§ '(1) The Treasury may direct the Bank to serve a notice of objection under this section on a person—
- (a) who has given notice under section 21 above of his intention to become a shareholder controller of any description of an institution; or
- (b) who has become such a controller without giving the required notice under that section,
§ (2) No direction shall he given in a case within subsection (1)(b) above more than three months after the Treasury becomes aware of the fact that the person concerned has become a controller of the relevant description.
§ (3) Any notice of objection served by virtue of a direction under this section shall state the grounds on which it is served2.—[Mr. Ian Stewart.]
§ Brought up, and read the first time.
§ 5 pm
§ The Economic Secretary to the Treasury (Mr. Ian Stewart)
I beg to move, That the clause be read a Second time.
§ Mr. Deputy Speaker (Sir Paul Dean)
With this we may discuss the following: Government new clauses 3 and 4.
New clause 6—Regulations regarding changes of control—'Without prejudice to the provisions of subsection (9A) of section 36 of this Act the Treasury shall after consultation with the Bank make regulations including regulations applying sections 21 to 24 with appropriate modifications to enable the Bank to apply to a significant shareholder the restriction provided for by section 24(2)(b) of this Act.Government amendments Nos. 7 to 11.
Amendment No. 12, in clause 22, page 16, line 23, leave out 'and' and insert 'or'.
Amendment No. 13, in page 16, line 32, at end insert—'(1A) Where the Bank considers that it may be contrary to the interests of the United Kingdom, or any substantial part thereof, for a person who has given a notice under section 21 above to become a controller of the description in question of the institution it shall inform the Treasury; and if the Treasury is satisfied that it would be contrary to those interests for him to become a controller of that description of the institution it may direct the Bank to serve a notice of objection on him.'.Government amendment No. 14.
Amendment No. 15, in page 16, line 33, after 'objection' insert 'under subsection (1) above'.
Government amendments Nos. 16 and 17A.
Amendment No. 17, in page 17, line 6, after 'objection' insert 'under subsection (1) above'.
Government amendments Nos. 18 to 24, 32 and 38.
Amendment No. 59, in clause 102, page 74, line 17, leave out '15 per cent.' and insert '10 per cent.'.
§ Mr. Stewart
It might be for the convenience of the House if at this stage I confine myself to describing the purpose of Government new clauses 2, 3 and 4, and then, 1086 if I catch your eye at a later stage, Mr. Deputy Speaker, and with the leave of the House, I can respond to a debate which will no doubt touch on a number of wider issues in relation to the other new clauses and amendments.
New clause 2 deals with reciprocity. The Financial Services Act contains power to refuse, remove or modify the authorisation of an institution whose country of origin does not offer to British institutions reciprocal facilities for financial business. These provisions apply to banking, investment and insurance businesses and were introduced to help British firms gain access to overseas markets, but because a substantial part of banking business is based on short-term deposits it is possible that a threat to revoke or even to impose conditions on a bank's authorisation will have adverse effects on public confidence in the institution and so be against the interests of its depositors.
The new clause would allow the Treasury to direct the Bank of England to object on reciprocity grounds to the acquisition of controlling shareholdings in British banks before that takes place and if necessary to block voting rights on the shares or to require divestment. These provisions could apply if the potential shareholder's country of origin does not allow British financial institutions equivalent access to its markets.
New clauses 3 and 4 relate to unsuitable shareholders. During the Committee stage of the Bill, anxieties were expressed by hon. Members on both sides about the effectiveness of the Bank of England's powers to prevent substantial shareholdings being built up by persons who might be unsuitable on prudential grounds. I undertook to introduce a clause that would require anyone acquiring 5 per cent. or more of the shares in a bank to give notice to the Bank of England of such a holding and to provide information required by the supervisors. I also said that I would bring forward another clause to extend the I3ank of England's powers in relation to 15 per cent. shareholdings to cover such shareholdings at any time, and not merely at the point of acquisition. I believe that the two new provisions contained in new clauses 3 and 4 will greatly strengthen the Bank of England's powers in relation to undesirable bank shareholders.
§ Dr. Oonagh McDonald (Thurrock)
Clause 2 is certainly an advance and I welcome the way in which the Economic Secretary has moved some way towards accommodating the views and anxieties that were expressed in Committee. We do not oppose that move in any way.
New clauses 3 and 4 offer a welcome response to the anxieties that were expressed in Committee, especially about the percentage of shareholding. We are glad that the Bank of England will have to be notified of the existence of significant shareholdings as defined in new clause 4. These new clauses are welcome additions to the Bill.
I beg to move amendment No. 13, in page 6, line 32—
§ Mr. Deputy Speaker
Order. The hon. Lady cannot move the amendment at this stage. It has been selected for debate with this group of new clauses and amendments. If the hon. Lady wishes to press her amendment to a Division, I shall at the appropriate time ask her to move the amendment formally.
§ Dr. McDonald
Thank you, Mr. Deputy Speaker. I shall ask for a Division on the amendent.
1087 It is important that, in addition to the proposed changes in new clause 2, the additional powers mentioned in amendment No. 13 are added. The concern and anxiety felt by hon. Members on both sides of the House relates to the foreign takeover of British banks, partly because we expect the Government to rely on the clearing banks to be responsive to economic and monetary policy. We expect British banks to be more inclined to act in the national interest.
We recognise that there is a risk of British banks being taken over by foreign banks, particularly Japanese and American banks, whose stock market valuation is far greater than that of the main British clearing banks and might therefore wish to take over one of these banks in order to be even more firmly established in the activities of the City of London than they are at present.
It is interesting to note the way in which Japanese banks operate in this country. They concentrate on wholesale distribution, central and local government, energy and water suppliers, and building societies. They pick out the safest part of the market and lend very little to traditional United Kingdom manufacturing industries. One cannot help wondering what the impact would be on the availability of finance for industry if British clearing banks were taken over by Japanese banks that are operating in this fashion in the City.
We want to see British concerns remaining British. It is proper for such a view to be expressed not just to financial institutions but to manufacturing industry. As each day unfolds, we are sorry to note that the Government have no such desire to see manufacturing or any other concerns remaining in British hands. We are firmly of that view because of various statements that have been made. We would like to see British concerns—be they financial or manufacturing—remaining British and providing jobs and services in this country to the benefit of Britain.
The provision in new clause 2 depends on reciprocity. I understand the Economic Secretary's reasons for introducing the new clause, but that is not enough to ensure that British banks remain British. The chances of a British bank being able to take over a major Japanese bank or a major American bank are remote, because it would not be able to afford to do so, whereas the converse seems to apply. The chances of a British bank being taken over by a foreign bank are much more likely.
If we think of the major problems in the banking sector over the past 15 years or so, we find that the Bank of England has had to rely on the main British clearing banks to rescue banks that failed, first, in the secondary banking crisis of 1974, and again in the Johnson Matthey case. British banks were persuaded by the Bank of England to join in those rescue attempts. They may have done so with reluctance, and it may have required pressure from the Bank of England, but nevertheless they responded. They may not have played as big a part as the Bank of England might have wished, but they did respond.
I wonder whether a London clearing bank run from Tokyo or New York would have been quite so willing to engage with the Bank of England in rescue attempts. Such a bank might have transitory reasons for wishing to do so —it might wish to gain acceptance or popularity here—but we could not rely on that. Therefore, it is important from many points of view that the Government have 1088 reserve powers to ensure that a bank remains British if it is considered in the national interest for that to happen. That is the purpose of my amendment. It goes beyond the provisions of new clause 2 and I think that it is right that it should do so.
