§ 4.28 p.m.
The Earl of Gowrie
My Lords, the amendment having been withdrawn, it might be at this point for the convenience of the House if I repeated a Statement that is being made in another place by my right honourable friend the Chancellor of the Exchequer on banking supervision and Johnson Matthey Bankers. My right honourable friend's Statement is as follows:
"In my Statement on 17th December, I told the House that the Johnson Matthey Bankers affair raised important issues about our present procedures of banking supervision, and the legislative framework within which it is conducted. I announced a full review, which would consider whether any early changes in present supervisory procedures were called for in the light of the problems which had arisen in Johnson Matthey Bankers, and whether there was a need to review or amend the Banking Act 1979.
"The Review Committee has now presented its report, which I have arranged to be published as a Command Paper and have laid before the House. I shall be considering the committee's proposals carefully. In the meantime, I have accepted the report as a basis for immediate consultation. Many of the recommendations do not require legislation. Some are already being implemented. But some of the committee's proposals do require fresh legislation. I therefore propose to publish a White Paper later this year, with the intention of bringing a Banking Bill before the House as soon as possible. The group of Treasury and Bank officials which I set up under the Review Committee's terms of reference is continuing its detailed examination of the Banking Act 1979.
"I am most grateful to the Governor of the Bank of England, who has chaired the Review 385 Committee, and to its members, who comprised senior officials of the Bank of England and the Treasury, and a distinguished commercial banker, Mr. Deryk Vander Weyer.
"A note by the Bank of England on events leading to the failure of Johnson Matthey Bankers, the subsequent rescue by the Bank, and its conduct of Johnson Matthey Bankers' affairs is annexed to the Bank's Annual Report and Accounts, which have been laid before the House today.
"The Bank's account makes it clear that serious shortcomings in the management of Johnson Matthey Bankers led to its collapse—over-rapid expansion of the loan book, heavy concentration of exposures, and lack of adequate control systems. Johnson Matthey Bankers was also guilty of serious misreporting to the supervisory authority.
"The circumstances described in the Bank's report must inevitably raise questions about the role of the auditors, Arthur Young. The board of Johnson Matthey Bankers, which is a wholly-owned subsidiary of the Bank of England, has today announced that it will be initiating legal action against Arthur Young. The Bank's account also explains its reasons for rescuing Johnson Matthey Bankers. In mounting the rescue, I am satisfied that the governor was acting properly within his discretion.
"The board of Johnson Matthey Bankers now estimates the company's losses at £248 million. Of this £130 million has been met by Johnson Matthey Bankers' original capital, reserves and provisions, and £50 million by a cash injection from Johnson Matthey plc, the former parent company. The rest of the losses are to be met from the indemnity of £150 million, split pound for pound between the Bank of England and a group of private sector banks and members of the London gold market. Potential claims on the indemnity to date thus amount to £68 million, of which £34 million falls to the Bank. Though in many instances recoveries will be only over the long term, Johnson Matthey Bankers' present board of directors are satisfied that the total eventual calls on the indemnity will fall comfortably within the £150 million ceiling.
"Since Johnson Matthey Bankers is now its wholly-owned subsidiary, the Bank of England of course stands fully behind it. On 22nd November the Bank placed a deposit of £100 million with Johnson Matthey Bankers, which has since been converted into £100 million of additional capital to strengthen Johnson Matthey Bankers' balance sheet. This will, of course, be fully reflected in the price the Bank of England receives for the sale of Johnson Matthey Bankers back to the private sector, which it plans to conclude as soon as practicable.
"The review committee has made 34 specific recommendations. Their implementation will require action by the Bank of England, supervised institutions, their auditors and the Government. The committee proposes two fundamental changes in the present arrangements, and several important modifications. It has taken the view, which I share, that the Johnson Matthey Bankers' case exposes 386 serious shortcomings in the present legislative framework and supervisory procedures. I shall in my Statement outline only the committee's main proposals. A full summary of their recommendations is annexed to their report.
