| Admin History | By the late 1970s, it was recognised that the structure and scope of the Prevention of Fraud (Investment) Act (PF(I) Act), the law regulating securities, was inadequate and outdated (as market techniques had moved on) for investor protection and many City institutions pressed for the Act to be revised. Since the Act was enacted in 1958, there was a substantial growth in the number of unregulated firms offering a wide range of investment planning, consultancy and advice to members of the public and businesses, as well as, overseas open-ended investment trusts offered in the UK. There was concern in official quarters about the deficiencies of the Licensed Dealers Rules as a means of protecting the public against fraud by those who undertake the management of investments for fees. In 1980/81, there were also a number of collapses of certain firms of ‘licensed dealers’ active in securities and commodity future dealings, causing losses to the public., failures in non-regulated areas and a number of inconsistencies in areas already regulated. These events in turn led to considerable press criticism.
Against this background and the calls for changes needed to provide for stricter supervision of such activities, it culminated to the then Parliamentary Under Secretary of State for Trade commissioning Professor L C B Gower, the Department of Trade’s Chief Legal Advisor on Company Law, in July 1981 to undertake an independent and comprehensive review and recommend proposals for a new legislative framework of protection for investors in securities and other forms of property.
The terms of reference were:
(a) to consider statutory protection required by (i) private and (ii) business investors in securities and other property, including investors through unit trusts and open-ended investment companies operating in the UK.
(b) to consider the need for statutory control of dealers in securities, investment consultant and investment managers, and
(c) to advise on the need for new legislation
In the course of his review of the statutory protection, Professor Gower published a Discussion Document in January 1982, on which there was wide and extensive consultation from interested persons and organisations. The Discussion Document referred to investment not only in securities but also in commodity and financial futures.
In the Discussion Document, Gower identified a number of shortcomings and put forward various options for reform and a new regulatory framework. His principal recommendations were that the PFI Act should be replaced by a new Investor Protection Act providing a system whereby basic policy, overall surveillance and residual regulation of investment business would be undertaken by a government agency. He expressed a preference for a balance between governmental regulation and self-regulation, namely a system of a small group of industry self-regulatory agencies, covering all investment activity comprehensively, under the supervision of the Council for Securities Industry, which would in turn be responsible to the Department of Trade. The responsibilities of the self-regulatory agencies were to be determined broadly by the activities to be regulated, for example, stock exchange dealing, off-market dealing and fund management, collective investment management (such as of Unit Trusts), commodity and financial futures dealing and issuing new securities, and suggested that some agencies could develop from existing bodies.
Gower’s final report entitled 'Review of Investor Protection' was presented to Parliament in January 1984. Part 1 of the Report sets out Gower’s analysis and recommendation for new legislation to operate in conjunction with the self-regulatory system with the object of enhancing the protection given to investors. Part 2, giving a draft for a Parliamentary Bill, which he would propose in order to give effect to his recommendations was to follow later. Interested parties were also invited to submit comments on his recommendations by 30 April 1984, after which the Government would decide and make known their intended course of action. The responses were varied, as well as critical, but were in general agreement that the existing legislation needed reform; although the form that reform should take, differed.
In response to Gower's report, the Government published a white paper on Financial Service in January 1985. This paper contained much of the regulatory proposals put forward by Gower, however moved towards more of a self-regulatory structure. Following industry comments and amendments to the white paper, this Financial Services Act was passed in 1986 which set out the new regulatory structure of the financial services industry. The act contained a mixture of governmental and self-regulation, and in particular created a new Securities Investment Board (SIB) which oversaw a number of self-regulating organisations (SROs).
(Sources used: 17A120/1/2, 17A120/4/2 and 17A120/7/14). |