§ '(1) Each bank carrying on a bona fide banking business in the United Kingdom shall, within six months of the end of each of its accounting periods, prepare a report which shall be sent to the Treasury and to the Bank of England, giving details of—
- (i) the average interest rate charged on all of its loans in aggregate to small businesses, the average aggregate principal of such loans and the average number thereof;
- (ii) the average interest rate charged on all of its loans in aggregate to large businesses, the average aggregate principal of such loans, and the average number thereof;
- (iii) each loan made during the year or in existence at the beginning of the year where the average percentage rate of interest charged on the loan exceeded such rate as is specified for the purposes of this section, not being less than 3% above base rate for the year as a whole;
- (iv) the average level of provisions made against loan interest due and against loan principal for loans of the sorts described at (i) and (ii) above, and the provisions, if any, made against each loan falling within (ii) above, and
- (v) such other matters as may be prescribed by regulations made under this section.
§ (2) The Treasury shall make such regulations as are needed to give effect to this section; and in particular such regulations shall define the terms "small businesses" and 'large businesses" mentioned in subsection (1) above and the specified rate of interest, and shall state the extent to which loans to a single borrower or associated borrowers may be regarded as a single loan for the purposes of this section.'.—[Mr. Chris Smith.]
§ Brought up, and read the First time.
§ Mr. Speaker
With this it will be convenient to take the following: new clause 35—Statement of interest and charges—
§ '(1) This section applies to any bank operating in the United Kingdom.
§ (2) When a bank sends a customer a bank statement detailing recent debits from and credits 'to the account of that business customer, the bank must publish on that statement the following items:
- (a) the interest rate or interest rates that have been applied to borrowings by that business over the period covered by the statement;
- (b) an itemised list of charges levied by the bank on the account of that business over the period covered by the statement.'.
New clause 37—Reports by banks as to enquiries
'—.(1) Any bank granted authorisation to receive deposits under section 9(1) of the Banking Act 1987 shall publish within one month of each accounting period a statement detailing—
(2) Publication of the results of such enquiries shall include all information as to communications and all correspondence to and from the authorities as defined in subsection (1)(a) unless such information as to communications or correspondence has not been approved for publication by those authorities.
(3) Where, pursuant to subsection (2) above, information as to any communication or correspondence has not been approved for publication by the appropriate authorities, a report shall be submitted to Mr. Chancellor of the Exchequer detailing the reasons why that information has not been published.'.
§ Mr. Smith
This debate on new clause 3, new clause 35 tabled by the Liberal Democrats and new clause 37 tabled by my hon. Friend the Member for Workington (Mr. Campbell-Savours) will enable us to discuss two particular and important issues that are of great public concern and relate to the procedures and practices of the banking industry.
The first issue is the treatment by banks of small businesses, especially in relation to the interest charged on loans that are taken out by small businesses, and the procedures followed by banks in the light of a falling base rate and not so rapidly falling interest rates which are charged to businesses that are borrowing money. The second issue relates to the regulatory system of banks, investigations of banks and the information that the public have about those investigations. That is uppermost in our mind in relation to the practices and record of the Bank of Credit and Commerce International.
§ Mr. Terence L. Higgins (Worthing)
I am a little uncertain about the exact status of new clause 3, as it appears in the name of the shadow Chief Secretary to the Treasury, but not in the name of the shadow Chancellor of the Exchequer. Is it official Opposition policy?
§ Mr. Smith
I am surprised that the right hon. Gentleman, who is normally very perceptive in these matters, should have made such an elementary error. During the proceedings on the Finance Bill, both in Committee upstairs and on the Floor of the House, it is usual practice for the shadow Chief Secretary to lead for the Opposition on amendments and speeches. The new clause which she, other colleagues and I have tabled has the full endorsement of the shadow Chancellor. We are simply following the normal practice in ensuring that her name stands at the top of the list.
§ Mr. Higgins
I fully understand that point, but it does not answer my question. Is new clause 3 official Opposition policy?
§ Mr. Smith
The right hon. Gentleman again betrays a certain degree of ignorance, which suprises me. As I have said, the Opposition tabled the new clause to the Finance 35 Bill with the full support of the shadow Chancellor. It is an official Opposition new clause. If the Government were minded to support it in the Division Lobbies at the end of our proceedings, we should be only too delighted to see it on its way into the Finance Bill. In so doing, it might ensure that some of our practices were improved generally.
The primary issue identified in new clause 3—
§ Mr. Smith
If the right hon. Gentleman wishes me to repeat the answer a third time, I am happy to do so, but other hon. Members wish to contribute to the debate.
The first matter raised in new clause 3 is the fundamental issue of the relationship between banks and small businesses. In recent weeks we have heard a lot about the concern among small businesses about the way in which the banking system has treated them. The case has been most strongly put by the National Federation of Self Employed and Small Businesses in a submission to the Treasury which contained more than 100 case histories of member businesses that thought that they had been badly treated by the banks. One of those businesses claimed to have suffered recently a 250 per cent. increase in charges, while another was charged a £50 fee for being overdrawn for one day in the previous 18 months.
Despite the fact that the high street banks claimed that most small businesses were paying only 4 per cent. or less above the base rate, the submission included details of businesses that were paying 6, 9 or even 15 per cent. over the base rate. Such are the concerns that have been clearly identified by the National Federation of Self Employed and Small Businesses.
Further concerns were identified two years ago in the Jack report published by the review committee on banking services. A significant number of recommendations were made in that report on the need to ensure a more friendly culture among banks in their dealings with small businesses.
Such is the scale of the concern that has been voiced by people in industry. However, the banks protest that they are not the guilty party. Recently, Shearson Lehman Brothers conducted an investigation into the rates charged by banks, especially the four large United Kingdom clearing banks, to small businesses. Its findings were, perhaps surprisingly, remarkably kind to the practices of the banks. It reported that some banks were better than others, but none the less it believed that some of the criticisms levelled at the banks were somewhat overstated.
All we have to go on is the claims that are made, on the one hand, by small businesses and, on the other, the claims made by the banks. We understand that the Treasury has conducted an analysis of what is going on and perhaps we will hear a little more about the Treasury's findings during the debate.
The new clause seeks to ensure that, at the very least, the public can have access to information about precisely what the banks are up to. So long as businesses claim that they are being unfairly penalised by the banks, while the banks say that they are in no way unfairly treating those 36 small businesses, there is an obvious need for clear information about what is happening. That information should be available to the public, the small business sector and those who are considering starting up a small business.
§ Sir Ian Stewart (Hertfordshire, North)
The new clause states that a report should be:sent to the Treasury and the Bank of England".Does that also imply that the report should be made public at the same time?
§ Mr. Smith
It states in the new clause that the report should besent to the Treasury and the Bank of England,because there may conceivably be items of commercial confidentiality included in such a report. However, we would confidently expect that the Treasury—at least under a Government who cared about public access to information—would wish to make public whatever useful findings that could be made on a comparative basis from the report submitted to it. It was with that in mind that we drafted the new clause.
A recent example illustrates the banks' understanding of small businesses. A constituent who happens to be an adviser to a number of small businesses drew my attention to a company that supplies high-quality shop fittings and employs 20 or 25 people, mainly skilled workers, in Somerset. Its order book contained orders amounting to some £1.25 million to a major customer on a cost-plus basis, so there was no risk of the company making a loss on the deal. Its marketing had attracted a DTI grant and sales of the firm's products were increasing. Therefore, on a cursory analysis, the firm was conducting its affairs with considerable success. However, National Westminster bank has now stepped in to reduce its overdraft arbitrarily by some 25 per cent. on the basis that the value of properties has decreased nationwide. About five months after the bank reduced the overdraft, it brought in Cork Gulley to close down the business overnight, dismissing all the staff and returning the equipment, because it believed that the company was no longer viable.
The way in which National Westminster bank acted in that incident is not only a tragedy for the company and employees concerned but serves to highlight how little the banks in this country understand about the practicalities and realities of the business world which those in industry and the market place face each day. An improvement in understanding between the banks and their customers in the small business sector is desperately needed and I hope that the new clause will help to bring it about.
§ Mr. Michael Latham (Rutland and Melton)
Where not such decisions taken, not so long ago, by local bank managers who knew their customers and worked with them? Now they are often arbitrarily determined decisions made much higher up the line and the local bank manager has no control.
§ Mr. Smith
The hon. Gentleman makes an extremely pertinent point. It is borne out by the decision taken by National Westminster bank to reduce overdraft facilities on the basis of a national assumption about the value of property without looking at the circumstances of individual companies or the different regions of the country. We strongly endorse the need for much greater local input into such decision making.
37 Having said that we want to know precisely what the banks are up to and that we want the banks to treat businesses properly and in a sensible and user-friendly way, we must not let the main culprit go unremarked. The main culprit in the problems faced by small businesses are the Government, whose policy of high interest rates has been the root cause of the difficulties faced by small businesses, whatever the banks may have been up to.
Even after last Friday, interest rates are 11 per cent. in Britain compared with 9 per cent. in Germany and France, and 5.5 per cent. in Japan and the United States. Interest rates in this country have been at 11 per cent. or more since August 1988, and were held at 15 per cent. for an entire year while the present Prime Minister was Chancellor. In the first half of this year, there were 23,000 business failures—a rise of 66 per cent. on the same period a year earlier and the highest level ever recorded. According to the Dun and Bradstreet figures, 900 business are going out of business every week in this country.
That is the Government's precise record, and it is directly attributable to the high interest rate policy that they have followed. They have used high interest rates as the only weapon to try to take demand out of the economy. We know from the savage experience of the recession that that taking out of demand has been belatedly, but all too substantially, successful. It has meant that we have been plunged into recession, which has dramatically affected the small business sector.
The Government should not seek to evade their responsibility for the problems faced by small businesses in this country. The Government are the principal culprits; the banks may or may not be secondary culprits in the affair. We will not know whether they are unless and until they are required to provide the information, as they would have to do under our new clause. We strongly believe that new clause 3 would represent an improvement in the availability of information and highlight the way in which Government policies have been operating to the detriment of the small business sector in this country.
New clause 37 was tabled by my hon. Friend the Member for Workington as a direct result of the enormous concern that is felt, and has been felt in the past week, at the closure of the Bank of Credit and Commerce International a week ago last Friday. It raises two primary issues, the first of which my right hon. and learned Friend the Chancellor drew attention to a week ago—[Laughter.] My right hon. and learned Friend the shadow Chancellor, I should say. I am running ahead of myself, but before too long we shall be referring to him as the Chancellor—the sooner that day comes, the better.
Last Monday, my right hon. and learned Friend raised the fundamental issue of the inadequacy of the depositors' protection scheme as it stands. It effectively places a cap of £15,000 on compensation available to those people and businesses that have put money into BCCI. That sits oddly alongside the investors' protection scheme, run under the auspices of the Securities and Investments Board, which has much more generous limits on the protection offered. The investors' compensation scheme pays up to the first £30,000 in full, and 90 per cent. of losses between £30,000 and £50,000.
Last week, we asked the Economic Secretary to the Treasury why the depositors' protection scheme was so much less generous than the investors' protection scheme, but received no answer. We should like an answer now. We also drew the attention of the Economic Secretary to the 38 example of other countries where deposit protection schemes are more generous than those available here. For example, the Canadian scheme offers 100 per cent. compensation up to Canadian $60,000. That is substantially more generous than the scheme that is in place here. The first issue is whether the deposit protection scheme is adequate and, if not, why not. Many small businesses, especially in the Asian community, have been badly hit by the closure of BCCI. The relief offered by the scheme, much delayed as I fear it will be, seems to be inadequate.
The second question raised by the affairs of BCCI and to which new clause 37 refers is perhaps even more fundamental. It is when the Bank of England and the Government knew that the affairs of BCCI required investigation and why they did not carry out such an investigation at an earlier stage. If the investigation that was clearly necessary had taken place earlier, much of the pain caused to depositors and employees of BCCI could have been avoided.
We know that doubts were expressed by Ernst and Young when they were BCCI's auditors some two or three years ago. We know that considerable doubts were raised in the marketplace for months before the Bank of England acted. We also know that doubts arose as a result of the prosecutions in Florida last year and that the present auditors, Price Waterhouse, delivered a report to the Bank of England in March 1990 which raised serious questions about the way in which BCCI was operating.
If reports in The Sunday Times yesterday are correct, the question of what information was provided to the Bank of England and the Treasury and why they failed to act upon it becomes urgent.
§ Mr. Campbell-Savours
Does my hon. Friend accept that the statement by Lord Henley in April last year in the other place is significant? When he made that statement, what did the noble Lord know that was not revealed to the other place in the debate?
§ Mr. Smith
I cannot answer that question, which is an important one. I hope that we shall get an answer from the Government. If we do not get a satisfactory answer I am sure that my hon. Friend will wish to press the matter if he speaks in the debate. My hon. Friend will be aware that whatever the noble Lord may have said at that time was said after the Price Waterhouse report of March 1990 was delivered to the Bank of England.The Sunday Times tells us that that report,had already revealed that BCCI was in serious financial trouble, with major gaps in its accounts raising the possibility of misuse of funds, a large number of questionable loans outstanding and lax internal controls.If that catalogue of impropriety was suspected at that stage, why did the Economic Secretary tell us last week that the Bank of England had sufficient information to act only 10 days before last Monday? Why was it that, in March 1990, the Bank of England did not commence serious investigations? That is a most important point. It is not only a question whether there is misuse of funds or potential fraud, or whether the Bank of England has powers to take action if it suspects fraud. The Bank of England is also supposed to reassure itself about whether someone running a bank is a "fit and proper person" to do so. Under that provision, there must have been scope for 39 questions to be raised, for investigations to be started and for the Bank of England to begin to take action earlier than it did.
§ Mr. Gerald Bermingham (St. Helens, South)
Is not one of the duties of the Bank of England to reassure itself about the liquidity of banks? In other words, it has to be sure that, if there is a run, each bank can meet its obligations. Bearing in mind the Price Waterhouse report of March 1990, was not it clear that the Bank of England could not properly have reached that conclusion?
§ Mr. Smith
My hon. Friend raises an important point. It seems that BCCI was adept at shuffling funds around among its various national identities to disguise the true position of its liquidity. Only a thorough investigation could have shown the true position. That is why a thorough investigation should have taken place sooner than it did.
§ Mr. Anthony Nelson (Chichester)
I am obliged to the hon. Member for Workington (Mr. Campbell-Savours) both for his remarks and for new clause 37, which raise reasonable questions that should be addressed. I have a question for the hon. Member for Islington, South and Finsbury (Mr. Smith), which must be addressed, as his party has pretensions to government. Is not it important for any Government, and the Bank of England, to ensure that there is neither a run on a bank nor a lack of confidence in the banking system? An extremely difficult balance must be struck between precipitating a run on a bank, and thus closing it peremptorily, and leaving it too long and allowing people to be defrauded. In that difficult balance of judgment, where does the hon. Gentleman stand? The Bank of England instituted inquiries properly, dealt with the matter exemplarily and, when it had clear evidence, closed the bank.
§ Mr. Smith
The hon. Gentleman is right to identify the difficult balance which the banking regulatory authorities have to undertake. It is a balance between raising too many public questions too early, and therefore undermining confidence in part of the banking system, and ensuring that, where bad practice is taking place, it is immediately investigated. Although we have our suspicions, we do not yet have enough information to answer our question about whether the Bank of England got the balance right with respect to BCCI. The reports of the past week leave us with no certainty that it did.
If the hon. Member for Chichester (Mr. Nelson) has read new clause 37 closely, he will know that it addresses this point. It requires that if a bank has been cleared of any wrong doing, the Chancellor of the Exchequer can require the report of the investigations to be made to him rather than be made public. That is a substantial protection against the confidence problems that the hon. Gentleman has identified. It is our belief that my hon. Friend the Member for Workington has addressed precisely that issue in his carefully worded new clause.
I shall draw my remarks to a close, because I know that many hon. Members wish to contribute to this important debate. It seems to us that we have still to hear a satisfactory response from the Government to the two overwhelming questions that must be directed to the 40 tragedy of the BCCI closure, which has caused so much difficulty for so many in this country. First, why is the deposit protection scheme so inadequate? Secondly, what did the Bank of England know, when did it know, how soon did it know and how rapidly or slowly did it seek to investigate? It is our impression from the information that is available to us that there are serious question marks about the way in which the Bank of England, the regulatory authorities and the Government have acted.
§ Mr. James Wallace (Orkney and Shetland)
It is obvious that new clause 35, in the names of my right hon. and hon. Friends, is linked with new clauses 3 and 37. I shall take up later the final comments of the hon. Member for Islington, South and Finsbury (Mr. Smith), but first I shall direct my remarks to the nub of the original problem, to the publicity that that has been given in recent weeks to exceptionally high interest rates allegedly being charged by several clearing banks, including Scottish banks, and to the damage that those rates have done, especially to small businesses.
As the hon. Member for Islington, South and Finsbury has reminded us, the high interest rates that are being charged are a regrettable and damaging symptom of the general regime of high interest rates that we have suffered for a long time. Life has not been made any easier for small businesses by the Government opting for the highest charge available to them for this year's uniform business rate in England and Wales. The Government are taking more from the business sector, particularly from small businesses, than they are putting back into it by means of the measures in this Bill.
There has been a dramatic and record increase in the failure of small businesses in recent times. Nine out of 10 of the businesses that have gone under employed fewer than 100 people. The major redundancies that are announced by household-name companies tend to attract news headlines, but the cumulative effect of small businesses going under is one of the principal causes of an increasing rate of unemployment. It is important, therefore, that we examine the implications of the Government's high-interest-rate policy and the way in which the banks have dealt with small businesses.
The main criticism and focus of attention has been on the rates of interest that are charged by banks to small businesses, but that is not the sole problem that small businesses face in their relationships with banks. I have heard complaints about the fact that a bank can increase the interest rate that is paid by a small business when the owner of the business reaches his current overdraft limit and has to negotiate an increase. That is often taken as an opportunity to increase the lending rate.
Another factor is the deduction of bank charges at source, invariably without notification to the business concerned. As that happens when it is least expected, or even when it is unexpected, the business can find that it has exceeded its overdraft limit and that charges are being applied at punitive rates.
