§ Mr. Speaker
With this we may also discuss Amendment No. 4, in page 1, line 15, leave out 'financial' and insert 'profit'.
§ Mr. Renton
The amendments provide that instead of "financial objectives" the Post Office would have strict profit objectives when providing banking services. The Opposition are by no means opposed to the principle of the Post Office's having financial or profit objectives, but we would prefer the latter. It certainly should have objectives, however. Having heard the debates on Second Reading and in Committee we are concerned with the way in which those objectives will be realised and monitored, and whether, as the Minister of State spelled them out to us, they are sufficient for the sort of major banking operation upon which Giro will now embark.
The Minister of State told us in Committee that he had decided that the financial objective set to Giro should be a return of 12½ per cent. per annum, over the next three years, on its public dividend capital and retained profits. It would be much more preferable, in a normal commercial sense, if that objective could be varied annually in the light of changing conditions. I say that to the Minister in a non-partisan spirit—that almost unbelievable mood—because banking profits vary greatly from year to year, depending on conditions in the money market. Banks almost inevitably make higher profits when interest rates are rising and lower profits when they are falling.
448 6.45 p.m.
While I support Giro as a money transmission service I do not support it as a banking service, but if it is to be a banking service it should have realistic and changing objectives, and it would be helpful to the managing director of Giro and his staff if they could have a varying objective which fluctuated in line with what was happening in the banking world and, most particularly, to interest rates. For instance, the financial objective could be 15 per cent. in a year when money was tight and rates were rising, and could drop to 10 per cent. the following year, when money was slack and interest rates were going down. To provide this sort of moving target could be of commercial assistance to Giro.
We then move on to the question whether, on its capital and reserves, 12½ per cent. is an appropriate target for Giro. The phrase "public dividend capital" is a misnomer, as my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson) said in Committee. It is just another name for a loss. Money has gone out of your pocket and mine, Mr. Speaker, in so far as we are both taxpayers. It is not admitted as being a loss; it is given another grandiose name.
How was the 12½ per cent. figure arrived at? How was it decided that Giro should have £13 million of public dividend capital? The Minister of State, with that charm and honesty which endear him to us all, gave the game away in Standing Committee when he said:In determining the amount of the write off "—as a result of which, of course, the figure of PDC was arrived at—we were guided by the principle of providing Giro with a reasonable prospect of servicing its remaining capital. In other words we aimed to give Giro a capital structure related to its expected earning capacity."—[Official Report, Standing Committee B, 10th February 1976; c. 161.]449 It does not need too much imagination to guess what happened behind the doors in the corridors of power. Presumably the managing director was told by the Minister of State "I have to let you go into banking services. I know that you want to do it, but the Treasury and I are opposed to the idea. However, you will be given the chance. How much money do you think you might make?" The managing director probably said that, at a guess, he might make £500,000. The Minister of State told him that that was not enough and asked what he thought of £1.5 million—and that was the figure finally settled on. The figure of £1.5 million multiplied by eight, which is the equivalent of a 12½ per cent. return, gives £13 million public dividend capital. That is how it probably happened.
Clearly the chicken came before the egg, because instead of arriving at a proper capital structure, and Giro deciding, with the Minister, the sort of return it might expect to make on the capital structure necessary for a fully-fledged bank, a profit figure was picked out of the air. Working back from that, given a 123½ per cent. return, £13 millions of PDC was deemed to be the appropriate sum. We shall come back to the question of the adequate capital structure of Giro when we consider Amendment No. 8 to Clause 4, but it is right to say straight away that this figure of a 12½ per cent. return as the objective that the Minister has set Giro was arrived at in totally the wrong way.
The Minister further told us in Committee that he hoped that that figure would rise to 20 per cent. in the third year. Accepting that this was done by the extremely tortuous process that I have described, I hope that the Minister will be able to tell us something that he was unable to tell us in Committee, namely, why he thinks that 20 per cent. can be achieved in three years' time, and what was Giro's own figure for its expected profit.
I remind the Minister of his words in Committee, thatthe objective we set is genuinely stretching … There was hard negotiating and pressure from the Government."—[Official Report, Standing Committee B, 10th February 1976; c. 157.]I am delighted to hear that, but what did Giro think it could achieve? Why does the Minister feel that Giro will be successful in reaching the target that he 450 has set, of rising from 12½ per cent. to 20 per cent.? Over past years Giro has lost about £30 million, and even last year it achieved a profit of only £64,000 on a turnover of £25 million. We would be delighted to welcome Giro as a prodigal son returning to the profitable ranks of the nationalised industries, but so far we have no reason to believe that its conversion is likely to take place, and we hope that the Minister will be able to spell out his reasons for believing that these objectives can be met.
In declaring my opposition to Clause 2 I move on to a considerable worry about the fact that so far we have not been given any figures relating to the level of advances that Giro expects to achieve over the years immediately ahead. The Minister told us, both on Second Reading and in Committee, that the present ceiling of personal loans was about £2 million, and he also said that there were—I see the Minister looking unhappy; if he wishes to contradict that figure perhaps he will do so, but he said specifically that the present ceiling of personal loans from Giro was about £2 million. We pressed him then, and I should like to press him again, today, to tell us what he expects the level of loans to be after one year, two years, three years and five years. Giro must have a business plan, and this is the time when the House should be taken into the Minister's and Giro's confidence.
The Minister may say, as he frequently did in Committee, that it is not his wish to interfere in the detailed running of the nationalised industries. I support that principle as a matter of day-to-day government, but we are now talking about something different. We are talking about Giro setting forth as a bank for the first time, and it is important for us to know what its overall objectives are.
I regret the brief appearance of the Financial Secretary to the Treasury at our debate about half an hour ago. I do not think that he added anything to the proceedings—much to our surprise, because we expected that the weight of Treasury advice would take us out of the jungle in which we have found ourselves. None the less, when debating the Trustee Savings Bank Bill, Treasury Ministers were prepared to be specific. Speaking from memory, I recall their telling us that in the case of the TSB 451 they expected advances of personal loans to be about £30 million by 1977 and, I think, £50 million by 1978, which would be about 1 per cent. of TSB deposits.
