Barings

HC Deb 18 July 1995 vol 263 cc1454-73 3.39 pm

The Chancellor of the Exchequer (Mr. Kenneth Clarke)

With permission, Madam Speaker, I should like to make a statement about the Board of Banking Supervision's inquiry into the collapse of Barings. I set up the inquiry in my statement to the House on 27 February and I have recently received the board's report from the Bank of England.

Since receiving the report, I have had to consider very carefully the legal considerations relevant to publication. I am sure that it is right for Parliament to have the report in all its detail, so that its consideration of the Board of Banking Supervision's conclusions and the lessons to be learned can be properly informed.

I have concluded that the balance of the public interest lies firmly in favour of publishing the full report. The report is being published today without any deletions, and copies are available from the Vote Office. I am very grateful to the board and to the investigating team for the huge effort they have put into compiling the report. They have done a thorough and a speedy job.

The report's main findings are: the losses were incurred by unauthorised and concealed trading activities within Barings Futures Singapore; the true position was not noticed earlier because of serious failures of controls and managerial confusion within the Barings group; and the true position had not been detected prior to the collapse by the external auditors, supervisors or regulators of Barings.

The Board of Banking Supervision was not able to gain access to all the information that it would have liked. In particular, it was unable to determine Nick Leeson's motives or whether he was acting alone, because of serious difficulties in obtaining information from Singapore. The obstacles were, I understand, legal ones, and there were some problems in providing the Singapore investigators with all the information that they, in turn, sought from London.

However, it was clearly important to ensure as complete an exchange of information as possible, and I wrote twice to the Finance Minister in Singapore seeking his help in obtaining the co-operation of the authorities there. It is regrettable that serious legal obstacles remained that prevented all the relevant documents from being provided to our board.

Leeson himself was invited to co-operate with the inquiry, but he declined to do so. Through his solicitors, he has been informed of the conclusions that the board has reached about his part in the collapse. His solicitors wrote to the board on 22 June saying that the report's conclusions were inaccurate in various respects, but they did not provide any further details of his response.

The report describes how the concealment of the true nature of dealings in Singapore and the build-up of losses from unauthorised trading began almost as soon as Nick Leeson joined Barings Futures Singapore as general manager and head trader in 1992. By the end of 1993, the cumulative loss was more than £20 million and, by the end of 1994, it was more than £200 million. Losses then leaped spectacularly in the first few weeks of 1995, and, after the collapse on 26 February, the cumulative loss was a staggering £827 million.

Leeson successfully sought to conceal those huge losses throughout by a complex and systematic process of deception and false reporting. Such a massive unauthorised position could not have been established if there had been an effective system of management, financial and operating controls within Barings. The report details a great number of failings, and I shall give the House some examples.

The money required to fund the losses came primarily from London. It was advanced to Singapore with no independent check on the validity of the requests, or any attempt to reconcile them to any known trading position. If management in London had sought to examine the information from Singapore to support the requests for funds, they should have discovered that the information that they were being given was meaningless.

Barings management in London seem generally to have believed that the money being sent to Singapore was being lent to clients to facilitate their trading. However, the credit aspects of these advances were never formally reviewed or considered by the credit committee.

Barings management did not question why they were apparently lending more than £300 million to clients to trade when they had collateral of only about £31 million from clients for those trades. The management of Barings did not question the extraordinarily high levels of apparent profitability of supposed arbitrage dealings in Singapore, which were regarded as being without risk.

In the view of the Board of Banking Supervision, those profits should have been viewed as abnormal and questionable, and the extraordinary profitability reported in 1994 should have attracted the close and thorough attention of the management long before the collapse.

Despite Leeson's efforts at concealment, some information on the account that he used to hide his losses was available to London, but it was never analysed. No one in Barings accepted responsibility for Leeson's activities for the whole of 1994. His deception was made easier as he was not only a trader but was in charge of the so-called back office, which processed the paperwork associated with trading. In 1994, Barings' internal auditors recommended that, as a trader, he should not have this responsibility for the back office. Barings failed to implement that recommendation.

There were also serious and consistent failures and errors in the bank's exposure reports to the Bank of England and in other reports to the Securities and Futures Authority, which made it less likely that they would be alerted to evidence of a problem.

Coopers and Lybrand Singapore was the auditor for Barings Futures Singapore for 1994. In preparing these accounts, the auditor expressed the view that the controls of Barings Futures Singapore were satisfactory. This conclusion is not easy to reconcile with the lack of segregation of duties within the Singapore subsidiary which I have just described.

For both 1993 and 1994, the auditor of the London operations was Coopers and Lybrand London. The report also raises doubts over the effectiveness of its testing of Barings' internal controls. The board considers that more thorough tests would have been likely to reveal the inadequate support for the funding requests from Singapore, but the 1994 audit had not been fully completed, and it will never be known whether Coopers would have raised with the management the important issues which had apparently not been identified or addressed by the time of the collapse.

The independent members of the Board of Banking Supervision were separately asked by me to review the role of the United Kingdom regulators, particularly the Bank of England, in the events leading to the collapse. The board was assisted in this inquiry by a team of accountants, lawyers and derivatives experts, all drawn from outside the Bank of England.

The board does not consider that the events leading up to the collapse point to the need for any fundamental change to the framework of regulation in the United Kingdom; but there is, it concludes, a need for improvements in the implementation of existing arrangements. [Laughter.] The arrangements are only as good as the people who carry them out.

The board considers that the Bank of England reasonably placed reliance on local regulators of the overseas operations, and was also entitled to place reliance on the explanations of the management for the profitability of these operations, and on the other information provided by Barings. Although the regulatory reports from Barings to regulators did contain information that was relevant to the collapse, they did not contain material information which could have alerted the regulators to the existence of the unauthorised positions that had been taken.

