§ Order for Second Reading read.9.35 am
§ The Economic Secretary to the Treasury (Mr. Ian Stewart)
I beg to move, That the Bill be now read a Second time.
This debate comes almost exactly eight years after the Second Reading of the first Banking Bill, introduced by the then Labour Government, which became the Act of 1979. On that occasion my hon. Friend the Member for East Lindsey (Sir P. Tapsell) and I, speaking for the then Opposition, drew attention to the difficulties which we thought would arise from the two-tier structure of authorisation—of recognised banks and of licensed deposit-takers—on which that Bill was based. Unfortunately, our misgivings did not prove unfounded, and I welcome the opportunity to introduce a Bill to revise, update and improve the original legislation.
Like the 1979 Act, the present Bill is primarily devoted to supervision in the interests of depositors, and certain related matters. It does not deal with questions concerning transactions between banks and their customers, with consumer protection, or with the consequences of technological change on the provision of banking and other financial services. Simultaneously with the publication of the Bill, I announced in a written answer on 14 November the Government's intention to set up a committee to review these matters.
There are, at the latest count, about 290 recognised banks and just over 300 licensed deposit-takers in the United Kingdom. Most of the major foreign banks around the world are represented here. Even since 1979 the international dimension of the City of London has become significantly more important. The volume of transactions conducted in London in foreign exchange, in Eurocurrency deposits, in new issues and underwriting, in stocks and shares, in options and futures and in commodities and insurance has been growing rapidly, confirming London's leading position among European financial centres.
At the same time, global markets have come into being with continuous trading around the world and around the clock from the far east through London to the United States. At a time of such rapid and fundamental change in financial markets, it is important that we should have appropriate legislation in place for the regulation of financial institutions.
One purpose of the Bill is accordingly to ensure that the supervisory regime for the banking sector is compatible with the systems which have been established for investment and securities business and for building societies by the Financial Services Act 1986 and the Building Societies Act 1986, which were passed by Parliament in the previous Session.
To be comprehensive, the regulatory framework for the supervision of financial institutions requires an appropriate degree of consistency between the three pieces of legislation in a number of different areas such as the role 543 of auditors, disclosure of information between supervisors, and the application of new offences and penalties. In particular, supervisors need to be able to communicate and co-operate without needless red tape.
Furthermore, the legislation needs to be flexible enough to cope with rapid change in market behaviour and structure and, just as under the Financial Services Act 1986 the definition of investments can be adjusted to meet changing circumstances, so will that of deposits be under the present Bill. The next purpose of the Bill is to update and improve the arrangements for authorisation and supervision of deposit-taking businesses in the light of experience gained since the Banking Act 1979 came into operation.
The remaining and most fundamental purpose is to introduce a number of policy changes which are desirable either to take account of developments in the banking sector, or to remedy deficiencies in the previous Act.
In those respects, the Bill draws especially on the lessons learnt from the collapse of Johnson Matthey Bankers in 1984. As hon. Members will recall, my right hon. Friend the Chancellor of the Exchequer set up a committee under the chairmanship of the Governor of the Bank of England, and including representatives of the Treasury and the commercial banking sector, to review the operation of the Banking Act, taking account of the implications of the Johnson Matthey Bankers affair, and to make recommendations with a view to a new Banking Bill. The committee reported in June 1985, and last December the Government published a White Paper foreshadowing the present Bill. During this entire period these matters were the subject of extensive consultation, and I express my thanks to all those who have contributed constructively to this process, including the Bank of England, the British Bankers Association, the Committee of London and Scottish Bankers, the Finance Houses Association, the Institute of Chartered Accountants in England and Wales, and many individual persons and institutions who have submitted their comments.
The Johnson Matthey Bankers case showed vividly the need to strengthen the powers of the supervisors and to impose more exacting duties on supervised institutions. It also exposed serious defects in the 1979 Act relating to the availability and accuracy of information provided to the supervisors, and the Bill is addressed especially to those points.
The main changes should come as no surprise, since they follow closely the proposals set out in the White Paper a year ago. The White Paper itself received a general welcome and I hope that the Bill will meet the same response. The Bill provides for a new Board of Banking Supervision to advise the Bank of England in its exercise of the powers conferred upon it, and the majority of the members of the board will be independent of the Bank of England. The distinction between recognised banks and licensed deposit-takers will be ended, and with it the separate systems of supervision and regulation which applied to the two categories. The provision of information to the supervisor will be subject to statutory reserve powers, and there will be specific requirements in relation to the notification of large exposures. The legal constraints on dialogue between supervisor and auditors 544 will be removed, and the submission by an institution of incorrect information will put those responsible at risk of conviction for a new offence of misleading the supervisors.
In other respects, the Bill for the most part follows the main provisions of the 1979 Act. Thus, the Bill continues the arrangements for deposit protection, the control of advertising, arrangements for authorisation, revocation and exemption.
§ Mr. Anthony Nelson (Chichester)
My hon. Friend mentioned deposit protection. Can he explain why the limits for deposit protection in this Bill remain exactly the same as in the previous legislation, which is effectively a reduction in protection? Is there not a case for a significant increase?
§ Mr. Stewart
The present limits have proved entirely adequate in practice and there is provision to change them if necessary. That is the short answer. If other hon. Members wish to take up that point during the debate and I am fortunate enough to catch your eye later, Mr. Deputy Speaker, I shall have more to say about it.
A new form of conditional authorisation is proposed, and there are some modifications to the appeal system, but the substance of the technical provisions in the 1979 Act is incorporated in the Bill without major differences. In theory, it might have been possible to introduce an amending Bill, but, in practice, because the separate treatment under the two-tier system is so pervasive throughout the 1979 Act, the case for rewriting the Bill was overwhelming. However, since so many of the provisions are repeated from the existing legislation, and as a comprehensive explanatory memorandum is attached to the Bill, I do not propose to go through its contents item by item. Instead, I shall concentrate on the three important areas where changes are being introduced: the position of the supervisor, the arrangements relating to authorisation and the provision of information.
Through the 1979 Act, Parliament entrusted the supervision of the banking sector to the Bank of England. It would be wrong to suggest that the Johnson Matthey Bankers affair did not reveal the need for some changes within the Bank of England itself. Following the Leigh-Pemberton committee's report, therefore, the Bank of England introduced several changes in the organisation of its banking supervision division, set out in its 1986 report under the Banking Act. Staff numbers have been increased by more than 60 per cent. and the number of institutions for which each manager has responsibility has been reduced. More frequent supervisory visits to institutions will, therefore, be possible, and a programme of inward and outward secondments to strengthen the commercial experience of supervisory staff has been introduced.
Although in some countries banking supervision is conducted by bodies independent of the central bank and the Government, international practice varies widely and it is clear that each country should make the arrangements most suited to its circumstances. For many years before the 1979 Act, the Bank of England was engaged in informal supervision and since 1979 this has been put on to a statutory basis. Following the decision to establish an independent board to deal with other financial activities, the Government considered whether it would be sensible to establish a separate supervisory body for the banking sector. However, given the knowledge and experience of banking supervision built up within the Bank of England 545 in recent years, we concluded that the bank should continue to be the supervisory authority in this area but that the system should be strengthened by introducing an element of independent advice and judgment into the process.
Therefore, the Bill establishes a new Board of Banking Supervision, which provides for advice to be given to the governor and his senior colleagues on supervisory matters. The board will consider individual cases and more general matters of supervisory policy. The rules for the board will require that its outside members are always in a majority at its meetings and the board will make its report to Parliament through the annual report of the Bank of England. If, in any case, the Bank of England decides not to follow the advice of the independent members, the ex-officio members of the board will be required to notify the Chancellor of the Exchequer.
The conduct of supervision will be subject to continual review by the board, which the Government believe will add greatly to the experience available to the Bank of England in taking what are inevitably sometimes extremely difficult decisions. The board will perform a function in relation to the banking sector which is in many ways comparable to that of the Building Societies Commission, and just as the commission began to operate informally before the Building Societies Bill was enacted, so the Board of Banking Supervision is already functioning on a non-statutory basis.
The process of supervision will need to respond to developments both at home and abroad. Like the 1979 Act, the new Bill is based on regulation of the activity of deposit-taking. The definitions of "deposit" and of a "deposit-taking business" are broadly as in the existing Act, but to enable the statutory framework to adjust to the changing market place, provision is made for those definitions to be amended by statutory instrument if it proves necessary to do so.
At the international level there has been greater discussion between the supervisory authorities in different countries in the last few years than ever before. The question is attracting keen interest in Europe, and nothing in the Bill cuts across current developments or thinking in the European Community. Several major countries, including the United States and Canada, are examining closely their systems of supervision, and we believe that it will be important in the years ahead to ensure closer understanding and co-operation between national supervisory authorities and to aim for the application of similar standards in different financial centres.
Subject to the abolition of the two-tier system, the principles and most of the procedures relating to the authorisation of deposit-taking institutions will remain substantially the same as they were in the 1979 Act. An institution will have to demonstrate that its management is not concentrated in the hands of one person, that its directors and managers are fit and proper persons to carry out their functions, and that the business is generally conducted in a prudent and responsible fashion. All institutions meeting the criteria set out in the Bill will fall into a single category of "authorised institutions" and be subject to the same system of supervision.
The 1979 Act concentrated the Bank of England's statutory powers of supervision on licensed deposit-takers, while the supervision of recognised banks continued to operate more informally. We should not forget that JMB, as a recognised bank, was accordingly subject to a less 546 stringent statutory regime than a licensed deposit-taker. Indeed, one of the effects of the two-tier system was often to encourage over rapid diversification and expansion of balance sheet totals in order to qualify an institution for recognition in the higher tier. With the benefit of hindsight, as well as foresight, it can be seen that the two-tier structure of the 1979 Act was fundamentally misconceived.
One of the difficulties which the two-tier system created was in the use of banking names and descriptions, which since 1979 have been available only to recognised banks. Under the Bill, the only requirement for the use of a banking name by an authorised institution will be a minimum paid-up equity capital or its equivalent of £5 million, while all authorised institutions will be allowed to use banking descriptions. For authorisation, the minimum qualifying capital will be £1 million. Institutions already authorised under the 1979 Act will retain their authorisation.
§ Sir Eldon Griffiths (Bury St. Edmunds)
My hon. Friend will be aware of the burden of my questions to him. Why is there to be a distinction between the £1 million figure for authorisation and the £5 million figure for the use of the name "bank"?
§ Mr. Stewart
My hon. Friend's intervention is not entirely unexpected, as we have already communicated on the subject. The case for having a substantial capital qualification for the use of the name "bank" rests on the need to ensure that only bodies of considerable substance should be regarded as banks and allowed to describe themselves specifically as such. There is also a case for saying that institutions should not be prevented from taking deposits, thus obtaining authorisation, even if they fall far short of the level deemed appopriate for that. I know my hon. Friend's views about that in relation to certain institutions, but there are considerable pressures from another direction, suggesting that the threshold for the use of banking names should be higher than £5 million. I think that the figure we have chosen is the right one. We can return to that subject if my hon. Friend wants to pursue it further.
In order to increase the Bank of England's flexibility in dealing with cases where it is dissatisfied with the position of a particular institution, it will be able to impose conditions on authorisation without having to go through the full process of revocation. We have also decided that the appeal system should be modified, so that decisions of the tribunal will in future be binding, rather than in the form of advice to the Chancellor of the Exhequer, and that the right of appeal will be extended to individuals whose fitness and properness, to use the technical terms, may be questioned by the supervisors.
The Bill also provides a new power enabling the Bank of England to block a proposed merger or takeover on prudential grounds. Anyone proposing to acquire, or substantially increase, a controlling interest in a deposit-taking business will have to give adequate notice to the Bank of England, which will then have the power to object to the transaction if the intended controller does not meet its prudential standards. Failure to notify the Bank of England under such circumstances will be a criminal offence, and powers are included in the Bill for restrictions to be applied to the shares in question if these procedures are contravened. The Bill itself contains no reciprocity 547 provisions, but this is because the Financial Services Act already covers deposit-taking businesses as well as investment businesses in this respect. Under that Act the Government will have the power to refuse, restrict or withdraw the authorisation of a foreign-owned deposit-taker, if equivalent opportunities are not available to British firms in its country of origin in either the banking or the securities sector.
The whole supervisory process depends upon relevant, accurate and timely information being provided by institutions to the Bank of England. Although most of such information will continue to be supplied on a voluntary basis, the Bill, unlike the 1979 Act, enables the Bank of England to obtain the necessary information under statutory powers from all authorised institutions, if need be on a regular basis, and backed up by criminal penalties for non-compliance. The supervisors will also have a right of entry to obtain such information on the spot, where a request to provide it has not been complied with, or, in exceptional cases, if it is suspected that papers might be tampered with or destroyed.
As in the JMB case, large exposures to the same or connected borrowers are a characteristic feature of banking problems. The Bill, therefore, contains new proposals requiring exposures above 10 per cent. of an institution's capital base to be reported to the supervisors post hoc, and the supervisors must be notified in advance before an exposure exceeding 25 per cent. of the capital base is undertaken. Criminal sanctions will attach to deliberate non-compliance with these provisions, in addition to the new criminal offence of knowingly or recklessly providing any information to the supervisors which is false or misleading in a material particular.
Under the existing Act, the Bank of England's powers to investigate cases of suspected illegal deposit-taking are virtually non-existent. The Bill greatly strengthens the powers of the supervisor in this area and, because of the ease with which evidence can be destroyed, it is proposed that there should, again as a last resort, be a power of entry for this purpose. The Bill also contains new provisions to help depositors recover funds held by illegal deposit-takers.
There is, and will continue to be, an overriding obligation of secrecy on supervisors and those who acquire supervisory information. As in the 1979 Act, it will continue to be a criminal offence to break this trust, but the Bill contains new provisions to enable information to be disclosed through strictly controlled gateways to other supervisors. This is essential if supervisors in the new framework are to be able to cope adequately with the affairs of financial conglomerates and with the global nature of financial and banking services today.
The provisions concerning auditors are parallel to those contained in the Building Societies and Financial Services Acts. The Bill provides that auditors and reporting accountants may communicate information about their client company to the Bank of England without breaching any obligation of confidentiality or loyalty which they would otherwise owe to their clients. We hope that the accountancy profession will bring forward satisfactory rules or guidance specifying the circumstances in which such information should be communicated, but the Bill 548 contains a reserve power for the Treasury to bring forward regulations imposing such a system if the profession fails to do so.
