HC Deb 10 December 1992 vol 215 cc1051-73 6.59 pm
The Economic Secretary to the Treasury (Mr. Anthony Nelson)

I beg to move,

That the draft Banking Coordination (Second Council Directive) Regulations 1992, which were laid before this House on 17th November, be approved.

The regulations, which give effect to the second banking directive and, in part, to the second consolidated supervision directive, represent a major new development in the framework for supervising banks in the Community and set the foundations for the single market in banking.

As the regulations implement a Community obligation, they are to be made under the powers provided by the European Communities Act 1972. That Act permits regulations to he made by negative resolution. However, on a matter of such importance—a matter which I know is of considerable interest to a number of hon. Members—it is clearly right to lay the regulations in draft and seek the approval of both Houses before making them.

The United Kingdom was in the forefront of those arguing for the adoption of the second banking directive, which offers opportunities for British banks and benefits for consumers throughout the Community. The financial services industry is, and always has been, one of the United Kingdom's key export earners, and the directive offers major opportunities for British banks and building societies that want to offer their services elsewhere in the Community. Rather than having to obtain separate authorisation from the authorities in each Community member state, banks will now be able to rely on their home state authorization—the so-called single passport—to conduct a wide range of banking and financial services, whether by establishing a branch in another member state or by providing cross-border services. The directive provides for the streamlining of supervision and the reduction of any barriers to entry that may exist in other member states.

Banks from other member states will also be able to operate in the United Kingdom on the basis of their home state authorisation. The success of United Kingdom financial centres has been won as a result of, rather than in spite of, the openness of our financial markets, so the principle that underlies the second banking directive—that of a market without barriers—goes entirely in the right direction.

The directive goes in the right direction for consumers, too. Banking is already, of course, an international market in many respects, but there may be scope for still more competition and diversity. The services and financial products that have been developed in one market may well catch the appetite of consumers in other parts of the Community. The aim of the second banking directive is to enhance the opportunities for banks to break into new markets, and if it succeeds in doing that, banks throughout the Community will be kept on their toes, which is clearly no bad thing.

It is important that increased competition should not be achieved at the expense of standards of regulation. That concern was at the forefront of the Government's mind when the second banking directive was being negotiated. That is why it is so important that underpinning the single passport regime is an extensive body of common standards on the prudential criteria for authorising and supervising banks. Some of that is in the second banking directive itself, and some in the second consolidated supervision directive, which the regulations also implement.

Other important elements are the own funds and solvency ratio directives, which set detailed solvency rules for credit institutions and which have already been implemented in the United Kingdom. The process of refining common standards will be carried forward in two further—directives-one dealing with banks' large exposures, the other setting out capital adequacy rules to cover market risk, which are on the point of adoption in the EC.

The harmonisation of prudential rules is a key element of the answer to those who express the concern that, in the wake of the BCCI experience, it is unwise to proceed with a framework for banking supervision that places such weight on the performance of other countries' supervisors. Quite apart from the fact that the whole second directive framework is about setting common basic standards, however, it is important to consider the positive benefits that flow from achieving a clear basis for assigning supervisory responsibility for internationally active banks. The BCCI case has shown clearly the difficulties that supervisors face in dealing with a complex international conglomerate with an extensive branch network in one country and its head office in another. Assigning full supervisory responsibility to the authority in the bank's home state, with host supervisors in a co-operating but clearly subordinate role, is clearly a sensible way of tackling such situations.

The principle of home state supervision established by the second banking directive framework builds to a great extent on the framework that banking supervisors throughout the world have been developing over the years—mainly through the Basle forum—to deal with internationally active banks.

Mr. A. J. Beith (Berwick-upon-Tweed)

What if the home state chosen by the bank were Luxembourg, bearing in mind the fact that, at one stage in the BCCI episode, Luxembourg said that it would prefer it if the Bank of England took over responsibility?

Mr. Nelson

In practical terms, as I shall try to explain, much of the responsibility for supervision may be delegated to the host state bank. Indeed, important responsibilities will remain with the host state bank under the regulations. The right hon. Gentleman has put the key question. These extremely complex regulations enact two important directives and the question at the back of my mind is exactly the question that the right hon. Gentleman poses: will banks authorised in a country—in this case. a country within the European Community—whose supervisor may not subscribe to the highest standards, or may not have the resources to operate such standards, be able to operate here? If the right hon. Gentleman will allow me to make progress, I hope that he will obtain some reassurance from my remarks.

Within the Community, the second banking directive takes the Basle principles to a new point by requiring the principle of mutual recognition of standards to be enshrined in national law.

Thus, the Government remain of the view that the supervisory principles underlying the second banking directive remain valid in a post-BCCI world—indeed, that in many respects, they are part of the process of ensuring that a bank could not in future develop as BCCI developed. That view is echoed in Sir Thomas Bingham's conclusions. Sir Thomas said that nothing in the history of BCCI called for the new Community regime to be substantially revised. Like Sir Thomas, however, we take the view that, within the framework, important issues of detail need to be looked at to ensure that all the lessons of the case are learnt.

Four of the issues that Sir Thomas covered in his recommendations are particularly relevant here. First, he emphasised the importance of the principle that a bank's head office—the location of its mind and management—should be in the same place as its registered office. A recital to the second banking directive makes it clear that member states should require that.

Secondly, Sir Thomas recommended that all supervisors should have powers to refuse authorisation, or to withdraw it once given, where banking groups are structured in such a way as to frustrate effective consolidated supervision.

I am pleased to say that both those potential changes in Community legislation were discussed in outline at the Economic and Finance Council on 23 November, and received a broad welcome both from the Commission and from other member states. The Commission has undertaken to bring forward specific proposals with all possible speed.

Thirdly, the Community needs to look again at the issue of supervisory confidentiality and, specifically, the exceptions to it—the so-called gateways—which enable supervisors to communicate as they need to with others engaged in regulating different aspects of the bank concerned, or with the banking and financial system more generally. Sir Thomas Bingham highlighted the issue of exchanges of information between Community supervisors and those in third countries, and I know that the Commission is keen to look at what can he done to facilitate co-operation and exchange of information in that regard.

Action is also in hand which will meet the last of Sir Thomas Bingham's recommendations on the EC framework, which was that there should be agreement as soon as possible on a Community directive on deposit protection, putting it on a home state basis, to parallel supervision.

The Government fully support that principle and a draft of such a directive is currently being discussed and considerable progress has been made under the United Kingdom presidency. The directive will introduce certain minimum requirements for deposit protection schemes and banks will have to make the protection afforded by their home state available to those who make deposits in their branches in any other member states.

I want now to explain in more detail how the broad principles of the directive have been transposed into United Kingdom law by the regulations that we are debating.