That was useful information for the House and for the Standing Committee studying TSB plans, because hon. Members were able to see that the TSB was setting itself conservative targets. That was a measure of the caution and moderation with which the TSB plans to progress. We have received no such targets and no such business plans from Giro, through the Minister of State, and I am certain that this would be the appropriate time for the Minister to tell us what Giro's objectives are. Let him look at the example of the TSB and realise that it provided the information for which we asked, and give us similar information for Giro.
We were told by the Financial Secretary to the Treasury that Giro is very modest and very small. These words were used constantly in Standing Committee. The fact remains, however, as the Minister said, that Giro is a trading division of the Post Office. From a consolidated balance sheet point of view it has all the assets of the Post Office behind it. Indeed, that is why the Financial Secretary said that depositors with Giro need not worry, that it will be like lending to the State, and that Giro does not have to have a bank balance sheet because it is all part of the Post Office.
That is not an argument that I accept, but let us pursue it. If Giro is a subsidiary division of the Post Office it can become an extremely highly-geared animal. It could have a high ratio between its lending, its deposits and its net worth. It is precisely because of its capacity to gear itself up on the basis of the Post Office and, thus, of the State balance sheet that we need to know what its financial objectives are.
Another point of importance which I hope the Minister will be able to clarify is what would be the proper relationship between the gross assets or balance sheet totals of Giro and its public dividend capital? I do not want to anticipate the debate on Clause 4, but this comes into the class of objectives, and so far, while we have been given a PDC figure and a 12½ per cent. target rate of return on 452 PDC plus retained profits, we have no idea what the objectives are in terms of Giro's turnover in a year or two's time. As the Minister knows, what one looks at in any bank balance sheet are the gross footings at the bottom of the assets column, and at the bottom of the liability column. It is important to know what the objectives of Giro are in terms of the balance sheet assets to which I have referred.
What concerns us most of all about Clause 2 lies in the first three lines, where one finds thatThe Secretary of State may from time to time determine, after consultation with the Post Office and with the concurrence of the Trasury, financial objectives …".What is becoming increasingly clear—it was made even clearer in the brief, unfortunate intervention of the Financial Secretary this afternoon—is that Giro will be in great danger of serving five political masters. The Department of Trade will be interested because of its present review of the Protection of Depositors Act. The Department of Prices and Consumer Protection will clearly be interested, because banking is one of the operations that is surveyed by the Consumer Credit Act. The Bank of England—the Financial Secretary emphasised this—will have its normal responsibility for supervising the day-to-day activities of Giro, and above the Bank of England will be the Treasury. In addition to these four masters, the Post Office will remain the direct responsibility of the Department of Industry.
It seems to me that it will be a case of all Chiefs and no Indians, particularly as we are told that there will be no extra Post Office staff when it goes into the banking business. That is one of the most extraordinary comments made in the Explanatory Memorandum, reference to which was made in the debate on the first amendment and to which no answer has been given.
§ 7.0 p.m.
§ Mr. Gregor Mackenzie
I thought that we had made it perfectly clear during the Second Reading debate. I recall the Under-Secretary of State indicating that if we pass this Bill the Post Office would initially take on about 14 people.
§ Mr. Renton
I thank the Minister for that intervention, but my understanding is different. No doubt the Official 453 Report will put us right. I thought that Giro had already taken on 14 people to handle its existing volume of banking business, which, after all, has only 3,600 customers involved in personal loans. That works out at one customer for every seven post offices throughout the country—not a large figure. I thought that 14 extra staff had already been taken on. It is astonishing that the Bill will not involve any addition to public service manpower.
§ Mr. Viggers
The Under-Secretary said during the Second Reading:Fourteen additional staff headed by the loans manager, have been employed to operate the personal loans service".—[Official Report, 20th January 1976; Vol. 903, c. 1261.]That presumbaly means that if one does not have the luck to come across one of the 14, the little girl behind the post office desk, normally serving stamps, will operate the loans facilities.
§ Mr. Renton
I am grateful to my hon. Friend for confirming that my memory is correct. How the Post Office is going to go into foreign exchange and the whole field of banking services using the same delightful—but inexperienced in banking—staff that they have at present is a mystery to all of us. It is inconceivable that the Post Office, through its Giro trading division, will be able to develop into a fully-fledged bank without taking on a full staff. But the fact remains that the Explanatory Memorandum says that there will be no addition to the number of employees in the public sector.
A parliamentary answer by the Chief Secretary to the Treasury makes clear that the public sector, in this context, includes the nationalised industries. It is an Alice-in-Wonderland situation, in which there will be five Ministers, or five Chiefs, all of whom will be responsible and all meddling in Giro. They will all be saying "This is what should happen" or "That is what should happen". The situation is that Giro, with 14 trained executives, is going into the world of competitive banking, seeking to build itself up into a bank the size of Barclays, with assets of £7 billion, without recruiting anyone to do it. It is unbelievable. Where has the Minister found the magic for Giro to do that without any additional staff?
454 Throughout the Committee debates the Minister always replied with great courtesy but with great ignorance. He did not know the answers. Today he must put the record straight. In seeking to delete the clause from the Bill, we are really probing to find out in greater depth what the objectives are, how they are to be set, and who is to be responsible for setting them and seeing that they are achieved. If we do not get an answer on those points, I fear that Giro will be not a four-legged animal but a monster with live heads which will not know where it is going. With the accumulated losses of the nationalised industries, the last thing we want to do is to encourage yet another nationalised industry to go further into debt. We shall listen with care to the Minister's answers before deciding whether or not to vote on the amendment.
§ Mr. Nelson
My hon. Friend the Member for Mid-Sussex (Mr. Renton) rightly drew the attention of the House to the importance of setting an adequate objective for Giro and therefore the importance of Giro having an adequate capital structure. The two are related. We listened with interest to the comments of the Financial Secretary at the end of the previous debate. I found his remarks anomalous and out of place. When we are discussing a clause on widening the banking services, it is extraordinary that we should be given a lecture on capital structure.