The board identified a number of shortcomings in implementation by the Bank of England. It considers that an error of judgment was made in 1993, in giving Barings Brothers and Company an "informal concession" in relation to the normal obligation of a bank to notify in advance exposures representing more than 25 per cent. of its capital base. The time taken by the Bank of England to address the policy issues involved resulted in what the board judged to be an unacceptable delay of almost two years in reimposing the 25 per cent. limit. The Board of Banking Supervision was unable to determine whether the delay on the part of the Bank of England in imposing that limit was a contributing factor in Barings' collapse.

The board also considers that the Bank of England displayed a lack of rigour in the analysis leading to the decision to permit Barings Securities Ltd. and Barings Brothers to be supervised on a joint, or so-called solo consolidation, basis, and in failing to review the decision. Solo consolidation of the two companies need not have resulted in a reduction in control over the advance of funds to the Singapore subsidiary, but in the case of Barings that was the practical effect.

The report draws lessons for the management of banks such as Barings, and for regulators and auditors. The Bank of England has accepted all the recommendations relevant to it, and I am placing copies of the Bank's detailed response in the Library of the House. The only other regulator for which the Board of Banking Supervision draws lessons is the Securities and Futures Authority, which will respond once it has studied the report.

The collapse of the Barings group was clearly a very serious matter, and caused great damage to the reputation of the City of London. It has led to loss for a number of investors in Barings. However, the takeover by ING has stabilised the group, and averted the prospect of far greater loss. Nothing has happened since my earlier statement, and there is nothing in the report, to make me doubt my view that it would have been wrong to use public funds to rescue Barings.

Finally, I should like to remind the House of an important point. No regulatory system can provide a 100 per cent. guarantee against a bank failure, especially where there is a deliberate intention on the part of individual traders to conceal or deceive, combined with inadequate management controls. In cases such as this, it is important that lessons are learned quickly and promulgated widely, so that all parties, including the management of other financial institutions, can learn from the unfortunate example.

The speed and openness of the process of inquiry is the best way to give confidence to the public and to the City. The Bank of England has already responded positively to the report. It is essential that the management of all financial firms do the same.

Mr. Gordon Brown (Dunfermline, East)

We now know from today's 350-page report that the entire capital of Britain's oldest merchant bank was transferred out of the country against the law, without any supervisor or regulator either noticing or finding out.

We now know also from the exposure in the pages of the report that, along the line, Barings' managers, directors, accountants and regulators were also subject to error. We now know also—an astonishing admission from the Bank of England in the report—that there were no guidelines or systems in place to deal with the problem.

Does not the 350-page report reveal not just the blame that must attach to Mr. Leeson, who gambled away a bank and who awaits trial in Singapore, but the fact that the system of regulation designed to detect and check irregularities is now also on trial? Is it really sufficient for the Chancellor, in a statement virtually devoid of significant recommendations for policy change, to tell us that all that is needed is a new memorandum of understanding with the Securities and Futures Authority and a better understanding by the Bank of England of non-banking business and the management structure of banks—all of which we should have expected to have been automatically in place years ago? We have had a statement from the Chancellor that suggests the need rather than answers the case for reform.

Given that the report has discovered not just serious failures of controls and managerial confusion in Barings, but that warnings were ignored from 1992 onwards, why were such failings not identified or dealt with by the regulatory authorities in advance of the collapse? There is no answer to that in the report we have.

Will action be taken against the management of Barings under the Banking Act? Do we have an assurance that they will not be allowed to take senior management positions in other banks, except under the most stringent controls? Will the Chancellor join me in criticising those officials still in post whose management has left pensioners without their savings, and who have disgracefully insisted on taking their share of £95 million in bonuses? That will cause considerable public anger.

What does the Chancellor have to say in response to Mr. Andrew Crockett of the Bank for International Settlements, who warned in January of the risks arising from banks increasingly using the derivatives trade to generate their biggest profits, and with Barings, as the report says, making its system of remuneration for senior executives throughout the bank heavily dependent on profits generated from derivatives? Was not the system itself inherently unstable? Will the Chancellor tell us why no requirements have yet been imposed on other banks to ensure the existence of adequate and greater controls to detect excessive exposure on a daily basis?

As for the role of the Bank of England, is it really right for a junior official in the Bank to carry the can? The report reveals that just about everyone in the know in Singapore, including many newspapers—and, indeed, many in London—was aware of the problems of Barings; but not, it seems, the Bank of England, which should have been the first to know, but apparently was the last to be told.

Is it not clear that the report has provided a damning indictment of the Bank of England's whole approach to the supervision of the banking system? On page 244, the Bank admits that it relied on an informal network of understanding, and made informal concessions—as the Chancellor said—to a management that it now concedes were shambolic. It was thought reasonable to rely on local regulators—regulators who have refused to co-operate in the investigation.

A statement on page 245 symbolises the whole problem: There does not appear to have been any guideline or system in place within the Bank for determining … the situation". Does that not illustrate everything that is wrong with the Bank's approach—an excessive reliance on the old boys network—and does it not demonstrate the need for tougher regulatory controls?

Can the Chancellor really be satisfied with a concluding statement in the report that says only: the Bank should explore ways of increasing its understanding of the non-banking business"? Why is it only now that the Bank proposes to co-operate with the SFA in a better way, and why does it propose only at this stage to prepare internal guidelines to assist its staff"? Is it not symptomatic of the whole culture of complacency that the Governor said only last August that there was no need to worry about the derivatives market, because We now have an expert team monitoring derivatives", getting better all the time? Was it not also over-complacent to dismiss the Americans as "over-excited" by the need for regulation, and to say of derivatives traders such as Barings: These people know what they are doing, whether it's at director level or the chaps on the desk"? These failures reflect not just incompetence, but a flawed structure of regulation. Is it not time to listen to the advice that has come from within London, from the Bank for International Settlements, to learn from the experience of the Securities and Exchange Commission, and to ensure that the regulatory system, nationally and internationally, matches the realities of global trading in the 1990s?