Those are the main provisions of a Bill which will complete the trio of statutes covering the regulation of banking and financial institutions. During recent years the business of the City of London has increased in scope and multiplied in volume.
§ Mr. John Browne (Winchester)
My hon. Friend has summarised well the provisions included in the Bill. As financial supermarkets are growing, can he tell us why the Bill does not include an amendment to the Consumer Credit Act 1974 to facilitate the development of electronic fund transfer at the point of sale, which he has rightly outlined? I wholly support the controls and monitoring of banks. However, that measure, which would be favourable to the banks and would increase their security, is not included. Can my hon. Friend explain why?
§ Mr. Stewart
My hon. Friend will recall that at the outset of my speech I announced that, along with publication of the Bill, the Government plan to set up a committee to review that and related subjects. I appreciate that my hon. Friend's point is one that the banks may regard as being more important and more urgent than certain other items in that area. I have therefore asked them to let me have further evidence showing what progress the banking sector is making in that direction and to let me know whether they feel that there is an absolute case for saying that such a matter should be brought forward and separated from the rest of the related subjects that are due to be dealt with under that review.
During recent years the business of the City of London has increased in scope and multiplied in volume. In 1979, when the first Banking Bill was enacted, it yielded an estimated £1.6 billion in foreign earnings. Last year it reached the huge figure of £7.6 billion. The banking sector has played a significant part in this contribution to our national economy and to our balance of payments from foreign business. If the British banking system is to continue to serve its customers satisfactorily at home and to command confidence abroad, we must ensure that the framework of supervision within which it operates is realistic, comprehensive and up to date. That is the purpose of the Bill and I hope that it will command general support. I commend it to the House.
§ Dr. Oonagh McDonald (Thurrock)
The Economic Secretary to the Treasury rightly referred in his speech to the background against which we should consider the Bill. I have two aspects to add to that background. The first is the post-big bang City of London. The second is the context of the JMB affair. I begin by referring to the first.
In the changing financial world, banks, particularly the smaller banks, will naturally feel encouraged to go for areas of lending that initially show high rates of return. In recent years, the banks have greatly extended both personal credit and mortgage lending. Since 1979 there has been an enormous expansion of personal credit. Up to the end of 1985, growth was of the order of 85 per cent. in real terms. By the end of the second quarter in 1986, outstanding consumer credit amounted to almost £28 billion. That means that the growth in the ratio of household debt to annual household income has increased 549 very considerably. During the period of the Barber boom in the early 1970s, it reached a peak of 45 per cent. Since 1980, it has risen very sharply to almost 70 per cent. That represents an enormous explosion of consumer credit, some of which is causing a great deal of concern.
I regret that it is not causing any great concern on the Government Benches, but it is causing great concern outside the House of Commons, particularly to those agencies that seek to assist, either voluntarily or as their statutory duty, families who are now in very serious debt. All this is being allowed to run in order to feed the pre-election boom and to make people feel well off in the run-up to the next general election. One sees exactly what the Government are doing by allowing this consumer boom to run in that way.
It has also led to comment by the Governor of the Bank of England. In his recent Loughborough speech he outlined many of the changes in banking practices and bank lending. Having reviewed the extent of the changes in bank lending he said that two years ago heenvisaged the possibility that the unpredictability of the relationship between money and nominal incomes could reach a point…at which we would do better to dispense with money targetry altogether, and I shall be considering with the Chancellor whether that point has arrived in relation to broad money when we come to review the MTFS framework around the turn of the year.it is therefore causing concern outside, but apparently it is of no concern to the Government.
The Economic Secretary rightly referred to the review that was announced in a written answer on Friday 14 November. There is to be a review of various ancient Acts that apply to the provision of banking services. He said:The law should provide the necessary legal framework for the provision of banking services"—which would include consumer credit—on fair and efficient terms."—[Official Report, 14 November 1986; Vol. 105, c. 8.]I welcome that review. However, I should like to know when the Economic Secretary expects it to be completed. Perhaps it is unfair to ask, as the full report is not yet available, but does he not consider that proposals for legislation should be made? Reference has already been made to the need for electronic services. The provision of consumer credit and the way in which cheques are treated by banks have already caused concern. Therefore we need to be told about the Economic Secretary's legislative plans.
Consumer credit has been allowed to grow apace, as has mortgage lending. The Economic Secretary knows that the Governor of the Bank of England has already expressed concern in one of the Bank of England reviews about the extent of bank lending going into property and about the terms upon which that money is lent, which leads to difficulties for certain families. In the past, there has been very little repossession of homes by building societies, banks or other lending institutions. That percentage, admittedly from a very low base, is increasing rapidly.
In a written answer this week the Department of the Environment said that at the end of June 1986 over 60,000 households were over six months in arrears with mortgage payments. That is worrying, and some of the Government's plans in other areas are not helping to overcome that problem. I refer to the proposal to delay the payment of mortgage interest to those receiving supplementary benefit for the first three months of unemployment. The Government's actions are making the problem worse. Both sides of the House want people to be 550 able to buy their homes. Nevertheless, the Opposition do not want people to have to struggle to make high mortgage repayments, and we do not want them to be cast out of their homes because the building societies or banks have repossessed.
The extension of mortgage lending and personal credit has been at the expense of bank lending in other areas. For example, in 1979 London clearing banks and their subsidiaries lent 27.4 per cent. of their total lending to manufacturing industry. By August 1985 the percentage had fallen to 14.7. That is a substantial drop and no doubt partially explains why the levels of investment in manufacturing industry have not yet reached the levels of 1979. There may be temporary reasons for that, such as the phasing out of capital allowances and the fact that in 1985, company profitability began to rise sharply and companies began to invest out of retained profit rather than by way of bank borrowing, However, it is a significant trend.
§ Dr. McDonald
No, I do not need to give way on that point. We are worried about the changes in bank lending and about the way in which consumer credit and mortgage lending is being expanded so rapidly. At some point, especially in the case of personal credit, that sort of lending must grind to a halt because we all know that at some point we have to stop borrowing and pay back the money that has been obtained through personal loans or credit cards. That is an area of concern.
My third point is about the big bang. As the Minister rightly said, this is the third part of the regulatory system that the Government put in place through the Financial Services Act 1986 and the Building Societies Act 1986. In this new situation we are faced with severe problems of regulation. As we know, all financial institutions, including banks and building societies, are extending their range of services and in so doing each institution falls under a range of self-regulatory organisations and under one or other lead regulator.
Rules are now being drawn up. For example, the Securities Investments Board and the banks are in the process of agreeing the rules under which banks may advise people about insurance and sell insurance policies, and under which they may advise on and sell securities. We are all anxious about precisely how this will work. In the case of financial conglomerates, which banks are obviously becoming, as are many other institutions, the legislation lays down that there will be a lead regulator and that the various self-regulatory organisations, including the lead regulator, will be able to exchange information. The Financial Services Act 1986 enables such an exchange of information to take place.
The Opposition have expressed their anxiety about the whole system because it depends on a range of self-regulatory organisations knowing what sort of information to convey to each other and when. How can they ensure that it is conveyed quickly enough and with sufficient urgency, because a failure in one area of a financial conglomerate can affect the business of the whole? Since the big bang, the City has faced major scandals. Insider trading was discovered in the case of Morgan Grenfell and we are still waiting to know the full implications for trading in this country as well as in America of the Boesky affair.
551 The last Bank of England report was published in May. In the course of describing the bank's activities the report spoke of the enormous scale and nature of their involvement in facilitating large mergers and acquisitions in the United Kingdom corporate sector and noted that a number of banks or banking groups had arranged to acquire significant strategic shareholdings in the companies involved. The report commented on how these will be viewed in terms of the capital adequacy of banks. However, I do not wish to pursue that point at the moment.
It may well be that if some banks, and especially the ones that are sometimes called bucket shop banks, engage in buying shares like this, insider trading will go on. Obviously, the Bank of England will be alert to that because it will be on the lookout to ensure that insider trading does not take place. If it does take place what will happen? Will the individual or the bank itself carry the can if insider trading is discovered?
§ Mr. John Butterfill (Bournemouth, West)
Surely the hon. Lady appreciates that we dealt with insider trading in the Financial Services Act 1986 which has only just been passed. That answers all the queries that the hon. Lady has raised.
§ Dr. McDonald
Of course that topic was discussed during the course of the Financial Services Bill, but a fortnight after the big bang there was a scandal involving a reputable company. That is why I am sure the hon. Gentleman will agree that when discussing banking supervision and noting that banks are engaged in buying shares in companies and in advising people about what shares they should buy, it is entirely proper to raise the whole issue of insider trading again and to ask not just whether the individual will carry the can but what will happen to the bank concerned.
I spoke specifically about the small bucket shop type of bank. Will the Bank of England take such a bank under its wing by issuing directions about how it should conduct its business, or will it withdraw authorisation from a bank discovered to be engaging in extensive insider trading? Quite naturally, people are extremely worried about what is happening in the City, and to suggest that all the problems have been solved by the Financial Services Act 1986 is taking too optimistic a view.
§ Dr. McDonald
No, I should like to move on.
The third point about which the Minister spoke was the Johnson Matthey Bankers affair. As he quite rightly recognised, that affair illustrated the gross incompetence of JMB in the conduct of its affairs and the failure to supervise by the Bank of England. The JMB affair was much debated in the House. I was careful to accuse the Bank of England simply of a failure to supervise and I suggested that the extraordinary and gross incompetence of JMB was the cause of the affair.
I should like the Minister to bring us up to date on the last Bank of England report which shows that police investigations are continuing into the lending business undertaken by JMB in the period before October 1984. If the Minister knows, I hope that he will tell us the up-to-date results of the police investigations. Will he also give 552 us the latest view, beyond the £25 million that is mentioned in the report, on the losses involved in the acquisition of JMB following its collapse?
I shall now address myself to the Bill. The Opposition will be looking for improvements in the depositor protection scheme.
§ Mr. John Browne
The hon. Lady was talking about liability for insider trading between the institution and the individual. Surely, as my hon Friend the Member for Bournemouth, West (Mr. Butterfill) said, the issue has been catered for by the Financial Services Act, which was enacted last Session. If the insider trading is for the benefit of the personal account of the individual, why should the institution suffer? If the insider trading is for the benefit of the institution, it is clear that the institution should be liable.
§ Dr. McDonald
I do not think that it is considered satisfactory that when insider trading is taking place one person alone should carry the can. We do not know the full implications for Britain of the events of the past few weeks. These events have caused some of us to think again. It may be that the hon. Gentleman and others are perfectly happy with matters as they stand, but there is disquiet elsewhere, and it is proper that it should be raised from the Opposition Front Bench.
The Minister has referred to foreign takovers, and we want it spelt out much more clearly in the Bill that such takeovers should not be allowed where there are no reciprocal arrangements. For example, a Japanese bank may seek to take over a British merchant bank or even one of the major clearing banks. We know that there are extremely substantial financial organisations in Japan and we contend that such institutions should not be allowed to take over a British bank when our institutions cannot get into the Japanese market.
Secondly, considerations of national interest should be taken into account. The major clearers play an important part in the management of the British economy and we intend to raise this issue in Committee——
§ Dr. McDonald
Undoubtedly we shall return to it when that stage is reached.
The Bill deals with the reporting of large exposures. There is voluntary reporting of exposures of 10 per cent. or less, and the reporting of a 25 per cent. proposed exposure to a single person or collective persons to the Bank of England will have to take place before the event.
§ Mr. Ian Stewart
Perhaps the hon. Lady made a slip of the tongue when she said that there would be voluntary reporting at 10 per cent. That reporting will be after the event and will not be voluntary.
§ Dr. McDonald
Yes, the Minister is right. That reporting will be after the event, and that is what I have in my notes. I was thinking of other remarks that the Minister made.
We shall be examining carefully the reporting provisions in Committee. I hope that the balance is right and that the 25 per cent. provision is not too much of a relaxation and is not over generous. Two of the main sources of the problems with JMB was its failure to report on time and its under-reporting. The bank allowed JMB to report late and then to postpone a meeting between the bank's directors and the Bank of England from July to 553 August. That was followed by under-reporting, which was quite substantial. In its 1985 annual report, the Bank of England claimed that the reported figures for the two exposures at the end of June 1985 were 15 per cent. and 12 per cent. of capital and that the true figures were 26 per cent. and 17 per cent. respectively. At the end of June 1984 the reported figures were 38 per cent. and 34 per cent. while the true figures were 76 per cent. and 39 per cent. There were enormous disparities and sloppy reporting.
There are two areas of concern. The first is whether such misreporting can be detected by the Bank of England's supervisors. The Minister has referred to the increase in the Bank's staff, and I understand that the staff now stands at 160. A considerable recruitment programme has taken place over the past year or so and, interestingly enough, it has been directed largely to graduates. I should like to see more secondments from the banking industry into the Bank and for those secondees to act as supervisors. That would be a way of getting practical experience into the Bank's own supervision.
Secondly, there is a problem with the banks detecting the degree of exposure to connected persons, which was the position with JMB. I do not think that JMB was necessarily aware of the extent of its loans to companies run by Shamji because it did not necessarily know, or did not look too hard to see what the connections were. The Bank of England should ensure that banks' internal control systems are designed so that they can pick up exposure to connected persons. We shall need to examine closely the reporting of large exposures when we come to consider the Bill in Committee.
I still find enormous problems in auditors being expected to inform the Bank of England's supervisors about the conduct of business by the bank of which they are auditors. This is understandable for two reasons. First, an auditor's final duty is to the shareholders. Secondly, large accountancy firms provide auditors and act as management consultants to the same bank. There is obviously a conflict of interest if an auditor's firm has provided advice on internal control systems and management systems, perhaps assisting the bank with the installation of a new computer system, and then finds that he is expected to say to the Bank of England's supervisors, "I do not think that the internal control systems of the bank are working effectively." It seems that there is a conflict of interest and I do not think that auditors who are appointed to a particular bank should be expected to act in the way that I have described, except in the last resort, and as any of us would, if we saw that there were clear examples of serious negligence and fraud. It is obvious that the Bank of England has a right to expect that of auditors. The role assigned to auditors in the Bill is not only the last resort role of reporting gross negligence or whatever but also the role of alerting Bank of England supervisors to possible problems. Of course, one needs a mechanism for that, but the auditors do not provide the right one.
