§ 3.5 p.m.
§ Report received.
§ Clause 2 [The Board of Banking Supervision]:
§ Lord Williams of Elvel moved Amendment No. 1:
§ Page 2, line 29, leave out ("ex officio") and insert ("independent")
§ The noble Lord said: My Lords, it may be for the convenience of the House if I speak also to Amendment No. 2 since the two amendments go together. When this Bill was in your Lordships' Committee we had a fairly detailed discussion about the Board of Banking Supervision, which is the object of Clause 2. It seemed to us at the time that certain difficulties were involved in the formulation of subsection (5) of the clause relating to the circumstances in which the independent members of the board shall be entitled to place before the Chancellor the reasons for their advice once the ex-officio members have given written notice to the Chancellor that it has been decided that the advice of the independent members should not be followed.
§ I raised in Committee a number of problems of procedure in deciding whether the advice of independent members was, or was not, followed. I did not 796 mean at all to indicate that we were opposed to the principle of the board or indeed opposed to the existence of independent members or to the majority being independent members. We support the general principle. We have to recognise however that this was not in the 1979 Banking Act. It is a new feature and for that reason alone deserves our particular scrutiny.
§ We all hope that disagreement between the independent members of the board and the ex-officio members will be very rare. Indeed, it would be surprising if it were a day-to-day occurrence. We must assume that the independent members, in disagreeing with the ex-officio members, will do so on a particularly serious matter and that if the matter is of minor importance there will be some way in which the independent members and the ex-officio members can come together and decide what is the middle way where two views have diverged. We are dealing here with the problem of what happens on the rare occasion of disagreement between the independent members and the ex-officio members on a serious matter.
§ The Bill as drafted is a compromise reached as a result of debates in another place, as the noble Lord told us in Committee. I am bound to say that we are not very happy with the compromise, as the Bill lays on the ex-officio members the duty to give written notice to the Chancellor when and if they decide to ignore the advice of the independent members.
§ In Committee, we had some discussion about the nature of the talks that might take place within the board. We ventilated the problem that there might be different pieces of advice offered by different independent members; that there might be a majority of independent members thinking one way but a minority of independent members thinking another way; that the process of decision as to whether advice was followed was rather a difficult one. But the most important problem we raised—and this is the problem to which I return—was the circumstances under which the independent members of the board have the right to direct access to the Chancellor of the Exchequer.
§ It is, if I may draw a comparison, rather the same as non-executive members of a board of directors of a company. There will be times—indeed there are times—when non-executive directors have direct access to shareholders. They can have that access by means of public correspondence or by means of expressing an opinion at a general meeting of shareholders. The same rights do not seem to be given to the independent members of the Board of Banking Supervision and our amendment seeks to address this very important point.
§ In our view, it should be the independent members who collectively decide whether their advice has not been followed—not the ex-officio members, but the independent members. If they do decide, which, as I emphasise, we hope would be a rare event and on a serious matter, it should be their privilege at that point to have direct access to the Chancellor.
§ This seems to us to be a much better formulation than the formulation at present in the Bill, and it gives the independent members not only the power that they need to make sure that the board performs its functions in a proper, sensible and supportive way, but also the visibility that is required if the board is to be 797 seen by the outside world to be an independent entity, which is what we want it to be. I beg to move.
§ 3.15 p.m.
§ The Secretary of State for Employment (Lord Young of Graffham)
My Lords, these amendments affect subsection (5) of Clause 2. This is an important part of the arrangements for the Board of Banking Supervision. It will be the duty of the independent members of the board under subsection (3) to initiate the discussion as well as to provide advice at the request of the Bank. The scope of this remit extends across the whole range of transactions exercised by the Bank under this legislation, including individual cases as well as more general policy issues.
The Government attach very great importance to the role of the independent members of the board and this is reflected in the safeguard provided by subsection (5). The subsection requires that, in the event that it is not decided to follow the advice of the independent members on any matter, the ex-officio members—that is, the Bank of England members—are required to give written notice of that fact to the Chancellor. The subsection goes further and provides that in such a case there is an explicit right to go to the Chancellor and explain the reasons for their advice.
It is very much to be expected that the board will operate smoothly through discussion and agreement and I am sure that that will be the case. But it is nevertheless right that the Bill should provide for difficult cases where disputes or irreconcilable differences may arise, and that is fully catered for in the provisions that I have described. These arrangements have been carefully thought through.
I have also looked carefully at the proposed amendments. What is proposed is that the obligation—and it should be noted that this is a statutory obligation—to give notice to the Chancellor when the independent advice is not to be followed should fall on the independent members rather than on the Bank of England, as presently provided.
I am grateful to the noble Lord for raising the subject for debate, but nevertheless I fear that I do not agree that the proposed changes would be preferable. The independent members must give the advice that they see fit. If the Bank of England believes that it should not follow that advice, it is surely right and proper that the obligation to notify the Chancellor of this difference should fall on the ex-officio Bank of England members.
On top of this, there would seem to me to be practical difficulties in the alternative which brings me to the second amendment. This amendment would provide that the notice should be given not at the time of the decision but when the independent members believe that their advice is not being followed. In my view, this would create an unnecessary vagueness which is avoided by retaining the present provision placing a clear obligation on the Bank of England to notify its decision. Clearly the Bank is in the best position to know whether the advice is to be followed and knows it at the time of decision rather than later.
I am sure it is not suggested that the Bank of England will fail to discharge its statutory obligation to 798 notify these cases, and the independent members' right to approach the Chancellor is clearly spelled out. It is also the case that the Bank is the responsible executive body under the legislation and that the board's role is advisory. The existing arrangements properly reflect this. That being so, there is every reason to retain the provisions as they are and I invite the noble Lord to withdraw his amendment in the light of what I have just said.
§ Lord Williams of Elvel
My Lords, I am grateful to the Secretary of State for his full reply. I agreed with two-thirds of what he said. His introduction to the subsection and his stressing the importance of the independent members—all that I agreed with and I think that the Opposition would certainly go along with that. Nevertheless, I am bound to say that I started to disagree when he said that the provision for the independent members to express their view was fully catered for. That was his expression. We do not believe that it is fully catered for.
Furthermore, I did not agree with him when he said that there would be practical difficulties in the arrangement that we propose. We see no practical difficulties in this arrangement. Clearly the independent members would have to act as a group. We have not tried to amend the Bill to allow one or other of the independent members to make representations to the Chancellor. The independent members would have to act as a group. The procedure would be perfectly simple. After discussion in the board, the independent members would get together and decide that their advice was not being followed by the ex-officio members. They would then notify the Bank, presumably out of courtesy, that that was what they were going to do and they would have the right of direct access to the Chancellor.
I am afraid that I am not persuaded by the arguments of the Secretary of State. I believe that this is a fundamental point in the Bill and that our amendments would fundamentally improve the Board of Banking Supervision. I am afraid that I am not prepared to withdraw the amendment and I shall seek the opinion of the House.
§ 3.18 p.m.
§ On Question, Whether the said amendment (No. 1) shall be agreed to?
