§ 3.29 p.m.
§ Lord DONALDSON of KINGS-BRIDGE
My Lords, I beg to move that this Bill be now read a second time. It is a short Bill which clarifies and amends the law on the investment and borrowing powers of trustee savings banks. I should like to make it clear at the outset that it is a technical Bill: it does not represent any change in Government policy towards the trustee savings banks. Its purpose is to make the law clear beyond doubt. The law governing the activities of trustee savings banks is to be found mainly in two statutes—the Trustee Savings Banks Act 1969 and the Trustee Savings Banks Act 1976. The 1969 Act was a consolidation measure. The 1976 Act which, as many noble Lords will remember, was introduced in this House 1163 by my noble friend Lord Jacques, extended the powers of trustee savings banks so that they could extend the range of their services.
Unfortunately doubts have arisen about the effects of some parts of the 1976 Act, and hence the need for this short Bill. The Bill has therefore only very limited aims. Its passage through another place took up very little of the time of that place, and I hope and trust that its passage through this House can be equally speedy. I believe it will be helpful to the House if I explain briefly the effect of the three substantive clauses and the need for them.
The main purpose of Clause 1 is to put beyond doubt trustee savings banks' powers to lend long term on the security of a mortgage. This is done by the declaration for the avoidance of doubt that trustee savings banks may invest their funds freely except as restricted by statute. In practice, the statutory restrictions are tight. It was thought that Section 9(1) of the 1976 Act, which gave trustee savings banks the power "to carry on the business of banking", would allow trustee savings banks to undertake mortgage lending. But sufficient doubt has been expressed about this—as banks do not in practice lend money to their customers secured on a mortgage for periods as long as, say, building societies—to make it necessary to clarify the law.
It is necessary to do this now not because trustee savings banks in general are planning to start long-term mortgage lending—indeed, they have no immediate plans for doing so—but because one trustee savings bank, the Birmingham Municipal Trustee Savings Bank, has made some loans on mortgage. This bank is the successor body to the old Birmingham Municipal Bank, which had lent money on mortgage for a very long time and became a trustee savings bank only on the understanding that as a trustee savings bank it would be able to continue doing a limited amount of mortgage lending. Since it came into existence on 1stApril 1976, the Birmingham Municipal TSB has advanced some £2½ million in loans secured by mortgages. Because of the doubts about trustee savings banks' powers to lend money on mortgage the granting of these mortgage loans must be validated retrospectively.
1164 I should like to make it clear, my Lords, that it is not the mortgages that have to be validated. The loans themselves are valid. It is the granting of the loans that may have been outside the powers of the trustees. The trustees of the Birmingham Municipal TSB might thus be held to have acted in breach of trust in advancing loans secured by mortgages when they may not have had the power to do so. But, I repeat, this would not affect the validity of the loans themselves.
Clause 2 is required to correct an error made in the bringing into force of the 1976 Act. The Commencement No. 3 Order, which was made in November 1976 and brought into force the major part of the 1976 Act, repealed that part of the 1969 Act—Section 12(2)—which empowered TSBs to operate special investment departments, and also the definition of a "current account deposit". Unfortunately, these two repeals had side-effects which were overlooked at the time this commencement order was made.
The repeal of Section 12(2) produced a situation in which all deposits other than current account deposits were "ordinary deposits" as defined in that Act, and the repeal of Section 13(1) which, in fact, removed the definition of a "current account" made it arguable that current account deposits, too, were "ordinary deposits". Under the 1969 Act, as amended by the 1976 Act, all ordinary deposits—apart from the deposits, not exceeding 10 per cent. of the whole, which can be retained as "till money"—have to be invested with the National Debt Commissioners, and the trustee savings banks should pay no more than 4 per cent. per annum interest on them. Strictly speaking, therefore, trustee savings banks have been ultra vires since 21st November, 1976, in offering accounts paying more than 4 per cent. per annum interest—investment accounts, the TSB equivalent of the clearers' deposit account, and term deposits, where money is invested for a fixed period of one year or more for a higher rate of interest. TSB's operation of these accounts has, therefore, to be validated retrospectively. Retrospection is never popular, but this measure of retrospection does not detract from anybody's rights. Indeed, it works for the benefit of trustee savings banks customers, who have been receiving higher interest 1165 rates than the 4 per cent. maximum rate of interest payable on "ordinary deposits". The problems caused by the repeal of the definition of a "current account deposit" are more easily solved by a simple declaration for the avoidance of doubt in subsection (2) of Clause 2. Clause 2, therefore, enables trustee savings banks to carry on their business in the way that they and the Government always intended.