Obviously, the Opposition welcome any strengthening of banking supervision, particularly in a rapidly changing financial world. We all want the City to be seen to be operating honestly and fairly, as it is detrimental to its business if it is not. In Committee, we shall examine every aspect of the Bill closely to ensure that it succeeds in its aim of making sure that banking supervision is carried out 554 fully, properly and exhaustively, and that it goes as far as possible towards preventing the occurrence of fraud and towards alerting people to the possibility of collapse.
§ Mr. Anthony Nelson (Chichester)
I join the hon. Member for Thurrock (Dr. McDonald) in what I understand to be her general welcome for the Bill. I also congratulate my hon. Friend the Economic Secretary and his Treasury colleagues on introducing it, and on giving careful consideration to the recommendations of the Leigh-Pemberton committee and to the considerable representations made subsequently by many organisations.
The Bill is important. It follows scandals in the banking sector and a great deal of public concern that needs to be allayed. In introducing the Bill, my hon. Friend the Economic Secretary struck an important balance between the need for financial institutions and banks to continue to prosper in the new era of financial services, and ensuring that depositor protection is enhanced. Customers of banks should continue as such, secure in the knowledge that there is an adequate regulatory framework, means of redressing grievances, and obtaining compensation.
About 600 recognised banks operate in this country. They make a vital contribution to our economy, to industry, and to our balance of payments. They are increasingly important both in terms of employment and the provision of financial services. The Bill is the last of a trilogy of measures to try to ensure that the major expansion in financial services and banking generally in the City and elsewhere in Britain is subjected to a new, more adequate and up-to-date system of regulation.
We may all have ideas as to minor areas in which the provisions of this legislation could be improved or amended, but we must generally give the Bill a warm welcome. It was prompted by periods of crisis and banking scandals. However, it is important to emphasise that the Treasury has an obligation to frame legislation not just in response to the most recent scandal but for future circumstances that may arise. It is generally recognised that some of the inadequacies now apparent in the Banking Act 1979 are due to the fact that it was designed specifically to redress the problems of the fringe banking crisis of the early 1970s. Similarly, if this legislation were designed largely to redress the inadequacies that became apparent through the collapse of JMB, it might not be well framed for dealing with the next crisis, whether that involves a default in a bank's foreign exchange department, a fraudulent activity within a bank, or problems of loan concentration or of overlending in the future.
The problems of competition and credit control that partly led to the banking collapses of the 1970s, and the problems of culpable credit analyses and exposure that led to the collapse of JMB, should be born in mind, but they are not the only criteria on which to judge this legislation. The main reason for JMB's failure was the high concentration of loans to relatively few borrowers. Its loans increased nearly tenfold, to £296 million by 1984, and the bulk of them went to the connected companies of one shipping group.
The Banking Act 1979, which introduced the two-tier system of recognised banks and licensed deposit takers, was shown to be deficient when it came to supervising large exposures monitoring the financial adequacy of 555 banks and the general probity with which they fulfilled their responsibilities. The new structures in the Bill go a long way towards dealing with those problems.
Nevertheless, the Bill covers several important issues that should be addressed on Second Reading. The most important of those issues is the judgment of the Leigh-Pemberton committee, and the Government in their response to that document and in the framing of their legislation, that there should be no fundamental change in banking supervision. Given the problems that have occurred and the possible risks for the future, it is only proper that Parliament should ask whether a more stringent system of banking supervision should be introduced. It is not that I have serious misgivings, but I am not yet entirely clear why, if the interests of depositors are to remain paramount, it will be necessary to change the definitions of deposit and deposit-taking businesses.
I am worried about the possibility of secondary legislation being used in this regard, as is proposed in the Bill. I should not wish to see any undermining of our principal objective of securing the interests of depositors. Some hon. Members now in the Chamber took an active interest in the passage of the Financial Services Act, and just as in that Bill our principal criterion was to protect the interests of investors, so in this Bill we must always keep uppermost in our minds the need to protect the interests of depositors. Everything else should flow from that.
The Bill is not necessarily concerned with making the City work better or with making banks more profitable, although we hope that those things will come to pass, but is principally concerned with seeking better protection for depositors. I have therefore asked a question rather than expressed a misgiving about the proposal to change the definition of deposit and deposit-taking businesses.
The fundamental judgment that there should be no change in the structure of banking supervision involves a major decision to set up the Board of Banking Supervision within the Bank of England. My hon. Friend the Economic Secretary addressed the issue of whether there should be a supervisory authority that is separate from the central bank. That question exercised both the Leigh-Pemberton committee and many others. The eventual decision seems to be that there should be no separation along the lines that have been developed in many other countries. However, there are some arguments in favour of at least strengthening the independence and role of a supervisory authority within the central bank, even if it is not to be entirely separate.
It is suggested that where a supervisory authority is within the central bank, and where the Board of Banking Supervision is within the Bank of England, conflicts of interest could arise between the regulatory responsibilities of the board, and the central bank's prudential role. Some people would argue that the separation of a supervisory authority might promote the building of a professional core of supervisors with an ability to investigate and to hold to account those banks that were moving outside the lines of legislation or of prudential activities. That might prevent problems from arising and save having to deal with them once they had become apparent.
It is clear that the more separate a supervisory authority is from the central bank, the more accountable it is to Parliament. That is something that we should consider carefully. Sadly when things go wrong in the banking 556 sector, a lot of egg lands on the face of the Government of the day, rightly or wrongly, and people come to Parliament to seek redress. Therefore, we should be able to exert some control and accountability and should have the right to question a supervisory authority, and that is obviously diminished by the extent to which it remains part of the central bank, the Bank of England, which we are not able to question, as my hon. Friend the Economic Secretary will know.
There is something to learn from foreign comparisons. What we are proposing to continue in this legislation seems to run counter to the experience of many other countries in terms of separating the roles of the central bank and the supervisory authorities. The arguments against that and in favour of keeping the two roles together seem a little weak in that they give priority to the administrative upheaval that would be involved in separating the two.
I do not seek to make a strong case for separating the new board from the Bank of England. However, in the House and in Committee we should look carefully at ways of trying to ensure that the new board fulfils the purposes that we have in mind for it. It seems to me that there is a danger that if the governor is able to appoint the members of the committee—indeed the governor, the deputy governor and the executive director have ex officio places on the board—there could by a rather cosy club. The board will have an advisory role to the governor. This may give the impression to the public and the City that there is a board and that it is doing something, but, in fact, it will be business as usual. The people who will be taking the executive decisions about banking supervision will be the Governor of the Bank of England and the Banking Supervision Division of the Bank of England, not the new board which will have a purely advisory role.
§ Mr. Cash
In the context of the significance that has been placed on the independence of the board's supervisory role and, having experienced sitting with my hon. Friend on the Financial Services Bill recently, does he agree that it is not simply a question of having people who are apparently independent? We should be quite sure that the functions that they are given and the criteria by which they are chosen ensure that they really are in a position to exercise that element of independent judgment which will be certain to avoid any question of there being a cosy club.
§ Mr. Nelson
I am obliged to my hon. Friend. I take his intervention to be broadly in support of the sentiments I expressed. Of course, this is not uncharted territory. I understand that a shadow Board of Banking Supervision has already been set up with a membership, apart from the governor, the deputy governor and the director, of some five independent members. When one looks at the list of those members and their backgrounds, one sees that, far from being lay members, they are very much people involved in the banking sector. I make no complaint about that. To have the chairman of Standard Chartered Bank and a director of Kleinwort, Benson Lonsdale is probably a very good thing. One needs experts. However, as my hon. Friend the Member for Stafford (Mr. Cash) was saying, one needs a lay element, a common-sense element, to provide some input. I fear that we might end up with a cosy club of governor appointees; of people with whom he 557 is doing business on a day-to-day basis. That will not necessarily ensure what we want, which is better depositor protection.
§ Sir Eldon Griffiths
Is there not one safeguard in that, although the governor will propose, it will be for the Chancellor of the Exchequer to agree? To that extent, I would have thought that my right hon. Friend the Chancellor and his successors would ensure that a cosy club was not created by the banking industry and that some proper outside independent advice was available to the board.
§ Mr. Nelson
My hon. Friend is right. The Chancellor of the Exchequer does have to agree. However, it is interesting that in the case of the Securities and Investment Board—I think that this is a fair analogy—which supervises the investment sector as opposed to the banking sector, the chairmanship and the membership has to be agreed not just by the Chancellor of the Exchequer but by the Governor of the Bank of England acting jointly with him. There is no reciprocal requirement that members of the Board of Banking Supervision should be agreed with the chairman of the Securities and Investment Board. I do not necessarily suggest that there should be such a requirement.
However, although the Chancellor has an effective veto, which is what my hon. Friend was saying, he does not, as I understand it, have the right to nominate, propose and insist upon a certain membership. I feel that this is an issue that is worth some debate at a later stage in the Bill's progress.
There is the question of whether the Governor of the Bank of England should be able to disregard the advice of the Board of Banking Supervision. As I have said, it will have a purely advisory role and it will still be for the governor to decide what he wants to do. What will the relationship of that board be, not only to the banking supervisory division within the Bank of England, but to the new Standing Committee and the Standing Committee of Court which have been set up?
I welcome the board's establishment and the work that it is doing. However, I question whether we are involved in the cosmetic exercise of setting up a supervisory board to persuade people that something is happening but, in the end, it will be business as usual. We want to ensure through legislation and what we say in the House that the governor—he is a sensitive and able governor, in my judgment—is aware of the need for the board to fulfil the independent incisive role of scrutiny and that there should be compelling reasons before the governor rejects its advice.
There are some 300 foreign banks in the City of London alone. We have more foreign banks than any other capital of the world. They are welcome here and they make an important contribution to our invisibles, to employment and to our economy generally. However, there are serious difficulties in excercising prudential control of foreign banks. The governor is not able to exrcise the same degree of control and supervision over them as he is over United Kingdom banks.
As I understand it, foreign institutional banks are able to set up branches and do business in London provided only that they give two months' notice of their intention to do so to the governor. Indeed, there is not necessarily a need for them to seek authorisation in the same way as 558 a domestic United Kingdom bank. That is fine in the case of some of the major international banks. However, in recent years we have seen the establishment of some banks in the Cayman Islands and in other tax havens abroad which use their foreign banking status as a means to set up branches in this country and elsewhere which become the main centres of their activities. If those become a means of circumventing the authorisation provisions of this or other legislation or the prudential control that the governor has to exercise, it is a legitimate matter for concern.
My concern extends beyond that. The overriding feature of the development of the banking industry in recent years has been the enormous increase in the activities and the deposit-taking business of the foreign banks in London. They are the ones now, and in the future, who will wield massive financial muscle power. The ability of the governor and the regulatory bodies to control them and to ensure that their asset base and the nature of their activities complies with the stringent requirement placed on United Kingdom authorised banks is a matter about which we need to be satisfied. Of course, I acknowledge immediately that this is not an easy matter.
In this connection, I should like to see—I hope that the legislation will bring it forward—a contingent right to prevent foreign banks from coming in and taking over British banks. Of course, such takeovers can already be referred to the Monopolies and Mergers Commission, but in the new financial environment in which banks will be operating, there are legitimate concerns about the objectives of some overseas predators coming into the United Kingdom market and taking over long-established and important United Kingdom banking companies. At the very least, we should have a clause in the Bill that allows the Chancellor of the Exchequer to make a judgment on whether such a takeover is in the public interest and I am not sure that clause 21 goes this far.
§ Mr. Butterfill
Does my hon. Friend agree that we would need to be circumspect in the way in which we dealt with that? One of the aspects of the development of British banks of late has been that they have themselves made substantial overseas acquisitions, notably in the United States of America, and we would not want to put anything into British legislation that would inhibit that process. I am sure that my hon. Friend will agree with that.
§ Mr. Nelson
I agree with my hon. Friend. That is why I tried to couch my proposals in a tempered way. I mention the words "contingent" and "in the public interest". I reassert that there may be instances when major British banks or important companies in the financial sector should not suddenly be taken over by a little-known foreign predator, the objectives of which may be wholly different from the public interest. I do not think that what I am proposing in that regard need mean that the important investment of foreign banks over here will diminish or that there will be a reciprocal restriction on British banks making acquisitions abroad. My hon. Friend is right to say that British banks have been active in acquiring interests in banks abroad, but it has not been easy for many of them. When the Americans have wanted to restrict our investments in financial and other sectors in the United States, they have been willing and able to do so.
§ Mr. Cash
Will my hon. Friend also note that whereas, up to fairly recently, we tended to talk very much in terms of the United States of America, now when we are talking about financial markets and the sheer volume of money circulating in the world, and where much of it is controlled, we talk of Japan? It is extremely important to bear in mind the role of the Bank of Japan. We do not want to preclude the Japanese from coming here. We want quite the opposite. We want to be sure that there is reciprocity in the liberalisation of the financial markets as they affect the entrepot in the City of London, as between ourselves, Japan and other parts of the world.
§ Mr. Nelson
I readily accept what my hon. Friend says. I, too, believe that there is a need for more global co-operation between reserve and central banks. Both the Department of Trade and Industry, in its negotiations with the Japanese Government, and the Treasury have been exemplary in the way in which they have tried to promote this.
I should like to underline the point that I made in an intervention about the need to improve the level of depositors' protection that is allowed. In 1979, under the Banking Act, the maximum level of a depositor's protected deposit with one institution was set at £10,000. The deposit protection scheme set up in that legislation offered compensation of 75 per cent. of the deposit up to £10,000 so that, for example, a depositor with £5,000 would receive £3,750. Under the new Banking Bill, the money limits in the scheme remain exactly the same. That represents a considerable reduction in the real level of protection available to depositors now compared with 1979.
Over the past year, there have been considerable discussions on investor protection schemes, mainly in regard to financial services. The compensation scheme to be drawn up by the SIB is likely to offer maximum compensation of between £30,000 and £50,000. the Stock Exchange offers compensation of up to £250,000. It seems anomalous that the banking sector, which is regarded as being so much safer, should offer so much less. I hope very much that my hon. Friend the Economic Secretary to the Treasury, during the passage of the Bill or later,will have an opportunity to review the matter, on the advice of, and taking into account, the comments of other hon. Members who wish to participate.
Having made those remarks, which I hope are not taken in any way as undermining my support for the Bill, I reiterate my congratulations to my hon. Friend the Economic Secretary on bringing forward this much-needed legislation, with the important contribution that it will make towards keeping our banking system secure and respected.
§ Mr. David Penhaligon (Truro)
The speech by the hon. Member for Chichester (Mr. Nelson) was extremely interesting. I suspect from his general approach that his knowledge of how banks work and function is a shade in excess of mine. I hope that he can continue to make contributions of that nature in the House.
