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An article by Bill Cash published in The Times on 19 January 1987
'If our people' wrote Adam Smith's contemporary, Warren Hastings, 'confine themselves to an honest and fair trade they will everywhere be courted and respected. ' This message is as apposite now, in the wake of the mega-takeovers and commercial scandals which have accompanied the Big Bang, as it was then, in the time of the South Sea Bubble and the East India Company.
Now, as then, the international liberalization of markets offers new opportunities for increasing legitimate private, and public, wealth. But now there is intense international competition to win and secure new markets in an age of incomparably more rapid communications. But the winning must not be at any price.
Success and confidence in commerce depend upon trust in and between those who trade and those who provide the professional services on which trade depends. There must be restraints on commercial practice, not only for moral, ethical and institutional reasons, but also on practical grounds: to sustain domestic and international confidence.
The responsibility for clearing up the recent scandals does not rest exclusively with the government, Parliament or the City, nor even with the institutional investors themselves. A co-ordinated response is required by the leaders of industry and commerce. The chartered and other professional bodies also have a part to play, for it is from them that boards of directors seek advice.
Existing legislation and regulation is already extensive. The Financial Services Act covers investment business; the Banking Bill covers banking supervision; the Neill Report on Lloyd's is due this week. The government has also taken pre-emptive action with white papers, inquiries and legislation since 1979, and has acted swiftly and decisively under its new regulatory package. The Criminal Justice Bill now going through Parliament will provide a new Serious Fraud Department.
Yet the problems remain, and it cannot be assumed that legislation and the rule-book on their own, essential as they are in providing a responsible framework, will solve all the problems thrown up by the Big Bang and international competition. It would be equally wrong to suppose that exhortations to moral virtue would succeed without such a framework.
Confidence in the market depends above all on the attitudes of those in it and their advisers. For example, the powers which some of us sought in the Financial Services Bill and which were granted to the regulatory organizations, their officers and their advisers (in particular, the appointment of a number of independent members equipped with special knowledge to act as effective watchdogs) must be exercised decisively without fear or favour.
The same applies to the professional bodies whose members are advisers to commercial interests whether under the Companies Act, under the Financial Services Act or otherwise. The criminal law acts as a deterrent. But it also acts after the event, which is why an effective and confident market cannot depend on the use of the criminal law alone. If it did, the market would lose its customers overnight. Those who call for a more comprehensive statutory system along the lines of the SEC in the United States misunderstand the essential point about the need for current and future trust in the marketplace and the importance of self-regulation itself.
There was a time when the only institutions and professions which served the public in financial matters were lawyers and accountants, who, on the continuing principle of voluntary self-regulation, accepted requirements upon themselves above the law and who put the client and the public before self-interest and remuneration. This is the hallmark of a professional body.
The new financial services and banking legislation is changing and adding to these institutions. It is also, and rightly, preserving the principle of self-regulation together with new and tougher statutory regulation. The new financial services bodies and, indeed, the boards of companies under the Companies Act may have had their responsibilities imposed upon them by Parliament, but - as with the older professional bodies - the acid test will be whether their clients and customers at home and abroad recognize the trust upon which effective markets depend.
If they do, we will sustain our place at the centre of the world's financial and commercial market. The new codes of conduct approximate to the established professional ethics. With wider share ownership this will become ever more apparent and important. The code of practice and of conduct must therefore resolve the disadvantage experienced by an individual member of the public, a client or shareholder, in the fact of the special knowledge which is available to the provider of the service itself.
This is not just a matter for the institutional investors in the City. It affects the entire economy and the balance between the City, the boards of companies and those in manufacturing and the service industries. But today it will be ineffectual if the rules and codes are not also reciprocated in different parts of the globe. This is a matter for the current round of GATT.
Furthermore, it would be helpful if the leaders of British industry, commerce, the City and the professional bodies could get together informally, outside the new legislation, to reiterate the need to enhance the system of self-regulation and its principles upon which, ultimately, public and international confidence is built.
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