HC Deb 23 January 1976 vol 903 cc1773-84

3.29 p.m.

Mr. Ian Wrigglesworth (Thornaby)

I beg to move, That this House, noting the increasing responsibilities and functions being undertaken by the Bank of England, its dominant position in the City and its substantial influence on the country's monetary system and financial service industries as adviser to the Government, guardian of the financial system and spokesman for the City, considers that it is an impediment to closer relations and better understanding between the different financial service industries and Government, trade unions, and employers' organisations and that its activities should be more open and its operations more publicly accountable than at present. I am grateful for the opportunity to ask some questions about the Old Lady of Threadneedle Street shortly before the Select Committee on Nationalised Industries begins its investigation in a follow-up to the substantial inquiry into the Bank's activities in 1969 and 1970. I was pleased to hear that this further investigation was to be made, although I do not think that two inquiries by a Committee of the House each decade constitutes a sufficient degree of public accountability. I hope that some of the questions which will be raised in this short debate will be considered at great length by the Select Committee.

The Bank of England was established in 1694 by Act of Parliament and by Royal Charter. It is a typically British institution—aloof, distant, slightly disdainful. It pervades the whole fabric of the City and our financial services, and its authority relies as much on its history, its reputation, and its standing as upon statute and regulation.

The Bank's activities are carried out with discretion, always quietly, usually behind locked or closed doors, and in some cases with unnecessary secretiveness. It acts as agent and adviser to the Government, as an arm of Government as central banker, as a banker in its own right, as a guardian of the financial system, and as a spokesman for the City.

Today I want to draw the attention of the House to the last two of these questions. I do not think that anyone will want seriously to challenge the Bank's rôle and considerable expertise in exchange control, in note issue, in foreign exchange, on the currency market, or in managing the national debt.

Much has changed in the banking world since I studied after leaving school for my Institute of Bankers examination in my constituency of Middlesbrough. Indeed, the pace of change in the past five years, since the last Select Committee Report, has probably been more rapid than at any other time in banking history.

Of course, change continues apace. However, the basis of the Bank's role as supervisor and as spokesman remains the same as it was five years ago. It was described very clearly in the Bank's own evidence to the Select Committee, when it said that The Bank of England have in their own right no statutory power of control over financial and other institutions in the UK. … The Bank's … concern … is for the financial soundness of the British and foreign banks operating in the United Kingdom and the proper conduct of their activities. The Bank's ability to discharge their responsibility rests largely upon the spirit of co-operation and the vital importance attached by all concerned to the maintenance of good order, and the great reluctance of the banks operating in the UK to incur criticism or displeasure from the Bank of England. Considering that all those banks in fact bank at the Bank of England and rely upon its approval to operate in the foreign exchanges and in a number of other spheres, that is not surprising, quite apart also from the so far unused powers to issue directives under Section 4 of the Bank of England Act. There are very few customers who would like to incur the wrath of their bank manager, even the banks themselves.

The basis of the Bank's rôle as spokesman was described in this way in its evidence: The Bank rely wholly on seeking the voluntary co-operation of the institutions concerned. … This co-operation probably owes something to the rôle which the Bank have developed as acting as spokesman for the financial system in discussions with Whitehall. While it is open to any part of the system to approach Government direct, institutions or associations often prefer to approach the Bank first in order to persuade them to adopt the particular course which it is desired to advance. One cannot help but feel that behind those words lies the haughty disapproval of the Governor should anybody deign to approach Whitehall or Westminster—particularly, I suppose, the Treasury—without prior consultation.

Let me look a little further at the Bank's rôle as spokesman. It has developed considerably in the past two years. The City Liaison Committee under the Bank's auspices has existed since 1965. It has representatives of the Accepting Houses Committee, the Baltic Exchange, the British Bankers Association, the British Insurance Association, the Committee on Invisible Exports, the Finance Houses Association, the Issuing Houses Association, and a number of other bodies from the City. Then there is the City European Economic Community Liaison Group, with slightly broader membership, which seeks to provide a focal point for liaison and information on EEC matters and to keep a watching brief on all EEC proposals which have an impact on City interests. It maintains communications with both the Commission in Brussels and with Whitehall.