Will the Chancellor now set up a review to consider these matters, and also to consider whether the Bank of England should continue in its regulatory role, or should pass it to a new banking commission? After three significant and embarrassing failures—Johnson Matthey, the Bank of Credit and Commerce International and now Barings—we must do far more than the Chancellor has announced today to ensure effective supervision, and, for savers and investors, to ensure that there is far greater confidence in the integrity of our financial system.

Mr. Clarke

Like everyone else, the hon. Gentleman will no doubt study the report and reach sensible conclusions in the end.

First, let me deal with the Government's role. When Barings collapsed, the Government first took a full part in attempts to sort out the affair that led to ING taking over the bank, and to early fears of substantial losses being minimised. We were not panicked into using public funds to bail out the bank. I then immediately asked the Board of Banking Supervision to exercise its proper function and inquire into the matter, so that the House and the public would know the facts of the case and the lessons to be learned as quickly as possible. We were criticised for acting in that way, but the board has produced a copious report.

As the hon. Gentleman conceded, the report pulls no punches. It describes the facts in considerable detail, and it requires considerable study. Hours of reading are needed to catch up with precisely what went on in Singapore and London, in the bank and elsewhere. The report spares no one from criticism; it has exposed the failures, as far as is possible at this stage, for anyone to read.

The strictures that the hon. Gentleman heaped on Barings management are somewhat understated, compared with those in the report. So far as I am aware, all those responsible in Barings management are no longer with Barings, having left that bank as a result of action taken by the new owners and Barings. Similarly, the man most responsible for the supervision of Barings inside the Bank of England has resigned from that Bank. The attempt to get behind that and to ignore, perhaps, at this stage, on inadequate study, the report's findings on how carefully the trading in London was concealed, and how completely the failure of control inside Barings was concealed, is a mistake.

Having obtained the facts for the House and the lessons to be learned, I now commend the report to the House for study, no doubt, for debate, or for whatever else we wish to do in due course when people wish to consider this matter properly. Meanwhile, open inquiry, full disclosure and a hard-hitting, independent report are the best way of restoring confidence in the Bank of England.

Certainly we need to improve collaboration between supervisors in different countries, a process that has been well advanced by the Basle committee, but this underlines the need to take it further. It is not true that the Singapore authorities flatly refused to co-operate; there was proper reason. The Monetary Authority of Singapore and the Singapore Monetary Exchange are well-regulated bodies, and the reputation of Singapore and the City of London is high in the international arena.

On both sides of this divide, there are legal constraints imposed by the regulatory authorities on the disclosure of information, and that is the only thing that has stood in the way of the full information that will no doubt emerge in due course, when the entire Singapore and London picture is revealed.

There are failings inside the Bank, which is why 17 recommendations are addressed to the Bank and why it has accepted those recommendations and is addressing them, but, with the greatest respect, if one has a regulatory system that the board says is fundamentally right as a framework, it is fully effective only if the efficiency of the people operating it is as good as the ingenuity of the people who are trying to conceal information.

Frankly, just renaming the whole thing and having a new banking commission in a spirit of, "Something must be done, so let's move a lot of brass plates about and have the same people doing the regulating, but call them a different name and put them in a different institution," is a facile response to such a serious matter.

The hon. Member for Dunfermline, East (Mr. Brown) leaps off into the general question of derivatives, which is an important and serious matter. The report makes it clear that the cause of the collapse in this case was not the nature of the derivatives markets, although it is true that derivatives, because of their gearing, enable big positions to be run up more quickly than could occur in the ordinary futures market.

In that market, and in any international trading of this type, if people are skilful enough in their systematic concealing of the true nature of dealing, and if the people responsible for them, in the bank or outside, are complacent enough not seriously to get beneath it, this sort of thing occurs.

Mr. Gordon Brown

Complacent.

Mr. Clarke

The hon. Gentleman says, "Complacent." That is the criticism in the real world that could be hurled at many of the senior people in Barings and in the Bank of England.

Mr. Brown

Hindsight.

Mr. Clarke

It is all very well having hindsight. I have hindsight. The board has hindsight. I compete with the hon. Gentleman in imposing strictures on all those people who have lost their jobs. Any hon. Member putting himself in their position realises that it never crossed their minds that they might be playing some small part in such a huge and systematic process.

Obviously, however, it is clear that the systems inside financial institutions and inside the Bank of England had to be tightened up to ensure that absolutely no complacency or anything else could allow this sort of thing to slip through in future. That action has been taken because of the prompt, open and effective action of this country's Government in discharging their obligations to the House.

Mr. Tristan Garel-Jones (Watford)

Is my right hon. and learned Friend aware that, during his statement, he mentioned the name of my constituent, Mr. Nick Leeson, on about a dozen occasions? Does it not strike my right hon. and learned Friend as odd, to say the very least, as it certainly does both Mr. Leeson's family and most of my constituents, that Mr. Leeson, who is clearly a central figure in this matter, should be sitting in a prison in a member state of the European Union, awaiting extradition to Singapore, when he has made it clear that he is anxious to make a clean breast of this matter in his own country?

Does it not strike my right hon. and learned Friend as surprising, in relation to what I think is a good report that will help to re-establish confidence in the City, that someone who has such a contribution to make should not have been invited to return to this country to make a clean breast of his position, and therefore to enhance the sort of inquiries that my right hon. and learned Friend wishes to pursue?

