulators to whom auditors could report when they found fraud.

My hon. Friend the Member for Edinburgh, Central (Mr. Darling) said that the gaps in regulations do not cover Lloyd's, pension schemes and funds, or banks that are not domiciled in the United States. I have pointed out to the Minister that unless there is a duty to detect fraud as well as to report it, it is doubtful whether auditors could perform their functions.

The Local Government Finance Act 1982 imposes both duties, and the audit industry was in favour of that at the time. The industry saw that it would be able to get its fingers into local authority audits, and so was prepared to accept it then. The industry is only now balking at the proposition, and saying that it is horrendous and it cannot do it.

The firms are advertising fraud detection services all the time. KPMG Peat Marwick advertises that investigating financial frauds, and rectifying and recovering from them, requires specialised accounting skills. KPMG Forensic Accounting offers: experience of the techniques of fraudsters and the procedures they may have followed; awareness of the indicators of possible irregularities; the resources needed for a fast and accurate investigation; experience of the quality of evidence required to support a successful case, and the expertise to assemble and present that evidence … we can assist in tracing funds and unravelling the most complex international cases". The firm can provide all that for a fee. Why cannot the firm do it as a compulsory and necessary part of the service? The Minister may claim that it would be more expensive.

If a proper audit is done, it cannot be more expensive as it is the effective way to detect fraud. That needs to be a requirement which is imposed on the industry.

I have pointed out that, at present, auditors are not effectively regulated, Lord Justice Bingham said that the relationship between client, auditor and supervisor raises an issue of policy more appropriate for decision by parliament than by the accounting profession. However, that is subject to control by the Auditing Practices Board, which is not a statutory body. We have already been told that the board will impose passive requirements on auditors in this very difficult area. Passive requirements are just not adequate for the detection of fraud.

The board's draft standard states: the duty to make a report direct to a regulator does not impose upon auditors a duty to carry out specific work". It does not have to do specific work, and it has been told not to do anything. That is ludicrous. Unless the board does the work, it cannot make the report. The standard adds: no auditing procedures in addition to those carried out in the normal course of auditing the financial statements … are carried out …auditors are not responsible for reporting on a regulated entity's overall compliance with rules with which it is required to comply nor are they required to conduct their work in such a way that there is reasonable certainty that they will discover breaches. The board is not actually required to go out and look for things—it will just sit there, be passive, and it will all come pouring in.

Fraud does not work that way. A fraudster will not rush in saying "Here's the evidence, Mr. Auditor!" It is all well concealed, and unless the auditor has an obligation to hunt fraud down—become the "white hunter" of the British economy—fraud will not be detected. A passive approach to audit, such as the Audit Practices Board is recommending, is simply a recipe for further disasters and further audit failings.

The Government should surely have clarified the responsibility of auditors. Whom are they responsible to and to whom do they owe a duty of care? It is no good saying that they can report fraud to the regulator. Auditors should be responsible also to shareholders and to everyone involved in a company. In fact, they are not, and they have responsibility to no one except the directors who appoint them. The company's shareholders are given little information, and the choice of auditors is firmly in the hands of the directors. The depositors, consumers and employees have no say in the appointment of auditors.

Recent legal cases such as Caparo, Al Saudi Banque and Berg Son and Co. Ltd. have shown that auditors do not owe a duty of care to individual shareholders, potential investors or current or potential creditors, even though that information is supposed to be there to help markets understand what is happening to that company.

The Government have given no indication that they want to reverse those judgments, but they should do so. There should be a specific responsibility attached to auditors to give them a duty of care, so that information is spread more widely and the shareholders and stakeholders know what is going on, as well as the bank or financial institution.

My hon. Friend the Member for Edinburgh, Central quoted the President of the Board of Trade's book "Where There's a Will"—there's a corpse. The President stated that there should not be a conflict of interest and that accountancy firms should not do other work. That should be a paramount objective of the financial institutions, because DTI inquiries have indicated that work is less adequate when it relies on a man checking either his own figures or those of a colleague. The DTI report on Burnholme and Forder was critical of audit reports in that context.

None of the auditors who have been criticised by DTI reports over the years has been disbarred from practice. What kind of sanction is that to make auditors do their jobs properly? We need an effective, independent regulator, not the Mafia regulating the Mafia and saying, "It was quite understandable—we'll let you off this time." That is what happens now with the Institute of Chartered Accountants as a recognised supervisory body.

