The Barlow Clowes Affair 
by Lawrence Lever.
Macmillan, 278 pp., £17.50, February 1992, 0 333 51377 0
Show More
For whom the bell tolls: The Lesson of Lloyd’s of London 
by Jonathan Mantle.
Sinclair-Stevenson, 358 pp., £18, June 1992, 1 85619 152 4
Show More
The City of London: Continuity and Change, 1850-1990 
by Ranald Michie.
Macmillan, 238 pp., £30, January 1992, 0 333 55025 0
Show More
Show More

The City of London has always had a streak of lawlessness, partly because great fortunes could be made and partly because regulation has been relatively light. Advantage has repeatedly been taken of the latter, and certainly the past few years have seen a series of scandals, notably Lloyd’s, Guinness, Barlow Clowes, BCCI and now Maxwell. Indeed, Maxwell bids fair to be one of the best. Robert Maxwell was a rogue of the first order, but no one can say that we were not warned: in 1971 the Department of Trade and Industry warned that he was ‘not a fit and proper person to have charge of a public company’. Not the least interesting question is why, with that sort of record, banks were so eager to lend large sums of money to him.

To say that, in this case, regulation failed would be an understatement. Historically, it was the City’s practice to regulate itself, which was acceptable as long as scandal and losses were largely confined to those who could look after themselves. But once innocent people began (metaphorically) to throng the City’s streets in increasing numbers, and to get hurt, external regulation seemed the answer. But what then happens if regulation fails? Someone must be blamed: but whom? And beyond that, should someone pay?

Originally, the City of London was primarily a geographical area, and ‘the City’ referred to all of the activities that went on there, whether fishmongering or finance. It was the Second World War and its aftermath, according to Ranald Michie, which drove a furrow between the geographical and the functional Cities, as traditional City activities migrated further afield, driven thence by bombs or high rents. Nowadays ‘the City’ in common parlance tends to mean finance only. His short, wholesome and enlightening book makes clear how limited a vision this is. First the City traded; then it provided credit for trading; then it provided investment capital; and now it provides services. Among the most important of these are insurance and reinsurance, and the provision of investment opportunities, particularly for pensions.

It is within these service areas that two of the biggest public brouhahas of the last decade took place, the Barlow Clowes affair, now brought to a close, and the congeries of Lloyd’s scandals and disasters, still very much running. Barlow Clowes purported to be a firm specialising in investments in gilts, which are British government securities and thus by implication a very safe (if unexciting) investment. The firm cheated nearly from the first, and its victims were preponderantly pensioners who were threatened with the loss of their life savings. It was meant to be licensed and therefore externally regulated by the Department of Trade and Industry (DTI), with the Bank of England and the Stock Exchange in due course taking an interest. Lloyd’s of London, on the other hand, has always been self-regulated. What is at issue here is whether insiders in Lloyd’s (the working underwriters) took advantage of their position to subject outsiders (external Names) to excessive risk, or even actually to defraud them. If not, Lloyd’s have no case to answer; if so, who will force self-regulators to regulate themselves? For the victims in both cases, the question became: who will compensate us? For Barlow Clowes, it was eventually the Government; for Lloyd’s, the answer is no one.

Lawrence Lever’s book on the Barlow Clowes affair combines biography and City journalism. Peter Clowes must be at least faintly charismatic to have convinced so many people of his ability and rectitude, but Lever fails to convey this. On the other hand, had he tried, he would have been undermined by the photographs in the book: saying that Clowes looks like a used-car salesman would be an insult to that much-maligned breed. He was a lonely, intelligent, intense and hard-working child, who left school in the middle of A levels to make money, first in the family business selling paraffin, and then on his own, running a market stall, and after that, a landscape gardening business. In due course he joined an insurance company which was part of the empire of Bernard Cornfeld, shortly thereafter revealed as one of the more spectacular fraudsters of the Sixties.

Barlow Clowes dates from the early Seventies. It presented itself as a gilts investment manager, specialising in ‘anomaly switching’ (moving in and out of similar gilts in order to take advantage of momentary discrepancies in their prices). As government stock, the apparent solidity of gilts encouraged investors. Although the firm was unlicensed, it placed all of its deals through a reputable firm of London stockbrokers.

In fact, it should have been licensed by the DTI, but was not, entirely as the result of mistakes by junior civil servants; indeed, the ineptitude of DTI regulation is a continuing, and alarming, theme. Almost from the first, investors’ money was used by Clowes for his own deals. In the early days he gambled on gilts; in due course he diverted much of their money overseas and used it partly to support his own standard of living – he grew to quite like private jets – and partly to try and build a financial and commercial empire. The turning-point was May 1982, when he was invited onto Radio Four’s Money Box to explain his so-called new wheeze, bond-washing. (Buy a gilt just after it has paid a dividend, when the price is lower, hold it until just before the next dividend is due, when the price is higher, and sell it: you gain the capital value, rather than the dividend, and in 1982 the first £5000 of capital gain a year was tax-free.) The publicity led to money flowing into Barlow Clowes, which he encouraged by a wide-ranging advertising campaign the following year.