The regulations divide broadly into two main parts—the inward and the outward passports. Taking the inward passport first, the approach of the regulations is to ensure that the authorisation requirements under the Banking Act 1987, the Financial Services Act 1986, the Consumer Credit Act 1974, and the Insurance Companies Act 1982 do not bite on incoming EC institutions in respect of the activities listed in the second banking directive which they are entitled to conduct by virtue of their home state passport.

The regulations set out the categories of institutions which may have passport rights. These include not only the so-called credit institutions—the Community term for bank, defined as an institution which takes deposits and lends—but certain of their subsidiaries. The latter are subject to tight conditions, including a requirement that their parent credit institution holds 90 per cent. of the voting rights in the subsidiary and that they have a full parental guarantee.

The activities liberalised by the directive are listed in the annex to it, which is produced as schedule 1 to these regulations. They range from the familiar banking activities of taking deposits and lending, through a variety of activities regulated under the Financial Services Act, such as dealing in equities or giving investment advice, and include also activities such as safe custody services for which United Kingdom law does not require authorisation.

The precise scope of the activities listed in the directive does not correspond exactly with the coverage of existing United Kingdom regulatory legislation, so, for some activities outside the scope of the passport, incoming European institutions will continue to require authorisation under the Financial Services Act and Consumer Credit Act, as now. This is a complex and technical subject and further guidance on the intepretation of the activities listed in the annex, and their interaction with Financial Services Act and Consumer Credit Act activities, will be made available shortly to the institutions that will be affected.

Mr. John Butterfill (Bournemouth, West)

What progress is being made on investor compensation schemes? I do not think that the matter has yet been finalised, but presumably it will be the subject of a subsequent directive.

Mr. Nelson

Yes. I referred earlier to deposit protection. Investor protection is a separate matter and is some way behind. We have some way to go in making progress on deposit protection, top-up arrangements and various other important aspects, and we have even further to go on the investor compensation schemes. Some countries operate investor protection regimes and others do not. We, as my hon. Friend will know, have such a scheme, so investors here should be protected up to a certain level. That matter is being developed, but it is some way behind deposit protection.

The United Kingdom regulators will be able to exercise powers of restriction and prohibition in relation to incoming institutions. That is the key point in answer to the right hon. Member for Berwick-upon-Tweed (Mr. Beith). It is important that, although supervision will vest with a home state authority, there will remain with the host state the ability to exercise certain powers of restriction and prohibition in relation to incoming institutions. I believe that that is set out in regulation 9.

However, in recognition of the reduced role of the host state, the grounds on which they can exercise those powers are narrowed by the regulations. First, there is a specific responsibility for the host state, in co-operation with the home state, to supervise the liquidity of the branches on their territory.

In non-urgent cases the host state's prohibition and restriction powers in respect of liquidity of branches have to be exercised initially by approaching the home state and asking it to take action. However, the directive does provide for the host state to take immediate action in emergencies, and the regulations reflect that.

The host state also retains the right to continue to collect statistical information from EC institutions—banks authorised elsewhere in the Community operating in Britain—in its territory and to require compliance with rules it has adopted in the interests of what the directive describes as "the general good". Prohibitions and restrictions can he imposed for failure to comply with those rules.

The general good is an established concept in Community jurisprudence, the essential principles of which are that the rules should be non-discriminatory, should be proportionate to the ends at which it is directed, and should not duplicate equivalent provision in the home state.

The bulk of the general good rules which will apply to incoming institutions in the United Kingdom consist of conduct of business rules under the Financial Services Act and Consumer Credit Act, rules on advertisements, and the requirement that institutions in the United Kingdom be covered by investor compensation or deposit protection arrangements. The latter will in due course fall away when compensation schemes are moved on to a home state basis. Incoming institutions which join self-regulating organisations will also be subject to their rules in relation to investment business.

On the outward passport, the provisions affecting United Kingdom institutions mirror the provisions for incoming institutions in many respects, particularly as regards the procedures for obtaining the passport.

One of the important concepts that the regulations introduce into the Banking Act is the new concept of a credit institution, which is the nearest the Community has to an agreed definition of a bank. In practice, all building societies and most institutions authorised under the Banking Act qualify as credit institutions. But for the handful of authorised institutions that are not credit institutions, either because they do not lend, or because the deposits they take are not from the public, we need to preserve the Banking Act as it is, which we have done by means of a saving provision in the regulations.

The other important criterion to satisfy if United Kingdom banks and building societies are to be sure of benefiting from the passport is set out in article 18(1) of the directive which says that the passport is granted for all activities listed in the annex to the directive which are covered by the credit institution's authorisation". In order to produce a regime which unambiguously delivers that, the regulations set out formal links between the different authorisations which banks may obtain from the different functional United Kingdom regulators for activities on the second banking directive list. The informal communications which already exist between United Kingdom regulators are, in the process, put on a statutory basis, as is the supervision exercised by the Bank and the Building Societies Commission over activities for which at present no specific authorisation requirement exists under United Kingdom law.

We have also had to construct new arrangements to enable United Kingdom bank-owned financial institutions to make use of the article 18(2) passport under the conditions set out in the directive. The regulations therefore set up a framework for the Bank and the Building Societies Commission to exercise supervisory powers over those institutions, to the extent that they wish to use the banking directive passport to operate in other member states.

The regulations also make provision that is necessary to implement the EC second consolidated supervision directive. The purpose of that directive is to extend the range of circumstances in which supervision of a credit institution has to be conducted on a consolidated basis. Consolidated supervision means, in this context, that supervisors have to be satisfied about the solvency, large exposures and internal control systems not just of the credit institution in its own right, but when taken together with other credit institutions or financial businesses elsewhere in the same group structure. The aim of consolidation is to enable the risks to which the supervised bank is exposed to be properly assessed.

The first consolidated supervision directive established the principle of consolidated supervision for banking groups, whose parent is a credit institution. The new directive goes beyond that, to require consolidation of financial holding companies where a financial institution has as its subsidiaries, either exclusively or mainly, banks or financial institutions, so long as there is at least one bank. The bulk of the directive will be implemented through revised Bank of England and Building Societies Commission prudential notes, to be issued shortly, but the regulations supplement that by providing the investigation powers that are necessary for other EC supervisors whose exercise of consolidated supervision requires them to investigate entities in the United Kingdom.

The regulations also enable the Bank of England to assist other member states' authorities in those cases.

The regulations that we are debating are, by arty standards, long and complex. Without wishing to sound patronising, I am grateful to the House for bearing with me while I go through, in some detail, what some might regard as rather tedious regulations. Others will know that they are extremely important regulations, which will directly affect our banking community, and millions of individual, industrial and corporate customers of banks. They will crucially affect our prospects of taking full advantage of the single market. I know that the House will understand why it was important to set out the regulations in some detail for the benefit of the industry and for hon. Members who take an interest.