Some bank managers restrict borrowing to bring discipline to bear upon a business if it is not going about its business in the way that the bank would like. There are banks that charge an arrangement fee if a business takes the bank's advice and reduces its level of borrowing. Non-negotiable charges are imposed unilaterally by the bank and the unfortunate customer becomes aware of them only when he is told to pay up.
41 Another problem is that of the collateral demanded from small businesses which seek to take out loans, If one studied law, as I did, one worked out the respective advantages of limited liability companies or of unincorporated firms. We were told that one of the advantages of a limited liability company was that if the business went under, the authorities could not come after one's home or other assets. However, the truth is that many limited liability companies are family firms and they are asked to put their homes on the line as collateral. There are many examples of banks asking for homes as collateral as a sign that the person involved is committed to the business although that person has already put on the line his savings, his way of life arid his energy. I fear that the use of such collateral may have a damaging effect in the long term because, if so much personal risk is involved, it may inhibit a business's growth, or make it think twice about diversifying or taking up new ideas.
Those are examples of the banking sector not necessarily being in harmony with the small business sector. However, there are also problems with the small businesses themselves. Some go over their overdraft limit and some are not especially good at keeping the bank provided with information. Some perhaps use overdraft expenditure for capital investment when it might be much better to examine other ways of raising capital. Perhaps the recent furore over interest rate charges has given some focus to the search for a way in which the relationship between banks and small businesses can be improved. In some respects, that is a matter not for the House or for the Government but for good practice, and that can often be achieved without regulation.
New clause 35 proposes that, when making interest rate charges, the banks would be obliged to stipulate the rates at which the charges are made and the period of the loan or overdraft in respect of which they have been matte. The same would apply to bank service charges: the bank would be obliged to stipulate the various component parts of the bank charges. I should not assume that you pay bank charges on your account, Madam Deputy Speaker, but I am sure that many hon. Members do and that they sometimes merely accept them without bothering to find out the precise detail of those charges.
§ Mr. Kenneth Hind (Lancashire, West)
Has the hon. Gentleman also considered the penalties that are paid? I am sure that many hon. Members know of businesses which have exceeded their overdraft limits and whose interest rates have shot into the sky. In those circumstances, the proprietor of a small business had not anticipated what would happen and yet he automatically faces the bill. It is important that the public are made aware of that.
§ Mr. Wallace
I agree with the hon. Gentleman. One of the complaints made by small businesses is that the charges are often applied without notification and can, as a result, push the business above its overdraft limit and into the realm of punitive interest rates.
We must seek a contract between small businesses and the banks, but the uneven negotiating position of the banks and small businesses often stands in the way of such a contract.
§ Mr. Bermingham
Does the hon. Gentleman agree that another danger is what is known as uncleared effects? The small business man pays into the bank a cheque that he has been given by his supplier—
§ Mr. Bermingham
Yes, uncleared funds, or whatever they may be called. The cheque is as safe as houses because it is often drawn on state bodies and will not bounce. However, cheques take three to five days to clear and a business must pay a penalty during that time. That can materially affect a business's cash flow and ultimately its solvency.
§ Mr. Wallace
I could not agree more with the hon. Gentleman. That applies to my account and my salary cheque from the Paymaster General. One hopes that such cheques would not bounce and, if they did, we would have worse problems than those relating to small businesses and banks. As the hon. Gentleman says, when cheques are drawn, often on public bodies, and therefore will not be dishonoured, we must seek a way of speeding up the clearing process, especially as the company may draw on the strength of that cheque.
The relationship between small businesses and the banks is skewed because of the difference in their bargaining positions. If competition could encourage good practice, I am sure that it would benefit not only small businesses but the banks. Banks will do what they can to win the account of a large business and there are no doubt ways of offering an attractive package. The same can apply to individual customers. Loyalty to a particular bank is probably not such that if one did not receive a good service one would not switch to another bank or to a building society. If in future building societies and foreign banks were encouraged to enter the business loans market, the clearing banks and their Scottish counterparts might do much more to provide a better service for their small business customers. The Government, who are committed to competition, might wish not only to call in the banks and ask them about their policy with regard to small businesses, but to investigate how banking services for small businesses might be opened up to more competition which would, I believe, be for the greater benefit of all.
Although I believe that much should be done by good practice instigated by the banks themselves and by some contractual understanding and negotiation with the small business sector, if the banks were not prepared to take the initiative, the two modest proposals contained in new clause 35, which provide for the stipulation of a breakdown of bank and interest charges, would perhaps encourage them along the way. There would be resistance from the banks, but every other business is expected to give details when invoicing customers, so it is not unreasonable to expect banks to do the same.
Another issue raised by the hon. Member for Islington, South and Finsbury, and which is the subject of a new clause tabled by the hon. Member for Workington (Mr. Campbell-Savours), is the Bank of Credit and Commerce International. The hon. Member for Islington, South and Finsbury was right to focus his attention on why rumblings and suspicions were allowed to fester for so long before the Bank of England finally pulled the plug at the expense of many people in the business community—especially the Asian business community—of individual 43 investors and of a number of local authorities, not least that of the Western Isles which had invested perhaps more than any other authority in BCCI.
The House will be aware that my noble Friend Lord Harris of Greenwich raised the matter in another place in April last year. If one reads the report of that debate, one can say only that the Government's response was stonewalling as a refined art. It was clear that the Government were unwilling to give away what the Bank of England might have made of convictions across the Atlantic, but we can conclude that the Government must have been on notice—the Bank of England was certainly on notice. One wonders why such a state of affairs was allowed to continue for so long before the failure occurred and the plug was pulled, with the consequences of which hon. Members have been given examples over the past week to 10 days.
What sort of help will it be possible to provide to depositors? One amendment that has not been selected argued for an increase in the safety net incorporated in the Banking Act 1987. However, even an increase in that figure from £20,000 to £50,000 would have gone only a small way. It might have been a saving grace for some businesses, but it would have been of only minor assistance to the worst affected.
There is a prima facie case for protection to meet lost deposits. If the Government can say, even at this stage, that they are prepared to raise the compensation ceiling, that would come as welcome news to many.
§ Ms. Marjorie Mowlam (Redcar)
Is the hon. Gentleman suggesting that increased compensation should be paid by the Government or by the banks?
§ Mr. Wallace
If there is to be immediate help, I suspect that it would have to come from the Government rather than from the banking sector.
One must consider the effect of those losses on not only the firms immediately involved but the entire small business sector. The initial outlay could well be recouped because of the difficulties that would be prevented from occurring further down the line.
Last Thursday, the Prime Minister said during Question Time:Local authorities have a duty of care over the funds entrusted to them".—[Official Report, 11 July 1991; Vol, 194, column 1082.]The Prime Minister is not a lawyer, but the phrase "a duty of care" implies a certain relationship. One wonders whether local authorities have a duty of care to their poll tax payers. If no Government assistance is forthcoming, poll tax payers may have grounds for legal action against their local authorities, and have a right to pursue through the courts the argument that they are not obliged to pay any increase in poll tax that is a consequence of local authority financial negligence. The phrase "a duty of care" was an interesting one for the Prime Minister to use, and perhaps the Economic Secretary can enlighten the House as to what was in the Prime Minister's mind when he uttered it.
Returning to new clause 35, let me say that the small business sector has a tremendous contribution to make to the economy. Over the past two or three years, it has been prevented from doing so by high interest rates, and for even longer by a banking sector that is not particularly 44 well attuned to the needs and expectations of small firms. If the Government would make a positive response to some of the suggestions that are made today—many of which would not require legislation—that would show the way forward, and would be of considerable encouragement to small businesses.
§ Mr. Nigel Forman (Carshalton and Wallington)
The hon. Members for Islington, South and Finsbury (Mr. Smith) and for Orkney and Shetland (Mr. Wallace) make a sympathetic argument. Hon. Members in all parts of the House are concerned about the current plight of small businesses and have considerable sympathy with them—so one starts with a favourable disposition towards the proposed new clauses. However, on closer examination one discovers that new clause 3 in particular contains much that is not sensible—which leads one to believe that the amendments ought not to be supported in the Lobby.
New clause 3 makes at least two references tothe average interest rate chargedin respect of various categories of borrowing, which is not a sensible concept. That would give the House and the country only a rough idea of what was happening, and would be comparatively meaningless information in trying to monitor the terms and conditions of such loans.
The range of obligations imposed by new clause 3 implies a considerable burden of compliance costs on banks and other lenders in providing such information, and that would be at the expense of shareholders or customers, or both.
Subsection (1)(v) introduces a provision which a future Government of a different disposition and attitude towards banks and other financial institutions could use as a trojan horse in placing on banks and other financial institutions burdens far greater than could legitimately be justified. For those technical reasons, I find myself unable to support the new clause.
That does not take away from the concern that lies behind the arguments made by the hon. Members for Islington, South and Finsbury and for Orkney and Shetland, which is common to both sides of the House. There can be no doubting that the interest rates recently charged on loans, especially to small businesses, have been penal. Some might describe them almost as usury. The banks argue, justifiably, that the interest charged must relate to the risk involved in each case. However, it is not always easy for small businesses to understand or to accept that rationale.
One must acknowledge also that the banks themselves have been in some difficulty. That is recognised by the media and by the public. Banks have been understandably anxious to restore their balance sheets, and that has often been done at the expense of their clients—notably, their small business clients. The wide spread of interest rates charged to different borrowers should be more fully explained. To that extent, I have considerable sympathy with the argument of the hon. Member for Orkney and Shetland, that more timely information on the charges levied, and on the other terms and conditions insisted upon, would be useful. The best way to achieve that is, as the hon. Gentleman said, by good banking practice—spurred on by the power of publicity, which is to some extent enhanced by debates in the House.
When my hon. Friend the Economic Secretary replies, I hope that he will be able to tell the House the outcome of the discussions between my right hon. Friend the 45 Chancellor of the Exchequer and the managements of our leading banks, which I hope will serve to point the way to better and more responsible banking practices.
According to many small firms in my constituency, almost a greater problem than varying interest rates and the other terms and conditions on which loans are made is the late payment of large bills by major customers—which is sometimes deliberate, but often accidental. Delayed settlement and a change of policy in respect of payments to small firms can completely ruin their cash flow. I hope that my hon. Friend the Economic Secretary and his Treasury colleagues will reconsider adopting some of the measures used in other countries to encourage the earlier payment of bills to small businesses.
§ Mr. Nelson
My hon. Friend the Member for Carshalton and Wallington (Mr. Forman) may be aware that our hon. Friend the Member for East Hampshire, (Mr. Mates) introduced some time ago a private Member's Bill that sought to overcome the problem of overdue settlement, but that it received precious little support from the Department of Trade and Industry— despite the fact that many of us emphasised, long before delayed payment became a real problem, that something ought to be done. Ministers appeared reluctant to do anything at that time, but I urge them to reconsider that aspect, and I ask my hon. Friend the Economic Secretary to answer that point when he winds up.
§ Mr. Forman
I would expect my hon. Friend to endorse the thrust of my argument. It is time that Ministers gave us a full explanation of why they do not think it appropriate to act now.
I have much less sympathy with new clause 37. The hon. Member for Islington, South and Finsbury said that the depositors' protection scheme was markedly less generous than the investors' protection scheme, and that it should therefore be made more generous. Surely, however, the extra money could come only from either the banks or the taxpayer. I was interested by the challenge offered to the hon. Member for Orkney and Shetland; I do not believe that any more should be taken from the taxpayer. It has been asked why the Bank of England did not intervene earlier. The critical point is, in my view, the problem of balance alluded to by my hon. Friend the Member for Chichester (Mr. Nelson).
Ministers should consider two other points. First, those who deposit their funds with such institutions as BCCI and Barlow Clowes should realise that a greater return probably implies a greater risk. That should be stamped on every such venture. Secondly, depositors should be wary of advice that comes not independently, from people who charge a straightforward fee, but from people who are on commission. It is well known that larger-than-average commissions were earned by those whose advice favoured BCCI. Advice that comes on commission should be regarded with some suspicion.
§ Mr. Forman
I hope that my hon. Friend will forgive me if I do not. I want to be brief.
Obviously, much more will be said about the auditors, and I shall not say much about them now. At present, auditors have the right to draw the attention of the supervisors and regulatory agencies to any shortcomings 46 that could amount to fraud in certain circumstances, but no duty is imposed on them to do so. Ministers should take that into account when considering any changes in the law.
I appreciate the problems of small businesses, but I do not think that new clause 3 would solve them. Everyone should be extremely careful not to become involved in circumstances such as those that gave rise to the tragedy of BCCI.
§ Mr. Campbell-Savours
New clause 37 combines self-regulation with political accountability, and establishes an early-warning system to operate when banks are experiencing difficulties. Its objective is to construct a balance between the need for investors to be given some information about the nature and development of inquiries into the affairs of banks, and the need to avoid unforeseeable outflows of capital—otherwise known as "runs on the bank".
The idea was prompted by the comments of Ian Brindle, a senior partner at Price Waterhouse, in the Financial Times last week. When asked why BCCI accounts had not been qualified more promptly, Mr. Brindle replied:You simply cannot go round qualifying the accounts of a bank without creating all sorts of problems and without the whole thing collapsing.Unpalatable though they may appear at first glimpse, Mr. Brindle's remarks contain a grain of truth. What action can we take? We have a duty to maintain confidence in the banking system, as it oils the wheels of industry; but we must have a well-supervised banking system. I appeal to treasurers and institutional depositors who are considering pulling out of the secondary and fringe banking sectors to think twice before they do so. A quick pull-out could wipe out a sizeable part of Britain's small-business industrial base, doing immeasurable harm in regions such as mine.
Responsible institutional investors should do their homework before taking any precipitate action. They should check with their financial advisers and with sectoral advisory bodies, and perhaps collectively approach the Bank of England. They must not aggravate the current difficult situation.
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
Is there not a paradox in what the hon. Gentleman is saying? Local authorities' money should never be put at risk in any way: it is not their own money to invest in schemes that will earn interest. Some extra risk must be incurred by those who invest in the smaller, marginal banks, rather than in A or B banks. Why should community charge payers' money be endangered? The hon. Gentleman cannot have it both ways; either local authorities take a risk, or they do not.
§ Mr. Campbell-Savours
The small banking sector plays an important part in the funding of British industry, and it cannot be written off. The question is, what constitutes a risk? I shall deal with that later.
Pending reform of the Bank of England's supervisory arrangements, which should follow any inquiry such as that called for by my hon. Friends the Members for Dunfermline, East (Mr. Brown) and for Derby, South (Mrs. Beckett), we must maintain confidence in the banking system as it exists today, warts and all. My new clause would establish an early-warning system: it would require a bank to publish, within one month of its 47 accounting period, information about inquiries that have been, or are being, made into its affairs or those of an associate by the relevant supervisory or regulatory authorities.
Such a disclosure could be avoided only if the bank could convince the supervisory authority that, for whatever reason, it should not be made—or that a full disclosure should not be made. If it succeeded in persuading the authority that no disclosure should be made, the authority would have to inform the Chancellor of the Exchequer of its decision.
In the spirit of self-regulation, banks would have a real incentive to keep their affairs squeaky-clean. Not to do so would invite inquiry on the part of the relevant supervisory authority, and possibly require a public statement. The supervisory authority, recognising the critical nature of its decision to approve— or not approve—publication, would have to balance the need-to-know requirements of the discerning investor with the publicity that such a disclosure might engender. Furthermore, the authority, aware of the procedure triggering notification of the Chancellor, would be extremely sensitive to the political embarrassment that would arise if a decision to approve non-disclosure was followed by a collapse, as happened with BCCI.
The Chancellor would not be empowered to instruct the supervisory authority about disclosure or non-disclosure decisions. Nevertheless, he would be able to exert considerable pressure beyond assuming a supervisory responsibility himself. The fact that a Chancellor might at some stage have to stand at the Dispatch Box, held accountable to Parliament and the country, would certainly concentrate his or her mind on the decision being taken by the supervisory authority. I believe that the Chancellor would demand assurances that the most detailed inquiries were being undertaken into a bank's affairs before he would be prepared to sit back and let matters take their course under the cloak of confidentiality.
I want now to consider the question of adverse publicity that would arise where a bank had been obliged to issue a statement. The supervisory authorities are frequently called in to query the affairs of the banking community. To some extent, that frequency would insulate banks from the danger of a precipitate run and collapse. Rumours surrounding BCCI seem to have contributed little to undermining the credibility of and confidence in that bank. That is why the treasurers of local authorities continued to invest in it. The heavy hand of the Bank of England announcement triggered the bank's closure and, in other conditions, that could have led to a run on the bank.
§ Ms. Mowlam
My hon. Friend has referred to the attitude of local authorities and I invite him to comment on the minutes of a Treasury meeting of the committee of local authority borrowing. Back on 10 May, before BCCI issues were raised, the local authorities raised three points with the Treasury in which they were particularly interested. Their first point related to Chancery which was still on the Bank of England's authorised list. The local authorities raised the issue of the list of approved bodies on which Chancery still appeared. They said:If authorised banks were unsound, the list should carry a health warning.48 The local authorities asked for that back in May. In addition—
§ Madam Deputy Speaker (Miss Betty Boothroyd)
Order. The hon. Lady is making an intervention, not a speech.
§ Mr. Campbell-Savours
The health warning to which my hon. Friend refers is embodied in my new clause in so far as I provide for an early-warning system.
I believe that the disclosure procedure that I have outlined, in so far as a number of banks might be required to use it and where such inquiries are under way, would act as no more than a signal to depositors that they should be alert and sensitive to a bank's affairs. The effects would be no more undermining than the rumouring in the City in recent months about BCCI's affairs. However, it would enable institutional depositors such as local authorities to enjoy the benefits of what has hitherto been insider information available only to those who are more informed in the City.
§ Mr. Dick Douglas (Dunfermline, West)
The House is indebted to the hon. Member for Workington (Mr. Campbell-Savours) for proposing his new clause. Why should local authorities be in a privileged position over and above other investors in the hon. Gentleman's scheme of things?
