Labour swoops on City sleaze

Chancellor announces tough new system of supervision

Gordon Brown yesterday announced plans to create the most effective system of City supervision in the world, as a means of protecting small savers, pensioners and investors and enhancing the international reputation of London's financial markets.

The Chancellor of the Exchequer's announcement stunned the Commons, but it was promptly welcomed by the Consumers' Association and MPs who had been concerned by a growing list of embarrassing financial scandals.

The move, which follows hard on the heels of the Chancellor's decision to hand the Bank of England the freedom to set interest rates, is widely seen as retribution for the financial service industry's tardiness in clearing up the pensions' mis-selling scandal.

A series of scandals in recent years that have badly dented the City's reputation as a global financial centre, have included the collapse of the Bank of Credit and Commerce International, the Guinness scandal, the near collapse of the Lloyd's insurance market and the fall of Barings Bank at the hands of rogue trader Nick Leeson.

Today, The Indendent reveals that Prudential, the UK's largest insurer, has been criticised by the Securities and Investments Board, the present regulator, over claims of mis-selling of financial products and an alleged refusal to compensate victims.

Ministers played down the link to scandals, however, stressing that the new framework would be more efficient and less expensive. Mr Brown said he wanted "to reduce the chance of events such as the mis-selling of personal pensions happening again."

Howard Davies, a deputy governor of the Bank of England, is to become the head of a newly beefed-up SIB, which will firstly take over the Bank of England's regulatory supervision of the banks.

The enhanced SIB - which will act as watchdog with statutory powers of enforcement and scrutiny - will eventually take over the regulatory powers of no less than seven different bodies, following consultation and legislation, expected some time next year.

Mr Brown told the Commons: "The distinctions between different types of financial institution - banks, securities firms and insurance companies - are becoming increasingly blurred. Many of today's financial institutions are regulated by a plethora of different supervisors. This increases the cost and reduces the effectiveness of supervision."

As an example of the crossed lines of control, banks are supervised by the Bank, stockbrokers by the Securities and Futures Authority, asset managers by the Investment Management Regulatory Organ- isation, retail financial services advisers, who sell personal pensions, by the Personal Investment Authority, and unit trusts by SIB.

Self-regulatory organisations, like Lloyd's insurance market, and recognised professional bodies, are also to be brought within the remit of Mr Davies's new organisation, which should be up and running - with full powers, and a new name - by 1999. After telling the House of his decision to give the Bank of England independent control over interest rates, and the new City control structure, Mr Brown confirmed yesterday's Independent report that he had asked the National Audit Office to check Treasury assumptions on growth, unemployment, and interest rates, as well as projections on privatisation proceeds and "spend-to-save" measures like the receipts that would come from social security fraud exercises.

Later, after opening the final day's debate on the Queen's Speech, the Chancellor capped an action-packed day with a Confederation of British Industry dinner at which he said that he would be setting up a new enterprise and growth unit in the Treasury, as part of his aim to provide business with long-term economic stability.

The system had become widely discredited and had even been criticised by SIB's chairman, Sir Andrew Large.

Hamish McRae, page 21

Further reports, page 22

Prudential under fire, page 22

Major financial scandals

Barings: rogue trader pounds 800m

BCCI: bank collapse pounds 740m

Peter Young: unauthorised investments pounds 450m

Pension companies: mis-selling of pensions pounds 4bn (est.)

Maxwell: theft of pensions pounds 400m