HC Deb 22 July 1991 vol 195 cc903-24 1.33 am
Mr. Keith Vaz (Leicester, East)

No one would have anticipated that the closure of a bank would result in riots, disorder, or such anxiety, anguish and public concern as followed the decision that fateful Friday 5 July to close down the Bank of Credit and Commerce International. But this is the stuff of which fictional best sellers are made. We have all heard of the bank that likes to say yes. This is the bank that refuses to die. It is a story straight out of the Arabian Nights—of a bank, a sheikh, a governor, a political crisis and a Prime Minister who claims to have known nothing.

Every day and every hour, there seems to be some development or some new information about BCCI which occupies the top of our political agenda. It has dwarfed all other issues and events. It therefore seems remarkable that the Government refuse to give parliamentary time for a full debate, although we have had two statements, one private notice question and the announcement of a public inquiry as well as debating amendments to the Finance Bill last week. I welcome this debate and I pay tribute to hon. Members on both sides of the House who have helped to form the action committee on BCCI, especially the hon. Member for Nottingham, East (Mr. Knowles).

In the past few days I have had meetings with thousands of depositors and members of staff. They are in a time warp. It is like talking to victims of some terrible disaster. They are worried, perplexed and anxious. Many have lost their life savings, and many will be ruined. The reputations of some business people with even the most tenous connections have been put at risk. For the staff —12,000 of them worldwide—the situation is bleak indeed. They have lost jobs and deposits and they are at risk in the employment market because they have to some extent been ridiculed for working for an organisation that has been so bitterly attacked.

Those who have acted improperly ought to be brought to justice, but there have been no arrests or detentions and no prosecutions. We should like to know when they will start.

What action is being taken to support initiatives to help members of staff to keep their jobs? What arrangements can be made to help members of staff to clear their names? It would be ungracious not to welcome the establishment of the committee of inquiry announced by the Chancellor on Friday, but will the Minister explain why the Governor of the Bank of England told Members at 8 pm on Thursday that he did not favour an inquiry as it was not in the interests of depositors or the liquidator, but by Friday lunchtime had changed his mind? What persuaded him to do that?

Did the Governor meet the Chancellor before the two occasions that I have mentioned? The Prime Minister today announced the chairman of the team of inquiry, Lord Justice Bingham. Will the Minister confirm that the commission of inquiry will have full judicial authority, including the right to subpoena and examine all accounts and transactions of all BCCI banks and related activities throughout the world? The commission should also have full access to all information from Ministries, Depts and regulatory authorities, and the right to decide issues of compensation, the period for compensation, and any appeal procedures.

Will the Minister accept that the commission's main responsibility will be to undertake a thorough examination of all the events leading to the Bank of England's decision to close down the BCCI's operations and to assess whether the Bank of England examined all possible options to contain the situation? Will the commission of inquiry undertake an analysis of the economic and social consequences of BCCI's closure both in the United Kingdom and throughout the world? Will it be able to propose essential reforms, including reforms of the Bank of England and the other authorities? Will it be able clearly to identify the criminal and civil responsibilities of all concerned, including the auditors? Finally, will the commission be able to give us an interim report so that any findings can be the subject of parliamentary debate or legislation?

I pay tribute to the frankness of the Governor of the Bank of England, who I believe will eventually become the unfortunate scapegoat for the whole problem. In the two meetings that he has held with hon. Members, on Wednesday 10 July and on Thursday 18 July, to which he readily agreed and at which he was unfailingly courteous and frank, he gave us details and answered questions about events. However, if there has been a failure to regulate, no matter how nice and courteous the Governor may be, he must take full responsibility. He knew the seriousness of the situation. That is why he went to Downing street on 28 June to give the news of the proposed closure. We are entitled to know whether the bank, as the watchdog, had carried out its duty adequately —not whether it acted too early or too late, but whether it acted properly. The same considerations apply to Ministers.

The Bank of England has certain statutory responsibilities, and while the rest of us can raise rumours and other points of concern, the bank has the power to act. For example, did the Governor know about BCCI's alleged terrorist links? What action was taken after the two Price Waterhouse reports in March and October 1990? We know from our meeting with the deputy Governor on 10 July that 10 special reports were commissioned by the Bank of England, ending with the report of 25 June.

Does the Minister unequivocally endorse the role of the Bank of England? Is there nothing that it did or failed to do which causes the Government concern? The Chancellor said in his statement on Friday: I have no reason to doubt that the Bank acted properly and promptly in the best interests of the depositors."— [Official Report, 19 July, 1991; Vol. 195, c. 716.] Does the Minister agree?

It is also important to know when Ministers and Treasury officials knew, and what action was taken. Last year, in a debate in another place, the noble Lord Henley said: Treasury officials have been in touch with the Bank of England to emphasise to it the degree of public concern about the case, not least that expressed by noble Lords, and to ask it to take full account of the concern in its continued supervision of BCCI. The Bank of England has confirmed that it is doing this and will continue to do so."—[Official Report, House of Lords, 23 April 1990; Vol. 518, c. 421.] What action did the Treasury take to ensure that the situation was being monitored? When the Price Waterhouse report was received in October 1990, the Governor told us that it did not contain any fraud or anything to warrant the action now being taken. Does the Minister agree?

Yesterday in the House, there was an exchange between my right hon. Friend the Leader of the Opposition and the Prime Minister. On Thursday, I chaired two cross-party meetings. At the meeting with the Governor of the Bank of England, the Governor clearly stated when pressed by two colleagues that he always kept the Chancellor of the Exchequer fully informed of all major developments. He said that it was his job to do so, but that he could not divulge the nature of the conversations.

That course of action was confirmed in a written reply to me this evening from the Minister. I asked the Chancellor to list the dates on which we had discussed the trading position or other matters relating to BCCI with the Governor of the Bank of England in the past two years. The Minister replied that the Chancellor had discussed a number of supervisory cases, including BCCI, with the Governors of the Bank of England on a number of occasions since becoming Chancellor, but was not aware until 26 June that fraud had been uncovered.

Clearly the then Chancellor, now the Prime Minister, had similar meetings with the Governor. It is inconceivable that the Prime Minister was not informed of the circumstances of BCCI. BCCI was going through the most important development of the time, which resulted in the resignation of the president and chief executive of the bank, and a major reconstruction of the bank was taking place. At that time of hostilities in the Gulf, the Chancellor would have wanted to have that information and to act on it in defence of the leader of a friendly Gulf state. The Prime Minister must return to the House and make a statement about his true knowledge of events. He cannot keep hiding behind the old lady's skirts.

I accept that the Prime Minister did not know about the fraud until 28 June, but he has been reticent about telling the House what else he knew. The final report from Price Waterhouse arrived on 25 June. By 26 June, the gist of the report had been given to a Treasury official, John Geeve. On 28 June, a special meeting was held at Downing street, which was attended by both the Prime Minister and the Chancellor, and both were informed of what was to be done. There is then an extraordinary seven-day gap, in which there was no political or diplomatic initiative.