§ Mr. Campbell-Savours
Local authorities would not be in a privileged position. When the bank made a statement one month after the end of its accounting period, that would be a public statement to which anyone would have access.
I want now to consider BCCI's affairs and my knowledge of the events and to pose a number of questions which the Government should answer. My authority of Allerdale was the first authority in the United Kingdom to reveal that it had lost £1 million. That arose as a result of a policy decision taken by the Labour-controlled council when it was elected in May this year. It decided that at every stage, and whatever the matter, it would pursue a policy of full disclosure in the spirit of freedom of information legislation at local authority level. I pay tribute to my local authority for deciding to announce what happened in the way that it did.
The Government claim that the list of which I have a copy is not an authorised list. Hon. Members should note the size of the list which contains the names of all the banks that are authorised deposit-taking institutions and banks within the United Kingdom under the terms of the Banking Act 1987. The banks says that the list is only a list of authorised institutions. If that is the case, why are Chancery and Edington on that list when one of them went into liquidation earlier this year and the other is the subject of an administration order? Why were they on that list when my authority received a copy of that list on 28 June this year, two days after the Government had been informed in the Price Waterhouse report—
§ Mr. Campbell-Savours
No, I do not intend to give way again. Why did my authority receive a copy of that list two days after the Government had been informed formally of fraud in the bank?
49 I want the Government also to comment on a statutory instrument which I managed to dig out last week entitled the Local Authorities (Capital Finance)(Approved Investments) Regulations 1990. I draw those regulations to the attention of the House because the Department of the Environment has insisted repeatedly in press briefings that in no way was it approving the investments of local authorities. According to the explanatory note,These regulations contain a list of investments which are approved by the Secretary of State".Under 2 it statesthe following investments are approved".Under 2(b) it statesany deposit made with an authorised institution or Bank of Englandand it defines deposit as havingthe same meaning as in the Banking Act 1987.Having received a letter a week and a half ago which referred to a revised list, having received the list to which I have just referred, and knowing of the existence of the regulations to which I have just referred, local authorities believed that they were acting with the approval of the Bank of England and with the approval—
§ Mr. Campbell-Savours
I have no intention of giving way to the hon. Gentleman. Judging from his ill-conceived comments at the beginning of this debate when the revelations were first made public and his comments about Bury metropolitan district council, comments of which he should be deeply ashamed, he should make a point later of apologising to his local authority.
§ Madam Deputy Speaker
I have the impression that the hon. Gentleman's point of order is not a point of order for me but a point of frustration. I will try to call him later.
§ Mr. Sumberg
On a point of order, Madam Deputy Speaker, is it in order for the hon. Member for Workington (Mr. Campbell-Savours) to make comments about my conduct in this matter and then to refuse to give way? Is that not a disgraceful way to behave?
§ Madam Deputy Speaker
Order. It is for the hon. Member who has the Floor to decide whether to give way. I will do my best to ensure that the hon. Member for Bury, South (Mr. Sumberg) is called later.
§ Mr. Campbell-Savours
I want now to consider why local authorities invested in the way that they did. First, they were given assurances that the bank was being restructured. Secondly, they were given assurances that a major cash injection into the bank had taken place. Thirdly, the terms offered by the bank were special not only with respect to the premium interest rate on deposit accounts, but they provided an arrangement under which local authorities could put their money into the bank overnight and draw it out in the morning. A call arrangement existed at that bank which, I am told, is not generally available in all the institutions. The fourth 50 reason was that BCCI was on the banking list that the local authorities regarded as approving investment. Fifthly, the local authorities justify their actions on the basis of the regulations to which I referred.
I want to ask Ministers about the role of the brokers. If we cannot have an answer today, I should like to think that we can have an answer within the next couple of weeks. Were the brokers paid inflated commissions? Do Ministers know the answer to the question? Have they set out to establish the truth? If the brokers were paid inflated commissions, do Ministers believe that the size of those inflated commissions should have been revealed to the local authorities that were placing such large sums on deposit? What is the role of the Sterling Brokers Association which was drawn in over the Chancery affair? To what extent are the recommendations or statements that it makes to be taken seriously by local authorities? Will the Bank of England carry out its own inquiry into the actions of the money brokers involved in the affair?
I understand that BCCI purchased insurance from a Pakistani insurance company based in Karachi called Adamjee Insurance. To some extent, that insurance should cover losses. I ask the Minister whether it is effective. We are told that the policies that were taken out with Adamjee were reinsured on the London market through a subsidiary of Commercial Union—British and European—and were also reinsured in Italy through the Company Generali. May we also be told what were the links between BCCI and the life assurance London-based holding company CCL? I understand that CCL had money on deposit with the bank. It is a life assurance company. Will the collapse of BCCI affect the liquidity of CCL? Policy holders would like to know the answer to that question.
May we also be told about the position of Westminster city council? The treasurer there has drawn a distinction between lending and placing money on deposit. I am unable to understand the distinction.
May we also be told about the status of the Bank of England in the affair? Mr. Ian Brindle of Price Waterhouse has said that the Bank of England was repeatedly informed of irregularities. There must be a stage in the unwinding of the whole affair at which the substance of the reports—I understand that there were 10—from Price Waterhouse to the Bank of England is made public and certainly at which it is made available to the Government so that we can hold Ministers accountable at the Dispatch Box on those matters.
Did the Bank of England ask Ernst and Whinney why it gave up its £2 million lucrative BCCI auditing contract in 1988? That is an important question. Had Ernst and Whinney found evidence of fraud which it felt that it did not want to reveal by qualifying the accounts? Perhaps it gave up the auditing contract to place on its successor. Price Waterhouse, the responsibility for qualifying. Did Ernst and Whinney tell Price Waterhouse why it gave up the contract? Is it true that Sheikh Zayed Bin Sultan al-Nahayan sent £375 million to the bank only two weeks ago? Is it true that Ghanem Al Mazrui, the secretary general of the Abu Dhabi investors' authority, offered to invest £2.3 billion in the bank immediately prior to its collapse? If that is true, is it fair to say that the bank was trading insolvent?
May we have an assurance from the Dispatch Box that none of the 10 Price Waterhouse reports warranted earlier intervention? I am sure that Ministers have had access to the reports—at least, I hope that they have—so may we 51 have that assurance today? A BCCI director has said that Price Waterhouse was informed as early as 1988 of fraud in the bank and he says that his evidence for that is that Price Waterhouse was asking questions about fraud at that time.
May we have assurances about deeds held in the bank as security against mortgages? May we have an assurance that those who have mortgaged their properties will receive back their deeds? Furthermore, should mortgagees be paying money to the bank now? They need to know the answer.
Another question has been raised with me repeatedly, although I have no evidence in connection with it. Did the Foreign Office press for a delay in the appointment of Price Waterhouse? It may have pressed for a delay in the appointment of Price Waterhouse to carry out the inquiry into fraud until after the Gulf war had ended. I ask the Minister whether that is true; if it is not, I am sure that he can give the House assurances.
What is the position of local authorities affected by what has happened? They have few options open to them, although I will outline some. Some local authorities will have to sell assets to cover their losses. Some local authorities will use reserves, if they are available, to overcome the immediate funding crises. In some local authorities, a higher poll tax may be levied. I hope that that is not the case because it would have a severe effect on much of our community. The Government may decide to increase the borrowing limits of local authorities to help them to supplement their losses. Who should pay the servicing costs of those borrowings? I have no answer to that and I remain strictly neutral. It will have to be either the Government or the local authorities. In my local authority, if my local poll tax payers have to pay off the £1 million debt which has been incurred as a result of what I can only regard as negligence on behalf of the Government and of the Bank of England authorities, they will pay £3 a year extra in poll tax for the next 10 years, if the loan extends over a 10-year period.
§ Mr. Nelson
The hon. Member for Workington (Mr. Campbell-Savours) does a service to the House in raising these matters and in tabling new clause 37. I oppose the new clause for reasons that I shall adduce, but I believe that his questions and the respect that he has paid to the integrity and security of the banking system in our economy are well made, responsible and worthy of the House.
I shall confine my remarks almost exclusively to new clause 37. My hon. Friend the Member for Carshalton and Wallington (Mr. Forman) dealt extremely well with new clause 3, although I pay respect to the hon. Member for Islington, South and Finsbury (Mr. Smith) who raised a number of important points about small businesses.
I do not share the view of the hon. Member for Workington that his new clause is timely or worth while. Far from showing that the system of regulating our banks has been brought into question, this latest episode, tragic, hurtful and loss-making as it is for many individuals, has shown that that system is actually working and that the Banking Act 1987, which was introduced to redress the inadequacies in the supervision of our banking system, is also working, because it is bringing to book and closing down banking businesses that are acting fraudulently.
52 5.30 pm
The question that the House is addressing—not, I hope, in an unduly party political fashion—is when one should blow the whistle. Does one blow the whistle too soon and risk a run on the banks and bringing into question confidence in our entire banking system, or does one blow the whistle too late and jeopardise the deposits and interests of many people which otherwise might have been saved? If the whistle had been blown a year ago, many individuals would have lost out then, just as many have lost out now. On the other hand, many individuals have been saved because it happened a year later.
It is important for the House, which talks incessantly about accountability, to be sure that when we call people to account we can do so with justification. How can we ask the Bank of England to close down an authorised bank, a private enterprise or a company unless there are sound reasons for taking such action so that we can then hold it accountable? If the Bank of England were to take such action on the basis of suspicion, and if either the House or one of its Select Committees brought that into question how could we pillory the Bank for taking such action peremptorily?
In my judgment, and in so far as I observe these matters, it appears that the Governor of the Bank of England and the department of banking supervision at the Bank of England have behaved in an exemplary and wholly proper fashion in this matter, as have the Government of the day—
§ Mr. Greville Janner (Leicester, West)
Does the hon. Gentleman consider that, as part of behaving in an exemplary fashion, the Governor of the Bank of England owed any—and, if so, what—duty to pass on his suspicions to the Government of the day, and did the Government of the day have any—and, if so, what—duty to investigate those suspicions?
§ Mr. Nelson
The Banking Act 1987 deals clearly with those matters. The important matter to which the hon. and learned Gentleman has drawn attention was the subject of an extensive debate when that Bill was in Standing Committee and subsequently when it was considered on Report—
§ Mr. Nelson
The answer is that the primary responsibility for banking supervision rests with the Governor and with the department of banking supervision at the Bank of England. Undoubtedly, some informal discussion takes place—it is not required by statute—with the Treasury and with Ministers. To stiffen that process and to ensure that decisions would not be taken in a laggardly or neglectful fashion, this House and that Act established a board of banking supervision in the Bank of England, which is quite different from the department of banking supervision at the Bank. I am sorry that this is so esoteric, but it is an important point. To try to ensure greater accountability and greater supervision in our banking system, the House established—[Interruption.] I suggest that this is an answer to the hon. Gentleman's question—a board of banking supervision in the Bank of England to stand alongside the Governor, of which he would be a member, to which he would report, and the composition of which we discussed at length, as I am sure my hon. Friends will agree.
53 The Bank of Credit and Commerce International has a considerable history beyond the last year of suspicion. Many hon. Members will know that when it was first established in this country its wholesale expansion within a matter of months on some prime sites throughout the capital gave rise to suspicions about the way in which it was financed. When assurances were forthcoming that major depositors from the Gulf states were supporting it, the matter was laid to rest for some time. However, some doubts remained about the bank's ethics, objectives and deposit base.
Until 1987, this country differentiated between major authorised banks that could offer the whole range of banking services and the secondary or fringe banks that were licensed deposit-takers. It was only in 1987 that one category of bank was established—authorised banks. One major problem was that when authorising banking status we could not differentiate between domestic banks and foreign banks with branches in this country. That involved some risk, but there had previously been a risk with the licensed banking system.
The position of BCCI, however, was special, if not unique. To some extent and to some people, it was rather objectionable, because it tried to establish a banking basis that was different from all others. It sought to move beyond the financial facts of life and to talk about "moral profits" and "spiritual growth". It persuaded employees to work overtime for no remuneration at the weekend so that it could pay their moneys elsewhere. It was a crusading bank—a new phenomenon—which was attached to an ethnic background in this country and had an understandable appeal. I do not decry the sentiments behind it, although, in retrospect, we see that it was a scam like many others. In reality, it appears that those "moral profits" were being siphoned off into Grand Cayman and into a so-called charitable foundation that itself had an interest in BCCI. This and other irregularities subsequently brought about the downfall of that bank. The disappearance of significant funds which undermined the security of depositors and customers alike.
Therefore, although one rightly has enormous sympathy with those who, as employees, as well as depositors put their trust in that company, one must conclude that there can be no departure from the financial facts of life. Cardinal rules are that one should look at the spread of assets and liabilities of a banking organisation. One has to trust to the authorisation of the regulatory system and one should ensure that, when it comes to investing money, one does not put all one's eggs in one basket.
The United Arab Emirates and Sheikh Zayed al-Nahayan have behaved completely honourably. They may have been ripped off by Mr. Abedi. Time and time again, the sheikh has been asked to pay up to that bank. Let it not be forgotten that he donated generously and willingly to our country when we came to the aid of the Gulf militarily. He, personally, has behaved generously and honourably. I believe that, up to a certain level, he may yet be prepared to act again in that way towards the bank's non-sterling depositors. However, why should we limit our own liability and yet call upon him to idernnify without limit all others who have lost in this case? He may do more, but he has behaved entirely properly and we should be grateful for the role that he has played in stabilising the international banking system.
54 The hon. Member for Islington, South and Finsbury asked why there should be a differentiation between the depositor protection scheme that operates for the banking system and the investor protection scheme that operates in the financial services industry. There is a difference between liquid money and any equity investment. It is fair enough for the House to decide—as it did—that those who invest in banks shall be indemnified up to a certain level to try to protect the small depositors who may not have the benefit of reading the Financial Times every day and who cannot be expected to know which bank might be dodgy.
In 1987 we set that limit at £20,000 and for the time being decided that 75 per cent. of that should be the limit of the amount against which any individual depositor could be indemnified. So the sum was £15,000. That was not unreasonable at the time and it is not unreasonable now. It could perhaps be increased to £20,000, but it should not be increased to significantly more than that.
However, in the case of equity investments, the financial services industry and the vast range of organisations that operate as authorised businesses under a variety of recognised professional bodies and self-regulating organisations, people are probably entitled to greater recompense and security. But let us never forget one important factor. In both cases, it is not the taxpayer who indemnifies or guarantees the investor. It is not us or those whom we represent who pay depositors or loss" makers in the banking or investment sectors. It is the rest of the banking industry which, under the depositors' protection scheme, have to pay up or, under the Financial Services Act 1986, as authorised investment businesses have to pay into compensation funds.
If the House took a decision significantly to increase the amount of compensation made available to depositors, the cost would fall on the banks and their customers rather than our constituents. Therefore, it is a decision about which we should be careful—
§ Mr. Nelson
Well, it would cost the rest of the industry money. Let us take the banking sector as an example. If we raised the compensation under the scheme from £15,000 to, say, £50,000 or £100,000, on whom would the cost fall? It would fall not on the taxpayer or the Government but on the banks and their customers. Let us consider for a moment the consequences of that, not only the benefits for unlucky depositors. Let us consider the principle of the matter.
Surely the reputable, the conservative, the trusty and the responsible banks and financial service companies would end up indemnifying the least responsible, riskiest and fraudulent businesses in the same industry. The banks may well be prepared to cover that to a certain extent. So they should, because things can go wrong and there are bad apples in every tray. However, there must be a limit to the extent to which we can ask any bank or investment business to provide massive subvention to cover the losses of people who seek to take business away from them. It is true that banking is a market, that it is competitive and that there will be good as well as bad. However, it is impossible to create a failsafe system in which no one loses.
If bad decisions are made and if fraud takes place, someone must carry the loss. This House and the relevant industries can go too far in indeminifying people. At the 55 end of the day, we as well as the industries must send out the firm message, "Depositors beware. Investors beware. Nothing that this House can do can indemnify you against the possibility of loss. We will do our best to authorise institutions and ensure that fit and proper persons run them, but you must balance and cover your risks, and make your own judgment about with whom you invest."
I have sought strenuously today and on previous occasions to defend, indeed strongly to back, what the Governor of the Bank of England and the Government have done in this matter. Their action was absolutely responsible and right. As far as I can assess, their timing was wholly right.
However, I wish to make one point that I have made previously. It could be the answer to this difficulty. I urge the Government to listen to what I say, because I am sure that it will attract support from hon. Members on both sides of the House. There is a way of improving significantly the protection of depositors, investors and shareholders in businesses. It is called audit committees. Sir Brandon Rhys Williams, a former Member of the House, campaigned for years for the boards of companies to have a sufficient number of independent non-executives who would be forced by statute to form a cabal in order to ask difficult questions of the board and, in particular, sometimes of an autocratic chairman of a company. They could ask questions about extensive loans, faulty security for loans and the spread of risks. At the annual meeting of shareholders they could stand up and say what they had or had not asked during the year and what they received or did not receive by way of a reply.
I challenge anyone to suggest that in the cases of Blue Arrow, Johnson Matthey, BCCI or virtually any other collapse in the past 10 years a stronger, more independent, forthright audit committee of non-executive directors could not have saved many ordinary people from losing out.
§ Mr. Beaumont-Dark
Although my hon. Friend's idea sounds good, is not there a flaw in it? BCCI had worldwide ramifications and hundreds of thousands of customers. Would not his idea end up with non-executive directors who were almost full-time directors and a large staff to serve them? My hon. Friend's idea sounds good, but I do not believe that it would work in practice.
§ Mr. Nelson
I understand my hon. Friend's intervention and the motives behind it. International companies have a better reputation than us for appointing non-executive directors and audit committees. They do not seem to have the apocalyptic scandals and collapses that we have from time to time. Where such committees exist in Britain and elsewhere they seem to have an extremely good record of looking after shareholders' funds, as well as the security of depositors and employers.
It is extraordinary to hear from the Opposition Benches calls which seem to be for the bailing out of an offshore banking organisation and for people to be defended from losses which they should be expected to incur. Often they are big enough to incur such losses and sufficiently wise to make their own judgments.