§ Their Lordships divided: Contents, 54; Not-Contents, 86.799
|DIVISON NO. 1|
|Attlee, E.||Elwyn-Jones, L.|
|Aylestone, L.||Ennals, L.|
|Banks, L.||Fisher of Rednal, B.|
|Basnett, L.||Fitt, L.|
|Birk, B.||Gallacher, L.|
|Blyton, L.||Graham of Edmonton, L. [Teller.]|
|Bottomley, L.||Grey, E.|
|Briginshaw, L.||Grimond, L.|
|Bruce of Donington, L.||Hampton, L.|
|Carmichael of Kelvingrove, L.||Heycock, L.|
|Chandos, V.||Irvine of Lairg, L.|
|Cledwyn of Penrhos, L.||Jenkins of Putney, L.|
|Dean of Beswick, L.||Kearton, L.|
|Kilbracken, L.||Ross of Marnock, L.|
|Kilmarnock, L.||Sainsbury, L.|
|Llewelyn-Davies of Hastoe, B.||Serota, B.|
|Lloyd of Kilgerran, L.||Silkin of Dulwich, L.|
|McGregor of Durris, L.||Stallard, L.|
|McNair, L.||Stedman, B.|
|Mishcon, L.||Strabolgi, L.|
|Northfield, L.||Taylor of Blackburn, L.|
|Oram, L.||Taylor of Mansfield, L.|
|Peston, L.||Thomson of Monifieth, L.|
|Ponsonby of Shulbrede, L. [Teller.]||Tordoff, L.|
|Rea, L.||Wigoder, L.|
|Ritchie of Dundee, L.||Williams of Elvel, L.|
|Alexander of Tunis, E.||Hylton-Foster, B.|
|Alport, L||Kemsley, V.|
|Arran, E.||Kinloss, Ly.|
|Bauer, L.||Kinnaird, L.|
|Beaverbrook, L.||Lauderdale, E.|
|Beloff, L.||Lawrence, L.|
|Belstead, L.||Layton, L.|
|Blyth, L.||Long, V.|
|Boyd-Carpenter, L.||Lucas of Chilworth, L.|
|Brabazon of Tara, L.||Mancroft, L.|
|Broadbridge, L.||Manton, L.|
|Butterworth, L.||Marley, L.|
|Byron, L.||Merrivale, L.|
|Campbell of Alloway, L.||Mersey, V.|
|Campbell of Croy, L.||Molson, L.|
|Carnock, L.||Morris, L.|
|Constantine of Stanmore, L.||Mowbray and Stourton, L.|
|Cork and Orrery, E.||Newall, L.|
|Cottesloe, L.||Nugent of Guildford, L.|
|Cranbrook, E.||O'Brien of Lothbury, L.|
|Cullen of Ashbourne, L.||Porritt, L.|
|Davidson, V. [Teller.]||Portland, D.|
|Denham, L. [Teller.]||Rankeillour, L.|
|Denning, L.||Rawlinson of Ewell, L.|
|Derwent, L.||Richardson, L.|
|Drumalbyn, L.||St. Davids, V.|
|Dudley, B.||Saltoun of Abernethy,. Ly.|
|Dundee, E.||Selkirk, E.|
|Effingham, E.||Shannon, E.|
|Ellenborough, L.||Sharples, B.|
|Elliot of Harwood, B.||Skelmersdale, L.|
|Elton, L.||Strange, B.|
|Erne, E.||Strathspey, L.|
|Faithfull, B.||Sudeley, L.|
|Fortescue, E.||Terrington, L.|
|Fraser of Kilmorack, L.||Teviot, L.|
|Gainford, L.||Thorneycroft, L.|
|Greenhill of Harrow, L.||Todd, L.|
|Gridley, L.||Trenchard, V.|
|Hailsham of Saint Marylebone, L.||Trumpington, B.|
|Vaux of Harrowden, L.|
|Hesketh, L.||Westbury, L.|
|Home of the Hirsel, L.||Young of Graffham, L.|
§ Resolved in the negative, and amendment disagreed to accordingly.
§ 3.26 p.m.
§ [Amendment No. 2 not moved.]
§ Schedule 1 [The Board of Banking Supervision]:
§ Lord Williams of Elvel moved Amendment No. 3:
§ Page 80, line 29, at end insert ("provided always that there shall be a majority of independent members on the Board.").
§ The noble Lord said: My Lords, this amendment to Schedule 1 reflects discussion which took place in Committee. It picks up an assurance that the Secretary of State gave us at that time that it was the intention of the Government to maintain the majority of indepen- 800 dent members on the Board of Banking Supervision. It seems to us that, if the Government expressed such an intention in firm terms, then that is something that should be on the face of the Bill. The words may not be perfect and the Government may wish to redraft the amendment. However, it seems to us an important principle which should be in the Bill itself and I beg to move.
§ Lord Young of Graffham
My Lords, it has always been the intention of the Government that independent members should be in a majority on the board. That is also accepted by the Bank of England. The provision of paragraph (3) of Schedule 1 gives a necessary degree of flexibility to change the total number of board members, should that be desirable, in future and subject to the base line of six independent and three ex-officio members. However, this flexibility is not intended to undermine the policy of retaining a majority of independent members and I am therefore happy to accept the amendment of the noble Lord, which puts the matter on a more formal basis.
§ On Question, amendment agreed to.
§ Clause 5 [Meaning of "deposit"]:
§ Lord Williams of Elvel moved Amendment No. 4:
§ Page 4, line 31, leave out ("or an authorised institution").
§ The noble Lord said: My Lords, one-all, so far! I beg to move Amendment No. 4. I am grateful to the noble Lord the Secretary of State for accepting Amendment No. 3. This amendment is not intended as anything other than a probing amendment. We are still somewhat unhappy with the definitions of "deposits" under Clause 5 of the Bill as drafted. I believe that the noble Lord, Lord Beaverbrook, accepted in Committee that this was an extremely complex clause and one which needed a good deal of sorting out and understanding. I am not sure whether our understanding is as full as it should be.
§ I refer particularly to deposits which are normally regarded as deposits but which are not regarded as deposits in the ambit of this clause. In other words, I refer to the exemption given under Clause 5(3)(a), and in particular to those deposits being exempt, including sums paid by an authorised institution. If a deposit made by a bank—which is what we mean when we are talking about an authorised institution—is exempt from Clause 5 of the Bill, it is by definition exempt from Clause 6.
§ Whatever other clauses of the Bill may say, because other clauses redefine deposits for different purposes, authorised institutions that make deposits will be exempt (they shall not be called deposits) and those institutions—and there are a number—which may or may not be authorised, that accept and indeed live off, if I may use that expression, wholesale market deposits from authorised institutions would not be required, as I understand it, to be authorised as deposit-taking businesses under the Bill.
The noble Lord, Lord Beaverbrook, was kind enough to write to me after our discussion on this matter in Committee and said in his letter that a number of institutions would be exempt from authorisation under these arrangements because they
were wholly financed through wholesale money market deposits. Perhaps I may quote from his letter:
These institutions do not raise money from small depositors. They are funded by professional lenders who benefit from the flexibility and competitiveness of a wholesale market and who do not need the protection of the Act".
Clearly, a number of institutions will be on the margin. Some institutions will accept deposits from private policies, if I may use that expression, or from non-authorised institutions. I am curious to know from the noble Lord how far these institutions, which I regard as being at the margin, will have to be authorised under the legislation if they take one deposit or a small number of deposits, as defined by Clause 5, on a regular basis. Even though the bulk of their financing may come from the wholesale market, are they still caught by the Bill?
§ Is there any threshold? May they take just one deposit if they take on a regular basis? What kind of institutions are we talking about? Are we talking about finance houses which finance themselves largely from the wholesale market? Are we talking then about finance houses, now that the limit of authorisation has been extended down to the 20 per cent, relationship? Your Lordships did that in Committee. Are we talking about finance houses that may be 21 per cent, owned by an authorised institution? How does all this fit in? Any help the noble Lord can give me on this will go some way to assuaging my concern about the definition of "deposit" under this clause. I beg to move.
§ Lord Beaverbrook
My Lords, I had indeed assumed that this was a probing amendment to follow up the questions raised in Committee by the noble Lord, Lord Williams, about companies financed by wholesale moneys. As he said, I wrote to him about the subject and a copy of my letter has been placed in the Library.
The amendment is inappropriate. It implies that any loans from authorised institutions should be deposits as defined and that any business which borrows from banks other than very infrequently and which is financed to a material extent from such loans should be treated as carrying on deposit-taking business and is thus required to be authorised or exempted under the Bill. The prohibition would catch most businesses in the country, but more importantly banks as lenders do not need the protection of the Bill. They are sophisticated lenders.
Any business of deposit-taking where the proceeds are lent to others requires authorisation unless the deposits are accepted very infrequently. The cost of becoming authorised, staying under the Bank's supervision, fulfilling capital requirements and filling in the necessary returns suggests that there is a minimum level for viability. Companies which lend and finance by wholesale market borrowing would, for instance, include leasing companies and some finance companies. The Government do not consider that they should be authorised under the Bill.
Banks are sophisticated lenders and do not need protection in respect of their lending to such businesses. In any event the authorities have a degree of indirect influence over such businesses by their 802 supervision of the banks, which provide their funding. If prudential or systematic concerns were to arise the Government would consider using their order-making power under Clause 7 to bring such business within the scope of the Bill's control.
I hope that I have been able to assist the noble Lord by providing some information. It is a complicated clause as he said earlier. In the light of what I have said to him, I hope that he will feel able to withdraw the amendment today.
§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord for pursuing the discussion which we had in Committee and about which he wrote to me. I am still not entirely happy that the definition is fully clear cut and that everybody will understand it. However, I accept that to try to change the clause at this stage would throw the Bill into some confusion. I do not intend to press the amendment. Nevertheless I think it only fair to say that I still have certain concerns about the definition of "deposit" and the way it carries through into Clause 6 and into deposit-taking businesses. I am comforted by what the noble Lord has said in referring me to Clause 7, which gives the Treasury power to amend the meaning of "deposit". I suspect that we shall have to see how the Bill when enacted operates and then, if necessary, the Treasury may have to step in and redefine "deposit" in the appropriate manner. In the meantime, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 6 [Meaning of "deposit-taking business"]:
§ Lord Williams of Elvel moved Amendment No. 5:
§ Page 5, line 17, after ("occasions") insert ("or a particular series of occasions").