I also found extraordinary the Minister's suggestion that the constraints in the Post Office Act 1969—that the capital base of the bank would be limited—were sufficient to prevent Giro from developing into a State bank and accumulating a massive level of deposits. That is a misreading of the Act and it enhances our fears that neither the Treasury nor the Department of Industry has any idea of what they are doing in proposing this massive extension of the Post Office facilities. The Minister did not adequately explain how the existing constraints under the Post Office Act would operate as a limiting factor in enabling Giro to extend advances to various sectors of industry and take on a far higher level of business apart from the money-transmission services to which its traditional business has been tied.
455 In Committee, hon. Members had an opportunity to press the Minister for some indication of how the financial objective which Giro has been set was worked out. Over the next three years, we are told, it is hoped that Giro will be able to achieve an average return of 12½ per cent. per annum on its public dividend capital but by the end of that three-year period it is hoped and expected that the return on the capital will be nearer 20 per cent.
We have sought to question whether that is an adequate directive and whether the basis on which it is assessed is correct. The Minister said that the return on shareholders' capital was the correct one because a return on the balance sheet total or the turnover of Giro might turn away marginal business which provided a lower rate of return. I question the logic of that argument.
It seems to me that setting Giro's return on total assets employed, or on turnover, would be a far more meaningful guideline for future operations than a return on shareholders' capital. As my hon. Friend the Member for Mid-Sussex has pointed out succinctly, the capital structure of Giro is wholly artificial, even under the reconstruction set out in the Bill.
Why, therefore, is it logical to have a rate of return on public dividend capital and to say that that is necessarily the correct figure for Giro to seek to achieve? If a return were to be set on the gross assets or on turnover, although that percentage return per annum would be less than a return on public dividend capital, it would be far more meaningful because it would set those operating Giro a meaningful task of achieving a rate of return. As it is, it is easy to envisage a situation where loan capital will be accumulated debt on Giro and might rise even further, and where 12½ per cent. on public dividend capital will be an inadequate return for Giro to be seeking to achieve, bearing in mind that it has the added job then of reducing the debts accumulated.
This is a most technical and somewhat dry matter to discuss, but I have no hesitation in doing so because we have a proper responsibility to ensure that the taxpayer's liability is mitigated. We have been told that the Post Office's resources will stand behind Giro, and, 456 indeed, its resources amount to some 10 times the customers' deposits with Giro. There is no doubt that they are adequate. Equally, there is no doubt that the Government would not be prepared to allow a situation to arise in which there was any default on deposits. Therefore, in the last resort, the taxpayer is on the hook, and it is our responsibility to ensure that Giro is self-supporting and that the possibility of such default on its depositors and, therefore, on the taxpayers does not arise.
Clause 2 allows the Secretary of State to change from time to time the objectives which Giro has to meet. We sought in Committee to ensure that, where such different objectives were set, adequate opportunity would be presented to Parliament to discuss the change in directives and to ensure that they were proper. We regret that there is no procedure in Clause 2 for parliamentary scrutiny of changing directives or the initiation of new ones, although we have received some assurances that the Minister would make Parliament aware of such changes and would announce them to it in the usual way.
That assurance is inadequate. I would prefer the introduction of an Order whereby such changes in directive could be discussed. At least we should have an undertaking that any changes in objectives which Giro will seek to meet will be the subject of a paper to be laid before Parliament.
I ask how the financial objectives of Giro relate to those of the Trustee Savings Banks and the other banking activities of the public sector—the national savings movement and the Post Office Savings Bank. These can properly be regarded also as part of the public sector banking services, although they offer rather differing services. It would be interesting to know the basis on which the financial objectives for each of them have been set and whether Giro matches them.
It is immensely important that a bank should make adequate retentions out of its earning and profits to ensure that its capital structure keeps up the standards required by the Bank of England. We have explained that this is not necessarily the case with Giro, as the resources of the Post Office and, in the last resort, 457 the Government will stand behind it. If that is so, one questions why any capital reconstruction is necessary, and why any financial objective is being set. It is important that Giro should make adequate retentions, but the financial objective may therefore conflict with the requirement to pay increasing dividends under Clause 3. What solution is to be provided to this conflict?
We have received inadequate assurances in Committee that the basis on which this important financial objective for Giro was set was adequate. I believe that a return on gross assets employed, or on turnover, would be far more meaningful as a guideline and objective. I hope that the Minister will put his mind to that. In the absence of such reassurance, I hope that my right hon. and hon. Friends will press this matter, but first it is proper to hear what the hon. Gentleman has to say.
§ Mr. Parkinson
When one reads Clause 2, one is left with the reassuring feeling that Giro is to be set very businesslike targets. The Secretary of State is to talk to the Post Office and the Treasury and then fix a level of return on the capital employed. We have been told also that the rate of return has been roughly agreed at about 12½ per cent. on public dividend capital, and that Mr. Singer and his colleagues running Giro will do their duty. That sounds brisk and businesslike, and one may well wonder why, in the circumstances, we have moved an amendment to delete Clause 2, because on the surface it appears to be a perfectly businesslike and sensible clause.
I must admit that I would be horrified if we allowed the Bill to go through without some clause setting commercial objectives for Giro. This is, therefore, a probing amendment. We are not seeking to denude the Bill of the financial protection of Clause 2.
In the normal way, the essence of a bank is that it must build up its reserves, that it must make provision against all known contingencies, and that it must have substantial reserves of its own. Very few banks would consider paying a dividend if they had a huge accumulated deficit on their profit and loss account, or if they were making a very small profit at the time. Thus, Clause 2, which appears to be so businesslike, is based on the 458 fallacy that the Giro services are now solvent.
Giro is to have a public dividend capital of £13 million and the balance of the capital will be a loan. But we know already that writing off £16.7 million of accumulated loss will still leave a loss of £16.7 million, so the public dividend capital of £13 million does not, in tact, exist. It has already been lost. So has another £3.7 million of the loan from the National Loan Fund. Therefore, we start straight away by saying that Giro will prove how businesslike it is by agreeing to pay a rate of return on its dividend capital of 12½ per cent.
However, we know that that dividend capital does not exist. It has been lost and is merely an entry in a book. Therefore, Giro, in its very first action to prove how businesslike it is, agrees to pay a rate of return of 12½ per cent. on some non-existent capital.
We immediately wonder how we can take seriously Ministers who represent the Secretary of State and those who represent the Post Office who have agreed to set targets which are totally unbusinesslike. Yet we are told that because the clause exists the taxpayers will get more protection and that Giro will operate on a businesslike basis.