The drafting of the regulations has benefited greatly from the many helpful comments received during consultation with the institutions affected, the trade bodies that represent them, consumer bodies and other interested parties. They represent the first step in the process of turning the single market in banking into a practical reality.

The next step is for institutions to take advantage of the opportunities that the process presents. Financial services is an industry where United Kingdom firms are exceptionally well placed to make the most of new markets abroad. In an age when businesses and individuals are becoming ever more financially sophisticated, the prospects of greater competition, innovation and choice will receive an enthusiastic welcome throughout the Community. It is for that reason that I am confident that the regime that the regulations usher in is the right way ahead, and I commend them to the House.

7.21 pm
Mr. Alistair Darling (Edinburgh, Central)

The Minister should console himself with the fact that while he explained the regulations, which are indeed long and complicated, the Chamber has slowly filled. If another place that we are not allowed to mention has been cleared during the Minister's speech, I am sure that he will understand that it is because there is a narrow, if not important, interest in such matters.

The directive will open up the European market in banking and financial services and therefore the principle is right, which is why we shall not oppose it. As the Minister said, Britain has a justifiable lead in the provision of banking and financial services in London and many other parts of the United Kingdom. The industry is a major employer and earner of foreign currency. None the less, substantial concerns remain, and I shall draw those to the attention of the House because unless action is taken serious problems may arise.

The introduction of the European second banking directive will mean a dog's breakfast of regulations throughout Europe, leaving the investor and depositor wondering who to see and where to go when things go wrong in many cases. The directive may allow institutions to shop around for the poorest and least efficient system of regulation, just as the Bank of Credit and Commerce International was able to do. In many cases, the consumer will have no idea where a European bank or financial institution is regulated or what regulation means in each case. The consumer will not necessarily know which body is responsible for regulation in each country. In this country we have six main regulatory bodies. The consumer will not know what safeguards, if any, and compensation exist because the regulatory and compensation systems are different in each European Community member state.

I am in favour of competition in banking services and the services provided by financial institutions, but for there to be competition the depositor or investor needs to be able to make an informed choice about what is on sale and what safeguards are available in the event of failure or complaint. The problem is that each EC member state has a different financial system. A bank in Germany is different from a bank in Britain. The regulatory systems are also different and there are different expectations and standards in each EC member state, let alone those countries which expect to join the EC.

In Britain, we have a multitude of regulatory bodies and a continuing debate about what we need. It is necessary for us to draw attention to some of the problems in the United Kingdom so that we can better understand the potential for problems once the directive becomes operational on 1 January. It is regrettable that the Minister seems to have surrendered in the fight to improve City regulation, when he has not been in office for much more than six months. He said that the Government will not introduce legislation, which is vital if we are to regulate banking services in the 1990s and beyond. By telling the Financial Times on 4 December that the Government will not overhaul the system, which has some spectacular failures behind it, he is allowing the future of regulation to be dominated by producer group interests.

Nowhere is that illustrated more clearly than in the debate surrounding the setting up of the Personal Investment Authority, which has been dominated by producer group interests while those of the consumer have been left on the sidelines.

Regulation must be as clear and straightforward as possible if it is to succeed. Above all, it must be respected by producer and consumer interests alike. The Government have a duty to give a lead, and they have conspicuously failed to do so. The debate has gone on long enough. It is time to stop the platitudes and to set up a system with clout and, above all, with respect.

Mr. Butterfill

What grounds has the hon. Gentleman for those remarks about the Personal Investment Authority consultation? So far as I am aware, the Consumers Association has been active in making representations and has suggested that there should be greater consumer representation on the PIA. We are awaiting a report from the Office of Fair Trading, so what justification does the hon. Gentleman have for those extraordinary remarks?

Mr. Darling

Every justification. If the hon. Gentleman considers reports in the specialist and the general press surrounding the setting up of the PIA, he will find that there was an unseemly squabble between vested interests and the industry. I know that the Consumers Association and many others have made representations and that some amendments have recently been made, but if the hon. Gentleman studies the proposed composition of the PIA board he will find that it is dominated by the producer groups. The argument turned on which interests should be represented on the board. Would it not have been far better to have a smaller board, with an overall view, rather than trying to produce a board which simply represented the various interests which had to be catered for, especially producer group interests?

The Consumers Association has put forward its views, and many people have expressed concern. Even the Minister did so in his interview with the Financial Times last week. The debate surrounding the setting up of the PIA has been dominated by producer group interests, who are understandably concerned about the growing compensation claims made as a result of the failure of members of the Financial Intermediaries, Managers and Brokers Regulatory Association. I recollect that the hon. Member for Bournemouth, West (Mr. Butterfill) has some knowledge of those matters and an interest in the subject, and I understand why he intervened to say what he did. However, I am sure that he will accept that a casual look at the reports and discussions surrounding the setting up of the PIA will confirm my suspicions and those of many people who were involved. I was speaking to some of them today. The debate has been dominated by the interests of the producer groups, rather than by those of the people who will buy the products.

Mr. Butterfill

rose—

Mr. Darling

I shall not give way as I do not wish to be dragged into a debate on the PIA. I hope that we shall return to that subject in the early part of next year, perhaps just after the referendum is conducted among would-be members. The hon. Gentleman may well catch your eye, Mr. Deputy Speaker, but I do not wish to get bogged down while discussing developments in Europe.

I mentioned the need for proper regulation, and I can think of no better authority to quote than the present Secretary of State for Social Security who, as we know, is keen on proper regulation of the markets. When the House debated a similar instrument in February 1989, the now Secretary of State for Social Security—then the Economic Secretary—said: However, it is a mistake to suppose that a good regulatory regime will generally make banks authorised under it less competitive than those authorised under a weak regulatory regime. On the contrary, most customers would prefer to deal with banks which they know to be authorised and supervised by a strict and prudent regulator than banks authorised by a lax and incompetent regulator". I could not have put it better myself. Would that it were true. It is ironic that the then Economic Secretary should have gone on to say: However, he"— the consumer— will be guided in his judgment by the standards applied by the supervisory body. The expression 'as safe as the Bank of England' still quite rightly carries weight in people's minds. It lends an extra attraction to British banks".—[Official Report, 9 February 1989; Vol. 146, c. 1230–31.] I wonder if he knew that, even as he spoke, the Bank of England was propping up the BCCI and embarking on a course of action which would ultimately end in calamity. Perhaps the Economic Secretary of the time did not know what was happening, but the general point that he was making about the need for efficient and effective regulation was good and underpinned everything that I shall say tonight about the need for the same efficient and hard-hitting regulation, which is vital not only in this country but in Europe as a whole.

Before dealing with the impact of the directive, I repeat what I said on 6 November, when the House last debated these issues on that occasion in connection with the Bingham report. Two actions are necessary to put the United Kingdom regulatory house in order. First, there must be changes to the banking supervision legislation in the wake of the BCCI disaster. The then Economic Secretary conceded that point.