The hon. Gentleman referred to the necessity for real independence on the body when we set it up. That is true not just in the Bill but in quite a lot of legislation. I certainly support him on that. I could not help remembering listening to the radio nearly 20 years ago when it was said that in a council in south Wales 16 people 560 were standing as Labour candidates, 16 as Independents and the Rev. somebody or other as an independent Independent. We need independent independents with some real knowledge. It is easy to pick somebody who is just independent of all interests, but one has to find that peculiar combination of someone who is genuinely independent but who has real knowledge as well, otherwise he is nothing more than baggage, looking good and respectable, and giving people confidence when in reality it is not justified.
The combination of the Banking Bill and Friday is not exactly Utopian for me. However, the Bill is important and deserves a great deal of consideration.
I get the feeling that it may well get that, at least from those who have some expert knowledge.
I welcome the independent review announced by the Economic Secretary to the Treasury. Several issues are raised by electronic banking, which give one reason for concern. I say that as much from what I have received in my mailbag as for any other reason. I am sure that many hon. Members at one time or other have had a constituent complaining that money has been taken from his credit account when the constituent claims that he never went to the bank and withdrew it. The bank claims that it can never be wrong. One writes to the bank and to the constituent, and after a week or two one admits that one is hopelessly confused about the rights and wrongs. At the moment there is no satisfactory resolution of the problem. One hopes that the Committee will apply its mind to that.
I should appreciate it if the Economic Secretary explained what consumer representation there will be on the body. It is important to me that the consumer interest is fairly strongly represented. I should appreciate hearing whether the Government have it specifically in mind to cover that aspect.
The whole Bill is an attempt to maintain some freedom in banking as well as regulation. Many would argue that one cannot have a system of freedom with regulation. I am not convinced we can but the Government are right to try and I support their efforts. Many of the advantages that accrue to Britain arise from our ability to maintain freedom with some regulation, and this has not been altogether unsuccessful over the years, although it is not difficult to think of one or two cases that give reason for deep concern. Trying to maintain that contradiction is at the root of many of our difficulties.
Of all the careers augmented by the Bill, the career of auditor has been raised at least 30 steps on a 10-step ladder. It will be interesting to see whether someone is willing to take on the responsibilities involved. The role of the auditors is desperately important and significant.
The clause telling auditors of a bank that they have a duty from hereon to report to the Bank of England supervisory board whatever they see is of key importance. It could be argued that auditors have had that duty for some time by implication, because their responsibility is to audit, but from this moment on they will be liable to be sued by the third party interest if it believes that the auditors have failed to inform and carry out their responsibilities. It must be said——
§ 11 am
§ Mr. Peter Lilley (St. Albans)
On a point of order, Mr. Deputy Speaker. It arises out of early-day motion 195, which is on the Order Paper today. Several times this week, Mr. Speaker has pointed to the misuse of early-day 561 motions to vilify people who have no right of reply. This early-day motion, by contrast, makes serious and important allegations about the Leader of the Opposition. The right hon. Gentleman has the right of reply, and I ask you whether we can ensure that he makes a statement responding to the accusations that he, his office and his colleagues, have been in contact with and have been offering and receiving advice to and from, an opponent of the Crown in a court case in Australia, and that senior members of his entourage have been out in Australia collaborating with people there. These are important matters, and the House has a right to a serious reply from somebody who has the right to reply.
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
Order. If the early-day motion is on the Order Paper, it is in order. However, the making of a statement is not a matter for me, and I think the hon. Gentleman realises that.
§ Sir Ian Lloyd (Havant)
Further to that point of order, Mr. Deputy Speaker. I appreciate your ruling that these matters are not for you, but this is of such grave national importance that a number of us have made it clear, and I have written to the Leader of the Opposition this morning saying, that we wish to have a statement from him. Have you received no notification from him that he proposes to make a statement about what is in the newspapers?
§ Mr. Deputy Speaker
Order. I have received no sign from any right hon. or hon. Member that he wishes to make a statement.
§ Mr. Jerry Wiggin (Weston-super-Mare)
Further to that point of order, Mr. Deputy Speaker. An allegation of this sort against a Privy Councillor, setting out in considerable detail what appears to be unprecedented, irresponsible and, on the face of it, unpatriotic behaviour, surely calls for a personal statement from the right hon. Gentleman, who is present in the Chamber.
§ Mr. Deputy Speaker
Order. I remind the House that when the occupant of the Chair is on his feet all hon. Members must resume their seats. These matters may be of intense importance, as they are, but it is clearly understood that the making of a statement is not a matter for the Chair.
§ Mr. Neil Kinnock (Islwyn)
Further to that point of order, Mr. Deputy Speaker. Perhaps I can shorten these proceedings and ensure that the business of the House is resumed. As you may have observed, I have with me a statement which I deliberately brought into the House as a consequence of an early-day motion put on the Order Paper yesterday for malign and mischievous reasons that have no connection with matters relating to national security, and everything to do with efforts on the part of Government Back Benchers to cover the Government's exposed tail.
The events of this morning and the news that has become generally available through the BBC about the evidence given by Sir Robert Armstrong ensures that additional attention will be given to this case, and therefore to matters relating to national security. In these 562 circumstances, it is important that I make this point of order to give hon. Gentlemen an opportunity to withdraw their early-day motion.
I would be more than happy Mr. Deputy Speaker, if you were to find it acceptable, to provide, either in written form or before the House, a full statement of exactly what has transpired, the reasons for what has transpired and the extent to which I have used quotations, which I drew to the attention of the House on Monday last, of the transcript of the case in Australia.
§ Mr. Deputy Speaker
Order. If this is a personal statement, the right hon. Gentleman should send it to Mr. Speaker.
Sir John Biggs Davison
Further to that point of order, Mr. Deputy Speaker. That was the purpose of the point of order that I wished to put to you.
§ Mr. Marlow
Further to that point of order, Mr. Deputy Speaker. If the Leader of the Opposition is to make a personal statement, will it be in order to question him? Would it——
§ Mr. Deputy Speaker
Order. The hon. Gentleman cannot have heard what I said. If this is a personal statement, it should be sent to Mr. Speaker.
§ Mr. Marlow
On a further point of order, Mr. Deputy Speaker. You will know from "Erskine May", on page 342, paragraph 9, that it is always the habit, quite properly, of Governments not to answer questions on security. It appears that a lickspittle of the Leader of the Opposition's private office, Miss Helen Hayman, a member of the Australian establishment, is in Australia because the Leader of the Opposition——
§ Mr. Deputy Speaker
Order. We are in the middle of an important debate, and the hon. Gentleman is raising matters that could easily be raised at some other time.
§ Mr. Kinnock
Further to that point of order, Mr. Deputy Speaker. I feel that the comments made by the hon. Gentleman—I suppose that I have to use that term—are unworthy of the House, and that the House is in danger of being misled as a consequence of the specious and, to say the least, ungentlemanly, comment made by the hon. Member for Northampton, North (Mr. Marlow). The person to whom he referred, erroneously, using the wrong name, is no lickspittle. Miss Patricia Hewitt, who does work for me, is not in Australia. At this moment, I presume that she is at home, tending to her baby of a few months' age.
§ Mr. Deputy Speaker
Order. We should now proceed with the debate on the Banking Bill. Mr. Penhaligon.
§ Mr. Penhaligon
I was trying to discuss the role of auditors in banking. We could do with a few auditors within the confines of the House sometimes. By applying my mind to the Bill rather than to the more interesting 563 shenanigans that may or may not be taking place somewhere else I have clearly missed the main news story of the day.
Auditors are gradually being given a new role, which is being given strength and meaning by the ability of third parties to sue the auditor should the bank collapse. The argument will be that the auditor should have warned the system that something odd and peculiar was happening in the bank, as he should have had reason to know that. Therefore, if something goes wrong and he has failed in his role, he is responsible for a person's unfortunate financial position.
This is an important and significant job. The hon. Member for Thurrock (Dr. McDonald) suggested that the job should go to someone else, because the auditor is paid by the people on whom it could be alleged that he is spying. I am not certain that that is right. It is important that these responsibilities and jobs go to someone who is likely to know what is happening. Two parallel systems of auditing would have to be set up, one reporting to the bank and one reporting to somebody else when the sheer cost of auditing and checking is terrifying in any case.
However, there is a risk that, in difficult circumstances, the auditor will reach the point of semi-hysteria and feel that the only thing that he can do is report everything that comes to him just to protect himself. If that situation should arise would the supervisory board have the capacity to deal with the information with the necessary speed to alleviate people's worries? It may well trundle along rather nicely, but how would it deal with an emergency? I have no solution to that problem. However, because of the legal responsibilities on the auditor he may feel that the only way to protect himself is to report everything. At times when confidence is not high, there is a real danger of the whole system simply and absolutely becoming overwhelmed.
My next point relates to the role of the independent members of the supervisory board. I note that the legislation states that if the independent members disagree with the Bank of England members, they can report to the Chancellor. Does that mean that they meet separately and independently? As a member of a single political thrust that is divided into two entities, I can advise them not to meet separately too often. Sane, intelligent and rational people meeting separately have a tendency to reach marginally separate conclusions. If they do not meet separately, how can independent members show that they take a different view to non-independent members? They should make representations, as the Bill permits.
It is important to have independent members because it is crucial that the system is seen to be operated well by people of high calibre. I would like a litte more information about how the Minister thinks that the system will work in practice. Several hon. Members referred to the deposit protection scheme which is inadequate. There cannot be any justification for not indexing it at the earliest possible opportunity. The only satisfaction is the statutory instrument regulation means that it may be changed fairly easily.
I can think of no reason why the opportunity could not be taken to increase the £10,000, 75 per cent. limit. I am sure that many of my constituents do not realise that if they have £30,000 deposited in a bank and that bank gets into difficulties, the most that they can hope to recoup 564 under the scheme is £7,500. If they understood that, the banks might find themselves slightly lighter on one or two deposits. We must be concerned mainly about the small depositor. Millionaires receive advice and know the risks, although it is obvious from the odd cases that they do not always get it right. For those investing £30,000, possibly from a life insurance policy or savings, the safeguards are inadequate. Why did the Government decide not to do anything about that?
I cannot help but take a rather cynical approach to the clauses that prevent people from taking over our banks. By training I am an engineer and I make no apologies for that admission in a debate on banking. Sometimes a person with no direct involvement in the matter can make an important contribution. The powers to which the Minister referred already apply to Japan for engineering. Everyone said at the time that they would ensure that trade was fair, but in reality they did nothing about it. We have allowed a great slice of our industry to be undermined—admittedly by superb engineering, but with pretty dubious practices at the fringe.
Following the big bang, the fear in the City is that the Japanese will obey every rule, like no one has ever obeyed them, until they get too big for anyone to do anything about it and they will then act in the way that I have described. I am very worried about that. We should have an absolute assurance that the Japanese will not be involved in British banks until there is a considerable change in their attitude. By no involvement I mean no involvement. I wonder whether we are really wise to allow them to operate within the City, given their attitude and history. I put that point on the record.
My final point has nothing to do with the Bill. However, the hon. Member for Thurrock raised it, so I cannot see why I should not do so as well. It is the current consumer credit boom. That has enormous political attractions for the Government. For example, if someone borrows £1,000 and buys a television set—a rather expensive television set—the Chancellor immediately receives 15 per cent. in VAT. It is highly probable that the company that sold the £1,000 worth of goods will be profitable and the Chancellor will receive another cut from it. If it was purchased from a shop, someone would have served the customer, so there is an element of job creation. That is Utopia—a circle of events designed to please everyone, but it will in the end collapse and there are many reasons why we should worry about that. Clearly, many individuals are becoming so deeply involved in credit that often the only result is repossession.
I am not sure what the hon. Member for Thurrock was proposing. It appeared that she was getting very close to suggesting that the Government should in some way set up a supervisory board to examine the problem of individual debt. Certainly that would be an intrusion into the rights of individuals to organise their affairs as they want to, is over the top.
§ Dr. McDonald
The hon. Gentleman engaged in a flight of fancy when he described what I am alleged to have proposed. My point was that social workers, citizens advice bureaux and other bodies already assist people who are deeply in debt. Those agencies, as the hon. Gentleman must know, are very worried about the extent of debt that some people have taken on and their liability to fall into the hands of loan sharks. I made nothing like the proposals that the hon. Gentleman mentioned.
§ Mr. Penhaligon
I accept that the hon. Lady did not say what I thought she had said. Of course, the hon. Lady did not offer any solutions to the problem. I hope that she will take another opportunity to tell us what the Labour party proposes to do about the problem.
As a layman, I believe that the Bill is useful. I think that those who are not laymen also think that it is useful. We accept the legislation in principle, but we are worried as to how it will stand up to the test of time. When it has stood the test of time, it might be that some modification will be needed.
The role of independent observation is crucial to the whole operation, as is the role and the marginally peculiar position in which the auditor finds himself. Those are two of the major keystones that hold the legislation together, if it is held together. The Minister today should give us some information on the independent role, even if the questions that I have raised regarding auditors are not easy to answer. They are vital to the whole matter. If that part goes wrong, my fear is that we will produce a Bill which, in five or six years, we will have to replace. We must get it right.
My party will not oppose the Bill. Indeed, we cannot oppose any Bill on a Friday as we disperse to our various parts of the country. As is well known, however, the usual channels would not have put the Bill down for a Friday if there were fundamental opposition to it. As there is broad agreement, the Committee stage may be a fruitful one, as is so often the case in these circumstances.
§ Mr. John Browne (Winchester)
First, I must declare a financial interest in the finance industry.
The key importance of the banks in both international and national economies is well known. As my hon. Friend the Member for Chichester (Mr. Nelson) and others have said, people trust the banks with their entire savings. the Government therefore have a duty to ensure the maximum prudent protection by preventing banks from taking imprudent risks, as was done, for example, in the case of the international debt crisis.
A number of key changes have affected the banking industry in recent months and years. First, there has been the growth of financial supermarkets. This has been enhanced by the big bang, of which I entirely approve. Now, instead of just being lenders, banks are becoming dealers in securities.
§ Mr. Browne
Yes, although that happened to some extent in the past.
Two other developments have greatly changed the whole environment in which banks work. To use two buzz words, they are securitisation and globalisation. The first means that more and more debt obligations are not just between two parties but are traded as securities among many parties, so that in the world system there is a huge inherent and increasing risk of a settlement default and the ripple effect that such a problem would cause.