Then there are a number of smaller groups run by the Bank on which, in its words, City experts sit in a personal capacity. There are the City Taxation Committee, the City Telecommunications Committee with two working parties, the City Company Law Committee, the City Capital Markets Committee and the City Publicity and Public Relations Committee. I am pleased that the work of these committees has led to a useful number of reports being published, but I question whether the Bank of England should be organising them.

The last annual report of the Bank notes that The Bank provide secretarial services to all these committees as well as the Committee on Invisible Exports) and ensure, where necessary, effective co-ordination and liaison between them. It also notes that The formation and work of these bodies have demonstrated afresh the City's flexibility and capacity for collective thinking. The Bank should drop its rôle as spokesman of the City. I do not think it should try to be both poacher and gamekeeper. I should be interested to know whether the Minister can tell us how much it costs the Bank to carry out this rôole and to service these com- mittees. I do not think the money for this purpose should come from the Bank. The City should pay for and organise and control its own representative body. Why is it that the financial services industry should be so different from any other industry in the country? The Government and Members of this House receive representations from self-governing bodies organised on a federal or direct membership basis on all sorts of different industries and professions. I see no reason why the financial services industry should not do the same. This might show the City's flexibility and capacity in a much better light than the present system does.

There is evidence to show that the present system does not provide the best advocacy of views and that the rôle which the Bank plays inhibits closer understanding between Government Departments and other important bodies and the various City institutions. The City is too often regarded as being one big monolithic body. It consists, in reality, of many diverse and dissimilar industries such as insurance, banking, commodity broking, shipbroking and so on. Each of these has its own view and usually its own representative body. It is increasingly important that these individual views, and common views, are clearly expressed.

In the last few years there have been increasing Government intervention and increasing discussions and consultations on the economy and about the need for greater investment in industry. The various financial service industries have played a very muted part in all these discussions and consultations, despite their deep involvement and experience at the heart of these problems. Nor have they always been adequately consulted by the Government and other bodies on matters directly affecting them, such as the Consumer Credit Act 1974. In my view, this is because they have not got adequate representative machinery. The appointment of an industrial adviser to the Bank is a totally inadequate response to the need, and, with respect to Sir Henry Benson, who has had a distinguished career, I should have thought that somebody with a strong industrial background would be a better choice.

The establishment by the NEDC last December of a working party to look at the funding of industrial investment is another response to the need, and the City is well represented on that body. I am not sure why the Bank of England is sharing in the servicing of it, though. However, I think it is most unfortunate that the NEDC has not had a "little Neddy" I think it is most unfortunate long before now, and I hope the Chancellor and his colleagues in the NEDC will think about it again. What is really needed is a representative body run by and paid for by the financial services industry itself—a truly independent body which speaks loud and clear for the common interests of the financial services industry, and provides a framework for co-operation and consultation.

As the Inter-Bank Research Organisation's Report, prepared in 1973 for the Cabinet Office, pointed out: There is no confederation of British financial institutions". It went on to say that: many people in the City and in Whitehall appear to doubt whether it is realistic to expect the Bank of England to continue to act as the main channel of communication between the two. The Bank is an agency of government, and is responsible for controls over financial institutions; it must, therefore, be inhibited from representing their interests forcefully to the Government, espcially in potentially embarrassing circumstances … Moreover, the Bank staff cannot be expected to specialise in all the complex technical questions about taxation, insurance, company law, and a multitude of other topics, which will be raised as European harmonisation proceeds and on which close consultations between Whitehall and the City will be needed. If the Bank tried to handle all these questions it could become a barrier to communications —which is what I am saying— rather than a channel of communication. There is another defect mentioned in the Inter-Bank Research Organisation's Report, that Partly owing to the United Kingdom's market-oriented financial system, in which the City and the Government have tended to deal with each other at arm's length, and partly owing to the arrangement whereby the main channel of communication has been through the Bank of England, few people at the working level in Whitehall and the City know one another or have much insight into one another's work. Matters have improved in recent years, with one or two exchanges of staff and some increase in social contact. But these are not enough to solve the problem". With that also I wholeheartedly agree.

