§ THE EARL OF KINNOULL rose to ask Her Majesty's Government what action, if any, they intend to take to strengthen the safeguards of depositors' money under the Protection of Depositors Act 1963. The noble Earl said: My Lords, the reason why I put down this Unstarred Question for to-day will, I am sure, be quite clear to those few of us left in the Chamber. It is because, over the past six months, four large deposit-taking companies coming within the ambit of the Protection of Depositors Act 1963 have crashed, leaving some 20,000 depositors in peril of losing their money and involving in all some £18 million worth of investments. These cold facts in no way describe the anguish of those affected, many of whom are elderly couples, whose whole life savings have been put in jeopardy at a time when they hoped for nothing more than a few years of enjoyable retirement free from financial anxiety. To those people there is no relief, no compensation for their loss, only the bitter realisation that their hard-earned savings have been frittered 419 away, either through incompetent or inexperienced management, or even through reckless management.
§ The House will recall that the Protection of Depositors Act 1963 was introduced and passed at a time my noble friend Lord Erroll of Hale was President of the Board of Trade. At that time there had been a number of sinister looking deposit-taking companies advertising for funds and offering very high and attractive rates of interest. Those companies varied from operating pig investment schemes to devising and running casino systems; and I believe that one of those casino companies was reputed to have offered 250 per cent. return on any investment within one year. It is perhaps not surprising therefore that a number of these highly speculative companies collapsed, leaving behind the usual trail of misery. Perhaps the most notable and shocking case in the early 1960's became known as the M.I.A.S. affair, a Manchester investment company which operated fraudulently, as it later turned out, for four years at a cost of £750,000 of small investors' money. This case, perhaps above all others, demonstrated the weak powers of control of the Board of Trade at that time, and the need for reforming the law in the interests of protecting the public.
§ With this background no doubt in mind, the 1963 Act was introduced. Its aim, as I see it, was to retain a balance for the public between a free choice of investment on the one hand, and a measure of protection against dubious and fraudulent deposit-taking companies on the other. The Act imposed two main obligations on any company or body—that is, both public or private—who sought deposits by means of advertisement. I might perhaps add that it excluded certain reputable channels of finance, including building societies and banks, some of whom, of course, are already covered by legislation. The first obligation under the Act was that all companies were to lodge with the Board of Trade every year, both half-yearly and annual accounts; and the second obligation was that any future advertisement by a company had to receive Board of Trade approval before it was sent out. Both these controls were set out by means of regulations. With the help of those regula- 420 tions it was thought that the public would be given sufficient information about deposit-taking companies to be able to judge the soundness of their investment, and beyond that point the architects of the Bill no doubt felt that the law could not protect fools.
§ It is my submission to-night that the past three years have shown and proved conclusively that the present safeguards do not offer sufficient protection for the public, and that further measures should now be taken. It is not good enough, in my view, to argue that because a deposit-taking company is offering 8½ per cent. return, and a building society is offering 7¼ per cent. return, the investor should automatically assume that an investment in the deposit company will be highly speculative. Again, in my view it is not good enough to argue that an unqualified, inexperienced or even illiterate person may solicit savings from the public and invest them in whatever dubious speculative venture he may choose. It is not good enough, surely, that deposit funds may be transferred into associated companies which have no binding obligation under the Act to produce balance sheets to either the investors or the Board of Trade.
§ I have tried to obtain as accurately as possible certain statistics of the deposits held by companies since the Act came into force, and unless my arithmetic is very incorrect the facts are quite startling. There have been, I believe, 117 companies operating since the Act was passed. Here perhaps I may add that before the Act came into law there were 600 companies operating, which shows the considerable deterrent effect of that Act. In those 117 companies approximately £290 million of deposits has been invested by over 175,000 individual investors. Twelve of these companies have so far crashed, involving approximately £20 million and over 23,000 investors. In other words, since 1963 15 per cent. of the total deposits—that is, £290 million—have been either partially lost or completely lost, and 12 per cent. of all the depositors have been affected. These figures I believe demonstrate the very high risk the poor unsuspecting investor is taking, and show clearly, in my view, that whilst no Government can possibly legislate against company failures, there is a need for more control.
§ The reason I believe so many companies have failed in the past few months is due to a culmination of adverse trading conditions, and a faulty investment policy of borrowing short and lending long. This was particularly so in the case of Pinnock Finance, a company recently in the news. No investor could have known that out of the £8.3 million that was deposited with this company £7½ million was repayable within twelve months. And surely no investor could have guessed either, and certainly not from its brochure, that a company with an association going back to 1891 and deposits over £8 million was in danger of collapse, But on the other hand, no investor could have known or could have assessed where the investments of this company were going, because here was a company which was using British funds in its associated companies both in Australia and in Belgium.