However, no sensible business man would ever have made an arrangement to pay a rate of return of 12½per cent. on capital that has already been lost before he agreed to start rebuilding those reserves. First, the management of Giro should not go to the Department of Trade and Industry and agree to pay 12½ per cent. on some non-existent capital. They should come to the House and agree that they will make every effort to rebuild their capital and to wipe out their losses. The very fact that the Minister is able to tell us that Mr. Singer and his management have accepted the absurd objective of paying dividends on non-existent capital makes one wonder just how seriously we can take the safeguards which are supposed to be built into the clause.
Giro's first duty should be to recoup the £17 million which it has already lost. It should not be expected to pay any dividend of any kind until that £16.7 million, to be precise, is totally obliterated and until instead of a deficit we have at 459 least the restored position in which Giro's capital has been recouped.
Our reason for moving this amendment and for having doubts about this clause is that although the clause looks brisk and businesslike, the Secretary of State and, I am sorry to say, the Post Office have already proved how unbusinesslike they are by agreeing to an arrangement which is total commercial nonsense—in other words, the arrangement to pay dividends on non-existent capital. Simply because there is an entry in the books which is called "public dividend capital" does not mean that one has capital. If one's losses exceed one's capital, it is gone.
I hope that Mr. Singer will read the report of our debates. He should go back to the Department and say "I made a mistake. It is a raging nonsense for me to agree to pay a dividend on capital which no longer exists. You are saddling me and Giro with a great burden of debt, even though you have written off £16.7 million. The other £16.7 million is still like a great stone around my neck. I shall prove just how businesslike I am. My objective will be nothing to do with return on public dividend capital—it will be to recoup those losses which Giro has made to date. When I have done that I shall come back to you, Mr. Secretary of State, and discuss what sort of return you should have on the capital which will then come back into existence."
We view Clause 2 with a certain amount of alarm. It looks sensible and businesslike but the way in which the Minister has told us that it will operate is exactly the opposite of being sensible and businesslike. We tabled this amendment to give us the chance to express our concern about the approach to date of the three bodies named in the Bill, which are supposed to safeguard the taxpayers' interests.
§ Sir George Young
I, too, wish to speak in support of Amendment No. 3, which seeks to delete Clause 2 from the Bill. It might appear strange for me to do that because that clause has already been improved by the only Opposition amendment which we were able to persuade the Committee to accept, which deleted a few words.
460 This is a probing amendment to see whether we cannot at this late stage encourage the Government to stiffen the financial objectives facing Giro. The Minister outlined those financial objectives in the Second Reading debate and he reaffirmed them in Committee when he said:The financial objective is that over the three years 1975–76 to 1977–78 Giro will, after paying interest on its remaining loan capital, earn an average annual return of 12½ per cent. on its public dividend capital plus retained profits."—[Official Report. Standinq Committee B, 10th February 1976; c. 157.]In setting that target the Government were faced with a real dilemma. On the one hand Giro is a bank and the Minister has given assurances to the House on Second Reading thatCompetition with the banks will be fair."—[Official Report, 20th January 1976; Vol. 903. c. 1169.]I take that to mean that the Bank of England will expect Giro to have reserves which are equivalent to the reserves expected from a commercial bank undertaking the same scale of business and to adopt comparable ratios as the clearing banks so far as lending as a percentage of capital is concerned.
I totally reject the argument that the Financial Secretary sought to foist on the House that Giro has been different in the past. That was an argument for giving it a different code of conduct in the future, although the whole object of the Bill is to enable Giro to compete on equal terms with the clearing banks and to provide the same sort of business.
If Giro is to be a bank, quite clearly it has to build up its cash reserves quickly, together with its capital. As we made clear on several occasions in Committee, Giro is at present under-capitalised and technically insolvent. Therefore, as a bank, Giro requires very ambitious financial objectives in order to generate the funds which it needs to put it on a good banking basis. On the other hand, Giro is also a nationalised industry. The objectives of nationalised industries are traditionally expressed as a percentage return on capital. These objectives are set on a comparable basis to the return achieved in industry.
In setting a target for Giro the Government have decided that 12½ per cent. would be a fair objective. That is how they have attempted to resolve the 461 dilemma between setting Giro a target as a bank and setting it a target as a nationalised industry. In Committee the Minister said:The form of target chosen, that is a return on shareholders' capital, has similarities to the traditional basis adopted for nationalised industries of a return on net assets.Faced with that dilemma, the Government decided to reject the financial object and selected those appropriate for a bank and selected those appropriate for a nationalised industry. The Minister sought to defend this decision when he said:I question whether it is entirely fair to compare the performance of Giro, which is just taking its first tentative steps into banking, with the long-established banks with their large resources.That is the argument which the Financial Secretary also used earlier this evening. More worrying is what was also said by the Minister:We question the view that the principles to be applied by the Bank of England in assessing the adequacy of banks' capital are directly applicable to Giro as if it were an independent bank."—[Official Report, Standing Committee B, 10th February 1976; cc. 158–62.]In making that comment the Minister was, in part, withdrawing the assurance he gave us on Second Reading that competition with the banks would be fair. He seems to use the argument that Giro is somehow a special case and that the criteria which might apply to the clearing banks may not need to apply to Giro. It is difficult to say that Giro will compete fairly when it does not have to build up the same reserves and when it does not have to have the same capital ratio to its lending as the clearing banks.
A further complication was when the Minister said that it was not the reserves of Giro which were relevant but the reserves of the Post Office as a whole. If that is so, one wonders why there is any need to have any monetary control over Giro at all if it is absolutely clear that under no circumstances will the Government let the Post Office as a whole go bust.
I think that the Government are in a terrible muddle about the financial objectives. On the one hand, Giro is a bank, and must be treated like any other bank. On the other hand, it is not really a bank 462 but just a trading arm of the Post Office, with all the resources of the Post Office behind it. On yet another hand, it is a nationalised industry and must, therefore, have a profit target based on its net assets.