§ Mr. William Cash (Stafford)
In Committee I raised a similar amendment to that on which the hon. Lady has just addressed the House because I felt it important to draw attention to what would happen if one or two of our main clearing banks were acquired by a foreign banking institution. I had, I suppose, Japan as much in mind as any other country. I wish to put on record the fact that I, and no doubt many of my colleagues, greatly welcome the arrival of the Japanese in the City of London. I believe firmly in the liberalisation of the market place in all matters, and in particular to relation to banks and financial institutions. Having said that, and having regard to the fact that we are also concerned in the Bill with prudential banking, I believe that there is an important question to consider in regard to prudential legislation.
We could easily get into a position where, for example, the Midland bank, with a capitalisation of about £1.9 million, would be easy prey to Namura with a capitalisation of £19 billion. The word "predator" is used loosely. With the economy doing as well as it is doing under this Government, and because many people would like to invest in this country, we would be unwise to leave ourselves exposed to the taking over of our major banks by institutions based in foreign countries, although we have much to learn from, for example, the Japanese on management in Nissan in the north-east and elsewhere. If it was not the Japanese who wanted to take over a major bank, it might be the Americans or the Germans. I do not think that I am taking a little Englander approach in being cautious about what could happen if we had that scenario.
§ Mr. Edward Leigh (Gainsborough and Horncastle)
My hon. Friend speaks of the need for the liberalisation of trade and he knows that the City of London depends on that, yet he argues in effect for the restraint of trade. Does he not believe it possible that America, and the protectionist lobby in America, might respond and thereby inhibit the workings of the City of London?
§ Mr. Cash
My hon. Friend perhaps has not taken account of the fact that our banking system is different from the banking systems in Japan, in the United States and in Germany. In the United States there are about 14,000 banks. In Japan there is a strong centralised banking system in which the Bank of Japan plays a pivotal role. In Germany the Bundesbank is part of the constitution. The distinction has to be borne in mind. I hasten to add that I am not going down the route of the amendment in the name of the hon. Member for Thurrock (Dr. McDonald)—quite the opposite. Indeed, as I was about to say, it is on record that I abstained on this amendment in Committee precisely because I wished to ensure that the Government had ample opportunity to consider other aspects of the arguments that I put in Committee; in particular the arguments relating to sections 183 and 185 of the Financial Services Act 1986, having been a member of the Committee which considered that measure.
The amendment which my hon. Friend has proposed is very important, because it ensures reciprocity. We went 1089 into this question in Committee on what is now the Financial Services Act. Hon. Members on both sides of the House will remember the arguments. We insisted upon, and got, reciprocity. I argued in Committee that we should have that as a minimum, in conjunction with monopoly and mergers legislation, to ensure that our banking system was not at risk. As I have said, if our main clearing banks were taken over by institutions based in other countries we would be severely at risk.
I go further. If other countries were to allow us into their banking systems on the same terms, my concern would be greatly allayed. At the moment it is not possible for us to get into the banking systems of other countries. The use of the reciprocity provision will enable us to make sure that there is a fairly even playing field. The matter could usefully be discussed under the GATT. No doubt my hon. Friend the Minister and his colleagues will do that. I congratulate them on the way in which they have treated the subject.
If any one of our clearing banks was taken over by a banking institution in one country, inevitably a bank in another country would want to take over another of our banks. It is precisely because we have only four main clearing banks that we need to be prudential in the legislation.
There is a further question, which we also discussed in Committee. I am referring to the efficacy of the monopolies and mergers legislation to deal with the other limb of the argument, which is not merely that we want reciprocity, but that we want control in the public interest in the context of monopolies and mergers legislation. My hon. Friend may recall that I said in Committee that, because the monopolies and mergers legislation was under review, it was difficult for us to know what would emerge. At the moment we run on the basis of competition guidelines, but there are questions whether that will be the case when the the review is completed. Therefore, it is difficult to assume that the competition law devised to deal with current policy will necessarily be the same in, shall we say, 18 months' time when, as I confidently assert, this Government will be handling the problems and the difficulties, as we always do with great competence and skill, of the ever-expanding liberalisation of the financial markets and the contraction of the time span, the time scale and the global village that we have to occupy.
The review of monopolies and mergers is central to the question of how we balance the sensible provisions of reciprocity which have been introduced by my hon. Friend — with, I have no doubt, the full approval of the Chancellor of the Exchequer and all the other members of the Cabinet. This is not a question of playing games. It is a question of serious economic, political and diplomatic importance.
The question is whether the monopolies and mergers provisions as they now stand will be adequate to deal with the situation. There are serious problems relating to the presumption that applies to references under the current monopolies and mergers provisions. Some would argue that it is the wrong way round, that all mergers are regarded as being in the public interest and, that one can make an adverse reference only if a case is regarded as against the public interest. That is something that I am sure will be reviewed, and it is of immense importance in the context of banking legislation and of any monopolies or mergers that might arise in the banking world.
1090 Furthermore, there is no domino effect as between one decision and another. Unlike most of our other legal situations and cases, we do not, when considering monopolies and mergers legislation, operate on the basis of precedent. Each case is taken ad hoc. Therefore, I share the view of my hon. Friend when he ribbed me slightly over my reference to the Hong Kong and Shanghai bank as a precedent. He was quite right to point out that it is not possible to draw too much of a conclusion from that decision, but, as changes and the review are taking place, I believe that it is important to put on record the principles underpinning the application of the monopolies and mergers legislation to banking. I would be grateful if my hon. Friend could make a few remarks on that when he replies to the debate.
Another problem is the role of the Bank of England. There are people who believe that the status of the Bank of England has diminished to some extent. I do not believe that this is the case. It is important that we get that firmly on the record. It is crucial that the Bank of England should exert significant and substantial influence on legislation of this kind. I congratulate the Bank of England and, indeed, the British Bankers Association on their great help during the Committee's proceedings.
My hon. Friend will know that I am happy with the provisions relating to reciprocity. For the reasons that I have given, I shall not follow the hon. Member for Thurrock on her national interest point, although I suspect that the argument will rumble on. I shall watch the matter with great interest and with some sympathy, but for the underpinning reasons, not for the reasons that the hon. Lady has brought forward.
I have put down one or two other amendments which deal with the question of significant shareholders. I believe that there is a serious problem affecting merchant banks. My hon. Friend will recall that while I was absent on one occasion he kindly notified the Committee that an amendment was to come forward on Report and I was allowed about 30 seconds—I am not complaining, Mr. Deputy Speaker, for a minute—in which to deal with the question of significant shareholders. This is a problem that has attracted a great deal of attention in the City of London and I hope that I may be allowed to go into this question.
With reference to the Government's proposed 5 per cent. provision in relation to the significant shareholder clauses, the problem, in a nutshell — I said this in Committee — is that it does not incorporate any sanctions in the event of a person being deemed not fit and proper. The position is that the Bank of England may request information from a 5 per cent. shareholder, but if the bank considers that that person is not fit and proper it can take no further action unless the shareholding is increased to 15 per cent. At that point—this is crucial—the provisions applying to controller shareholders are triggered.
The proposed provision has a deficiency. It does riot recognise the serious practical implications and consequences to a deposit-taking institution and its business of a significant shareholding being in the hands of a person considered not to be fit and proper. Those serious implications and consequences are heightened rather than reduced by the public announcement of the shareholding that takes place under the Companies Act 1985, so the result may be the reverse of that intended.