§ It was said during the passage of the 1963 Act that as in the future full information was to be made available by deposit companies about themselves, the financial Press could play an important role as custodians and advisers to the public. This mantle, I would suggest, has been fully accepted so far as the laws of libel will allow. But the Press themselves have to retain a certain commercial sense, and it must be very tempting not to refuse large advertisement revenue. Furthermore, any inquiry on their part into a company often proves very costly in time, and the subsequent articles may only result in preaching to the converted.
§ I appreciate that deposits handled by companies under the Act are only a small proportion of the total deposits invested throughout the country through other financial channels. They are, however, in my view a most important minority, for they come largely from small investors who can least afford to lose their savings. As I have already said, I believe the case for stricter control of these companies to be most urgent. What controls should be brought in is luckily not my headache, and I appreciate that it is most difficult to legislate successfully in order to preserve the important principle of free choice of investment.
My Lords, would the noble Lord allow me to interrupt him for one moment. There is a company called Anglo-Norness, a shipping com- 422 pany in which I have no interest whatsoever. According to my information a great part of the profits of that company have been siphoned off by the managing director into a subsidiary or associated company, and therefore the shares have dropped by about 50 per cent. There is no legal redress at present for this sort of thing. It is all wrong, and the noble Earl is absolutely right in all the arguments he is putting forward.
My Lords, I am most grateful for the noble Lord's intervention. There are, I believe, a number of shining weaknesses under the present law. In the first place, the two most important features of a deposit company—that is, its management and its investment policy—appear not to be covered under the Act. Other channels of investment, such as unit trusts, have, I believe, carefully laid down standards of control, and one wonders why it is not possible for deposit companies to have similar standards. Perhaps the noble Lord will reply to this point later.
Then again, deposit companies have no standards of liquidity ratio as building societies are required to have. Another apparent weakness is that associated companies who receive the funds have no binding obligations to produce balance sheets to the Board of Trade. This is a point that I have already made. Yet perhaps another weakness is the way Bahama-based deposit companies are allowed to trade under the disguise of the most high-sounding names which, if they had applied to Companies House to be registered as British companies, would not have been allowed.
Finally, and perhaps most important of all, in my opinion the Government should set up a form of insurance scheme which would pay compensation to luckless deposit holders who through no real fault of their own get caught up in the collapse of these companies and stand to lose, as in many cases, their entire life savings. If some compensation scheme of this nature could be set up under the Act, at least a partial measure of protection would be afforded to depositors and much of the present hardship suffered would, I suggest, be averted.
My Lords, I am most grateful to the noble Earl for raising this matter because, as he has so 423 rightly pointed out, it is one of considerable topical interest, as well as being a matter which creates a great deal of personal hardship in most undeserved cases. I hope that if, at the end of my reply, he feels that I have been unhelpful, he will realise that it is not because I have any lack of sympathy or understanding in regard to the actual hardships which have occurred.
Here, there is really a deep basic issue which the noble Earl has raised: how far should the private individual be protected against other members of society? Clearly, the private individual must be protected against other members of society when they are committing illegal acts. But in this connection there is no suggestion here that illegal acts have been carried out. If there have been, there are all the provisions dealing with obtaining money under false pretences, fraud and so on, under which the aggrieved party can proceed, even though he may find it difficult to get any actual financial recompense. Here. I take it, we are concerned simply with protecting individual members of society against the incompetence or recklessness (I think those were the noble Earl's words) of others. And here, I must say, I begin to part company with the noble Earl.
Although, as I say, I have great sympathy with the individuals who have suffered from this sort of thing, I do not really think that it is the duty of the State, or of the Government, to meddle unduly in transactions between two perfectly honest, perfectly free and, so far as we know, perfectly intelligent groups of people, parties, individuals, whatever it may be. If one person wishes to borrow and another wishes to lend at a certain rate of interest, with a certain element of risk, I do not think it would be right, and I do not think many noble Lords, on either side of the House, certainly not on the other side of the House, would feel that it would be right, for the Government to step in. What we do want to do—and it was what the previous Government attempted to do, and succeeded with our help, I should like to think, in doing—is to offer some element of protection in this particular matter of depositors and of high interest rates and so on; and I think that that Act of Parliament, the Protection of Depositors Act 1963, was a good one.
424 As the noble Earl has said, from the statistics it appears that it has had some valuable effect. But I think it had one weakness, perhaps a rather serious weakness; and that was in its Title, because it does not give protection to depositors. I think that the words of my right honourable friend the present Chief Secretary of the Treasury, Mr. Diamond, during the debate on that particular measure when it was before another place, were absolutely true He said that the Title ought really to have been something like "Sources of Information for Certain Depositors Bill", or some wording of that kind, because this Act does not, and cannot, give complete protection to the depositor. All it can do is to ensure—and it has done this—that these companies which are taking deposits at a certain relatively high rate of interest shall provide the depositor, and also the Board of Trade frequently—every six months—with the full sources of information concerning their assets.