It is beyond belief that the Prime Minister, who a few months ago had been fighting on the same side as the sheikh, could not even pick up a telephone or send an official to visit the sheikh to see what could be done to save the bank. That crucial gap, that seven-day silence, has still not been explained. Both the Prime Minister and the Chancellor must have known the consequences, both financial and political, of that gap. They had a duty to act. The shiekh makes it clear that, had he been asked, he would have provided financial support to save the bank, but no approach was made.

Mr. Tim Smith (Beaconsfield)

Listening to the hon. Gentleman, anyone would think that the head office of BCCI was regulated by the Bank of England. It was not —it was regulated by the Luxembourg authorities. As we know, the bank operated in a large number of different countries. Is not the reason why there was some delay once the Bank of England had decided to act in the United Kingdom the fact that it had to communicate with all the regulators so as to ensure that there was concerted action throughout the world?

Mr. Vaz

As the hon. Gentleman will find out from my speech, negotiations were taking place and the College of Regulators was already fully informed of what was being proposed.

BCCI Holdings is a member of a substantial group of companies which carried on a banking business in over 60 countries, where it had more than 1.25 million depositors and approximately 12,000 staff. his Highness Sheikh Zayed bin Sultan an-Nahayan has always maintained that he was more than prepared to co-operate with any scheme and any initiative by the Bank of England to maintain BCCI. Can the Minister confirm that he has no information which casts any doubt on that statement? Last Thursday, the sheikh went to the trouble of taking out full-page advertisements in national newspapers citing his outrage at what had happened. The statement speaks of his shock at the abrupt action taken by the Bank of England, without any consultation with either the shareholders or the central bank of the United Arab Emirates.

The sheikh, as the majority shareholder, was well aware of the troubles in the bank, and he tried to implement new measures. Their implementation involved close cooperation and consultation with the Bank of England and other members of the College of Regulators. As the investigations were pursued, further losses and certain irregularities were uncovered. These were reported on a regular basis to the College of Regulators to keep it informed of the developing situation.

In the light of those discoveries, Price Waterhouse was instructed by the sheikh to prepare a refinancing and restructuring plan designed to reorganise the group on a sound footing. A first draft of this plan was presented to the College of Regulators in October 1990. Members of the college, and the Bank of England, made it clear that they welcomed and were willing to co-operate fully in implementing the proposals for restructuring on the basis that this would best safeguard the interests of the group, depositors, shareholders and staff, and avoid the other alternative. The other alternative was liquidation, which, it was recognised by all concerned, would have catastrophic effects, given the size and extent of the group's liabilities.

In a letter to the department of finance dated 11 April 1991, the Bank of England stated: The college did form the view that the proposed overall framework of the new structure appears to acceptable basis for restructuring … All the relevant supervisors stand ready to engage in the necessary dialogue in the near future. On 5 July 1991, the latest in a long series of meetings was due to take place between representatives from the Bank of England, the Luxembourg monetary Institute and the majority shareholders so that the finalised restructuring plan could be presented to the majority shareholders. A new chief executive, Mr. Kingshott, had been appointed, and a new name—the Commercial Bank of Europe—had been found, but that plan came to an abrupt end on 5 July as a result of the Bank of England's decision.

As the House knows, this morning's High Court hearing was adjourned. I attended the hearing, and was amused to see that the judge was having as much difficulty as some of the lawyers in following this complex case. I strongly believe that it is not impossible to save the bank, or at least to protect the depositors and staff. The adjournment has provided ample opportunity for consideration as to whether something can be done to ameliorate the situation.

It is disgraceful that a rush to wind up the bank should prevent a possible rescue of parts of the group by the sheikh. I understand—I should be grateful if the Minister would confirm that it is his understanding, too—that on Saturday the Abu Dhabi-based BCC (Emirates) conditionally approved a takeover of BCCI's three branches in Pakistan. It is possible that attempts are being made to construct a new regional bank out of the remains of BCCI.

Even now, at the eleventh hour, it would be possible to arrive at a formula to help the depositors, investors and staff. The answer may well be a freezing of the bank's assets and the payment of interest with the long-term aim of creating a new bank, allowing those who wish to take the statutory compenstion to do so. To achieve that, the Governor of the Bank of England must continue his dialogue with the Sheikh of Abu Dhabi, and the Bank of England must show a willingness to do that. Will the Minister confirm that the Government would support such an initiative?

There are reports that British exporters are in danger of losing at least £2 billion as a result of the closure, and that some of those firms may themselves close. What action does the Minister propose to take to assist them? Clearly, the plan presented on 5 July—which had taken many months to develop—is wholly inapplicable, due to the Bank's action.. If the group, or any of its constituent elements—including BCCI—is to avoid liquidation, an alternative plan must now be developed by the sheikh, in conjunction with the commissioner appointed by the Luxembourg court, Mr. Smouha, and the Bank of England.

Is the Minister aware that, in the past 10 days, a number of meetings have been held by Mr. Smouha and those representing the sheikh? Those meetings have involved constructive discussions intended to explore whether there is any alternative to liquidation. The adjournment of the case in the High Court allows the sheikh to conduct a review, and to enable the discussions to continue, with a view to establishing whether there is any viable means of preserving the value of the group for the benefit of all interested parties—depositors, employees and shareholders. The possibility of a viable alternative to liquidation is, in the sheikh's view, a real one.

The majority shareholders have already taken active steps to secure that objective, and apparently wish to continue to do so for as long as may be necessary. If, however, the court ordered that BCCI be wound up, the majority shareholders would have no continuing interest in rescuing that element of the group. The negotiations and discussions are continuing at the highest level. Is the Minister aware of those discussions, and does he support them?

Did the Minister know that a meeting had taken place in Abu Dhabi on Tuesday 16 July 1991—attended by Mr. Jaans, the director-general of the Luxembourg Monetary Institute, the Governor of the Bank of England, Mr. Leigh-Pemberton, and Brian Quinn, the director of finance, together with the ambassador to the United Arab Emirates? Mr. Jaans referred to the six-month period that Mr. Smouche had been given by the Luxembourg court to do what he described as a thorough stocktaking intended to enable him to tell the court whether a reconstruction of BCCI should be attempted.

Mr. Jaans stated expressly that he regarded the stocktaking operation as being necessary to establish the true position of BCCI and that it must be completed before a solution could be found. Will the Economic Secretary confirm what he said to me earlier—that if there were any means by which a reconstructed group could be viable, by removing those who have committed the fraud and bringing them to justice, the Government would support it? Is he aware that there are only eight days in which to do so?

