§ The Minister of State, Ministry of Agriculture, Fisheries and Food (Lord Belstead)
My Lords, with the leave of the House I will repeat a Statement being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:
"With permission, Mr. Speaker, I should like to make a Statement.
695 "I am publishing today a White Paper setting out the Government's proposals for strengthening banking supervision, with a view to bringing a new Banking Bill before the House early in the next Session.
"The proposals contained in the White Paper reflect the vital Importance this Government attach to effective supervision. They build on the findings of the review of banking supervision which I set up exactly a year ago today under the chairmanship of the Governor of the Bank of England, in the wake of the Johnson Matthey Bankers débâcle. Six months later, when the group's report was published, I told the House that the Government were minded to accept its two key recommendations. I can now confirm that both will be implemented.
"First, the new legislation will extend to banks the higher supervisory standards which Labour's 1979 Banking Act applied only to licensed deposit-takers, and not to recognised banks. This means that the so-called two-tier system will go. I have, however, concluded that it would be right to confine the use of the name 'bank' to institutions with at least £5 million paid-up equity capital.
"Second, the Government will do whatever is needed to permit effective two-way communication between supervisors and bank auditors. If this can be done on the basis of agreed professional guidelines, underpinned by statute, well and good; if not, we shall not hesitate to take appropriate further powers.
"However, assisted by the extensive consultations that have taken place since I made my Statement to the House in June, I have become convinced that it would be right in a number of respects to go beyond the Leigh-Pemberton Committee's recommendations.
"The key to better supervision is the organisation and ability of the supervisors themselves. Last October the Governor announced changes in the Bank's organisation to give supervision a higher priority. To carry this further, he will now set up as soon as possible a new Board of Banking Supervision within the Bank of England. The new board will be given statutory backing in the forthcoming legislation. It will be chaired by the Governor; a majority of its members will be experienced practitioners from outside the Bank of England. This will bring independent outside expertise to bear at the highest level and give more forceful direction to the task of bank supervision. The board's views will be separately identified in the Bank's annual report, which I lay before the House.
"Second, supervisors cannot do their jobs unless they have adequate, accurate and timely information. This was one clear lesson of the JMB affair. Under the existing legislation it is not a criminal offence to mislead the supervisors, even if this is done knowingly or recklessly. I propose to make it one—with appropriate penalties.
"As I told the House in June, one of the most conspicuous reasons for JMB's failure was that it was over-committed to a small number of closely-related borrowers. Building on the Leigh- 696 Pemberton group's recommendation, I propose to make it a statutory requirement for banks to notify all such exposures in excess of 10 per cent. of their capital base; and all exposures in excess of 25 per cent. will require prior notification.
"But important as they are, rules of this kind are not enough. Supervisors need to have a better knowledge of individual institutions at first hand. I therefore welcome the steps that have recently been taken to increase the frequency of supervisory visits to banks, on a routine basis as well as where there are grounds for prudential concern.
"The nature of banking is changing fast and the supervisory system has to keep up with it. We cannot prescribe for every eventuality in advance. In particular there is a risk that new forms of deposit-taking may fall through the supervisory net. I therefore propose to take powers to vary by secondary legislation the definition of deposits and deposit-taking around which the legislation will continue to be structured.
"I am also very conscious that banking supervision can no longer be considered in isolation. The Government are urgently considering the supervisory problems posed by the growth of financial conglomerates. One of the most obvious requirements is that those who supervise banks should be able to exchange information with other supervisory authorities. Legislation this Session will make this possible. Changes in the confidentiality requirements, including those in the Banking Act, will be secured through the financial services and building societies Bills this Session.
"The details of these and other proposals are in the White Paper. They represent a considered, full and prompt response to the real lessons of the Johnson Matthey Bankers affair. The system of supervision we will be putting in place will be strict, without being a straitjacket. The proposals avoid the pitfalls of unnecessary bureaucracy and administrative upheaval. They also avoid the danger of setting out rules so rigid that they encourage compliance with their letter but not their spirit.
