Roy Hattersley – 1986 Speech on the City of London
Below is the text of the speech made by Roy Hattersley, the then Labour MP for Birmingham Sparkbrook, in the House of Commons on 12 March 1986.
I beg to move,
That this House, deploring the increasing influence of the City over the Government and its policies, calls upon the Government to put aside considerations of political support and personal connection and to introduce a system of regulation of, and supervision for, the financial services which will provide an adequate response to the increase in City fraud, to introduce a stricter system of surveillance of monopolies and mergers, and to adopt economic policies which are to the benefit not of the City alone, but of the whole economy and which will therefore assist in the reduction of unemployment, the rehabilitation of manufacturing industry and the provision of an adequate alternative to diminishing oil revenues.
Today we debate the City against a background of continuing economic crisis. The fact that the existence of that crisis, the truth of the existence of that crisis, will be rejected by Conservative Members who speak underlines the gulf which divides the two sides of the House and the necessity for today’s debate. Conservatives judge economic success by the Financial Times index. We judge it by different standards, not least the ability of our nation to provide jobs for all its people.
The facts of the economic crisis are that unemployment now stands at between 3·5 million and 4 million, manufacturing trade is in deficit and real interest rates are at record levels. Each of those individual catastrophes has been intensified by the Government’s enthusiasm for economic policies which benefit the City but damage the rest of the economy. We have today a Government of the City for the City and, by far too large an extent, by the City.
The connection between the Government and the Tory Benches was on blatant display during the Second Reading of the Financial Services Bill when stockbrokers and underwriters from the Conservative Benches took it in turn to defend their vested interests and to argue against effective Government supervision. It is that close connection that makes a Tory Government certainly unwilling to tackle, and perhaps incapable of tackling, the City fraud crisis by instituting an effective system of regulation and supervision.
Yet rarely a week goes past without the discovery and exposure of some other malpractice and scandal. Indeed, only this morning our newest daily paper, Today, had on its front page an exclusive story about what is rightly described as the latest series of dirty tricks.
The normal defence for the City’s behaviour and the Government’s refusal to act appropriately is the assertion that a majority of City firms is honest. Of course, I accept that, but the honest and honourable majority is not sufficiently determined to expose and act against the criminal minority. I give a current example. Ten days ago, I wrote an article in The Observer which spoke of stock exchange fraud. Early this week, I received a letter from Sir Nicholas Goodison, the chairman of the stock exchange, who asked me—I think it was intended to be a challenge—what I meant by stock exchange fraud and what examples I could give him.
I cannot believe that Sir Nicholas does not know the facts of insider dealing, as confirmed on 11 December by the Parliamentary Under-Secretary of State for Trade and Industry in an answer given in another place. He confirmed that there were 25 prima facie cases of insider dealing and that 80 cases were referred to the Department of Trade and Industry under section 2 of the Companies Act, and he expressed anxiety about the difficulty of securing convictions in such cases. Yet Sir Nicholas challenges me to explain what I am talking about. I can only assume that Sir Nicholas’s definition of fraud is different from mine and different from that of most people outside the City.
Some people in the stock exchange take a stronger and clearer view on these matters than does the chairman. Michael Feltham of the stock exchange finance department wrote in the Financial Times earlier this week:
“We can track down the small insider deals … but the big fish go offshore.”
They go offshore because of inadequate supervision and because too many people in the City who may be honest are not prepared to expose the dishonesty among them. Indeed, the City remains a charmed and closed circle wedded to the misplaced loyalty of a gentleman’s club, although the City is clearly no longer the exclusive preserve of gentleman.
The City is incapable of regulating its affairs. Let us consider the alternatives to that, in each area, which are offered by the Government. The Government’s remedy for bank fraud is a board of supervision which is almost a subcommittee of the Bank of England. But the Bank of England, especially under its present Governor, is wholly incapable of performing that task, because the Bank of England is not the agent of Government in the City, but the voice of the City in Government. What is more, the new supervisory agency—the Bank of England—was blamed by the Chancellor of the Exchequer when the going was rough and he needed something to hide behind. It was made a scapegoat for compounding the Johnson Matthey affair, yet now the bank must make sure that errors for which it was partly responsible do not happen again.
As a remedy for the City’s general malpractices, we are offered the prospect of legislation based on the Gower commission’s recommendations. Yet the Government know that those recommendations were made before deregulation increased potential rewards, potential risks and, therefore, the temptation to defraud. As a remedy for Lloyd’s fraud, we were offered two conflicting assurances. The first was that the Lloyd’s Act 1982 is sufficient; the second is that a new inquiry will examine whether the Lloyd’s Act 1982 is sufficient.