§ The noble Lord said: My Lords, when discussing Clause 6 in Committee we had an exchange on the subject of sterling debt securities and sterling commercial paper. The noble Lord, Lord Beaverbrook, was kind enough to write to me and enclose a copy of the order which was issued under the Banking Act and which he said, as I understood him, would be reissued as an order under the Bill when enacted. My difficulty is whether commercial paper or debt securities in currencies other than sterling are covered by this provision.
§ Clearly they are not under the statutory instrument which the noble Lord sent me. That refers specifically to sterling commercial paper and sterling debt. It is quite a common feature that companies can raise, through the mechanism of commercial paper, currencies other than sterling. For instance, dollar commercial paper is now quite a common feature of the market.
§ It seemed to me that to have an amendment of the kind I have drafted—and I do not pretend for a moment that it is perfect—would allow companies and institutions to issue these securities, or this commercial paper or notes, or whatever instrument it may be, on a tap basis as it were. There is no one particular occasion. There may be a series of occasions of which companies may wish to take advantage in releasing on to the market their securities, their notes 803 or paper, or whatever other instrument it may be. It was with those two objects in mind that I tabled this amendment. I do not think we have thought our way through this problem—atleast, I have not. I shall be grateful for any help the noble Lord can give me. I beg to move.
§ Lord Beaverbrook
My Lords, I am grateful to the noble Lord, Lord Williams, for tabling this amendment and I think I may be able to be of some help to him. The noble Lord says that this may not be the definitive amendment that he would like to see, so perhaps I may make one or two points and see whether we can make progress.
This amendment would seriously undermine the protection given to depositors. As the Bill is framed, it lays down a wide prohibition on the acceptance of deposits without authorisation, though it permits a business to accept deposits if they are accepted only on particular occasions. The term "particular occasions", as Clause 6(4) makes clear, means occasions which have characteristics which distinguish each from the other. The Bill therefore allows businesses to raise deposit-type finance through the occasional debenture or loan stock issue to the public. The issues would take place on particular occasions because they would be infrequent and each have unique and distinctive terms, different interest rates, maturity, purpose, and so on.
However, if a company wished to raise finance involving the acceptance of deposits more frequently, it would either have to be authorised under the Bill or ensure that it would benefit under exempt transactions regulations made under the Bill. Such exemption regulations have been made under the existing Act for sterling corporate bonds and for commercial paper. Such exemptions are granted on the basis that there are safeguards to protect the public; for example, that there are disclosure requirements and minimum denominations for deposit so that the small man would not be exposed to the risk of loss. These exemption regulations will be continued under the Bill.
The problem with the amendment tabled by the noble Lord, Lord Williams, is that it would allow a person to accept deposits on a regular basis without being authorised under the Bill or otherwise subject to safeguards. The phrase "particular series of occasions" could, it appears, cover a large number of occasions. Thus it would appear, for example, that a person could accept deposits from the public, say, every Tuesday, as a particular series of occasions and not be subject to the Bill's controls. That, I believe, would expose the public to unacceptable risks in this respect.
If there is a concern that at some future time businesses were not getting sufficient access to non-bank loan finance the appropriate course would be to make further exempt transactions; but only if suitable safeguards can be established as they have been with the regulations under the 1979 Act. The point I made on the previous amendment about Clause 7 would also apply here.
I hope I have been able to be of some assistance to the noble Lord and that he will feel able to withdraw his amendment. I certainly should like to read what he said and consider the point further.
§ 3.45 p.m.
§ Lord Williams of Elvel
My Lords, I am most grateful to the noble Lord. However, I still have the two problems. I accept that under Clause 7 the Treasury "may" make an order varying the exemption provisions. Companies do issue notes, securities and commercial paper on a tap basis and they will continue to do so. We hope they will, because they benefit from that and it is not something which should be stopped. Therefore, just one occasion does not seem to me to cover that important activity.
The second problem that I still have relates to foreign currencies. New York is a major market for commercial paper for British companies and it would be sad, to say the least, if they were in any way prevented from carrying on that business, or the Treasury had to make a new order in some way in order to exempt this type of transaction.
Those are the two questions I had in mind in tabling this amendment and perhaps the noble Lord, with the leave of the House, may be able to help me further.
§ Lord Beaverbrook
My Lords, with the leave of the House, perhaps I may come back on that point. Regarding the noble Lord's point about foreign currency transactions, I understand that it has not been necessary, for example, to make an exemption for dollar securities under the 1979 Act because deposits are not accepted in the United Kingdom. This is not seen as a risk to depositors; only professionals lend in the currency markets. If attempts were made to solicit deposits from small depositors in currency by United Kingdom borrowers, the power to control, or even ban, advertising for such deposits would apply.
I recognise that this is a complicated matter so I should be happy to consider further what the noble Lord has said and perhaps table an amendment at the next stage of the Bill if we have not covered the entire area that the noble Lord wished to cover today.
§ Viscount Chandos
My Lords, from these Benches I should like to support the request to the noble Lord to reconsider the matter as he has already promised to do. Since the 1979 Act the markets have developed in a way that makes it difficult to suggest that even a dollar paper is not offered within the United Kingdom or in areas or time zones around the United Kingdom that would make it possible for investors, albeit large investors, to be able to buy such paper.
§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord and I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 23 [Objection by direction of the Treasury]:
§ Lord Elton moved Amendment No. 6:
Page 18, line 4, after ("controller") insert—
("(i) the interests of the United Kingdom, or of any substantial part thereof, would be damaged; or
(ii) without prejudice to the generality of (i) above,").
§ The noble Lord said: On Second Reading, and again in Committee, I asked your Lordships and the Government to consider the anxiety which many people feel, not all of them bankers, about one striking 805 absence in the Bill. It is the apparent absence of any power of the Bank of England or even the Treasury itself to prevent the takeover of a major British authorised institution by a foreign institution on the ground that such an acquisition would be against the national interest.
§ My concern may be clearer if I abandon the language of the law and stop talking about major authorised institutions and simply refer to our biggest banks, the clearing banks or, to be understood by all and sundry, the high street banks—because they are my primary concern. There are in the Bill, or elsewhere, powers to take over on three distinct grounds. First, there are powers of objection on prudential grounds—for example, the reason that the bidder is not a fit and proper person—and that I expect and would not want otherwise.
§ In Committee my noble friend made some play with the second ground for prohibiting an acquisition. He pointed to the power to prohibit an acquisition by foreign persons or institutions on the ground that our people and institutions cannot buy into their system on the same terms as they can buy into ours. That is what my noble friend termed the requirement for reciprocity. It lies in the Financial Services Act and is now being put severely to the test.
§ In this context, I ask my noble friend whether the reciprocity provision in Section 183 of the Financial Services Act is sufficiently clear in allowing action to be taken against an overseas bank if there is insufficient reciprocity in one of the other financial fields—either investment or insurance business—and vice versa. I understand that that is the intention of the provision, but can my noble friend assure me that it is also its effect? It will be interesting to see whether the demonstration of a lack of reciprocity proves to be such a simple matter, even in the case of Japan, as has been supposed.
§ However, I repeat that that is not the case in which I am primarily interested. The eruption of the Japanese difficulty, which does not arise from banking, has served only to cloud the issue. If it proves that there is no reciprocity with Japan there will be a defence against a Japanese takeover for as long as it lasts. But Her Majesty's Government are doing everything they possibly can to persuade the Japanese to abandon discrimination and adopt reciprocity as soon as possible. If they succeed—we all hope they will succeed soon—Her Majesty's Government will then be in honour bound positively to welcome the Japanese into our high streets. If my noble friend is intending to sit on that particular branch, he had better take note that his colleagues in the other place are sawing away at it for all they are worth.
§ This is a side issue. It is not worth my noble friend's while to sit on that branch at all. There is reciprocity, unless I am very much mistaken, with plenty of other countries—Hong Kong, the United States, and Germany, just for a start. Institutions from those countries and many more beside are entirely unfettered by the reciprocity requirements in the Financial Services Act. Within those countries, and others, which satisfy the requirements, there are a great many institutions which are unquestionably "fit 806 and proper persons" to be bankers in this country. Many of them certainly have the means and some may soon have the motive to get into banking in the British high street. Clearly, no British Government could watch contentedly while that went on.