"The Banking Act 1979 draws a distinction between recognised banks and licensed deposit-takers. Johnson Matthey Bankers was, and still is, a recognised bank. Most of the Act's provisions, and of the Bank's powers set out in it, relate to licensed deposit-takers. A dual system of supervision has resulted. Licensed deposit-takers have been subject to a more rigorous regime of supervision, whereas the supervisors have relied heavily on the integrity and co-operation of the management of recognised banks. With most banks, this confidence has not been misplaced. But the banking industry has expanded rapidly, and its activities have diversified. Recognised bank status—as we have seen with Johnson Matthey Bankers—has not always guaranteed prudence and responsibility.
"The committee recommends that the two-tier system be abolished and that the powers given to the Bank under the Act should apply to all authorised institutions. I accept this recommendation. The committee accepts that all authorised institutions would in consequence be entitled to use banking names. I also intend to tighten the criteria for authorisation, including the minimum net assets required.
"The second fundamental change recommended by the review committee concerns bank auditors. In this context, I am grateful to the Institutes of Chartered Accountants of England and Wales and of Scotland for the co-operation they have afforded the committee.
"The committee recommends that there should in future be a regular dialogue between the supervisors and banks' auditors. I strongly endorse this proposal.
"A bank's auditors are uniquely placed to monitor its control systems and assess its financial prudence. The accountancy profession at present considers itself prevented by a duty of confidentiality to the client from passing information to the supervisors. At the same time, the supervisors are themselves inhibited by the Banking Act from communicating supervisory information to third parties without the institution's consent. This is clearly an unsatisfactory state of affairs. It is in cases where consent is not forthcoming that dialogue might most be necessary. This is why I accept the committee's recommendation that the constraints on contact between auditors and supervisors be removed.
"I emphasise, however, that it is the directors and senior managers of banks who are responsible for the conduct of their business. They have duties both to depositors and to shareholders. This responsibility cannot be shuffled off to auditors or supervisors. The overriding lesson of the Johnson Matthey Bankers' collapse is that banks must have in place adequate management and control systems. I therefore endorse the committee's suggestion that banks should appoint an audit committee and 387 finance director where they do not already have them.
"The committee has also made important recommendations on the staffing and organisation of the Banking Supervision Division of the Bank of England. The work of the supervision division has increased greatly in both complexity and volume in recent years, and the Bank of England now supervises more than 600 institutions. In general it does a difficult job diligently and well. But in the case of Johnson Matthey Bankers the supervisors cannot escape criticism for failing to respond more quickly to the danger signals.
"The committee has recommended that the staff of the division would benefit from wider commercial experience; that there should be more secondments in both directions between the division and commercial banks; that a significant cadre of experienced long-term banking supervisors must be built up and that there should be more professionally qualified accountants in the division. It has suggested that more staff are needed.
"The Bank has already begun to implement these recommendations. The division is being strengthened both in numbers and in the range of expertise available. Some rearrangement of responsibilities has taken place within the division and further secondments to and from commercial banks have been arranged. To provide advice at a senior level, Mr. Sidney Procter, Chief Executive of the Royal Bank of Scotland Group, who retires from that position on 30th September, has accepted the Governor's invitation to serve on a part-time basis as an adviser on banking supervisory issues.
"The failure of Johnson Matthey Bankers stemmed directly from a number of large, related exposures. The committee recommends—and the Bank of England has accepted—that in future no exposure to a borrower, or to closely related borrowers, should exceed 25 per cent. of the lender's capital base, other than in the most exceptional circumstances. 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.
"The review committee's report brings out very clearly the lessons to be learned from the collapse of Johnson Matthey Bankers. But more than that, it proposes a number of important changes to banking supervision in this country, which I am confident will greatly strengthen the system and make a repetition of the Johnson Matthey Bankers' affair very much less likely to occur. I commend it to the House."
My Lords, that concludes the Statement of my right honourable friend the Chancellor of the Exchequer.
§ Lord Barnett
My Lords, I begin by thanking the noble Earl for repeating the Statement made by the Chancellor of the Exchequer in another place. It was a very long Statement and there are lengthy documents to go with it. Also, there is to be legislation, so I am sure your Lordships will want more time to study all that has been put forward in the documents and the 388 Statement. I am certain that I speak for most if not all Members of this House when I say that we would welcome changes to strengthen the Bank's supervisory position, which has been shown to be so inadequate in these particular circumstances.