1091 It seems to me that there is no good reason for objection to a shareholder who is judged by the Bank to be fit and proper and whose intentions as a shareholder are in the interests of the deposit-taking institution. I believe that judgment must be made on a case-by-case basis. The purpose of the supervisory regime is to regulate the situation where the fit and proper requirements are not, or are not likely to be, met. It is in the interests of deposit-taking institutions, the Bank of England and the reputation and status of the City of London as an international financial centre that that should be so.
The nature of the business of deposit-taking institutions, particularly those operating in international markets in the corporate and in the Government sector, sets them apart from other commercial enterprises. Whereas an unwelcome shareholding of 5 per cent. might not affect either the management or the business of most commercial enterprises, it can have a damaging impact on a deposit-taking institution.
It is therefore important not only that there should be a requirement for the 5 per cent. shareholder to give written notification to the Bank of England and any further information that the Bank may request, but that the Bank should be able to take further action should it view the shareholders as not fulfilling the fit and proper requirement. As the Bill currently stands, a shareholder who is not considered fit and proper could, nevertheless, increase his stake by 200 per cent., to 15 per cent., over and above the level of 5 per cent. at which he must notify the Bank of his shareholding.
Under clause 24(2) the Bank is afforded powers to impose one or more of four restrictions on a shareholder controller on whom an objection notice has been served. In the case of a significant shareholder — which is defined as someone holding 5 per cent. or more, alone or with associates, which follows clause 102(3)(c) — it is appropriate that the Bank should have a sanction available to suspend voting rights for the part of any shareholding in excess of 5 per cent. should the Bank find that the shareholder is not fit and proper. The voting rights so suspended would be reinstated in the event of the sale of shares to a person who, alone or with associates, would hold less than 5 per cent. or who would thereby hold more than 5 per cent. but be deemed to be fit and proper. The shareholder would therefore not be prohibited from making a trade investment in terms of the dividend income of his shares and any capital uplift on his holding.
In introducing a clause dealing with a situation in whch a person requires a holding of 5 per cent. or more, the Government have recognised that there should be a mechanism for monitoring and investigating that person. However, that provision may not be adequate to prevent damage to the business occurring when a person who is not fit and proper continues his stake. It is necessary that the Bank of England should have power to take positive action before the sanctions at the 15 per cent. level become available. That power should simply be the ability to suspend the voting rights for that part of the shareholding in excess of 5 per cent.
I make no apology for having explicitly and carefully explained the circumstances that underpin the new clause. The argument is complicated, but necessary. I am certain 1092 that my hon. Friend the Economic Secretary will have listened to my argument with some interest and great care. I sincerely hope that at the appropriate time he will respond and the matter may be taken forward.
Finally, I want to consider the minor amendment, No. 12. It involves the substitution of the word "or" for "and" in clause 22. I sincerely hope that my hon. Friend will approve the amendment on the basis that it does not alter very much, although it seeks to achieve a great deal.
§ Mr. Austin Mitchell (Great Grimsby)
I do not want to follow the line pursued by the hon. Member for Stafford (Mr. Cash) in his brief, courageous and exciting speech which had a stunning, if not mesmeric, effect on the Conservative Benches. I hope that the hon. Gentleman's speech succeeds in getting him a job with either the British Bankers Association or the Bank of England, for which he was clearly angling in the early part of his speech.
I welcome the support of the hon. Member for Stafford for amendment No. 13. The hon. Gentleman's argument about the effect of the Government on the British economy is one of the major arguments for amendment No. 13. The Government have produced a position rather like a fire sale or a sale of damaged goods in the major part of the economy and especially in manufacturing. That has allowed overseas organisations to enter this country with the prospect of taking over the damaged goods which the Government's economic policies have created in the market.
The hon. Member for Stafford produced a strong argument in favour of amendment No. 13. I do not wish to disparage the hon. Gentleman's support because I know that he always has the courage to carry through his bold declarations and to follow them up with his vote. If it becomes necessary, I hope that he will do so on this occasion.
I want to speak only briefly. I would have liked to be able to speak for longer, but my new clause 5, which would have reconstructed the Bill to provide for a banking commission, has not been selected, although it was important. I hope that there has been no subterranean interference by Barclays bank, Otley road, Shipley to sabotage my amendment. However, that is now out of the scope of the argument.
My hon. Friend the Member for Thurrock (Dr. McDonald) did not speak to amendment No. 59, but will the Economic Secretary to the Treasury tell us whether the basic intention of that amendment is, as I presume it to be, covered by the new clause? I hope that it is and I hope that that is why my hon. Friend the Member for Thurrock did not refer to it. I believe that the amendment is worth while, but I believe, too, that it is covered by the new clause.
The financial community is becoming more and more internationalised and intermeshed. There is clearly real cause for concern about penetration into banking institutions in this country. As our institutions become more international, so other institutions are moving into this country and the two sets of institutions—abroad and here — are in increasing likelihood of merging. Therefore, we must pay more attention to that problem.
Banking is a crucial institution in the economy. It is, as we say in Grimsby, sui generis and therefore requires the Government's particular attention. I hope that the Government would want to pay some attention to the national interest which is not necessarily served by foreign 1093 takeovers of British banks, given the ramifications of those banks and the way in which their tentacles extend into the whole economy.
My hon. Friend the Member for Thurrock said that she was primarily concerned about the high street banks. That is correct, but we should also be concerned about the whole range of banking. Because of banking's unique nature, there is a special need for concern. That would be met effectively by amendment No. 13. That amendment does not say necessarily that the Treasury has to ask a bank to lodge an objection to every possibility of foreign takeover or intervention, it just states that the bank "may". In other words, it leaves it to the Treasury's discretion. In that context, the Treasury is the custodian of the national interest, which, particularly in banking, must be safeguarded even if the Government pay so little attention to it in other aspects of the economy.
§ Sir Julian Ridsdale (Harwich)
I want to support new clause 2. I was very interested in the Opposition's argument, especially their desire to place an additional safeguard against the huge strength of Japanese banks and financial institutions. There is a question of balance at the moment and I believe that the balance that the Government have achieved is about right.
It is terribly difficult to decide in these matters. In dealing with the Japanese at the moment in banking, we are not receiving the reciprocity of treatment that we should, either on the Tokyo stock exchange or in Tokyo itself. I should like to believe that new clause 2 is a warning shot to our friends who claim that it is their intention to create a freer trading system. We have a fair trading system at the moment. The Tokyo system is not completely open—as I would like it to be—and the City of London is far more open than Tokyo.
Those of us who deal and talk with the Japanese banks and business houses impress upon them as hard as we can the necessity for more open markets. That is the advice that I have been giving. However, I believe that the balance that the Government have achieved in new clause 2 is about right. I understand the Opposition's fears, but I would not go as far at this stage as they have gone, especially in connection with the United States. I remind the Opposition that the Midland bank bought the unfortunate Crocker bank. Perhaps it would have been better if the Midland had not done that. Nevertheless, we want to maintain an open banking system, not a closed one. Therefore, I support new clause 2, but would not want to go as far as the Opposition suggest at the moment.
§ Mr. Ken Weetch (Ipswich)
I rise to support amendment No. 13 and I shall not be long about it. This amendment is of considerable importance because it seeks to asert the national interest in matters of bank control.
According to clause 21, anyone who intends to become a controller of an authorised bank must give notice. The Bank of England can object to such a notice on various grounds. For example, it can object if it considers that that person is not fit and proper or if the depositor's interests are at stake. These are wise precautions, but they are not sufficient.
We should protect ourselves in the Bill from the potentially damaging repercussions of foreign control over a British bank. There is a danger that we may be talking at cross purposes here and I accept the final point made by the hon. Member for Harwich (Sir J. Ridsdale). The 1094 purpose of this clause is not to exclude foreign banks from the City of London, but to take steps when there is a chance that the repercussions will be damaging. We are talking about specific and not general intervention.