For example, we must prevent forum shopping. That is of direct relevance when discussing the instrument now before the House because there is a substantial risk that some banks or institutions may be tempted to forum shop. I appreciate that the directive provides that host and home countries should do their best to avoid doing that. It is an illustration of where the rules are not deficient but where the will and effective machinery are not present to ensure that it happens.

I remind the House that what went wrong in respect of BCCI was not that the Bank of England did not have the power to regulate, but that it did not actually do it. So it is no good the Minister saying tonight that the directive provides machinery to ensure that people will not move around Europe looking for the least effective regulatory system. We must be sure that in each and every member state a regulatory regime is in place to ensure that it does not and cannot happen.

As I said, we do not yet have that system in the United Kingdom, and our regulatory system is much better than that existing in some member states of the EC. If we cannot get this right ourselves, we are in no position to complain when other EC member states do not have an efficient system.

The need for additional duties for auditors-which hon. Members in all parts of the House accept to be necessary—will, I hope, be implemented throughout the EC. We have seen in this country, in the case of Maxwell, how comparatively easy it is to deceive auditors in one country. I wonder how much easier it would be for someone to deceive auditors if institutions are carrying on business in different EC states at the same time.

The need to provide for a lead regulator is of crucial importance, and the right hon. Member for Berwick-upon-Tweed (Mr. Beith) drew attention to that. While the mechanism may in theory be there, many of us are concerned that in practice it may not be in place. There will he many cases of institutions using the directive even though they have their headquarters in one country but be substantially transacting their business in another. It is important to ensure that the regulators in both, or all, the countries concerned make sure that there is a lead regulator and that, at the end of the day, someone accepts responsibility.

In discussing the Bingham report, we saw the difficulties which could arise when one country takes a considerable interest in those issues and there is one bank. In that case it was the Bank of England. We witnessed the difficulty involved in getting the different parts of that bank to focus on a growing problem. How much more important it is to ensure that we have a mechanism which will take account of the fact that institutions will get into trouble not just in one but in many member states, and probably in states which are not in the EC.

Ms. Diane Abbott (Hackney, North and Stoke Newington)

My hon. Friend referred to the concern felt by many of us lest the directive lead to lowest common denominator regulations. Institutions may deliberately place themselves in a country such as Luxembourg, which has notoriously lax regulatory standards. As my hon. Friend said, a latent power is not enough. It is necessary to ensure that it is used to achieve proper regulatory standards.

I am sure that people involved in financial services would like to hear the Minister explain how the Government intend to raise regulatory standards in countries such as Luxembourg. We on the Treasury and Civil Service Select Committee have heard from Bank of England officials how they are in discussions with Luxembourg monetary officials. As we have pointed out, however, discussions are not enough. Luxembourg has hundreds of banks and a handful of regulators. Unless there is an adequate system to raise standards, we shall continue to fear that lowest common denominator regulatory standards will apply, especially for the ordinary investor and depositor.

Although it is not wholly relevant to today's debate, we must at some stage consider the whole question of financial regulation in this country and whether we have reached the point at which we should consider splitting the Bank of England's functions so that, as in other countries, we have a separate regulatory body regulating financial institutions.

Mr. Darling

I do not know whether my hon. Friend was present for the debate on the Bingham report when too, said that the Government would have to examine the last point that she made in her intervention. We on these Benches are considering whether those functions should be split.

My hon. Friend made an equally good point about Luxembourg and other countries. Had Switzerland decided to continue to move towards and then join the EC, other problems might have been brought into sharper focus. Switzerland makes a virtue of the fact that some of its regulations, particularly the secrecy available in that country, are an attraction for people to bank there. If one day Switzerland joins the EC—I suspect that it will, though I do not know when—we shall then have to consider how the directive will work there.

As I have said, there are different standards, expectations and requirements. I welcome the fact that the directive will be in force because without it there would be greater problems, but the Minister must explain what he intends to do to ensure that we go on to the logical next step, which is to ensure that, having got the framework in place, we have an efficient regulatory system in every EC member state. We may have the framework, but we do not have it in practice, and my hon. Friend the Member for Hackney, North and Stoke Newington (Ms. Abbott) was right to draw attention to that.

I have been talking about the need to get our banking supervision in order. The logical next step is to end the dispute about the future of financial services regulation. I regret that, in his interview with the Financial Times last week, the Minister conceded more ground than he had to. We should build on what we have rather than scrap the whole system. It would be a mistake to tear everything down and try to return to the situation which prevailed before 1986.

Some of our regulatory system works well, but some of it does not. The Securities and Investments Board should be without a direct regulatory role, though it should have overall responsibility for providing an actively policed system, preferably through two self-regulatory organisations. I would differentiate between the SROs which would deal with institutions—or at least with people who could be expected to be properly advised and thus have a degree of protection behind them—and the SROs which would deal with what one might call the retail end of the market. The differentiation relates to the product rather than to the institutions themselves. There would possibly have to be another SRO dealing with pension regulation. That is outside the scope of tonight's debate, though we shall have to return to that subject in view of the controversy.

The Government must give a lead to ensure that the regulatory system works and is readily understood. The idea of a Personal Investment Authority is welcome, but I have grave doubts about what it would do, if it could be got off the ground, and the threats made by some institutions do not augur well for its future.

Having put the United Kingdom's house in order, or at least by the end of the debate extracted a promise from the Minister that he will attempt to do that, I shall deal now with the problems in the EC, particularly those arising as a result of implementation of the directive. Is it possible for consumers to identify where each institution is regulated so that they know where they stand? I have in mind a simple notice on the front door saying where the regulator is. The Commission may decide that that is anticompetitive, but it seems to be exactly the assistance needed to ensure that there is adequate competition, so that anyone entering a bank or financial institution will know where it is regulated. If it says, "This organisation is regulated in Luxembourg" and the institution next door says that it is regulated in the United Kingdom or Germany, the consumer can take that into account in deciding whether to proceed further.

Many institutions in this country have British names and are well recognised but are owned by organisations and institutions based in other EC countries. For example, Cornhill Insurance, a well known company, is owned by a German company. Although the specialists and everyone in the House knew that, I doubt whether the customers of Cornhill knew it. I wonder how many customers of Sun Life know that a French company has a 26 per cent. holding in it. Those who invest and deposit are entitled to know who regulates a particular organisation.

The passport system has substantial merit, but only if we know what that passport means. In evidence to the Treasury and Civil Service Select Committee, which appears in the Fourth Report on banking supervision prepared in conjunction with the collapse of BCCI in the 1991–92 Session, the British Bankers Association made the following useful observation: there is a danger that the somewhat vague specifications of the duties"— contained in the draft directive— of the host supervisor may generate an element of confusion and, thereby, in certain circumstances, allow gaps to occur in the overall scrutiny of an institution's activities". That point is well made and the Government must take account of it.