I should like to take up one or two points with the noble Earl. The Chancellor of the Exchequer says in his Statement that:The governor was acting properly within his discretion"—that is to say, when he did not tell the Treasury about the money being put into Johnson Matthey Bankers. Can the Minister tell the House whether the Chancellor did not expect to be consulted on so important a decision? I hope that there will never be another case of this kind, but if there is, will the Chancellor and the Treasury be so consulted?
I refer briefly to the other recommendation in the Statement, when the Chancellor said that:In future no exposure to a borrower … should exceed 25 per cent. of the lender's capital base, other than in the most exceptional circumstances".The House will have noted that comment. Can the noble Earl assure this House, and reassure many people outside it, that there are no banks in that particular condition at the present time?
The House will have noted also the fact that the auditors are being sued. As the noble Earl rightly said, the Institute of Chartered Accountants and the accountancy profession generally (of which I am honoured to be a member) are only too willing to co-operate with the Government and the Bank of England, and with anyone else, to ensure that what has happened in this case does not happen again. But despite the shortcomings of the legislation, is the Chancellor saying in his Statement that the supervisors did not have it in their power, in co-operation with any particular bank and firm of accountants, to obtain additional information that would have been available to them? Can the noble Earl tell the House therefore whether any action is being taken against the supervisory department of the Bank of England itself?
§ Lord Taylor of Gryfe
My Lords, we on these Benches would also like to thank the noble Earl for repeating the Statement and for his very frank confession of the weaknesses and problems which arose in this particular case. I do not intend, on a banking matter, to make a party political point but I believe that this is the first occasion on which this Conservative Government have nationalised an industry. The net result of this exercise is that the Government, through the Bank of England, have acquired Johnson Matthey, although it is implied in the Statement that the bank will be returned to the private sector at the appropriate time. It is an interesting comment on the debate we had in this Chamber not so long ago, when the virtues of robust private enterprise were lauded and the inadequacies of state enterprise were exposed.
The Statement proves of course that bad management produces bad results whether a company is owned by the private sector or is a state enterprise. I should be interested to hear the Minister's comments on the effect of the indemnity that is being provided by the Bank of England, which I am glad to see should not 389 exceed £150 million. Part of this is being carried by the well-managed banks in the City of London, in most cases quite reluctantly. I should be interested to hear from the noble Earl what impact such underwriting will have on the dividends, which are payable to the Treasury in due course. Much has been said of the fact that the money involved is not public money—but it is public money, since it is part of the accumulated reserves of the Bank of England, and the profits of the Bank of England are made available to the Treasury in the form of dividends.
This is a sad Statement. Any noble Lords who may have read The Times of last Monday, 17th June, which went into this matter in some detail, will realise the full implications of the undermining of the reputation of the financial institutions of the City which is implied in the Statement we have heard today. It was a rescue operation; of this there is no doubt, and that is accepted by the Minister. Not only was the supervision of the Bank of England totally inadequate but also the management of Johnson Matthey was inept. Also, the process of supervision of the Bank of England and its relationship with Johnson Matthey was subject to criticism. As the report in The Times states:There was nothing to celebrate. In just 48 hours the assumption that the inherent authority of the Bank was itself a deterrent to imprudent financing by banks in the City had been shattered'.There is no doubt at all about that; there has been a serious undermining of the authority and the status of the Bank of England in this whole matter.
I should like to ask the Minister whether the Price Waterhouse Report on this matter is to be published and made available and whether the fact that the Fraud Squad was brought in at some stage to investigate the proceedings will lead to any development in that direction, arising from their study of the Price Waterhouse Report.
We very much welcome the Minister's comments and his support of the tighter controls which are going to be introduced now. They will be of some reassurance to all in the banking community in the City. The old rules can no longer apply in the new environment of the City. There has been an invasion by new banking organisations and the growth of financial conglomerates. All of this requires a degree of supervision which is not catered for in the present arrangements.
We welcome also the fact that there is to be insistence on setting up an audit committee within the bank. This is a practice which is generally quite common in industrial and commercial institutions. One is rather surprised that an audit committee did not exist within a well-established organisation such as Johnson Matthey. We look forward very much to the White Paper that has been promised. This will be the subject of great debate and I hope that we shall all be able to make constructive proposals for strengthening supervision and for bringing rules to the governing of the City which will be beneficial not only to shareholders in banks but also to depositors in banks, and to the reputation of the City as a whole.
