HC Deb 14 February 1979 vol 962 cc1216-26
Mr. John Moore

I beg to move amendment no. 14, in page 26, line 42, leave out "£5,000" and insert "£2,500".

The amendment raises an important issue which we discussed in Committee. For those who were not privileged to serve on the Committee, may I say that the amendment relates to the minimum initial contribution and proposes that it should be reduced to £2,500 for institutions.

Despite the extremely co-operative attitude of the Minister of State throughout the Committee proceedings, this is one area in which no answers were given to the case made by many of my hon. Friends on behalf of smaller institutions. I shall reiterate briefly the arguments that we advanced in Committee, because we have not yet had rejoinders to them.

The evidence of the Consumer Credit Trade Association was the basis for some of the points that we made. I accept that there is a great deal of doubt about the number of institutions covered by the association that would come within the purview of the legislation, but that does not alter the fact that many similar small institutions may be hurt.

We were told by the association that it had about 560 finance house members and that 150 of those took deposits. We are not sure how many of those 150 come within the purview of the legislation, but, if we extend those figures and take into account the institutions that are not members of the association, we could suggest that there may be as many as 440 such finance houses taking deposits. That is a substantial number. There may be other small institutions that we do not know about, and I know that some of my hon. Friends wish to raise issues concerning particular small institutions.

The association's survey showed that 39 of the 150 deposit-taking members had deposits of less than £10,000 each. The suggested minimum initial contribution would be the equivalent of 50 per cent. of their deposit base. Another 25 institutions had a deposit base of less than £20,000 each and the minimum initial contribution would represent about 25 per cent. of their deposit base. An additional 20 institutions had deposits of less than £50.000 and the minimum initial contribution would be the equivalent of about 10 per cent. of their deposit base.

For a substantial proportion of those institutions the proposed miniumum initial contribution would be a significant percentage of their overall deposit base. It would be an absurdly high proportion. It is relevant to remind the House of the key thrust of the nature of the fund and the character of the legislation that we are discussing.

The legislation seeks to protect depositors. In Committee, we began to see, when we considered the character of the initial contribution and, particularly, its impact on small institutions, a confusion in the Government's arguments concerning the protection of depositors, as opposed to the character of the club being set up by those making contributions. We were told in Committee: £5,000 is a kind of entrance fee". We were also told that: If an institution could not pay the £5,000, it might not be in very good shape. In addition, the Minister said: I do not accept that it is a lot of money for a small deposit-taking institution."—[Official Report, Standing Committee A, 23 January 1979; c. 287-8.] The Treasury wrote to Mr. C. McNeil Greig, the head of the Consumer Credit Trade Association, in response to its comments to the Treasury. That letter of 6 February said: it is necessary to provide for some minimum contribution in order to give balance to the scheme and we believe that a minimum figure of £5,000 gives the correct balance. But none of those points has any relevance to the protection of depositors. They show how the setting up of such organisations often leads to the development of a bureaucratic "tidy" frame of mind. We have decided, legitimately, that there must be a fee, but we have adopted the peculiar characteristic shared by so many people of thinking that if a reasonable club is established it must have reasonable dues and that if they are too inexpensive the club cannot be respectable. The figure of £5,000 sounds respectable, but it has no relevance to the nature and character of the institutions which the Government intend should pay it as the club fee.

Not only does this proposal not concern itself with protecting depositors but, in so far as the size of the initial contribution could hurt some small institutions—I do not say that it could mean the difference between whether they did or did not go into this business—it could create difficulties for depositors when the Bill seeks to protect them.

The case made by the Opposition in Committee has not been answered other than by the administrative decision that it was necessary to have a fee. That is not sufficient to carry the case in the House. especially when we are seeking to encourage the development of small institutions.

Mr. Hector Monro (Dumfries)

I am glad to support this important amendment. It may be that I can bring home to the Minister some of the practical problems affecting two of the three savings banks in Scotland, both of which happen to be in my constituency. I refer to the Annan savings bank and the Lockerbie savings bank, which did not opt to join the trustee savings bank movement and which, for very good reasons of their own, still operate under the 1819 Act.

We in Parliament have a duty to see that small savings banks are not affected adversely by this legislation. Unfortunately, they will be. The two of which I speak are small, efficient and effective and have first-class boards of directors. The Annan and the Lockerbie banks are very similar in many ways. However, I take the Lockerbie bank as an example.