Clause 3 provides that TSBs shall have the power to borrow, subject to obtaining the approval of the TSB Central Board. The 1976 Act left it unclear whether the TSBs had the power to borrow. It is obviously right that they should be able to borrow, and it seems sensible to put the matter beyond doubt in this Bill, at the same time introducing adequate safeguards for the exercise of the power. I should like to draw noble Lords' attention to just two points on the clause. It provides that no borrowing by TSBs may be secured, so there can be no question of depositors' interests being subordinate to those of other creditors. This is a very important point. I should also like to make it clear that there is no question of TSBs using their powers under this clause to change radically their mode of operations and extend towards being the wider province of wholesale banking. The Treasury have agreed with the trustee savings banks Central Board that TSBs should be allowed to borrow only a very limited amount of money on the market.
As noble Lords will understand, although short, this is quite a complex Bill. I hope that my explanation of its contents has been adequate. In no way does it mark a change in Government policy towards the TSBs. It is a technical Bill which the TSBs themselves wish to see enacted. I ask the House to give the Bill a Second Reading.
§ Moved, that the Bill be now read 2a—(Lord Donaldson of kingsbridge.)
§ 3.38 p.m.
§ Lord LYELL
My Lords, I am sure that the whole House will be grateful to the noble Lord, Lord Donaldson, for his customary courtesy and, his attention to detail in respect of this Bill. Short the Bill may be and, indeed, short was the noble Lord's speech—nine minutes as opposed to the 18 minutes which his colleague 1166 in the other place took to explain what I thought was the same detail as the noble Lord explained. His brevity is welcome and what we have come to expect from the noble Lord. Nevertheless, this Bill is brief.
However, there are some very technical aspects which the noble Lord explained to us which I think are worth the consideration of the House. The Minister in another place pointed out, as one example, that Clause 2 enables trustee savings banks to carry out their banking operations as they and the Government had intended. To me and, I believe, to many in the House, this is a very weird statement, but from it flow several consequences. First, apart from the problem of mortgages, particularly in respect of Birmingham, as was explained by the noble Lord, there seems to have been a misunderstanding, or a misnomer, so far as the ordinary accounts and the investment accounts were concerned. I do not believe that the account-holders will complain that they have been receiving 10 per cent. as opposed to 4 per cent. in their balance since the 1976 Act was passed. Indeed, the noble Lord pointed that out. We believe that this Bill seeks to remove doubts that the 1976 Act and the 1969 Act mean what the banks, their clients and the Central Board intend these Acts should mean.
In the remarks made by the Minister in another place and indeed today by the noble Lord, Lord Donaldson, it is very encouraging to see emphasis being given to Clause 2(2) and the declaration of the avoidance of doubt. The second point which I believe is worth mentioning is that in Clause 3 we find powers given to the trustee savings banks to borrow, subject to certain limits. That must be to the benefit of the 8 million depositors and savers who are the customers of the trustees saving banks. Both aspects to which I have drawn the attention of the House would appear to have arisen through some faulty drafting and what I believe is a very rare example of lack of foresight on the part of the draftsmen and possible misfortune on the part of the Government.