We must have effective control and discipline of auditors. In a written reply to me, the Secretary of State said: there has been no occasion where criticism of a company's auditors by my Department's inspectors in reports published since June 1979 has led to an audit partner being excluded from membership of a professional accountancy body".—[Official Report, 26 March 1990; Vol. 170, c. 25.] He added in another written reply to me: no auditor criticised in an inspector's report has been debarred from auditing as a result of information in that report."—[Official Report, 22 November 1991; Vol. 199, c. 341.] The Government have never initiated any criminal proceedings against auditors criticised in DTI report, so there are no effective sanctions. For all those reasons, the instruments are inadequate—they are too little, too late.

The Opposition cannot vote against them, although the hon. Member for South Hams seemed inclinded to vote against them. I only wish that the hon. Gentleman had the courage of his convictions. The Opposition are far more responsible that than. Voting against the measures might give an indication that we were as much in favour of fraud as Conservative Members are. We are not in favour of fraud, and we welcome any progress in its detection. That progress includes measures that we asked for when the relevant legislation was passed. For that reason, we must welcome the instruments, but they are just not good enough.

Photo of John Greenway John Greenway , Ryedale 7:48 pm, 15th February 1994

The last half hour has shown that the quality of debate in the House remains extremely high. Even on an issue which, on the face of it, looks as dry as dust, some hon. Members will pick an argument when there should not be much of one.

I cannot say that I agreed with much of what the hon. Member for Great Grimsby (Mr. Mitchell) said. He implied early in his speech that most of the City of London was collapsing into a sea of sleaze and other goings on which are extremely to be regretted. We should remind him that all four measures follow the recommendations of the Bingham inquiry into what happened at the Bank of Credit and Commerce International, which was not a British bank but an international bank based overseas. I think that I am right in saying—my hon. Friend the Minister will correct me if I am wrong—that BCCI was the first difficulty that we had experienced for a long time.

I want to explore what role an auditor should play in the insurance and financial services industry in looking at particular firms. I have several interests, of which the hon. Member for Edinburgh, Central (Mr. Darling) is aware. The one that is relevant to tonight's debate is that I am an elected member of the Insurance Brokers Registration Council. The way in which we regulate insurance brokers is laid down by statute. It demonstrates the benefit of a statutory requirement for audit and for proper oversight of how the regulator reacts to what the auditor may say.

I greatly welcome the four measures, which are some of the most beneficial things to come out of the BCCI disaster. The hon. Member for Great Grimsby and I have debated the matter on many occasions. We usually do so on television, not on the Floor of the House and, therefore, not for quite so long. He said that what went wrong with BCCI was that Price Waterhouse knew that there was fraud but did not say so. Lord Justice Bingham pointed out that there was a clear conflict of interest between the interest of the client, for whom the auditor worked, and the public interest. He said that some amendment to the Banking Act 1987 was needed to clarify that, and that is precisely what the measures provide.

No one can seriously criticise the Government when they have not only come up with the regulations to deal with the problem, but have gone further and applied them to financial services, building societies and insurance companies, just to be absolutely sure. I am not a chartered accountant. I am an insurance broker. I am not aware of all the rules and regulations that affect accountants and the way in which audits are carried out. However, I was surprised to hear during the debate that the problem with BCCI was the conflict of interest. Fraud was known and was not declared. The regulations should make that considerably more clear.

I have sat through the debate because I wished to make one particular point. The hon. Member for Edinburgh, Central called for stronger regulation. I expected that. We had the argument the other week about whether we should have statutory regulation or make the self-regulation system for the financial services industry work. I believe that we should try to make the existing arrangements work. We are fast approaching a key point in that process.

I understand that on Thursday the Securities and Investments Board will consider the proposed Personal Investment Authority prospectus. Within a week or so we shall all be able to read it. The key question tonight is what regulatory framework the PIA should place on inter-mediaries, life assurance companies, pension funds and financial advisers in general, to ensure that the public interest is protected.

We heard earlier about the Levitt case. The hon. Member for Edinburgh, Central referred to community service punishment, so I think that he had that case in mind. What should we do to ensure that malpractice and fraud are picked up quickly? The order relating to financial services certainly helps because it places on the auditor the obligation to report any malpractice and potential fraud that he may see immediately to the regulator. As my hon. Friend the Minister knows, there will be quite an argument when we see the prospectus. I have not had the privilege of seeing it, although I have had the opportunity to discuss its contents with the chairman and the chief executive of the PIA.

It is important that we do not have too many regulations. That is why I have some sympathy with what my hon. Friend the Member for South Hams (Mr. Steen) said. We must not regulate to the point at which firms simply go out of business and give up because it is too expensive and burdensome to operate. We need to get the balance right between the amount and cost of regulation and making it effective.

I plead with my hon. Friend the Minister to bear in mind to what extent the Government should support the PIA prospectus and what should be done. We want a specific requirement not that firms must have this much or that much capital and so on, but that there is a regular audit trail and an annual look is taken at the figures and accounts of all the intermediaries and the firms with which difficulties have occurred in the past.