Mr. Clarke

I appreciate the fact that my right hon. Friend is speaking on behalf of the legitimate interests of his constituent, which is what he and I are elected to the House to do. However, it is not possible to produce a board report that does not make copious references to Mr. Leeson, given that he was personally responsible for the trading and settlement of transactions that ran up a total of £827 million in losses and broke the bank where he was employed.

When it came to publication, I carefully considered Mr. Leeson's position and the public interest. Mr. Leeson must be dealt with by due process of law on whatever charges may be brought against him in whatever jurisdiction, but it seemed to me that the overriding public interest was to restore confidence in the City of London and our regulatory authorities, and to meet the Government's obligations to the House and let the House know as much as we knew, so that it can in due course reach a considered conclusion.

As for Mr. Leeson's possible trials, he was a resident of Singapore, and therefore made himself subject to the laws and jurisdiction of Singapore. If he goes back to Singapore, he will no doubt have a fair trial—[HON. MEMBERS: "Oh."] I am sorry that half the Labour party still thinks that mention of foreigners means that there is no justice to be had. We are dealing with trading in Singapore. I have no doubt that, when considering extradition, the German authorities will consider the nature of the charges against Mr. Leeson, the prospects of a trial there, and, quite properly, German extradition law and whether he should be extradited.

The question whether Mr. Leeson faces charges in this country is a matter for the prosecuting authorities and the Serious Fraud Office, not for Ministers. It is hardly surprising that proceedings are going ahead in Germany, and the British Government can play no part in determining whether Mr. Leeson is extradited from Germany. We cannot repeat the sneers of the Opposition, who seem to think that one should not extradite Brits to foreign countries even when they seem to have been engaged in unauthorised trading activities in Singapore and the concealment of those activities, which resulted in considerable loss for other people.

Mr. Nick Harvey (North Devon)

The report and the Chancellor's statement are scathing about the Barings management, but what lessons are the regulatory authorities going to learn? If there is be no fundamental change, despite what the Chancellor sees as the Bank of England's lack of rigour, can we at least be reassured that there is to be new vigilance with regard to the same people running the front and back office or new restrictions on individuals' trading positions?

What comfort is there in the statement for small investors who believed that they were investing safely in the Queen's bank? Will the Chancellor press the new owners and the banking sector to compensate them, at least in part?

Mr. Clarke

The House can in due course debate the regulatory system, but the board, which put an enormous amount of work into studying the matter, concluded that the framework of regulation is not the problem.

May I make a very loose analogy, of which I hope people will not make too light a use? In a system of law—for example, criminal law, to enter another sphere—if a policeman makes mistakes, it does not mean that the criminal law is defective and should be changed by Parliament. What is important in that instance is that the police take on board the lessons and ensure that those who work for them investigate properly and do not allow things to pass them by which should not have passed them by. That is a rough analogy with what we are facing now.

As for the hon. Gentleman's two specific points, separation between front of house and back of house, between trading and settlements, is, as I understand it, absolutely fundamental to the proper financial control of any action of this kind. I know of no one in the City of London who does not take it as elementary that there should be a separation of responsibilities between the front of house and the back of house.

That is a serious criticism of Barings in the report, but no one out there in any financial house has any grounds to believe that a new rule is required. Anyone should be caught up by his management and regulator if it is discovered that there is no proper separation. Mr. Leeson was in charge of the entire Singapore arrangement—trading and settlements—in Barings Futures Singapore.

I cannot remember the last point that the hon. Gentleman mentioned.

Mr. Harvey

Compensation.

Mr. Clarke

As far as compensation for people is concerned, the losses have been hugely reduced by the successful acquisition of Barings by the Dutch bank, as have those of the 4,000 employees of Barings, most of whom were trading successfully in a good bank and had nothing whatever to do with these operations in Singapore. If one takes a stake in the capital of a company and something goes wrong with the capital and the company goes down, it does not seem obvious to me that one can instantly look for compensation elsewhere.

Several hon. Members

rose—

Madam Speaker

Order. Many hon. Members are seeking to be called, and I must ask for the co-operation of the House. I would like brisk questions, a single question from each Member, and I must ask the Chancellor for brisk answers.

Sir Peter Tapsell (East Lindsey)

Has the attention of my right hon. and learned Friend been drawn to figures published by the Bank for International Settlements which estimates that the worldwide market in derivatives grew from $1 trillion in 1986 to $45 trillion by the end of 1994; a more than fortyfold increase in eight years, to which the Bank of England now plans to add by introducing a strips market in gilts; that the co-operation between national regulators of this market is wholly inadequate; and that there is actual competition between derivative markets in various parts of the world, so that they often positively refuse to pass on information to each other—for instance, between the Singapore and Osaka stock exchanges?

Is not it clear that, unless better international regulation is introduced, we will have a succession of Barings-type collapses throughout the financial markets of the western world?

Mr. Clarke

There is indeed a huge growth in derivative markets all over the world. It is part of the rapidly changing nature of financial markets. I have already conceded that trading in any form of derivative with the new financial instruments now emerging is more highly geared, so that positions can rapidly become more exposed than those in ordinary cash futures markets or anything of that kind.

This report again comes to the conclusion that the collapse was not caused because we were in derivative markets. The collapse was caused because a single trader, from the moment that he arrived there, started concealing what he was doing from the authorities in London, which had a complete collapse of management controls and failed to detect what he was doing. That could have happened in any kind of market.

Subject to that, I agree with my hon. Friend about the importance of much closer collaboration between the supervising authorities in different countries. That becomes ever more important as we see these markets explode at the rate that they are doing, and I am sure that the Bank of England is in the forefront of those who want to extend the present Basle arrangements wider and wider across the globe, especially into the Asian markets which he describes.