As the Economic Secretary knows, the issue was raised earlier in the House. Serious allegations have been made in some main newspapers about alleged terrorist links with the bank. Will the Economic Secretary comment on those allegations and tell us whether the security services have indeed informed Ministers? Has the matter been reported to the Cabinet's joint intelligence committee? I understand that the British security services first warned the Bank of England over a year ago of terrorist links and of accounts used by terrorists, including Abu Nidal. It is important that Ministers should take early opportunities either to confirm or to deny those rumours.

Did the security services tell the Prime Minister? If so, the Prime Minister had two different channels of communication—first from officials from the Bank of England, in his position as Chancellor of the Exchequer, and secondly, from the security services in his position as the Prime Minister.

I wish to refer finally to two points. The first is the position of local authorities. My hon. Friend will speak later, if he catches your eye, Madam Deputy Speaker, about local authorities, which have been severely affected. They invested their money on the basis of an authorised list provided by the Bank of England and with the approval of the Department of the Environment. When we met the Governor on Wednesday 10 July he said that the list was not a guaranteed list. Both my colleagues and I disagreed. A list from an authoritative body such as the Bank of England must be assumed to be authoritative. Unless it carries an exemption notice, there is, in my mind, no question that it cannot be acted upon. Can the Economic Secretary confirm what action has been taken by the Government to ensure that the list has been checked and that all the listed insitutions are sound? What compensation is he proposing to offer to local authorities?

Depositors—the Economic Secretary was pressed about this on 8 July when he made his first statement to the House—must be given an assurance that the amount being offered by the Deposit Protection Board will be increased from the present level of £15,000. The average portfolio of investors in this bank is £15,000. They cannot possibly be expected to accept less than that. The Government must consider increasing that figure. If they cannot do so out of their own funds, they must pay even more attention to the initiatives currently being undertaken by the sheikh and others so as to ensure that they succeed.

This has been a fiasco which has degenerated into a shambles. The pivotal role of the Prime Minister and the Governor of the Bank of England needs to be carefully examined. I welcome the Treasury and Civil Service Select Committee inquiry. I hope that the Committee will invite the Prime Minister and the Chancellor of the Exchequer to give evidence. The Prime Minister had the audacity in the House this afternoon to accuse my right hon. Friend the Leader of the Opposition of muckraking. How can raising the hardship and misery of individuals and others, and the possible failure to act properly, be regarded as muckraking? In my view, the Prime Minister ought to apologise to those whom he has insulted.

In a democracy, we demand the right to know the truth. The depositors, the investors, the staff—indeed, the whole country—want to know the truth. Those in high office who have breached their duty of care should consider their position in the light of the revelations of the past few days. This astonishing banking scandal will live to haunt the present Administration and taint the reputation of the Bank of England for years to come. Even at this late stage, I hope that the Government will act.

1.58 am
Mr. Michael Knowles (Nottingham, East)

I thank the hon. Member for Leicester, East (Mr. Vaz) for the kind words that he said about me. We started together on the scheme in the somewhat vain and naive hope that, in an election year, BCCI could be kept out of the party political bull ring. Inevitably, it was bound to be dragged in.

Bank failures in the United Kingdom are rare compared with countries such as the United States, where banks go to the wall not every day of the week but reasonably frequently. In the United Kingdom, such failures tend to be rare because of the Bank of England system, which has been very effective. With the more open international banking system, which has grown and I suspect will continue to do so, BCCI could happen again —and all too easily.

Mr. Quentin Davies (Stamford and Spalding)

Will my hon. Friend acknowledge that there are two salient points to this affair? The first is that BCCI was not registered in this country, so the prime regulatory authority was not based in this country. Secondly, bank regulation is not for the Government but for the Bank of England. That has always been true, and presumably would be if, God forbid, we had a Labour Government.

Mr. Knowles

That is right. The Bank of England is not an independent central bank like those in Germany and the United States. In the Banking Act 1987, the House deliberately give it great powers of independence. The alternative is for the Chancellor to look after it, but I am sure that no Chancellor would like to do that.

As far as I am aware, no hon. Member has had the opportunity to read the auditors' full 800-page report. In the Governor's opinion, that report of 26 June left the Bank of England with no choice but to move immediately. It revealed not inefficiency or poor management but fraud on a massive scale. The phrase used was "a bank within a bank".

The Bank of England has been subject to similar criticism in the past. The Johnson Matthey case showed that the Bank of England will lean over backwards to save a bank if it is humanly possible. However, the Bank of England believed that nothing could be done to save BCCI. It may have been right or wrong, and that will be tested in the courts in eight days' time and certainly in the investigation, but the fact that it had to act is irrefutable, because that responsibility is laid on it.

Did the House get it right in not only the 1987 Act but the Banking Act 1981? I suspect that the answer to that will emerge in the report.

With the internationalisation of banking, and given the amount of money in that system, the problem will be how a single nation state polices an international bank such as BCCI. We could tighten the 1987 Act and the Bank of England could close any institution not on proof of fraud or any wrongdoing but on suspicion alone. Is anyone going to argue for that power to be given to the Bank of England? That might also have an effect on the operation of the City of London. There might suddenly be a massive growth in Frankfurt and Paris as international centres.

Pre-1987 and in the old days, the Bank of England worked very much on an old boy network. We moved away from that as we saw a changing international environment. We wanted to move the Bank more towards having to work on a basis of law and of being able to prove its suspicions rather than having a quiet word in somebody's ear. That means that situations like the present one can occur. One cannot have the best of all systems; one will always have to make hard choices. We made choices when we passed the 1987 Act.

Can BCCI be rescued? As the hon. Member for Leicester, East said, there are eight days in which to decide that. Who can rescue it? There would seem to be only one man—his excellency the Sheik. How much will it cost? No one knows, because no one has yet been able to quantify the amount that has been extracted fraudulently from the bank. We have no idea what funds are left in it. The amount could be anything up to the book value of £20 billion, which is a horrendous sum.

Should the Bank of England have acted sooner? Some argue not that it has acted precipitately, but that it left it too long. I suspect not, because the Bank hoped to have some proof on which to operate. The gap from 28 June to 5 July does not seem unreasonable.

There had to be consultations with Luxembourg, where the bank is domiciled. When the Luxembourg authorities had agreed that action had to be taken, it then had to be agreed with all the other regulators and central banks around the globe, and they all had to move together. I remember it being explained clearly at one meeting that, if one loophole had been left, funds would have flowed out of the bank so fast that nothing but an empty shell would have been left. The whole point was to try to save at least some of the investors' money.

The hon. Member for Leicester, East mentioned local authorities and investors. No lists are issued by the Bank of England with hard guarantees. No Government could give a guarantee to anyone investing on a market anywhere that he will be totally safe. If somebody offered someone else a gold brick for 50p, he would do well to investigate it and look at it closely. The same applies if someone offers 2 per cent. or 3 per cent. more interest. Why is he doing that? How is he able to do that? The responsibility lies with all of us individually when we invest our money. It is still a matter of caveat emptor—the buyer has to beware. No one can or will give a guarantee.