As I have told my hon. Friend the Minister before on the Floor of the House, that is what the Insurance Brokers Registration Council is required to do for all insurance broking firms. That is what Parliament required in the Insurance Brokers (Registration) Act 1977. It is not an onerous requirement on firms, nor is it excessively expensive. So it would meet any cost compliance test that the Department of Trade and Industry might wish to insist on. It would ensure that a proper look was taken each year at the finances of each firm and, if things were wrong, that they were reported immediately.

That is the lesson of BCCI. When things are not all that they should be, they must be dealt with and reported quickly. The orders go a long way to helping to ensure that. For that reason, the House should warmly welcome them.

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester 7:56 pm, 15th February 1994

This has been a curiously old-fashioned debate in some ways, with hon. Members on one side of the House calling for more regulation and hon. Members on the other side calling for less. My hon. Friend the Member for South Hams (Mr. Steen) eloquently called for less regulation again this evening.

My hon. Friend the Member for Ryedale (Mr. Greenway) takes a close interest in and is well informed on matters of financial regulation. I am grateful to him for the welcome that he gave to the measures. He is right that we have gone beyond what was strictly called for by Bingham. We have extended it to other sectors of the financial services industry. That is all to the good. Therefore, I reject roundly the accusation of the hon. Member for Edinburgh, Central (Mr. Darling) that the orders are timid. They are what was called for by the Treasury Select Committee. They are what was proposed by Bingham and we have introduced them here tonight.

My hon. Friend the Member for Ryedale will have ark early opportunity to consider the Personal Investment Authority prospectus, which is being published. I take: seriously his point about adequate monitoring procedures, and the need for an audit trail. A central criterion for the effectiveness of self-regulating organisations is the: methodical nature of their monitoring. I hope that all concerned will consider the matter carefully.

My hon. Friend the Member for South Hams made an amusing but perceptive speech about the growth of deregulation. Some would say that deregulation is the fastest growing part of bureaucracy in Whitehall. There have been calls to deregulate the deregulators. My hon. Friend is right to say that Parkinson's theory can be extended and that deregulation can acquire a life and momentum of its own. The underlying purpose of reducing unnecessary bureaucracy and stripping away the red tape that hinders enterprise and good governance in Britian is one to which the Government are very committed. We intend to promulgate that doctrine throughout all areas and it is being taken forward in legislation.

The hon. Member for Edinburgh, Central said there was a case for a wider inquiry into the auditing of companies. That was not specifically called for by Bingham, although I acknowledge that such a case can be made. We should be extremely careful before extending that, as was proposed by the hon. Gentleman and the hon. Member for Great Grimsby, beyond the direct responsibility to the members or owners of the company. It must be right for auditors to audit and regulators to regulate. It does not help the argument for there to be an overlap in responsibilities and in some way turn auditors into snoopers and narks and make one's regulators more supine. I do not think that there is a case for a widened inquiry into the auditing of companies.

It was said that there was a case for extending the duty of care of auditors beyond members, but again Bingham did not find that necessary as a result of his inquiry into BCCI. I was asked what "material significance" meant. That is set out in the guidelines in the statement on auditing standards. The hon. Member for Great Grimsby asked about Lloyd's. He is quite right that it is not covered by the measures, but it is a condition of the appointment of auditors into syndicates that they shall report. They have a duty to report where those circumstances arise.

I do not have time to deal with the other points, but if I have missed anything in particular, I will write to the hon. Members concerned. The whole import of these measures is to ensure that they look at the criteria of authorisation. They are concerned with the authorisation of firms that take public deposits and investments. When that is brought into question, and when there is evidence to suggest that those criteria are not being adequately met, it must be right to impose a non-costly duty on the auditors to bring that about. That is what the measures do and they are an extremely welcome addition to the stable of measures of regulation. They will improve depositor protection materially.

It being one and a half hours after the commencement of proceedings on the motion, MR. DEPUTY SPEAKER put the Question, pursuant to Order [11 February].

Question agreed to.

Resolved,That the draft Auditors (Financial Services Act 1986) Rules 1994, which were laid before this House on 15th December, be approved.

MR. DEPUTY SPEAKER then put the Questions necessary to dispose of the other motions to be decided at that hour.

Resolved,That the draft Accountants (Banking Act 1987) Regulations 1994, which were laid before this House on 15th December, be approved.

Resolved,That the draft Building Societies (Auditors) Order 1994, which was laid before this House on 15th December be approved.

Resolved,That the draft Auditors (Insurance Companies Act 1982) Regulations 1994, which were laid before this House on 14 January, be approved.—[Mr. Nelson.]