The Earl of Gowrie
I am grateful for the generally supportive reaction from the opposition Benches to my right honourable friend's Statement. The noble Lord, Lord Barnett, asked about the discretion and independence of the Governor of the Bank of England in this context. The governor's independence has been accepted by successive Governments. Individual judgments are always difficult and when there has been an upset of some kind, any of us can make criticisms with the benefit of hindsight. But in this field, decisions need to be taken very quickly and it seems to me right that the governor should take them and be responsible for them.
The Bank of England Act 1946 left the bank entirely free to conduct its own affairs, as did the Banking Act 1979. I remind the House that both Acts were passed by Labour Governments. My right honourable friend the Chancellor has discussed these issues with the Governor of the Bank of England and the governor has agreed that in future rescue cases he will inform my right honourable friend of his concerns and intentions as fully and as far in advance as possible.
The noble Lord, Lord Barnett, asked also about mistakes by banking supervisors, and about disciplinary measures. It is clear from my right honourable friend's Statement that it was the former management of Johnson Matthey Bankers who were responsible for its collapse and not the Bank of England. The review committee identified weaknesses in staffing of the supervision division of the Bank of England, however, and recommendations to correct this are already being implemented. I think that Mr. Sid Proctor's appointment will enormously help to strengthen this division. That said, of course, specific staff appointments and discipline are matters for the governor.
On that particular aspect of the issue, the noble Lord, Lord Taylor of Gryfe, raised the issue of any criminal activity or fraud. My understanding is that Price Waterhouse is still investigating the affairs of Johnson Matthey Bankers and so far neither Price Waterhouse nor the board of Johnson Matthey Bankers have found any prima facie evidence of fraud. If in due course any such evidence is found I am confident that the board will inform the appropriate prosecuting authority.
The noble Lord, Lord Taylor of Gryfe, asked about the rescue costs. The rescue costs have not affected the level of the bank's dividend to Her Majesty's Government. Losses to date have been absorbed by the banking department of the Bank of England. As my right honourable friend's Statement made clear, Johnson Matthey Bankers is, of course, to be sold as soon as practicable for the best possible price, and that should recoup some money.
On the question of publishing the Price Waterhouse report, the report was commissioned by the Bank of England and the board of Johnson Matthey Bankers, now a wholly-owned subsidiary of the Bank of England, for their own guidance without publication in mind. Much of it relates to information about customers' accounts which, under common law, is confidential. My right honourable friend also accepts the governor's advice that publication would prejudice the conduct of Johnson Matthey Bankers' suit against 391 Arthur Young; that is, of course, the suit of the new board. I understand that the new board has acted on the criticisms by Price Waterhouse of Johnson Matthey Bankers' operations, and the annexe to the bank's report on Johnson Matthey Bankers also reflects the views of Price Waterhouse and the action taken upon them.
As to the mildly teasing remarks with which the noble Lord, Lord Taylor of Gryfe, prefaced his welcome of the Statement, I do not think that they are very well founded. It seems to me that both the governor of the Bank of England and my right honourable friend have moved very quickly in this case to redress any deficiencies in the present system. It is certainly quite right that the Bank of England made the rescue decision. The banking industry is unique in its reliance on confidence and the shock waves which bank failures tend to cause can go far beyond the immediate causes or, indeed, the immediate connections with any given bank. The House will be well aware that support, rescues and reorganisations leading to legislative changes or changes in appointments are not unknown in other parts of industry, whether in the public or private sectors, and I do not see why, when the time is right, that should not be the case in the financial sector.
That said, this was a decision taken by a particular governor in a particular case and it is in no sense a signal to other institutions.
§ Lord Polwarth
My Lords, as the director of a clearing bank, may I say that it would be improper for me to comment on the detail of this Statement at this stage. However, may I ask the Government to accept that I believe the vast majority in the banking industry who conduct their affairs with prudence will welcome any measures designed to maintain and enhance their reputation for sound banking, and will wish to cooperate in supporting the measures proposed when we have time to see them in detail?
The Earl of Gowrie
My Lords, I am sure that is right and I am most grateful for that endorsement of the remarks made in my right honourable friend's Statement as to the general health of the banking community. That endorsement, coming from one as experienced in both English and Scottish banking as my noble friend, is a clear signal which we welcome.
