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The Guardian
Thursday, 8 March 1990
A traditional nod that should not serve for scrutiny
Notebook
Alex Brummer
FOR generations the City of London has prospered on the principle "my word is my bond." This has been the raison d'etre which has set the Square Mile apart from other financial centres. Wall Street has been regarded as cut-throat; the Italians as mercurial and the Japanese as chauvinistic. But the City with its panelled boardrooms, decanters of port and sprinkling of knights is the epitome of civilisation and bedrock of integrity.
Over the decades this reputation occasionally has been dented. Not least by the Blue Arrow affair and Guinness, both of which are chugging through the legal system, having left the character of such once-distinguished houses as Morgan Grenfell splattered with mud. The City, it will be argued, has survived as Barings survived the Argentine bond crisis of 1890. But in many ways the House of Fraser report is qualitatively different.
It was not a business judgment which was at stake in the Fayed brothers' £600 million takeover in March 1985. The price was fine for shareholders. The financing (despite its murky origins) was in place and the board was satisfied that the core retailing business of the flagship Harrods and other stores would not be affected.
What is put on trial in the report is the methodology of the City. It is the handshake which substitutes for rigorous scrutiny; the nod which is seen to be as important as well researched documents, and the arrogance of a system in which the City establishment closes around its preferred clients (Arabs in the mid-1980s were the chosen flavour) and rejects those it has chosen to blackball. Tiny Rowland's contribution to British commercial life, from the rescue of ailing companies like Brentford Nylons to his strong relationships with black Africa, have been infinitely more useful than anything the Fayeds appear to have done.
Yet it was they who were ushered into the presence of Mrs Thatcher at 10 Downing Street; it was they who were passed on from two blue-blooded merchant banking houses, Morgan Grenfell and Lazards, to another, Kleinworts, without anyone apparently bothering to ask pertinent questions. And it was the Fayeds who were given the benefit of the doubt by the Office of Fair Trading and other regulatory bodies, while Lonrho was vilified. For the OFT and others who trusted the City it was a case of my word becoming my noose. The system which had served for centuries came apart. Even such distinguished figures as Sir David Scholey of Warburgs, advisers to the House of Fraser board, asked the right questions but found it acceptable in the end "to rely on the word of Kleinworts," as the inspectors succinctly describe it. Having driven a locomotive through the City's governing ethos, not to mention the legal thicket which governs the role of DTI inspectors, where do the authorities go from here?
In the narrow sense of the Trade Secretary, Nicholas Ridley's decision to take no criminal action, it would seem the House of Fraser scandal has hit the buffers. One should not become too hung up on individuals. It is, however, hard to feel anything but contempt for men of the Fayed brothers' moral and ethical turpitude.
Two aspects of the Fayeds' background and behaviour uncovered by the inspectors particularly stick in the gullet. First, the inspectors discovered that Mohamed Al Fayed "perpetrated a substantial deceit on the Government and people of Haiti in 1964" by absconding with $100,000. White-collar crime, in all its forms, is reprehensible. But when it is executed against a people with the lowest standard of living in the Western hemisphere, who live in conditions of unspeakable poverty, it becomes heinous. Second, the Fayeds displayed a virulent anti-Semitism which is totally out of keeping with the tolerance for which Britain is renowned. The inspectors noted that on a number of occasions Mohamed repeated the word "Jews" with emphasis as a term of abuse and made no attempt to hide his contempt for Jews on other occasions. These were the men that merchant banks, with roots deep inside German-Jewish culture, chose to promote.
Putting passion aside, what are the wider issues which should exercise us? Certainly, the inspectors touch on several in recommendations on their own role. It is ludicrous that they and the Serious Fraud Office were unable to obtain personal bank accounts and trace the money trail right back to the Sultan of Brunei with whom, the inspectors believe, it began. Sometimes, it would seem that we in Britain are so concerned at preserving the integrity of the City that it is undermined. In the US it was entirely possible for the special prosecutor in the Iran-contra case to gain access to the secret Swiss bank accounts of General Secord and Adnan Khashoggi because the American authorities with their commitment to openness were willing to make reciprocal arrangements. With such accords in the Fayed case the inspectors, the SFO and Mr Ridley might have achieved satisfaction more easily. Instead they have been left with a blistering sore.
Plainly, many of the regulatory loopholes exposed by Messrs Henry Brooke, QC, and Hugh Graham Cazalet Aldous, FCA, have been closed, or will be closed shortly with change in the
takeover code, the operating rules of the OFT and the new Companies Act. The problem is that they are not root-and-branch reforms and none can now be expected until after the next election at least. What is significant, however, is that Guinness, Blue Arrow, and now House of Fraser, together provide a damning indictment of existing structures. If shareholders and the public cannot believe City prospectuses, because of the peremptory research and slapdash verification, then clearly there must eventually be change.
It is no accident that offer documents and prospectuses in the US are the width of the London yellow pages and high quality information on British companies and their directors, available nowhere in the UK, are required by the Securities & Exchange Commission. Until Britain adopts the rigorous standards which exist across the Atlantic, then the dictum on which the City operates will be a sham and the merchant banking jewels in its coronet will continue to be acquired by overseas marauders.
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