Globalisation means not only that a problem in one country could spin into many others, as in the tin market crisis, but that one has to consider the effect of cross-border transactions. A dealer in Thailand may not fully understand financial instruments in the London and New York markets. There are also physical settlement risks.
566 The international legal system may also not be keeping up with the speed at which cross-border transactions are developing throughout the world.
§ Mr. Browne
I should love to give way to my hon. Friend, but I cannot do so as I am trying to be brief.
Commercial and financial risks are well known and have existed for years, although they are now larger. However, the commercial banks got themselves into a great new area of risk by moving into international lending. That is still a very serious risk. They are now getting into yet another area of risk—quasi-security markets. As a result of financial engineering over the past two or three years, the banks are now not just in the futures market, but in the options market and the swaps market. Indeed, they are now getting into future options on swaps! That involves very great risk, which the bank regulatory authorities may be willing to tackle, but are not yet able to tackle.
Three years ago the swaps market turnover amounted to about $15 billion. It now involves some $300 billion per year. The image of that market is that everyone makes a profit and huge salaries are paid to swaps dealers, but who is making the losses to provide those profits? It is also believed that everyone, from corporate treasurers to banks, avoids all risks. In that case, who is taking on the risks? Most swaps are done through banks, so banks are becoming increasingly involved in the underlying synthetic quasi-security dealings. Indeed, often they do not match the current transactions of the parties but warehouse the unmatched trades. In other words, the banks are now getting into the warehousing of security risks rather merely warehousing securities.
There are forward swaps, zero coupon swaps and even put-and-call swaps. The main risks are risks of practice and agency and the legal, systemic and process risks.
First, the practice risk arises because there is a genuine lack of understanding of this new, complex and fast-moving cross-border market. People may not understand what the transaction is about and what their commitment really is in a future swap or a put-and-call swap. They may be advised to engage in such dealings without any bona fide understanding of what exposure is involved. There is also the risk of malpractice. I do not say that this is taking off in a big way, but we know that it occurs, and in this market it can have an exponential effect involving many innocent people who may have no idea of the underlying transaction.
Secondly, there is the agency risk. A person involved in malpractice may dash from one firm to another, out of the business altogether or across to another country, taking with him the computer discs on which the trades were recorded. How can we catch that individual and the on-line records? Some of the transactions are extremely large.
Thirdly, there is the legal risk. I have yet to find a legal definition of a swap, yet this forms the basis of a $300 billion market. One thinks of London and New York, but what about the Japanese, Chinese or Australian definitions of cross-border swap transactions? There is also uncertainty as to the legal practices involved in all the quasi-security operations undertaken by the banks. Then there are the new markets in which there is little or no legal precedent for transactions of this kind. There is also the 567 cross-border problem arising because international legal accords are way behind the actual transactions taking place, especially by electronic means.
Fourthly, there is the systemic risk. Spreads of seven basis points on average for a swap deal seem to me, as a virtual outsider, too small to cater for the inherent risk of warehousing risks rather than securities; just as one may argue with hindsight that Lloyd's charges for the risks that it was undertaking three or four years ago were not high enough, or that some banks in the international debt market were not charging high enough spreads for the risks they were undertaking. There is also an over-concentration of risk in the hands of major banks and investment banks in the big capital markets, especially London and New York. The risk taken on by financial supermarkets represent big risks for the public and for the economy generally. With the systemic risk, to, there is the cross-border problem.
Fifthly, there is the process risk, or back office settlement risk. There may be a lack of genuine understanding, not just by those doing the deals, but by the back office people who have even less ability to understand the theory, let alone the practice and the physical settlement aspect. That, too, is a very high risk. It is an exploding market and involves high turnover, so it will load the back offices heavily in an area which they might not fully understand. We must also consider the cross-border problem, there being different ideas about and methods of settling.
I strongly support the Bill. I congratulate my hon. Friend the Economic Secretary and the Government on their initiative, but I believe that, in some areas, the Bill does not go far enough with regard to supervision of the banks. We must ensure that the banking regulatory authorities are brought more up to speed with today's trades, and do not just follow and react to reports of yesterday's trades. That is urgent, and the Government must face it for the national and international good.
§ Mr. Ken Weetch (Ipswich)
The House has heard some interesting speeches this morning and I have followed them with great attention, especially that made by the hon. Member for Chichester (Mr. Nelson). As a result of listening to his speech, I scrapped a good deal of the text that I had prepared. It is now rolled up on the floor at my feet.
I sincerely hope that the hon. Gentleman follows through much of what he said and that we shall see him in Committee. He made some valid points which should be expanded a great deal.
I could not follow the intricacies of the swap market, to which the hon. Member for Winchester (Mr. Browne) referred. It is an arcane area which I have never followed, and I shall need more guidance on it.
On 20 June, the Chancellor of the Exchequer said:serious shortcomings in the management of JMB led to its collapse—over-rapid expansion of the loan book, heavy concentration of exposures, and lack of adequate control systems. JMB was also guilty of serious misreporting to the supervisory authority."—[Official Report, 20 June 1985; Vol. 81, c. 452.]Is there enough in the Bill to give us a strong assurance that the same crisis will not be upon us again? That is the key question. My contacts in the City are limited in 568 number, but I can tell the Economic Secretary that many of them think that the Bill is not drawn stringently enough. I share that view.
It is a sad fact of recent banking legislation in Britain that regulation comes only in response to serious breakdowns in the financial system. To a non-professional such as me, banking legislation in modern times seems to have been only a response to serious events rather than a grasped opportunity to give a strong and effective lead to the banking fraternity and the City of London. We have lagged behind events, and not put down strong markers.
It seems that banking legislation has been only a few notches down from ad hoc problem management. Surely that is not right. We have had two good examples recently. In the mid-1970s, the City of London was rocked by the fringe banking crisis which occurred in the wake of the collapse in property values, and some fringe banks went to the wall. That disreputable episode was largely responsible for the Banking Act 1979.
In a similar way, the Johnson Matthey scandal has had much to do with prompting this Bill. Just as the 1979 Act related to previous omissions and gaps in official financial control, the present Bill relates to omissions that have been discovered since 1979, not least of which are critical weaknesses in control systems. Once again, we are reacting to events rather than trying to shape the future.
I am the first to admit that, when the Treasury approaches these problems, it is in difficulties because it must try to reach a compromise between flexibility, so that the City can develop to meet the needs of growing financial markets, and firm regulation. It is never easy to strike that balance.
There will always be banking collapses. The Government can lay down as many regulations as they like but, in the end, banking, like much else, depends on the quality of the individuals involved. How much regulation can there be against an incompetent who makes ill-judged investments? How much regulation can there be against people whose conception of everyday ethics is pretty flexible?
As my hon. Friend the Member for Thurrock (Dr. McDonald) said, after the big bang the City of London contains a diverse range of people from old world financial rectitude to financial riff-raff. The Economic Secretary does not have an easy task, but a more rigorous approach than is evident in the Bill is needed.
I support the Bill as far as it goes. It says something new and something old in that we have debated some issues before. There is to be the Board of Banking Supervision. I appreciate everything that the hon. Member for Chichester said about that. I listened to him carefully. A good deal of what he said should be explored thoroughly when we examine the Bill line by line.
I am not convinced that abolition of the two-tier system is the right way forward. I am not saying that it is not, but I shall require a great deal more convincing before I believe that it should be abandoned. I accept the proposals concerning authorisation criteria, large exposures, relations between supervisors and auditors and banking names and descriptions. We are arguing about what will happen in practice rather than what is set down on paper.
The House should support the Bill, but in Committee we should scrutinise it carefully to make it as strong and effective as possible. However, that should not prevent us from asking some critical questions about the make-up of the Bill now.
569 One of my criticisms about financial legislation is that it leans far too heavily on informal understandings as a basis for control and on the old-boy network in the City, which is always assumed to understand such matters. I am the first to accept that the hallmark of the developments in the City and in the banking system has been a heavy emphasis on informal and intuitive understandings among people who know the system. The standard argument is that informality has always been the strength of the system, but that argument can be pushed too far. It is all very well to have informal understandings, but when something goes seriously wrong, we reach for the levers of formal control. We are pushed into reacting to serious events when we should have tried a little foresight.
In banking, we have always relied on the minimum legislation necessary. The formal powers given to the Bank of England in the Banking Act 1946 were seldom used. That may be a strength, but over the years it has also become a weakness. After the big bang in the City, there will be more opportunities for those who have speculative intentions, which will do no good to the City and its earning capacity in invisible exports or to the long-term purpose of financing British industry and commerce. There is considerable potential for a casino in the new system just down the road. That applies, to some extent, to the banking framework as well as to operations in other financial markets.
The Bill is not rigorous enough. It should take steps to establish a stronger framework of statutory regulations. I do not intend to make a Committee-style speech, because I shall pursue that point in Committee and examine the Bill line by line, but I should say now that the Bill is not formal enough, as I have said. Nor is it rigorous enough. It is still permeated by the mentality of a nod and a wink, as was obvious from the tone and temper of the report of the committee set up to consider banking supervision.
The old-boy network and the informal understanding are still very much with us, to the detriment of more effective regulation. With the new financial jet set in the City, that approach is clearly not enough. I was not impressed by the report of the committee. It was weakly argued, it was casual in its approach, it lacked a sense of urgency and it belonged to the easy world of yesterday rather than to the competitive jungle of today and tomorrow. The hon. Member for Winchester described part of that competitive jungle, and I was interested to listen to him. I do not know how we could ever regulate against that, but I strongly agree with him that we should at least think seriously about it and try to follow developments in the new operation, which throws up stark challenges to us.
The hon. Member for Chichester mentioned the Board of Banking Supervision and the independent advice on it. It is my experience that, if they are not careful, non-executive directors are always out-manoeuvred in serious matters and are often short-circuited when it comes to providing information. The hon. Gentleman mentioned a banking establishment. There was no greater banking establishment than this committee, three members of which came from the Bank of England. Indeed, 50 per cent. of the committe members came from institutions whose previous supervisory activities and records were not exactly covered in glory.
After the Johnson Matthey Bankers fiasco, we need more regulation, not less. Therefore, I wish to know more about why the previously considered protective device of 570 two-tier regulation has been dismantled. From what I have heard, I understand that it was dismantled more because of its operation and mangement that because of inherent difficulties in its nature, and I remain to be persuaded on that point. The committee's report was certainly unconvincing. The suggestion that the two tiers made supervision more difficult was stated repeatedly in the report—indeed, it was stated repeatedly today—rather than convincingly argued. As a layman—one of the laymen welcomed by the hon. Member for Chichester—I know that there is a public perception of the word bank. To ordinary people, it suggests caution, prudence, safety, financial rectitude and soundness, much more than does an ordinary licensed deposit institution. The report said that two-tier supervision caused administrative difficulties. Administrative difficulties are meant to be solved. Administration is a tool of Government, not a end in itself. The fact that there were administrative difficulties, as a conceptual argument, is neither here nor there.
Nor was I impressed by the argument about lowering the status of banks to that of licensed deposit-takers. The report said that this was a useless tool of discipline because it questioned confidence in the institution, which could cause a run on the bank. If, after fair warning from the supervisory authority, a financial institution or bank does not mend its ways, it must face the financial consequences. That is the purpose and part of the mechanism of financial regulation. A major criticism of the informal system of regulation before 1979 was that it was too easy to become a bank. The 1979 legislation responded to that criticism and made it more difficult to become a bank. I ask the Economic Secretary a question. There has been a serious banking collapse and a desperate rescue operation. Why then should we change the criteria now when the situation is becoming more serious, not less, and will need more regulation, not less?
I am not convinced about the safeguards in the provisions on exposures. Can the Minister tell us whether the provisions of clause 35(1)(a) and (b) mean less regulation of exposures or more? Are the criteria being more tightly drawn, or less? If they are less tightly drawn, we are moving in the wrong direction. Clause 35 states that a report shall be given to the Bank of England if a bank under supervision intends to enter into transactions that will lead to an exposure to risk of losses in excess of 25 per cent. of the capital base. Is that less regulation than before, or more? I understand that the Bank's current guidance on exposure is related to 10 per cent. of the capital base. I have not had a chance to compare the proportions of exposure to the capital base in the United Kingdom with those of the European Community and elsewhere. Are our regulations more tightly drawn?
The Minister was right to emphasise the adequacy, calibre and quality of control systems together with the nature of the supervisory personnel who will have to operate those mechanisms. Some vital questions must be answered and I hope that we shall explore this matter further in Committee. What steps will be taken to change and improve the flow of information from supervised banks? The Chancellor of the Exchequer said that one of the things that went wrong in the JMB case was that the Government received duff information from the bank when they were trying to exercise some supervision. What is there in the Minister's statement today to assure us that 571 we shall tighten up on the quality of information that is given to supervisors, so that we can rest more easily in our beds?
There is need to explore much further the nature of the relationships betwen supervisors and auditors. My hon. Friend the Member for Thurrock has promised a close scrutiny of that and other matters when the Bill is examined line by line. I support her in that, especially as at present both financial procedures and financial ethics in the City of London are becoming much more flexible.
§ Sir Eldon Griffiths (Bury St. Edmunds)
The House must be grateful to two cathedral cities of England. My hon. Friend the Member for Chichester (Mr. Nelson) spoke with great authority and perception and I am sure that my hon. Friend the Minister will wish to reply to his various points. My hon. Friend the Member for Winchester (Mr. Browne) made a highly technical and impressive speech which, to use one of his phrases, will overload the back office of my hon. Friend the Minister.
I was surprised at the speech of the hon. Member for Truro (Mr. Penhaligon), although I agreed with his central point. He said that whatever else we do, the Japanese must be kept out. That is an odd view for a Liberal. I do not propose to comment on the speech of the hon. Member for Thurrock (Dr. McDonald), because I am sure that my hon. Friend the Minister will do so. However, I hope that the Labour party will avoid reacting to the immediate headline. There are problems in the City of London and they deserve to be condemned, but a Bill of this nature which fits into the Government's general strategy deserves to be examined more maturely than on the basis of the most recent scandal—deplorable though it certainly is.
As a non-banker, I understand the Government's broad strategy to be, first, to liberalise, deregulate and free the environment in which our financial institutions operate—that objective is to be commended warmly—and, secondly, to provide more competition and open wider the gates of the City of London to small new firms and perhaps more specialised, diversified firms so that the range of services is broader, discipline keener and the choice to the consumer wider. That second objective is also entirely right.
