Financial Services

Part of the debate – in the House of Commons at 7:48 pm on 15th February 1994.

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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.