Mr. Robert Sheldon (Ashton-under-Lyne)

Does the Chancellor of the Exchequer realise that we have been in this position before? This is not the first occasion that we have investigated in this House. There have been other cases, and the same kind of complacency seems to go on from inquiry to inquiry. Does he not understand that the Bank of England's role in supervision is seriously flawed? It has good friends, it relies on the friendships that it has acquired, and that is not good enough.

The regulations we require demand a certain amount of scepticism. That is not the province of the Bank. The Bank does not behave in such a way. What we really need is a proper regulator, and the Chancellor should turn his attention to that.

Mr. Clarke

I do not think that the Bingham report can be described as complacent. Indeed, this Board of Banking Supervision report cannot be described as complacent. It is no good coming along with set attitudes before the report has even been presented and saying that is complacent or a whitewash, or anything like that. It is an extremely hard-hitting report, with positive recommendations, which have to be acted on by the Bank and by any financial institution. It is no good putting up stereotypes of the old boys network being relied on. This report gives no credulity at all to that kind of broad-brush allegation.

What happened was that the responsible people in the Bank, and one under the responsibility of the man who has now gone, gave an informal concession to the 25 per cent. limit, which was then allowed to run for two years before they were told that no such concession should be allowed. For that and other reasons, there are 17 recommendations addressed to the Bank, and they should be answered and acted on by the Bank, as they are going to be.

It is scratching about and trying to find something new to state, "Never mind the recommendations, we now want a brand new institution to be set up." A brand new institution would probably have exactly the same people working in it as those who work in the Bank of England. It would have to start from scratch, carrying out the recommendations of the Board of Banking Supervision.

Mr. David Shaw (Dover)

Can my right hon. and learned Friend assure the House that this speedy report will result in action? We all welcome the fact that the report has been obtained efficiently and effectively. Can my right hon. and learned Friend, however, assure the House that the action that will result will be that a proper financial review will take place of the financial controls in every bank operating outside London, in respect of their derivatives, futures and options operations? It is clear that the way in which the Bank of England went about its regulation was totally inadequate, and that it did not have proper reporting systems set up in this regard.

Mr. Clarke

I very much trust that such a review is taking place in every financial institution that has been remotely involved in the derivatives market or has significant exposures of any kind. One aftermath of Barings in practice is undoubtedly that every similar institution throughout the globe is trying to ensure that its system protects it against any rogue trader exposing it to such enormous sums that the bank can be brought down or anything like it.

I trust that every institution will have in place the internal financial controls to ensure that no single trader is reporting as profit transactions that are actually losses which he is hiding away in some undisclosed account. That is what Mr. Leeson was doing in Singapore, among other things, to try to conceal and to limit his exposure in the trades in which he was taking part.

I agree with my hon. Friend. The difference is that it is no good pretending that the Government can review the internal auditing procedures of every bank in London. There is no way in which, as the board concedes, the Bank of England can go over every internal audit inside London. We all know that catastrophic errors were made in this case. All institutions, not just Barings and its new owners, the Bank of England and all other regulators, should now be reading the report and taking action, as my hon. Friend rightly demands, on its recommendations.

Mr. Giles Radice (Durham, North)

As the Chancellor's statement has made clear, the report on the Barings crash reveals massive failures by auditors, by supervisors and by regulators. What action does the Chancellor propose should be taken?

Mr. Clarke

The action I have taken is that, within five or six months, from February to July, I have had produced an extremely comprehensive report setting out all the facts and presenting lengthy recommendations about the steps that should be taken by the Bank of England and by others to ensure that the best protection possible is given against such problems in future.

If I had heeded half the requests that were put to me in the aftermath of Barings, when everyone was trying to be wise after the event and everyone wanted some great new judicial study to be set up, we would not have got what we have now, which is a concrete report of great length and thoroughness, which sets out recommendations that now have to be acted on. That is the responsibility of Government and that is why I am accountable to the House for the way in which we do that. I advise the hon. Gentleman now to study the report and to follow it up, if he wishes. He may wish to ensure that the supervisory authorities are taking action as they committed themselves to do in the light of this disaster.

Mrs. Teresa Gorman (Billericay)

Given, as my right hon. and learned Friend has said, that there was a massive failure of supervision in this country of Mr. Leeson's activities, and given that he is a British subject working for a British bank and investing largely British funds, is it not appropriate at least to consider extraditing him back to this country, where the whole story can come out? Mr. Leeson has offered to co-operate with the Serious Fraud Office. Would that not be better than having him hung out to dry while people in this country are able to walk away from their basic responsibility for this whole business?

Mr. Clarke

It is not like that. The question of prosecuting is not for Ministers, but for prosecuting authorities. Whether anybody is charged with an offence in this country, or whether anybody's extradition to this country is sought, is not a matter in which the Chancellor of the Exchequer of any Government should properly take a role. To do so would be simply to set aside the rule of law.

As I have said of Mr. Leeson, he went to take charge of his bank's operations in Singapore, operating on the highly sophisticated market of the Singapore Monetary Exchange, subject to the controls of that exchange and of the Monetary Authority of Singapore. If one goes to live and work in Singapore, one accepts the jurisdiction of Singapore and the laws of Singapore. If one leaves Singapore afterwards, one is entitled to challenge any request for extradition to Singapore which the Singapore authorities make.

Those are matters for the Singapore and German courts, not for the British Government. It would be a bizarre policy stance for the British Government to say that we wanted our prosecuting authorities to bring charges that they are not at the moment minded to bring, in order to rescue somebody from extradition proceedings that he faces in Germany to send him back to Singapore to face charges. That is nothing to do with me; I have neither good will nor ill will towards Mr. Leeson. It is up to him and his lawyers to handle their current problem, which is the extradition proceedings in Germany.