Certainly the Bill itself is complicated, and many of us will hope that it will give the trustee savings banks such powers as they require to provide an 1167 adequate service to their customers. However, I find it very odd that the definitions of "banking" elsewhere in statute law do not define, for the purposes of former Acts, such functions as borrowing or making loans by means of a mortgage so far as trustee savings banks are concerned. Nevertheless, I hope that this Bill can be considered as non-controversial and certainly we on these Benches accept it as such.
However, we must be thankful that this House exists to revise and tidy up such lacunae—I am sure that the noble and learned Lord who sits on the Woolsack will be aware of the terms which were bandied about during the lengthy deliberations on the Patents Bill. I believe that once again the House is showing that we are capable of doing such a job. These errors and lacunae have been discovered in the 1969 and 1976 Acts; but certainly no one could think that the banks have carried out their duties to their customers other than with the greatest competence and skill.
I wonder whether the noble Lord can clear up one small detail for me: perhaps he could do it at some later stage so as not to delay the passage of the Bill. In order to remove doubt, I understand that this Bill is validating countless transactions. When it becomes law we hope that nobody would be affected adversely but rather that they may have gained quite reasonably and fairly in regard to the special investment deposits, as we have heard. This is what the Bill would indicate, but I wonder whether the noble Lord the Minister could confirm that there have been no complaints or actions from any members of the public or from any interested organisations. I cannot imagine that any criticism has arisen, but I am sure that the Minister will at a later stage be able to set my mind completely at rest.
The Government, here and in another place, have taken immense trouble over this Bill to correct what seems to be a tiny gap in the drafting. I should like to pay tribute to the skill, persistence and unceasing vigilance of the Parliamentary draftsmen; but I just wonder, with the noble and learned Lord sitting on the Woolsack, how many other similar lacunae and errors we are likely to find in this 1168 vast measure which is at present occupying your Lordships' House for two days a week; namely, the Scotland Bill—and, of course, we have the Wales Bill to consider also. I hope that in years to come we shall not be having little "correcting" Bills every two years, as we have had with the trustee savings banks. However, I think that the draftsmen do an excellent job and this Bill exists to clear up just one or two areas of doubt. I hope this Bill will enable the trustee savings banks to provide a service to their customers in the way that everyone would wish without the one small area of doubt that, incredibly, existed after the 1969 and the 1976 Acts. May the Bill move on with the good wishes of these Benches and, I believe, of the whole House.
§ 3.44 p.m.
§ Lord BANKS
My Lords, I think perhaps I should begin by declaring an interest, since I am a director of a firm of insurance brokers specialising in life assurance and pensions and therefore may be said to have an interest in an alternative form of small savings. I should like to join with the noble Lord who has just spoken in thanking the noble Lord, Lord Donaldson, for his very thorough explanation of the purpose and scope of this Bill.
The Bill arises, as he made clear, from defects in the 1976 Act. That was an Act which prepared the way for a major transformation in the role of the trustee savings banks, giving effect to the recommendations of the Page Report. It is a transformation which is still gradually taking place and the trustee savings banks are emerging as a third force in banking —a mutual element offering full banking services. However, as we have been told, some doubt has arisen as to whether the 1976 Act adequately provides for full banking services.
There is the doubt about the mortgage lending powers, and I was interested to learn that this clause in the Bill is required not because there is any general intention to enter the mortgage market on any scale but in order to regularise the position of the Birmingham Municipal Bank now a trustee savings bank which has traditionally undertaken a certain amount of mortgage business. I must say that I would not object if there were plans for the trustee savings banks to enter the 1169 mortgage field because I think that competition would not do the building societies any harm.
There is some doubt as to what constitutes ordinary department deposits; there is doubt over the borrowing powers. We on these Benches fully support the Bill and, like the noble Lord, Lord Lyell, I would hesitate to criticise the Parliamentary draftsmen for the errors. We have a vast quantity of legislation passing through Parliament and I suppose it is inevitable that from time to time there will be omissions of this kind which have to be rectified.