This campaign, as well as bringing in large numbers of new clients, also ‘unleashed a maelstrom of incredulity and concern about the firm and its products’, according to Lever. How could the firm generate the high returns promised to investors? A number of warnings came to the Bank of England and the DTI from various quarters, including the head of surveillance at the Stock Exchange and the chief executive of Gartmore, a major fund management group in the City. In December 1984 Clowes was called to the DTI, where, lying through his teeth, he convinced them that while affairs were in a bit of a muddle, he was basically honest. The DTI looked at the books, however, and became increasingly worried. If they shopped Barlow Clowes, two undesirable things may result: first, he might abscond with the money, and second, questions might be asked about why the DTI had allowed the firm to remain unlicensed for so long. From this point on, avoidance of embarrassment was high amongst the DTI’s concerns. So high, in fact, that they moved towards legitimising Barlow Clowes, in spite of profound doubts about the firm, partly because there was some hope that this would bring the firm into line, but primarily to protect themselves from charges of negligence and from liability. Meanwhile the firm took in more and more money from investors.

What finally tripped up Clowes was a request to be listed on the Stock Exchange. He had first backed the firm into a publicly-listed company in a reverse takeover: that is, James Ferguson Holdings, the smaller company, bought Barlow Clowes Group, the larger company, paying Peter Clowes in shares; he thus became the largest shareholder in the company and controlled it. Clowes then used this vehicle to try and take over two public companies, intending to pay with Ferguson (Barlow Clowes) shares. The Surveillance Department of the Stock Exchange was infinitely more knowledgeable and infinitely tougher than the handful of civil servants in the DTI responsible for licensing firms which managed money for investors. They recommended not only that Barlow Clowes be denied a listing, but also that it be investigated. By this time the Bank of England, the Takeover Panel and the Stock Exchange were all worried, and they told the DTI Peter Clowes was out of control and that it was time to do something. In September 1987 the DTI decided that the firm should be investigated. This led to a massive cover-up by Clowes, which was ultimately unsuccessful. In May 1988 the new Securities and Investments Board, set up by the Financial Services Act of 1985 to police the City, shut down Barlow Clowes.

The remainder of the book deals with the arrest, trial and conviction of Peter Clowes, and with the attempts of his victims to win compensation from the Government: the spectacle of the Government trying to wriggle out of any responsibility is especially interesting. (Norman Tebbit cuts an unedifying figure in both this and the Lloyd’s book.) The Barlow Clowes investors cleverly organised themselves into a political lobby, keeping up the pressure on their constituency MPs, who then kept up the pressure on the Government, as well as asking the Ombudsman to look into the matter. In the end, it took the report of the Ombudsman, charging the DTI with maladministration in five different areas and insisting on compensation for all of the investors, to bring the Government to heel.

For those Barlow Clowes investors who were still alive then, the whole episode had a satisfyingly happy ending, one which some hundreds of Lloyd’s Names might well envy. Lloyd’s of London began in Edward Lloyd’s coffee-house, traditionally in 1688, and early on became a centre for marine insurance. Over the subsequent three centuries it went into and out of different areas of insurance, concentrating nowadays on reinsurance, but what has remained the same is the concept of unlimited liability. A member of Lloyd’s who underwrote a risk pledged his or her entire wealth as backing.

Assume you were an insurance company which had insured an oil rig (say, the Piper Alpha) or an oil tanker (say, the Exxon Valdez). You would naturally wish to lessen your own risk by reinsuring it, and would therefore go to a Lloyd’s broker to do so. The broker would go to one or more underwriters at Lloyd’s and see who would agree to underwrite the risk and at what premium; once a satisfactory bargain was struck, it would be entered on both of their slips of paper and liability was now with the underwriter. The underwriter himself would be taking on these risks not just on his own behalf but on behalf of a whole syndicate of ‘Names’: their wealth formed the substance of his resources, and they in turn shared the premium income generated by his underwriting.

In most years for most Names this amounts to a licence to coin money. Those involved have to show a minimum level of easily-realisable assets to be accepted as a Name, but they have to deposit only a proportion of them: therefore they can earn premium income on money or assets which are already at work elsewhere. Sometimes, however, the unthinkable happens and they have to pay up, but it was always assumed that a Name’s wealth was such that this could be done without difficulty.

Over the years, however, Lloyd’s have been reducing the asset requirement in a bid to increase the number of Names. This began in the late Sixties in response to a need for more money to cover more and higher risks. They even started to admit women and foreigners – by 1984, 15 per cent were non-UK citizens. There was another recruitment drive in the mid-Eighties, again reflecting the need for increased capacity, and at this point the wealth which a Name needed to show was only £250,000, not a large sum in the South-East, where an ordinary family house would command that. Michie shows the scale of increase: in 1948 there were 2422 Names, in 1965 5828 and in 1988 33, 527.