However, what powers would exist to intervene? I come here to the third power referred to by my noble friend in Committee. It was on this power—referral by the Secretary of State for Trade and Industry to the Monopolies and Mergers Commission—that he placed the greatest weight. Your Lordships will perhaps recall that both he and I referred to the attempted takeover of the Royal Bank of Scotland by the Hongkong & Shanghai Banking Corporation and Standard Chartered. My noble friend directed attention to that case because it had been referred by the Secretary of State for Trade and Industry of the day to the Monopolies and Mergers Commission. Although, for reasons which I made clear, I hope, to the Committee, I do not altogether like the idea of handing this very important aspect of banking control to a non-banking department of state, I withdrew my amendment in order to study the report of the commission further. I wished to see if I could draw from it the comfort which my noble friend led me to expect to find there. It is true that the report adduces the national interest as one of the principal grounds for its decision to recommend against the proposed acquisition. It says in paragraph 12.39:
We find not only the adverse effects on Scotland mentioned in paragraph 12.38, but also that transfer of ultimate control of a significant part of the clearing bank system outside the United Kingdom would have the adverse effect of opening up possibilities of divergence of interest which would not otherwise arise".
We can all agree with that language. It is exactly the point I am making. If matters rested there, I might bicker with my noble friend over the location of this power in the DTI rather than the Treasury or the Bank. But I would be reassured that it existed and that it would be used. The Secretary of State for Trade and Industry has the power to refer foreign bids to take over high street banks to the MMC, and the MMC has actually used the power to recommend against such a bid on precisely the grounds I am advancing. But the defensive machinery rests not with the Secretary of State but with the MMC. It can work only if engaged by the Secretary of State referring the case.
Matters did not rest there. The report was published in January, 1982, and on 5th July, 1984 the then Secretary of State for Trade and Industry made a statement in the form of a Written Answer on mergers policy. The relevant part of it appears in col. 213 of the Official Report for that day and reads:
Apart from market share and assets tests in Section 64, the Fair Trading Act lays down no statutory criteria for references to the MMC. I regard mergers policy as an important part of the Government's general policy of promoting competition within the economy in the interests of the customer and of efficiency and hence of growth and jobs. Accordingly my policy has been and will continue to be to make references primarily on competition grounds. In evaluating the competitive situation in individual cases I shall have regard to the international context; to the extent of competition in the home market from non-United Kingdom sources and to the competitive position of United Kingdom companies in overseas markets".
In that passage, the whole weight of government policy is leaned upon protecting competition. The only reference to the international dimension is in the
context of competition and there is no allusion to the national interest as anything but competition. He who runs may read that statement but he can read it only as meaning that in future competition will normally be the sole ground for referral.
§ That was the last definitive statement on government policy on this matter that there has been. The only public statement since then referring to this policy which I have been able to find, is the statement by the present Secretary of State for Trade and Industry, given in a Written Answer on 5th June, 1986, at col. 615, to the effect that both mergers policy and restrictive trade practices were up for review. They may be under review; but as yet they have yet not been changed.
§ My right honourable friend's statement of July, 1984, is still therefore the Government's current published policy. It is not enough for my noble friend to tell us, as he did in Committee, that our concern will be put before our mutual and right honourable friend, nor to tell us, as in the letter he was kind enough to write to me and copy to your Lordships' Library, that our right honourable friend had given an assurance that there was no reason why that review would result in any weakening of the broad public interest criterion contained in the Fair Trading Act. For, unless I have got it wrong, it is not the Secretary of State who applies the criterion. It is applied by the commission once he has referred the case to it. The latest statement of policy is that he is not likely to refer the case to it at all.
§ Can my noble friend therefore please put on record what is current policy on referrals, pending the completion of the review that is now under way? Will he make his assurance specific to the banking sector? Does the Government's policy now extend to the referral of bids for British institutions from foreign-based bidders on grounds of national interest when the circumstances justify it? I am not asking my noble friend categorically to say that every such bid will be referred. That would be foolish. I merely want an assurance that it is part of the policy to refer cases where appropriate.
§ It is not mere chauvinism which makes the foreign takeover of our high street banks repugnant to us, although that has electoral connotations, no doubt. There is the very practical question of what the takeover of such an influential part of our monetary system would do to the Bank of England and to the Government's control of the economy. The discreet guidance which the Bank of England gives to the clearers is heeded by them because they are British institutions owned predominantly by British shareholders with a very real interest in the health and security of the British economy. Their interest is the national interest. But that system of management will not work when the controlling interest diverges from the national interest. It will diverge when ownership goes out of the country, and, as I hope I have shown, there is nothing in the Bill to stop it doing so. There is certainly nothing in the Bill to give us a new system when it does.
§ Failing a full and quotable assurance on this policy, it seems to me that my amendment which puts the explicit discretion directly in the hands of the principal 808 department of state involved in this field offers the only safe way forward. I therefore beg to move.
§ Lord Williams of Elvel
My Lords, it may be convenient for the House if I speak also to Amendment No. 7 in the names of my noble friend Lord Bruce of Donington and myself. I do not wish to repeat all the arguments which the noble Lord, Lord Elton, has set out. Many of them were set out by both of us at the Committee stage of the Bill. But the noble Lord has brought forward some new developments since then which are very interesting.
I do not feel there is a great deal of difference between our two positions. We both believe there should be some provision in this Bill which protects the national interest specifically in respect of what we call important authorised institutions. The noble Lord, Lord Elton, seeks an assurance from the Secretary of State on the operation of competition policy. No doubt the Secretary of State will decide whether or not he gives such an assurance. My problem is slightly different. I think the Monopolies and Mergers Commission is an unhappy forum to decide issues of this nature.
The noble Lord, Lord Elton, brought forward the correct argument, which was used in the case of the Hongkong & Shanghai Bank's attempted acquisition, that control of the major clearing banks would give a foreign bank considerable influence on the operation of our monetary policy. I think that was a point brought out by the noble Lord to which we would agree. We think that the Monopolies and Mergers Commission is therefore an unhappy body to push this—it is a bit of a fudge frankly—just because it happens to be there.
We are much more worried about the review of competition policy to which the noble Lord, Lord Elton, referred and which the Secretary of State mentioned during the second day in Committee, when he said, referring to that review:One thing I can assure the Committee is that the Secretary of State for Trade and Industry will take these points on board. I cannot say what the outcome of the review will be, but I can say that the position of the banks and the banking system as a whole will be taken into account during the course of the current review of these matters".—[Official Report, 23/3/87; col. 31.]That is fine as far as it goes, but "taken into account" does not give us an assurance of the type that we are requesting.
The Secretary of State for Trade and Industry can take into account all sorts of things in his review of competition policy. Certainly he is entitled to do so and quite rightly should do so; but we are looking for a much stronger assurance that clearing banks, which are major financial institutions, will be protected if it is against the national interest for them to be taken over by foreign institutions. Our view on this matter is perfectly clear. The Monopolies and Mergers Commission is not the right forum. We are wholly uncertain about the result of the competition review. Therefore we believe that there should be something on the face of the Bill.
§ 4 p.m.
§ Lord O'Brien of Lothbury
My Lords, it is too early for me to say that I support the amendment that has 809 been put forward by the noble Lord, Lord Elton, but I have much sympathy with the views that he has expressed. I look forward with great interest to the reply that will eventually be given by the Secretary of State on this matter, in the light of which we can decide what, if anything, we wish to do.
Of course, nowadays we live in a world in which banking is highly internationalised and cross-shareholdings in banks are growing all the time. There is no way of stopping that so far as I can see. Nevertheless, I believe that we should have adequate protection against the taking over of our large deposit banks by foreign institutions. If those banks were eventually to be assimilated by banks of a similar character within the European Community, as the Community moves closer together as a single market, maybe eventually that would become acceptable. It is too early for that to be acceptable now and in my view it would not be at all acceptable for that assimilation to take place with banks in more distant countries.
Can one really envisage a situation in which all the British clearing banks are owned by the Japanese and half of the principal Japanese banks are owned by the British? It may be very international but it seems to me that it is not very sensible. The deposit banks have a special position. They are quite unlike the rest of the banking organisations. They hold the deposits of the people of this country, and it is important that we should enable such institutions to remain in British hands for the comfort of their British depositors. Of course they hold other deposits as well—more so as banking becomes more international—but I believe that competition is not an adequate criterion for judging whether foreign takeovers should be allowed. Reciprocity is not an adequate criterion because, as I say, reciprocity would be met if British banks were owned by the Japanese and Japanese banks were owned by the British, but that would not seem to me to make a lot of sense.
Also, like the noble Lord, Lord Williams of Elvel, I am not very happy about the Monopolies and Mergers Commission. It is true that about 15 years ago when they considered the potential union of Barclays Bank and Lloyds Bank, which was one that those two banks would have undertaken in agreement, it was not acceptable. At that time I was rather inclined to think that the larger bank that would have resulted would have been a more adequate competitor for other large banks in Japan, America and throughout the world. However, in the end in that case the Monopolies and Mergers Commission came to the right answer.