In 1877, more than 100 years ago, deposits and reserves were of the order of £10,000. Today, more than 100 years later, they are more than £800,000, with 2,400 depositors—mainly local farmers, small business men and professional men, who are proud of that bank.

The Government should be concerned to protect minorities such as small banks which are trading perfectly legitimately under their own names. It is important also to ensure that there are some small banks which retain their local identities and associations with the areas in which they are situated.

I accept that in the moves towards this Bill over the past two years the Treasury has been helpful. It made a number of concessions before introducing it, although the permission to savings banks to keep their own names was very minimal. Had it not been accepted, I suggest that there would have been a major row.

The main issue involved in this amendment is the deposit protection scheme. As my hon. Friend the Member for Croydon, Central (Mr. Moore) pointed out, the scheme is reasonable in principle. But it will not work in practice as fairly as, I suspect, the Minister hones.

7.45 p.m.

The scheme calls for a minimum subscription of £5,000. I suspect that the Minister and his colleagues worked that out on 0.3 per cent. of deposits. Of course, that may be perfectly satisfactory for the vast majority of our major banks. But, in the case of the Lockerbie savings bank, 0.3 per cent. of deposits equals £2,200. That means that this small bank will have to pay a deposit to fund the scheme which represents a very much higher proportion of its deposits than that of almost every other bank which the Minister may care to name.

Under the Bill, instead of paying £2,200, which even the Bank thinks is fairly hefty, the Lockerbie bank will have to pay £5,000 and, although we all hope that subventions of this type will be required to be paid infrequently, for all we know it could happen annually. It will depend entirely on the claims on the fund.

This is a big sum for a small bank, even if it is highly efficient. For the Lockerbie bank, a contribution of £5,000 is equivalent to putting up administrative charges by between 25 per cent. and 30 per cent. At a time when we are all trying to keep down costs, this is not a very encouraging way to proceed.

The sum is also equivalent in lost interest to about 10 per cent. of management expenses and, of course, it will reduce the bank's income by about 1 per cent., thereby reducing its reserves.

The assets of the bank have never fallen in the 156 years of its existence to less than 75 per cent. of deposits.

What is the justification for treating small banks in this way? We want to help small businesses and not discourage them in the way that this heavy imposi- tion must. It may be administratively convenient, but it is manifestly unfair to these small saving banks.

I wish to echo one of the quotations read from the proceedings in Committee by my hon. Friend the Member for Croydon, Central. The Minister said: But my point is that £5,000 is not a lot for a small institution to pay, and the protection for its depositors should help it in its business. If an institution could not pay the £5,000, it might not be in very good shape."— [Official Report, Standing Committee A, 23 January 1979; c. 288.] I have shown from the various figures that I have given that the money involved here could be much better used than for the deposit protection scheme. What is more, because the bank is in such good shape, the Minister's words fall to the ground there and then.

It may be through inadvertence or because the Minister was not apprised of the position of the small savings banks, but the £5,000 appears to have been grasped out of the air as being a sum about which a major bank could not care less. However, it appears that no consideration was given to the small banks.

I hope that the Minister will think again about this. If he will not accept this reasonable amendment, bearing in mind that it will affect comparatively few banks in practical terms, it may be that he will consider redrafting the clause so that the small banks may pay either the equivalent of 0.3 per cent. of their deposits or the £2,500 which we propose. After all, even that is high in the view of the two banks to which I have referred.

In my view, the small banks have a cast-iron case. I am sure that this proposal has been introduced by the Government through inadvertence. The Minister ought to take the opportunity to put it right in another place if necessary and bring back to this House the news that he has seen fit to help the small savings banks. After all, they are doing an immensely important job. We are crying out for everyone to make savings. Here are banks which are accepting them and paying a very reasonable rate of interest. They are doing just the sort of practical work in terms of banking which the Treasury commends. Here is a chance to reciprocate and help these small banks. I ask the Minister to think about this amendment very carefully.