I feel more sorry for the small investor who gets taken in by a fraud. I have less sympathy with professional investors and with borough treasurers, who are paid substantial sums to know their way around. If we could do something to help the smaller investor, I would be sympathetic. Some councils seem to have been trying to play the money market and have got their fingers burnt.

Mr. Alex Carlile (Montgomery)

Of all parties.

Mr. Knowles

Of all parties. This is not a party political point. I have a fairly hard heart towards such councils, and that is probably true of most hon. Members. There will be a lot of lessons for a lot of people to learn from this, not least all hon. Members who have passed the Banking Acts. In many cases, they were bipartisan Acts which had been in the treadmill of legislation for many years. We may have got it right, but we may have got it wrong. Before we start trying to pass the buck to other people, we must look carefully at what we did right and wrong in the first place.

2.9 am

Mr. Ian McCartney (Makerfield)

I know that other hon. Members want to speak, so I shall make a relatively short speech. Many hon. Members present tonight have taken part in all, or almost all, the meetings that have been held so far with the Treasury and the Bank of England.

I shall deal with the issue of local authorities. Local authorities, whatever their political persuasion, are concerned at the interpretation, after the event., being placed by the Department of the Environment and the Treasury on the list issued by the Bank of England. Discussions between the Bank of England, the Treasury and the local authority associations were held in mid-May. Therefore, one can well understand why local authorities feel extremely aggrieved about the reinterpretation of events now offered by the Treasury and the Bank of England.

I should like to bring to the attention of the House a Press Association report issued earlier this evening. It records the disturbing claim by Sky News that it has documentary evidence to suggest that Abu Nidal was ferried between BCCI branches in London by the police, with the full knowledge of MI5, to oversee his accounts. That operation was allowed so as to ensure that MI5 had close contact with the terrorist to enable it to monitor his activities and that of his organisation. We should remember that this is the terrorist who planned and caused the destruction of the Pan Am aircraft over Lockerbie.

That allegation has not been made by a politician or an organisation known to be sympathetic to the Labour movement. We are talking about an organisation owned and controlled by Murdoch and his associates. According to the information from Sky, it is clear that the manager of the BCCI branch in north London provided information to the police and MI5 about the amount of money deposited on behalf of the terrorist in both of his accounts. He says that he gave information to MI5 about the activities of the bank in relation to that terrorist organisation.

According to the allegations, MI5 revealed the information to the Bank of England which set up an inquiry into Nidal's accounts in London code-named Project Q—Q for Qassem, the name of the Jordanian manager of the London branch.

Given the type of information that has filtered out, one can understand why the Opposition and the people cannot believe that the Prime Minister's sole knowledge of the events commenced on the morning of 28 June when he met the Governor of the Bank of England at Downing Street to discuss the latest Price Waterhouse report. That is inconceivable. In October 1990, the Governor reported to the then Chancellor, the present Prime Minister, on the Price Waterhouse inquiries. Since then, he has kept the Prime Minister and the current Chancellor abreast of events.

My local authority has so far lost £2.1 million, plus interest to the value of almost £26,000. My authority has banked on and off with BCCI since the early 1980s. At one stage, it withdrew its reserves from the bank following an investigation in the United States. Money was replaced in the bank following discussions and assurances from the authority's advisers, the brokers R. P. Martin, and from others in the City. One of the decisions we should reach as a result of this case is whether brokers should be regulated far more strictly.

The Treasury and the Bank of England should at least support those local authorities. Organisations such as R. P. Martin should immediately provide their accounts to show all transactions between the local authorities and the bank. That would clarify, once and for all, whether R. P. Martin and other brokers received preferential treatment and, in the process, failed to carry out their duties on behalf of their clients, the local authority associations. It is vital to the brokers' organisations in the City that that happens urgently.

Last week, my local authority asked R. P. Martin, verbally and in writing, for that information. I understand that it has failed to respond to the request for information. Will the Minister respond by saying whether the bank will put pressure on brokers to ensure that such information is made available at the earliest opportunity?

The Minister may also like to comment on the fact that, at 10 am on 5 July, in the normal course of events, my local authority sought to transfer its overnight deposit from BCCI to National Westminster Bank. BCCI acknowledged that request at 10 am, and at 12 noon it notified the local authority that the Bank of England had stepped in and was preventing the transfer of the funds to the appropriate account at NatWest.

Why, three hours before the bank was closed, was a transaction that BCCI had agreed to make to one of the clearing banks intercepted by the Bank of England? Because of the Bank of England's action, my authority lost over £2 million. Was that step taken to prevent haemorrhages of funds from other institutions, or was it a direct attempt to ensure that local authorities and other lenders did not have the opportunity to withdraw substantial sums of money which could be used at a later date by the liquidator? The Minister should make a commitment to provide a public answer to that question.

In the meeting between the Chancellor of the Exchequer and the Governor of the Bank of England, I raised—as did other hon. Members—the subject of the list that the Bank of England issued to local authorities. I do not have time to discuss whether that list carried a risk. If I accept the argument that it did, why did Treasury and Bank of England officials at the Committee on Local Authority Borrowing, which met on 10 May in the Treasury under the chairmanship of the adviser to the current Chancellor of the Exchequer, go out of their way to make it clear to the local authorities that there were no problems with the secondary banking system?

Indeed, Mr. Beverly, representing the Bank of England, said that local authorities would have to take into account the risk of overreacting and moving funds unnecessary and at some expense. That statement was not made in isolation. It was a direct attempt by the Bank of England to put off inquiring local authority treasurers who were voicing concern about the problems of the secondary banking system at that time.

Given the consequences of the two smaller banks, on 13 May—

Mr. Tim Smith

Will the hon. Gentleman give way?

Mr. McCartney

No, the hon. Gentleman can make his own contribution. If he cannot do so, it is tough luck—at the top.

Mr. Smith

Why does not the hon. Gentleman read from paragraph 11 of the minutes of the meeting?

Mr. McCartney

I would read the whole minute if I had time. From the discussions in paragraphs 10, 11 and 12, it was clear that local authority representatives had become concerned that there was no guarantee about the list. They therefore said that it would be reasonable for them to withdraw the funding from the secondary banking system. In paragraph 13, the Bank of England representatives went out of their way to show that that was not the best course of action for them to take at that time.

That minute was subsequently followed by a letter on behalf of the local authorities from those represented at the meeting. The letter asked the Bank to confirm that it had been given the assurance that there was no systemic problem with the secondary banking system and to confirm the confidence shown by the Bank of England at the meeting of 10 May. The Bank of England did not respond to that inquiry to deny confirmation that there was no substantial problem lurking round the corner for the local authorities that were investing in the secondary banking system.