My right hon. Friend the Prime Minister was absolutely right to come to the House last week and say that local 56 authorities that, for a marginal increase in the interest rate which they could obtain on deposits, decided to hold 100 per cent. of the value of the capital at risk could not be indemnified at public expense. It is not the job of the House or the Government to underwrite every local authority treasurer who runs amok. One can only question the motives of treasurers who put enormous sums of money—millions of pounds of local communities' money—into banks which were previously licensed deposit takers and were long regarded as dubious. It is extraordinary that such decisions were made with the public's money.
The Prime Minister and the Government were absolutely right to say that there was a limit to our competence and the extent to which the taxpayer can bail banks or local authorities out. That is why I hope that the Government will take a reluctant and resistant attitude to the new clause.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
The hon. Member for Chichester (Mr. Nelson) should be careful that he does not go too far. Contrary to the views of the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark), the smaller banks have a role. If we end up with everyone putting their money into the top four banks, it would play the devil with the City of London.
Like the hon. Member for Chichester, I intend to speak mainly to new clause 37, for which we are grateful to my hon. Friend the Member for Workington (Mr. Campbell-Savours). Not only is it a good new clause but he made a fine speech. However, first, I wish to comment briefly on new clause 35.
The charges that banks impose on their customers are an outrage. The first a customer knows that he is being charged anything is when the statement shows a deduction. That is a scandal. If I buy anything or incur any cost, I expect, first, an invoice, and, secondly, the details of what I have purchased, giving me the cost of each item. Then I pay after a certain time. All right, the banks are paid a bit quicker, but they give no detailed information of any kind. It is an outrage that we have got used to. I have had discussions with the chairmen of the main banks who all accept that and say, "Yes, eventually we must move in that direction." I say, "Not in that direction; we must give an itemised list of what the charges are for and some justification for them."
The Banking Act 1979 was the first legislation to lay responsibility on the Bank of England for granting a licence to a bank to take money from depositors. Section 3(3)(b) states:the Bank shall not grant a full licence to an institution unless it is satisfied that the criteria in Part II of that Schedule are fulfilled with respect to the institution.The said schedule 2 states that a licence shall be granted ifthe institution enjoys, and has for a reasonable period of time enjoyed, a high reputation and standing in the financial community.Nobody could ever have said that the BCCI ever qualified in that respect. Right from the start—this is not something new; we all knew it at the time—it was astonishing that the Bank of England accepted that the BCCI was a responsible institution and gave it power to expand all over London. It was a scandal.
That having been done, it is clear from the debate of 23 November that it was understood that the Bank of England would supervise the activities of such banks. When the hon. Member for East Lindsey (Sir P. Tapsell) asked about that, he was assured that everything would be 57 all right because the Bank of England would be supervising the banks. That allayed some of our doubts. We knew that the BCCI had been given these powers, but we were reassured by the supervisory role of the Bank of England. Moreover, as the BCCI was such a fraudulent concern—it was fraudulent in so many ways—we assumed that the Bank of England would watch carefully over all its activities. The Bank of England failed to carry out that elementary, continuing supervision. That was the burden on the Bank of England which it should have carried.
It is almost insulting to talk about all the treasurers of local councils and all the business men who were taken in when it was the Bank of England that was taken in. It is insulting to talk about those treasurers, including the treasurer of Westminster city council who is so close to all these events, being so naive, when the one body that was failing in its duty and was being naive was the Bank of England. We should understand that important point.
The Bank of England knew of the bank's actions on the other side of the Atlantic, yet it said nothing to anybody about them. The treasurers of our great local authorities and the business men of some standing assumed that such actions happened elsewhere. If the Bank of England thought that the actions would have these consequences, it should have done something there and then. It had a long period of notice that it was not dealing with ordinary bankers as we have traditionally come to expect them to be; it was dealing with people who were trying to make money for themselves and, at the very least, to bend the rules.
We cannot leave the matter as it stands. We know that the Bank of England had a greater responsibility than it now admits. We see that it is trying to dodge the responsibility that we always assumed and that we were told by Ministers at the time that it had. If the Bank of England is trying to dodge its responsibilities, we need new provisions in a new banking Act.
§ Sir Ian Stewart
I declare an interest as for most of my working life I have been either a manager or a director of a bank, except when I was a member of the Government. My reasons for wanting to speak in this debate are not so much because of that connection as because in 1978–79 I was the Opposition spokesman on the then Banking Bill and in the last Parliament I was responsible for introducing the Banking Act 1987, which has been much in discussion this afternoon.
I do not want to spend more than a moment on one or two of the issues raised about the relationship between banks and their customers, but I wish to take this opportunity to support the general purpose behind new clause 35. It suggests that banks should state on statements of account to their customers the rates of interest being charged and provide some explanation of bank charges. It is not necessarily time for that to be embodied in statute, but I hope that when my right hon. Friend the Chancellor of the Exchequer meets representatives of the banks shortly he will make it clear that there is a general feeling in the House that banks' customers have grounds for suspicion about how they are being treated by banks merely because such information is not readily available.
I shall give the House one practical example of that. Recently, a person came to me suspecting that the interest charges on an account were excessive. After I made some calculations, it looked as though the rate of interest was several per cent. above any reasonable rate that should 58 have been charged on that account. I contacted the bank and after a considerable period it was established that the rate of interest had been much too high. It then took a great deal of time to work back over a long period to find out how much the bank had overcharged and to correct it. Had there been a simple statement on any of the statements of account in the interim showing what rate of interest was being charged, it would not have taken so long to resolve the matter. It is in the interests of the banks to avoid the misunderstanding and mistrust that can arise and to be more open with their customers about their charges.
My second point about the relationship between banks and their customers concerns the nature of the list of authorised banks. The very fact that some people can misunderstand the list to be some sort of guarantee of the automatic integrity of the banks listed suggests that some sort of health warning needs to be applied to it. I shall not suggest the form of words. In bare terms the list states that it is a list of the institutions authorised under the Banking Act. It would not come amiss if additional words made it clear that the statement did not go further than the bare words represented. There is no harm in giving people more information, particularly if a shortage of that information can mislead.
My third point about the relationship concerns the vexed question of deposit protection. My hon. Friend the Member for Chichester (Mr. Nelson) has just made a speech about that and I agreed with much of what he said. I must confess that during the passage of the Banking Act I was responsible for trying to prevent the deposit protection arrangement being set at too high a figure, because I believed that if we were not careful a version of Gresham's law would apply to banking. Hon. Members will recall that Gresham's law states that bad money drives out good.
I fear that if deposit protection is too extensive, bad deposits will drive out good. The reason for that is simple and has been dramatically illustrated by events of the past few years in America where deposits of up to $100,000 have been protected up to 100 per cent. Therefore there was no greater risk to the depositor from placing his money with a badly run organisation that paid higher interest rates than there was from placing his money with a well-run organisation that paid lower interest rates. Therefore, in that sense, bad deposits could drive out good.
The end result of the protection offered in the United States was that the deposit-taking institutions, which are the equivalent of our building societies—the savings and loans institutions—were faced with comprehensive bankruptcy. In order to pay higher and higher rates of interest those institutions had to take on riskier and riskier business until the whole financial sector collapsed. It was beyond that sector to provide any deposit protection and that obligation will fall on the United States' taxpayers. They will have to finance that problem for many years to come.
I caution those who say, for perfectly understandable reasons, that more and more deposit protection should be provided. If one enables depositors to place their money without disadvantage with an institution that is less responsible, one will end up taking serious risks with the banking system as a whole.
59 The BCCI case has raised a number of serious issues that have been aired this afternoon by a number of hon. Members. The big question that any supervisory authority must face is when it should act. When doubts have become apparent about an institution, at what point should the regulatory body move in and take disciplinary action? That will always be a difficult decision, but we must make sure that the necessary framework is available for the regulators to take such action when they deem it right.
From having read the published reports on the BCCI case, I believe that the Bank of England is to be greatly commended for mobilising international agreement at a difficult time on the contentious subject of the cessation of business in BCCI. However, one must ask a more difficult question—was it open to the regulatory authority to do something about the problem in the United Kingdom? It is especially timely to ask that question because we are about to be bound by the second European banking directive, which automatically extends mutual authorisation from one member state in the Community to all the others. I do not want to pick out Luxembourg as being particularly irresponsible, but the BCCI case has demonstrated that the regulatory authority in that country was not in a position to ensure that the worldwide business of a bank as complicated and as extensive as BCCI could be comprehensively and effectively regulated from one centre—let alone the smallest centre in the EC.
Once that second banking directive is implemented we must ask about its implications for branches of banks in countries other than those where those banks are authorised. We do not have long to think about that because the directive is coming in next year. The regulators and my right hon. and hon. Friends at the Treasury will have to think carefully about whether some adjustment must be made to our statute or whether we should propose some changes within the Community to ensure that we do not expose ourselves unwittingly to the risk of further problems with international banks where there is an obligation in this country or any other country to accept the authorisation granted elsewhere on grounds with which we may not be thoroughly satisfied.
I had a most unfortunate experience a few years ago because, in 1985, I was the Treasury Minister who had to look at the affairs of Barlow Clowes. At that time I wrote to the Department of Trade and Industry to say that, in my view, if the answers coming from that body were not entirely satisfactory it would be better to face the unpleasantness of a cessation of business than to risk collapse at any time. Those words were not drafted for me by any official in the Treasury and I wrote them because I felt so strongly. I felt that if one had a badly run company and if one knew that there were serious deficiencies in the way in which its business was conducted, it was likely that fraud would soon take place—if it had not yet taken place—because of the great opportunities to exploit inadequate accounts and a badly-managed business. In the financial sector that temptation is all the greater. Unfortunately, it seemed to me absolutely clear that it was right to close Barlow Clowes at that time. However, there was a natural reluctance on the part of the regulators and supervisors to allow things to be corrected. However, the danger is that by the time one gets sufficiently clear evidence that something is seriously wrong, it is too late to protect the money of investors or depositors. That serious problem has been highlighted again by BCCI.
60 By the time that one can prove anything, the time to act has probably gone, and yet how can one identify what intermediate action one should take? I commend the hon. Member for Workington (Mr. Campbell-Savours) for his suggestions in new clause 37. I do not necessarily agree with them in the technical sense, as I do not know whether they would achieve the right result, but they certainly point to the crucial issue. How can one take intermediate action when one thinks things may be going wrong, when one does not have absolute proof that would stand up in a court of law?
It was because of my concern about such a problem that I pressed for the inclusion—I use those words carefully—in the Banking Act 1987 of a special provision, now section 12, for restricted authorisation. Under that section the Bank of England could impose conditions on the authorisation of a body about which it was unhappy without going to the length of requiring it to close its doors. At that time there was some resistance to the inclusion of that provision, but I had in mind exactly the sort of circumstances which have now arisen. In other words, a good deal of negative information would have been forthcoming that raised suspicion in the minds of those responsible for the regulatory system. Such information could be made available about any bank, but the fact that, in this case, it related to BCCI made things more difficult because that bank was not controlled directly in this country.
If the regulators are not satisfied with the answers that they are given in a particular country, they should be able to require that bank to incorporate in their own country so that there is an incorporated body that then comes under the direct control of the regulatory authority in the country concerned. If we have to "borrow" the authorisation made in other countries for the sake of our own control, we are never likely to be able to get all the information we need quickly enough about banks which have widespread business throughout the world, and which can move funds rapidly from one centre to another.
If a bank has dedicated capital in this country, an identifiable board of directors and management, and if its affairs can be supervised as intensively as those of any domestic bank, we could be more confident that the international banking system, as applied in this country, would not pose risks for depositors and investors of the kind that we have unfortunately witnessed in the BCCI case.
I believe that there are urgent questions to ask about the way in which anticipatory steps can be taken before we reach the point at which a deposit-taking institution is likely to go bust or to close its doors. I hope that the inclusion of section 12 in the Banking Act 1987 offers a route that could be exploited in such cases. In the fullness of time, I shall be interested to learn whether it was invoked in that case and, if not, why not. Perhaps it was my fault because I did not ensure that the section was drawn up in such a way that it could be implemented in such a case. If so, we should revise the statute. The thinking behind the section covered just the circumstances that have arisen in the case of BCCI, where the supervisors were left with the difficult balance of judgment to which my hon. Friend the Member for Chichester referred. We were not in a position to know all the relevant information because of the world-wide nature of the business concerned.
§ Mr. Dick Douglas (Dunfermline, West)
This has been an interesting debate and I am sure that the whole House is indebted to the hon. Member for Workington (Mr. Campbell-Savours) for tabling new clause 37.
Two former Treasury Ministers have spoken—one on each side of the House. I wonder what advice they would have given to local authorities that said that they were about to invest in the Bank of Credit and Commerce International. It is all very well to be careful and guided on the basis of 20:20 hindsight, but a treasurer of a local authority, especially a small local authority. I see that the hon. Member for Western Isles (Mr. Macdonald) is in his place—would not necessarily ask two former Treasury Ministers for advice, but would ask the Bank of England. The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) was perfectly right to say—I hope that I am paraphrasing him correctly—that in this instance the organisation within the British constitution with a duty of care was the Bank of England. Local authority treasurers would have asked the Bank of England what sort of organisation BCCI was, given that it had been authorised to take deposits. The Bank of England has issued a long list—the hon. Member for Workington has trailed that list, of which we all have copies—and BCCI is on it.
Local authority members asking whether they should place such a deposit would be confronted with a treasurer who would consider the list as an indication from the Government's banker of organisations that have been examined and with which deposits can be placed. Although one should not put all one's eggs in one basket, and it is not for me to defend the actions of local authorities, the local authorities' public representatives, who are the custodians of local probity—local councilors were— placed in an extremely difficult position.
Although new clauses 3, 35 and 37 have been linked on the amendment paper, they are not necessarily linked in reality, except in one sense. The Government have caused much of the difficulty. The Prime Minister speaks of a "duty of care" but the real thrust of the difficulties Faced by the financial sector and small businesses relates to runaway inflation. The former Prime Minister, the right hon. Member for Finchley (Mrs. Thatcher), used to say that inflation was a crime and that it was cheating. That is absolutely true. Small businesses are placed in difficulties by other institutions and organisations because of the high rate of inflation and the fact that money falls in value, especially when inflation is high. That is why small businesses often encounter difficulties when they are waiting for payment from those to whom they supply goods and services. Most large companies find that it is to their advantage to delay payment because the value of money 100 or 200 days later is less than it is at the present time. The higher the rate of inflation, the less that value will be. The Government have a responsibility in terms of duty of care.
I represent a Scottish constituency and the Scottish National party and I want to know what the Government's intentions are in relation to their duty of care. Will they rest on the Prime Minister's argument and say that local authorities should know that if a premium is offered on a rate of interest, the risk is higher and that that should have been taken into consideration by the local 62 authority treasurers and others? If so, that does not seem to be a safe case, because a health warning should have appeared on the list issued by the Bank of England.
I recall what auditors have done in some of the institutions with which I have been associated, particularly the Co-operative movement. Without wishing to blame Price Waterhouse for all the difficulties, auditors have dodged their responsibilities. Their responsibilities are not simply to protect the shareholders. They have a wider responsibility, and it is not good enough for Price Waterhouse and other companies simply to say that they were investigating the matter and told people about the results of their investigation. I should imagine that if a local authority treasurer looked at the auditors' docket on any of those institutions, he would find that they had used the common accepted phraseology "a true and fair view". Although I would not go as far as saying that we should have an internal audit within a bank or joint stock company, we should examine the role of auditors further.
Enormous difficulties are involved in monitoring financial institutions because of the international electronic transfer of money. What resources do the Treasury and the Bank of England have to get ahead of the game? My knowledge on this matter is limited to the public print, but there seems to have been an enormous swindle going on for many years. It was deeply hidden within the organisation on an international scale. It is extremely difficult to get ahead of that game unless the House, through the Treasury and the Bank of England, has resources such as international collaboration to keep ahead of the game.
I trust that the Treasury will not simply rest on the Prime Minister's words about a duty of care. Local authority councillors and treasurers will have relied on a view expressed through the Government's publications. Therefore, although I do not expect the Government wholly to indemnify local authorities, I hope that, in consultation with local authorities, they will look at the burden that will be placed on poll tax payers within the local authority concerned if the Government wash their hands of that affair.
§ Mr. Beaumont-Dark
I do not want to say too much about the Bank of England now as I have the honour to sit on the Treasury and Civil Service Select Committee and I am confident that next week we shall be making some inquiries of the Governor himself. It is easy, off the cuff, to say that it must be someone else's fault—that it must be the fault of the Bank of England. It may well be that the Bank of England will prove to have been somewhat at fault.
However, 20 years ago I had the pleasure of being the chairman of the finance committee of the city of Birmingham council. I followed that by being the chairman of West Midlands county council finance committee. All those years ago, we had rules and regulations. The sums that we had available then would amount to hundreds of millions of pounds today. We had rules about the sort of banks with which the money could be lent and the percentages of money that could be lent. If those rules were sensible then, surely they would be sensible today. To say that the county treasurers and finance directors depended, in all their innocence, on the wicked Governor on the hill in the Bank of England is nonsense because all those treasurers are members of the 63 Chartered Institute of Public Finance and Accountancy, are all qualified public accountants, have all, I hope, been in other jobs before and all know about finance.
I am amazed that speakers in today's debate have used the word "authorised" by the Bank of England as though it were the same word as "guaranteed". It is not in any way. "Authorised" means that the Bank of England or anyone else gives a list; "guaranteed" means that, whatever happens, someone will make a guarantee.
In this country and in America there is a list—the Standard and Poors-Bank rating system—which gives a number of banks. There are two organisations in this country that list banks and their credit worthiness. I am a director and adviser of Touch Remnant, which is only an investment trust, not a great local authority dealing with other people's money. It deals with shareholders' money. At the board meeting every month a list of banks and their credit rating is produced and we discuss whether a million pounds here or there should be lent to such banks.
Are hon. Members trying to tell me that a public official who is paid £60,000 or £70,000 a year should not show the same propriety with public money as other people use with shareholders' money? It is nonsense to talk as though there were some wicked plot. In the case of the Western Isles council, it is either criminal or folly, or both, that someone could lend £23 million—£750 per head of community charge payers' money—to such an irresponsible organisation.