It is not clear what sort of bank the Government think that Giro is. The longer our Committee proceedings went on, the more confusion and difficulty many of us found in trying to identify what sort of animal Giro was and what sort of targets the Government were setting. The Government should rethink the financial objectives. My concern is that they are not high enough in that they will not allow Giro to generate the extra capital that it desperately needs if it is to be as well founded as I believe a clearing bank should be.
A totally arbitrary figure of 12½ per cent. has been plucked out of the air. It has been applied to an equally arbitrary figure—namely, the public dividend capital, which was a residual figure and the left-over after negotiations between the Treasury and the Post Office. We are left with this arbitrary return on an arbitrary figure as the financial objective for a bank. It is a totally unsatisfactory state of affairs.
Another complication to which I should like to refer relates to the obligation of the Post Office to meet its rate of return as that affects the price that it will have to charge. I raised this matter in Committee and asked the Minister whether the Post Office would have to increase the tariffs for Giro if it were to meet the new financial target. The Minister replied:This is a marketing decision influenced in part by competitive considerations. The objective is there to be met and if price rises are necessary for its achievement, they will have to be introduced—subject, of course, to the Price Code."—[Official Report, Standing Committee B, 10th February 1976; c. 158.]I am not sure that that is a satisfactory explanation. We know what the target now is and the Post Office should be able to work out whether it can meet this new target without changing its tariffs or whether it will have to change them. If a tariff change is necessary, may we be told whether it is in connection with the Price Code and what the impact on the Post Office's marketing of Giro might 463 be? If the financial objective is beyond the reach of the Post Office because the tariffs are in direct contravention of the Price Code, this puts another complexion on our debate about financial objectives.
In conclusion, I find the financial objectives to be a rather unhappy compromise. They do not fulfil the criteria of a bank, they may not relate to the marketing criteria of the Post Office, and they may conflict with the Price Code. Over the next few months, I hope that the Minister will have discussions with the Bank of England and other authorities involved to try to derive a more appropriate set of financial objectives for the Post Office, and will set out quite clearly on what basis the objectives have been arrived at and what the implications might be for Giro and, in particular, its tariffs.
§ Mr. Viggers
There is a passage in one of Shakespeare's plays in which I think Beatrice says to Benedick,I wonder that you will still be talking, signior Benedick; nobody marks you.I sometimes wonder whether we are being marked or noticed by anyone. We have had a passing visit from the Financial Secretary. I passed the Chancellor of the Exchequer outside the Chamber just now. I do not know whether the Financial Secretary has gone to help the Chancellor to look for people with "tiny little Chinese minds" in the corridors of power.
The capital base for Giro as projected is completely unrealistic. I have just looked at the Second Reading debate. I see that the Minister of State then said:In place of the existing capital, which consists entirely of long-term loans from the National Loans Fund, Giro's new capital of £25.8 million will be half in the form of public dividend capital and half in the form of National Loans Fund loans."—[Official Report, 20th January 1976; Vol. 903, c. 1170.]Therefore, it is quite obvious that the way in which the new capital has been worked out is that the Government have thought of a number and halved it.
The financial objectives of Giro will lead it into commercial fields and away from what could be loosely called the "public duty" sector. We know that the Chairman of the National Giro is a commercial man with a commercial background—and all credit to him that that should be so. However, the more he 464 seeks to enforce a high standard of financial objectives upon Giro, the more likely it is that he will be led into paths for Giro which are commercially profitable and which are not necessarily of public service to the country as a whole. The financial objectives are based on the return on a very artificial capital employed.
I think that we are entitled to broaden the question slightly and to ask what the purpose of the Bill is anyway. What is the overall objective? The Financial Secretary said that he was shocked by the exaggerated claims made about the Giro. However, it was not from the Opposition side of the House that it was said that,Giro Chief outlines the basis for massive State Bank.
§ Mr. Viggers
That was the Chairman of the National Giro. The Minister of State, who holds an office of Government, cannot bring a Bill before the House and deny a statement made by the head of the nationalised organisation concerned. The Minister cannot say that he is not responsible for the statement of the chairman of his own nationalised organisation.
§ Mr. Gregor Mackenzie
I have read with great care the remarks attributed to Mr. Singer in the newspapers. I am not certain whether his remarks were interpreted aright. All that I or any Minister can do in the House of Commons in this respect is to present a White Paper, which we have done. On Second Reading I made my comments on the situation. I do not think that the hon. Gentleman is being fair to me. The Government's objectives are quite clearly laid out in the White Paper and in the Bill that we are discussing. I cannot be responsible for remarks published in the newspapers—about which I am not certain, in any event.
§ Mr. Viggers
I disagree. That is not all that the Minister of State can do. He can do two things. The first is a narrow thing. He can say on behalf of the Government that he disowns the statementGiro Chief outlines the basis for massive State Bank.The Minister can deny that it is the Government's intention to set up a State bank the size of Barclays with overall assets of £7.4 billion. He can deny that if he 465 wishes, and can deny that it is the Government's objective. It would have saved us a lot of time in Committee if he had done it previously. I accept the Minister of State's statement that Mr. Singer has given his own personal view, but he is the Minister responsible.
The second thing that the Minister can do is to draw the teeth of the Bill. He can take from the Bill the wide, all-embracing powers that it currently contains and he can make it the kind of Bill that he says he wants. At present it is a very much wider Bill and it is a dangerous Bill. It is not good enough for the Minister personally to disown responsibility for such a wide Bill. It is at present the most wide-ranging Bill that one could conceivably imagine, giving the Government power, through Giro, to go into all areas of commercial banking.
With all respect to the Minister of State—and we of the Opposition do respect him—it simply is not good enough for him personally to disown responsibility, We are very apprehensive about the Bill. It has not been widely understood, I believe, among Ministers, and certainly not by the public at large. I am not reassured by the Minister's comments. We remain deeply apprehensive. The Minister ought to clarify his own views and those of the Government, or bring in a Minister from the Treasury who will listen to the debate and, perhaps, give an informed view.
We have a confused picture. We have a sort of bank that does not comply with Bank of England rulings. We have a thing which does not have a capital structure and which is quite inadequate. We are told that it is purely the banking arm of the Post Office.