"As I told the House in June, an effective system of banking supervision is essential, not merely for the protection of depositors but for the financial health of the economy as a whole. Effective supervision is also a vital weapon in the fight against fraud, which the Government are determined to do all in their power to combat. But supervision cannot eradicate risk—nor should it. And it must not stifle competition. Nor, above all, can it derogate in the slightest degree from the overriding responsibility of managers to run their businesses soundly and properly.
"Together with the Building Societies Bill, to be read for the second time on Thursday, and the forthcoming financial services legislation, I believe the proposals outlined in this White Paper will help create a comprehensive and effective statutory framework for a rapidly changing financial services sector."
My Lords, that is my right honourable friend's Statement in another place.
§ Lord Barnett
My Lords, may I begin by thanking the noble Lord the Minister for repeating the Chancellor's Statement. I also welcome those parts of the Statement which give statutory backing and strengthening of the rules on notification, including the fact that it will be a criminal offence recklessly to mislead. Many people will be surprised that it is not already a criminal offence recklessly to mislead. The Statement also talks about appropriate penalties, and I wonder whether the noble Lord the Minister could tell us what the Chancellor had in mind in that respect. However, would the noble Lord the Minister accept that it was not the rules alone which led to the Johnson Matthey scandal, but the failure by the Bank of England adequately to supervise what was going on: that was the real problem.
Arising out of that, I have one or two questions for the noble Lord the Minister. First, while I welcome the new powers of notification that the Chancellor referred to, may I ask what happens then? Suppose a bank notifies the new board that they intend to lend more than 25 per cent. of their assets to one customer. What powers, if any, does either the Governor or the new statutory board have to deal with that bank? From listening to the Statement and reading it and other papers, my impression is that there will be no powers whatsoever. Perhaps the Minister would confirm that such is the case.
Further on in the Statement there is a reference to changes in confidentiality requirements, which comes after a reference to the fact that changes will be sought with banks' auditors. What further changes in confidentiality rules does the Minister have in mind here? While I welcome, as I say, the strengthening of the rules on notification and other matters within the Statement, is the Minister aware that the worries of many people in the City and outside it, rightly or wrongly, centre around the impression that the City is a cosy club that can be left to regulate itself, albeit now with statutory backing but apparently with no real powers and no real teeth?
Those worries are surely strengthened by the Chancellor's Statement, for despite the failures of the Bank of England, despite the fact that the Chancellor himself is finding that the Governor's own recommendations were inadequate and has had to go beyond them, and despite the clear failure of self-regulation, he is now proposing to leave the new board of banking supervision within the Bank of England itself and under the chairmanship of the same Governor. Would it not he in the national interest and, indeed, in the interest of the City itself for the new board to be seen as being truly independent by taking it out of the confines of the Bank of England?
§ Lord Taylor of Gryfe
My Lords, from these Benches we welcome the Statement that has just been made and thank the Minister for repeating it in this House. We particularly welcome the opening statement in the foreword of the White Paper, which says:an effective system of banking supervision is as important as the banking system itself.It goes on to say in the opening paragraph, clearly and concisely:The Government consider an effective system of banking supervision to be a matter of the first importance".698 In so far as the Statement reflects that anxiety and that determination, it is very much welcomed.
Perhaps I may make some comment on some of the paragraphs. The assurance that the Government take this matter so seriously is reassuring after the shocking events of the Johnson Matthey affair. I am not discussing whether or not there was fraud; there was certainly inadequate supervision as well as appalling mismanagement in the bank itself and its lending policies.
So far as paragraph 34 is concerned, the two-tier system is to go. I very much support this because it brings the whole system within the same supervisory framework, though I wonder how the figure of £5 million of paid-up equity capital was arrived at. In modern banking terms it seems to me to be rather a small figure as a base for something which might call itself a bank. Perhaps the Minister would deal with that point.
As regards paragraph 5 and the two-way communications, I very much support the idea that the bank supervisors should have a direct line to the auditors of the bank. I hope that this will not he a system for bypassing the board of the bank concerned, and that the bank being reviewed by the supervisors and the auditors will be brought into the picture, since they have the corporate responsibility for the affairs of the bank. The reference there is to agreed professional guidelines, and I understand that the professional bankers are discussing this matter at the moment. Perhaps that point could be clarified.