Mr. Brian Sedgemore (Hackney, South and Shoreditch)

Is the Chancellor aware that, when the Governor of the Bank of England gave evidence to the Treasury and Civil Service Select Committee, he said that to transfer more than 100 per cent. of the share capital of Barings bank to Singapore without the permission of the Bank of England was a criminal offence, and that such permission had not been given in that case? Does that mean that criminal proceedings will take place against Barings bank, or is the Chancellor saying that some informal non-legally binding concession constitutes a bar to legal action?

Mr. Clarke

The question of criminal charges is not a matter for me—nor, in my opinion, should it be up to a Minister of the Crown to decide whether any individual should be prosecuted for such things. No doubt the Governor of the Bank of England gave the reply that the hon. Gentleman mentioned, because normally there is a 25 per cent. limit on exposure compared with the capital value of a bank, and in certain circumstances there could be a criminal offence.

It is not a matter for me, but it would appear that, on that occasion, an informal concession had been given by the responsible official in the Bank of England without referring the matter up to anything like the level of the Governor. It is for the Serious Fraud Office to decide whether an informal concession stands in the way of any prosecution. The whole point of the board's report is to bring such matters out, and it is now for the responsible authorities to take action or not to take action, depending on the evidence that we now have, or on any evidence to which they have access, in support of what the board reports.

Mr. Mark Wolfson (Sevenoaks)

I have listened carefully to what the Chancellor has said about Mr. Leeson's position, but it seems to me astonishing and unsatisfactory that the investigation took place here in the City of London without Mr. Leeson's being involved face to face. In the light of the extreme incompetence demonstrated by Barings management, I hope that, whatever may happen to Mr. Lees.on afterwards, it is not too late to bring him back to undergo an investigation.

Mr. Clarke

No one here has the powers to extradite somebody from another country to give evidence to such a board of inquiry. Mr. Leeson was invited to co-operate with the inquiry, and people would have been sent to interview him had he been willing. But he declined to co-operate, and all we received was a bland questioning of the accuracy of the report, by his solicitors.

Even if Mr. Leeson wished to come to this country, he is inconvenienced at the moment by the fact that he is in a German gaol facing German extradition proceedings. It is more than likely that, if he came to this country, he would face extradition proceedings here too, because no doubt the Singapore authorities would seek to extradite him from this country. Those are not matters for me—nor, with the greatest respect, are they matters for the House. They are matters for the prosecuting and legal authorities in the various countries involved.

Mr. Dennis Skinner (Bolsover)

Has it ever crossed the Chancellor's mind that, in the whole series of crashes in the financial world that have extended over many years—in fact, throughout the 16 years that the Tory Government have been in power—[AN HON. MEMBER: "And Maxwell."] Yes, that as well—and Johnson Matthey. When each crash happened, we were told that things would be put right, that the Bank of England would deal with things, and that people would be put in place to watch over what happened.

But since then, there has been not only the Bank of Credit and Commerce International but a whole catalogue of others. Many of the people on the Treasury Bench come from the belly of the banking establishment, and they are always spouting, "Don't let Labour in, they'll lose your money." Yet this is a Government who in 1992 lost £10 billion in an afternoon, and never went near a betting shop.

I have some advice for the Chancellor of the Exchequer. Instead of talking about investing in derivatives, why do the Government not resign and let the British people invest in the future instead?

Mr. Clarke

I can recall three such collapses in a number of years. The City of London is the major international centre for financial dealings across the exchanges, and it has an extremely good reputation for regulation. That reputation is reinforced by the promptness with which we produce inquiries of this kind with a full disclosure of the facts, and also by the fact that we are seen to be taking action in the light of those inquiries.

I said at the end of my statement that it is impossible to devise any system which gives a total guarantee that nobody will ever successfully beat the system. Our system is as good as anywhere in the world, and it must be—as far as we can create it—the best in the world to keep up the reputation of the City of London. The Government have never been charged with direct responsibility for supervising banking. Even the hon. Member for Dunfermline, East (Mr. Brown) is not suggesting that the Treasury or the Government should take control. The attempt by the hon. Member for Bolsover (Mr. Skinner) to make party political points is completely pointless.

Just to show how people can be deceived—we all remember the case of Robert Maxwell, which my hon. Friend the Member for Dover (Mr. Shaw) helpfully recalled. I remember that Mr. Maxwell was the hero of the hour at the Trades Union Congress that I attended, and he practically owned the Labour party. Everybody at the time said that they had doubts about Mr. Maxwell's financial propriety, but they took the money, went to the parties and were patronised by Mr. Maxwell. So we do not want the Labour establishment coming here to tell us that we are deficient in regulating the City of London.

Mr. Quentin Davies (Stamford and Spalding)

Does my right hon. and learned Friend agree that the very fact that we have this public report stands in fine contrast to the practices in other jurisdictions? For example, as far I know, the French authorities have still not produced a public report on the appalling shambles at Credit Lyonnais.

Since the report exposes the most monumental record of management incompetence and failure, does my right hon. and learned Friend agree that it is extremely important for the integrity and international reputation of the City that those involved in that management negligence are not allowed in future to occupy positions of responsibility in financial institutions?

Mr. Clarke

I am grateful to my hon. Friend, and I am sure that he is right. There are other authorities in the world that might be capable of producing as full and frank a response to a problem of this kind as we have done, but there are not very many. There are quite a lot of authorities that would never do it, and quite a lot that—I hope—will learn from our report and our openness. That openness and rapidity of response and reaction is the best reassurance for people who are looking for prudent management and the safety of their funds in the City of London.

As far as I am aware, all the significant people in the management of Barings who were named in the report are no longer with Barings, and the person responsible in the Bank of England is no longer there. Should any of them seek to re-enter the financial services market, they will have an opportunity to do so, but they will have to satisfy the regulators about the propriety of their return.