I ask the Chief Secretary two specific questions, although in the light of previous behaviour whether anyone will believe his answer is open to question. What does he think about, in many cases, the absence and, in all cases, the delay and reluctance to mount prosecutions against City frauds? Secondly, how would he react if I were to suggest that we abandoned any hope of pursuing social security frauds, most of which are minute compared with the rewards obtained from City malpractices?
All that being said, and my hopes of an honest answer being optimistically renewed, I must tell the Chief Secretary that the City crime wave is not the most important or most urgent issue that we should debate. The crime wave is only one aspect of a larger problem: the City’s view of itself as an independent power that is too big, too powerful, too rich and too international to be supervised by the Government, the Government’s craven acceptance of the view that the City can act independently and the Government’s agreement that the City can develop a life of its own detached from the rest of the economy.
The United Kingdom is the only country that talks about a separate institution— the City — as though it were not part of the rest of the world, the rest of the economy and the other prospects and hopes for the country. With the City’s international connections, only in Great Britain is its interests not so much different from the interests of manufacturing economy, but often diametrically opposed to them. Indeed, as the circumstances and facts of the past seven years prove, as the real economy of investment, output, manufacturing, exports and jobs declines, the City can benefit from that, improve its position, increase its rewards and extend its influence.
The Government’s pandering to the City’s wishes has meant that, for the past six years, our economic policy has benefited financial services but worked directly against the interest of manufacture, employment and visible trade. The City has benefited from high interest rates, uncompetitive exchange rate and the abolition of exchange control; it has benefited, in part scandalously, from the sale of national assets.
The City has made vast sums from the privatisation programme, and again I ask the Chief Secretary some specific questions. Much of the money—certainly some of it—was made improperly. First, the City prices the assets, or, to be more specific, it underprices the assets. It is estimated that the City underpriced the assets sold by the Government by about £3 billion. Had the Government obtained the proper price, it would have been enough to fund the entire programme of jobs for the long-term unemployed that was recommended to the House by the Select Committee on Employment.
It is worth noting that the Government, composed of City experts—or at least financial journalists—let the City get away with it. I hope that the Chief Secretary will tell us whether incompetence or malice allowed the Government to sacrifice £3 billion to City corruption. It was one or the other. One way or another, the Government lost £3 billion of taxpayers’ money and, as the afternoon goes on, the Chief Secretary must choose which it was.
Having underpriced the assets, the City then bought many of them at the artificially low price. Indeed, I understand — I trust that the Chief Secretary will comment on it — that some City institutions bought assets in excess of the amount which they were officially allocated. As well as making that killing on the underpriced assets, the City also charged the Government an unwarranted underwriters’ risk premium, when it knew that there was no risk. The City knew that the stock would be sold and that the price was too low, yet it chose to charge the Government a commission which it knew was unjustifiable.
Some of the questions that I would have wished to ask this afternoon have, as a result of recent prosecutions mounted and continued this week, become subject to the sub judice rule, but I can at least ask the Chief Secretary this. As it is beyond dispute that many of the assets sold by the Government have been scandalously undervalued—
Mr. Tim Smith (Beaconsfield)
Rubbish.
Mr. Hattersley
Rubbish? We shall hear the Chief Secretary defend that in a minute. Many of the assets sold by this Government have been scandalously undervalued—
Mr. Smith
What about the last issue of Cable and Wireless shares, which was exactly right?
Mr. Deputy Speaker (Mr. Ernest Armstrong)
Order. If the hon. Gentleman wishes to intervene, he knows that there is a proper way to do so.
Mr. Hattersley
As it is generally accepted by all those without bias or a vested interest in financial concerns—those who have are showing their spots and colours vividly and dramatically this afternoon—that what I have said is true, I ask the Chief Secretary how he proposes to avoid that scandal in the future, or is he so anxious for a quick sale of public assets to pad the Budget and make future tax cuts possible that he is prepared to sell off national assets knowing that the city is improperly and unscrupulously lining its pockets?
Mr. Allan Rogers (Rhondda)
My right hon. Friend was challenged from a sedentary position by the hon. Member for Beaconsfield (Mr. Smith). I hope that my right hon. Friend will listen to what the hon. Gentleman is saying. Does my right hon. Friend realise that the hon. Gentleman is parliamentary consultant to the National Association of Security Dealers and Investment Managers, and to the County bank, and obviously has a strong interest in this debate and knows what he is talking about?
Mr. Hattersley
I think that the interesting nature of the hon. Gentleman’s remarks was not so much his authority, which I do not doubt, but the passion with which he defended the vested interest with which he is concerned.