It is also important to provide what is called, in City jargon, "a level playing field". I understand that the investment service directive has now been substantially agreed, but it is not to be implemented for about three years. If that is so, where does it leave the many institutions in this country which will not be covered by the banking directive but rely on the investment services directive to receive sufficient authorisation to trade in other EC countries?

When discussing that point in the same debate to which I referred earlier, the then Economic Secretary to the Treasury, now the Secretary of State for Social Security, said: But if the second banking directive were enacted before the investment services directive, continental banks offering investment services could be given an unfair headstart over the specialist firms. Fortunately, we have been reassured by the Commission's clear statement that its intention is for both directives to be implemented at the same time."—[Official Report, 9 February 1989; Vol. 146, c. 1232.] I do not believe that that has happened—if I am wrong, the Minister will tell me. I understand that the investment services directive is some three years away. Clearly, that will prejudice the operation of many institutions in this country which need their own directive to start trading in other EC member states. I hope that the Government will urge the Commission to do something about that.

What will happen in cases where the United Kingdom presently regulates if it has to withdraw because the area is regulated by another EC country? How can we be sure that those areas where we no longer regulate because a passport has been obtained by an incoming company will be regulated by another EC country? How will depositors and investors be directed where to go? What happens if they go somewhere else? Many institutions will have their activities regulated partly in their home country and partly in their host country. What will happen to new countries admitted to the EC with no experience of banking supervision in a modern society? How are we to ascertain where an activity in terms of the directive is carried out? For example, is a money-lending activity carried out where the agreement is made or where the money is passed over?

Those matters may be crucial in the event of a dispute. How will the regulators know what they still need to regulate, for example, where an EC institution provides commodities futures business? Importantly, do the United Kingdom regulators have the resources to look after those problems? Although the Bank of England has had many successes, we know that it has had problems with BCCI. We also know that there are problems with the SIB's self-regulatory organisation. I doubt, for instance, that the Financial Intermediaries, Managers and Brokers Regulatory Association could possibly cope with those new obligations because it is already struggling. Is the Minister confident that this country, let alone other EC member states, has sufficient powers to deal with the problems facing us?

How will prudential supervision be exercised with head offices in one state but much of the business in another? The Minister said that the structure exists to deal with that, but what will happen in practice? Is not that where the whole ethos of self-regulation breaks down? Self-regulation depends on people knowing the business and when to blow the whistle. It is difficult enough to do that in one city, let alone several EC countries. The idea that the industry will know what is going on in every corner of Europe and be able to give a nod to the regulator is patently ludicrous.

The scope for abuse—for another BCCI, another home income plan failure or pension scandal—is immense unless there is active, efficient regulation within the United Kingdom and the EC. There is a substantial risk that the supervisory systems will be harmonised down to the most basic level, not up the highest level. If I am wrong, the Minister will tell us what he intends to do to ensure that that does not happen.

The question of compensation is important. I am glad to hear that the deposit protection directive is under way, but sorry to hear that the investor protection measures are some way down the line. Schemes throughout the EC differ greatly. Here our investor compensation scheme under the Financial Services Act 1986 is not working well. Again, I cite the home income plan problem. However, if self-regulation is to continue, it is important that the compensation schemes work, because compensation is one of the best ways to ensure that self-regulation works.

We shall continue to see banks and institutions with British names owned elsewhere in the EC. I hope that we shall see the same thing happening with British firms owning EC institutions. It is all to the good, provided that they are properly regulated. Legislation to set up a regulatory system with teeth is good for the consumer, efficient for the industry, and vital for the good name of the City. Good regulation is a good selling point and will ensure the sale of good quality products.

We have a justifiable lead in providing banking and financial services and it is vital that the directive does not tempt a lowering of standards in the name of harmonisation. I cannot say that I am optimistic. Although the Minister is tempted to throw in the towel about the argument at home, I hope that the Government have the stomach to continue the fight for high standards in Europe. Above all, we need a clear statement of what the Government intend to do at the next stage to ensure that the framework in the directive is built upon, so that the interests of investors and depositors, and the reputation of those institutions, are maintained at a high standard.

7.48 pm
Mr. Terence L. Higgins (Worthing)

I shall not detain the House for more than a few moments. We have a massive document before us and I could raise many points arising from its wording. However, there would he little point in doing so, because we must either take it or leave it. We have no way to amend the vast amount of wording, although much of it relates to other legislation to which the House has paid considerable attention in the past. That is not a satisfactory position. As we do not have time to examine the document in detail, I shall simply make one or two technical points.

On page five the basis on which the regulations are made is said to be the fact that the Treasury are a government department designated (a) for the purposes of section 2(2) of the European Communities Act 1972". I greatly welcome the fact that my hon. Friend the Minister has taken over responsibility for financial matters, because I always thought that the split between the Department of Trade and Industry and the Treasury was not a happy one. Various matters tend to fall, if I may use the expression, between the two stools.

The regulations cover several matters relating to the Insurance Companies Act 1982 which I understand have not been transferred from the Department of Trade and Industry to my hon. Friend the Minister. The basis on which the order is made refers to the Treasury. I have forgotten why that Act refers to the Treasury when all other cases refer to the Secretary of State being a designated Minister. Suddenly, when we get to page 58 we find that, like the smile on the face of the Cheshire cat after it has departed, there is reference to a Secretary of State having power to deal with such matters. It is not clear why that does not appear at the beginning of the authority for making such regulations. Generally speaking, it does not seem to be a satisfactory way to proceed.

My second point is that we are renowned for regularly implementing European Community directives by producing such regulations. One feels bound to say that other countries seem to be much slower at implementing directives. That can have a serious adverse affect on British companies in the interim period. I think that we should have a set rule that, whenever we have a specific directive to implement, we should be told in the clearest terms the extent to which other countries in the EC have already taken such action. Perhaps my hon. Friend can explain the position. In many instances I think that we go ahead of the game, which has an adverse effect on British companies.

Given what I have said about the inability to amend such documents, I am worried that there is a tendency for regulations of this sort, which implement a particular directive, to be used to extend legislation on other matters beyond the strict scope of the directive. If that is so, it is done without our having the ability to amend it. I have a suspicion—I put it no higher than that—that some of the regulations are being used to make changes to our law which, on the strict interpretation of the directive, are not necessary, but which would otherwise need to be put before the House in a form of amendable legislation.

Those are technical issues. None the less, in terms of the House getting a grip on what is happening, not merely in the European legislation, but in the powers that go beyond the requirements of European directives, the issues are important. I take the opportunity to bring those matters to the attention of the House. Perhaps the various bodies in the House could give further consideration to whether possible abuses of this sort—I am not saying that it is so in this case; my hon. Friend will tell me whether it is so—can be avoided.