Having the Bill before us reminds us of the work which is carried out by the trustee savings banks, of the change in their role which is taking place and of the progress they have made so far to implement the changes. For example, they are now lending to their customers on a modest scale some £25 million—that was to the end of their financial year last November. They are to introduce the credit or trust card in November this year. There has been an increase in their reserves, which is important when you consider that they are now entering into investment fields where the risk, though small, is greater that it has formerly been. Next year they are to lose their tax advantages and I was interested to read what the Chairman of the Trustee Savings Bank Central Board had to say in his annual report about tax relief on savings. He said that the trustee savings banks favoured tax relief going to people and not to institutions, and I think there is a case for a tax relief against all savings.
In the last full year the trustee savings banks have increased the number of cheque accounts by 35 per cent., and I look with envious eyes at the increase in the sales of their trust company, which undertakes the unit-linked life assurance business. A start has been made in the elections of trustees by depositors, which we on these Benches regard as important. So, in conclusion, I would say that we welcome the opportunity to be reminded of what is being done by the trustee savings banks. We wish them well and shall watch with interest how the transformation continues. We support this Bill as being necessary to assist that continuing transformation and the future development of the trustee savings banks.
§ 3.49 p.m.
§ Lord LEATHERLAND
My Lords, there is one relatively small matter that I should like to raise, and I shall raise it without indulging in any embroidery. Once upon a time—that is to say until a few months ago—it was the custom of the trustee savings banks to pay up to £70 per account in interest without liability for any income tax. That is the same principle that applies with regard to the National Savings Bank run by the Post Office. I read a few weeks ago—and having read it in a newspaper, I suppose that it must be correct—that this £70 interest to depositors was no longer to be paid tax free; that it would have to be entered upon a man's tax form and that he would have tax levied upon it.
I am not attempting to make out a case for the old custom to be restored. What I am asking is that my noble friend should, perhaps, make clear to the 8 million people who have accounts with the trustee savings banks—and these are usually small, frugal and prudent people—what exactly the position now is. It may very well be that the Finance Act, or some action by the Chancellor of the Exchequer, has decreed that this £70 interest shall no longer be tax free. All I want my noble friend to do is to make known publicly what the present position is.
§ 3.51 p.m.
§ Lord DONALDSON of KINGS-BRIDGE
My Lords, I am grateful to noble Lords for what they have said about this Bill. May I begin by answering my noble friend's query. The position is that the first £70 of interest is, at the moment, still free of tax. but as the Government's policy, with which I think all Parties agree, is that trustee savings banks should be empowered to operate a full range of banking services and, to become a third influence in the banking world, the intention is that at some stage, as a result of the 1976 Act, this privilege should be withdrawn. But at the moment it still operates.
The noble Lord, Lord Lyell, made only one point which I could not understand, when he described Clause 2 as weird. I can think of various descriptions, but that seems to me a little extreme.
§ Lord LYELL
My Lords, what I was describing as weird—and alas! I was not as clear as the noble Lord, Lord Donaldson, would wish me to have been—were the comments made by his colleague in another place—not the clause itself. I apologise for that.
§ Lord DONALDSON of KINGS-BRIDGE
My Lords, I shall tell my right honourable friend Mr. Denzil Davies that the noble Lord thought his comments were weird, but I shall not comment on that myself. The noble Lord quite rightly said that the necessity for this Bill is the result of faulty drafting. That is true, and we apologise. We agree with him that the Parliamentary draftsmen do a marvellous job, but every now and then something gets by them. The noble Lord asked whether there had been other complaints. The answer is that there has not been one from anybody else.
The noble Lord, Lord Banks, I was glad to hear, expressed the Government's view, to which I have already referred, that the trustee savings banks should become a third force in banking. He referred to the very satisfactory increase in their reserves, which is making them more able to take this on. And my noble friend behind me murmured in my ear, "At least they are open on Saturdays". Alas! I do not think they are. I think that they have a great future, and that this Bill will consolidate the opportunity which the last two Acts were meant to give them to expand in this way. I think that they will do so, and I am grateful for the reception which noble Lords have given to this Bill.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.