So, not only did a lot of people become Names in the Eighties who should never have done so: their agents (known as members’ agents) put many of them on underwriting syndicates which concentrated on Excess of Loss reinsurance – that is to say, on reinsuring other Lloyd’s insurers against risk. This looked like a very profitable place to be – premiums were high and risks believed to be low – but it was spoilt by brokers churning the market: instead of laying off the risks to the syndicates by going outside Lloyd’s for reinsurance – say to Swiss Reinsurance or Munich Reinsurance – which would have been costly, they went round and round various Lloyd’s syndicates madly reinsuring and piling up their fees. When a whole series of disasters, from Piper Alpha to huge claims from America for pollution damage, then hit these syndicates, the Names in them discovered two things: first, unlimited liability meant just that, and many faced total ruin; and second, these Excess of Loss syndicates seemed to be made up almost entirely of external Names, such as themselves, with very few working Names – i.e. Lloyd’s insiders – among them. A number decided that there had been absence of due care and sued. They thereby joined Names who were fighting Lloyd’s for compensation for having been defrauded in a fairly spectacular way in the late Seventies and early Eighties by Lloyd’s underwriters Peter Cameron-Webb and Peter Dixon.

All this has now brought the very future of Lloyd’s into question. Lloyd’s success appeared to lie in having the freedom to innovate and regulate itself. The latter freedom was enshrined in law in 1982, but this was just before the storm broke, and external regulation is now a possibility. If it does happen, Lloyd’s will become a different animal. But it also might die, because Names are resigning at an alarming rate – since 1988 some 10,000 Names have ceased underwriting – and the market is losing capacity. The question as to whether or not there ought to be a limit on loss, and if there is, whether it should be backdated to 1987 in order to help some of the Names currently reeling from their losses, has received a mixed reply. On the one hand, a new scheme has just been introduced which will cap the losses of Names who join next year; on the other hand, there will be no rescue of Names currently staggering under huge losses (£1 billion of the £2 billion of losses dating from 1989 will be borne this year by members of just 15 of the 401 syndicates of Names underwriting in 1989).

The argument over compensation – should there be any, and if so, who should pay? – has deeply divided Lloyd’s. There is a precedent: in 1958 the Central Fund (a ‘lifeboat’ fund reserved to help pay claims in the short term) was used to help distressed members. Many members then feared that this would set a precedent, and presumably currently distressed Names hoped the same. Lloyd’s council has in fact recently levied funds from Names to build up the Central Fund, but this so angered other Names that the rejection of further forced contributions was probably inevitable. Because Lloyd’s is self-regulated, the members themselves would be liable, and this would effectviely mean taking funds belonging to the winners within Lloyd’s and redistributing them to the losers (a ‘market settlement’): the general response has been that if Names could not stand the heat, they should have foreborne to enter the kitchen. To top it all off, there is currently a drive by two hundred underwriting members to force a vote of no confidence in the chairman, David Coleridge, and the ruling council.

It is clear, then, that Jonathan Mantle has a riveting tale to tell in For whom the bell tolls, and it is a matter of some regret that he tells it so maladroitly. The book is jerky and anecdotal and unstructured. He has tried to combine analysis with prosopography, interweaving the frequently heart-rending stories of some of the losers with the larger tale, but he cannot control his material. He claims, for example, that for the first time the true story of the insuring of Piper Alpha will be told, and then changes the subject, returning to it in dribs and drabs. He forces the reader to provide the unifying structure.

What both Mantle and Lever have in common is that they are journalists who have followed their respective stories as they unfolded, and the content of their books is undeniably interesting. Other journalists are almost certainly compiling books about BCCI and the Maxwell scandal. But books are more than a series of extended newspaper articles between hard covers, and they should have been told so by their editors. Michie, on the other hand, has certainly written a useful book, but the reader looks in vain for life and colour, for the romance of the City.

The City, some might say, is at a turning-point, but what the reader of Michie’s book will realise is that there have been frequent turning-points in the City’s history. It has adapted and survived, supported by a critical mass of experience, expertise and resources, all of which still exist. On the whole, scandal does not stalk the streets. On the whole, the City renders valuable service, not only to clients but to the country. But it can no longer be as self-regarding as it once was. A government which encourages a mass shareholding public is a government which has some responsibility to that public for ensuring that there is a level playing-field. On the other hand, the Government has encouraged mass participation partly because it will be profitable for its supporters to become involved: it must therefore take care that it does not, through over-regulation, drive this very business away. A line was drawn in 1985 with the passing of the Financial Services Act and the consequent setting-up of the Securities and Investments Board and various self-regulating agencies, but the results have not been wholly happy and adjustments are being made. Lloyd’s, too, will probably have to change. The question is, who will judge between baby and bathwater.

Send Letters To:

The Editor
London Review of Books,
28 Little Russell Street
London, WC1A 2HN

Please include name, address, and a telephone number.

Read anywhere with the London Review of Books app, available now from the App Store for Apple devices, Google Play for Android devices and Amazon for your Kindle Fire.

Sign up to our newsletter

For highlights from the latest issue, our archive and the blog, as well as news, events and exclusive promotions.

Newsletter Preferences