7.54 pm
Mr. A. J. Beith (Berwick-upon-Tweed)

The final remark of the right hon. Member for Worthing (Mr. Higgins) echoed a theme which the Prime Minister took up on other aspects of Community legislation relating to the environment and health. Certainly, from my experience, it seems that there are times when those in the United Kingdom who should be implementing the regulations seem to use them to ride other hobby horses which go far beyond the original intention. It would be welcomed if the Government examined the matter generally.

The Government should do something to put the genuine activities of the Community and the Commission, such as the single market, in their proper context and see them for what they are, not cause them to be complained about because of other things that have subsequently been added to them. That is a sensible suggestion which the Government may care to examine.

Many people will be disappointed to learn that the second banking directive is not a directive to British banks to pass on interest rate reductions to their customers, to have a sensible long-term policy towards small business and to stop imposing charges on customers without telling them in advance that they are doing so.

We must break the sad news to our constituents that the second banking directive is of a different character. Nevertheless, it is important to them because it is necessary to ensure that we have adequate banking supervision in the future and that banking and financial institutions and financial services can take advantage of the single market. Indeed, it is a field in which we would expect the United Kingdom to do well, with its considerable experience and expertise in financial services.

The recent experience of the Bank of Credit and Commerce International case must cause us to examine with great care banking supervision and the dangers that might lie in a bank being supervised from a country that could not manage that supervision well. It is not a chauvinistic or nationalistic point. In that context, it must be said that the Bingham report revealed that the Bank of England showed many deficiencies in its supervision of BCCI. Therefore, we are not holding Britain up as an example of a country which has perfect banking supervision.

The BCCI case also showed that Luxembourg was clearly nowhere near adequate to the task of being the lead regulator of the BCCI. The Luxembourg authorities became conscious of that fact, and drew the attention of other countries' regulators to it. At one stage the Luxembourg authorities would have welcomed the Bank of England, where so much more BCCI business was being done, taking on the responsibility of the regulator.

The Minister dealt carefully with many aspects of the matter in his thoughtful and lucid remarks. He gave some reassurance, not least that the matter was actively in his mind and that he was seeking in various other ways to extend the available protection and improve banking supervision, which is deficient.

I do not want to go into the details of the BCCI case because more discussions about it will take place. The Treasury Select Committee still has the matter in its sights and will have further discussions about it. The Committee has issued reports that bear on the matters which we are discussing tonight. The Committee expressed concern about the second banking directive in its fourth report, to which reference has already been made. The Committee also expressed anxiety about the assessment of regulations—how we will know that we can rely on the capacity of other countries as lead regulator and how they will know that they can rely on us.

The absence of any real system to assess supervisory standards was the focus of specific comment by the Committee. The Committee said that there was clearly a need for some mechanism to assess supervisory standards. At present, all we have is the Basle committee. The matter is not the responsibility of that committee. It does not have that sort of locus, any formal machinery or any standing to judge the supervisory standards in member countries, let alone non-member countries. It is a matter of continuing concern which I hope the Government will keep actively in mind.

The issue has been raised by other hon. Members, and I think that perhaps sufficient has been said to alert Ministers to the widespread concern. The report raises a question of how we will organise banking supervision in the United Kingdom in the future. The BCCI case has focused attention on banking supervision, and caused many of us to believe firmly that there is a case for separating banking supervision from the work of the Bank of England as monetary authority. I believe that the Bank should have independent responsibility in the conduct of monetary policy. In some ways that makes a much stronger case for separating those two areas. If anything, the United Kingdom has it the wrong way round. Perhaps the Bank should have been more accountable for its supervision of the banking system and less subject to accountability for monetary policy.

I hope that the Government will continue to examine the arguments for a system such as the German one in which a separate institution has responsibility for banking supervision, but which draws on the experience and knowledge of the Bundesbank.

There can be no effective system of monitoring and supervision that does not draw on the expertise which the central bank is bound to have. But there is a strong case for a separate focus of responsibility. Also, there is obviously a clear case, so long as the system remains in its present form, for a substantial reorganisation of the Bank of England, such as it has already begun. I must add that I remain concerned that there appears to have been no disciplinary action and no resignation and no one has moved jobs within the Bank of England following the BCCI case.

I see the directive as an appropriate part of the moves towards a single market. But before the Commission becomes too excited about its successes in moving towards a single market, it should look at other matters on which progress seems to be slow. The hon. Member for Edinburgh, Central (Mr. Darling) mentioned the insurance market. I understand that the pensions fund directive has not yet been fully agreed. That is another area of financial services in which uncertainty remains and sufficient progress has not been made.

The more that we move towards the single market, the more apparent it will become that it is difficult to operate a single market in financial services without a single currency. It will also become more apparent that the movement of capital, which is inherent in a free market in financial services, will make it difficult for national currencies to maintain their position.

If institutions increasingly operate across national boundaries with free movement of capital and if that movement is further enhanced by the freedom of customers in each of the member countries to place their deposits with, or take their loans from, banks in other countries, the amount of capital flow across frontiers will become ever larger and will increasingly dwarf the reserves available to central banks to defend individual currencies. That reinforces my view that we must move to a single currency if we wish to operate a free market—which I do.

I know from the speeches that the Minister made before he took up his ministerial post that I shall receive a sympathetic hearing from him. I do not wish to embarrass him unduly, but I hope that he is fighting his corner on the issue in government. The capital movements that are implicit in the single market in financial services, along with the effects that we have already seen of the removal of restrictions on capital movement, will become incompatible with the maintenance of national currencies at differentiated levels by traditional means.

Increasing capital movements will make it that much more imperative that we stop talking about opting out of the single currency and dedicate ourselves to achieving the convergence conditions. I cannot understand why anyone is against the convergence conditions. They are supposed to be good for the economy in any case, so we should hardly argue about them.

I see the directive as part of the process of development in Europe, which it is difficult for Britain not to be part of, still less stop. However, that does not stop me wishing to express anxieties about whether, when combined with other regulations under discussion, the directive will be sufficiently effective in protecting bank customers from experiences such as that which BCCI customers faced. There will never be another fraud like BCCI. It is a mistake to design one's system to suit the last fraud. But it certainly will not be the last banking fraud. Our system must be strong enough to be alert to and deal with potential fraud.

8.3 pm

Mr. John Butterfill (Bournemouth, West)

I congratulate my hon. Friend the Minister on the action that he has taken in bringing the directive before the House. It is true to say that the regulations amend some important legislation that we passed in the House after lengthy debate. I participated in scrutinising some of that legislation, such as the Banking Act 1987 and the Financial Services Act 1986.

We must recognise that the financial services sector is important for the United Kingdom. The ability of our financial institutions to operate freely throughout the European Community is of vital national interest to us. There are immense opportunities for British business in that sector.