Mr. Emery

I wish to urge the Minister yet again to deal with this matter as we did in Committee, where there was a tied vote. I still feel that the Minister's arguments in Committee do not accord with his general approach of trying to look after the smaller end of the financial industry. My hon. Friend the Member for Croydon, Central (Mr. Moore) spoke much more succinctly on the statistics that I had used in Committee. He referred to the Bill as being a protection for depositors Bill. It would be wrong for people to believe that this is the only or major aspect. The major aspect of the Bill is contained in the first sentence of the long title: To regulate the acceptance of deposits in the course of business; to confer functions on the Bank of England with respect to the control of institutions carrying on deposit-taking …. The major point of the Bill is therefore the control of the banking system rather than protection for the deposit-taking side.

Mr. John Moore

I always listen with care to the wisdom of my hon. Friend the Member for Honiton (Mr. Emery). He is totally right. I would not wish only to emphasise the protection of depositors aspect. But we are now discussing the concept of the fund which is essentially the outcome of the legitimate demand to seek some form of protection. Whether or not we like that form, that is what we are discussing.

Mr. Emery

I agree entirely with my hon. Friend. It would be a mistake if the Minister did not accept this amendment. A number of deposit-taking bodies provide banking services as part of their business operation and should come within the scope of the Bill. It has been suggested by one of the associations concerned that these smaller organisations will stop taking deposits. They will go outside the Bill. I do not want to see that happen.

Nor did I believe that was the intention of the Minister. I did not think that he was attempting to make any of the bodies at the bottom end—as long as they were respectable—which have been carrying on a deposit-taking business which might assist their overall financial operation, cease that business.

The management of companies which might have to pay a contribution of 20 per cent., 25 per cent. or 30 per cent. of their deposit side into the fund would find that unacceptable. It may be better for them to return the deposits and stop doing business of that nature. I do not think that was the Bill's intention. We do not want to drive them out. There is some reason for having them within the Bill, hoping that they may expand. There is obviously room for expansion if they are taking deposits of only £20,000 or £30,000 a year. They should come within the general supervision of the Bank of England.

The Treasury is fighting on a partially false point. The one real argument is that it is not charging a registration for the licence and that the Bill replaces that. For the big bodies, that is sensible. But the argument does not hold much sway with the small firms at the bottom end of the industry. The fee in small areas of profitability of £40,000 or £50,000 is much too high for these small companies It should not be asked. The fund would not lose much money. The number affected would be very small. What is the point, other than the stoical principle that the Government have said that this is what they will do and they will hold to it? This has not been the Minister's approach in Committee. It is difficult for me to see the objection to the amendment that has been moved.

Mr. John Moore

My hon. Friend will not have seen the letter sent by the Treasury to the Consumer Credit Trade Association. It adds to the point that he is making. The letter states: Without detailed information in respect of the deposit-taking activities of the particular institutions, it is, of course, not possible to say precisely which institutions will be excluded by the provision, but we believe that it will exclude a very large proportion of cases"— I am being as fair as I can— where a small business is financed by friends or relatives. I am trying to help my hon. Friend. There is clearly an area of great doubt. We do not know the number of small institutions we are talking about. It makes it even more important, when the Treasury is unaware of the total number, that we should not seek to create difficulties that would reduce the size of this sector.

Mr. Emery

I thank my hon. Friend. This greatly helps my argument and reinforces the point I am making. Why do we want to appear beastly to these very small bodies? It seems unnecessary and a little insidious. If my hon. Friend the Member for Dumfries (Mr. Monro) wishes to press this matter to a Division, I would be willing to go into the Lobby to support him.

8.0 p.m.

Mr. Moate

As I have said, I come fresh to the Bill, but I understand that the Minister has been very reasonable in previous debates. I am therefore surprised to receive the impression that he is being obdurate in this respect.

Mr. Denzil Davies

I have not said anything yet.

Mr. Moate

That is true—how unfair can I be? Perhaps I am misjudging the position and the Minister will concede the point.

My hon. Friends seem to have made an overwhelming case for reducing the minimum figure from £5,000 to £2,500. My hon. Friend the Member for Honiton (Mr. Emery) concluded his admirable speech by suggesting that the present limit was beastly to small businesses. I am sure that the Minister is not one of those Labour Members who want to be beastly to businesses, big or small. I expect that argument from his hon. Friends below the Gangway—they seem to think that any "financial institution" must be large, impersonal and profitable, extracting large sums from ordinary people—but the Minister of State and the hon. Member for Thornaby (Mr. Wrigglesworth) know better. I expect that the latter will speak and vote in support of the amendment. I certainly shall, because it is fundamentally right, but I hope that the Minister will accept its logic and equity.