I am very much less happy about the answer to which the commission eventually came about the affair of the Hongkong & Shanghai Bank and the Royal Bank of Scotland. There it showed itself to be singularly lacking in enlightenment. I should much have preferred to have seen that decision taken by people who were closely connected with the financial affairs of our country.
That is all I have to say at this point. I await with interest the reply by the Secretary of State.
§ Lord Campbell of Alloway
My Lords, I support the spirit of this amendment and at the outset should very 810 much like to thank my noble friend the Minister for the exchange of correspondence on the subject of overseas bank takeovers since the Committee stage of the Bill. I wholly agree with, and indeed could not do otherwise than accept, the expertise of the noble Lord, Lord O'Brien of Lothbury, who has confirmed that the concern is with the deposit banks—the high street banks. That is where throughout my personal concern has been.
At Committee stage Amendment No. 50 to Clause 22 was moved by my noble friend Lord Elton. It evoked the ministerial response (to be found at col. 29 of the Official Report, Vol. 486, No. 60) that for Section 84 of the Fair Trading Act 1973 "public interest" was adequate to cover both domestic and overseas takeover bids.
The noble Lord, Lord Williams of Elvel, has said today that the commission is an unhappy forum. The noble Lord, Lord O'Brien of Lothbury, with his vast experience, said that in this sphere competition was not the effective yardstick. Those are not his words but that is the sense of his most interesting and authoritative speech. Therefore the MMC is not wholly acceptable to many noble Lords in this House. It remains an open question but a question on which the door to argument in this Bill is now closed.
At Committee stage I expressed my views, for what they were worth, which probably was not much, and there is no object in repeating them. We now know that my right honourable friend will be looking into the delay factor in the review of the MMC procedure. We understand that according to the view of the Government the expertise of the MMC is such as not to warrant any new special provisions for bank mergers. However, that tentative view was expressed before my noble friend the Minister had the advantage of hearing the remarks of the noble Lord, Lord O'Brien.
This amendment to Clause 23, which deals with the direction to be given by the Treasury, affords some sort of compensatory safeguard as regards:the interests of the United Kingdom, or of any substantial part thereof,irrespective of the question of "fit and proper person" and irrespective of the question of "reciprocity" which arises under the Financial Services Act. I respectfully suggest that it is important, because in this Bill no standard whatsoever is laid down for any reference to the MMC and surely in a matter of such importance it must be right to lay down some standard; even if those standards—and I freely accept the argument—are not justiciable in the form in which this amendment is cast. That perhaps does not matter.
Your Lordships may well think that it is of importance that the standards should be laid down, and on record and that there should be a policy on record. I hope my noble friend the Minister, having heard what has been said, might think it right to give some form of assurance.
§ Viscount Chandos
My Lords, I should like to repeat the support that I gave to the amendment in Committee. The noble Lord, Lord O'Brien, has already expressed the problem succinctly; that is, that reciprocity and competition, either individually or 811 together, cannot be enough in considering the question of the takeover by a foreign bank of one of our major banks. On that basis, therefore, the question of the Secretary of State's decision to refer any such merger becomes critical.
I should like to add only one further point to what the noble Lord, Lord Elton, said on this question. In the two years following the decision of the Monopolies and Mergers Commission on the Royal Bank of Scotland bids, I believe that both the Prime Minister and the current Governor of the Bank of England, who did not hold office at the time of the bid, expressed the view that the decision of the commission was wrong and that the decision should have been made purely on competition grounds.
If this is a fair representation of the way that the Government are thinking and the way in which they will apply their thinking in the course of the review of the Monopolies and Mergers Commission's activities and the Restrictive Practices Court, the concerns of your Lordships' House are all the more valid. Although a review of competition policy that did not delete the national interest aspect might leave the banks adequately protected at this stage, it seems to me necessary and important insurance for the Bill to include adequate protection specifically for our largest banks. There is little to lose.
The noble Lord, Lord Young, expressed surprise in Committee that I felt I could read the mind of the authorities in other countries, and I certainly cannot. However, I think that reserve powers of this sort would not and should not be taken as a step by this country towards greater protectionism in financial services.
§ 4.15 p.m.
§ Lord Thomson of Monifieth
My Lords, I declare an interest as an independent director of the Royal Bank of Scotland.
I should like to support the new clause moved by the noble Lord, Lord Williams, or the amendment of the noble Lord, Lord Elton. I do so, I hope, with all due diffidence. As chairman of one of the national broadcasting authorities, I do not normally intervene in your Lordships' debates, and I have not taken part in any of the earlier discussions on the Bill.
There is perhaps one aspect of the Independent Broadcasting Authority that is relevant to your Lordships' consideration in this matter. Under the broadcasting Acts the ownership and control of any commercial broadcasting station is considered sufficiently important to the national interest to make non-EC ownership illegal. If it is against the national interest for Radio Clyde or Thames Television to be under foreign control, I should have thought that the national interest in maintaining national control of the great clearing banks of the country was even greater.
Britain, unlike for example the United States, has a fairly centralised clearing bank system with only a handful of clearing banks working in close collaboration with the Bank of England. It is a confidential and sensitive relationship built up over a long period of time. By and large I think that it works very well. It is hard to believe that it would not be changed for the worse if a clearing bank in foreign ownership were to have access to these deliberations.
812 The relationship between the clearing banks and the Bank of England lies at the very heart of the nation's financial and monetary strategy. It is very hard to conceive that if, for example, a major Japanese bank, or for that matter the other banks that could be thought of in other parts of the world, were to have access to the heart of the financial system, that would not do great damage to the mutual trust on which it has been based. It is, for example, very hard to see the Japanese offering equal reciprocity on their side.
If it is conceded that the national interest is involved in a foreign takeover of a British clearing bank, the question is how the nation's interest should best be determined. It seems to me, with respect, that the Government and the Treasury cannot avoid the responsibility of making that necessary judgment. It is for that reason that I support either the new clause moved by the noble Lord, Lord Williams, or the amendment of the noble Lord, Lord Elton. I certainly do not believe, for the reasons given by the noble Lord, Lord Elton, that the reciprocity formula is a sufficient safeguard.
The noble Lord, Lord Elton, explored the alternative route by way of a judgment of the Monopolies and Mergers Commission. We all await with great interest what the noble Lord, Lord Young of Graffham, may tell us about further government consideration of that aspect. I can only say to your Lordships as a director of the Royal Bank of Scotland, which has been mentioned frequently in the discussions, that we have been over this course and are much aware of the hazards and uncertainties that are involved in it. It lasted in our case I think for very nearly a year. These hazards and uncertainties the noble Lord, Lord Young, must accept—until he speaks—have grown greater rather than less since the royal bank inquiry.
The noble Lord, Lord Elton, quoted the statement in another place of the Secretary of State responsible on 5th July 1984.I noticed that on Second Reading of the Bill in another place the Minister winding up referred to this situation. On 28th November 1986 he said at col. 583:Trade Ministers are conducting a review of the policy of the Monopolies and Mergers Commission. It has concentrated heavily on domestic competition, but other factors could be taken into account".That itself is a singularly unsatisfactory basis for the present legislation to become an Act.
The public interest involved in a British clearing bank coming under foreign control goes a great deal deeper and wider than simply considerations of competition policy. It is not just a matter of competitiveness either in the domestic or in the international market but of the national interest in safeguarding the means of control of our national banking system with all that that implies, above all for the ordinary depositors in this country, as the noble Lord, Lord O'Brien, so clearly stated.
§ Lord Grimond
My Lords, I support the amendment and the new clause from a position slightly different from that of most previous speakers. I appreciate that the noble Lord, Lord Thomson of Monifieth, speaks with direct knowledge of Scottish banking. As I read it, the amendment would not only apply to potential takeovers by foreign banks. It would not be necessary 813 to prove that those were against the interests of the whole of the United Kingdom. The amendment specifically provides:or of any substantial part thereof.I welcome that, because I wish to speak from Scotland's point of view, although no doubt what I say will be relevant to England and Wales and, for all I know, Northern Ireland.
When the Hongkong and Shanghai Banking Corporation proposed a takeover of the Royal Bank of Scotland, it was the preferred candidate in Scotland. I think I am right when I say that most people in Scotland would have welcomed a takeover by the Hongkong and Shanghai Bank rather than one by its rivals, because the impression was given that it would allow the Royal Bank of Scotland more independence. The question of independence is of great importance in Scotland. Scotland has suffered continually since the first world war from the takeover of major independent companies in all parts of the economy. That is still going on today.