§ Mr. David Shaw (Dover)
I take my hon. Friend's point and agree that a number of local authority treasurers may well have made mistakes. I agree that to lend about half the council's total financial resources, as the Western Isles council did, seems to show a high degree of negligence. However, has not my hon. Friend read reports that, apparently, the auditors did not qualify the accounts but insisted only on an amendment to the first note to BCCI accounts, which normally deals with accounting policies and would be the last place anyone would expect to have to pay serious attention to a question mark about the company's financial health? Does not that suggest that there may be something a little wrong, and some treasurers may have been innocently taken in?
§ Mr. Beaumont-Dark
I rarely come across financial innocence, but I come across incompetence daily. Anyone in his right mind who heard what happened in Florida a few months ago, when Noriega drug money was talked about, who still thinks that a local authority should lend money in that way is incompetent in his job.
I was taught early, as an articled clerk, that one should never borrow long and lend short. That is precisely what some of the highly geared, fringe banks are doing, which is why they get into terrible trouble. Everybody should look not just at the bank balance sheet, but at the quality of the loan book—the rating system is involved when one checks the quality of the loan book.
I shall not say too much about BCCI because that has already been done and I agree with most of the comments. I shall deal with a suggestion that was mentioned last Monday. Many of us know that we cannot expect the ordinary bank depositor, particularly if there is a language problem, totally to understand the system. I am always frightened in foreign banks because I do not speak a 64 foreign language. Many Asian investors and depositors have money in BCCI and under the bank deposit scheme they will get back 75 per cent., up to a maximum of £15,000, of it.
I hope that we can agree that the Government and the Bank of England could pay out money where deposits can be proved. That would help people in crucial difficulty and the money would then come back through the bank deposit scheme. The only loss involved would be the interest on the money—a small sum when set against the amount of suffering that could be caused. Such a scheme might also provide a saving in unemployment benefit. We could help distressed depositors in the short term in such a way without actually bailing them out. We would not be breaking rules or setting precedents, but would save many people a tremendous amount of the tragic suffering which, to my certain knowledge as a Member of Parliament, exists.
§ Ms. Mowlam
I shall try to be brief and not repeat the comments of many hon. Members, particularly the long list of questions of my hon. Friend the Member for Workington (Mr. Campbell-Savours). We look forward to answers from the Economic Secretary to those questions.
Much of today's debate has focused on the nature of systemic risk to the banking system. The Opposition have made it clear that they understand the arguments about systemic risk and getting sufficient information to take a case to the Serious Fraud Office with the legal backing and status to make it stick. We also understand the time needed for the Bank of England to put together a sufficient case. There is no disagreement about that.
However, the Opposition believe that fraud at BCCI was possibly ignored for far too long while the importance of avoiding systemic risk to the system was considered paramount. The Economic Secretary must explain that this evening. It would also be helpful if, when responding, he could clarify a number of issues raised in the press. There has been nowhere else to debate the matter during the past four or five days.
First, can the Price Waterhouse report of March 1990 be made public? It seems that the Wall Street Journal has more influence and the American press have better copies of that report than we do on this side of the Atlantic. Secondly, in last Monday's debate the Economic Secretary said that information came to light at the beginning of this year. He referred to a manager in the bank and used the pronoun "she".
§ The Economic Secretary to the Treasury (Mr. John Maples)
I saw the record, and it was a mistake. I do not think that I said "she". I certainly did not mean to imply any gender.
§ Ms. Mowlam
What information was it that that genderless person, or person of doubtful gender, provided in January of this year? The press seemed to suggest that the Price Waterhouse report of March 1990 was a pretty damning indictment of BCCI. If the Economic Secretary could give the House that sort of information tonight, we would then know whether the Bank of England acted with due diligence or was too tardy in its behaviour. As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said, it would be useful to hear about why Ernst and Whinney, now Ernst and Young, switched to Price Waterhouse in 1987–88. That debate between the two big accounting firms has been reported in the press.
65 The bar protocol of 1983, the international banking settlement, gave the option for a college of regulators to be set up when a banking problem was pan-national. In relation to BCCI, that college was set up in 1987–88. If it was set up in response to the bar protocol of 1983, why did it take so long? If it was not, what was there about BCCI in 1987–88 that led to the setting up of the college of regulators? Such clarification would make a great difference to the debate.
It would be interesting to know about the keenness of local authorities to get to the bottom of some of the difficulties. As I said in an intervention, the Treasury had a meeting with the committee on local authority borrowing on 10 May this year at the Treasury chambers in Parliament street. The minutes of that meeting show that a representative of the Bank of England, Miss Jean Noble,commented that the bank had a statutory duty to step in as soon as depositors' funds appeared to be at risk.I am sure that the Minister will quibble over the word "appeared". The minutes continued:They acted on the behalf of depositors to minimise losses even though it might take time for depositors to get their funds back.There is therefore a clear commitment by the Treasury that the bank should step in as soon as depositors' fund are at risk. At that meeting local authorities voiced their concern. The Association of British Counties said:They worried about the risks for smaller banks' liquidities if local authorities lost confidence in this area of small banking as they switched deposits in larger banks.We should not blame local authorities if, as a result of the speech by the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark), they shift their deposits to mainland banks and cause problems. Local authorities were aware of such problems and asked about them in May.
One issue has not been debated since 5 July. Local authorities, small investors and small businesses had money in BCCI. It is odd to say the least that none of the big clearers had any open exchange trade with BCCI at the time of its closure at 3 pm on 5 July. Why was that? Normally there are open exchange trades of deposits and lending between clearers and secondary banks. There have been no reports of any of the clearers sustaining losses. We can either conclude that the clearers had spoken to the Bank of England some time ago and were well aware of BCCI's problems and were not exposed in the same way as local authorities, or—a more damning indictment, although I am sure that the Minister will clarify the matter—the clearers were tipped off and told to get out by 5 July because there would be a closure and local authorities would be left to stew. I am sure that the Minister will tell us whether some of the clearers got out 18 months ago. If they did, the message that prompted them to do so should have been passed to others in the financial system.
Some Conservative Members spoke about the role of brokers. Does the Treasury intend to look again at the grey code governing brokers and their actions? Is there a need to look at the regulations on brokers or to publish the rates that brokers are paid? It would be useful to know whether the Minister proposes even to look at such matters. A Conservative Member said that auditors should have a duty rather than a right to report fraud or 66 potential fraud. I put that question last week to the Department of Trade and Industry and was told that the Department had no intention of examining the issue.
As hon. Members have said, we are facing a serious banking crisis and some knock-on questions should be examined. Auditing and the question of duty versus right to report fraud is one of them. The other question relates to qualified reports by accountants on companies. The hon. Member for Dover (Mr. Shaw) nods. He raised that matter. Price Waterhouse is on record as saying that it could not qualify accounts because the whole system would crack up. Surely it is incumbent on the Treasury or the DTI to say that if qualifying will rock the boat the Government will look at an alternative way to send a signal to local authorities and others about problems with accounts. We either change the system and have another flag, another indicator, or say to Price Waterhouse that it has not acted within the present legislation and is at fault. The Minister cannot have it both ways. Either Price Waterhouse has not done the job properly or the Government's legislation is inadequate.
Hon. Members have spoken about the status of the bank list and the hon. Member for Selly Oak said that Opposition Members are arguing that that list should authorise the deposits of local authorities. Even if the hon. Gentleman had been here for the whole of the debate, he would not have heard one Opposition Member argue for that. Local authorities thought that that list had some meaning. Why should they not? The Department of the Environment sent it to them and it had the Department's imprimatur. I do not suggest that the list guarantees deposits, but it indicates which banks are authorised.
Surely the hon. Member for Selly Oak can see that there was confusion and misunderstanding. Local authorities thought that it meant more than the bank thought it meant. Plainly the bank did not think much of it because by June it had not removed from the list Chancery or Edington, although they were in liquidation or administration. As the right hon. Member for Hertfordshire, North (Sir I. Stewart) said, we should look at that again. We should also look at the quality of the advice that the Bank of England gives to local authorities. We are asking only that the quality of information on the list should be examined.
The right hon. Member for Hertfordshire, North raised an issue that has not been mentioned much in the debate or in the press, although it is crucial for the future, and that is the whole question of Europe. In a year there will he a single passport on banking, and banking systems in other countries may not have even the bare necessities of banking regulations that exist in Britain. The Minister must tell us whether he is prepared to support a push for the levelling of banking regulations throughout Europe so that we are not exposed to the weakest link in the European chain.
We must also examine compensation schemes throughout Europe. We do not say that they should all be the same, but there should be convergence and understanding and the present consolidated supervision directive on compensation throughout Europe, which is in the bowels of the Commission, should be brought to light and politically backed so that when we are in the single market we are not faced with banking problems.
My hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) spoke about the compensation scheme. Conservative Members tried to portray us as if we 67 were saying that people should have 100 per cent. protection and that we would then get into the savings and loan position of the United States Government. Not one Opposition Member argued for that. The least that any of us has asked for is an increase in the investment protection scheme so that in real terms it will be at the 1979 level when the £15,000 maximum was set. That maximum was reintroduced in the Banking Act 1987 and the original maximum was set 12 years ago. Surely that should be index linked in line with inflation. That is asking not for 100 per cent. protection but for a basic improvement in the investment compensation scheme.
Small investors and Asian business people in particular have been exposed to great problems. If the Government are committed to small businesses, the least that they can do for small businesses, which are going to the wall as a result of this banking collapse, is to give them a package. They need more than helplines, which are merely a sign of blowing in the wind. The only sensible part of the speech of the hon. Member for Selly Oak was his call for a package. Such a commitment would mean something to people.
§ Mr. Calum Macdonald (Western Isles)
I was not a member of the Committee that examined the Finance Bill, and I speak as a Member who represents a constituency that has been badly affected by the collapse and the crisis.
I was dismayed by the attitudes shown by Conservative Members, which were exemplified in the speech of the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark). Labour Members and local authorities are not denying that mistakes and errors were made and that there were misjudgments, but, despite what the hon. Member for Selly Oak said, it has to be remembered that local authorities and their finance divisions are amateurs in the money markets. I do not know what the finance director in Selly Oak is paid. If it is £70,000, that is not the case in the Western Isles. The only people earning that kind of money of whom I know are those who are supposed to be running the Bank of England and looking after the interests of the depositors.
The professionals dealing with the money markets are the Bank of England regulators, who look after the interests of the public. As my hon. Friend the Member for Redcar (Ms. Mowlam) said, brokers who gave advice to local authorities in these matters have some responsibility as well. If it is a matter of surprise and concern that a local authority such as Western Isles placed £23 million in a bank like BCCI, what about the nature of the professional advice received by that local authority, particularly when it now emerges that the local authority expressed to its brokers doubt and concern about the bank? The brokers came all the way to Stornoway to persuade the local authority that BCCI was a legitimate bank and that it was all right to leave the £23 million in the account there.
It is no surprise that people whose day-to-day expertise is that of a director of finance in a local authority have had their fingers burnt in a crisis of this sort. The real surprise, and the cause for concern and dismay, is that the much-vaunted financial professionals in London and in Edinburgh also got their fingers burnt, and that their advice caused local authorities to get their fingers burnt.
There is a contrast between the attitude taken by local authorities in the middle of the crisis and that taken by the regulators, the Government and the brokers involved. In every local authority, there is a searching inquiry as to why 68 things went wrong and money was lost, nowhere more so than in the Western Isles where there has been an honest admission of error, self-criticism and a determination to put things right so that such mistakes are not made again. However, the professional brokers who advised the local authorities have produced nothing but a stone wall of silence. There has been no hint of self-criticism or admission of failure or an apology for the bad advice that they gave. The Bank of England and the Government have exhibited the same stone wall of silence. It is not good enough for the Government and the Bank of England to wash their hands of the matter and to claim that it is up to the local authorities.
The people who will suffer if that attitude is taken will be the only innocents in this affair—the old folk who rely on home services, the children in schools who rely on continuing levels of expenditure to provide them with an adequate education, and poll tax payers. The impact of these losses will fall on their backs unless the Government take a more positive and constructive attitude. Somebody will have to pick up all the bills for this. Either the receivers of local authority services and poll tax payers will pay for all, or the burden will be shared so that the Government and the general public take on some of it. The Government will have no moral or political credit if they continue stonewalling in the way shown by the Prime Minister last Tuesday and Thursday and by Ministers today.
§ Ms Diane Abbott (Hackney, North and Stoke Newington)
There are several categories of losers from the BCCI collapse, and I believe that this debate has not sufficiently distinguished between them. One of the big losers is the Sheikh of Abu Dhabi. I have read that his father was accustomed to keeping his money in a suitcase under the bed. The present sheikh may wish that he had stuck to that. Another category is local authorities. I do not intend to repeat all that has been said about them, but I shall point out that the finance department of one local authority had the presence of mind, the expertise and the skill to withdraw its money from BCCI—that of the London borough of Lambeth. That borough is much maligned in the Chamber, so I am glad to put that fact on record.
A third category of loser is distinct from the first two categories. It encompasses ordinary small business men and depositors, notably Asian business men and shopkeepers. Conservative Members and those speaking from the Treasury Bench have adopted a sneering tone towards the depositors in BCCI. The hon. Member for Chichester (Mr. Nelson) said that anybody who had put his money into BCCI would need his head examined, and that everybody knew about BCCI. But how were ordinary shopkeepers in Southall, Bradford, east London and Glasgow supposed to know the gossip at City cocktail parties?
Furthermore, those people banked with BCCI not because they wanted a greater return but because BCCI, literally and figuratively, spoke their language. They received what they saw as a more welcoming and supportive service than that offered by the main clearing banks. It was not greed that led Asian small business men to bank with BCCI but the fact that they found it a supportive and understanding environment. Those shopkeepers do not go to the same cocktail parties as the 69 Economic Secretary or the hon. Member for Chichester. They were in the hands of the supervisory and regulatory authorities. And there is a growing suspicion among commentators and amongst Labour Members that those authorities failed this category of loser.
We have read in the newspapers today that, before this wave of Bank of England and Price Waterhouse investigations, United States regulators had complained about the Bank of England's reluctance to co-operate in investigations on BCCI. Last week, the Economic Secretary said that the Bank of England could not be expected to act on rumour. It cannot be stressed enough that BCCI's problems were not rumours. In 1988, it was indicted in the US for laundering drug money. It was indicted for fraudulently acquiring a US bank. There were well-documented connections with Noriega. Furthermore, as my colleagues have pointed out, Ernst and Young, the bank's former auditors, voluntarily gave up a huge account. As my hon. Friend the Member for Workington (Mr. Campbell-Savours) wondered, did the Bank of England ask why Ernst and Young chose to give up BCCI?
This scandal raises a number of questions, and it is as well to put them on record again. One involves the role of the auditor. Several hon. Members have suggested that, in future, the auditor should have not just the right but the duty to point to fraud. There are questions about the role of the Bank of England and about the powers of the Serious Fraud Office, which can act only on referrals. There have also been questions about the deposit protection scheme and suggestions that it should be raised in line with inflation. Thousands of ordinary, hardworking Asian people throughout the country with small businesses put their trust in BCCI. They believed that if the bank had the support of the Bank of England it was safe to do so. These people have contributed greatly to our economy in extremely difficult times. We believe that they deserve more from the Government than an assumption that they should have known about City gossip.
§ Mr. Ian McCartney (Makerfield)
As the House will know, Wigan metropolitan borough council has been caught up in the demise of the Bank of Credit and Commerce International. Many Conservative Members represent banking, but they seem not to realise the damage that banking can inflict on local authorities by making short-term political attacks upon them. In this instance the local authorities do not, in the main, represent the political party with which banking is associated.
Last year, Wigan metropolitan borough council handled over £400 million, and it will probably handle even more than that this year. The only money that it will lose this year will be what it invested in BCCI, having taken the advice of brokers in the City and the advice contained in circulars submitted to local authorities by the Department of the Environment. Local authority treasurers act with professional integrity and give proper advice to councillors, but on this occasion they have found themselves misled and misinformed.
Only one class of person had the opportunity in the City to receive a nod and a wink or advice in advance about the position of BCCI. Local authorities, people with small businesses and other ordinary depositors are the innocent victims. Conservative Members argue that individuals have a duty of care and must be mindful of that responsibility. In terms of reasonable action, there is the individual depositor and the local authority treasurer who 70 places moneys in a bank. Do Conservative Members suggest that if a marginally higher rate of interest is paid there must be additional risk? Why is it that every night on television the big four banks and building societies are advertising marginal increases in interest rates to encourage depositors to place their money with them? Is it suggested that anyone who deposits with the big four banks and building societies is running a risk?
§ Mr. McCartney
I think that the hon. Gentleman has been downstairs somewhere looking at his deposits. I shall not give way to him. I normally allow others to intervene in my speeches, but I shall not give way to someone who has come into the Chamber at the tail end of the debate to cat-call hon. Members who are speaking on behalf of their constituents.
Surely it is not being suggested that a marginal increase in the rate of return is a sign that a deposit is less safe than it would be with any of the other 499 banks on the list submitted by the Bank of England. If the list that was prepared by the Treasury and the Bank of England and submitted to local authorities on 28 June was meaningless, why was it ever issued? Why was it not issued along with a letter from the Department of the Environment asking local authority treasurers to set out by return of post the investments made in the previous quarter with the banks on the list? Such a request would show that the Department of the Environment and the Treasury regularly seek information that is based on the banks on the list that is sent to local authorities. It would be reasonable for local authority treasurers to take the view that, on that basis, the risk of placing a deposit with a bank on the list would be minimal.
We are not talking about share speculation, when a share can increase in value or lose value. We are talking about individuals making deposits in a bank that was recognised by the Bank of England as one that was operating effectively, though we know now that it was not. As far back as 1987, shortly after the publication of the Banking Act 1987—section 12 is especially relevant—advice was being given to the Bank of England that showed that the BCCI was operating in a fraudulent manner, or that that could be so. Ernst and Young decided to stop acting for the bank. It decided that it would forgo £2 million a year because it was not prepared to continue with the cover-up of the bank's activities. In March 1990, Price Waterhouse suggested clearly to the Bank of England that there was serious fraud taking place within BCCI. It believed that in the circumstances it was unable to make such a statement in its report.