Concerning the new board of banking supervisors, unlike the noble Lord, Lord Barnett, I am not sure that it is a good idea if you separate the supervisory function from the central bank. I believe that the balance contained in the White Paper is just about right: that you will have within the bank a group of people who will exercise a supervisory function and that they will be of sufficient standing and authority as not necessarily to be a poodle of the bank but able to carry the weight and the power of the Bank of England in exercising their supervisory function. I would have thought that the balance was about right. What concerns me a little is the availability of staff to exercise this supervisory function, because what happened in the case of the Johnson Matthey affair indicated that there was inadequate staffing to support the bank in exercising its responsibilities.
As regards adequate information, as mentioned in paragraph 8, this takes cognisance of the disturbing events at JMB. With regard to exposure and the limitations on exposure of a bank's lending, I am glad that there is flexibility and not a statutory, limited figure because, as the Minister well knows, there is a wide variation in the quality of lending which requires to be taken into account when assessing the volume of lending.
Finally, the Statement recognises that the banks are not what they were. In the past they were simply lending institutions. The banks in the City of London have a great spread of functions in the new situation. They are financial conglomerates, and I am glad that this will be taken into account in the new financial services Bill, to ensure that all aspects of banking activity will be appropriately supervised.
699 This is a very important Statement because it deals with the protection of the integrity and the good name of the City of London. The City of London can easily be diminished and lose its importance as well as its substantial invisible earnings if we do not establish the proper standards which encourage people to trust our financial institutions and the authorities which supervise them.
§ Lord Belstead
My Lords, I am grateful to the noble Lords, Lord Barnett and Lord Taylor of Gryfe, for their response to my right honourable friend's Statement. The noble Lord, Lord Barnett, asked me first of all what will be the penalties for recklessly misleading. They will be appropriate. It will be necessary, for instance, to consult the Home Office, as he will know from his experience, before bringing the exact proposals forward.
He next asked me what happens after notification if the exposure of a bank exceeds 10 per cent. or, on a prior notification basis, 25 per cent. The duty to notify being statutory, there will be criminal sanctions. It might also be necessary, according to what the supervisor thought as a result of the notification, to require extra capital if the exposure was particularly large. In the final analysis, it would be possible for the supervisor to require revocation of authorisation as an ultimate sanction. That is set out at the end of Chapter 10 of the White Paper.
The noble Lord also asked about the changes in confidentiality which the White Paper puts forward. The proposals in the White Paper are a power to disclose information among supervisors. I think that that is precisely addressed to the final point which the noble Lord, Lord Taylor, raised about the fact that the financial institutions are changing so fast, particularly with the establishment of conglomerates, that it was felt that it would be necessary to enable supervisors, if the need arises, to discuss information among themselves without breaching confidentiality rules. It may also be necessary to disclose information to Government departments other than Her Majesty's Treasury in exceptional circumstances when the interests of depositors or the national interest might require it. It is also necessary, and so the White Paper proposes, for supervisors to be able to disclose information to auditors. That is so that the whole system of communication between auditors and supervisors which the White Paper strongly proposes can have real meaning.
The noble Lord, Lord Barnett, criticised the proposal that the new board should be placed within the Bank of England. The proposal for the board of banking supervision is that it shall be within the Bank of England but that there shall be a majority of outside members, five in all. Set out in the relevant chapter of the White Paper are the powers and responsibilities that the new board will have. As I say, the majority on the board would be independent members. The noble Lord may have noticed that in the White Paper there is also the proposal that if the Governor does not wish to take the advice of the majority view on the board he may do that but he must notify my right honourable friend. I would simply add that the proposal is that the annual report of the Bank of England to both Houses 700 of Parliament shall now include a specific report on the activities of the board.
The noble Lord, Lord Taylor, asked why the White Paper had lighted upon £5 million as being the right threshold before a bank can use the name "bank". It is not possible to have an ideal solution and it is conceivable that that is not ideal. It is proposed that there will be power to amend by order in the legislation that will come before both Houses of Parliament. At this stage I simply say that it is hoped that that is about the right level, but it is a matter to which Parliament can come back.
