13.2 Financial regulation in the uk

Box 13.3

Maxwell and the pension funds

On 31 October 1991 the body of the newspaper tycoon, Robert Maxwell, was discovered

oating in the sea off the Canary Islands. During the subsequent unravelling of the affairs

of the Maxwell group of companies, including Maxwell Communications Corporation

(MCC) and Mirror Group Newspapers (MGN), massive fraud was discovered relating to

the pension funds of the Maxwell companies.

Two types of problems were uncovered. The rst was the management of the pension

funds in the interests of the Maxwell family rather than of the investors in the fund. When

Maxwell had taken control of the MGN fund in 1985, investments were largely in UK

blue chip equities. By April 1990, more than half of the twenty largest investments in the

fund’s portfolio were in companies with which Maxwell had a connection or in his own

private interests. This was clearly contrary to general trust law, which lays down three

obligations for trustees:

l	to diversify investments;
l	to avoid exposing beneciaries to undue risk;
l	to act reasonably.

However, much worse was to follow. During 1991, Maxwell siphoned off up to £1bn

from the pension funds of his companies in the form of unsecured loans for his own use

in defending his seriously troubled empire. When the Maxwell companies collapsed, this

money was lost, leaving several of the funds unable to meet their obligations to pay

pensions to employees and former employees.

How could this have happened?

Pension funds (as mentioned in Chapter 4) are required by law to be kept separate

from company accounts. A board of ‘independent’ trustees is appointed to oversee the

running of the fund. However, Maxwell was able to appoint his own trustees and did so

to good effect. There was a gradual erosion of representation of employees on the board,

and most trustees appeared to know little of what was being done in their name. Maxwell

managed the funds through his own private management rm, Bishopgate Investment

Management (BIM). It was subject to inspection by auditors and to regulation by one of

the SROs, IMRO (the Investment Management Regulatory Organisation).

A report compiled by the House of Commons social security committee later described

the events as a ‘spectacle to make even Pontius Pilate blush’ as everyone in the City

seemed mainly concerned to deny blame. The report concluded that if the regulators

had ‘acted with the proper degree of suspicion...and if professional advisers’ care had

been commensurate with their fees...then the Maxwell pension funds would have been

secure’ (Financial Times, 10 March 1992, page 8).

The report particularly criticised the accountancy rm Coopers & Lybrand Deloitte,

which had detailed serious shortcomings in the way BIM managed the pension funds

as early as February 1991 but had reported this only to the pension fund manager and

rarely attended meetings of the trustees of the funds. IMRO was also heavily criticised.

It had investigated BIM only ve weeks before Maxwell’s death but had claimed to nd

nothing wrong. They had failed, said the select committee, to spot stealing on a massive

scale. Self-regulation, said the committee, was little short of tragic comedy.

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Chapter 13 • The regulation of nancial markets

For these sorts of reasons, self-regulation is often equated with self-interest. This was

particularly true of the City of London system because of the uncovering of a large

number of illegal activities and institutional collapses in the late 1980s and 1990s.

Competitive laxity of a rather different kind occurred in the case of the previously

unregulated market in eurobonds. The initial intention had been that regulation

by the different SROs and the levels of disclosure required by the various exchanges

should be compatible. However, fears that placing onerous requirements on the

eurobond market in London would drive much of the business abroad quickly led

to an easing of its rule book. The self-regulation of the City of London certainly did

not overcome the problem of agency capture. The regulators were, in effect, part of

the industry – indeed, often they were employees of the producers on secondment

from their normal jobs. This led to the concern that they were likely to take too

sympathetic a view of the behaviour of the industry and fail to understand the point

of view of the consumers.

Another complaint about the operation of the SROs was that retail business

was under-regulated, while business carried out for professional customers was over-

regulated. The establishment of the Personal Investment Authority (PIA) as an

umbrella regulator for retail nancial business was a response to the rst part of the

complaint.

Finally, there was concern over the ability of the regulators to obtain convictions

and over the sentences imposed by the courts. Indeed, the Serious Fraud Ofce (SFO)

was set up in 1987 specically because of the inability of the City of London Fraud

Squad to obtain convictions. However, the SFO (which dealt with cases involving more

than £1m) itself experienced a number of embarrassing failures. One suggestion was

that there were frequently too many agencies engaged in investigations – the SFO,

the Metropolitan Police fraud squad, the SIB, the various SROs and the investigation

branches of the Department of Trade and Industry – and that their actions lacked

co-ordination.

Dissatisfaction with the operation of the system led to the commissioning by

the Chancellor of the Exchequer of a report by SIB’s chairman, Andrew Large. The

report, published in May 1993, listed a number of criticisms of the existing system

but still defended the two-tier self-regulatory system and committed SIB to making

it work. The report was cautiously welcomed by the SROs but was greeted elsewhere

with some scepticism. Many thought it insufciently radical and as placing too much

of a burden on the good intentions of the chairman of SIB. Nonetheless, the system

was given the benet of the doubt for four more years, largely on the grounds that

a complex system needed time to settle down. However, by 1997 the industry was

still struggling to cope with issues such as the failure of agents to seek the best prices

for clients and the giving of unsuitable investment advice. In May 1997, the new

Labour government announced major changes to the UK regulatory system. We look

at these changes in section 13.2.3.

13.2.2

Supervision of the banking system We have mentioned two regulatory issues in banking:

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