Individual depositors, local authorities and even finance directors of large private companies have to rely on information that is gained in the public domain when it comes to making deposits. Since 1987, the Bank of England has deliberately conspired to ensure that information that should properly be available in the public domain would not be disclosed. As my hon. Friend the Member for Redcar (Ms. Mowlam) said, that was done to protect the secondary banking system.
New clause 37, in the names of my hon. Friend the Member for Workington (Mr. Campbell-Savours) and others, provides an opportunity to protect the banking system from a bank or a group of banks when information 71 that is made available in an investigation is found to be incorrect. The new clause would also provide protection for depositors, be they institutional depositors such as local authorities or individuals, such as people running small businesses. If the relevant information is available at an early stage, logical decisions will be made about deposits and the Bank of England will be able to step in to protect depositors.
At the end of the day, the Bank of England is the regulator, and it must be an effective one. Instead, we have seen a failure of regulation. Individuals, many of whom deposited hundreds of thousands of pounds, which was hard earned, have not been protected. As a result, they have seen their businesses fail and their lives have been ruined. Local authorities' trust in the banking system has been undermined. The Government must not underestimate the capacity of institutional depositors, such as local authorities, to remove their deposits from other areas of the secondary banking system, particularly when they are being vilified constantly by Conservative Back-Bench Members. Their integrity is being attacked as their banking practices are criticised.
If the attacks continue, there could be an immediate political response. Institutions could withdraw substantial funds from the secondary banking system, causing further problems for banking and the City. Surely Conservative Back-Bench Members are acting irresponsibly in what is already a crisis. They are making attacks on local authorities in the short term which in the long term will undermine the banking system and the way in which it is operated.
§ Mr. Roger Stott (Wigan)
The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) has been highly critical of the behaviour of local authority treasurers. Does my hon. Friend agree that under current regulations and legislation local authority treasurers have a duty to maximise the amount of money that is at their disposal? That applies especially to the Wigan authority, which is poll tax capped. It cannot raise any extra money because it is capped, so the borough treasurer, under the relevant reguations, has to maximise the amount of money that is at his disposal. That is precisely what he was doing when he invested in BCCI.
§ 7 pm
§ Mr. McCartney
Will my hon. Friend let me answer the hon. Gentleman who is heckling from a sedentary position? Perhaps he is on your deaf side, Mr. Deputy Speaker.
My hon. Friend said that local authorities have a duty to maximise their funds, and in 1990 the Government introduced capital finance regulations to ensure that that happened. At that time, my right hon. Friend the Leader of the Opposition prayed against the regulations in order to allow the Opposition an opportunity to question the Government about their scope and effect and about whether the list of institutions issued on a quarterly basis by the Bank of England had some validity. However, the Government did not allow a debate and the regulations were put into effect without being publicly scrutinised; thus preventing the Opposition from questioning directly 72 the consequences and practical effects of regulations which are now operated by local authorities, irrespective of their political colour.
I shall be brief, because many hon. Members may wish to make further contributions to the debate. If the Minister does not respond today, the Government need to respond at the highest level before the House rises for the summer recess. It would be intolerable—if not negligent—if the House did not consider further Government proposals between now and the summer recess but left over the summer not only local authorities, which will cope one way or another, but individuals who are affected by the banking collapse with no idea of what is happening. It will be intolerable if people have no idea whether there will be an investigation, why the failure occurred, no idea of the Government's position or of the decisions taken by the Bank of England and no idea whether the Government are prepared to mount a rescue operation such as that following the Barlow Clowes affair or to accept the necessity of protecting small business people for the sake of jobs and of the long-term future of communities and of protecting individuals who have other forms of deposit with BCCI, including deposits relating to their private dwellings. It is absolutely essential that those people are not left to sit—as it were—sweating until the House resumes in the autumn or until there is a general election and a change of Government—the new Government would never allow such a situation to arise.
Finally, those who are interested in protecting the integrity of the City of London or the banking institutions should look not to Tory bankers, but to the Opposition.
§ Mr. Bob Cryer (Bradford, South)
The collapse of the Bank of Credit and Commerce International has raised a number of awkward questions, not least that raised by the Economic Secretary to the Treasury who is now lounging on the Front Bench. If a bank is registered within the Common Market, it apparently has immunity to establish itself in any other member state and to rip off its customers. I do not agree with that and I suspect that many other people would be critical of such a view. It has raised some serious questions about the position of banks within the Common Market and, because of the greater integration proposed by the Government and the move towards 1992, something should be done quickly before it gets worse.
The list issued by the Department of the Environment has been mentioned several times, and rightly so. There is no point in the Department of the Environment sending out a list to seek information about how local authorities are investing their money unless some credibility is given to that list. Although the information was provided by the Bank of England, the list of approved institutions sent out by the Department of the Environment must have carried some weight with local authorities. Moreover, two banks on that list were in grave financial difficulties—and were known to be so—and were near liquidation, and yet they were incorporated in the Department of the Environment's list. There is a legitimate argument for saying that the Government should make a contribution to the local authorities that have been affected since they invested in BCCI because the Government implied that it was safe to invest in that institution. It was merely an indication, but the Government cannot escape the fact that if they issue a list of institutions, it is likely that those 73 institutions will be taken to be sound in wind and limb. The Government are at fault as far as local authorities are concerned.
I support new clause 37 because many people affected by the collapse are not professional investors. They are small business men and business women who are absorbed in the operation of their company, which arises as a matter of course in small businesses because the managing director is also the major shareholder, or the sole proprietor is also the marketing manager, the planner, the designer and the production engineer all rolled into one. Such people cannot be expected also to be financial experts. The provisions thrown up by the liquidation facilities to protect depositors are inadequate.
A Conservative Member said that it was not for us to pick up the pieces and that people must make their own way. That is arrant nonsense because the community as a whole picks up the pieces. If small businesses or medium-sized businesses—and I use the term "small businesses" in the sense of the Bolton committee report to mean companies employing up to 200 people—go into liquidation because of the collapse of the bank, the community as a whole picks up the pieces through unemployment benefit, income support and other benefits provided by the nation. The community will be called upon to save from abject poverty the people who are thrown out of work. It will not be good on the dole but at least it will not mean abject poverty. Why do riot the Government consider whether they can save some of the small businesses and prevent them from going into liquidation by providing better protection for them and for small deposit holders? I am not suggesting a blanket indemnity—I am stating merely that if a lot of businesses go to the wall, the Government will have to provide support through unemployment benefit.
Another issue is what the Bank of England did. It is amazing that the people on telephone number salaries—such as the Governor of the Bank of England who recently received a 17 per cent. increase—never bear the responsibility when something goes wrong. That is certainly true in this case. Under the front page heading "CIA challenged on BCCI role", the Financial Times makes it clear that the information received from the United States Federal Reserve and the Bank of England about BCCI had been singularly lacking. It states:Mr. von Raab's complaints about official stonewalling have been echoed— Mr. von Raab is a former United States commissioner of Customs—by Mr. Robert Morgenthau, the New York district attorney who for several months has vented his frustration at the lack of co-operation he has received from the US Federal Reserve and the Bank of England.Why is that so? Why did not the Bank of England co-operate with the United States authorities to ensure proper and adequate scrutiny and information? Was it because the Bank of England wanted to keep the bank alive and dared not provide the information in case the United States authorities pulled the plug in view of the Bank of England's inactivity and in case it was exposed as being less than zealous in the performance of its duties?
§ Mr. Cryer
I will not give way, because I am sure that everyone wants to hear the Minister's detailed replies to all the points that have been made.
74 Curiously enough, it appears from a story on the front page of the Financial Times that there has been a degree of fraud even at one of the joint stock banks. Under the headline,Midland operated secret defence offshoot",is this report:A trade finance arm of the Midland Bank, one of whose subsidiaries had secret links with Britain's security services, incurred losses of at least £75 million over the past decade. The losses arose in part from undisclosed fraud at one of the trade offshoot's customers.It seems that fraud is to be found not only in the secondary bank system, but the Midland. Sir Kit McMahon's reign as chairman of the Midland bank was not exactly distinguished, and apparently he did not know of the existence of that subsidiary. Nevertheless, he left the bank with telephone number compensation. He was described as a marvellous banker, but they still got rid of him. The same has happened with other people—such as the former Prime Minister, the right hon. Member for Finchley (Mrs. Thatcher). The Government put their faith in the Bank of England, but it seems slow and unwieldy, and failed to take action for far too long.
In the case of BCCI's collapse, which affected thousands of people, the Government and the Bank of England were apparently taken by surprise, while auditors turned a blind eye. However, when it was suggested that two trade union officials were not handling comparatively paltry sums of money absolutely properly, there was an outcry. The Government told the certification officer to prosecute Arthur Scargill and Pete Heathfield and to leave no stone unturned. However, they were vindicated on every charge.
There is a stark contrast between the way that National Union of Mineworkers' officials were dragged through court after court, largely at the Government's instigation, and the attitude taken towards BCCI—where fraud was known of by Ministers, Government officials, the Bank of England, and Price Waterhouse. The fear was that if someone made a statement, the whole thing would collapse like a pack of cards. That is why there was so much inactivity for so long.
The Government must take some responsibility for that mess, and it is time that they exercised it in respect of small depositors, small businesses, and local authorities that took the Government's implicit advice. The lesson for anyone is, never trust a single word that the Government say.
§ Mr. Maples
We are all concerned about the stories we have heard in our own constituencies of the somewhat high-handed and insensitive way—to say the least—that many banks have treated their small business customers. As a result, the Treasury and the banks undertook a study. We are finalising our conclusions. That has taken time, but we expect to make a statement soon. I cannot say now what those conclusions are, but we have found no evidence of collusion, or any suggestion that the major banks are conspiring with one another to treat small businesses in the same way. Certainly most businesses received the 3.5 per cent. cut in the base rate up to last Friday.
Although there have been many complaints, when one remembers that the banks have 4 million small business customers—about half of which are in credit, and half in debit—they still represent a small overall percentage. Nevertheless, there is clear evidence that some customers 75 have been treated insensitively, and perhaps even outside the terms of their contractual arrangements with their banks. We will address that problem in any recommendations that we make.
We also found in some instances that what the banks told us was that their policy has not necessarily translated into action at branch level. However, there is a fair amount of competition, and customers can move their accounts. I appreciate that at present, in the middle of a recession, it is probably impossible for a firm to move if it owes money to its bank. However, when that time ends, banks which treated their customers in a high-handed way will suffer for it. One must remember also that the relationship is the subject of a commercial agreement between banks and their small customers.
§ Mr. McCartney
Is the Government's intervention an indication that the banking ombudsman scheme is a farce and a failure, and has done nothing to protect individual depositors with complaints about their banks or individual branches?
§ Mr. Maples
As the hon. Gentleman may know, the recent Jack report recommended a code of conduct, and I will deal with that in the context of new clause 35.
§ Mr. Nigel Griffiths (Edinburgh, South)
The Economic Secretary said that central bank policy may not have filtered down to branch level, but that is the very level at which businesses and individuals transact their borrowing. It is at that level that businesses and individuals suffer, if not malpractice, then unfair practices that penalise their interests. What explanation did the banks give in that regard? Why did they allow that breakdown in communications to affect their customers so badly?
§ Mr. Maples
If that is the impression that the hon. Gentleman gained, I could not have expressed myself very well. I meant to convey the information that we did not always find that that which head offices told us was their policy was happening on the ground. In some cases, activity at branch level did not accord with what the head office thought was happening or intended to happen. We shall draw such instances to the attention of the banks concerned.
New clause 3 would impose huge administrative burdens on banks, for little discernible benefit. Those burdens would inevitably be reflected in higher costs, which would have knock-on effects for the banks.
§ Mr. Maples
I have listened to the debate for three and a half hours. If I am not allowed to respond without an intervention every 45 seconds, we will be here for a very long time. The hon. Gentleman made an extremely long speech.
§ Mr. Campbell-Savours
I am sorry to press the Economic Secretary, but could it be that the targets set for bank managers are such that the only way that they can be met is by ignoring the advice given by their central offices?
§ Mr. Maples
It is for the banks concerned to diagnose the causes and decide what to do.
New clause 3 would impose expensive burdens on banks, and there is a likelihood that the added administrative burden of handling loans at higher interest rates might make banks unwilling to lend on riskier 76 projects, which often involve small companies. Where information is needed, it can readily be gathered by the Government, and I hope that, on reflection, and in view of my following comments on the Jack report, the House will agree that it is not necessary to pursue that clause.
New clause 34 seeks an inquiry into competition. As I said, we have found no evidence of anti-competitive practices. However, as one of his duties, the Director General of Fair Trading constantly keeps an eye out for anti-competitive practices and behaviour. If he were to find any, I am sure that he would act. In the absence of convincing evidence, to undertake a study of the kind proposed would involve unnecessary time and expense. Again, I hope it is felt that enough is being done not to require a statutory inquiry into competition.
I have some sympathy with new clause 35 and the suggestion that bank charges should be more transparent. As the House knows, the Jack report recommended a code of conduct. The banks have published a draft, and expressed willingness to institute a code of conduct.
The banks are thinking again, and are talking constructively to consumer bodies. Although no timetable has been established, we regard the matter as important. If a satisfactory voluntary code is not forthcoming, we shall seriously consider implementing a statutory code: we feel that people are entitled to know how interest and bank charges are calculated.
I hope that those who tabled the new clauses will decide that enough is already being done to make it unnecessary to press them. Several of my hon. Friends spoke about new businesses. I hope that they, and Opposition Members, will forgive me if I do not deal with every point that was raised. I shall try to deal with most of them, but hon. members should let me know if they feel that I have left out anything about small businesses.
I think that the purpose of tabling new clause 37 was to institute a debate about bank regulation and BCCI. The BCCI fraud was complex and sophisticated, and took place within a group that operated in some 65 countries. Several companies sought to arrange the bank's affairs in a way that made it difficult to regulate. For a long time it had two auditors, and the arrangement was difficult to police. All that made the fraud easier to perpetuate than it would have been had the operation been limited to one country. It is not surprising that the auditors were fooled, and that it took a long time to discover the fraud.
We are not discussing whether a banking licence should have been granted. Under the legislation of the 1970s, the bankers were entitled to come to this country and open branches. We are discussing whether the licence should have been revoked earlier. As several of my hon. Friends have pointed out, the position is very difficult. We—or, at least, the Bank of England—should, apparently, have acted earlier; we are being criticised by many Opposition Members for not having done so. According to others, however—given that a restructuring arrangement was being negotiated, and given that the major shareholder had indicated a willingness to invest additional funds—the problems might have been sorted out if the situation had been allowed to continue for longer.
In such circumstances, we always hear the same conflicting arguments. If, however, the Bank of England goes to the extent of revoking a banking licence and applying for a liquidation order against a company, it effectively puts that company out of business. Once the step has been taken, the company cannot possibly be put 77 back on its feet. When they are in liquidation, a bank's assets nearly always turn out to be worth less than they are worth on paper. It is therefore difficult for a bank in such a position to be solvent. Action can be taken only when it is certain that the bank is insolvent, and there must be hard evidence, because the bank has the right to appeal against the Bank of England's decision. If its licence is revoked, it can appeal to a banking appellate body, and it has the right to a court hearing in respect of a liquidation order. The Bank of England has made it clear that it is satisfied that it acted as soon as it felt that it had the necessary evidence.
§ Mr. Sheldon
Why was the bank authorised to be covered by the Bank of England in the first place? During the passage of the Banking Act 1979, we were given specific assurances that nobody would be given such authorisation unless it was composed of fit and proper people—and these were certainly not fit and proper people. A further obligation was imposed: that of continuing supervision. Neither of those requirements was met in this instance.
The Minister said that problems would arise once it was known that a bank was acting fraudulently. But the position could have been dealt with much earlier. Why was it not?
§ Mr. Maples
The right hon. Gentleman says that there has been inadequate supervision. According to him, the failure of a bank may be a definition of inadequate supervision, but he could not possibly know what the Bank of England has been doing since 1974, or whenever BCCI set up in this country.
When the bank set up here, it did not need any authorisation. It had been authorised in another European country, and was entitled to establish branches here in the mid-1970s. Under the Banking Act 1979 its licence could have been revoked, but I have already mentioned the difficulties involved in providing the necessary evidence. I have heard no one suggest that there was any evidence at the time of the problems that have now come to light. Under the Banking Act 1987, the bank was "grand-fathered", and, as a bank that was already in existence, it was entitled to continue in existence. I do not believe that the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) can have any evidence that the Bank of England has failed in its supervision.
Hon. Members have asked why no action was taken earlier. None of the earlier rumours, and none of the work that was done, brought any fraud to light; all that we were told was that the bank had made losses.
§ Mr. Maples
I cannot take an intervention in the middle of replying to an intervention from the right hon. Member for Ashton-under-Lyne.
All the questions that were raised at that earlier stage concerned whether the bank had adequate financial controls, whether it had bad loans, and the fact that it had made losses. It was felt that the losses endangered the bank's liquidity and its equity base. In every case, the shareholders injected further funds to deal with the problems. The Price Waterhouse investigation, whose findings were given to the Bank of England on 27 June, provided the first evidence of fraud. It was on that 78 evidence that the Bank of England acted. It could not have acted on rumours, or on the basis that the bank was inadequately capitalised and that, whenever losses were made, additional capital was injected.
§ Mr. Maples
I will give way, but I am afraid that this cannot go on. I am not getting around to answering any of the points that have been raised.
§ Mr. Davies
I am grateful. I do not know whether I should admit it, but I was the Minister responsible for the Banking Act 1979. Does not the Economic Secretary agree that, under that Act, the Bank of England had greater and better powers to police institutions such as BCCI than were conferred by the Act that followed it, which the present Government invoked to repeal the 1979 Act?