The noble Lord asked whether consultation was going on at the present time on how the two-way cooperation between supervisors and auditors shall be undertaken. That is the case. The way that the Government would like to see it done is by professional guidelines which are set out in Annex 4 to the White Paper. We hope that that is the way forward.
The noble Lord also queried whether staff would be available in the Bank of England to undertake the new supervisory responsibilities set out in the White Paper. In addition to an executive director being appointed for the conduct of banking supervision within the Bank and a standing committee having been formed under the deputy governor to co-ordinate decisions at the Bank on supervisory policy, there have been new senior staff supervisory appointments and, I understand, more support staff appointed in order for increased supervisory visits to be undertaken and also so that there is enough flexibility for secondments, which are set out particularly in the White Paper. He will be pleased to hear that, as a result of all that, there has been an increase in that part of the manning of the Bank of England. I think that that answers the points which both noble Lords put to me.
§ Lord Bruce-Gardyne
My Lords, can my noble friend explain one point? The existing Banking Act is only six years old and was drafted precisely to avert such happenings as those at JMB. What reason do we have to think that we have it right now in view of the suggestion that we got it wrong before? Were not the powers under the existing Banking Act ample for the Bank of England to have caught JMB before it hit the ground, but they were not effectively used?
§ Lord Belstead
My Lords, my right honourable friend's Statement takes the view that the JMB affair shows that there are shortcomings in the 1979 Act. We believe that the proposals that we have put before your Lordships this afternoon go in the right direction to put that right. My noble friend asks why the Government believe that that is so. The answer is the improvements in statutory powers and procedures for authorisation and supervision and also in the organisation of supervision. That is vital and was not addressed in the 1979 Act.
§ Lord Williams of Elvel
My Lords, can the noble Lord clarify two points? Before asking my questions may I say that I very much regret the attitude of the noble Lord, Lord Taylor of Gryfe, in respect of the suggestion of my noble friend Lord Barnett that the 701 commission should be independent of the Bank of England, particularly in view of the fact that when the Chancellor read out his Statement in another place one of his colleagues said that it was the policy of the SDP that banking supervision should be in the form of an independent commission outside the Bank of England?
I come now to the questions that I have for the noble Lord. Lord Belstead. The first concerns the board of banking supervision. I have had the opportunity to read Chapter 5 of the White Paper. The Statement clearly says that the new board will be given statutory backing in the forthcoming legislation. The White Paper, on the other hand, says that the board will assist the governor in the performance of his banking supervisory duties. The areas on which the board will provide advice to the governor are listed as the broad issues involving supervision, the development and evolution of supervisory practice, the administration of the new banking supervisory legislation and the structure, staffing and training of the banking supervision. Nowhere does it say that this new board will have any executive authority over the activities of the banking supervision division.
I do not quite understand why a board needs a statutory backing—a very important phrase—simply to give advice to the Governor of the Bank of England, who can overrule that advice simply by writing a letter to the right honourable gentleman the Chancellor of the Exchequer. This does not seem to me, in spite of the fact that there may be a majority, perhaps 75 per cent., of people on the board who are independent of the bank, a major strengthening of the powers of independence of the Bank of England in banking supervision.
My second question relates to the remark that the noble Lord made in response to the noble Lord, Lord Taylor of Gryfe, in referring to Chapter 7.17 of the White Paper. I think that I heard the noble Lord say, although he will perhaps clarify this for me, that there was provision to alter the figure of £5 million of paid up equity should that be found to be reasonable and acceptable in practice. I see no such undertaking in the White Paper. Will the noble Lord clarify whether this will be a facility in the hands of the Chancellor of the Exchequer or not?