However, we know from the information that came to light that that was not so. The Bank of England was well aware that it would take action within days, if not weeks, to close down the bank. We can well understand why local authorities feel aggrieved that they were taken for a ride by the Bank of England and the Treasury, which failed to take them into their confidence when the issue was raised on 10 May by those representing local authorities at the meeting at the Treasury.

Irrespective of what anyone believes about local authorities' role in the affair, one fact is clear—local authorities of all political persuasions have become involved. All took the same view about investing in the bank. They all took the same advice, and came to the conclusion that, having made the best inquiries that they could, their investments were safe.

Local authorities will survive the affair, but that is not true of the tens of thousands of small depositors in this country. Therefore, it is vital that we ensure that, if it is clear that the Treasury failed to recognise the signs as soon as it should have done, and that the Bank of England failed to act to defend depositors, the Government should admit that mistake and allow compensation to be paid.

Mr. D. N. Campbell-Savours (Workington)

I think that I know what the hon. Member for Beaconsfield (Mr. Smith) was trying to say about paragraph 11 when he attempted to intervene in my hon. Friend's speech. However, I do not think that he heard my hon. Friend's comments. At the meeting, assurances were given about the secondary banking sector and, having heard them, treasurers believed that they were safe in making investments. Therefore, paragraph 11 does not relate to the issue to which my hon. Friend alluded—

Mr. Deputy Speaker (Mr Harold Walker)

Order. I am not sure whether the hon. Member for Workington (Mr. Campbell-Savours) is intervening in the speech of the hon. Member for Makerfield (Mr McCartney) or in a hypothetical intervention that I did not hear.

Mr. McCartney

Either way, my hon. Friend the Member for Workington (Mr Campbell-Savours) made a telling intervention. My hon. Friend is always able to provide information to the House that is helpful in clarifying the confusion surrounding this issue—which is more than can be said about the various statements that have been made by Ministers to the House.

During the past few weeks, we have seen a pass-the-parcel Government. The parcel has passed between the Department of Trade and Industry, the Department of Employment, the Treasury and the Bank of England—and back again. During the past 18 months or so, millions of pounds have been sifted out of that parcel. A decision was eventually taken on 28 June which changed for the worse the livelihoods of many people in this country and worldwide, probably for the rest of their lives.

The lesson that should be learned from the debacle is that we must ensure that nothing similar happens again. We must ensure that we have international arrangements so that small countries such as Luxembourg cannot hide behind inefficient regulations that allow funds to flow into that country that affect the international banking system. We must also devise a warning system, so that not only local authorities but others can invest with confidence in the secondary banking system—otherwise, it will be deprived of many millions of pounds of resources, which are important to its continuing good health in the British economy.

I hope that the Minister will take on board not only the points made in the debate but over the past few days and weeks. Unless he does, we will be back debating the collapse of another bank, and the problems that that creates not only for local authorities but for tens of thousands of our constituents.

Several Hon. Members

rose—

Mr. Deputy Speaker

Order. May I ask for very brief speeches? Mr. Burt.

2.25 am
Mr. Alistair Burt (Bury, North)

I will be as brief as I can, Mr. Deputy Speaker. It is clear that the BCCI affair has many levels. I am grateful to the hon. Member for Leicester, East (Mr. Vaz) for reminding the House that the real villains are those who are allegedly guilty of fraud. We are running around chasing everyone else, but we should be chasing those primarily involved in the fraud—and they should be brought to justice as soon as possible.

There are many questions to be asked at the highest level of both the Bank of England and the Treasury concerning the time scale of knowledge held by each. As a Member of Parliament whose constituents have lost £6.5 million via the local authority's investment in BCCI, quite apart from the losses of individual investors, I recognise the need for, and welcome unreservedly, the inquiry—and the remarkably free range of it indicated by my right hon. Friend the Prime Minister in his statement. He clearly contemplates that no holds will be barred, and putting himself forward if required to do so. Only the most churlish person can fail to recognise the integrity of such an offer.

As to the casualties of the affair, I will concentrate—as did the hon. Member for Makerfield (Mr. McCartney) —on one group of investors, in the form of local authorities. The BCCI scandal has made more open than ever before the complex nature of local authority financial transactions. After the public difficulties concerning, recent interest rate swaps that led to court cases, several councils lost significant sums of money through that particular choice of investment.

The inquiry will, rightly, examine the role of the Bank of England and the Treasury in the BCCI affair, but I hope, for the sake of millions of taxpayers throughout the country, that local authority finance systems will also come under scrutiny. I stress that I am in no way prejudging the issue, or impugning the integrity of any local authority officers. I merely want to make it clear that many people whose local authorities have lost money are asking pertinent questions. The most pertinent among them is, "Why us? Why did other authorities choose not to invest as ours did?"

It is incumbent on all public officials to seek answers to such questions. What standing orders govern the making of local authority financial transactions and their reporting to meetings of their full councils or council committees—and are they adequate? In the case of Bury borough council, an officer is empowered to deal, under delegated authority, with day-to-day investment decisions —and that is quite right. I cannot see that arrangement changing, and nor should it. However, the council's standing orders do not subsequently require a full report detailing, among other things, the name of the bank with which a deposit has been placed.

Mr. Campbell-Savours

The same is true of all local authorities.

Mr. Burt

I accept the hon. Gentleman's assertion—he makes my point for me.

In Bury's case, an investment of £6.5 million was made for five years, from April 1988, renewable on six-monthly instalments—the last being in April 1991. Although the terms were reported in confidence to the council's finance sub-committee, the name of the bank in which that money was invested was not revealed—nor was it required to be. I cannot help but feel that such deposits should be reported in full. If that were done, at least all councillors would know of the details of an investment, and any who came to believe that there might be something untoward about the bank concerned could make further inquiries. That could not be done in the case of Bury—and I suspect that the same is true of many other councils.

The hon. Member for Makerfield asked what rules govern the relationships between local authorities investing public money and the investment brokers. Is it wise to take advice "for free"? It is emerging that certain investment brokers who advised councils were allegedly on commission from BCCI of up to four times the norm. Was that known to local authorities? Did they ask? Should they not be compelled to seek independent untied financial advice, or at least know in detail and make public the commission arrangements of those who advise them?

Exactly what information was available and circulated among local authorities from 1988 onwards? Why did some authorities resist the pressures to invest with BCCI? Why did some—notably and incredibly, Lambeth—withdraw investments already made while others did not? If all local authorities looked to the famous Bank of England and Department of the Environment lists as gospel, many other authorities would have been caught out. They were not, and we should all know why.

I submit that the questions that I have asked are appropriate for all local authorities, because I suspect that Bury's action was pretty standard. It is proper to pursue such inquiries, bearing in mind the fact that the public in the authorities concerned cannot easily be expected to put the loss of millions of pounds down to experience. Whatever comes out of the inquiries that involves the Bank of England, some authorities—I accept, not all—would still have been caught out, having invested some time ago. Had the Bank of England been in a position to close down BCCI earlier, such authorities would have lost their moneys a few years before they did. For them, therefore, my set of questions about their predicament is easily as relevant as any other set of questions that has been directed to the Government and the Treasury inquiry.

