In the City

After New Cross

Jock Bruce-Gardyne

How seemingly appropriate that the publication of Professor Jim Gower's considered views about the policing of financial markets should follow swiftly on the heels of dramatic action by the Registrar of Building Societies to terminate the inde- pendent life of a medium-rank building society. For the general impression has been created that, but for the prescient action of the Registrar, thousands of small investors would have lost their shirts; that, even so, thousands more were still surrendering those articles of clothing while the courts were secretly ruminating about the appro- priateness of the use of Mr Bridgeman's whistle; that New Cross is 'the tip of the iceberg'; and that the sooner someone does a Gower on the building societies, the bet- ter. That seems to be the view of Gower himself.

So perhaps it might be just as well to put things in perspective. Not only did not a single depositor with the New Cross Build- ing Society lose a shirt or even a solid plastic cufflink; but also the same was true of every other recent drama in the history of the building societies movement. Well before

the present back-up fund was established the system regularly contrived to catch the widows and the orphans before they hit the ground. Nor is there any conclusive balance of probability that depositors in New Cross would have been at risk had Mr Bridgeman not blown his whistle. Indeed the former chairman of the society claims that two leading city accountants, Peats and Dearden Farrow, gave it a clean bill of health, and they have not denied his claint. To argue, as Labour's Mr Kenneth Weetch, a long-standing critic of building societY management, has done, that there was something reprehensible about 'secret at- tempts to sort out the society's difficulties, is absurd. Nothing could have been better calculated to provoke a run on the society than a public announcement that it had been ordered to desist from bidding for new deposits: and it would be a travesty of natural justice to deny the management of a society the right to challenge an order from the Registrar before the courts. EventuallY the courts came down — on appeal — In favour of the Registrar. But the New Cross remained solvent and its depositors are now being safely transferred to the Woolwich. Far from this being, in the words of Mr Weetch, 'a classic case of closing the door after the horse has bolted', the horse had never left the stable.

Assuredly the building societies are navigating uncharted waters: but perhaps it was about time they did. For years they of- fered to depositors rates that did not recompense them for the ravages of infla- tion, while the composite rate made a minority of those depositors pay tax 101 which they were not liable. Meanwhile mortgage interest relief ensured that there was no shortage of borrowers eager to take out mortgages at rates which left the societies with a handsome margin for the acquisition of prestigious branch offices in town centres. Times have changed. It is a lenders' market, and to win deposits the societies must offer premium coupons in competition with the banks and national savings. Margins are therefore under pressure, and the society which finds Its cushion of profit from dealings in the gilts markets deflated by bad luck, bad judg- ment or bad timing, or which fails to restrain its overheads, can get into trouble.

Undoubtedly there are also some building societies — though for the most part smaller ones whose investors could 10 case of need be sheltered easily by the pro- tection fund whose boards of manage- ment would not for long be tolerated in a quoted company. One minnow, I recall, which had to be rescued in the nick of time, rejoiced in a board to which all the other

members had been first appointed before the chief executive had been born — and he Was middle-aged. Hence the enhanced supervisory activity of the Registrar. When the promised building societies' legislation comes to Parliament next year it is likely to contain Provisions to broaden the range of options

available to the Registrar when he fears a society may be putting itself at risk. But it is wishful thinking to imagine that the in- genuity of parliamentary draftsmen can

somehow resolve the conflict between the need to avoid undermining investors' con-

fidence — perhaps unnecessarily — and the equally crucial need to provide a manage- ment under challenge with rights of appeal against the inevitably arbitrary judgments of the Registrar.

Which brings us back to Gower. The good professor has predictably given short shrift to the pleas of the various city institu- tions and markets to keep their own respec- tive troops in order. Whether a galaxy of quangos, each with statutory powers and

responsibilities, in orbit round a revamped Council for the Securities Industry on

Which they would be represented, would really make a better fist of policing markets 11, period of dramatic change must be, at

best, an open question (and it will be in- teresting to see how the Bank of England reacts to the proposal to introduce new regulatory agencies between it and such old- established clients as the Accepting Houses Committee),

There is a cautionary story from American experience. Back in 1981, when Was taking a close interest in the affairs of one John De Lorean, I obtained a copy of a draft prospectus which this unusual entre-

preneur had lodged with the Securities and 8xchange Commission in preparation for

an issue of shares upon the New York over-

the-counter market. It was a horrendous document, studded not so much with health warnings as with 'keep off' notices. Anyone fool enough to trust his cash to Mr De Lorean, the message seemed to be, would deserve to lose it. Surely, I suggested to my American contacts, the issue was bound to be a total flop. On the contrary, I was told, it Was expected to go with a zing. In the end it never did, since Mr De Lorean' s little local difficulties came to

Public notice first. But had they not emerg-

ed in time there would have been plenty of enthusiastic punters. For the sort of disclaimers incorporated in the De Lorean

Prospectus are now so commonplace in such documents as to be almost totally dis-

counted. The corporate lawyers are thus Protected from any risk of accusation of !laving misled the investing public. The Investing public is not so fortunate. So perhaps we should reflect that if we start out with the laudable intention of

se eking to guarantee the security of every

imaginable investor against every im- aginable predator or bungler, we are all too

liable to discover that we have ended up by guaranteeing nobody — and maybe gum- med up the markets in the process.