But as this Bill and others demonstrate, the Government also seek to provide a clearer, simpler and, hopefully, more effective system of control and supervision. That cannot be put more effectively than it was by my right hon. Friend the Chancellor of the Exchequer in his foreword to the White Paper when he said:An effective system of banking supervision is as important as the banking system itself. For without it there will not be the confidence on which sound banking depends—from the confidence of the individual depositor that his money is safe, to confidence in Britain as one of the foremost financial centres in the world.
I, too, warmly welcome the Bill. I remind the House that only last night we agreed to the establishment of the new serious fraud office under the Attorney-General. That was a wholly proper response to the recent rash of improprieties which have disfigured the City. It will be welcome to the hard-pressed fraud squads of the City of London police and the Metropolitan police.
572 There is only one main flaw in the Bill. I see that my hon. Friend the Minister is wearing his Hawks club tie, which on other occasions I am proud to wear. He will therefore be aware of the matter worrying me. The worm in the wood is part III, particularly clause 63. This would prevent licensed deposit-taking institutions from using the name "bank" and from giving any indication in their names that they undertake banking business unless they have more than £5 million paid-up capital. Foreign-owned banks however are to be excepted and the Bank of England will be able to do nothing about them as they do not fall under clause 63.
The Government's cut-off figure of £5 million for the use of bank names will have a damaging effect on many of our small institutions, especially the Reliance Trust—the Salvation Army's bank—and the Manchester Exchange Trust. I have no personal interest in either, but it is right that the anxieties of both these institutions should be known. Their complaint is, first, that there was insufficient consultation and, secondly, that it is inconsistent to set a figure of £1 million as the net assets criterion for deposit taking and a figure of £5 million to use the name bank. Thirdly, there is, as a result, the prospect of our continuing with two tiers of financial institutions that are to be separated by no more than the arbitrary prohibition of the smaller ones from describing themselves as banks. There will be sheep and goats—those above £5 million who can call themselves banks and those below £5 million who cannot. This is bound to damage the public reputation and business of well-established smaller institutions, whose customers henceforth will be unable to indentify them as banks.
As to the failure to consult, the basis of the Bill is the report of the Leigh-Pemberton committee. I do not accept the strictures of the hon. Member for Ipswich (Mr. Weetch) about this committee. It did a first-class job and ought to be commended, not reprehended in this House, but as far as I can discover, the smaller institutions were given no formal consultation opportunity to make known their objections when the Government decided to shift from the Leigh-Pemberton recommendation regarding the figure that would be appropriate for banking names to the White Paper recommendation that changed that proposal.
My hon. Friend the Economic Secretary has been most courteous in listening to me in private on this matter. He told me that it was open both to Manex and Reliance to make known their feelings at any time after the publication of the White Paper. Manex did so, directly to the Bank of England. Perhaps the Bank of England was unable to convey this to my hon. Friend or to the Treasury, in which case there may have been a failure of communication between the City and Westminster.
Howsoever that may be, both these companies are deeply affronted. Rightly or wrongly, they have drawn the inference that the Treasury sought opinions on this matter only from those larger institutions that have, the House might think, an obvious interest in preventing their smaller competitors from calling themselves banks.
I turn from consultation to the substance of the complaints made by these smaller but highly reputable institutions. Both Leigh-Pemberton and the White Paper are united in believing that there should be a single threshold of £1 million as the basis for authorisation of deposit-taking institutions. What baffles me is the decision to raise the threshold for the use of the name bank to a level that is five times higher than this.
573 The tests that are set out in the White Paper, as by Leigh-Pemberton, to justify any financial institution being authorised are very clear: adequate capital and liquidity, a high reputation and standing, prudent operation by appropriate persons and the provision of a wide range of banking services. These are very proper criteria. And Manchester Exchange Trust and Reliance Trust unquestionably meet these criteria. Indeed, I would argue that they do so more effectively than certain institutions whose equity exceeds the £5 million mark, which is to be used to exclude Manex and Reliance from describing themselves as banks.
I remind the House that a very large number of overseas banks will continue to be established in the City of London and will not be caught by the £5 million cut-off for use of the name "bank". Many of them—I hope not to cast aspersions on them—certainly cannot be described as having greater probity, better quality staff or a higher reputation than Manex or Reliance. That is why I find it impossible to reconcile the insistence in the Bill that a £5 million threshold must be used to justify the use of the term bank with the statement in the White Paper, paragraph 7.13, thatIt is important to avoid the requirement which frustrates market entry and the benefits of competition… Adequate substance is only one and not the first of the requirements for a prudent deposit-taking institution.I believe that Manex and Reliance are entirely prudent deposit-taking institutions and that it is wrong to deny to them the right to describe themselves as banks.
Let me now quote very precisely to my hon. Friend the Economic Secretary the clear recommendation of the Leigh-Pemberton committee. Recommendation 13.2 says thatThe present two-tier system of authorisation should be replaced by a single authorisation… All the powers given to the Bank under the Act should apply to all authorised institutions and all authorised institutions should be entitled to use banking names".I do not think that Leigh-Pemberton could have put it more clearly and precisely than that, but the Bill abandons that advice.
The White Paper offers a variety of reasons but it comes to the clear conclusion thatThe popular understanding of the word 'bank' lends a more substantial aura to certain institutions than their size and standing merit.I suppose it was this that led the Government to limit the use of the word bank to institutions with paid-up capital of more than £5 million. But my hon. Friend has accepted in the White Paper and in his converstations with me that this figures is wholly arbitrary. It is bound to be.
I am well aware that there was pressure for the figure to be higher as well as pressure for it to be lower. However, it is unjust to the Salvation Army's bank and to Manex to suggest that their size and standing are such as to make them unsuitable to enjoy what the Government describe as the "aura" that the word bank lends to their operations.
One result of my hon. Friend's proposals will be to recreate two tiers: £1 million for licensing and £5 million for nomenclature. The consequence of this, in practical terms, is bound to be that two lists will be kept by the Bank of England and, no doubt, by the Securities and Investment Board and the other institutions. One list will be headed "banks". The other will be headed by some other term of art. For shorthand purposes, I shall use the term non-banks. So there will be the authorised banks—over £5 million—and the others under £5 million.
574 By my calculation, there will be only a few British institutions which fall below the £5 million threshold—save for the large number of foreign banks that are operating in this country—and two of them will be Reliance and Manex. This will surely damage them. For whereas until now there has been a fairly large number of licensed deposit-taking institutions in the second category, henceforth that minority will be very small indeed.
From the point of view of corporate treasurers, local authority treasurers and building societies, there will assuredly be the tendency not to treat those on the second list—the non-banks—in the same way in the market place as those who can use the term bank.
Fund managers with cash to deposit for a short period will be reluctant, to put it mildly, to place their funds with institutions which are statutorily denied the use of banking names. As a consequence the competitive position of Manex and Reliance may well he damaged. We shall be making it less easy for small new institutions to add to the competitive environment of the City.
I turn now to my suggestions for tackling this problem. My hon. Friend the Minister is aware of at least two of them, but the third may be rather better. One possibility would be to reduce the proposed £5 million to perhaps £2.5 million. I understand the difficulties that the Government would face over that, but it is certainly a possibility.
Secondly, the Minister could allow the Bank of England or the supervisory board to exercise a measure of discretion. That is to say, if they were satisfied that an institution was up to the mark in every respect in probity and reputation they could allow it to use the name bank even though its capital was somewhat below what my hon. Friend himself acknowledges is the purely arbitrary figure of £5 million. That second option of the supervisory board being able to use its discretion has a great deal to be said for it, but since discussing this with my hon. Friend I have come up with a third possibility. It is what I would call broadly the grandfather approach. As my hon. Friend knows, since the Banking Act 1979, institutions entitled to use banking names have been limited. I propose that this Bill should accept another category, namely authorised institutions that used banking names prior to the 1979 Act.
My hon. Friend may wonder why I wish to go back to the position that existed before that Act. I make no bones about it. He has acknowledged, and I think it is common ground in the House, that the 1979 Act did not do the job properly. We are getting rid of most of it. For that reason, there can be nothing sacred about the arrangements made under that Act to distinguish between the licensed deposit takers and the banks.
As my right hon. Friend the Chancellor of the Exchequer said, the 1979 Act has serious weaknesses. That was one of them and it would be quite reasonable to return to the situation in which authorised institutions which used the name bank prior to the 1979 Act should again be allowed to do so. That would certainly solve the problems of the Salvation Army's bank and Manex.
My hon. Friend has already undertaken to consider carefully the following points. First, small institutions which by any measure meet all the relevant tests of competence, high reputation and demonstrated achievement in the market place, ought not to be damaged solely because they do not possess the arbitrarily established figure of £5 million of equity capital. It is the quality and not simply the quantity of a bank's assets that ought to determine its standing.
575 Secondly, if we believe, as I do, in fair competition, it cannot be right to handicap our smaller financial institutions vis-à-vis their larger competitors, simply because they do not meet some purely arbitrary figure for their paid-up equity capital.
Third—and the House may think that my third point is most important—it is wrong to allow the subsidiaries of foreign institutions operating in Britain to call themselves banks, despite the fact that in Britain they own considerably less than the £5 million required, while at the same time denying this advantage to our own well-established indigenous licensed deposit taking institutions.
Finally, it is unreasonable to legislate to prevent a respectable and properly constituted business from incorporating into its name an accurate description of the nature of its activities, especially when it has been specifically authorised by the Bank of England—as it will have to be—as being competent to undertake that business.
As a civilised and astute Minister, my hon. Friend will recognise that there is no point in deeply offending by this Bill two small but immediately reputable institutions one of which, the Salvation Army's Bank, has a specially wide appeal, and the other, Manex, which for 103 years, since 1876, called itself a bank without any adverse consequences whatsoever. I should like the Minister to make good the damage that the 1979 Act caused to those institutions, in other words to make reparation to them for a mischief that was never right.
§ Mr. John Butterfill (Bournemouth, West)
One of he disadvantages of catching your eye at a late stage in a debate such as this, Mr. Deputy Speaker, is that many of the points that one would have made have been by other hon. Members, and in many cases they have been made much more eloquently than one could make them oneself. I pay tribute to the contributions of my hon. Friends the Members for Chichester (Mr. Nelson) and for Winchester (Mr. Browne), whose knowledge of the subject is quite outstanding.
The hon. Member for Thurrock (Dr. McDonald) could not resist having a swipe at Government economic policy, but I was encouraged to hear her say that, for any Government, there comes a time when borrowing has to stop. That is a refreshing change of heart by the Labour party, especially when one looks at the future spending plans outlined by the shadow cabinet. It also causes one to recollect the time when the borrowing had to stop under the last Labour Government, when the right hon. Member for Leeds, East (Mr. Healey) was recalled from the airport to talk to the IMF.
The hon. Member for Thurrock said that she was worried about insider dealing. Perhaps I can assist her. She played a distinguished part on the Committee which considered the Financial Services Bill, as did many hon. Members who have spoken in the debate. Perhaps I can refresh her memory by referring her to sections 173 to 178 of the Act. She suggested that there was a problem in that under the Act only individuals would be subject to sanctions, and that there was a need for further action. Section 174(2) deals with market makers. It refers toa person (whether an individual partnership or company)".
576 The Act goes on to detail the penalties that can be applied to companies and individuals and specifically sets out what they can be. They include imprisonment for individuals and removal of authorisation for companies.
§ Dr. McDonald
I am aware of the legislation that already exists, but we are worried about the use of such legislation. All too often it appears that when insider trading is discovered an individual is found guilty of the offence and he or she resigns from the company or organisation, and that seems to be the end of the matter. We need to make sure that organisations which benefit from such dealing are penalised as well. We have already had two cases of insider dealing, one of which probably affects Britain, and many commentators expect many more cases of such dealing to occur. We do not want individuals merely to resign gracefully from the organisation involved, to suffer their own penalties and for nothing further to happen.
§ Mr. Butterfill
We would all agree entirely with the hon. Lady on that score. That was the purpose of our debates on what is now the Financial Services Act 1986. It has been law for only a matter of weeks, but I am sure that it will be enforced rigorously. The signs that are coming from the Securities and Investment Board are that that will be the case.
I endorse what has been said about the importance of the banking sector to the economy and to the prosperity of us all. It is especially important in my constituency, where many clearing banks have established major offices. We are fortunate that the European headquarters of Chase Manhatten are being established there. This diversification is providing welcome employment opportunities for those of my constituents who have, sadly, been finding themselves the victims of the relatively high levels of unemployment that have existed in Britain over the past few years.
The Bill will build upon what we have already done with the Building Societies Act 1986 and the Financial Services Act 1986. The discussions that we have had so far are encouraging and suggest that our discussions in Committee will be as constructive as those that took place in Committee when we considered what was then the Financial Services Bill. I echo what my hon. Friends have said about the Board of Banking Supervision. We know that there will be five independent members of the board, and we appreciate that they will need to have a high level of expertise in, and knowledge of, the banking system. I am sure we all hope that they will accurately and fairly represent the lay public. It would be helpful if my hon. Friend the Economic Secretary to the Treasury could set out the sort of criteria that he envisages will be required for membership of the board.
The immunity provisions for the Bank of England in exercise of it supervisory and regulatory functions echo very much the debates that we had on what is now the Financial Services Act. I was pleased to see that it was proposed to give immunity to the bank as an institution and to its employees. It would be impossible for the bank to carry on adeqately its supervisory function unless it and its employees had immunity.
I welcome the revised basis of supervision and the powers of direction that will exist. Undoubtedly there were deficiencies in the 1979 Act. It seemed rather anomalous that the requirements for licensed takers of deposits were 577 in many instances a good deal more strigent than for those who were able to call themselves banks. It is right that included in the Bill is the right of appeal to an independent tribunal for any person who is aggrieved by an action of the supervisor.
I am interested to see in clauses 30 to 33 that the Treasury will have power to place restrictions on advertising and cold calling. These were subjects to which we turned when considering what was the Financial Services Bill. I am a little concerned, however, that it is merely a general power. I appreciate that it is right to reserve the ability to deal with situations that arise in future, but I hope that it will be possible in Committee at least to consider what the criteria should be in the exercise of those functions. I hope that we will be able to have a detailed discussion on the types of advertising that might be objectionable, and especially on the controversial issue of cold calling.
The extension of the role of auditors in passing information to the Bank of England is a vital extension of the protection that will be given to depositors. The exemption that they will enjoy from the normal requirements of client confidentially is an essential adjunct. We are placing heavy responsibilities on auditors in a variety of Acts, and it may be that a general consideration of their profession in relation to a number of pieces of legislation might be appropriate at some time in the near future.