I take the point that the prosperity and the activity in the City of London has been enhanced by the activities of foreign banks. Nobody would gainsay that. We are talking about potential events. Amendment No. 13 should make the Economic Secretary think carefully. The arguments that I shall put forward in support of that are not mine. They have already been advanced by the Bank of England itself in an inquiry at which the Royal Bank of Scotland was the object of a takeover by the Hong Kong and Shanghai Banking Corporation and the Standard Chartered bank.
At that time, the arguments were clearly set out and their validity has not altered. First, the possibility of foreign control could interfere with the interests of the depositors of the bank. One cannot separate prudential matters from matters of national interest. It could well be that foreign control would make it more difficult to protect depositors' interests. Foreign ownership could well intefere with prudential supervision.
Secondly, if we were talking about a major clearing bank, it would make the Bank of England's task of financial control of the money supply, bank lending policy and the creation of control of credit much more difficult. Those dealings would be rendered more difficult if ownership and control were not in the United Kingdom.
Thirdly, banking and finance are becoming more international. At the same time, the distinction between types of banking and commercial investment functions is becoming increasingly blurred. As time passes, British banks will become more susceptible to foreign takeovers. We should not always resist mergers of this kind, but sometimes we should, and that is what the clause is about. In time, foreign control may reach a point at which no further foreign penetration is desirable. The national interest would then be at stake and amendment No. 13 would enable the Government to intervene on those grounds.
Fourthly, such intervention in the case of a foreign takeover could have an effect upon a region of Britain. The most quoted example is the one about which I have already spoken, the Royal Bank of Scotland. In Committee my hon. Friend the Member for Glasgow, Maryhill (Mr. Craigen) gave chapter and verse about the reservations north of the border regarding that very point. The point should be repeated and underlined.
Amendment No. 13 proposes that the Bank of England should be responsible for adjudicating in the national interest. The argument against that is that the bank's purpose should always be prudential and not political. Who are we kidding? Very often the Bank of England acts in a political way and there should be no difficulty about that. If the Bank of England does not know what Britain's political interests are, the Chancellor of the Exchequer could soon tell the bank precisely what is at stake. The national interest should figure largely in this Bill as the first point for consideration.
§ Mr. Anthony Nelson (Chichester)
I congratulate my hon. Friend the Economic Secretary on fulfilling a number of commitments that he made in Committee by bringing forward the new clauses. I admit that I am probably in a 1095 minority of one about new clause 2, because I have some reservations about the implanting in legislation of protective measures that seek to provide reciprocity in the provision of financial or banking services.
That is not so unusual outside the House and many commentators, not least the Financial Times during the passage of the Financial Services Act 1986, took the view that it was wholly inappropriate for reciprocity provisions to be built into that Bill, which was principally concerned with investor protection. The commentators said that the importation of provisions specifically to try to put a lever on a foreign country or Government to allow reciprocal investment or banking facilities had nothing directly to do with investor or depositor protection. For that reason, I voted against that provision during the passage of the Financial Services Bill. Similarly, in Committee I expressed reservations about this Bill and about whether this new clause and the idea behind it are relevant to the basic purpose of this legislation, which is to provide an enhanced degree of depositor protection.
This is essentially a protectionist measure about which we ought to be circumspect. We should be reluctant to leap into legislation too soon because Britain has little to gain from erecting even contingent protective barriers. The prosperity, growth and vibrancy of the City of London rests as much as anything on the freedom of access that many foreign companies and countries have to it. The fact that the City has achieved such excellence is a reflection of the special skills and the freedom of integrity maintained in the City up to now.
I admit that new clause 2 is compatible and follows logically from what is already law in the Financial Services Act. If it is perceived to be of value, perhaps as a bargaining tool for Ministers in the context of the former Bill, it could reasonably be argued that it should be imported into this Bill as well. We must question whether it will genuinely be a spur to Japan or to other countries with strong financial services or banking industries to open their gates to us, or whether it will be a futile gesture and a bit of huffing and puffing to give the impression that we are doing something.
In my judgment, the plans of the Japanese financial and banking institutions will continue unchanged whether or not this clause is imported. The influence and financial muscle power that they deploy and the quality of many of the services that they offer, especially in international banking, are likely to make the growth of Japanese banks a secular trend. While I have some reservations, it is not my intention to resist new clause 2. New clause 3 fulfils an undertaking given in Committee by the Economic Secretary.
I should like to speak about new clause 4 in the context of what was said about it by my hon. Friend the Member for Stafford (Mr. Cash) because there seems to be some misunderstanding. Basically, notification of acquisition of a significant shareholding comes into effect when somebody acquires or maintains a 5 per cent. shareholding. As I understand it, my hon. Friend the Economic Secretary undertook in Committee to bring forward this new clause because of pressure from many hon. Members on both sides of the Committee. He said that a threshold of 15 per cent. would be retained, at which point the bank would have a right to decide whether a 1096 person was fit and proper to have such shareholding and, if not, certain sanctions should be imposed. Some Committee Members said that 15 per cent. was too high.
My hon. Friend the Economic Secretary said—it was a reasonable and sensible compromise—"I share some of the sentiments behind that representation. I take the view that perhaps some requirements ought to exist when someone acquires more than 5 per cent., and the fact that he has to register and notify his shareholding at that stage will be taken into account if he increases his shareholding to 15 per cent., when different provisions come into effect."
That seemed to me to be wholly reasonable, given the impossible administrative burden of taking sanctions against someone who is deemed arbitrarily to be unfit and improper when his shareholding is over 5 per cent. If we went the whole way on this provision, I believe that it would undermine to some extent the 15 per cent. provision.
My hon. Friend the Economic Secretary has kept faith with the Standing Committee. He has taken account of the views expressed on both sides of the Committee about notification at a lower level, and we should not impede the progress of the new clause.
Amendment No. 13, in the name of the hon. Member for Thurrock (Dr. McDonald), prompts the thought that one has to be careful to define exactly what situations will or should trigger an assessment by the Government or even the Bank of England of a takeover. When someone becomes a 5 per cent. shareholder in a company—especially a bank—there are requirements for notifying that shareholding. Although 5 per cent. is a significant shareholding, it is not an effective or controlling shareholding, although it may buy the person concerned a seat on the board. When the shareholding rises to 30 per cent. it will not only effectively control the organisation or bank concerned but trigger a requirement to the effect that an offer must be made to the rest of the shareholders, in the case of a public company, to acquire it.
What happens now, without amendment No. 13? If a domestic or foreign organisation or bank acquires such a holding and seeks to use it as a springboard to acquire the whole of the bank, the case may be referred to the Monopolies and Mergers Commission. So we must ask whether the competition and public interests requirement in the Fair Trading Act, about whether a takeover should or should not be allowed, necessitates a rather novel and very specialised amendment such as this.
Admittedly, the Industry Act 1975 provides for a comparable right to prevent in the last resort a foreign takeover of a manufacturing company in this country when the national interest is involved. However, that legislation was not of the Conservative Government's making. It was a Labour Government's Act and it is not surprising that the hon. Member for Thurrock now seeks to introduce a clause that is compatible with it.
That is not in itself a compelling reason to accept the amendment. The Fair Trading Act provides wide enough discretionary powers to refer cases to the Monopolies and Mergers Commission so that a foreign predator can be questioned by it and, if necessary, a political decision can be made. That was what happened in the case of the Hong Kong and Shanghai Banking Corporation, the decision about which I thought was wrong. The report on that matter was one of the worst that the Monopolies and Mergers Commission has ever produced. The decision was 1097 political. It concerned a so-called attempted foreign takeover and the Secretary of State of the day had no difficulty in referring it to the Monopolies and Mergers Commission.