Of course, we know why this monster is brought before us. We have been saved the words, but on probing I am sure that we should hear the usual parrot cry that this is featured in the Labour Party manifesto. It has been dressed up as if it is a bank but, in fact, it is not. Clause 2 is fairly businesslike but it is out of place. The objective should be to set up an efficient money transmission service by an extension of powers by means of a modest Bill. It would be logical to set a financial objective based on the turnover of the National Giro. The present objective is completely out of place.
466 Although this is a probing amendment, I feel that the Government should take proper note of it. The Government have not faced the problems that they are creating for themselves. The National Giro does not have a proper capital structure or the need to service one as would a proper bank. Normally if a bank were to shelter under the fatherly arm of a parent bank, as the Giro shelters under the fatherly arm of the Post Office, there would be some sort of guarantee charge levied by the parent on the subsidiary. There is no such charge in this case.
The Government do not seem to understand that they are creating an animal which will either have no staff or an extra 14 staff. We do not know whether the profit objective is based on an increase in staff. I am horrified to find that the Government do not know either.
§ Mr. Gregor Mackenzie
First, I want to clarify an issue that has been running through this debate and through many of our earlier deliberations. It is an issue that applies to the articles that I have read which appeared in The Guardian last week.
Should the Government at any stage wish to move in the way of having a massive State bank—we must be fair to Mr. Singer and acknowledge that that is not a quote but a comment by the journalist who wrote the article—the Bill would not be the appropriate vehicle. Members of Parliament would properly expect a Bill of quite a different nature to be brought before the House.
We put forward our proposals in the White Paper. We decided to produce the Bill because there had always been an element of doubt about what Giro actually meant. The hon. Member for Ealing, Acton (Sir G. Young) expressed his concern, but he will know from his previous experience that there was an element of doubt about the terms of the Giro banking operations. It was primarily because of that doubt that we introduced what we considered to be a clarifying clause. The clause sets the Bill in keeping with the rest of the 1969 Act.
I can assure Conservative Members that whenever a proposal comes from the Chairman of the Post Office Board and his colleagues it will be individually 467 and carefully scrutinised by the Department and by the appropriate monetary authorities. I am sure that the Chairman and his colleagues, including Mr. Singer, do not envisage that the Bill, on receiving Royal Assent, will suddenly explode into a massive State bank, or anything of that nature.
We see this undertaking as a modest banking enterprise which fulfils a useful function. That is a matter on which I thought we were all agreed. If there is any extension of the services provided by Giro they will have to come before Ministers, before the Treasury, and before the various monetary authorities.
§ Mr. Nelson
I appreciate that the Minister has sought to give some assurances, but will he say quite clearly whether he considers there are any limits on the size to which Giro may grow? Under the Bill it can continue accumulating deposits and taking business away from joint stock banks. There is no limit to the amount of business that it can accumulate. If the hon. Gentleman is assuring us that, if appropriate, another Bill will be brought forward, will he say when that will be done and whether an enabling Bill will be introduced?
§ Mr. Mackenzie
When referring to the newspaper article that referred to a joining of the national savings movement, Giro, the Paymaster-General's Office, and so forth, I said that the Bill was not the vehicle for anything of that sort. The hon. Gentleman seeks an assurance on how vast Giro will become. That is asking me to take on the role of a fortune-teller. I hope that Giro will succeed. I hope that it will meet with greater success than it did in its early stages. It would not be sensible for a Minister or anyone else to make guesstimates about Giro's position in five or 10 years' time. That will depend entirely on the support it receives from the general public. I hope that they will support it.
§ Mr. Tim Renton
The Minister has said that we are asking him to take on the role of fortune-teller. Surely that is not the case. We are asking him to do precisely the same exercise as Treasury Ministers did in relation to the Trustee Savings Banks. They came forward with their plans and told us the level of loans 468 or advances that we could expect in three years' time and four years' time. They said that they would represent under 1 per cent. of deposits, and later around 1 per cent. On that basis the Bill received support from all parties. It went through Committee quickly and easily. We are looking for a similar specific advance business programme. Surely the hon. Gentleman must have that information from Giro. Why is he not prepared to put it before the House?
§ Mr. Mackenzie
The hon. Gentleman and his hon. Friends keep trying to compare the Post Office with the Trustee Savings Banks. They are quite different animals. I think that this point was perfectly adequately dealt with by my hon. Friend the Financial Secretary.
Should we leave out Clause 2? That rather surprises me. Perhaps I take amendments too literally. It appears as though the enthusiasm of Conservative Members for preventing this Bill from becoming law means that they are prepared to relieve Giro of obligations that I am asked to impose in other contexts. It seems that they are saying that we should not have a financial target. That is what the amendment says. It may be tempting to accept the amendment, but I shall put Tory Members out of their misery and say that I cannot do so. A financial target for Giro is a proper concomitant of introducing PDC. We have discussed the issue in Committee. Without it there is a danger that by relieving Giro of interest obligations on National Loans Fund capital we would be giving it a soft option. I do not want to do this.
Tory Members when in Government saw public dividend capital as respectable when coupled with a financial objective. We could relieve the Secretary of State of his statutory obligations to set an objective and leave it to administrative initiative. That would be very much out of accord with the Opposition's views in other directions. There are precedents for legislative provisions on financial objectives, for example, with British Steel Corporation and British Airways. I cannot accept an amendment that simply wipes this clause from the Bill. We set Giro a demanding target. After negotiation it has been accepted. It is the 12½ per cent. that I mentioned in my Second Reading speech—the annual average 469 return of 12½ per cent. on the PDC and retained profits from 1975–78.
§ Mr. Parkinson
Will the Minister of State deal with the point I was making, which was that although we call this public dividend capital it no longer exists? The losses on Giro's books totally extinguish the public dividend capital. We say that it is in no way realistic to suggest that Giro will pay a dividend of £5 million over three years on public dividend capital when it has a huge accumulated loss. Giro would be better employed recouping its losses instead of entering into such agreements to pay dividends.
§ Mr. Mackenzie
The hon. Member knows that we have written off or are in the course of writing off part of this loss, and we have put the other part into public dividend capital. When the Conservatives were in Government they spoke fulsomely of the virtues of public dividend capital. The hon. Member for Henley (Mr. Heseltine) praised it when he was a Minister with aviation responsibilities.