That means that there is not only a direct loss of employment, there is a serious loss of top-level employment. A serious social loss is caused by the removal from Scotland of its ablest and most ambitious people. I beg your Lordships as I have before—as have so many other people—to take that point into account. If one or both of the only remaining truly independent banks in Scotland were taken over by a major London bank, that would be extremely serious for Scotland.
As I understand it, at present there is nothing to prevent that happening so long as some competition remains. Like other noble Lords, I believe that this is not solely a question of competition and that it should not be left to the MMC. I candidly do not know whether the Treasury is the right body to deal with it. Neither do I know whether it is sufficient to speak of interests—without defining them—of the United Kingdom, or of any substantial part thereof".I am convinced that the Bill should contain a provision for taking into account considerations other than competition; for instance, considerations of the effect on a substantial part of the United Kingdom and the general social effect of takeovers. In parenthesis, I say that that does not apply only to banking. As has been mentioned before, in some ways banks are asking for protection which should be given to all major companies. This is a Banking Bill and something in it along the lines of the amendment would be useful.
When the noble Lord, Lord Elton, moved his amendment he asked for an answer with regard to the Government's proposals. As I understood it, he referred largely to their proposals for controlling the intervention of foreign banks. I hope that when the Government reply they will pay some attention to the possibility of British banks interfering in this field because, as I said, in Scotland that too is a serious matter. Some people in Scotland think that it might be better to have a greater degree of independence under a foreign bank than complete control by a bank based on London.
§ Lord Boardman
My Lords, I start by declaring an interest as I did on Second Reading. I am not sure whether my interest is in favour or against the amendment. It is against the amendment, I suppose, speaking as chairman of a large clearing bank. I should not wish to see my shareholders denied the opportunity of the most attractive bid which might be presented to them, although I believe that they would suffer from the lack of management skills that they now enjoy if that circumstance should arise.
For the amendment, however, I feel strongly that the public interest requires that one or more of the larger High Street deposit banks should not come into foreign ownership.
The noble Lord, Lord O'Brien of Lothbury, knows this better than anyone, but I believe that the influence that is exercised through the Government, the Bank of England and the clearing banks provides a powerful economic lever. It is one which I believe has been used for the benefit of this country's economy for a long time. That relationship would be completely destroyed, if sitting around the governor's table were the chairmen of Hong Kong, Japanese or German institutions. That would change the situation dramatically in a way which I believe would be against the public interest.
We have been referred to the fact that safeguards exist. I was overseas when the Bill was in Committee; but I read the Official Report in which my noble friend Lord Young referred to some of the safeguards which would prevent that fate befalling British banks. My noble friend Lord Elton has responded effectively to them. Fit and proper persons, banking prudence, and so on, are essential ingredients for anyone running a major bank.
With regard to reciprocity, I have just returned from Japan. There I inquired carefully under what circumstances a British bank would be prevented from bidding for or acquiring a Japanese bank. My noble friend will no doubt be able to confirm this, but the answer was that there is nothing legally to prevent it from so doing. In practice of course the PE ratio and the price of Japanese banks are such as to put them right out of the reach of any British bank. The bureaucracy which applies would no doubt also bar us from so doing.
I do not believe that technically there is anything in the reciprocity point which would enable the Government, under the Bill as now drafted, to say, "You cannot bid for and acquire a British bank". The same applies to places like Hong Kong where there is vast wealth and future money coming through from China, and so forth. I do not know that my noble friend would necessarily think that such takeovers would make for the most stable British banking system.
With regard to the Community, reciprocity is presumably written into all Community legislation and understandings, and yet in practice we know that it would be extremely difficult for a British bank to acquire, for example, a French bank. I do not believe that the reciprocity provisions provide the safeguard which I believe is highly desirable.
We therefore fall back on the MMC. My noble friend Lord Elton has effectively referred to the 815 weaknesses in that system. I am advised that the decision which applied in the Royal Bank of Scotland case could not be supported today under the present competition policy that was stated by Mr. Tebbit when he was Secretary of State for Trade and Industry on 5th July 1984 and to which my noble friend has referred.
My noble friend will no doubt rightly say that in that policy statement Mr. Tebbit said:Accordingly my policy has been and will continue to be to make references primarily on competition grounds"—[Official Report Commons, 5/7/84; col. 213.]My noble friend will be entitled to say that does not exclude references being made on other grounds. Perhaps there have been some since that statement.
But the whole balance is such that it would be difficult to justify making a reference on purely national-interest grounds even though it may appear right and proper that that should be so.
There is the further complication that the policy stated in July 1984 is now under review. We do not know what will come out at the end of that review. Is the whole future of the banking system and the economy's essential economic levers to depend on something, which is under review, which has not yet come out of the machine and about which we do not yet know?
I hope that if my noble friend does not accept the amendment, he can give the assurance for which my noble friend Lord Elton has asked, so that we can be clear that the Government's policy would be to refer to the MMC any reference that included the acquisition or possible acquisition of one of the economy's major economic levers; namely, one of the clearing banks.
§ 4.30 p.m.
§ Lord Young of Graffham
My Lords, there are occasions when sitting on the Front Bench of your Lordships' House appears a somewhat cold and lonely place, although I must confess that this afternoon I am kept warm by the strength of the arguments that I wish to outline.
We conducted a substantial debate on this issue during the Committee stage. It has also been the subject of extensive debate in another place. But it is an important subject and I therefore make no apology for stating again in some detail—in reply to many points made by noble Lords today—why the Government consider that it is neither necessary nor desirable for the Bill to be amended, either in the way proposed by my noble friend or that suggested by the noble Lord, Lord Bruce of Donington.
The case argued in favour of amendment is, first, that the acquisition of a major controlling shareholder in an important British banking institution could raise questions of whether it would be in the general public or national interest for such an acquisition to proceed especially if the acquisition were mounted from overseas. Secondly, it is argued that there should be statutory procedures for consideration of the public interest in such cases. It is then concluded that the Bill should be amended to give the Government power to object to certain bank takeovers on grounds of public interest.
816 I have no difficulty with the premises of these arguments, only with the conclusion. The question has been looked at most carefully by the Government both before and during the proceedings on the Bill, and in the light of representations that we have received, including those from noble Lords. It is fully accepted that public interest factors could arise as a result of takeover proposals in the banking sector. This is not a unique case. I am sure that noble Lords would accept that public interest factors could also arise in other sectors including other financial services, the service sector more generally or in manufacturing, chemicals, foods and so on. Therefore, although banking is a very important area, there is no monopoly on public interest considerations arising in the context of changes of control.
The second premise is that since the public interest can be a relevant factor in takeovers, then there should be a statutory procedure for the consideration of these issues and powers available to the Government to prevent a takeover that will be contrary to public interest. It is indeed right that there should be such powers. However, in the Government's view, these are already provided for by the statutory procedures for bids to be referred to the Monopolies and Mergers Commission. These procedures apply to banks just as they do to companies and any other sector. We believe that it would be unnecessary and confusing to introduce further statutory provisions for banks and wrong to single out for special treatment a particular group of institutions.
I am aware that a number of noble Lords are familiar with the procedure for references to the Monopolies and Mergers Commission. I hope, however, that I may be forgiven for saying something further on the main points. A reference may be made when any merger situation which qualifies for investigation arises. If such a reference is made, the commission is required to report on whether the takeover may be expected to operate against the public interest. If that is indeed the finding, then powers are available to the Government to prevent or, if necessary, to remedy the situation. This includes powers to order divestment of shareholdings.
I was asked during our debate in Committee how the public interest was defined in this context. I fear that a complete and definitive interpretation is something that neither I, nor I imagine other noble Lords, would care to undertake. However, I can say that the construction is a wide one and not restricted solely to matters of competition policy. In my view there are clear advantages in its being kept in this general form. Certainly the phrase is common in "statute. I point out that the relevant section of the legislation obliges the commission to take into account all matters which appear to it to be relevant in considering the public interest. I am not in any doubt that the phrase covers the concerns for the United Kingdom's national or public interest that have been raised in this debate.