§ Mr. Jim Craigen (Glasgow, Maryhill)
As the hon. Gentleman reminds us, the Hong Kong decision was a political one. In the light of what he has said, it is as well that he was not the Minister responsible for taking it. Is not the hon. Gentleman reading too much into the amendment? We are not trying to establish a ring fence. We are simply seeking to take out an insurance policy that may or may not be used.
§ Mr. Nelson
I accept the hon. Gentleman's remarks. Equally, he should concede that he and the hon. Member for Thurrock must show that the existing provisions are inadequate. Moreover, they have to argue that there are special compelling reasons applying to banking that do not apply and would not be allowed to apply to the rest of industry. This is a special and more restrictive insurance provision, to use the hon. Gentleman's phrase.
Of course the banking sector is important, but it is by no means unique. I believe that the amendment would imperil the freedom of the City and, more importantly, the principle that matters such as this should not be dealt with on a sectoral basis. If we want changes in the rules of competition or in the way in which a proposed merger is referred or politically decided, we should grasp the nettle and consider the matter in the context of the whole of industry.
§ Mr. Ian Gow (Eastbourne)
Does my hon. Friend agree that, although the hon. Member for Ipswich (Mr. Weetch) referred to a foreign takeover, amendment No. 13 mentions no foreign entity? If the amendment were included in the Bill, would it not be possible for discrimination to take place at the suggestion of the Bank of England and on the decision of the Treasury, not on the ground that the person was a foreigner but on quite different grounds?
§ Mr. Nelson
My hon. Friend does the House a service by drawing attention to that fact. The ambit of the amendment certainly goes wide. However, much of the debate has surrounded the possible threat from offshore predators and that is the most obvious kind of circumstance in which the amendment might be used.
As my hon. Friend has said, it could be put to a different purpose. We should be suspicious of this kind of planning and control. I support the new clause.
§ Mr. Ian Wrigglesworth (Stockton, South)
I rise briefly to support the broad sweep of the new clause and amendments that the Government have introduced and the amendment in the name of the hon. Member for Thurrock (Dr. McDonald). I must begin by declaring an interest. I am an adviser to Barclays Bank.
I should like to refer to what the hon. Member for Harwich (Sir J. Ridsdale) said. He spoke of getting the balance right, and that is what we are trying to do in the Bill.
The hon. Member for Chichester (Mr. Nelson) exaggerates the impact of the amendment. I prefer the belt-and-braces approach proposed by the hon. Member for 1098 Thurrock and her hon. Friends to leaving things as they are. We need as much freedom as possible, and to that extent I agree with the hon. Gentleman. It is vital that British banks have the right to operate abroad.
The Midland bank takeover has been mentioned, and there are other examples of British banks operating overseas successfully — more successfully than on that occasion. We do not want to stop that happening. Neither should we stop the enormous contribution which overseas banks make to this country.
There is no doubt—here I part company with the hon. Member for Chichester—that other financial centres of the world, not least Tokyo, have proved tough nuts to crack. All the evidence suggests that the only way to crack such nuts is by being tough oneself. I think that the reciprocal arrangement is entirely justified. It is necessary to ensure that we have the right sort of arrangements to obtain the freedom that we want.
§ 6 pm
§ Mr. Edward Leigh (Gainsborough and Horncastle)
The hon. Member for Glasgow, Maryhill (Mr. Craigen) said that the purpose of amendment No. 13 was not to erect a ring fence, but the hon. Member for Stockton, South (Mr. Wrigglesworth) spoke of the necessity for British banks to be able to operate abroad. Will that not be perceived as a ring fence and as a protectionist measure by foreign banks?
§ Mr. Wrigglesworth
The proposers of the amendment can speak for themselves, but I do not see it in that way, and would regret it if it were seen in that way. It seems to me to provide a degree of flexibility to ensure that there is no ring fence. It also provides the opportunity for direct action to be taken in this important sphere. Again, I disagree with the hon. Member for Chichester, because I consider that to be necessary.
Banking is different from industry. The banking institutions can have such a profound impact on the national economy—not only on individual firms and sectors of industry, but on the economy as a whole and on individual parts of it according to regional or other distinctions — that the national interest must be expressed in the way that it is. That is why I support what the Government are doing, hut with the addition of our amendment.
§ Mr. Alan Howarth (Stratford-on-Avon)
My purpose in speaking is to seek some additional elucidation about the Government's purposes, and to find out my hon. Friend the Economic Secretary's views on what powers the Government would have were the Bill to be enacted with the addition of the Government's new clauses.
It is well within the bounds of possibility that a Japanese or German bank would try to take over a significant British bank. My concern is not with the merchant banks or with the smaller banks—and I should declare my interest as public affairs adviser to a merchant bank. The merchant banks would expect to fend for themselves in the rough and tumble of the international financial world, and would be well able to do so. The process of mergers and the joining of financial forces within the City of London is already well under way. M y concern is with the position that would arise if a takeover bid were mounted for one of our clearing banks.
1099 The clearing banks are unquestionably vulnerable to such an attempt. Even the American money centre banks are vulnerable to possible takeovers by the large Japanese banks.
An academic economist could mount a powerful case in favour of allowing such an event. There are good arguments against protectionism. It can be argued that Britain, as a relatively small economy with an exceptional stake in international trade, stands to lose more than other economies by resorting to protectionism. It could also be argued that it is never good for a business not to feel vulnerable either to competition or to the ultimate threat of takeover. It could be argued that essentially banks are no different from other businesses.
On the other hand, it can be and has been argued this afternoon that banks are different—that they are crucial to the financing of British industry, and that they have an indispensable part to play in the implementation of the policies of the Government of the day — monetary policy, credit policy, and so forth.
The economic arguments are quite finely balanced, but I favour the case against protectionism. I believe that the internationalisation and liberalisation of the financial markets will bring great benefits to this country and to the world economy. I welcome the contribution of the Japanese in the City of London, and I am very apprehensive about the predilection of the Labour party for the direction of investment, of which there was more than a hint in the speech of the hon. Member for Thurrock (Dr. McDonald).
However, the political arguments point rather powerfully in the other direction. I do not believe that the public would accept a proposed takeover of one of our clearing banks by a foreign bank. We in this country have an amiable idiosyncrasy: we like bankers. In the United States, the bank robbers — Jesse James, Bonnie and Clyde—are the goodies; the bankers are the baddies. But we in Britain rather like bankers, and tend to say, "Please don't shoot the banker." Any political trouble that might arise from, for instance, a proposal that parts of British Leyland should be taken over by General Motors or DAF would be a vicarage tea party compared with the force of public anxiety and disapproval over an attempt by a foreign bank to take over one of our clearing banks.
The Government of the day would be rather hapless politically if their powers were not clear-cut to resolve such a situation. I should therefore be grateful if my hon. Friend the Economic Secretary would elucidate the position following the enactment of the legislation.