Let me deal now with Amendment No. 4, which we are also considering. It would be a serious mistake to set a profit figure for Giro to attain year after year, as is suggested. We looked at this as a possible type of target, but dismissed it, largely because it would fail to take account of changes in the value of money. We agree with the Opposition that it is necessary to ensure that the objectives are high enough for Giro to make a profit. That does not mean that I can accept the amendment. It is unrealistic to invest with the full majesty of the law duties, obligations and requirements that are susceptible to external and unforeseeable influences. The furthest that nationalisation Acts have gone in this direction is in a requirement to balance the books, taking one year with another. After the write-off of losses coupled with the ability to provide a wider range of services, Giro is expected to be profitable, on the basis of detailed forecasts. We will do all that we can, fairly and without subsidy, to assist it. I do not feel, however, that I can accept the amendment.
The hon. Member for Mid-Sussex (Mr. Renton) raised the question of Giro's objective. This is expressed in terms of an average over the first three years. That 470 goes some way to meeting the hon. Gentleman's suggestion of a varying target. Apart from that, the objective will be regularly reviewed by the Department and the Treasury. Our aim will continue to be the setting of an objective which does not make life easy for anyone. I am sure that Giro wants to be set an objective that will stretch it.
The trading services of Giro have shown a steady improvement over the past four years. We must expect this to continue, combined with capital reconstruction. This should enable the target rate of return to be reached. The hon. Member also asked me to clarify the question of public sector manpower, as did the hon. Member for Ealing, Acton. I shall try to clarify what I said earlier. There was no intention on my part to mislead anyone.
There are no direct effects on the number of civil servants as a result of this measure. The implications for the Post Office as a public sector industry are difficult to quantify. I said that 14 additional staff were being taken on to operate the Giro personal loan scheme. Further increases in Post Office staff must be expected, commensurate with the growth of the scheme. I have emphasised the phased introduction of staff. I can give no numbers, nor details about types of staff, because this will be dependent on decisions taken by the monetary authorities.
I was also asked about balance sheet ratios and about the liabilities that Giro will have to its customers. The Financial Secretary dealt fairly fully with the question of capital adequacy. I went into the subject in detail in Committee. I remind hon. Members once again of the issues involved. The liability to Giro depositors is that of the Post Office as a whole. The hon. Member for Ealing, Acton made much of this, but with his considerable experience of the Post Office, he must know this to be so.
The security for account holders' deposits rests on the credit-worthiness of the whole Post Office whose reserves stand behind Giro. In this situation, we cannot apply the test of capital adequacy to the Giro balance sheet. The fact that the Post Office as a whole has an obligation to Giro depositors does not mean that Giro is given some kind of hidden subsidy. It was established, when 471 Giro achieved the first of the two targets set by previous administrations, that the Post Office is better off with Giro than without it.
Giro will not go in for speculation in property development, which has led to the establishment of lifeboats funds. Its investment will be limited to Government and local authority securities.
§ Mr. Tim Renton
The Minister of State has repeated the point made by the Financial Secretary to the Treasury in an earlier intervention, but the Financial Secretary was referring to the balance sheet of Giro as a money transmission organisation. We have referred to something very different—Giro's future balance sheet, as a banking organisation in competition with the clearing banks. Is the Minister of State prepared to assure us that Giro will continue to keep its assets in the same liquid form and ratios as they were at the end of March?
§ Mr. Mackenzie
The matters raised by the hon. Member are subject to constant consultation with Treasury Ministers, as I have said time and again. I can go no further than that. I have looked at the amendments with the greatest care. Perhaps I have taken them far too literally, but I do not feel that I can recommend them to the House.
§ Mr. Tim Renton
When the Minister of State waves his bat at the balls which we bowl, he either does so very successfully or seems to have totally failed to see the ball at all. That is why we do not get answers. The ball whizzes past, there is a noise, but the Minister of State wonders what has caused it. He has not seen the ball and he has not dealt with the points we put to him.
He tried to impale us on the obvious hook of suggesting that we wanted all financial objectives removed from Giro, but I dealt with this in my opening remarks and the point was covered much more adequately by my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson). We made it abundantly plain that we were seeking to draw out the Minister to tell us much more about Giro's objectives than we were told in Committee. That is the point at which he flashed his bat. Perhaps the ball has gone to the leg boundary, but I have 472 not seen it. We had no reaction from the Minister at all.
§ Mr. Gregor Mackenzie
If an amendment is put on the Order Paper, the Minister who has to reply must assume that it is what the Opposition mean. I prepared my notes on that basis. It is all very well the Opposition now saying they put down an amendment but did not mean it. It is credited to them on the Order Paper.
§ Mr. Renton
I am surprised at the hon. Gentleman. He has a great deal more experience of the procedure of the House than I, but surely he has heard of a probing amendment? With his deep psychological insight, I thought he might have seen what was behind the amendment, and in his wish to approach it in a non-partisan spirit he might have dealt with our points more adequately.
He said that writing off all the losses, which he had thought of doing, would have given Giro a soft option. However, we believe—and I think that in his heart of hearts the Minister shares this belief—that we have arrived at a compromise structure which does not suit anyone. It does not give Giro an adequate banking balance sheet, but sets it some almost impossible targets. How is it to meet the 12½ per cent. return on capital and how can the figure of 20 per cent. be achieved? None of these matters was dealt with by the Minister of State.
As my hon. Friend the Member for Gosport (Mr. Viggers) said in his brief and telling speech, what appears to have happened is that the experts sat down with their slide rules but were unable to come up with the answers. Consequently, they cut the losses in two, wrote off half and made the other half public dividend capital. However, they were probably a little more sophisticated than that. Writing off more than 50 per cent. of the losses would have been embarrassing. So slightly less than half were written off. The amount to be converted into PDC is slightly more than the outstanding loans. I suspect this was done for largely cosmetic reasons. Nothing leads me to believe it has been properly thought out. Giro is to become a bank without an adequate banking balance sheet and with targets which are not likely to be achieved.
473 The Post Office would be far better employed using its manifold talents to improve the letter service, to ensure that mail gets to business and private users more efficiently and to ensure that the telephones work, rather than going into banking in this unplanned and disorganised way.