§ Mr. Maples
No, I do not agree. When the 1987 legislation was going through the House, every hon. Member agreed that it gave the Bank of England greater powers and tightened up the regime. I am not criticising the 1979 Act, which was a considerable step forward; indeed, I gave way to the right hon. Member for Llanelli (Mr. Davies) because I knew that he had been a Treasury Minister at the time. The only difference of which I am aware is that, under that Act, the banks were not automatically "grandfathered", and the Bank of England was able to remove licences more easily than it could have done under the 1987 Act. Revoking licences involves problems, however, in relation both to obtaining evidence and to the consequences of such action.
Many people seem to think that the Government, or the Bank of England, can provide a guarantee. I am not ascribing that view to any specific Member, but some of the comments, especially those about local authorities, suggested that the Government or the Bank of England could guarantee that a bank would never go broke. It must be clear to the hon. Members for Workington (Mr. Campbell-Savours) and for Redcar (Ms. Mowlam) that that is not the case.
If it is accepted that a bank can fail, it must be accepted that people must bear the costs of that failure. The alternative is for the Government or the Bank of England to step into the breach and pay all the money—which is exactly the same as guaranteeing that the bank could not be insolvent, or go into liquidation, in the first place. we accept that it can, and that it is not reasonable to expect public funds to guarantee every liability of every bank, we must also accept that the creditors must bear some of the costs.
Because that would have harsh consequences, successive Governments have introduced deposit protection schemes. The limit under the 1979 Act was £10,000, not £20,000; it was raised in 1987, partly as a result of overtures from Opposition Members, although the Government readily agreed to the move. Some could argue that the limit was too high, although others argue that it was too low. It could be said that a moral hazard must be created, and that the aim was to protect small depositors who could not be expected to be aware of the position. I believe that 75 per cent. of £20,000 is a reasonable scheme. We have no intention of making proposals to raise or change that sum. I am afraid that it is important that such a hazard is involved in doing business with banks.
79 7.30 pm
As several hon. Members have explained, there is a risk-reward ratio in dealing with investments. If the Government were effectively to underwrite a far greater percentage, or if we had an American system whereby the first $100,000 in an account was underwritten by the Government, people would place their money with the institution offering the highest rate of return knowing that it was guaranteed by the Government. The Government would not be allowing the market to create any distinction between banks running their affairs conservatively and well and those running their affairs irresponsibly and taking greater risks.
It has been said that the deposit protection scheme could be more generous. I have now explained the consequences of that. In my statement last Monday, I was asked whether we should have a scheme like the American scheme and I have tried to explain how that could create problems in the United States which we would not want to repeat here.
Other hon. Members suggested that the Government should be responsible for standing behind local authorities. We cannot be. Others asked whether the scheme should be made more generous, and I have tried to explain why it cannot be. We should all realise that the collapse of any bank, particularly one with as many customers as BCCI, is clearly a tragedy for the customers, for the businesses doing business with them, for the depositors and for those who borrowed money, because I suspect that they will be called upon to repay it sooner than they expected.
The deposit protection scheme will be activated as soon as is conceivably possible. The Bank of England is taking steps with the full co-operation of the liquidators to compile lists of depositors and their addresses even in advance of the liquidation order. The bank has an accelerated hearing for the liquidation order; it will now be heard on Monday 22 July. That is about as soon as it could conceivably have been heard. If it is granted—and I have no reason to suspect that it will not be granted, but it is a court order that is being sought—letters and claim forms will be sent to depositors as soon as possible. It should therefore be possible to pay the vast majority of depositors extremely quickly. I cannot give a timetable because we do not know how many people are involved. It may amount to 100,000. Clearly there is a logistical problem in processing 100,000 applications.
§ Mr. Maples
This is an important point. If the hon. Lady will allow me to deal with it, I will give way later.
I have made it clear to the Bank of England that the utmost priority should be given to dealing with the claims as soon as possible and that the bank should have the necessary temporary staff to deal with the applications. I am confident that the bank will do that, and I will stay in touch with the operation to ensure that everything is being done as fast and as efficiently as possible. However one looks at it, it will be difficult to process 100,000 applications and it will take a little time.
There will also be some difficult cases. The vast majority of the cases will be simple. People will have one account at one branch, that person's identity will be clear, that person will not have other borrowings or dealings with the bank and the account will not be held in trust for someone else.
80 That kind of person can be dealt with quickly. As we found with the British Commonwealth merchant bank case, in other cases there will be complications. We do not expect more than a minority of the depositors to be involved in such cases, but there will have to be investigations in some cases.
With regard to small businesses, I outlined on Monday a scheme which the Bank of England was trying to establish. Considerable progress has been made with that and at least one clearing bank has nominated several of its branches specifically to help former customers of BCCI, to deal with their applications, to process with the liquidator the status of accounts, how they had been run and whether it is possible to release security. The best way to deal with the problem is to arrange for other banks to step into the breach. So far as I am aware, the attitude of the other big clearing banks is positive. Undoubtedly some extremely good businesses banked with BCCI and they offer good business opportunities for the other banks. As I have said, the Bank of England is actively helping to establish those arrangements.
§ Ms. Abbott
The Economic Secretary has spent considerable time answering arguments that Opposition Members have not put to him. Does he have any intention of answering our specific questions, particularly about the auditors? Why is the 1990 Price Waterhouse report not to be published? Did the Bank of England ask Ernst and Young why it gave up the lucrative BCCI account of its own volition?
§ Mr. Maples
If the hon. Lady would allow me to make my speech in my own way, she will discover that I have a raft of answers for the points that were raised. If I may say so, the hon. Lady made an intemperate intervention. Most of the points that I have answered were raised, if not in this debate today, then in the newspapers. There was considerable discussion on the Opposition Benches about whether the deposit protection scheme was adequate and whether the Government should stand behind local authorities.
§ Mr. Gerald Howarth (Cannock and Burntwood)
Will my hon. Friend acknowledge that there will be a widespread welcome in the country for the restatement of the Government's resolve not to bail out BCCI's creditors in any other way than is already provided for by statute? Does he accept that local authorities, such as Lichfield district council, which have been prudent and have forgone the extra one eighth of 1 per cent. in order to ensure that they are investing in proper institutions understand that if the Government were to follow the Opposition's advice that would simply encourage imprudence on a wide scale and penalise the authorities that have looked after their charge payers' money?
§ Mr. Maples
I agree with my hon. Friend. I tried to make that point earlier.
I want now to deal with some of the specific points that were raised. The compensation scheme under the Financial Services Act 1986 is more generous because, in general, ordinary investors tend to have larger sums invested in unit trusts, investment trusts or pension funds than in bank deposits. Paying a percentage of £20,000 is probably the right way to deal with bank deposits with its slightly more generous scheme for investors.
81 I was asked about the 1.990 Price Waterhouse report. I understand that there have been a number of reports in recent years relating to the financial condition of BCCI. The response to those reports was a need for additional capital, usually at the prompting of the supervisory authorities, and that capital was always forthcoming and the bank was always adequately capitalised. At least, when a request for additional capital was made, it was forthcoming. Those previous reports related to financial controls, bad debt, and the bank's operating losses. They stated that in all cases the problems could be corrected through the bank being adequately capitalised and additional capital was forthcoming.
None of the earlier reports contained evidence of fraud or other wrongdoing of the kind that prompted the action which the regulators took earlier this month. That was the first occasion when there was hard evidence on which the Bank of England could act.
§ Mr. Maples
I explained earlier the need for hard evidence. If there is no hard evidence, the Bank of England would lose the case on appeal and would essentially have ruined the bank because it would not be able to continue to operate.
§ Mr. Wallace
The Economic Secretary has been very good at giving way. I understand what he said about hard evidence and the difficulties about rumours of fraud. However, how did the Bank of England react to the guilty plea in the American courts in connection with serious charges involving drug trafficking? When the matter was raised in another place, we could get no answers from Ministers.
§ Mr. Maples
I dealt with that issue last Monday. The bank pleaded guilty in the United States because in America companies can be vicariously liable for the criminal acts of their employees. It was thought at the time—it may be true, and I do not know that any evidence to the contrary has since come to light—that those activities were confined to the Tampa branch of the bank and that the people concerned were not associated with the senior management of the bank in London. There was no evidence of fraud. There was evidence of illegal activities in laundering drug money, but there was not evidence of what has given rise to the revocation of the bank's licence, namely, that the bank was being systematically defrauded of funds by its senior executives. No evidence of that was contained in those matters in the United States.
I was asked some specific questions by the hon. Members for Workington and for Redcar. Mortgagees have a liability to continue to pay, but they will be entitled to have their property back once the deed has been paid off. They are simply debtors of the bank, and part of the liquidators' task will be to collect the assets of the bank—of which mortgages will be one.
I was asked why Ernst and Whinney gave up the audit. I do not know and I cannot speculate about that. I know that the regulators in various countries wanted one company—in this case Price Waterhouse—to take on the whole audit. They were worried that there were two separate auditors—a situation that was deliberately created and perpetuated by the bank itself. The fact that there were two separate auditors must have made it far 82 easier to conceal the frauds because money could be moved from one section of the group to another when an audit or inspection was taking place.
I was asked about the insurance company CCL. I am told that, although BCCI acted as one of the company's principal bankers and as one of its appointed representatives for the sale of life policies, CCL held no shares in BCCI and is not a subsidiary of BCCI. I cannot give the hon. Member for Workington any further information about the connection. Neither is a subsidiary of or a shareholder in the other. The regulation of insurance companies is a matter for the Department of Trade and Industry, which is fully aware of all that we know about the problems surrounding the bank and is looking into the matter. As the hon. Gentleman knows, under the Policyholders Protection Act 1975, policyholders would get compensation up to a high level of any liabilities of a failed insurance company. There is no evidence that it will be necessary to invoke that Act.
I was asked why Chancery and Edington remained on the list. Whether that was unfortunate and misled anyone or not, there was no way in which either bank could have taken deposits. Both were in administration at the time and had had their licences suspended. I understand that they were not removed from the list because their licences had not been cancelled and, at some stage in the future, they could have been reauthorised or had their licences reactivated. That could not have endangered any depositor's money because the banks could not have taken deposits at that stage.
It was a most peculiar suggestion and I cannot understand why I was asked whether the Foreign Office tried to stop the Bank of England launching a section 41 inquiry earlier. I am told that the answer is categorically no. I was asked about the investigation of money brokers and their commissions.
§ Mr. Maples
I do not know the answer to whether the insurers of the bank's liabilities are active. The liquidators will look into that. If those insurers are active, that will be a source of some protection for the depositors. I am afraid that I have no knowledge of that.
The hon. Gentleman raised the question of the money brokers. Money broking is a deregulated area of the market, so people are entitled to negotiate their own commissions. If money brokers pushed depositors, especially local authorities, towards the bank because they were being paid over-the-odds commissions and were not disclosing that to the local authorities, and if the local authorities had reason to think of the money brokers as their advisers, local authorities may have some recourse against their money brokers. I do not know. I am, on the whole, in favour of the disclosure of commissions. That makes for a much cleaner market and cleaner arrangements between people. However, local authorities could have asked the money brokers to disclose their commissions. If they had refused to do so, the local authorities would have had some cause for complaint.
I was asked about the college of regulators. It was not really set up under the formal Basle procedure. It was the first example of an international college of regulators being put together, and it was put together by the Bank of England. Whether it could have been put together earlier or whether it could have waited slightly longer are difficult 83 questions. I do not know the answer. The bank would say that it was put together as soon as it thought that it was appropriate to do so.
I have dealt with most of the points that were raised in debate. If any hon. Member feels that there are points with which I have not dealt—
§ Ms. Mowlam
The Minister did not answer one important point. When the bank was closed on 5 July, the local authorities were in and the small investors were in. However, there seems to be no sign that the clearers had any exchange trading going on. Why did the clearers seemingly not get caught too?
§ Mr. Maples
It has been commented that anybody would realise that people paying slightly over the odds were incurring a higher risk. The other clearers may have been a more sophisticated group of counter parties. The premise of the hon. Lady's question is not necessarily true. It is not the case that there were no outstanding transactions with the clearers. There must have been many outstanding transactions in the market because the bank was closed in the middle of the day. Some of the clearers may have been on the other end of the transactions. It is clear that people could assess the risks of dealing with different counter parties. I know that large banks and large financial institutions, as my hon. Friend said, have rules about the exposure that they may have to particular institutions. I expect that their permitted exposure to BCCI was fairly small.
§ Mr. Campbell-Savours
The Minister said that he would answer all outstanding questions. May I remind him of what they were? We asked him about the £2.3 billion offered to the bank by Ghanem Al Mazrui from Abu Dhabi in the hours immediately before the closure. Is that correct? We also asked about the £375 million which was sent to the bank by Sheikh Zayed Bin Sultan al-Nahayan two weeks before the closure of the bank. We also asked about—[HON. MEMBERS: "Come on."] These are very important matters. The Minister asked us to set out our position. I also asked about the distinction being drawn by Westminster city council between lending and deposit making. I asked about the statement made by Ian Brindle of Price Waterhouse. He said that Price Waterhouse repeatedly informed the Bank of England of irregularities.
§ Mr. Maples
I have already dealt with the question of irregularities. I said that they were all related to loan losses, lack of financial controls, and the need for additional equity capital which was injected on every occasion on which it was required. The first hard evidence of fraud emerged in the Price Waterhouse inquiry, the report of which was delivered to the Bank of England on 27 June.
In my own mind, I am aware of no distinction between lending to a bank and making a deposit with it. I do not know what the treasurer of Westminster city council had in mind. I am responsible for many things, but not for what he says.
There were certainly additional injections of equity capital. I am not sure whether the hon. Gentleman's figures are right. There were several occasions on which additional injections of capital were requested and made.
84 It is not for me to comment on what the shareholders might have done if the restructuring had gone ahead. Additional injections of capital might have been made. However, the evidence of fraud was so pervasive and involved the senior management of the bank to such an extent that the regulators came to the conclusion that there was no way in which the management could be allowed to operate, whether additional capital was injected or not.
If there are points with which hon. Members think I have not dealt, I hope that they will write to me and I will seek to answer them. In the circumstances, I hope that they will feel that at this stage it is not in the interests of banking regulation to pass new clause 37.
§ Mr. Paul Boateng (Brent, South)
This has been a good debate, although it is a pity that the response from the Economic Secretary was so very inadequate. He gave few answers to the many Opposition questions. It is clear from the response of Conservative Members to those answers that they are only too anxious to mull over them in the course of a good supper.
The Opposition, however, recognise only too clearly that the Minister's responses provide particularly thin gruel for the many deposit holders who are concerned about interest rates and about bank charges. We believe that the answers provide very thin gruel indeed for those who have suffered as a result of the collapse of BCCI. We want our questions to be answered.
It was instructive to hear the Economic Secretary's response to the important points that were raised by my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon). It revealed the arrogance and, I am bound to say, the complacency—I use those words with a degree of sadness—that have characterised the Government's response throughout the BCCI farrago. The response from the Economic Secretary was that my right hon. Friend did not know what the Bank of England had been doing since the 1970s. That is precisely our point. This House does not know what the Bank of England has been doing since the 1970s, although we have a pretty strong suspicion about what BCCI has been doing since the 1970s.
We ask—we reiterate our demand tonight—that in the interests not only of the many small business men throughout the country who have suffered as a result of the collapse and whose lives are in ruins, not only in the interests of the people who have been put out of work and whose homes and security have been threatened by the collapse of the bank, but on behalf of all those who are concerned about the probity of our banking sector, the way in which it is regulated and the way in which our supervisory system works, that there should be a full inquiry into the collapse of BCCI. Nothing less will satisfy the House or the people of this country. Then, perhaps, we shall have the answers to the questions that my hon. Friend the Member for Workington (Mr. Campbell-Savours) so eloquently asked when speaking to his new clause 37. They are important questions that need to be answered. We intend to continue to ask them day in, day out in the House until they are answered to the satisfaction of the House and the country as a whole.
I turn now to an examination of the important new clause 3, which, unfortunately, has not received the attention that it might have, for understandable reasons. There is a crisis of confidence among the customers and consumers of the banking sector about bank charges and the transparency of the market in banking services. That 85 crisis is due to the banks' failure to come clean about the impact of their charges and costs on the ordinary consumer. Our mailbags provide evidence of that, as do the columns of both popular and serious newspapers. Again, the public are entitled to reassurance.
Having set the hare running and sought to obtain a scapegoat for their own abysmal economic performance and the impact of high interest rates, the Government have sought to blame the banks for the suffering of the many small businesses that have gone under during the past six months. Small businesses failures are at a record level and are more than 50 per cent. higher than the level at this time last year.
The Government's response has been to set in train a Treasury study, of which they have leaked the conclusion without making the body of its findings available to the public or the House. We want those findings to be made public and to be the subject of a debate in the House. It is interesting that, as our proceedings draw to a close and we look forward to the recess, we are told that we shall have the report "some time". Why can we not have it now'? Why can we not have a clear undertaking from the Economic Secretary that we shall have the report before the end of the Session? If we had it, we could ensure that it receives the full glare of public scrutiny that it deserves. What have the Government got to hide? Why are they not prepared to have an open debate? They do not like it, do they?—[HON. MEMBERS: "No."] No, they do not like it, but by jove we shall make sure that this one does not get away. We want a clear and unequivocal undertaking tonight that there will be a debate on this issue. Is that too much to ask?—[HON. MEMBERS: "No."] No, and that is what we are asking for, and we shall ask again and again.
One important point to which all those outside the House will want to hear a response is the issue of the new banking code. It was put out in draft form by the banks and received a unanimous thumbs down from consumer groups. The National Consumer Council described it as wholly inadequate. A whole range—a "raft" to use the Economic Secretary's word—of consumer-oriented bodies is seeking amendments and changes to it. When will the code be published? If we do not have a clear undertaking from the banks that it will be published before the end of the summer, let me make one thing crystal clear: after the next general election, a Labour Government will introduce a statutory banking code to protect the interests of consumers—
§ Mr. Boateng
The Financial Secretary says, "More regulations." Yes, we shall regulate when it is necessary to protect consumers. It is the absence of proper, prudent regulation which has led to the current abuses. Yes, we shall regulate to ensure that there is full consultation on any change in the terms of an overdraft facility or account. Customers should not have to discover by accident that their margins or charges have been raised. If that requires regulation, we shall introduce such regulation. Any change in the terms that customers are obliged to endure should be fully justified. They should not have to pay higher margins because of an increase in risks across the bank's loan book, and we shall introduce regulations to ensure that they do not. There should be a reasonable time for the repayment of an overdraft or loan. How many of us, of all parties, have received letters from small business men 86 protesting about the way in which they have suffered at the banks' hands in this regard? How many small businesses have been brought to an end needlessly because the business man has not been given an opportunity to deal with the problem of the overdraft or loan?