Will a notice of objection such as is adumbrated in new clause 2 amount to a veto by the Government, or by the Bank of England acting on the Government's behalf? Is it inconceivable that the Government's view might differ from that of the Bank of England? If a notice of objection is not a veto, what other powers have the Government? Are their powers under the Fair Trading Act and the possibility of reference to the Monopolies and Mergers Commission adequate to enable the Government, if they felt that it was in the public interest, to prevent an outright takeover? Would the competent Minister be entitled to refer a bid to the MMC if the Director-General of Fair Trading had not advised him to do so? Is he certain that the director-general would advise him to do so? 1100 The question of monopoly might arise. One could imagine — there is a touch of fantasy in this — the Industrial Bank of Japan, with a capitalisation of £29 billion, or the Sumitomo bank, with a capitalisation of £32 billion, deciding that it would have the Midland bank for breakfast at a capitalisation of £1.5 billion, Lloyds bank for elevenses at £2.6 billion, the National Westminster bank for a slightly heavier lunch at £4.5 billion, and Barclays bank for a relatively light supper at £3.7 billion. The total capitalisation of the four British clearing banks is £12.3 billion, only just over one third of the capitalisation of the Sumitomo bank.
That is a fantastic situation. The monopoly question would fairly and squarely arise and we could deal with it, but the question of monopoly would not so definitely arise if piecemeal attempts were made to take over British banks. For example, Deutschebank, Dresdnerbank, Mitsubishi bank and Fuji bank might each decide to help itself to a clearer. What does my hon. Friend think the position would be in relation to the Monopolies and Mergers Commission if such a development started to unfold?
If a bid were referred to the commission, the process of scrutiny would be lengthy and subjective. There have been phases when the criteria by which the MMC has to work have been less than perfectly clear and we cannot be absolutely sure that the result of a reference would be rejection. One imagines that that would be the result, but we cannot be sure.
Let me also ask my hon. Friend about the reciprocity provision in new clause 2. It seems to me that, as other hon. Members have suggested, that factor would not be sufficient in every foreseeable case to enable the Government to prevent a takeover. One can imagine a takeover bid occurring at a time when the markets in other countries, such as Japan and Germany, had been made more effectively open. I am happy to say that, thanks to the strenuous and skilful efforts of my right hon. and hon. Friends at the Department of Trade and Industry and my hon. Friend the Economic Secretary, we are making good progress towards that liberalisation. Therefore, the reciprocity factor might be irrelevant. It seems to me that the "fit and proper" consideration might also be irrelevant. How can we realistically say that the Deutschebank and the Sumitomo bank are not fit and proper to run banking businesses in this country? If we consider their financial capacity and the general standards by which they run their business, they are.
My hon. Friend the Member for Chichester (Mr. Nelson) referred to the Industry Act that was passed by the previous Labour Government. There is a view that that Act provides powers to enable the Government to prevent or veto a takeover without reference to the MMC. However, there is another view — that, since those powers have never in fact been used in more than 10 years, they have effectively ceased to be current and valid. What is my hon. Friend's appreciation of the Government's powers under the Industry Act?
My questions in sum are these. Will the Government have the power to act directly to prevent a takeover that they do not consider to be in the national interest? If not, why are they content to rest on the existing legislation, plus this new legislation?
§ Mr. Eric Forth (Mid-Worcestershire)
I come to this stage of the debate with all the trepidation and diffidence 1101 of someone who has not participated in the Committee stage of such a Bill, with all its technicalities. I want to express a view along the lines expressed by my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth), but in a slightly different direction. I have always believed, as he does, in free trade as having been the base for the wealth that has been developed by the free world, this country and our friends and partners throughout the world. I recognise also the increasing role that the financial sector is playing in the wealth-creating process, and not just in this country or in the European Community where we are trying to persuade our partners of the virtues of the free movement of capital, as well as of goods and people. We have persistently tried to preach to them how openness in capital markets will be of the greatest benefit to all members of the Community, and also the world's financial markets.
It is against that background that we must look at the basic questions raised during the debate about the balance to be struck — as mentioned by my hon. Friend the Member for Harwich (Sir J. Ridsdale) — between the national interest and the benefits of the free movements as we have perceived them in the past and as we hope to enjoy even more in the future.
Like my hon. Friend the Member for Stratford-onAvon, I ask the Economic Secretary to explain the role that he envisages that the Financial Services Act 1986 might play through some parts of its provisions, or alternatively the Fair Trading Act, both of which may have a role to play in any assessment either in reciprocity or public interest provision, especially when we are discussing an overseas bid or an attempted takeover of a crucial part of our banking sector. That could equally apply to one that is strictly domestic.
Therefore, the question arises whether, in view of the measures available under the present legislation, we want to go yet further in a Bill that is as important as this, with its role in the financial sector, in signalling yet a further move in a more protective or inward-looking direction. That must be a crucial consideration. While we look to the City and the financial sector to play an increasingly important role in the development of a worldwide financial sector, would it be wise or make sense for us to signal in this Bill that we want to start looking ever more inwardly, and that somehow we are afraid of what it involved in the financial sector in terms of give and take?
Much has been said about the Japanese, but we should also bear in mind the Americans whose role is every bit as crucial as that of the Japanese. We are all aware of the increasing tendency for protectionist arguments to develop in the USA. Great strides have been made in opening our financial and economic markets in the past and the benefits that we have gained from them show us how important it is not to allow even our friends in the USA to use anything that we do here to develop their protectionist arguments and potentially to damage the development of the financial sector in this country, the United States, and beyond. From all the speeches made so far in the debate, that appears to be the key consideration.
We look to the Economic Secretary to reassure us about what is already on the statute book to help us to take the necessary steps for the future. My predilection is for a free market and a free and open approach rather than to introduce unnecessary additional measures that involve 1102 vague concepts of the national interest, and that could be brought in unnecessarily to counter the markets. I hope that my hon. Friend can give us those reassurances because I do not want to support amendment No. 13. I am sure that he will find it easy to reassure the House on those points so that we do not find it necessary to support amendment No. 13.
§ Mr. Leigh
I wish to speak briefly in support of new clauses 2, 3 and 4. As my hon. Friend the Member for Chichester (Mr. Nelson) said, reciprocity is of great interest and importance. However, as my hon. Friend the Member for Harwich (Sir J. Ridsdale) said, it is also important that we should consider it in a balanced way. My hon. Friend the Economic Secretary has proposed a compromise. I do not think that the blunt instrument of the Financial Services Act 1986 will make much sense in banking terms. The provision that my hon. Friend outlined of blocking a freeze on voting rights should deal with the problem.
As my hon. Friend the Member for Harwich said, the new clause is a compromise that we should accept. The fact that notice must be given at a 5 per cent. shareholding will ensure that a shadow will be cast back from the 15 per cent. limit. That will give my hon. Friend the Economic Secretary a chance to step in in the case of unsavoury shareholders. Therefore, in terms of reciprocity and unsavoury shareholders, we are striking the right balance.
I am concerned about amendment No. 13. The hon. Member for Ipswich (Mr. Weetch) has put forward an attractive argument. He always argues his case moderately and sensibly. He suggested that, as clearing banks were important to the economy, there should be a fallback clause. Indeed, one Opposition Member said that it was simply a ring fence.
As I said in my intervention in the speech of the hon. Member for Stockton, South (Mr. Wrigglesworth), who did not answer my point, perceptions are important. My hon. Friend the Member for Mid-Worcestershire (Mr. Forth) said that the City of London relies on perceptions and on its history as a centre of free trade and financial institutions. If we were to accept amendment No. 13, we would damage those perceptions. Again, as my hon. Friend the Member for Mid-Worcestershire said, we should be worried about the protectionist instincts in the United States of America. Our banks have as much access to the American financial market as the American banks, but we should always be wary of the spectre of American protectionism. We should consider it in terms of balance and accept that what happened with the proposed takeover of the Royal Bank of Scotland, where the Monopolies and Mergers Commission stepped in under the Financial Services Act, is a sufficient safeguard.