The Minister of State has still not told us whether the objectives set for Giro are comparable with the Price Code. Nor did he deal with our point that Giro will be a new animal, pulled in different directions by different Government Departments. It reminds me of that strange animal created by Dr. Doolittle the "Pushmi-Pulyu" which, from the drawings in the Dr. Dolittle books, always seemed to be a very uncomfortable animal. Like Janus, it had to face in two directions at once and that is what will happen to Giro.
The Treasury will exercise credit control and monetary restraint and will put strict limits—which we shall probably never hear about—on Giro's expansion, while the managing directors of the Post Office and Giro, together with the Department of Industry, will be saying that Giro should lend more because it has to make a profit to justify its new activities. The new banking division of Giro will be put in an extremely difficult position.
My hon. Friend the Member for Hertfordshire, South said that the first duty of Giro should be to recoup the millions that Giro has lost over the years, and that Giro should forget any notion of paying dividend. I suspect that my hon. Friend, with that generosity to the nationalised industries for which he is well known, has been over-optimistic. On a fairly simple reckoning it would take Giro at least 20 years at its initial profit targets to make back the losses of the past few years. If interest is added to the losses it becomes an impossible task.
My hon. Friend the Member for Hertfordshire, South also raised in detail the definition of public dividend capital. He said that it was perfectly reasonable to start off an enterprise with a balance sheet composed in part of loans that carry interest and in part of equity capital that does not carry interest but that will share in the profits of the business when profits are made.
474 That, surely, is the proper definition of public dividend capital. That is a far cry from dignifying the writing off of losses with the name of public dividend capital. That is a balance sheet nonsense. We are saying "Now you see it, now you do not; you had a loss, but you no longer have a loss; it has become equity capital". That makes chaos out of the basis on which public dividend capital was originally started and on which it should be made available in future to nationalised industries.
My hon. Friend the Member for Ealing, Acton (Sir G. Young) asked what sort of animal was Giro. He asked whether it was a nationalised industry, a bank or a trading division of the Post Office. He rightly fears that it will fall between all three stools. I regret that in answering the debate on the amendment and in other full debates on Giro the Minister of State has been unable to come forward with some straightforward objectives for Giro.
When Giro gets going as a bank it should come forward and say openly that the following four standards will be achieved: unfair competition will not take place; management performance will be capable of realistic assessment by Ministers and, through them, by the House; the banking relationship with the rest of the public sector will be assessed and criticised and it, too, will be on a fair basis; and normal prudential oversight of Giro will be conducted and available at all times. Without those four standards Giro will not meet the expectations of the Minister and the Post Office.
What a contrast to the debates on the Trustee Savings Bank has been our debate on the amendment. The Minister of State has periodically told us not to compare the two, but it is difficult not to do so when both Giro and the Trustee Savings Bank are being encouraged at the same time to go into banking. In speaking of the Trustee Savings Bank Treasury Ministers emphasised the note of controlled and careful growth. The Minister of State used the words "modest growth", but he has not been prepared to quantify that. In moving the amendment I sought for just that quantification.
The Trustee Savings Bank came forward with forecasts of growth of loans over the next four years. We have had 475 nothing of that kind from Giro through the Minister. The scope of Giro to grow is infinitely greater than that of the Trustee Savings Bank. The Trustee Savings Bank has only 1,500 branch offices and approximately 450 chequeing accounts per branch. The Post Office has 21,000 branches—approximately 15 times as many as the TSB—and everyone is a customer of the Post Office.
If every branch of the Post Office were in due course to have the same number of Giro accounts as there are chequeing accounts with every banch of the TSB at present, and if every one of those Giro accounts were to have an overdraft or a personal loan of £500—which is the average figure for personal loans in Giro—the amount of money lent by Giro would be £4,725 million. Once it is known that personal loans and overdrafts are available, it is not difficult to envisage Giro having an overwhelming demand for such facilities which could quickly escalate into billions.
§ Mr. Gregor Mackenzie indicated dissent.
§ Mr. Renton
The Minister shakes his head, but until he tells us the target we must follow on to these conclusions.
My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) spoke of the potential danger of this expansion of Giro to the money supply. The potential danger lies not to the money supply but to domestic credit expansion, which is the figure emphasised by the Chancellor of the Exchequer in his letter of application to the International Monetary Fund. Domestic credit should be controlled, but Giro could become the instrument for doing the opposite.
We fear that Giro through poor management and lack of targets could become the London and County of tomorrow. There are to be inexperienced people—with no addition to the staff—pushing out loans and overdrafts through 21,000 branches. I make no imputation about the honesty and integrity of those people, but there is no easier way of losing money than to have inexperienced people who do not know the business making loans and overdrafts available on an uncontrolled basis.
476 Against that background it is nonsense to attempt to produce an additional profit for Giro by grafting on to a computerised money transmission system wide powers of commercial banking with all the inherent risks that go with it.
§ Mr. Gregor Mackenzie
I have said time and again, in Committee and in the House, that when any move is made to expand Giro's services it will be subject to the stringent scrutiny of the monetary authorities—and the hon. Gentleman knows much more about that than I do.
§ Mr. Renton
The Minister of State, in saying very politely that I know more about these matters than he does, reminds me that at the outset of the proceedings I failed to declare an interest as a director of a bank whose activities are almost all in overseas banking. I do not think that we are a competitor of Giro, and I have declared my interest both on Second Reading and in Committee. I apologise for not having declared it again at the beginning of the debate. I must have been carried away by my eloquence in moving the first amendment.
The Minister of State tells us, as he has previously, that any expansion by Giro will be subject to stringent control by the monetary authorities. Why, then, does he not wait until the new supervisory legislation is available, and until the White Paper about the supervision of the banks being prepared by the Treasury, is to hand? Then we could see into what framework Giro will have to fit, who its bosses are to be, and we could accept with much greater readiness the assurances given by the Minister of State.
I do not propose to suggest to my hon. Friends that we vote for the removal of the clause, and I should like, therefore, to ask permission of the House to withdraw the amendment. I shall do so more in sorrow than in anger. We have not had our questions answered. Objectives have not been defined. I have no doubt that in a few years' time we shall be debating how to write off the losses which will have been incurred by the banking division of the Post Office.
I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.