The Government's view—and it follows from what I have said—is that these procedures deal adequately with the concerns expressed about bank takeovers. If further evidence were required, then I draw attention to the case of the proposed acquisition of the Royal 817 Bank of Scotland by Hongkong and Shanghai. This is a case directly relevant to our debate and sets an important precedent. The proposed acquisition was found to be against the public interest. An important part of this conclusion was—I quote from the conclusions of the commission's 1982 report—that,transfer of ultimate control of a significant part of the clearing bank system outside the United Kingdom would have the adverse effect of opening up possibilities of divergence of interest which would not otherwise arise".It seems clear that the matters about which concern has been expressed can be and have been, taken into account under the existing procedures. It is in the nature of these matters that the Government must avoid any commitments that a particular hypothetical case or class of cases will, or will not, be referred, or what the outcome should be. Nevertheless, my honourable friend the Economic Secretary to the Treasury has already said in another place—and I agree with him—that it is difficult to imagine that any foreign bid for a major British bank would not raise issues of public interest at least as great as those in the case to which I have already referred. These public interest factors have been taken into account in the past and I would hope, and certainly expect, that they will be taken into account in the future.
This, then, is the situation under the present legislation. I hope that what I have said has given assurances to noble Lords. Your Lordships will, however, be aware that the Government are currently undertaking a thorough review of the existing procedures covering both policy under the existing law and the statutory provisions themselves. I can therefore appreciate the concern that has been expressed, both in another place, during the course of our earlier debates and today about the continuation of the public interest criteria. It was, however, for this very reason that my honourable friend the Economic Secretary put on the record in another place an assurance on behalf of my right honourable friend the Secretary of State for Trade and Industry that there is no reason why the review will result in any weakening of the broad public interest criterion contained in the existing legislation.
I hope that this assurance also gives comfort to the noble Viscount, Lord Chandos, and to other noble Lords who have expressed concern on this point. My noble friend Lord Boardman drew attention to the statement made by my right honourable friend Norman Tebbit in 1984 when he was Secretary, of State for Trade and Industry. He said that the policyhas been and will continue to be to make references primarily on competition grounds". [Official Report, Commons, 5/7/84; col. 213.]That of course, is the situation today subject to the conclusions of the current review. I think that it is entirely to be expected that questions of competition will be the dominant reason for referrals rather than the wider public interest issues which we have been discussing. But the policy statement of 1984 does not in any way rule out references on general grounds of public interest including the fact that the proposed acquisition is by an overseas company. This is a matter that has been made clear on a number of subsequent occasions.
818 Perhaps I may refer to a speech last November by my honourable friend Michael Howard who said:But Norman Tebbit never said that references would be made only on competition grounds and there have been a small number of exceptional cases in which mergers have been referred because they were thought to raise other public interest issues".There have been a number of other cases subsequent to the 1984 statement where references have been made on grounds other than competition or where competition was only one of several factors. Such grounds included the special nature of a particular industry. While I cannot say that the acquisition of a British bank would automatically be referred, there is no doubt that both the statutory framework and the current policy towards references allow full scope for referral and consideration of proposed acquisitions of general public interest grounds. As my honourable friend Ian Stewart has already said, it is almost impossible to conceive that an overseas bid for a United Kingdom clearing bank would not be referred.
I hope that this restores confidence in the Government's position, and I refer here in particular to the noble Lord, Lord Thomson of Monifieth, who has written to me on the matter. I have also, as I undertook to do in our earlier debate, drawn the debate of your Lordships to the attention of my right honourable friend who has the prime responsibility for this review. I know that he will also take into account the various points that have been made today.
Finally the matter of reciprocity was raised: the statutory provisions, including those in the Bill, designed to encourage the opening up of overseas financial markets to British firms. This is an additional factor. The Monopolies and Mergers Commission procedures do not deal explicitly with reciprocity. The provisions of the Financial Services Act expanded by the provisions of this Bill provide the necessary reserve powers.
On the question of takeovers, the Bill provides a power for the Government to object to any proposed acquisition of control where the result of the acquisition proceedings would be controlled by an institution whose country of origin did not meet this test. This is an additional important safeguard. But I am aware that my noble friend Lord Elton asked whether the provisions in Section 183 of the Financial Services Act are sufficiently clear in allowing action to be taken against overseas banks if the reciprocity in one of the other financial fields is there.
The intention is that the power should be usable in this way. Whether the drafting is adequately clear is very much a matter of detailed legal interpretation. Nevertheless it is an important issue and Clause 23 works by reference to the section of the Financial Services Act to which my noble friend referred. I shall therefore ensure that the matter is thoroughly looked into and if necessary we can return to this matter at Third Reading.
My noble friend Lord Campbell of Alloway asked whether the Government more than the MMC should have the actual decision. Indeed this is not a point—as I think I have already said—that relates only to banks. One could argue the same for any sector where there might be a special interest on the part of the Government or in any other way. The noble Lord, Lord Grimond, I believe found this a very attractive 819 proposition. But this is surely down the slippery path at the end of which all takeovers would be inhibited, and if we were not careful we should find that the entire market would start to become complacent and sink into decay. The approach suggested by the Government is to take the matter to an independent body, the Monopolies and Mergers Commission, to investigate.
There are advantages in such an approach and there is no case that we can see for special procedures for banks. Reference has been made to the delay in obtaining the decision from the Monopolies and Mergers Commission in the case of the Royal Bank of Scotland. Is there any thought that it would be any quicker from government? Indeed there is great advantage of an outside body. Of course there is no question that regional factors will be taken into account. Again I refer particularly to the Royal Bank of Scotland where the Monopolies and Mergers Commission referred specifically to Scottish interests. I hope that that is a matter that will always be taken into account in considering the national interest as a whole.
Finally, in addition to the arguments that have already been made against the need to introduce new powers to prevent takeovers of British banks on grounds of national interest, we ought to take into account the circumstances of the day and the current climate of international trading relations. There are obvious tensions at the present time. There are increasing anxieties about protectionism and specific difficulties involving the United States, the United Kingdom and Japan.
Given that in the Government's stated view adequate statutory procedures already exist for consideration of the national interest aspect of bank takeovers generally, and given the provisions already in the Bill dealing with reciprocity, it would not be at all clear what purpose was to be solved by the proposed new powers. I fear that they would only create unnecessary doubt and suspicion in the minds of our overseas trading partners at a particularly difficult moment.
I briefly summarise by saying that the question is essentially one of means rather than ends. The Government's view is that adequate means are available for the scrutiny of bank takeovers affecting the public interest and that no compelling case has been made for new and special statutory procedures for banks. I therefore invite my noble friend and noble Lords to withdraw their amendments.
§ Lord Harmar-Nicholls
My Lords, did I understand my noble friend to say, three-quarters of the way through his answer, that he would look at this again and that there was still a chance that something might be done from the Government Bench?
§ Lord Young of Graffham
No, my Lords. I was referring to a specific matter raised by my noble friend Lord Elton. I was confirming the effect of Section 183 of the Financial Services Act but not referring to the general position.
§ Lord Harmar-Nicholls
My Lords, in that case I do not think that the answer my noble friend has given is 820 good enough in all the circumstances. The matter ought to be looked at again even at this late stage. He has repeated the arguments which were used in another place and which he earlier in these proceedings put in front of the House. In his opening he said that the considered view was that such a provision was neither necessary nor desirable.
Even conceding the point that, as he views the situation and the possible problems of the future, it may not be necessary because all the powers are there, is it not a case in this instance, when dealing with the important banking section of this nation's interests, that a belt and braces approach is more than justified, even though it may not be necessary in the strict terms as interpreted? Why not let it be seen that the message from Parliament, so far as the statute which other people will have to work, is that we want this looked at with all the special care that the extra words of the amendment would put in?
As regards this being desirable, I was a little put off—I wanted to support my noble friend at this stage: I do not know that we want any votes against this—when he said that he did not think there was all that much difference between other manufacturing industries and banks. If it is done for this, one might well be opening the law to the other. There is a difference between separate industries and the banking industry. Other industries are confined to their articles of association covering individual businesses, but the tentacles of banking go into all sorts of businesses. I should have thought that to suggest that one of the reasons for not introducing these extra words is that it may interfere with other separate industries is a weak point which makes one rather suspicious.
As regards being desirable and the reciprocity issue, those of us who have watched what has happened in Europe are not terribly impressed with what flows from the supposed reciprocity. One could not have a tougher agreement than the Treaty of Rome. One could not have anything to cover the supposed affinity of all the nations involved, which should be as one. We have far too many examples, even under the protection of the Treaty of Rome, where self-interest takes priority over supposed adherence to the spirit of the partnership. This is particularly so in the field of banking. When I was sitting in the European Parliament I remember we had to make a detailed investigation of the sort of response we were getting from the insurance sector. We found that in Germany the idea of widening it in the interests of the good partner was not on.
My noble friend pointed out the dangers of giving the impression that we are all becoming protectionists. I agree with that and I do not think we want to risk doing that if we can possibly avoid it. But with one or two of the clashes in other fields which are going on at the minute, I should like the message to go out to many countries of the world that, while we do not want to have to hide behind protectionism because of the dangers that would flow, we are prepared to do so if the interests of this nation are involved.