The Opposition argue that banks are crucial to the economy. It is precisely because they are so crucial that there is no way that the Secretary of State for Trade and Industry would not refer such matters to the Monopolies and Mergers Commission. I have no doubt that there would be a similar result if there were a proposal from a Japanese bank. All in all, this is a fair compromise and we should accept my hon. Friend's case.
§ Mr. Tim Yeo (Suffolk, South)
I join in the general welcome given to new clause 2. Reciprocity is an important principle for financial markets, particularly when we discuss the markets in this country that have had open 1103 access to participants not only from this country, but from abroad. There is nothing protectionist about enshrining the principle of reciprocity in our legislation. We seek to break down barriers put up in other markets. When the Japanese and Americans give British players in these markets the same rights as we give them, by all means let us look at the Bill and the Financial Services Act 1986 and ask whether we need to amend or open them further. At the moment, by putting reciprocity in it, we are going a long way to removing protectionism. It is quite the reverse to suggest that there is anything protectionist about the principle of reciprocity in our financial markets and the legislation that governs them. I welcome new clause 2.
How does my hon. Friend see this legislation working in practice? I have some anxiety about how the principle of reciprocity will be tested. My hon. Friend the Member for Stratford-on-Avon (Mr. Howarth) produced some striking figures. He quoted the total capitalisation of the four British clearing banks as being little over one third of that of the Japanese bank, the Sumitomo bank. That is the position at present. With fluctuations in exchange rates, volatility in exchange markets and the fact that exchange rate movements tend to be overdone, at some time—particularly in the unlikely event of there being the whiff of a threat of a change of Government — the pound might fall dramatically, and this might open up an opportunity for an opportunist approach by a Japanese bank. Far from costing one third of their capitalisation to swallow up all four of the British clearing banks, it might cost a fifth, a tenth or a twentieth. Because of currency movements as well as other factors, British banks might be vulnerable.
In those circumstances, who can conceive of a British institution being able to take over a Japanese bank that is quoted at a price 10 or 20 times greater than the size of the British institution? How could it do it?
§ Mr. Christopher Hawkins (High Peak)
As someone who did not serve on the Committee, I share my hon. Friend's great concern about what reciprocity means in practice. America might say, "Yes, you can buy some banks in America," but it has 14,000 banks. I do not believe for one moment that the Americans would let us buy one third of their banking system. An American bank could buy NatWest, and that would be one third of our banking system gone in one hit. The Monopolies and Mergers Commission would not help. It would argue that another bank buying a British bank might ginger up competition, not reduce it, because it would not be a reduction in the number of banks in Britain.
§ Mr. Yeo
The differences between our banking system and the American banking system are far-reaching and fundamental. Not only could a British bank not buy up one third of the American banking system, but an American bank could not do so, either, under their present legislation. They have problems in reaching any comparability with us.
I ask the Minister to address the matter of reciprocity. It looks fine to me in theory, but, in practice, will it mean anything? If a British institution genuinely wanted to buy a Japanese bank, if it were ever in a position to do so, would it be able to do so? There is a danger that reciprocity is still a one-way access for foreign institutions to use their 1104 hard currency assets to acquire British institutions at perhaps moments that are favourable to them but are unfavourable to us.
My hon. Friend the Member for Eastbourne (Mr. Gow) made an important point. We must be fair to Opposition Members. After all, politically they are in such a parlous condition at the moment that it is incumbent upon us to be fair to them. Amendment No. 13 does not mention foreign takeovers. It is designed to block any takeover that we regard as being against the national interest.
I put to my hon. Friend the Minister a hypothetical but not totally inconceivable situation. Under the existing legislation, the Monopolies and Mergers Commission, the other powers in the Bill and so on, will it be possible to deal with the situation that I am about to describe? Let us suppose that Mr. Ivan Boesky, with all the substantial assets that he acquired by one means or another over the past few years, decides to go into the British banking business by acquiring a major British bank. To do so, he does not wish to become the chairman or a director of the bank, but he produces a few experienced bankers who will operate through a new business form for the purpose of acquiring, say, Barclays bank. Let us suppose that there is enough equity base in the new company so that there is no question of any prudential factor arising and that the whole operation is adequately financed.
With existing powers, whether under this Bill or under some other legislation, will the Government be able to block a takeover of that sort which they regard as undersirable, not because it involves any unnecessary financial risk on the part of the institution, not because there is inadequate management—the Barclays management will still be there, backed by additional management perhaps from the United States—but merely because the ultimate shareholder is someone whom we may think is not wholly suitable to control a British institution? Would the powers in amendment No. 13 help in that respect? I should be grateful if my hon. Friend would address that point. I shall listen with great interest to his reply.
§ Mr. John Butterfill (Bournemouth, West)
Many hon. Members who served on the Standing Committee will no doubt remember the arguments that were deployed in relation to a matter similar to that raised by amendment No. 13. We should reflect on the arguments that were deployed then. One of my objections to amendment No. 13 is that it imports the general and rather vague notion of the national interest. The problem with that general and rather vague notion is that the definition of "national interest" can vary from time to time, according to the political complexion of the Government of the time. My hon. Friend the Member for Eastbourne (Mr. Gow) did us a great service by pointing out that, under the terms of amendment No. 13, this could apply equally to British and overseas companies. The vague notion, which can be used to block all sorts of proposed mergers or takeovers in the vague concept of the national interest, is a dangerous road for us to go down.
I support the concept of reciprocity. I supported it when I was a member of the Standing Committee that considered the Bill that became the Financial Services Act 1986 and again when the Standing Committee considered this Bill. I pointed out that we did not need to go any further than invoking clause 183 of the Financial Services Act to achieve our objectives. I am interested to see that 1105 my hon. Friend, in drafting clause 2, has provided specific machinery for the use of the Financial Services Act. That will be helpful. Had we relied on the Act as it stood, it would have required the Treasury to give notice directly to a potential acquirer, whereas, through this Bill, we propose to enable the Bank of England to give directions. It is therefore helpful that the amendment quite clearly sets out the procedure to be followed in such circumstances.
My hon. Friend will no doubt remember that, in Committee, I asked him whether he considered that somebody who financed a series of acquisitions by separate people might be caught under this clause. He was kind enough to write to me to say that he considered that, if a number of people acted in concert, that circumstance would be caught. Will the Minister confirm that the word "associates" in subsection (2) of new clause 4 includes somebody who financed a series of transactions and that, therefore, it will have the effect of preventing such transactions?
§ Sir Brandon Rhys Williams (Kensington)
I support my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth) who drew attention to the embarrassment of the Bank of England in the event of a deposit-taking institution being invaded by someone whom the bank did not consider fit and proper acquiring shares. I hope that my hon. Friend the Economic Secretary to the Treasury will have been impressed by my hon. Friend's remarks, which I felt were convincing. It would be wrong that the bank should be frustrated until such a person had actually acquired a 15 per cent. holding. I hope that, at a later stage of the Bill, the Economic Secretary will do something to it which makes it possible for the bank to act more strongly in such a case.
§ Mr. Ian Stewart
A very large number of questions have been asked during the debate. Rather than go through them individually, I think that it would be better if I were to group them into three subjects: substantial and controlling shareholders, reciprocity, and the national interest powers. By doing so, I shall be able to answer all the points of substance that have been raised. I say that with one exception. My hon. Friend the Member for Stafford (Mr. Cash) referred to amendment No. 12 and suggested that there should be a reference to "depositors or potential depositors" instead of "depositors and potential depositors". I am grateful to him for mentioning that point.