§ Lord Zouche of Haryngworth
My Lords, before the noble Earl sits down I should like to ask him whether the Government are aware of any Johnson Matthey Bankers' customers who have had their loans withdrawn or lines of credit curtailed because of the Johnson Matthey Bankers' collapse? If this has occurred, will these lines of credit or loans be reinstated by Johnson Matthey Bankers or the Bank of England?
The Earl of Gowrie
My Lords, I am not aware of any such cases, but I shall investigate the matter and let my noble friend know.
§ Lord Bruce-Gardyne
My Lords, I join in the thanks to my noble friend for repeating the Statement. Was it 392 not somewhat unreasonable of the noble Lord, Lord Taylor of Gryfe, to accuse the Government of setting a precedent in this instance since the previous Conservative Government undertook a far larger piece of nationalisation in the shape of Rolls-Royce? That apart, is there not some slight danger in this instance of casting out the baby with the bath water, if one can refer to the Bank of England as a baby in this affair? I have in mind that my noble friend referred to the governor acting properly within his discretion in this matter. Is it not unfortunately the case that it is not just the shortcomings of supervision to which my noble friend referred but also, perhaps more fundamentally, the actual circumstances and methods of this rescue operation which may have done some harm to the standing of the bank in the City and to the relationship between the bank and the Treasury? Is it not crucially important that the fences, particularly between the bank and the Treasury, should now be mended as rapidly as possible? Does that not call for a certain amount of, should one say, forbearance on both sides?
As to the announcement of a new banking Act, is it not a little preoccupying that only six years ago we had a Banking Act which was supposed to cover these matters? Although I was not there at the time, one is led to understand that the Bank of England had a substantial role in the preparation of that Act. If we appear to have got it so badly wrong then, are we absolutely certain that we shall be able to get it right now? Is it not conceivable, notwithstanding what my noble friend said in reply to the last question, that the lessons of this affair might possibly have been more effectively achieved if the attempted rescue had not been undertaken in the first place?
The Earl of Gowrie
My Lords, I think that my noble friend would not be right to assume that the system of legislation covering banking activities was generally wrong because of this particular case; rather should he and, I think, the House be encouraged at the speed at which my right honourable friend, the Government and the Bank of England have agreed to make changes in the system, both in terms of the internal ordering of the Bank of England's supervisory division and in terms of my right honourable friend's proposals to plug what may appear to be some legislative loopholes. That seems to be the way, empirically and sensibly, to proceed. As my right honourable friend's Statement said: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".I do not accept that that is an indication of any lack of financial health in the economy as a whole, but certainly what might be a disturbing virus is being, as it were, throttled at birth.
Lord Bruce of Donington
My Lords, I have two short questions to ask the noble Earl, but if he does not find it convenient to answer them now perhaps he would care to write to me. Will he inform us of the form and composition of the audit committees that he has mentioned, and their terms of reference? Will he also give the assurance that there will be complete facility for interchange of views between the audit committees and the auditors of the bank itself?
The Earl of Gowrie
My Lords, I am grateful to the noble Lord, who of course has a distinguished record as an auditor and an accountant, for allowing me the loophole of writing to him. Having been plunged somewhat into the deep end of this Statement in the middle of legislation on another issue, I think that I shall yield to the temptation of taking him up on it.
§ Viscount Trenchard
My Lords, does my noble friend agree that, while everybody has supported the strengthening of the supervisory department of the Bank of England in his right honourable friend's Statement, the key is the highest possible quality of people in the department; and that probably that will not be achieved by simply strict rules of enforcement alone but more by the terms of reference being made wider and thus more interesting for high quality people, following his remarks on secondments from private banks which I think bear on that? Will it be possible for the duties, as they will become, to be looked on as an extremely valuable training area for commercial banks' secondments or for other people taking those jobs?
The Earl of Gowrie
My Lords, I think that my noble friend is quite right. We must of course learn lessons from what transpires. There are lessons to be learnt from Johnson Matthey Bankers itself and its history, as well as from any shortcomings in the supervision division of the Bank of England. I think that everyone in the House who knows or knows of Mr. Vander Weyer will know of his ability and independence. I hope that that will be an indicator of the kind of quality that we shall be able to command in attempting to learn those lessons.