§ Lord Belstead
My Lords, the noble Lord, Lord Williams, first disagreed with the noble Lord, Lord Taylor of Gryfe, on the view that the noble Lord had put forward over where the board of banking supervision should be located. If I may, I shall stick to the position of the Government who believe that it is right that it should be within the Bank of England. Noble Lords opposite will know a great deal more about this than I do, but I am advised that if one looks around the developed countries of the world one will see that the central banks of other countries, almost without exception, are involved in one way or another with banking supervision. We have believed, and I think it is the case, that in this country it is better not to alter things dramatically unless there is need. We believe that the spread of proposals within the White Paper, including that particular proposal, is the way to go about this move.
702 The noble Lord asked a question about there being nowhere any executive authority of the board of banking supervision over the banking supervision division in the Bank of England. It is indeed not supposed to be an executive arm of the bank. But we believe that it is important to give authority to the board and statutory reference to its existence. I would point out that the noble Lord mentioned paragraph 5.6 with its sub-paragraphs but did not go just beyond, to the words:it will be open to the Board and to Board members to raise matters of concern, either general or particular, in the field of banking supervision; and to discuss and provide advice to the Governor on such matters".Finally the noble Lord asked whether I was right in saying that the £5 million trigger figure for being a bank name can be altered by order. I understand that this is the case. I cannot put my finger on it in the White Paper, but I shall try to do so afterwards.
§ Lord Alport
My Lords, am I right in understanding that there is now to be only one category of bank? In those circumstances, is it likely that some of those financial institutions which have not hitherto been regarded as eligible to be considered a bank under the present legislation will be considered under the new legislation provided they can achieve the capital requirement to which my noble friend referred?
§ Lord Belstead
My Lords, my noble friend is right. It is proposed that the two-tier system should be abolished. The Government intend to establish that there will be a threshold of £1 million of net assets for authorisations of institutions that will be authorised under this procedure. It may very well be, therefore, that matters will move in the opposite direction to the one that my noble friend suggests, and that some institutions that have been licensed to take deposits may find they do not have the necessary capital base.
§ Lord Seebohm
My Lords, having spent the whole of my working life in a commercial bank, may I ask two questions and make one comment? My comment is simply to agree with the noble Lord, Lord Taylor of Gryfe, that £5 million is a very small figure nowadays particularly in the new set-up after the big bang. It is tiny.
In the commercial banks we have always had an inspectorate completely separate from the managers of the bank. Once an inspector, you can ask any question about any advance, any asset and any liability and the chief inspector in my bank had direct access to the board. This is the biggest protection that you could possibly have in a bank where things happen very quickly. I do not believe that outside supervisors will have a hope of stopping quite a lot of things that went on in JMB. I would sugget that what are called banks should have an independent inspector of staff, as has been the custom in commercial banks in the past. Statutorily, I believe, they should have one, independent of management. Secondly, should there not be some link between these very adequate and experienced inspectorates and the new form of supervision?
§ Lord Belstead
My Lords, there are, indeed, proposals in the White Paper that there shall be 703 internal controls in authorised institutions. I believe that the thrust of the White Paper on that point is entirely in accord with what the noble Lord, Lord Seebohm, has said.
§ Lord Harris of Greenwich
My Lords, can I ask the noble Lord one point put earlier by my noble friend Lord Taylor of Gryfe? I refer to the additional resources in terms of officials to be made available to carry out these responsibilities. I realise that the question is one that the noble Lord may not be able to answer today but he might perhaps follow it up in correspondence. How many additional officials above the equivalent rank of, say, principal in the Home Civil Service, will be appointed to carry out these responsibilities? There is no point, as I am sure the noble Lord would agree, in giving these additional responsibilities without having the staff back-up to do the necessary work. Is he aware that there have already been many criticisms of the inadequancy of existing arrangements to deal with company fraud, one made by a senior official in the office of the director of Public Prosecutions? Is he aware, secondly, of the woefully inadequate arrangements that we have in terms of the joint fraud squad between the Metropolitan police and the City of London police?
§ Lord Belstead
My Lords, I shall not go over the ground again. I cannot give the exact figure. It is embedded somewhere in the White Paper, and the noble Lord must forgive me if it has slipped my mind. I would repeat that there have been additional appointments made both to senior supervisory posts and also the back-up posts in the bank. I shall write to the noble Lord, if I may, to give him the exact figures.