I concede that, not surprisingly during the past seven years, the City has done very well by its own standards. City salaries have risen astronomically. I know that the Chief Secretary is an expert in these matters. Will he give us his judgment about City salaries and about the society in which we remove the wages council protection from the young but allow City institutions to pay men of 30, 35 or 40 not only £50,000 or £60,000 a year, but a £250,000 signing-on fee—a new phrase in the English language that goes with hello, and which the Chief Secretary knows perfectly well is common in the City? Will he comment not only on the morality and propriety of that, but on how he thinks that it affects the Government’s drive for lower wages for those at the lower end of the income scale?
The City has done well, its salaries have risen vastly and City employment has risen while employment in the rest of the economy has slumped. We have to understand — and hon. Members who defend the City have to accept—that the City has not and cannot make up for the matching and related collapse in manufacturing industry. The City cannot fill the gap that will be left in our balance of payments when the oil begins to run out. The British Invisible Exports Council was explicit on this point. It says that it does not see the growth of services
“as being to a major extent a substitute for decline in general industrial activity.”
In the words of the right hon. Member for Old Bexley and Sidcup (Mr. Heath),
“the service industries have to have something to service.”
In the economy in general under this City-oriented Government, it has been seven years of decline, in part because the City has hopelessly failed to provide investment in export promotions, in job creation and in the areas where manufacturing industry might grow and where new jobs might be found.
There are three sectors of particular concern. One is small firms, particularly those that need, and should be provided with, loans and investment at the soft rates common among our more successful creditors. Secondly, there is an important need for but failure in long-term investment—the failure of the City to take a long-term view of these things. Thirdly, there is a desperate need for the City, when it is examining industry, to make a more sensible evaluation of the long-term risks.
One of the reasons why long-term risk evaluation is so often inadequate is that the City does not know about manufacturing industries, is not interested in them and is not concerned in them. In our more successful competitors in the OECD and EEC there are banks that choose to work as part of industry alongside industry and understanding its problems. Here in Britain, the City is different, superior, exclusive and industrially ignorant. However, when charged with failure to provide an adequate investment, the City always gives the same circular, self-righteous, self-serving defence. It is that there is plenty available for suitable investment. I see the hon. Member for Beaconsfield (Mr. Smith) utter the words as I say them. That is his view, but not that of British industry.
I quote from Sir Terence Beckett, not usually on the side of Labour party economic policy, who spoke to the House of Lords Select Committee about:
“the widespread comments I get from industry, particularly small and medium sized companies who have difficulty in getting finance from banks”.
The British Chamber of Commerce was equally conclusive. It said:
“Every bank will tell you that there is money available in all directions—but they have to or feel obliged to put certain criteria on the lending which are somewhat different from our overseas competitors”.
The hon. Member for Beaconsfield may laugh at the idea of the British Chamber of Commerce complaining about the absence of investment, but he is laughing about the failure of the Government and the institutions that they support to help small firms to develop and grow.
In any case, what does money available for suitable projects mean in practice? I give the House a definition offered to me by a west midlands clothing company whose highly successful expansion, principally into the export market, was made possible only because of the help that it received from the West Midlands enterprise board. The chairman of that company, who had touted about the City looking for new investment, said;
“If I had wanted to build a casino in Mayfair they would have pressed £5 notes into my hand. But because I wanted to make things and export things, they did not want to know.”
They want to know about some things—the merger boom, for example, which occurs under our wholly inadequate competition policy. The City wants to finance takeovers, which have nothing to do with efficiency, output or employment, because this is a sector of easy pickings. It is work with which the real economy has no connection, work that is unproductive in terms of investment, output and jobs.
What is more — and the tragedy and mistake is accentuated by the takeover boom—the stock exchange system as a whole concentrates far too much of its financial attention on short-term profits. Prices are determined by the most recent returns, and so are takeover profits. Now, with more and more successful predators stalking the market, company after company increasingly occupies its time in erecting protection from suddenly being swallowed up. I offer in evidence the comments made in an article in the Bank of England Quarterly by David Walker, the bank’s executive director. He talked about takeover mania:
“re-inforcing in many boards the disposition to be cautious about innovation expenditure which reduces profit in the short term.”
The country needs the will to innovate and a willingness to make judgments on the long-term not the short-term profits. Yet the takeover mania, the inadequacies of present competition policy, buttressed by the behaviour of the City, has concentrated industry’s mind more and more on the next share price, on the next quarterly profit and on the prospects of being swallowed up while the needs of the real economy are investment growth and jobs. Those needs are forgotten.
Perhaps most important of all, for the City to say that its investment programmes, investment potential and the investment it makes available to manufacturing industry are meeting the economy’s needs is for the City complacently to accept an economy in which manufacture collapses, in which there is an incipient balance of payments crisis which will break over us when the oil runs out and in which there are permanently 3 million or 4 million men and women unemployed. That may be good enough for the City, with its vast salaries, its great power and its special relationship with the Government. It is not good enough for the Opposition, and I do not believe that it is good enough for the people of this country.