The provisions in clauses 78 to 93, which relate to the lifting of restrictions on disclosure by certain persons, contain an interesting omission from the schedule of the circumstances in which disclosure may be made. I note that, although the Director General of Fair Trading, in exercising his functions under the Consumer Credit Act 1974, can make disclosure, there is no provision—I understand why this may be—for disclosure direct to the commissioners of Inland Revenue. I know that such disclosure would cause great concern in the banking sector, and when we examine these clauses more closely we realise that that might be disclosure.
There is a provision in clause 80 for disclosure in the "public interest". The "public interest" might be deemed in future, and perhaps should be, to include the collection of taxes. Furthermore, disclosure is permittedwith a view to the institution of, or otherwise for the purposes of, any criminal proceedings".As cases involving the Inland Revenue might involve the institution of criminal proceedings, perhaps my hon. Friend the Economic Secretary will refer to the Government's view on that when he responds to the debate, or alternatively in Committee.
I am slightly worried by clause 35 and the exposure provisions, and my concerns have been amply demonstrated by my hon. Friend the Member for Winchester. With the esoteric instruments which now exist in international banking, and with the globalisation and securitisation which he so ably described, it will become extremely difficult for a supervisor or for a bank to make an accurate assessment of the degree of exposure. It seems that the concept behind clause 35 needs to be examined in much more depth. There are differences in international practice and in many instances American banks are more closely regulated than our banks. There are particular regulations dealing with loans to developing countries. That is not covered by the Bill, but it is something that should be considered for the future.
578 I put my hon. Friend the Economic Secretary on notice that I hope to move a modest amendment to the Bill, dealing with the Cheques Act 1957. This Bill's primary purpose is to protect depositors, but the Cheques Act fails, in part, to fulfil that desirable objective. A constituent of mine, an elderly widow, had a deposit with a local authority in the north of England, and wrote to it asking if she could withdraw £1,500. The local authority sent her a cheque for that amount, but sadly it was stolen in Bournemouth by somebody who took the mail hag containing the letter. The thief opened the mail, saw the cheque, and decided to appropriate the money. He went to a branch of a well-known clearing bank, opened an account with it, and paid in the money. Shortly afterwards, he drew it all out.
When he opened the account, the thief gave as his name the name of the person to whom the cheque had been made payable. My constituent's solicitors said that under section 4 of the Cheques Act the bank could claim immunity. That section states that a banker is protected where he actsin good faith and without negligence".Nobody would suggest that the reputable clearing bank involved had acted in anything other than good faith. One must therefore consider whether it was negligent. In that respect history is unfortunate, as several cases dating from the early part of this century reflect an attitude towards consumer protection that is no longer prevalent. The tests of negligence then imposed by the judiciary were extremely severe.
As a result, it has been held that a bank does not necessarily have to establish the strict identity of the person opening an account with it. I believe that we should amend the Cheques Act to say that negligence would be deemed unless a bank had taken reasonable measures to establish the identity of a customer who was previously unknown to it.
Having said that, I very much welcome the Bill. It will perform a valuable function in regulating banks and in instilling much greater confidence in the market. That will be to the nation's benefit, and I wish the Bill well.
§ Mr. William Cash (Stafford)
I welcome the Bill, and congratulate my hon. Friend the Economic Secretary and his team on it. Perhaps this is the opportunity to look not merely at the Bill's technical aspects, which have been dealt with so expertly by other hon. Members, but at its objectives, given the explosion that has taken place in financial services and the opportunities offered in the new international markets in which we shall be operating.
To some extent, we could become bogged down in the technicalities of the issues before us. There can be no doubt that the majority of commentators have given the Bill a fair wind. However, we must strike a balance between the opportunity that is offered and the controls that are to be imposed. I have confidence in the Government's ability to make the right choices, but I must stress the importance of the role of the independent members of the Board of Banking Supervision. That is important, and I have no doubt that the matters that have been mentioned so frequently in this debate will be observed by those who have responsibilities in that regard.
During the past few centuries some of the swings in the banking system have reflected new opportunities. I hope that I have got my history right, as I think particularly of the time when the Bank of England was first instituted in 579 the 1690s. There were opportunities in the East Indies and other countries. We were effectively providing an entrepot financial service for the world. Merchants wanted to come here and we were in competition with other countries. I believe that the position of the banks in this country, complementary to the banks of other countries now seeking to use the entrepot facilities provided in this country, gives us an opportunity to provide a worldwide service which will be extremely good for the prosperity and enterprise of this country. However, there is an inherent risk in having a large proportion of foreign investment and foreign money in this country, which is the balance of the other argument I put forward between opportunity and control. The need for control—if I recollect aright, I think that this is dealt with in sections 21 and 35—needs to be looked at in Committee so that, in line with the remarks of other hon. Gentlemen, we ensure that the foreign companies which come in do so on a basis which is not only reciprocated in their own countries but is fair on those banking institutions which already exist in this country. There is a balance to be struck there.
There are extremely important reasons why we need an effective banking service. Of course the banks must be technically sound. However, we must also concentrate on why the bank is there at all. It is there to provide a good financial service. Banks providing banking services for other banks would not be terribly productive. Banks are not provided in order to help themselves, but are there as a service for the manufacturing and commercial interests of the country and they have grown up on a mutaul and complementary basis to them. Therefore, it is essential that we keep the long-term interests of prosperity and enterprise of this country in the forefront of the consideration of a Bill of this kind.
Looking back into the 19th century one remembers the Glasgow banking case in the mid-19th century, the collapse of the country banks, the over-speculation in South American banks in the 1820s mirrored only by the over-speculation of the United States banks in South America in the past 15 or so years. All those things came down to one essential question, which is the need to ensure that things which could go wrong do not go wrong. I hesitate to mention Johnson Matthey. I think that there were special circumstances in that case which have been reviewed by the Bank of England and others very successfully. I also feel that there is much misguided criticism of the banking system in this country.
I welcome the Bill because the balance provided in it is just about right. At the end of the day, banks have to be there to provide an opportunity to spot the winners, to provide stability and to provide a back-up to companies, whether they are in manufacturing, farming, commerce or whatever, where we are going to have quality enterprise in this country. As I see it, there is no way in which we will be able to go on with the old idea that volume production is what is required. The banks are there to provide the means for liquidity in the capital markets to enable investment for quality companies. I believe that it is the ability to spot the winners that will be the acid test for the banking system.
A further point cropped up in the area of financial services when I had the honour to serve on the Committee on the Financial Services Bill with other hon. Members who have spoken in this debate. There was an enormous 580 explosion of capital, for example in the building of the railways in the 19th Century. My family founded the London-Brighton railway in the early 1830s. They needed capital, and they went off to the then bankers and got the money to provide the network of communications, and now there are the new technologies, information technology and so on. Money must also be provided for this country's present manufacturing core.
The manner in which regulation is exercised in conjunction with the opportunities for enterprise which the banking system offers has to be weighed against the people who will run the regulation. I do not want to make a meal of this, and I certainly do not want to moralise—that is absurd—but at the end of the day, as with financial services, the professions and all the self-regulatory organisations—whether it is banking, Lloyd's, the Law Society, the accountancy bodies, medicine, journalism, or broadcasting—in providing the service, there is the opportunity to give an objective assessment and to make the right decision. In self-regulation one not merely spots the winners, but ensures that there is no monopoly, no cosy club, and that proper standards of impartiality are observed.
All along there is one main, consistent theme. It is that the people who are running those organisations, who have obtained pivotal positions in them, or who are providing those services, are themselves aware of the fact that they are not just engaged in a technical exercise, but are providing a service, which is a balance between the private and public interest.
Some of the scandals that we have heard of recently are characteristic of a new speculative entrepreneurial age, which I entirely welcome because of the opportunities that it offers for changing our economic direction. At the same time, we must be sure that the people who are engaged in the business of regulation and self-regulation are aware that they will need to be pretty tough with the aberrant situations that occur from time to time.
I should like to take this opportunity to pay a tribute to Sir Kenneth Berrill, who is in financial services, which will complement and dovetail this sector, for the line that he has taken to ensure that the rules are properly observed. I welcome the Bill because I believe that the people who will be chosen to run the banking system will need also to have regard to those important factors. I have no doubt that they will.
Of course, there is at the bottom of such a Bill a protection in law for the banking system. That is precisely what such a Bill provides. In other words, not only does it protect the consumer who comes into the bank, but it protects the banking interest. As with all cartel monopolies—we do not need to avoid that point—one needs to protect one's banking system, because only by doing so can one provide sound money and confidence for the investor and a sound, enterprising society. So I welcome the basic underpinning of the Bill, which is protection of the banking system itself.
The Japanese have made remarkable progress in capital markets. They were fairly described as being backward in their capitalisation and capital market programme, but contrary to the position in this country and the United States, where the stock exchanges have tended to lead in those areas, Japan has now moved into an era when the targeting of capital markets within a much more liberal international market is becoming increasingly important. If one looks at the back page of The Economist in any given 581 week and compares the Japanese performance with that of the United States, one sees the extent to which the Japanese have taken off. We have a great deal to learn from them.
I spoke earlier about the pivotal role of the Bank of Japan. Although we cannot copycat the Japanese in any way, we should look carefully at the way in which they have oriented their markets, because they provide, both through the way in which they have established their market structure and through the establishment of the Bank of Japan, a strategic role. There is an umbrella system, of which the centre pole is the bank, and the struts and the fabric are extended.
There are no hostile bids in Japan. There may be differences of opinion about hostile bids, but the banks themselves play a mutual or complementary role between industry and the banking system. The banks play a positive and enterprising role in the Japanese system and we find a reluctance there to engage in short-term profits. There is a greater insistence on research, which leads to a stable economy, and we could learn much from that. The break up of the Japanese cartels which is in progress is a sign of the way in which the Japanese are responding to the greater liberalisation in the world.
The back pages of The Economist also show the strength of the West German economy and the central role of the Bundesbank. West German bankers also play a significant part in industrial management and sit on the boards of industrial companies. In other words, there is a complementary relationship between the banking system, investment, research and the capacity for enterprise in those countries, which is developing here. I wish to encourage more of that. Banks are not there just to make money. They provide investment for their shareholders, but they must also be a mechanism and an opportunity for the making of money as engines of wealth.
Over-provision of financial services may seem a strange subject to mention, as we now have a trilogy of Acts, concerning banks, building societies and financial services. However, I am concerned that if banks go, as I hope they will, into the financial services sector on a significant scale, they will be competent and provide a high quality service. We dealt with this matter on what is now the Administration of Justice Act as well, in the context of conveyancing. I served on the Committee that considered that measure. Although it is important that the banks should be going into a variety of different services, quality and competence are more important.
§ Mr. Butterfill
Would we not do well to look at the United States of America, where banks are precluded from certain sectors where it is perceived that a conflict of interests might arise, and that includes the insurance market?
§ Mr. Cash
My hon. Friend makes a valid point, and conflicts of interest, Chinese walls and other such matters must be kept closely under control. I welcome the Bill because the opportunity for regulation, within the enterprising framework and in relation to financial services, is the key to the whole thing. Nothing is more absurd than to have rice paper thin Chinese walls. We must make sure that we have an effective system of proper supervision. The manner in which the regulatory system is followed will largely depend on information—the 582 speed of information, spotting when things go wrong and new technologies. I think that it was Bacon who said, "Knowledge is power."
There is an opportunity now to use the new technologies to ensure that the principle "Who guards the guardian?" is genuinely understood in the City of London and in banking circles. We have a tremendous opportunity, with the entrepot of financial services, to ensure an engine of wealth for this country. We must ensure that everyone—the domestic banking market and the foreign banking market entering this country—is properly regulated, without too much smothering control, but with the means to ensure that enterprise and the spotting of winners are the key criteria. I welcome the Bill and I wish the big bang and all that accompanies it every possible success.
§ Dr. McDonald
With the leave, of the House, Mr. Deputy Speaker, I should like to reply. I shall not delay the House for long at this stage of what has been a full and useful debate, but I should like to comment on one or two points that have emerged from the debate.
Reference has been made to the use of new financial instruments, such as swap arrangements, and to the problems created by bad debts. Of course, it was right that such reference should be made. As I understand it, schedule 3 gives the Bank of England, as the supervisory body, greater powers to advise and guide banks over new financial instruments. It would plainly be difficult to specify these in legislation, because that would appear as an exclusive list and banks might be encouraged to believe that they were free—with the imagination and ingenuity characteristic of many banks—promptly to invent new financial instruments which the Bank of England, as the supervisory body, would find it difficult to control. Obviously that must be left, as at present, to the guidance of the Bank of England and to the assessment that it continually makes of new financial instruments and capital adequacy.
The only doubts that I have lie in the speed of the operation, and possibly about some of the judgments that have been made—for example, concerning capital adequacy. I also understand that the Bank of England, as a member of the Group of 30, is in fairly constant contact with other central banks over issues such as bed debt and the use and spread of new financial instruments. Perhaps the Minister would comment on that when he replies.
The other issues that have plainly emerged concern the independence of the supervisory board. We intend to table amendments to give the supervisory board a certain degree of independence. However, at least in terms of representation on the board, the question of how far it should be independent of the Bank of England is a matter that should be discussed thoroughly in Committee.
Reference has also been made to large exposures, and doubts were raised on that matter from both sides of the House. I have my own doubts about the role assigned to auditors. When we examine the Bill in detail in Committee, we shall have much constructive work to do. The intention is to have an efficient supervisory body and sufficient supervisory arrangements for banks operating in this country.
§ Mr. Ian Stewart
With the leave of the House, Mr. Deputy Speaker, I should like to reply to this brief but interesting debate. I shall certainly welcome further discussions in Committee, because many of the detailed technical provisions are of general relevance and will determine the way in which the arrangements work in practice.
I listened with much sympathy to the comments of my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) about his unfortunate constituent, but I think that it may be difficult for him to table an amendment on that point that will be in order, as the Bill is devoted to other matters. Nevertheless, it is just the kind of point that should be taken into account in the review of other legislation relating to the provision of banking services. As the hon. Member for Thurrock (Dr. McDonald) pointed out, not only the Cheques Act 1957 but various other statutes, some dating from the 19th century, are not up to date in every respect with today's practices. I therefore take note of my hon. Friend's point, although I cannot encourage him in the thought that the Bill might be the right place to put it right.