The Report said further: Whitehall officials from three different Departments have told us that they would welcome initiatives from the City … But many City people are not in close enough contact with government to know what kind of proposals might be feasible and how to present them in a manner which would enable Whitehall officials to deal with them constructively. "Conversely", say the people carrying out the study, we met several people in the City who have genuinely felt that if only they could have been consulted about the practical effects of decisions made in the Treasury or the DTI, they could have helped the officials concerned to make better decisions. But those officials do not know whom to consult or, quite possibly, what questions to ask. And there is no focal point in the City to which they can easily go to find out. Thus, the prior conditions for a useful dialogue are lacking. The arm's length relationship prevails. All that confirms my own experience in the City and what I hear from colleagues in the Labour Economic, Finance and Taxation Association, of which I have the honour to be Secretary; and it applies as much to relations with the TUC, the CBI and their affiliates and various other bodies as to relations between the City and the Government.

I now turn to the Bank's rôle as the guardian of the financial system. Here again, there have been many major developments affecting this role in the past five years—the development of the competition and credit control policy and the consequent lifeboat operation to rescue ailing firms after December 1973, the growth of the Eurodollar and certificate of deposit markets, the tremendous task of handling the oil revenues, proposals for company law reform, for consumer credit control, for new regulations for the securities market and, shortly, for the licensing of banks. Clearly, one must question whether the supervisory functions of the Bank of England should continue to be exercised by the Bank, and whether they should be added to in the way that has been suggested.

From time to time, people have proposed that an independent Securities and Exchange Commission type of body should be established. For my part, I take the view that the Bank is probably the right body to exercise existing and new supervisory functions, but only provided that it drops the rôle as spokesman of the City, becoming solely a gamekeeper, and provided that there is much more accountability for these functions to the House of Commons through Ministers. There may, indeed, be a case for reconstituting the Bank, or this particular part of its work, in a constitutional way similar to that adopted for the Board of Inland Revenue. The present system contrasts vividly with the accountability of the Department of Trade through the Secretary of State, a Department which also has a substantial responsibility for supervising City institutions.

It is remarkable, is it not, that the Chancellor of the Exchequer has to come to this House to pass a Bill or lay an Order when he wishes to change taxation in any way or to use the regulator, but the Bank of England can take in special deposits, make quantitative or qualitative controls on credit, or make radical and far-reaching changes in the whole of our monetary system by introducing a policy such as the competition and credit control policy without anyone coming to this House at all?

I do not deny that the Bank now tells the world more about its affairs than it ever did before the Radcliffe inquiry into the country's monetary system and the Select Committee's Report, although I should be grateful if the Minister could explain why the Quarterly Bulletin, which began after the Radcliffe recommendations, reproduce in toto virtually all the statistics published in the Central Statistical Office's Monthly Volume of Financial Statistics. This seems to me a quite unnecessary duplication and expense, and I would like to see it stopped.

The Bank appears to employ more economists than the Treasury does. Its staff has grown from 4,500 in 1970 to nearly 8.000 in 1975. Could my hon. Friend comment on that?

I believe that a considerable degree of frustration has been felt by hon. Members on both sides of the House at their inability to question and meaningfully discuss a number of major activities in which the Bank has been involved in recent years—such matters as the establishment of Finance for Industry in November 1973, in which the Bank took 15 per cent. stake in the capital, the rescue of Burmah Oil in December 1974, when the Bank gave assistance by taking BP stock from Burmah, on which I think it has made a substantial profit, and the controversial proposals for an equity bank which are now being considered.