Whatever may have been the cause of the losses to local taxpayers, I hope that they will not have to pay too high a price for the actions of others. My hon. Friend the Member for Bury, South (Mr. Sumberg) and I support the efforts that are being made by authorities to persuade the Government to spread the repayment of the debts over as long a period as possible, to reduce the impact year by year on local taxpayers.

None of us wants to see BCCI-type collapses affect public authorities in future. Only by asking the right questions and seeking the right answers will some good come from the collapse. Only in that way will a similar situation be avoided for local taxpayers of the future—who deserve no less.

2.32 am
Mr. Paul Boateng (Brent, South)

The appointment of Lord Justice Bingham to head a committee of inquiry into this sorry and unhappy affair is a welcome one.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

On a point of order, Mr. Deputy Speaker. In a short debate, is it right that the summings up should continue for half an hour? This is meant to be a private Members' day.

Mr. Deputy Speaker

It is the convention that, when a Front Bench spokesman seeks to catch the eye of the occupant of the Chair, preference is given to him. I hope that the hon. Member for Brent, South (Mr. Boateng), who is speaking from the Opposition Front Bench, will not take up so much time that no other Back Bench Member will be able to contribute to the debate. I hope that other Back Bench Members will be able to take part in the debate before the time limit expires.

Mr. Boateng

The appointment of Lord Justice Bingham to head an inquiry into this sorry and unhappy affair is a welcome one. It is, however, a matter of regret that the Opposition's call for an inquiry was not met sooner. It is also a sad and sorry affair that there is about the inquiry, and the Government's surprising reticence in relation to its terms of reference, suspicion on our part —indeed, more than suspicion—that we are about to see created a smokescreen behind which the Government intend to play a game of pass the ministerial parcel.

Mr. Beaumont-Dark

Rubbish.

Mr. Boateng

I wish that the hon. Gentleman would refrain from making comments of that nature from a sedentary position. He will have time to make his own speech.

There is concern on our part that we shall see the creation of a smokescreen behind which there will be played a game of pass the ministerial parcel, and that the Government will use that as a cover for inactivity on matters that it is possible for them to take action on now.

I raise one such matter immediately with the Economic Secretary because he is aware that it has been raised with the Government on several occasions since the BCCI affair came to light. It relates to the role of auditors and whether there should be a duty, not merely a right, placed on auditors to report to the regulating authority—the Bank of England—when they have a suspicion of irregularities, dishonesty or fraud. That is a reasonable demand, but it has been consistently resisted by Ministers. Will the Minister now say that he does not intend to continue to resist that modest request, and that he will not allow the appointment of a commission of inquiry to be the cause of delay in that matter?

Will the Minister confirm that the inquiry can consider the following questions? Do current regulatory procedures concerning both sound banking practice and fraud provide adequate protection for the consumer? Should there be an independent supervisory body for the banking industry? Should banks have a statutory responsibility to insure customer deposits? Should this country propose amendments to the European Community first banking directive to establish more effective supervision within the single market? Finally—this relates to a matter that I raised with the Minister earlier—will the inquiry consider the role played by the BCCI auditors in the light of their responsibility to present a true and fair view of the company's accounts, and what changes should be made in that regard?

Those are five simple matters, and we seek an assurance that the inquiry can take them on board within its remit. If it does not have a sufficiently wide-ranging brief, and if it is not equipped with the power not just to summon Ministers and civil servants but to sub poena others who do not fall within either category, we must wonder whether the inquiry can adequately do the work that I imagine the whole House wants it to do.

It is important to ensure that there is a clear sign, at the earliest possible stage, of exactly what Ministers knew and when they first knew it. There is a concern not only about when the Treasury and the Chancellor knew the facts—either the present Chancellor or, importantly and significantly, the former Chancellor, now the Prime Minister—but about the role of the Department of Trade and Industry. As the responsible body with regard to the Investment Management Regulatory Organisation, was the DTI aware of the concerns of that body about the approval of BCCI's application?

If the DTI was aware of those concerns, of the failure of IMRO to register BCCI for its purposes, and of its reservations about the people operating the investment management division within BCCI, why was that not considered sufficient warning as to the probity of the bank and the fitness of those who managed it? Should not that have sparked warning lights at the Treasury and the Bank of England? There is more than a suspicion that there was a breakdown in communications between Government Departments, which of itself could only have put depositers and the general public still further at risk.

There is no reason why there should not be—and I should like an assurance that there will be—an interim report produced by Lord Justice Bingham. That would allay the very real concerns about the potential for delay and for removal of material from the public domain which should be in it as quickly as possible. We do not want the report merely to be promised tomorrow and tomorrow and tomorrow.

There is a question which I am sure the Minister appreciates is important to those within and outside the house who witness our proceedings. What can be done in the interim for the deposit holders and the staff? What is the current status of the practical steps promised by the liquidators and the Bank of England to ameliorate the plight of those people in so far as that is possible? Many small business people want an assurance that their needs and worries will not be ignored in the inquiry. The hard-pressed staff of BCCI await some reassurance, in so far as it can be given, by the liquidators and the Bank of England. We hope that it will soon be forthcoming.

Several Hon. Members

rose—

Mr. Deputy Speaker

Order. I remind party spokesmen that the debate arising out of the Consolidated Fund Bill is one of the most precious opportunities for Back Benchers to raise matters in the House.

2.41 am
Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

The hon. Member for Brent, South (Mr. Boateng) did not like my saying, "Rubbish," from a seated position, so I shall say it from a standing position. It was rubbish to suggest that the Government were reticent about holding the inquiry, or that the inquiry is being held to hide something. The one certainty of our judicial system is that no Lord Justice will be used or abused by any Government. As my right hon. Friend the Prime Minister said, the Lord Justice will call whom he wishes in order to get at the truth for the House, as it has demanded. Surely that is right.

The hon. Member for Leicester, East (Mr. Vaz) referred to what the Governor of the Bank of England was meant to have said. Referring to the debate in the House yesterday—Monday—today's Financial Times published a statement by the bank: The governor certainly did not intend to give any impression that the chancellor is briefed other than in general terms on major supervisory developments and issues. As the PM indicated in the House today, the governor would not have told the chancellor about individual reports on individual cases". It was said in the House yesterday that the Chancellor must have known of every page in the accountants' reports —[HON. MEMBERS: "No."] That was said by the respected Leader of the Opposition.

BCCI has 48,400 accounts. Some 36,000 of them have less than £1,000, so those depositors will get most of their money back; a further 9,500 have less than £20,000, so those depositors will get 75 per cent. back; then there are 3,100 large accounts, of which the local authorities will be the biggest losers. There have been two debates on the position of the local authorities. One should not repeat the comments which have been made, because other hon. Members wish to speak.