I pay tribute to the work done by the Minister and his colleagues in the Treasury in securing the directive. It is true that the restraints and controls in many other European countries are not so strong as in Britain, but I am reassured by the fact that those who operate in the United Kingdom under the terms of the directive will come under the control and supervision of the relevant supervisory authorities in the United Kingdom.

The hon. Member for Edinburgh, Central (Mr. Darling) complained about investor compensation. He should remember that the United Kingdom is the only EC country which has in place an effective compensation scheme. The reason why we have not reached a conclusion on that is largely the inadequacy of the provisions in other member countries. The hon. Gentleman would be right to say that we must not drop our standards we must try to persuade other countries to conform to them. However. to denigrate our standards when by and large the Financial Services Act has worked well is an unfortunate line to take.

Mr. Darling

The hon. Gentleman is wrong. There are investor compensation schemes in other EC countries. Admittedly, some of them are not very good—that was my point. I accept that we have such a scheme in Britain, but I am sure that the hon. Gentleman will accept that it is not without justifiable criticisms.

Mr. Butterfill

I accept that our schemes are not yet perfect. They are being developed. They are self-regulatory regimes. That is infinitely preferable to a statutory form of regulation, which the Labour party views with some enthusiasm. Countries which have such regimes do not view them with quite the same enthusiasm. They look at ours with envy. Nevertheless, our schemes could be improved. I hope that the Personal Investment Authority will be established and will do its work in a much more efficient way than the present components of what will be the PIA. I have some doubts about whether that can be achieved without further legislation.

It will probably be necessary to give the Securities and Investments Board the power to direct people into a particular self-regulatory organisation and get rid of the SIB's own regulatory organization—which is an unfortunate development. Not many of us anticipated the development of that organisation when we debated the Financial Services Act 1986.

On balance, we can feel some satisfaction with the system that we have set in place in Britain. It is infinitely superior to that which exists elsewhere in the Community and in the world. Our byword must be to improve consistently on it, not simply to run it down. Therefore, I congratulate the Minister on the work that he has done on the directive. I wish him success in future discussions on other aspects of financial services.

8.7 pm

Mr. Nelson

With the leave of the House, I should like to respond to the debate. I thank all hon. Members for their contributions to the debate. It is an important subject, as all who spoke recognised. It directly affects the prospects, employment and profitability of the services offered by our banking and financial services community and industry in Europe. Several of the points that have been made in the debate are extremely cogent. They will certainly be taken on board by the Government. They are helpful to me in scrutinising future legislation and the implementation of other directives.

The hon. Member for Edinburgh, Central (Mr. Darling) started and finished by talking about the separate but related issue of financial services regulation and supervision. He suggested that I had thrown in the towel at an early stage in my ministerial career on that issue. I hasten to assure him that the principles which lay behind many of the representations that I made as a Back-Bencher are alive and well in the Treasury. I am seeking as best I can, as I did then, to improve depositor and investor protection in Britain. However, given the collective wisdom of fellow Ministers, it is not always as easy to say or do certain things as it was on the Back Benches. I hope that I shall not "go native" too fast, because the matters involved are important, and not subjects of partisan difference.

I think that I agreed with what I thought the hon. Gentleman was saying. I do not want to abandon the existing legislative structure; I see no great advantage in embarking on early, hasty and wholesale reform of our supervision of financial services. After all, such reform visits great uncertainty and great costs on the industry. Unless there is consensus on what is to replace the current arrangements, and a clear way forward which will deliver higher standards of investor protection, it is a foolhardy Government who embark on such a course without lengthy consideration and consultation.

As I have suggested outside the House—I hope that we shall have further opportunities to debate these critical issues inside it—I believe that much can be done within the existing structure to beef up the system of supervision and regulation within the Financial Services Act. It would not be wise to toss aside legislation passed by the House of Commons, to undermine the authority of those who are trying to do a good job, and to embark on an uncertain course.

Mr. Darling

rose—

Mr. Nelson

Let me make a point that relates to what the hon. Gentleman and others have said about compensation. There is a growing feeling in financial services and banking that there is a trade-off between the costs of supervision and regulation on the one hand, and the costs of paying compensation on the other. Many people would be content to pay for a high standard of supervision and regulation if they did not expect to have to pay increasing amounts of compensation, which this year has amounted to some £50 million.

Mr. Darling

I wholeheartedly agree with what the Economic Secretary has said about compensation and the need for tough regulation. I also appreciate that, as a member of the Government, he is not an entirely free agent: as long as the Chancellor remains his boss, he may find that he is constrained. Does he accept, however, that—while there is much to be said for legislating in broad agreement with all the people who will be affected—unless the Government say that they are prepared to step in and take a lead, many people who do not want change and are happy for the present mess to continue will see what he has said as a sign that that can go on for much longer, perhaps for years, before the Government are driven to act? I urge the Economic Secretary to get a grip on the situation now, rather than waiting until another crisis turns up on our doorstep.

Mr. Nelson

I hear what the hon. Gentleman says, but imperatives of a different order are also at work. There is, for instance, the liability that institutions and SROs are having to incur to raise the money among their authorised firms to pay for new orders of compensation: that in itself is driving the case for reforms. It is not really a question whether the Government are forthright or reluctant to bring about change: change is being forced on the system in any event. The City wanted self-regulation, and it now has a high degree of self-regulation; so it must now self-regulate.

In the process of consultation over PIA, I look to the SROs and the firms involved to find a positive way forward. I am limited in what I can and should say about such matters at this stage, but that strikes me as a way forward that is on offer—a way that takes account of the representations that have been made, and the latest response to the consultation process. That reponse has pointed to a number of important changes that should give confidence to potential participants. I hope that a positive, constructive approach to the PIA proposals will be adopted.

The hon. Member for Edinburgh, Central said that it was not enough for supervisors to have the powers: they must exercise those powers. That point was echoed by the right hon. Member for Berwick-upon-Tweed (Mr. Beith), and I think that it was the most critical observation of all. Even if we have the best possible system of supervision, if we do not have the right people and the willingness to exercise the powers concerned the system will be wasted. Similarly, a deficient system may work if good people are operating it. A perfect system can never be arrived at, but any system will involve problems. We can do much to improve resources, in terms of ability, numbers and the financial resources available to supervisors and regulators; we can build on the excellent work that has already been done.

The hon. Member for Edinburgh, Central spoke of the duty placed on auditors to report. That duty was announced in response to Sir Thomas Bingham's report on BCCI. Rightly, it will be subject to consultation with the professional bodies; it is important that we get it right. The bodies concerned are adopting an extremely constructive approach, for which I am grateful. I also appreciate what the hon. Gentleman said about the common approach of hon. Members on both sides of the House to the need for a duty on auditors to report.