I am not concerned with smaller issues such as the reported prominent role which the Bank played this week in getting a settlement between two well-known City concerns in order to avoid a major public dispute, although, when reading such reports, one wonders at times where the Bank considers its duty towards the system to end.

By far the most important issue in recent years has been the introduction and unlamented demise of the competition and credit control policy and the lifeboat operation which followed. In one respect, the Bank has reaped the just reward of its folly over that control by having to organise the clearing up of the mess afterwards, although the £.9.8 million provision for losses on the operation, detected in the 1974–75 accounts, makes it clear that the cost of the folly is to be borne by us all as well as by the organisations and banks affected. In addition to that, we have had to withstand the disastrous economic and social impact of the policy.

We are told that anything up to £l½, billion has to be found to protect secondary banks and other organisations being supported by the lifeboat committee under the chairmanship of the Deputy Governor of the Bank of England. We can understand the need to sustain confidence in the financial system, but if steps are being taken to ensure that the same sort of disaster does not befall the banks and the financial system again, while at the same time ensuring the continual development of competition in banking, there must be much more public discussion of the issues. That cannot take place unless many more facts are known than are published at present.

If the new potential regulations for banks, with an EEC-type bank licensing system, are to be administered here, the Bank of England's activities must be made known far more than they are to this House. Before the White Paper outlining the proposals is published, I hope that the Ministers at the Treasury and the Department of Trade will give very careful consideration to the ways in which this can be made possible.

I am most grateful to have had an opportunity of raising these matters. On Tuesday we debated the Post Office's banking services and we shall shortly be having a debate on the Bill dealing with the Trustee Savings Bank. This is another indication of the pace of change in the banking industry in which the Bank of England plays such an important role. It is right, if the role is changing and the demands upon the banking and financial services industry are so much greater, that this House should consider this issue with great care because of the enormous impact it makes upon the economy and all of our lives.

3.50 p.m.

Mr. David Howell (Guildford)

The hon. Member for Thornaby (Mr. Wriggles-worth has made a great many valid points, which we do not now have the time to debate. I concur with the general direction of his conclusions. In particular, there is the proposition that there should be a wider public debate about the monetary and financial implications of public policy, especially the public expenditure aspects of public policy.

The hon. Member's analysis was a shade on the narrow side for me. I believe that he placed a little too much faith in representative machinery. In his motion he talks about: Government, trade unions, and employers' organisations". He seems not to believe as strongly as I do that there are vast other areas of the economy which make our nation tick and which should come into the act a good deal more than they do. The 10 million people employed in privately-owned businesses are an obvious example.

I query some of the hon. Member's more stringent conclusions and his call for this and that kind of representative machinery. I do, however, support the general proposition that there should be a wider, more public and parliamentary analysis of the monetary implications, particularly of public expenditure and fiscal decisions. We have a good analysis, nowadays, of the resource implications of public expenditure, and no doubt the forthcoming Public Expenditure White Paper will repeat that.

There is a fine debate going on about the structure implications of public expenditure and the drain-off of resources and demand power into the public sector. I know that we are still far from satisfied about the monetary, Government debt and interest-rate implications of public expenditure. A stronger and more open voice from the City—perhaps this is a case for strengthening rather than weakening the Bank of England—in the general public debate on our economic policy would do nothing but good.

There is no time to say more. I offer my support for any enlargement we can devise of public and political understanding of the monetary implications of public finance. We all stand to gain, City, public policy-makers, Governments and Opposition, if we can achieve something of this kind.

3.54 p.m.