We have had a wide-ranging and interesting debate, but in my reply I shall concentrate on matters specifically related to the Bill. The review deals with a number of matters outside the scope of the Bill, but I was rightly asked about the likely timetable. We want to get the review under way as soon as possible, by the beginning of next year or very shortly thereafter, but I think that it would be optimistic to expect it to take less than a year, or perhaps a little more, to cover the very complicated area that it has to consider. I cannot say at this stage whether it will make recommendations for legislation. Some of the matters covered are embodied in statute, but others are questions of practice which might be better dealt with by rules, codes of conduct, and so on. Moreover, if the review made recommendations for legislation, they would not necessarily be for a single piece of legislation, as they might be items which could be dealt with in other Bills.
The hon. Member for Truro (Mr. Penhaligon) referred to consumer interests. Perhaps I could make a general reply to that. I hope that the review team will be a small one dealing with technical matters, and not a large body of people representing particular interests. I envisage that those interests would make representations to the reivew body. It would otherwise be impossible to draw a line and I believe that it would complicate the technical and legal task of the review body if it comprised representatives of all the various interests. The review body will, however, want the widest possible representations from all interested parties, as the range of activities related to general legislation on banking services is enormously wide.
§ Mr. Penhaligon
I did not suggest that there should be a consumer representative on the review body. I sought the assurance that when the small number of people are selected, there would be someone with specific knowledge and responsibility for that aspect of the review. I seek not the appointment of a "statutory consumer", but the appointment of someone with specific knowledge in that area.
§ Mr. Stewart
I am sorry if I misunderstood the hon. Gentleman's exact point.
The hon. Member for Thurrock raised one or two matters in relation to JMB. I believe that police 584 investigations are continuing. I have no means of knowing, either personally or through my post, whether those investigations relate to JMB itself or to its customers—those are matters for the police and not for me—but most of the matters raised in the House a year or so ago, and which have been subject to investigation, related to customers of JMB rather than to JMB itself.
The hon. Lady also asked about the £25 million—the potential ultimate cost to the bank. I gather that the figure is not likely to be higher, and could be lower, depending on recoveries for the outstanding business and the outcome of the court case.
My hon. Friend the Member for Chichester (Mr. Nelson), the hon. Member for Truro and others asked about deposit protection provisions which are carried forward from the 1979 Act. The Minister at the time said that £10,000 was a high figure, which he thought would last for a long time. If we thought that it was too low, we would consider changing it by using means in the Bill and existing legislation. More than 90 per cent. of the accounts affected in the relatively few cases when the fund has been called upon have been below £10,000, and 80 per cent. of accounts are below £5,000. We would have to demonstrate the need for change.
The figures covered in the Financial Services Act 1986, such as the £30,000 for investments, relate not to the failure of the investment, but to fraud or breaches of rules. They are not comparable to the limits in the Bill. That matter must be reviewed from time to time, but I am not convinced that a higher figure is appropriate.
As was fully debated when we considered what became the Banking Act 1979, the vast majority of resources put up for deposit protection are put up by large banks, especially high street banks, which are the least likely, we hope, to run into financial trouble and therefore to cause difficulty for depositors. The two-tier system, as established by the 1979 Act, meant that many of the smaller institutions received protection from the new fund to which the clearing banks were contributing, but they did not have the advantages of using banking names and had more stringent regulations which applied to licensed deposit takers.
If we sweep the two-tier system away, the argument points rather in the opposite direction. Almost all authorised institutions would be able to use banking names, whereas the protection which was afforded as part of the quid pro quo for setting up the protection fund would be taken away.
My hon. Friend the Member for Bury St. Edmunds (Sir E. Griffiths) suggested two or three means by which to get round the inability of institutions with capital of between £1 million and £5 million to use banking names. He used the word "henceforth", implying that the change was adverse. I think that he gave that impression accidentally, because he clearly recognised that it was the 1979 Act, not the Bill, which caused the original difficulty.
No institution will be worse off in regard to banking names if the new Bill is enacted. Indeed, institutions will be better off, because provision for using banking descriptions is substantially more liberal under the Bill. I shall consider the points that my hon. Friend has made today, although I do not wish to give an instant answer. I shall need much convincing that even what I accept is an arbitrary figure should be changed. As he will accept, there is a difference between the Leigh-Pemberton committee's reommendations and the White Paper, because this and 585 other matters were extensively discussed and many representations were made. We resisted putting the figure as high as many of those representations suggested.
By no means do we accept the position of the big battalions as against that of the small battalions. We have tried to take into account both sorts of representations. I shall reconsider the matter, but I do not wish to encourage my hon. Friend to think that, at this stage, there is a good case for departing from the provisions in the Bill.
§ Sir Eldon Griffiths
My hon. Friend said, fairly, that no one would be worse off than he was before, and I understand his point. However, there is this difference: henceforth—to use my own term—the deposit-taking institutions which are excluded from using the name "hank" will be many fewer in number and will be part of a much tinier minority. They will have less sway and recognition in the market place and, to that extent, they will be disadvantaged.
§ Mr. Stewart
That shows the unwisdom of giving way, even if one is in the most generous of moods. I was about to deal with my hon. Friend's point about separate lists of authorised institutions which could be described as banks and those which could not. There were two lists of recognised banks and licensed deposit-takers because entirely separate regimes operated in relation to each of them. There is no point in putting into a single list those institutions which do not or are not permitted to use the name "bank". It has no operational significance for the normal purposes for which such a list would be prepared.
That is my immediate reaction to the question, without having considered the background. From the point of view of other investors who might decide to place their money in an institution, I do not believe that such a public separation would be required. Indeed, many reputable banks—most of the accepting houses—do not have the word "bank" in their titles. It has never been a central feature of the system that a bank must be called a bank. Many have got on without it. However, the matter obviously requires attention and I am glad that my hon. Friend raised it today.
My hon. Friend the Member for Chichester asked about takeovers and the national interest. I noted that my hon. Friend the Member for Bournemouth, West and the hon. Member for Truro took a slightly contrary view. We should pause before introducing provisions on general grounds such as those suggested in relation to foreign takeovers. I remind hon. Members that a range of powers will relate to foreign takeovers. First, the Monopolies and Mergers Commission must take into account the public interest. Trade Ministers are conducting a review of the policy of the Monopolies and Mergers Commission. It has concentrated heavily on domestic competition, but other factors could be taken into account. Secondly, new provisions in the Bill will enable the Bank of England to say no to a takeover if it is not satisfied with the credentials of the potential controller. Those are important provisions.
Thirdly, there are the provisions on reciprocity in the Financial Services Act 1986 which cover the banking sector and other types of financial institutions. Taken together, that is a formidable group of provisions. I shall not elaborate further on that now because we can consider it at a later stage, but, by way of prelimary remark, I should say that one should not underestimate the weapons that are already at hand.
586 Large exposures have attracted a good deal of interest. As the hon. Member for Ipswich (Mr. Weetch) said—he was courteous enough to tell me that he could not be present for the reply—the JMB case involved serious misreporting. That is one of the factors which have informed our decisions on what to include in the Bill. The large exposure provisions which cover exposures to connected persons are rather important. If the Bill had been enacted before the JMB case, those responsible in the management of the institution would clearly have been at grave risk of being convicted for misleading the supervisor. That is a new offence that we are introducing. It is only with hindsight that one can see how important such a provision is. That is an important improvement.
I was asked whether the exposure provisions in clause 35 operated more tightly than previous provisions. They do. First, the offence is established, and secondly, whereas in the past there has been a requirement to report after the event only, whatever the size of the exposure, now anything over 25 per cent. will have to be notified to the Bank of England in advance and there will be specific statutory provision for reporting any exposure over 10 per cent. Those figures are somewhat arbitrary, but they are appropriate and can be changed by statutory instrument if they are found not to be so.
§ Mr. Cash
I agree that those provisions are important, and my hon. Friend is right in saying that they represent a tightening in the regulations. However, clause 35 does not apply to those whose businesses are outside the United Kingdom. I recognise the difficulties involved, but could my hon. Friend comment on that residual question, now or later?
§ Mr. Stewart
As that would take us into another area of technical questions, I shall leave it to another occasion.
The large exposure provisions are a means of concentrating on one of the particular areas where difficulties have arisen. It is right that they should be spelt out in statute, because of their importance.
I listened with interest to what my hon. Friend the Member for Winchester (Mr. Browne) said about swaps, options and futures. I do not know whether it is likely that either the hon. Member for Thurrock or I will leave the Chamber, go to our banks and fix swaps, options or futures. They are not frequently the business of ordinary personal customers of banks; they are at the professional end of the scale. It is right to say that all banking supervisors in the world, especially the Bank of England, which, often to its great credit, takes the lead in these matters, are paying much more attention to general off balance sheet commitments. The contingent risk in those transactions is considerable and needs to be taken into account in assessing general management and the overall exposure of the institutions concerned. I was, indeed, interested in what my hon. Friend had to say.
The next general area that commanded great attention was auditors. The general principle is that we want to unblock the lines of communication between auditors and supervisors. It remains to be seen whether the profession will be able to work out a satisfactory basis. I hope that it will be able to do so, but we should not forget that the institution being supervised will usually be present at any discussion that involves the auditor. It would only be in exceptional cases, perhaps involving suspected fraud or serious developments, where there needed to be a direct 587 dialogue between the auditor and the supervisor without the knowledge of the institution, that the provision would be brought into effect. One will only be able to tell how that works as it is tried out in practice, but one hopes that occasions of that kind will be relatively infrequent.
§ Mr. John Browne
I thank my hon. Friend for what he has said, but I emphasise that the person at the retail end does not normally engage in these relatively sophisticated financial transactions. However, this is a large professional market of $300 billion a year which involves the banks in inherent risks. If, therefore, the banks are involved in this risk, their retail customers are involved because the security of their deposits is at risk—as is the whole economy. Will the Government please look urgently at this problem, because it is extremely difficult to monitor?
§ Mr. Stewart
I had hoped that I had reassured my hon. Friend that these matters are being looked at very carefully by the supervisors. They appreciate the importance, for the stability of institutions, of not being drawn too much into this type of contingent risk. The contingent risk is not usually the value of the whole transaction. It is usually the difference between the rate at which it was taken on and the closing rate. Nevertheless, the scale on which this business is now being undertaken make it very important that these matters should be recognised in policy terms, particularly in relation to the supervisor's assessment of the management competence of particular institutions.
§ Mr. Browne
In this case one is trying to get at the risk of settlement, particularly cross-border settlement. If there is a failure in settlement, the whole transaction is at risk.
§ Mr. Stewart
I appreciate my hon. Friend's point, and I am sure that the supervisors will do so also.
On the general question of regulation and the Board of Banking Supervision, a matter which was covered in more of the contributions to this debate than any other, my hon. Friends the Members for Chichester, for Stafford (Mr. Cash) and for Bournemouth, West and also the hon. Member for Ipswich referred to the importance of independence. The Bill provides quite deliberately that the majority of the members of the Board of Banking Supervision will be outside members. They will be in a position to exercise independent judgment and an independent view.
The hon. Member for Truro asked me whether the board members would have separate meetings. I imagine that if there were a difference of view between the ex officio Bank of England members of the board and the outside members, that would rapidly become apparent in the course of the affairs of the Board of Banking Supervision. They might then decide among themselves whether they wanted to press the matter more strongly. If they did and agreement was not reached, the bank would have to report to my right hon. Friend the Chancellor of the Exchequer. This matter would be recorded in the report to Parliament and to the Board of Banking Supervision. That introduces a considerable element of independence to the affairs of the board, and it is designed to do so. It is the counterpart to the fact that, on balance, we felt it was right that the responsibility for supervision should remain with the Bank of England rather than be transferred to a new and separate organisation.
588 The hon. Member for Ipswich asked about that and said that it appeared to be only for administrative conveniecnce. It goes a good deal further than that, because, quite apart from not wanting to break up an existing structure unless one is absolutely certain that another structure would be better, and not wanting to cause a lot of upheaveal, if one removes supervision from the Bank of England there would be a lack of general cross-fertilisation of banking information.
Financial services and banking are changing. They are evolving so rapidly that there is a positive advantage in an understanding between the other parts of the Bank of England and the banking supervision division, and it is advantageous to have this happening within the one institution. The Board of Banking Supervision will give an actual and visible independence to the process of ensuring that the provisions of the Bill are implemented as Parliament would wish. I shall be glad to discuss the matter further when we debate the clauses in Committee. The idea is right, and we have probably struck the right balance in the method that we have followed.
Our general approach to supervision is to build on successful parts of what has already been developed, while at the same time trying to make corrections in areas where problems have arisen.
I was asked whether we were reacting to the past or trying to shape the future of supervision. We are certainly reacting to experience, but the fact that we set up a wide-ranging review of the whole subject means that we took into account the developments that are likely to take place in future. One can never anticipate exactly what will happen or what sort of supervision will be needed for future developments. We have tried to make the Bill flexible so that we can take account of changes in the market place.
My hon. Friend the Member for Chichester asked why we proposed to alter the definitions of a deposit-taking business. It is being done for the very purpose of flexibility. My hon. Friend the Member for Winchester asked about securitisation and the changes that that will bring about. It may not always be possible exactly to define in advance what should be regarded for this purpose as deposit taking. For example, when we introduced the provisions to permit industrial and commercial companies to issue commercial paper we had to look at how that would accord with the definitions in the Banking Act 1979 of deposits and deposit-taking businesses.
As instruments change, and as new techniques are developed, we will have to make changes, but we hope that the legislation will be flexible and that in general it will strengthen, improve and modernise the system of banking supervision. That is important, given the rapid growth of that sector in the economy and in the City of London.
I am grateful to the hon. Member for Thurrock and to other Opposition Members for welcoming the general purpose of the Bill.
§ Mr. Butterfill
Can my hon. Friend give me some advice about the point that I raised on permitted disclosure and whether this will be extended to include the commissioners of Inland Revenue under sections 80 and 81? Is that envisaged? Perhaps my hon. Friend intends to comment on that later.
§ Mr. Stewart
The provision specifically refers to the Secretary of State and does not include the Inland 589 Revenue. The matter of disclosure is rather detailed and technical, and perhaps we could refer to it at another stage. There are many detailed matters which we shall have to consider further, an example being the issue which my hon. Friend has raised, and I hope that we shall be able to do so in Committee. Meanwhile, I commend the Bill to the House and hope that it will be given an unopposed Second Reading.
§ Question put and agreed to.
§ Bill accordingly read a Second time and committed to a Standing Committee pursuant to Standing Order No. 61 (Committal of Bills).