The hon. Gentleman asked about notices on doors; he wanted to know whether people would be aware that a European institution was different from an authorised bank, and would know what sort of country was supervising that institution. Registers will be issued by the Bank of England and other institutions clearly stating the identity of the home country and the home supervisor. There will be procedures to ensure that misleading names are not used by companies passporting their services into other countries.

It is not possible to go too far down that line, however: at the end of the day, we are aiming for a common market for these services. We are not trying to differentiate; the central objective must be common supervisory standards, and a universal reliance on the common application of those standards throughout member states. We would not want people to have to choose—hut there should be no need to choose the bank with which one deposits money according to the identity of its home supervisor.

The hon. Gentleman asked whether there were gaps in supervision. I can tell him that memoranda of understanding are being drawn up between the various member states to ensure that no such gaps exist. He also asked what was happening about the investment services directive, on which common agreement has virtually been reached after a protracted negotiation period. Both the investment services directive and the capital adequacy directive—technical as they are—represent major strides for Britain in Europe. I believe that they will protect our main interests at home and in other member states, while ensuring common standards of protection for those who use the services involved. They will also give major opportunities to British firms that are moving into the rest of the European Community.

We would have liked the investment services directive to come into force at the same time as the banking directives, as was originally planned, to give investment firms more generally the passport at the same time as the banks; but we saw no benefit in agreeing, at an early stage, an investment services directive that would restrict activities and damage markets. The United Kingdom and her allies were right to hold out in negotiations for the liberalising directive agreed by the EC Finance Ministers on 23 November.

Many of the larger UK-based investment firms in competition with EC banks are already established in the member states in which they wish to operate. These firms may not need the ISD passport to continue to compete effectively. United Kingdom markets will in turn continue to be as open to EC and overseas investment firms as they are at present.

The ISD will come into force on 1 January 1996. Although we might have preferred an earlier date, this is realistic, as implementation of the rules to underpin the directive will require considerable work by United Kingdom regulators and firms.

The hon. Gentleman asked how new members of the European Community will comply with the regulations. Phased provisions enable countries acceding to the Community to adopt and translate their laws to comply with the Community's. This, like many other directives, will be an essential part of that process. We must not be prepared to extend the passport to countries that do not comply with the standards of supervision and the regulations.

The hon. Gentleman asked whether we have enough resources. I think that we have adequate resources but could probably do with some more in the banking and investment sectors. I hope that we shall achieve consensus on the proposals for the financial services and banking sectors.

The hon. Gentleman and others dwelt on the importance of adequate compensation. The Commission has proposed a working party on the depositor protection directive, which contains important, sensitive and costly issues for the banks to consider.

My right hon.Friend the Member for Worthing (Mr. Higgins) made some extremely interesting points. However hard one tries, one can never prepare for all the questions that one is asked, and his point fell into that category. He said that it was not satisfactory that we could not amend the regulations. I understand that, but, as I said earlier, they could have been subject to the negative resolution procedure. We brought them before the House for debate because we wanted to take on board the views expressed and to take account of them in implementing the regulations.

As my right hon. Friend will know, the Treasury and the Department of Trade and Industry issued a consultation document on this matter. He asked why the Treasury is responsible for insurance, whereas the name of the Secretary of State appears later in the regulations. The European Communities Act 1972 gives the Treasury power to make provision in relation to credit institutions. The amendments to the Insurance Companies Act 1982 fall within that designation. The Secretary of State retains his responsibilities under that Act and, as my right hon. Friend pointed out, the regulations reflect that.

My right hon. Friend asked an important question about what other member states are doing to implement the directive. I asked the same question of my officials, and the answer is that other member states are implementing it in the same way at about the same time.

My right hon. Friend asked an interesting question about the changes in law beyond the scope of the directive that are unamendable. I hope that I can assure him that the scope of the regulations does not extend beyond what is provided for in the directive. That shows the value of bringing measures before the House and of giving hon. Members an opportunity to question whether what is being proposed is beyond the scope of the directive. The House must have the opportunity to revise, amend and vote on such measures.

The right hon. Member for Berwick-upon-Tweed asked how we can rely on other supervisors. As I said in opening, this is the key question. Other supervisors will have to implement the same standards. As my right hon. Friend the Chancellor announced in response to the Bingham report, a peer group review process involving the G 10 supervisors committee and the EC banking advisory committee will ensure that the best ways forward are implemented and that supervisory standards are assessed.

The Government and the Bank propose the establishment of peer group reviews under this process. Member states other than the United Kingdom will be responsible for accepting applications for authorisation from banks. They will have to comply with legislation under this directive. They will then be required to notify the Bank of England that a European institution wishes to passport its services into the United Kingdom and we shall have certain powers.

I refer hon. Members to regulation 9, which sets out requirements on such things as liquidity and compliance with regulations. If they are not complied with, they can provide the basis for restriction or revocation, and action can be taken by the host state.

The right hon. Gentleman mentioned the fascinating question of a split in central banking responsibilities, with supervision of banking being hived off from central banking functions. That point was echoed by the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott). I referred to this at some length on 5 or 6 December in my speech on BCCI, in which I set out as clearly as I could the arguments for and against.

I said that the Government are not minded to do that, but no doubt the legitimate debate on it will go on. On the basis of BCCI, Lord Justice Bingham found no case for such a change, although many hon. Members will know that other EC members have such a separation of powers with a banking commission as well as a central bank. With the arrival of a European central bank or independent central banks within member states, there is often a more compelling case for the separation of such powers. As we do not have that, we have no intention of changing our present arrangements.

I am most grateful for the long interest of my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) in these issues. He emphasised the importance of banking and financial services to the United Kingdom economy and the great opportunities that will result from the introduction of the directive and the regulations. I wholeheartedly concur with him and pay tribute to the way in which, over many years, he has brought his experience and keen interest in investor and depositor protection to the attention of the House, to the benefit of the legislation that has been passed.

We have seen today the fruition of contributions and efforts by many hon. Members over many years. We shall not get it absolutely right. Sadly, there will be failures and collapses in the future. We cannot devise a wholly fail-safe system, but we can improve the situation substantially. We can improve the opportunities for British business, banks and investment companies abroad to ensure not only their greater profitability, growth and employment for the future but, critically and above all, the highest standards of investor and depositor protection, which have always been the hallmarks of attracting funds to this country and which are why Britain—not only the City of London but Scotland and other parts of the country—remains the financial centre of Europe. We should be proud of that, and should be careful to enhance and protect it for the future. The regulations will bring about exactly that possibility.

It is with much confidence and pleasure that I invite the House to agree the banking directive, which will be an enormous advantage and opportunity to these great industries.

Question put and agreed to.

Resolved, That the draft Banking Coordination (Second Council Directive) Regulations 1992, which were laid before this House on 17th November, be approved.