It is inequitable that many worthy small businesses will be penalised by this provision. My hon. Friend the Member for Croydon, Central (Mr. Moore) mentioned a survey—it could not represent all the financial institutions affected—which showed that 39 had deposits totalling less than £10,000. No one suggests that they will not be licensed to take deposits or that the Bank of England will frown on them. They are apparently perfectly acceptable and will be allowed, even encouraged, to carry on business. Are such institutions to be asked to pay £5,000 into the central fund? That proposal cannot be defended.

That survey also showed that 25 other institutions have deposits of less than £20,000 and 20 more of less than £50,000. Yet these are only representative figures and there will be many other institutions which will be properly licensed and will have to pay out £5,000. I have seen no justification for that.

My hon. Friend the Member for Honiton talked of the main purpose of the Bill. Surely it is not to protect depositors by paying compensation on a collapse. It is to prevent collapse—prevention rather than cure. The object is a full licensing procedure, a system of scrutiny, control and regulation, which will prevent collapse in the first place. If a collapse occurs, in many ways the system proposed by the Bill will have failed. It will not make a scrap of difference to depositors then whether that little institution had paid out £2,500 or £5,000. The institution will have been weakened because the Bank of England had been required to take £5,000 rather than £2,500.

The £5,000 minimum does not meet the main objectives. It undermines them by weakening the institutions that the Bill and previous Acts seek to sustain. This is an unfair penalty on small businesses; it is a regressive form of taxation. I cannot believe that that is the Minister's intention. I hope that he will continue his consistent helpfulness and accept the amendment.

Mr. Denzil Davies

Hon. Members have made impassioned pleas for a reduction of this figure from £5,000 to £2,500. If the Bill had specified £2,500, no doubt there would have been an amendment to reduce it to £1,250 and we should have heard impassioned pleas on behalf of institutions with deposits of £5,000. But that is the nature of the House. When a concession is given, another is requested and concession follows concession.

The hon. Member for Dumfries (Mr. Monro) made a strong plea for some smaller institutions in his constituency. We are well aware of their representations. They are not backward in putting their representations to the Treasury—quite rightly—and at least, as he said, we have been able to help them in some ways.

The argument for £5,000—any figure is bound to be arbitrary to some extent—was the need to preserve some balance. On Second Reading, Opposition spokesmen said that, because the clearers would have to pay out large sums and they would never get into difficulties, they would in effect be subsidising the smaller banks. Now the argument is reversed: we are told that the smaller banks should not pay so much. There has to be some balance between the contributions of the larger and smaller institutions.

Also, although hon. Members may not thtink it very important, it will be helpful to smaller institutions that we shall not charge licence fees. There is also a tax liability which reduces. I do not know the profits of the Lockerbie savings bank, but if it were paying corporation tax or income tax at 40 per cent. or 50 per cent., that would halve its contribution. At least we were able to meet that point.

However, despite all that, despite what the hon. Member for Faversham (Mr. Moate) said, despite this Government's good record on small businesses, in whose regard we have done more than any previous Government, and because the hon. Member for Dumfries comes from that other Celtic fringe of Great Britain—this is the sort of thing which sways Ministers on Report—I am prepared to say that I shall be happy to accept the amendment.

Mr. John Moore

With the leave of the House, Mr. Deputy Speaker, I will say a few more words. I am sure that my hon. Friend the Member for Faversham (Mr. Moate) will understand why the deliberations in Committee were so delightful since the Minister of State, with intelligence and generosity, has accepted the amendment. One could say nothing but complimentary things about him. The extent to which the activities of the Celtic fringe are beginning to focus the attention of minds is remarkable.

I compliment my hon. Friend the Member for Dumfries (Mr. Monro). If we had had his help in Committee, the Minister of State might have accepted each of the amendments that we pressed. I also thank my hon. Friends the Members for Honiton (Mr. Emery) and for Faversham. It is an important victory. I am delighted that we pressed this amendment. I am glad that our arguments have been met. This represents an important victory for the smaller institutions. I thank the Minister of State for accepting the amendment.

Mr. Deputy Speaker

With such pleasantries, perhaps hon. Members will begin to lend each other money.

Amendment agreed to.

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