Ms Diane Abbott (Hackney, North and Stoke Newington)

Does the Chancellor accept that the idea that Leeson acted completely on his own—the so-called rogue trader theory—is increasingly less credible? Has he read the sentence in the conclusions of the report which says: Moreover, we cannot rule out the possibility that Leeson may have been acting in concert with one or more persons"?

Mr. Clarke

I made reference to that comment in the report in my statement, and I accept that. It is clear that Leeson traded in an unauthorised and concealed way. He opened—very rapidly after he arrived—account No. 88888, which was concealed from the management in London, although references to it might have been picked up later in London. He hid losses in that account to make his transactions appear profitable when they were making a loss. When he was finally pressed on the margins and could not find finance, Leeson created apparent financial obligations that were not there, and I recommend that the hon. Lady see what he did.

If we get all the details and papers from Singapore—these may well emerge in due course, when the Singapore authorities have completed their processes—we may be able to rule out the possibility that others were involved. But it is not possible to get away from the fact at the heart of the matter, that this man was in charge of trading and settlements. For reasons at the moment best known to himself, he was not disclosing—indeed, he was systematically concealing—the true nature of that trading to all those in the Barings group in London.

Mr. Nigel Forman (Carshalton and Wallington)

As it appears from everything that my right hon. and learned Friend has said this afternoon that none of the dramatis personae—whether traders, managers, regulators, supervisors or auditors—comes particularly well out of this story, and as few of us have yet had a chance to read this long and important report, will my right hon. and learned Friend at least keep an open mind on the important political point that it may be necessary to take subsequent action on mature consideration once he and his colleagues have had a chance to look further at all the implications? He should not close off that possibility yet.

Mr. Clarke

I shall certainly heed my hon. Friend's wise advice. I think that he is correct. I have published this report at the earliest possible moment, which I appreciate is on the eve of the parliamentary recess. To have held it back until after the recess would have caused unreasonable delay.

My main concern is to re-establish the reputation of the City of London and ensure that every possible lesson is learned from this collapse. We can all read the report properly, and there is plenty of time for more mature consideration. Many people with expertise on the subject, both inside the House and outside, will no doubt come forward with proposals for more precautions against such events happening again.

The Government will keep an open mind and are open to sensible suggestions. What I am rebutting today is off-the-cuff bright ideas that are not in the report. The report makes a full disclosure and many recommendations, and hon. Members should now consider it seriously and decide whether they have a substantial contribution to make on further protection.

Mr. Denis MacShane (Rotherham)

The Chancellor has used parliamentary privilege to find Nick Leeson guilty, and now wants him sent back to Changi gaol to disappear for ever. That is odd behaviour for a lawyer, given that Ministers can instruct prosecuting authorities on extradition matters.

On the main point of public policy, the Chancellor has displayed extraordinary complacency, and the Bank of England has issued a press release saying that nothing fundamental needs to be changed. How soon will it be before people with investments through PEPs or pension funds that are traded overseas have a regulatory body independent of the Bank of England to oversee how banks in this country handle those investments? Leaving it with the Bank of England ensures that, in future, our money will be as unsafe as the Bank of England. The Chancellor should heed the recommendation of my hon. Friend the shadow Chancellor in that regard.

Mr. Clarke

I have said all that I need to say about the legal position. These matters must be settled by due process of law, which is a matter for neither the Government nor this House. Nor can it be resolved by emotional references to overseas jurisdictions, as though courts outside this country are necessarily inferior to those in this country, and therefore British subjects should not appear before them. Hon. Members should make a more objective judgment than that.

On the hon. Gentleman's criticism of the Bank of England, of course the Bank must act as it said it would act on each of the 17 recommendations addressed to it. But it is simplistic politics to say that we should take those matters away from the Bank of England and set up a new banking commission, which presumably will operate the same Banking Act within the same framework, as though one had taken determined action that would improve matters.

We have a good system of regulation in the City of London. The Bank of England is a highly acclaimed regulator, and, when mistakes are made, it is for the Bank of England in the first place to act on them. The independent board charged with the purpose has recommended that there is no immediate need to change the Banking Act which this House has put in place.

Sir Anthony Grant (Cambridgeshire, South-West)

What explanation did the inquiry obtain from Barings senior management about why the extraordinary situation prevailed whereby Leeson was both trader and back office settlement manager? As that most unusual and improper position was apparently known for some time, not only to senior Barings management but to other people, why did not the Bank of England know about it?

Mr. Clarke

First, the internal audit of Barings disclosed that matter in 1994. It must be said, in response to my hon. Friend's incredulity that this should continue, that there is no doubt that Barings failed to take any steps in the light of that.

Although the Bank of England cannot check every internal audit in a bank—that would not be physically possible—nevertheless the report sets out a number of warning signs that should have been heeded. The key matter is whether the Bank should have acted more quickly on the informal concession, apparently given temporarily, on the 25 per cent. limit. The board was unable to come to a conclusion as to whether, had something been done in less than two years on that informal concession, all the problems, including the failure to separate front of house from back of house, might not have to come to light.

Mr. Peter Hain (Neath)

Can we be clear that the Chancellor is asking us to accept the following proposition: that a cunning rogue trader hoodwinks the entire management of one of the oldest banks in the country; then lifts two fingers at all the regulatory controls; and then cons the supervising authorities of the Bank of England? Is the right hon. and learned Gentleman really saying that no policy reforms, not even the tiniest, are necessary to prevent that sort of thing from happening again?

Mr. Clarke

The regulators regulate a bank, acting on the information they receive from senior management and the best information that they can get from that bank. They make proper inquiry, as they should, but the Bank of England cannot be expected to have access to gossip, rumour and details of transactions in all the subsidiaries of that bank.

Mr. Hain

It is amazing.