The Minister of State, Treasury (Mr. Denzil Davies)

In the time that is available, my hon. Friend the Member for Thornaby (Mr. Wrigglesworth) will not expect me to comment profoundly on the many areas over which he has ranged in his speech. We are grateful to him for tabling this motion. It is a preliminary to the re-examination by the Select Committee—we hope early next month—of the Bank's role. I have no doubt that the Select Committee will wish to probe more deeply and to follow some of the suggestions my hon. Friend has made. For that reason, too, I welcome his intervention.

The first of the two main themes in my hon. Friend's speech was that the Bank should not act as the spokesman for the City. The Bank would deny that it was formally a spokesman for the City. On the other hand, I think we must concede that it is to a large extent a spokesman in the sense that it is, informally and in practice, the main body that channels much of City thought to the Government. It is not the only body that channels City thought and comment on Government legislation to the Government. Some of the institutions deal directly with the Government.

The insurance industry, for instance, has a fairly long history of consulting directly with Whitehall. My hon. Friend mentioned the consumer credit legislation. I understand that the industry was consulted widely on this legislation and on the legislation affecting social security pensions.

Possibly the pensions industry is not directly consulted so often. I understand that the reason for that is that it is not perhaps as coherent a body as the insurance industry. It was not consulted on the consumer credit legislation because it was felt by the Department of Prices and Consumer Protection that its legislation did not affect the pensions industry. The Committee of London Clearing Banks is consulted by Whitehall, and in turn consults Whitehall, on legislation, and I understand that it was consulted on the consumer credit legislation.

However, I take my hon. Friend's point that often there is difficulty in knowing what body to go to, and there may well be a case for bringing together these diverse bodies to improve the channels of communication between the City institutions and the Government.

My hon. Friend referred, as did the hon. Member for Guildford (Mr. Howell), to the question of financial and monetary policy. The hon. Member for Guildford even mentioned fiscal policy. By discussing financial and monetary policy, we move into a different field from the matter of the Bank acting in a mechanistic capacity in relation to the supervision of City institutions.

I disagree to some extent with my hon. Friend when he says that there is no accountability to the House of Commons over these financial matters, but in this area the Bank does not operate as an independent body. It merely advises the Treasury, just as the Treasury receives advice from other quarters. There is accountability to the House by Treasury Ministers and the Government. I should not have thought that my hon. Friend wished the Bank to become more independent in these areas because then accountability to Parliament would be reduced. I do not think that we want to see in this country the situation which obtains in the United States where the Federal Reserve Bank constitutionally is different from the Bank of England and where perhaps accountability is exercised differently.

There is accountability to Parliament over financial and monetary matters, as Treasury Ministers learn early in their careers at Question Time and in debates. That is the right way to deal with the matter. Perhaps we should debate such matters more often and probe further into Government monetary and financial policy—I do not deny that—but it cannot be said that the Bank is not accountable and should be accountable, because it is not an independent arm of the Government. It merely advises the Government on financial and monetary matters, and I would prefer to see that situation remain.

My hon. Friend asked a number of detailed questions and, in view of the time available, I hope that he will bear with me if the answers are not as detailed as the questions. He pointed to the increase in the Bank's staff which occurred between 1970 and 1975. He said that the increase was from 4,500 to 9,000. I do not want to question his figures. I am sure that they are reasonably accurate. My note states that there are 7,000 full-time staff and 800 part-time staff. But no doubt there has been an increase in staff. I do not know the exact reason for it, but I shall write to my hon. Friend and endeavour to explain, I hope to his satisfaction, the reason. If the Bank were to operate in the way advocated by my hon. Friend it might lead to a further increase.

My hon. Friend also dealt with the question of the cost of monitoring City liaison committees. My answer on this will be even less forthcoming than my previous answer. I am told, in a splendid Bank-type answer, that the cost is negligible. I cannot take the matter any further at the moment.

Finally, my hon. Friend referred to the dupliction of CSO financial statistics and those in the Bank of England Quarterly Bulletin—

It being Four o'clock, the debate stood adjourned.