If one thinks about it, this is the simplest thing in the world. I have a list of all the banks that the Bank of England authorises. It does not guarantee their accounts. Those banks range from those with deposits of £100 million down to those with deposits of £20 million. Any local government treasurer who thinks that a bank with £100 billion and an AAA rating is exactly the same as the BCCI, with a minus-C rating, is not fit to hold his job. If anyone thinks that for a treasurer in the Western Isles to borrow £17 million to lend to someone else to gain ¼ per cent. more interest is not irresponsible, it is hardly surprising that so many Labour-controlled authorities go up the spout.

The one certainty is that everyone has a fiduciary capacity to be responsible with other people's money. We may be sorry for the people who chose such idiots to be their local authority treasurers, but it is no good saying that it is the Government's fault and that the Government should bail everyone out.

Mr. Tim Smith

I referred earlier—[Interruption.] The hon. Member for Makerfield (Mr. McCartney) refused to give way to me when I sought to draw the attention of the House to the minutes of the meeting to which he referred. This is an important matter. The representative of the Bank of England, Mr. Beverly, addressing the local authority associations which were present at the meeting, emphasised: The list did not say anything about the relative creditworthiness of the institutions or that they could not fail. That was an assessment the local authorities, and other depositors, had to make. That was passed on by the Association of Metropolitan Authorities in a circular three days later to its members when it said: It cannot be assumed that all institutions on the list are equally creditworthy.

Mr. Beaumont-Dark

I agree with that point. The list is clear and it is there for good reason. Anyone who wants to lend or borrow money can look at that list. If the Opposition are saying that when there is a list this long of category A and B banks, one should lend to an inferior bank, they do not know much about local government finance.

2.46 am
Mr. Alex Carlile (Montgomery)

Lord Justice Bingham would have been the first choice of many of us for the task that he is about to undertake. It is unfortunate that the Prime Minister was unable to confirm this afternoon that the Lord Justice will have the power to compel witnesses or to take evidence abroad. I hope that we shall hear from the Economic Secretary tonight that that will be the case.

I was criticised by the Prime Minister when I intervened this afternoon for referring to the toytown banking laws of Luxembourg. I make no apology for repeating that allegation. My recollection of Noddy is that he was particularly good at keeping secrets, even from Mr. Plod.

In December 1988, Professor Richard Dale, the consulting editor of the Financial Times Newsletter and Financial Regulation Report, wrote an article in which he suggested that the BCCI holding company structure was designed to bypass the regulators, that Luxembourg's secrecy laws were inviting criminal activity at BCCI and that for those reasons, as well as the absence of a lender of last resort, BCCI could collapse. Lord Justice Bingham will probably not be looking at the differences between European banking laws and regulation, but I hope that, in the light of what has happened, the Government will.

The banking laws of Luxembourg are similar to those of the Cayman Islands. They guarantee secrecy. That means that they are calculated to be attractive to tax evaders, fraudsters and money launderers. Luxembourg can nevertheless claim to wash its hands of the inevitable consequences of having such lax laws.

BCCI's corporate structure, which consisted of an unregulated Luxembourg holding company and two main operating subsidiaries incorporated in separate offshore secrecy havens, Luxembourg and the Cayman Islands, was purpose-built to confuse the regulatory authorities. That structure made nonsense of the Basle concordat, which was revised in 1983 specifically to take account of the principle that banking supervisory authorities cannot be fully satisfied about the soundness of individual banks unless they can examine tha totality of each bank's business worldwide through the technique of consolidation. I ask that there should now be a searching review of the international bank regulatory framework. A number of points are already clear. First, the principle of consolidated supervision which was formally adopted but then neglected by the group of 10 countries in 1983 must be rigorously enforced. Secondly, further efforts must be made to combat bank fraud, and that should mean greater emphasis on unannounced on-site examinations by regulatory authorities.

Thirdly—I acknowledge my debt to Professor Dale for these views—and most importantly, the present regime under which offshore banking services tout for business by offering secrecy, fiscal and other regulatory inducements needs to be overhauled. After all, what conceivable benefit does a banking centre in Luxembourg or the Cayman islands confer on the global economy? Offshore banking is a legitimate business, but it should be conducted in centres that have the financial and regulatory infrastructure to host it responsibly.

Part of the responsibility for what has happened with the BCCI lies with Governments who have been prepared to condone such a lax regulatory structure. I hope that the Government will allow Lord Justice Bingham to take that into account; but above all I hope that he will be able to decide whether there has been a failure of a reasonable duty of care, whether by the Government or the Bank of England. If there has been such a failure, I hope that the Government will undertake to pay compensation to the hard-pressed account holders.

2.50 am
The Economic Secretary to the Treasury (Mr. John Maples)

I am sorry that not everyone who wished to speak has been able to do so, but I wanted to try to answer as many as possible of the points that have been made.

The hon. and learned Member for Montgomery (Mr. Carlile) raised an interesting and difficult point—the regulation of multinational banking organisations. He was right that this one would seem to have been deliberately organised to make it difficult to supervise. There are lessons to be learned from that and we shall look hard at the second banking co-ordination directive and at supervision in Europe after the end of 1992.

The hon. Member for Brent, South (Mr. Boateng) said that he was suspicious about the terms of reference of the inquiry. I am not sure why, as they are perfectly clear. I shall read them out, although that has already been done at least twice. They are: To enquire into the supervision of BCCI under the Banking Acts; to consider whether the action taken by the UK authorities was appropriate and timely; and to make recommendations. As my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) said, it is unlikely that Lord Justice Bingham will allow himself to be used as a smokescreen. Lord Justice Bingham will be able to make recommendations to us about banking supervision. I have been asked whether I am generally happy with the powers under the Banking Act 1987. In general, we are happy, but if there are lessons to be learnt from the inquiry, we shall take them on board.

The hon. Member for Leicester, East (Mr Vaz) asked about an interim report. I doubt whether an interim report would be appropriate in this case. I hope that the job can be done fairly quickly so that such a report will not be necessary, but it will be up to Lord Justice Bingham to publish an interim report if he feels that to be necessary.

I have already dealt twice with questions about what and when Ministers knew. The Chancellor has dealt with them once, as has the Prime Minister. A series of events was involved, and the best place to bring them together is the inquiry. All records and Ministers will be available to Lord Justice Bingham so that he can elicit all the detail of what Ministers knew, and when.

It was interesting that the hon. Member for Leicester, East should raise the subject of auditors. In the Committee stage of the Banking Bill, which became the 1987 Act, the Opposition spokesman, Dr Oonagh McDonald, said that she still found enormous problems with auditors being expected to inform the Bank of England's supervisors about the conduct of business by the bank of which they are auditors.

