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GAZETTE
JULY/AUGUST 1987
Big Bang we were subject to the
regulations of the Federated Stock
Exchange of the United Kingdom
and Ireland (of which we were
members) and relied on it to act as
an effective regulatory body. With
the expansion of the role of
members of the Stock Exchange,
we are now in a situation in which
we continue to operate under a set
of rules which are no longer
comprehensive and have failed
either to introduce regulation
ourselves to fill the gap, or to adopt
any of the new U.K. rules.
By failing to introduce a proper
statutory framework, we in Ireland
are placing ourselves in an ex-
tremely vulnerable position. There
is a high risk that we will attract
into this country business which
enshrines practices no longer ad-
missible in strictly regulated
markets. This will rapidly act to
reduce the credibility and standing
of the Irish market.
The lack of regulation is
particularly important in the light of
the proposed new financial centre
on Custom House Quay. If we are
to be competitive in this area, it is
likely that further deregulation will
have to be introduced into the Irish
finance industry, albeit in a form
designed to suit the needs of the
smaller Irish market. While dual
capacity is permiss ible in the case
of equities, it has not developed to
any great extent. Dual capacity in
the case of gilts has not been
accepted by the Irish Authorities,
following the refusal of the Depart-
ment of Finance to allow gilt
brokers to become "ma r k et
makers". Effectively, we are now
in an exposed position and the
onus is on the Irish Authorities to
take urgent steps to remedy the
situation. The introduction of full
deregulation without a supporting
regulatory framework would be a
sure formula for chaos. It is thus
useful to examine in more detail the
background to the changes which
have occurred in the U.K. and the
type of framework the authorities
there have decided to implement.
The Prevention of Fraud (Invest-
ments) Act 1958 in the U.K. is bas-
ed on pre-war legislation. The rapid
changes in the securities industry
since then have rendered that Act
obsolete, a fact amply illustrated
by its failure to protect investors in
the wake of a string of investment
scandals. The public outcry follow-
ing the failure of two investment
firms in particular, finally prompted
the U.K. government to act on in-
vestor protection. In July 1981,
Professor James Gower of
Southampton University was com-
missioned by the U.K. Government
to lead an investigation into in-
vestor protection in England. The
investigation was to operate within
the following terms of reference: —
(a) to consider the statutory pro-
tection now required by (i)
private and (ii) business in-
vestors in securities and other
property, including investors
through unit trusts and open-
ended investment companies
operating in the United
Kingdom;
(b) to consider the need for
statutory control of dealers in
securities investment con-
sultants and investment
managers, and
(c) to advise on the need for new
legislation.
Published in 1984, the Gower
Report was highly critical of ex-
isting investor protection and of the
restrictive practices enshrined in
the Stock Exchange. The Report
proposed that the Prevention of
Fraud (Investment) Act 1958 be
repealed and replaced by a new In-
vestor Protection Act. Everyone
engaged in the investment
business (defined in the widest
terms) would have to register
either direct with a government
body or with an approved self-
regulatory agency, which would
have to comply with specified con-
ditions. In its initial form, the
Report proposed the establishment
of an independent commission to
watch over the new system. This
latter proposal was met by strong
opposition from the City which
had, by tradition, been self-
regulatory and operated largely
under "club rules". In the event,
and largely due to rearguard action
by the Bank of England, the pro-
posed commission was replaced by
a private City body known as the
Securities and Investment Board
(S.I.B.). Essentially, the Gower
Report settled for self-regulation
within a statutory framework. The
Report eventually formed the basis
of the Financial Services Act,
which recently passed through the
final stages of Parliament, but has
not yet been brought into effect.
Criticisms
Inevitably, the Gower Report and
the legislation based on it remains
highly controversial. It had to try to
strike a balance between the
demands of the securities industry
to remain self-regulatory and the
necessity of imposing a statutory
framework on that industry. Most
of the controversy centres around
these two issues.
One of the most serious
criticisms levelled at the new
system has come from Sir John
Nott, a former Cabinet Minister,
and now Chairman of Lazards, a
leading London-based Merchant
Bank. In his view, the City was un-
wise to promote the concept of
practitioner-based regulation and
the Bank of England even more so.
He argues that when the next
downturn in the market arrives
firms will inevitably go bankrupt
and no one is going to distinguish
politically between bankruptcy and
fraud. The blame will descend on
the City self-regulators and most
certainly on the Bank of England for
failing to police the system. He
feels that the City, and especially
the Bank of England, have played
into Government's hands and
placed themselves in an exposed
position.
Another criticism suggests that
legislation based on the Gower
Report does not tackle the sweep-
ing changes which occurred in the
City after Big Bang (deregulation).
In recent months, "insider dealing"
scandals have shed further doubts
on the ability of the City to regulate
itself, especially in the deregulated
market. A U.K. Labour Party
document published in March of
this year argues that the City needs
to be brought under at least the
same standards of supervision and
legal restrictions as other areas of
business life — a view shared by
many outside the City, including
Dr. David Owen the U.K. Social
Democratic Party Leader, who
believes that independent out-
siders, rather than City insiders,
should be made a majority on the
S.I.B. The central issue here is that
practitioner-based regulation is
naturally suspect of using its
powers to discriminate in favour of
itself or against those offering in-
novation' or
uncomfortable
competition. Self-regulation is
traditionally argued as being tighter
than a legalistic code. It sets
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