If the banks do not put their own house in order, we shall put it in order for them—no one should be under any illusions about that—and the sooner, the better.
§ Question put, That the clause be read a Second time:—
§ The House divided: Ayes 213, Noes 316.89
|Division No. 209]||[7.58 pm|
|Abbott, Ms Diane||Evans, John (St Helens N)|
|Adams, Mrs Irene (Paisley, N.)||Ewing, Harry (Falkirk E)|
|Allen, Graham||Ewing, Mrs Margaret (Moray)|
|Anderson, Donald||Fatchett, Derek|
|Archer, Rt Hon Peter||Fearn, Ronald|
|Armstrong, Hilary||Field, Frank (Birkenhead)|
|Ashley, Rt Hon Jack||Fisher, Mark|
|Ashton, Joe||Flannery, Martin|
|Banks, Tony (Newham NW)||Flynn, Paul|
|Barnes, Harry (Derbyshire NE)||Foot, Rt Hon Michael|
|Barnes, Mrs Rosie (Greenwich)||Foster, Derek|
|Barron, Kevin||Foulkes, George|
|Battle, John||Fraser, John|
|Beckett, Margaret||Fyfe, Maria|
|Bell, Stuart||Galloway, George|
|Bellotti, David||Garrett, Ted (Wallsend)|
|Benn, Rt Hon Tony||George, Bruce|
|Bennett, A. F. (D'nt'n & R'dish)||Gilbert, Rt Hon Dr John|
|Benton, Joseph||Godman, Dr Norman A.|
|Bermingham, Gerald||Golding, Mrs Llin|
|Blair, Tony||Gordon, Mildred|
|Blunkett, David||Gould, Bryan|
|Boateng, Paul||Graham, Thomas|
|Boyes, Roland||Grant, Bernie (Tottenham)|
|Bradley, Keith||Griffiths, Nigel (Edinburgh S)|
|Bray, Dr Jeremy||Griffiths, Win (Bridgend)|
|Brown, Gordon (D'mline E)||Grocott, Bruce|
|Brown, Nicholas (Newcastle E)||Hain, Peter|
|Brown, Ron (Edinburgh Leith)||Hardy, Peter|
|Buckley, George J.||Hattersley, Rt Hon Roy|
|Caborn, Richard||Heal, Mrs Sylvia|
|Callaghan, Jim||Henderson, Doug|
|Campbell, Menzies (Fife NE)||Hinchliffe, David|
|Campbell, Ron (Blyth Valley)||Hogg, N. (C'nauld & Kilsyth)|
|Campbell-Savours, D. N.||Hood, Jimmy|
|Canavan, Dennis||Howarth, George (Knowsley N)|
|Carr, Michael||Howell, Rt Hon D. (S'heath)|
|Cartwright, John||Howells, Geraint|
|Clark, Dr David (S Shields)||Howells, Dr. Kim (Pontypridd)|
|Clarke, Tom (Monklands W)||Hoyle, Doug|
|Clelland, David||Hughes, John (Coventry NE)|
|Clwyd, Mrs Ann||Hughes, Robert (Aberdeen N)|
|Cohen, Harry||Hughes, Roy (Newport E)|
|Cook, Frank (Stockton N)||Illsley, Eric|
|Corbett, Robin||Ingram, Adam|
|Corbyn, Jeremy||Janner, Greville|
|Cousins, Jim||Jones, Barry (Alyn & Deeside)|
|Cox, Tom||Kaufman, Rt Hon Gerald|
|Crowther, Stan||Kilfoyle, Peter|
|Cryer, Bob||Kinnock, Rt Hon Neil|
|Cummings, John||Lambie, David|
|Cunliffe, Lawrence||Lamond, James|
|Dalyell, Tam||Leadbitter, Ted|
|Darling, Alistair||Leighton, Ron|
|Davies, Rt Hon Denzil (Llanelli)||Lestor, Joan (Eccles)|
|Davies, Ron (Caerphilly)||Lewis, Terry|
|Davis, Terry (B'ham Hodge H'l)||Loyden, Eddie|
|Dewar, Donald||McAllion, John|
|Dixon, Don||McCartney, Ian|
|Doran, Frank||Macdonald, Calum A.|
|Douglas, Dick||McFall, John|
|Dunnachie, Jimmy||McKay, Allen (Barnsley West)|
|Eadie, Alexander||McKelvey, William|
|Eastham, Ken||McLeish, Henry|
|Edwards, Huw||McMaster, Gordon|
|McNamara, Kevin||Rooney, Terence|
|Madden, Max||Ross, Ernie (Dundee W)|
|Mahon, Mrs Alice||Rowlands, Ted|
|Marek, Dr John||Ruddock, Joan|
|Marshall, David (Shettleston)||Salmond, Alex|
|Marshall, Jim (Leicester S)||Sedgemore, Brian|
|Martin, Michael J. (Springburn)||Sheerman, Barry|
|Martlew, Eric||Sheldon, Rt Hon Robert|
|Maxton, John||Shore, Rt Hon Peter|
|Meacher, Michael||Short, Clare|
|Meale, Alan||Skinner, Dennis|
|Michael, Alan||Smith, Andrew (Oxford E)|
|Michie, Bill (Sheffield Heeley)||Smith, C. (Isl'ton & F'bury)|
|Michie, Mrs Ray (Arg'l & Bute)||Smith, Rt Hon J. (Monk'ds E)|
|Molyneaux, Rt Hon James||Smith, J. P. (Vale of Glam)|
|Morgan, Rhodri||Soley, Clive|
|Morley, Elliot||Spearing, Nigel|
|Morris, Rt Hon A. (W'shawe)||Steinberg, Gerry|
|Morris, Rt Hon J. (Aberavon)||Stott, Roger|
|Mowlam, Marjorie||Strang, Gavin|
|Mullin, Chris||Straw, Jack|
|Murphy, Paul||Taylor, Mrs Ann (Dewsbury)|
|Nellist, Dave||Thompson, Jack (Wansbeck)|
|Oakes, Rt Hon Gordon||Trimble, David|
|O'Brien, William||Turner, Dennis|
|O'Hara, Edward||Wallace, James|
|O'Neill, Martin||Walley, Joan|
|Orme, Rt Hon Stanley||Warden, Gareth (Gower)|
|Parry, Robert||Wareing, Robert N.|
|Patchett, Terry||Watson, Mike (Glasgow, C)|
|Pendry, Tom||Welsh, Michael (Doncaster N)|
|Pike, Peter L.||Williams, Rt Hon Alan|
|Powell, Ray (Ogmore)||Williams, Alan W. (Carm'then)|
|Prescott, John||Wilson, Brian|
|Primarolo, Dawn||Winnick, David|
|Quin, Ms Joyce||Wise, Mrs Audrey|
|Radice, Giles||Worthington, Tony|
|Randall, Stuart||Wray, Jimmy|
|Redmond, Martin||Young, David (Bolton SE)|
|Rees, Rt Hon Merlyn|
|Richardson, Jo||Tellers for the Ayes:|
|Robertson, George||Mr. Frank Haynes and Mr. Thomas McAvoy.|
|Adley, Robert||Braine, Rt Hon Sir Bernard|
|Alison, Rt Hon Michael||Brandon-Bravo, Martin|
|Allason, Rupert||Brazier, Julian|
|Amess, David||Bright, Graham|
|Amos, Alan||Brown, Michael (Brigg & Cl't's)|
|Arbuthnot, James||Browne, John (Winchester)|
|Arnold, Jacques (Gravesham)||Bruce, Ian (Dorset South)|
|Arnold, Sir Thomas||Buck, Sir Antony|
|Ashby, David||Budgen, Nicholas|
|Aspinwall, Jack||Burns, Simon|
|Atkins, Robert||Butcher, John|
|Atkinson, David||Butler, Chris|
|Baker, Rt Hon K. (Mole Valley)||Butterfill, John|
|Baker, Nicholas (Dorset N)||Carlisle, John, (Luton N)|
|Baldry, Tony||Carrington, Matthew|
|Banks, Robert (Harrogate)||Cash, William|
|Batiste, Spencer||Chalker, Rt Hon Mrs Lynda|
|Beaumont-Dark, Anthony||Channon, Rt Hon Paul|
|Bellingham, Henry||Chapman, Sydney|
|Bendall, Vivian||Chope, Christopher|
|Bennett, Nicholas (Pembroke)||Churchill, Mr|
|Benyon, W.||Clark, Dr Michael (Rochtord)|
|Bevan, David Gilroy||Clark, Rt Hon Sir William|
|Blackburn, Dr John G.||Colvin, Michael|
|Blaker, Rt Hon Sir Peter||Conway, Derek|
|Body, Sir Richard||Coombs, Anthony (Wyre F'rest)|
|Bonsor, Sir Nicholas||Coombs, Simon (Swindon)|
|Boscawen, Hon Robert||Cope, Rt Hon Sir John|
|Boswell, Tim||Cormack, Patrick|
|Bottomley, Peter||Couchman, James|
|Bottomley, Mrs Virginia||Cran, James|
|Bowden, Gerald (Dulwich)||Currie, Mrs Edwina|
|Bowis, John||Davis, David (Boothferry)|
|Boyson, Rt Hon Dr Sir Rhodes||Day, Stephen|
|Devlin, Tim||Irvine, Michael|
|Dickens, Geoffrey||Irving, Sir Charles|
|Dicks, Terry||Jack, Michael|
|Dorrell, Stephen||Jackson, Robert|
|Douglas-Hamilton, Lord James||Janman, Tim|
|Dover, Den||Jessel, Toby|
|Durant, Sir Anthony||Johnson Smith, Sir Geoffrey|
|Dykes, Hugh||Jones, Gwilym (Cardiff N)|
|Eggar, Tim||Jones, Robert B (Herts W)|
|Emery, Sir Peter||Jopling, Rt Hon Michael|
|Evans, David (Welwyn Hatf'd)||Kellett-Bowman, Dame Elaine|
|Evennett, David||Kilfedder, James|
|Fairbaim, Sir Nicholas||King, Roger (B'ham N'thfield)|
|Fallon, Michael||Kirkhope, Timothy|
|Farr, Sir John||Knapman, Roger|
|Fenner, Dame Peggy||Knight, Greg (Derby North)|
|Field, Barry (Isle of Wight)||Knight, Dame Jill (Edgbaston)|
|Finsberg, Sir Geoffrey||Knowles, Michael|
|Fishburn, John Dudley||Lang, Rt Hon Ian|
|Fookes, Dame Janet||Latham, Michael|
|Forman, Nigel||Lawrence, Ivan|
|Forsyth, Michael (Stirling)||Lee, John (Pendle)|
|Forth, Eric||Lennox-Boyd, Hon Mark|
|Fowler, Rt Hon Sir Norman||Lester, Jim (Broxtowe)|
|Fox, Sir Marcus||Lloyd, Sir Ian (Havant)|
|Franks, Cecil||Lloyd, Peter (Fareham)|
|Freeman, Roger||Lord, Michael|
|French, Douglas||Luce, Rt Hon Sir Richard|
|Fry, Peter||Lyell, Rt Hon Sir Nicholas|
|Gale, Roger||McCrindle, Sir Robert|
|Gardiner, Sir George||MacGregor, Rt Hon John|
|Garel-Jones, Tristan||MacKay, Andrew (E Berkshire)|
|Gill, Christopher||Maclean, David|
|Gilmour, Rt Hon Sir Ian||McLoughlin, Patrick|
|Glyn, Dr Sir Alan||McNair-Wilson, Sir Michael|
|Goodhart, Sir Philip||McNair-Wilson, Sir Patrick|
|Goodlad, Alastair||Madel, David|
|Goodson-Wickes, Dr Charles||Malins, Humfrey|
|Gorman, Mrs Teresa||Mans, Keith|
|Gorst, John||Maples, John|
|Grant, Sir Anthony (CambsSW)||Marlow, Tony|
|Greenway, Harry (Ealing N)||Marshall, John (Hendon S)|
|Greenway, John (Ryedale)||Marshall, Sir Michael (Arundel)|
|Gregory, Conal||Martin, David (Portsmouth S)|
|Griffiths, Sir Eldon (Bury St E')||Mates, Michael|
|Griffiths, Peter (Portsmouth N)||Maude, Hon Francis|
|Grist, Ian||Mawhinney, Dr Brian|
|Ground, Patrick||Maxwell-Hyslop, Robin|
|Grylls, Michael||Mayhew, Rt Hon Sir Patrick|
|Hague, William||Mellor, Rt Hon David|
|Hamilton, Neil (Tatton)||Meyer, Sir Anthony|
|Hampson, Dr Keith||Miller, Sir Hal|
|Hanley, Jeremy||Mills, lain|
|Hannam, John||Miscampbell, Norman|
|Hargreaves, A. (B'ham H'll Gr')||Mitchell, Andrew (Gedling)|
|Hargreaves, Ken (Hyndburn)||Mitchell, Sir David|
|Harris, David||Moate, Roger|
|Haselhurst, Alan||Monro, Sir Hector|
|Hawkins, Christopher||Montgomery, Sir Fergus|
|Hayes, Jerry||Moore, Rt Hon John|
|Hayhoe, Rt Hon Sir Barney||Morris, M (N'hampton S)|
|Hayward, Robert||Morrison, Sir Charles|
|Heathcoat-Amory, David||Morrison, Rt Hon Sir Peter|
|Hicks, Mrs Maureen (Wolv' NE)||Moss, Malcolm|
|Hicks, Robert (Cornwall SE)||Moynihan, Hon Colin|
|Higgins, Rt Hon Terence L.||Mudd, David|
|Hill, James||Neale, Sir Gerrard|
|Hind, Kenneth||Needham, Richard|
|Hogg, Hon Douglas (Gr'th'm)||Nelson, Anthony|
|Holt, Richard||Neubert, Sir Michael|
|Hordern, Sir Peter||Newton, Rt Hon Tony|
|Howard, Rt Hon Michael||Nicholls, Patrick|
|Howarth, Alan (Strat'd-on-A)||Nicholson, David (Taunton)|
|Howarth, G. (Cannock & B'wd)||Nicholson, Emma (Devon West)|
|Howe, Rt Hon Sir Geoffrey||Norris, Steve|
|Howell, Rt Hon David (G'dford)||Onslow, Rt Hon Cranley|
|Howell, Ralph (North Norfolk)||Oppenheim, Phillip|
|Hughes, Robert G. (Harrow W)||Page, Richard|
|Hunt, Sir John (Ravensbourne)||Paice, James|
|Hunter, Andrew||Patnick, Irvine|
|Patten, Rt Hon Chris (Bath)||Stewart, Allan (Eastwood)|
|Patten, Rt Hon John||Stewart, Andy (Sherwood)|
|Pawsey, James||Stewart, Rt Hon Sir Ian|
|Peacock, Mrs Elizabeth||Sumberg, David|
|Porter, Barry (Wirral S)||Summerson, Hugo|
|Porter, David (Waveney)||Tapsell, Sir Peter|
|Powell, William (Corby)||Taylor, Sir Teddy|
|Price, Sir David||Tebbit, Rt Hon Norman|
|Raffan, Keith||Temple-Morris, Peter|
|Raison, Rt Hon Sir Timothy||Thompson, D. (Calder Valley)|
|Redwood, John||Thompson, Patrick (Norwich N)|
|Renton, Rt Hon Tim||Thorne, Neil|
|Rhodes James, Sir Robert||Thurnham, Peter|
|Riddick, Graham||Townend, John (Bridlington)|
|Ridley, Rt Hon Nicholas||Townsend, Cyril D. (B'heath)|
|Rifkind, Rt Hon Malcolm||Tracey, Richard|
|Roberts, Rt Hon Sir Wyn||Tredinnick, David|
|Rossi, Sir Hugh||Trippier, David|
|Rost, Peter||Trotter, Neville|
|Rowe, Andrew||Twinn, Dr Ian|
|Rumbold, Rt Hon Mrs Angela||Viggers, Peter|
|Ryder, Rt Hon Richard||Wakeham, Rt Hon John|
|Sackville, Hon Tom||Walden, George|
|Sayeed, Jonathan||Walker, Bill (T'side North)|
|Scott, Rt Hon Nicholas||Waller, Gary|
|Shaw, David (Dover)||Walters, Sir Dennis|
|Shaw, Sir Giles (Pudsey)||Ward, John|
|Shaw, Sir Michael (Scarb')||Wardle, Charles (Bexhill)|
|Shelton, Sir William||Watts, John|
|Shephard, Mrs G. (Norfolk SW)||Wells, Bowen|
|Shepherd, Colin (Hereford)||Wheeler, Sir John|
|Shepherd, Richard (Aldridge)||Whitney, Ray|
|Sims, Roger||Widdecombe, Ann|
|Skeet, Sir Trevor||Wiggin, Jerry|
|Smith, Sir Dudley (Warwick)||Wilkinson, John|
|Smith, Tim (Beaconsfield)||Wilshire, David|
|Speed, Keith||Winterton, Mrs Ann|
|Speller, Tony||Winterton, Nicholas|
|Spicer, Sir Jim (Dorset W)||Wolfson, Mark|
|Spicer, Michael (S Worcs)||Wood, Timothy|
|Squire, Robin||Yeo, Tim|
|Stanbrook, Ivor||Younger, Rt Hon George|
|Stanley, Rt Hon Sir John|
|Steen, Anthony||Tellers for the Noes:|
|Stern, Michael||Mr. David Lightbown and Mr. John M. Taylor.|
§ Question accordingly negatived.