Although elsewhere in the Bill the correct expression is indeed "depositors or potential depositors", the context here requires "depositors and potential depositors", for this reason. The provision is saying that the bank may issue a notice of objection, unless it is satisfied that both existing and potential depositors are safe. If the amendment were accepted, the provision might prevent the Bank of England from acting in cases where only one class of depositor was threatened. This particular case is the other way round; it is a kind of double negative. I hope that I have answered my hon. Friend's point.
The first of the three main subjects to which I referred was substantial and controlling shareholders: substantial shareholders with 5 per cent. or more of the shareholding of a bank and controlling shareholders with 15 per cent. or more of its capital. The new clauses provide two points at which the supervisor becomes interested in such 1106 holdings. First, at 5 per cent. the shareholder has to give notice to the supervisor that he has such a holding and thereafter he has to provide information to the supervisor and respond to his inquiries. At the 15 per cent. level he has to satisfy the supervisor that he is fit and proper in the context of a holding of that amount, which can be described as a controlling shareholding in a bank.
My hon. Friend the Member for Stafford, supported by my hon. Friend the Member for Kensington (Sir B. Rhys Williams), expressed anxiety about the position of those who hold shareholdings of 5 per cent. or more but who do not hold shareholdings of 15 per cent. or more. The hon. Member for Great Grimsby (Mr. Mitchell) referred me to amendment No. 59, which suggests the substitution of 10 per cent. for 15 per cent., and asked me whether it was relevant to these provisions. The hon. Gentleman is quite right.
I suggested in Committee, and I am now bringing forward on Report, provisions that do not change the 15 per cent. test — the original provision in the Bill — by setting it at 10 per cent., but I meet the point that was raised in Committee, that anxiety could arise about holdings of less than 15 per cent., by two means. First, I have introduced the new 5 per cent. test. Secondly, I have strengthened the 15 per cent. test so that it is not just a single hurdle to be safely negotiated and then forgotten but a continuing requirement for responsible behaviour by existing shareholders. Taken together, I believe that the two provisions amount to adequate protection against undesirable shareholders.
My hon. Friend the Member for Stafford said that there are no sanctions against someone who does not seem to be suitable. However, the problem is that 5 per cent. —and perhaps a figure above 5 per cent.—is not a level at which a very great deal of influence can be exercised over the conduct of a bank. In fact, 5 per cent. is a common level of institutional shareholding in a bank, and it carries with it no implication of involvement in the management of the bank.
However, the combination of the 5 per cent. and 15 per cent. triggers makes accountable to the Bank of England anyone who has acquired 5 per cent. If anybody takes his shareholding up to 15 per cent., he will have had to establish in the meanwhile that he has behaved satisfactorily and is able to pass the 15 per cent. test. If he had not behaved in such a way while he was a 5 per cent. or 10 per cent. shareholder, if he did not responsibly answer questions and inquiries put to him by the Bank of England and if, in other ways, he did not show that he was suitable to be a controlling shareholder, he would find it extremely difficult and probably impossible to surmount the 15 per cent. test. That is why the combination of the 15 per cent. and the 5 per cent. tests will be effective.
After I had announced in Committee the two new provisions, there was a case in the market. A substantial shareholding had been built up in a British bank and the reaction of the market was to make a very significant adjustment in the price of the shares in that bank, which suggested that the market regarded these proposals as of significance.
My hon. Friend the Member for Suffolk, South (Mr. Yeo) asked what would happen if a particularly unsavoury character came along, and I think that he quoted the name of a person whom he might put into that category. He asked whether the provisions of the Bill, including the Government's new clauses, would enable his control to be 1107 frustrated. The answer is yes. If he were a wide boy, on a grand scale, he would never pass the fit and proper test. Only narrow boys would be able to pass the fit and proper test. Even if they appear to be narrow boys at the time they acquire their 15 per cent. but subsequently are shown to be wide boys, under the new provisions that I am introducing they would be subject to the blocking provisions. On all those counts, my hon. Friend can be satisfied that his concern will be met.
During the last hour or two the House has been considerably occupied with the question of reciprocity. I agree with the sentiments of a number of my hon. Friends that the reputation and success of the London financial markets have been based on open trading and that we do not want to introduce protectionist sentiments into our legislation, if they are unnecessary.
In a brief but, I thought, telling intervention my hon. Friend the Member for Harwich (Sir J. Ridsdale) said that he felt that in the case of Japan there is insufficient reciprocity and that it is very difficult for British or other foreign companies to gain adequate access to Japanese markets. Should the reciprocity provisions of the Bill or of the Financial Services Act 1986 be called into play if there were an approach by a Japanese company, it would be very difficult for me to disagree with his analysis. I shall resist the temptation to make a world tour and say, country by country, where I think that such problems might arise, but there has been anxiety about Japan and the point is very well taken.
The fundamental point about reciprocity that I should like to emphasise is that the provisions of the Financial Services Act and of this Bill are designed to open up markets overseas, not to put up the shutters around London. It is not only in the circumstances where a United Kingdom bank could not buy a Japanese bank that the provisions might be triggered; it is a much more general question of access to the provision of financial services. That applies to banking, insurance, investment and other matters. If hon. Members study the way in which new clause 2 is phrased they will see that it states:overseas countries which do not afford reciprocal facilities for financial business".Therefore, we have gone far beyond the question of takeovers.
I felt it necessary to strengthen, or rather adapt, the reciprocity provisions contained in the Financial Services Act 1986 because, whereas the threat of withdrawal of authorisation may be an appropriate sanction in the case of an investment or insurance business, in the case of banks that rely on taking deposits in the market from day to day, the withdrawal of authorisation may cause great difficulties for depositors. Therefore, the threat of that withdrawal of authorisation would not be a credible deterrent.
The reciprocity powers, should they ever be put into practice, must be workable. I hope that they will not be brought into play. I hope that other countries, encouraged by our example, will open up their markets to our banks and other foreign banks and financial companies. Other countries may discover, in the same way as we have discovered, that that action will create a thriving market, which is of great advantage, as indeed it has been for the City of London.
1108 I do not believe that others should be entitled to become predators of our banking system and at the same time fail to offer us equivalent access to their markets. That is the essence of the case on reciprocity.
Amendment No. 13, moved by the hon. Member for Thurrock (Dr. McDonald) raised an important question about national interest. The Bill does not contain general powers to object to bank shareholdings on the grounds of national interest. That matter is the responsibility of the Monopolies and Mergers Commission. The Government's policy in applying the powers contained in the Fair Trading Act 1973 takes full account of the public interest. Any projected foreign takeover of a British bank will continue to be subject to that policy.
I was asked what would happen as a result of the review of the Monopolies and Mergers Commission, carried out in the general review of competition policy, which is being conducted by the Department of Trade and Industry. I expressed the Committee's concern to my right hon. Friend the Secretary of State and he has confirmed that there is no reason why that review will result in any weakening of the broad public interest criterion contained in the Fair Trading Act.
I believe that we have an effective system contained in the Monopolies and Mergers Commission and that that system is the best way to deal with the question of public interest or national interest in the case of banks or any other sector. One of my hon. Friends said that if banking is a crucial sector—as Opposition Members and others have said—by definition, if an approach was made to one of our major banks, it would be referred to the Monopolies and Mergers Commission. I believe that it is inevitable that, if an approach was made to one of the high street banks, it would be referred to the Commission. I have no doubt that similar factors would be adduced in such a review as in the case of the Royal Bank of Scotland.
I believe that the anxieties that have been expressed on that score are not well-founded. Therefore, I hope that the House will accept the Government new clauses and the related amendments, but will object to amendment No. 13.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.