It is perfectly true that, even though these companies are constrained to do this by law, there are always certain delays in preparing the accounts. There are always ways for dishonest people so to present the accounts that, unless there were the most searching investigation by a highly qualified team of accountants, it would be impossible within a reasonable space of time to get at the true facts of the case. I am not suggesting that in regard to any of the names the noble Earl has mentioned there has been a desire to defraud, but what I am saying is that if there were this desire it would always he possible to circumvent any legislation which we were able to enact here. Even without that desire, owing to the complexities of the modern financial system and the complexities of the old-established business of Pinnock's, to which the noble Earl referred, operating in Australia and Belgium, as well as in this country, and with a large number of subsidiaries, again it would take an enormous number of man-hours by highly skilled accountants for the Board of Trade to be able to look into this sufficiently rapidly to do any good.
I suggest to your Lordships that we must accept the fact that the onus here must rest with the depositor. He has many different ways of investing his money if he has any money to invest. 425 He can invest it in Post Office Savings. He can invest it in what are well known to be gilt-edged securities. He can go and ask his bank manager for his advice. If he has a large sum, he can go to a stockbroker and ask his advice. He can go to a great array of highly qualified people who will give advice and who, in fact, will be studying all these figures which are produced in the annual accounts of public companies in the ordinary course of business, and in the provision of six-monthly accounts in these particular companies. In this way the advice of the professionals will be available.
While repeating my sympathy for the luckless depositors if for one reason or another they are unable or unwilling to make use of the professional advice which is available, and if, at the same time, they want to gain a higher rate of interest for their capital, their deposits and savings than they could do, with complete safety, in a whole variety of other investments, then the risk is theirs. All we can do is to draw attention to that risk. That is the second reason why I am grateful to the noble Earl for bringing forward this matter, because I think this short debate will once more underline the risks which people run when they feel that they can with no risk get a higher rate of interest than that which is normally prevalent at any given moment.
When the noble Earl suggests that there should be a Government insurance scheme to help these people, I am afraid that I must quite emphatically and categorically say, No.
My Lords, it was not a Government insurance scheme, but a scheme to be operated by those coming within the Act.
I beg the noble Earl's pardon. He was suggesting that there should be some levy on all those who come within the Act which would create this insurance scheme. That is certainly a suggestion well worth following up; that any of those who come within the ambit of the scheme should make their contribution. It may well be, of course, that the cost of the premium the would have to pay would be such that their interest rates would immediately come down below the level which brings them within the ambit of the existing Act. I think that 426 that is a matter which could profitably be looked into; and there are other suggestions which have been made from many experienced and valuable quarters.
I do not want to give the impression that our minds are closed on this matter, that we are sitting back quite satisfied and saying, "All is well. We have the Protection of Depositors Act; we have the Companies Bill, soon to become an Act, and that is all we need to do." We are always looking for practical methods of giving greater protection to the public against fraud in the first place, against dishonesty, and, within the limits of our power, against recklessness and stupidity. But, my Lords, having said that, I must emphasise again that the greatest protection against recklessness and stupidity must lie with the investor himself. Whatever the Government do to help—and we have done something, as have noble Lords opposite, and we hope to do more—the ultimate responsibility must rest with them. I hope that the sad and tragic events in these companies about which we have all read will make people all the more aware of the importance of getting professional advice if they do not have the knowledge themselves; and, if they do not wish to do either of those things, induce them to be content with a lower but safer form in investment.
My Lords, should like to ask the noble Lord two questions. In the sphere of advertising for depositors, one of the difficulties, as the noble Lord mentioned, is the time-lag between the time of the latest balance sheet or the latest accounts and the time when the advertisement is submitted to the Board of Trade for approval. By the time the advertisement is submitted it may be misleading as to the state of the company. It may well say something about security which in fact does not exist, but which the Board of Trade cannot possibly know does not exist merely by studying the accounts.
There are two questions which arise. The first is as to what further inquiries the Board of Trade make as a matter of routine or in special circumstances. The second question is, what should be done where it is subsequently found that the Board of Trade have been misled as to the state of the company, even though the accounts which were submitted to them were in order—misled, that is, in 427 terms that the situation of the company had deteriorated very severely since the time when they were submitted, and that the advertisement which was submitted to the Board of Trade for approval took no account whatsoever of that situation. It seems to me that these two points might be further looked into, and I should be grateful if the noble Lord would consider them.