Mr. Clarke

The hon. Gentleman shakes his head and says that it is amazing. I recommend him to read the report. It is amazing that Mr. Leeson in Singapore opened the account in 1992; and that in early 1995 he had lost more than £800 million, yet the management in London had still not detected that he was trading in an unauthorised way on such a scale.

Mr. Skinner

Do you believe it?

Mr. Clarke

The hon. Member for Bolsover (Mr. Skinner) is straying slightly out of order.

Madam Speaker

Order. The hon. Member for Bolsover (Mr. Skinner) has had his question.

Mr. Clarke

The hon. Member for Bolsover asks me, do I believe it? I accept that the report offers a description of the total collapse of management control. I do not see what motive people in Barings in London could have had for ignoring information they had and allowing their bank to collapse, and them to lose their jobs. The fact is that it is incredible that no system of financial control should exist in such a bank.

Mr. Anthony Coombs (Wyre Forest)

Is not one of the principal lessons of this abysmal episode that the Bank of England seems to have significantly underestimated the effect of the huge increase in derivatives trading, which was mentioned earlier, upon the profitability and viability of banks? That effect was compounded in this instance by the informal concession, which seems to have lain unnoticed for two years. What assurances can the Chancellor give us that such informal concessions will no longer be made by anybody from the Bank of England? What can he say about the extent of derivatives trading and possible control of it?

Mr. Clarke

On the key matter of derivatives trading, the collapse of Barings was not caused because the trading was in derivatives. I think everybody would concede that the rapid and remarkable build-up of the exposure between January of this year and the end of February was no doubt partly because derivatives were being used. I believe that 61,000 separate trades were entered into, all apparently on the assumption that the collapse in the Japanese market following the Kobe earthquake was about to be reversed. Quite a lot of the bank's money was staked on that assumption.

The kind of unauthorised trading entered into, and lack of financial and management control, meant that the bank could get into difficulties regardless of derivatives. Derivatives deserve serious examination, but the collapse of Barings does not offer a case against all derivatives. Derivatives exist in considerable part to protect against risk. The bank in London did not realise that the derivatives were exposed, high-risk positions. Because of its lack of control, it believed that the trade was almost risk-free, arbitrage business, taking advantage of differences in price which could occur for the same commodity in Osaka and in Singapore.

The report again amazes the ordinary reader, because no one questioned how such enormous and risk-free profitability had somehow been discovered by one trader in Singapore. That failure underlines the fact that one must have in place not only elementary financial controls in banks, but strict and rigorous controls of credit and risk, and a proper line of management responsibility. Those are necessary in modern financial markets, because huge exposures can be run up rapidly if some bank tries to proceed without such controls and management in place.

Mr. Keith Vaz (Leicester, East)

The Chancellor acknowledged that the criticism of the Bank of England contained in the report is even more savage than the criticism contained in the Bingham report. Will he tell the House what is so special about Mr. Eddie George that he is able to survive such harsh criticism, relating to the past three years, and will he tell the House how many of the 17 recommendations made by the report are broadly similar to the recommendations made by Lord Justice Bingham?

Mr. Clarke

I did not describe the criticism as savage. There are 17 recommendations, but they do not go to the regulatory structure of the Bank of England, and they do not go to the management controls of the Bank of England. They go to the way in which the responsible people carried out their obligations, including what appears to be a straightforward lapse of giving that informal concession and, two years later, readdressing themselves to the problem and saying that no further concession could be given. The report is not as damning of the Bank of England as it is of Barings, but it is important that the Bank acts on the 17 recommendations.

On the last point, I have not compared the recommendations in the Bingham report with the precise recommendations in the Board of Banking Supervision's report, but I do not believe that they are the same. At no point does the board's report say that the Bank failed to act on things on which it had been told to act after the Bingham inquiry.

Mr. Alistair Darling (Edinburgh, Central)

Is it not significant that the report had to conclude that the Bank of England should find ways of increasing its understanding of non-banking business for which it is responsible, such as financial services business and derivatives? It also concludes, at paragraph 13.61: There does not appear to have been any guideline or system in place within the Bank for determining whether the situation…was … such that it could affect the well-being of the bank. Is that not the ultimate indictment on a central bank, when there are such fundamental failures?

Does not the Chancellor understand that there is a clear public interest in ensuring the integrity of the supervisory system of this country, not only with the Bank of England, but with the Securities and Futures Authority, and that he simply cannot brush off that whole affair as mainly the activities of one rogue trader, or rely on 17 weak recommendations which only touch on the fundamental problems that confront us? The sooner he realises that not only the Opposition but many Conservative Back Benchers believe that a thorough overhaul of the regulatory system is long overdue, the better it will be for this country's international reputation.

Mr. Clarke

I am not brushing off anything; indeed, I keep coming to the House, somewhat repetitively, with full descriptions of what happened at Barings; with announcements that I am setting up inquiries, and producing the results of inquiries which answer almost all the questions on the facts that could conceivably be answered before the Singapore authorities have produced their side of the arrangements; and with recommendations on which we shall act.

The question to which the hon. Gentleman specifically refers covers the position that exists in the real world, where the Bank of England is the lead supervisor for a group that contains banks and other financial services organisations. It is true that we need to keep readdressing the extent to which the necessary skills are there in the Bank when one consolidates those organisations for a regulatory purpose, and the relationships between the Bank and the Securities and Futures Authority, to ensure that those large, complex modern businesses are adequately regulated.

I repeat: we have one of the best regulatory systems in the world, and our openness and promptness in reacting to those problems help strengthen that reputation. It is nonsense to believe that the House must legislate every time and start inventing new organisations, as though that will give a 100 per cent. guarantee that, in the modern financial markets, it will never be possible for a rogue trader to lead to any problems of any kind.