It is fascinating to see the ground shifting now.

Mr. McCartney

She lost her seat.

Mr. Maples

She knew quite a lot about banking. It is the professional duty of auditors to inform the supervisory authorities if they are aware of anything that they believe is wrong. The hon. Member for Brent, South shakes his head, but he is wrong. I did not say that this was a statutory duty. I was going to say that their professional conduct includes the duty to do so. It is also clear from the supervisory guidance issued by the Bank of England under the Banking Act 1987 that the auditors should do so. If that became a problem, we could consider a statute, but many things happen outside statute and if they work satisfactorily they should be allowed to do so. I do not think that it has been suggested that the auditors withheld information which should have been given to the supervisors.

The hon. Member for Leicestershire, East posed many questions, but as there is little time I shall have to deal with them quickly. He asked what could be done for depositors and staff. The depositors can be compensated under the deposit protection scheme, which cannot be brought into action until a winding-up order has been made. That was today adjourned for eight days. We and the bank hope that the order will be made in eight days' time, although interestingly the representatives of the depositors and the shareholder and the liquidator today resisted that. Perhaps the depositors need to decide where their interests really lie because the deposit protection scheme cannot be activated until a winding-up order is in place.

The Deposit Protection Board has already started to write to all 57,000 eligible depositors enclosing the necessary claim form. The process is going ahead even though the winding-up order has not yet been obtained. We are moving on that as fast as we can and I am conscious of the need to continue to move fast. I assure the House that I shall keep an eye on that.

I understand that all members of staff have been retained as employees until the end of July and will be paid by the liquidator for their employment during that period. A winding-up order must be passed before redundancy and compensation can be paid. It may be in the interests of staff for the order to be passed before the end of the month so that they can receive the appropriate payments.

Several hon. Members spoke of local authorities, and in that context my hon. Friend the Member for Beaconsfield (Mr. Smith) read out a pertinent passage from the minutes of a Treasury meeting. I shall not repeat my hon. Friend's point because he made it well. No one can consider that a list of the more than 550 banks licensed by the Bank of England should carry a Government guarantee. First, the potential liability for public expenditure on such a scheme would be absolutely astronomical.

Secondly, if every banking organisation carried out Government guarantee, we might see on a smaller scale what happened in the United States. People would tend to invest in banks offering slightly higher rates of return. Of necessity, that higher return is earned by taking greater risks. A guarantee scheme would remove the moral hazard and shift the risk to the Government. There would then be no incentive to invest in a responsible bank paying a slightly lower rate of interest, because exactly the same guarantee would apply to all banks. No Government would be prepared to give such a guarantee to every depositor.

Some hon. Members referred to the commissions paid by local authorities. Local authorities are supposed to be sophisticated investors and could certainly have asked the brokers to state their commission. If the authorities were advised by their brokers to take certain actions they may have legal remedies, but that depends on the circumstances of each case. Local authorities are probably looking at that. I cannot offer much comfort on that score and, as I have said, it would be invidious for the Government to try to pick and choose between different creditors. Local authorities will have to live with the problems that they have created for themselves. Those problems may require more attention than it would be appropriate for me to give, and questions about such matters should be addressed to Ministers at the Department of the Environment.

Mr. David Shaw (Dover)

Will my hon. Friend deal with timing? Would it have been reasonable for the fraud to be detected earlier and for the bank to decide to close earlier? Or does he think, as some people argue, that it should not have been closed at all? Have we struck the right balance? Were the seven days during which the Chancellor, the Prime Minister and the Governors of the Bank of England knew about the situation well spent? It is quite an achievement to close a bank of that size in seven days.

Mr. Maples

My hon. Friend has made some good points. One of the misconceptions that many people have is that the first thing that a banking regulator would do if it got adverse information about a bank that it was regulating would be to close it down. In fact, the first thing that it would do would be to try to correct the problem. We have seen the awful problems that are created by the closing of a bank. It has to be the weapon of last resort. It is a serious step to take, and there has to be the evidence to support taking it. If there is any alternative, it should be pursued.

Two cases have been put to me this evening and on previous occasions. One is that the Bank of England closed BCCI too soon; the other is that it closed it too late. When a bank's licence is revoked, there are always arguments that it should have been done sooner, or that it should have been done later.

Mr. Vaz

In the short time that the Minister has left, will he direct his comments to the points that I raised about the negotiations which are going on with the sheikh, because many people would like to see the Government supporting such negotiations?

Mr. Maples

I cannot deal with all the hon. Gentleman's points, but as he has raised that one. I will deal with it. The best outcome, from everyone's point of view, would be an orderly rundown, with the co-operation of the major shareholder in a way which minimised depositors' losses. The major shareholders have proved themselves to be responsible, and we hope that they will co-operate in that rundown. The negotiations are between the Luxembourg liquidator and the Abu Dhabi authorities. It is for them to conduct the negotiations, but we should be happy if they had the outcome that the hon. Gentleman envisages.

Obtaining a winding-up order would not stop that process. If my memory of company law is right, if a winding-up order was obtained but the bank was put back in a financially sound position, it would still be possible for the order to be lifted and the winding-up process to stop. One has to go through with the order to get the deposit protection scheme activated.

The hon. Gentleman asked me why the sheikh and the Abu Dhabi authorities were not informed before the licence was revoked. The Bank of England came to the conclusion that the fraud was so deep and pervasive, and the losses so extensive, that there were no circumstances in which it would be possible to allow the bank to stay open, and nothing that the shareholders could have done, by way of changing management or injecting further funds, would have enabled the Bank of England to allow the licence to continue. The chances of putting together the sort of package that the hon. Gentleman envisages are remote, but I hope that it is possible. I would support such a move. If there is anything that anybody feels that we could do to facilitate that, we would do it, although the responsibility is with the main liquidator—the Luxembourg commissioner—who I understand is having talks with the Abu Dhabi authorities.

The hon. Gentleman asked why there had been no arrests. It is a bit early for that. The Serious Fraud Office has only had the papers since 5 July, and these are complex frauds, as will emerge if any cases come to trial. The hon. Gentleman asked whether the inquiry would have judicial authority. The answer is no. It will be set up in exactly the same way as the Lord Justice Taylor inquiry into the Hillsborough disaster, and the Wolff inquiry into prisons, not as a judicial inquiry. It is an inquiry into the supervisory authorities', the Governor's and the Bank of England's role in this.

The Prime Minister has made it clear that Ministers and Government officials and papers, and Bank of England officials and papers, will be made available to the inquiry without restriction. He went so far as to say that the Government would place no restrictions on what the inquiry had access to. If it becomes necessary for the inquiry to cast its net a little wider, we shall have to see whether it is necessarsy to give it further powers, but I hope that it will not be.

I am sorry that I have not been able to deal with all the points that the hon. Gentleman raised, but I will try to address the remaining ones in a letter.