In many parts of the world people think we are so tied to the free trade ethos that there is no question ever of our deviating from it. Therefore, from the point of view of the general impression, I should think 821 that it may be helpful in fields other than banking. Banking is different and should be judged to be different from any ordinary manufacturing industry or any other industry. Even though in the view of my noble friend and the Government generally it is not absolutely necessary, the belts and braces approach sometimes is more than worth while. I should have thought that that may be so in this case.
I still hope that even at this late stage my noble friend will say that the Government will reconsider the matter with a view to coming a little nearer to my noble friend's amendment than the answer that has just been given seemed to imply.
§ Lord Young of Graffham
My Lords, with the leave of the House, I am grateful to my noble friend Lord Harmar-Nicholls and I believe that what he says is so important that I should reply.
This afternoon I have endeavoured to assure your Lordships' House that we have the means to ensure that these circumstances do not come about. However, this is the top of a very slippery slope down which we can fall and hurt ourselves. I remind your Lordships' House that, first, a bank is not inherently different from any other company. Indeed, in the way the world is changing, financial services companies are appearing to be more like banks than banks themselves and it becomes extremely difficult to tell the difference.
Secondly, the net overseas investments of the United Kingdom today total £ 110 billion and are exceeded only by those of Japan. I remind all in your Lordships' House that we have more investments and employ more people in the United States of America than Americans own and employ in this country. That applies in many countries of the world. If we start to introduce measures which are as obviously protectionist as this one, I suspect that we shall not be protecting ourselves but will begin to set in train a series of measures from which we shall suffer.
I have endeavoured to assure all in your Lordships' House that we have the means to ensure that that does not come about. I ask your Lordships not to go along with these amendments because in the end I do not think that they will give us a whit more protection but they may harm us considerably.
§ Viscount Chandos
My Lords, before the noble Lord sits down will he tell us why, if he thinks that banks are no different from other companies, we are seeking to produce a new Banking Act when there is in existence a Companies Act?
§ Lord Young of Graffham
My Lords, I was being asked to give an assurance that the banks are so different in this field that they demand special protection. I am merely drawing attention to the fact that over the last few years financial services companies have become almost indistinguishable from banks.
We hope that the Bill will become an Act and that it will last for many years to come. In the fast-changing world of financial services I do not see how, once we start to widen the net, we can say for one moment that 822 banks are unique. That is the slope about which I was warning your Lordships.
§ Lord Thorneycroft
My Lords, I should like to intervene for a few moments in this debate in which I have not yet spoken. I believe that the noble Lord, Lord Young of Graffham, has the matter just about right in what is a desperately difficult argument.
During much of my life I have watched various Secretaries of State struggling for acceptance of the same attitudes towards financial services as we enjoy under the General Agreement on Tariffs and Trade. One of the main complaints, not just of banking but of the wider fields of financial services, is that we could not obtain that treatment ourselves. When one is dealing with that matter one wants to approach with the very greatest caution special legislation with faintly protective overtones on any one of our particular activities.
I accept that this argument is much more about means than ends. The amendment as argued by the noble Lord, Lord O'Brien, or by the noble Viscount, Lord Chandos, is practically non-protectionist. When argued—and I say this with great respect—by my noble friend Lord Grimond, (who would almost prefer a Japanese bank to anything from London) it becomes a powerful protective weapon for a particular end. If the amendment were passed it is absolutely certain that it would be widely misunderstood.
Against that background I accept what the noble Lord, Lord O'Brien, said. He is as well aware of these problems as we are. We all accept his point that to have half the Japanese banks in our hands and all our banks in theirs makes no sense whatever. Nobody seriously imagines that the Government will get into that position. However, we can safeguard our position rather well without passing special legislation with very protective overtones about banks at this time.
§ Lord Elton
My Lords, I hope that your Lordships will be indulgent to my noble friend once more, because it will save a good deal of time if I can ask him one specific question again before I embark on my reply. I asked him previously whether the Government's policy now extends to the referral of bids for British institutions from foreign-based bidders on the grounds of national interest when the circumstances justify it.
My shorthand is not good but every time my noble friend came to that point there was some saving clause like "difficult to imagine", "not reasonable to expect" or "primarily". I am asking for a simple statement of whether that is the Government's policy. That is what this debate is all about.
§ Lord Young of Graffham
My Lords, if I can strain the leave of the House, I can at least reply in the shortest possible way to my noble friend Lord Elton by saying yes.
§ Lord Elton
My Lords, I am deeply obliged to my noble friend because he has saved me a long and sometimes painful speech. When I came in I sat behind him thinking that I might have the advantage of looking over his shoulder and being in a position of strength. I then found myself between the upper and 823 the nether millstone, so I approach my case now with less confidence than I did before.
The fact is—and I hope that I made it clear—that I am resigned with as much regret as was so eloquently expressed by my noble friend Lord Campbell of Alloway to the commitment of this safeguard of British interests to a free and independent body which is instituted by a different department of state. I do not wish to make a song and dance about that but merely to say that that is a position which I have conceded because we are here to achieve an agreement as best we can.
I therefore wanted to be assured that that machinery would work. We both quoted from the report of the Monopolies and Mergers Commission which demonstrated that when it dealt with the Royal Bank of Scotland and the Hongkong & Shanghai Banking Corporation it was definitely within its remit to look after the national interest. There have been subsequent events, which I shall not relate again, that threw that into doubt. My noble friend has now put it firmly on the record that where it is appropriate so to do the Secretary of State will refer a takeover bid from a board or wherever to the commission for its advice and decision.
That was the minimum assurance I could accept but I have been given it and therefore, although I looked forward to an extension of this debate with excitement, I also did so with regret. I am very glad therefore to be able to beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Lord Williams of Elvel moved Amendment No. 7:
After Clause 24, insert the following new clause:
("Objection to a person becoming a shareholder controller. If it appears to the Chancellor of the Exchequer—
he may by order specify the institution and—
§ The noble Lord said: My Lords, I have listened with considerable interest to this debate. I have already spoken to Amendment No. 7 and I do not intend to pursue my remarks very far. I am afraid that I still hold the view that the Monopolies and Mergers Commission is the wrong forum in which to hold this debate. I do not believe that your Lordships have got any further as a result of the Secretary of State's statement because the competition review that is under way at the moment could produce quite a different result and we do not know what that will be.
§ Unlike the noble Lord, Lord Elton, I do not feel inclined to withdraw my amendment. I wish to test the opinion of the House.
§ 5 p.m.
§ On Question, Whether the said amendment (No. 7) shall be agreed to?824
§ Their Lordships divided: Contents, 69; Not-Contents, 100.825
|DIVISON NO. 2|
|Amherst, E.||Kilmarnock, L.|
|Ardwick, L.||Kirkhill, L.|
|Aylestone, L.||Longford, E.|
|Banks, L.||Lovell-Davis, L.|
|Birk, B.||McNair, L.|
|Blease, L.||Mishcon, L.|
|Blyton, L.||Nicol, B.|
|Bottomley, L.||Northfield, L.|
|Bruce of Donington, L.||Oram, L.|
|Carmichael of Kelvingrove, L.||Paget of Northampton, L.|
|Carter, L.||Peston, L.|
|Chandos, V.||Phillips, B.|
|Chitnis, L.||Pitt of Hampstead, L.|
|Cledwyn of Penrhos, L.||Ponsonby of Shulbrede, L [Teller.]|
|Dean of Beswick, L.||Ritchie of Dundee, L.|
|Elwyn-Jones, L.||Ross of Marnock, L.|
|Ezra, L.||Seear, B.|
|Falkland, V.||Serota, B.|
|Fitt, L.||Shackleton, L.|
|Foot, L.||Silkin of Dulwich, L.|
|Gallacher, L.||Stallard, L.|
|Galpern, L.||Stedman, B.|
|Graham of Edmonton, L [Teller.]||Stoddart of Swindon, L.|
|Grey, E.||Taylor of Blackburn, L.|
|Hampton, L.||Taylor of Mansfield, L.|
|Hanworth, V.||Thomson of Monifieth, L|
|Hatch of Lusby, L.||Tordoff, L.|
|Heycock, L.||Underhill, L.|
|Hughes, L.||Walston, L.|
|Jeger, B.||Wells-Pestell, L.|
|Jenkins of Putney, L.||White, B.|
|John-Mackie, L.||Wigoder, L.|
|Kearton, L.||Williams of Elvel, L.|
|Ailesbury, M.||Gibson-Watt, L.|
|Alexander of Tunis, E.||Gridley, L.|
|Auckland, L.||Hailsham of Saint Marylebone, L.|
|Beaverbrook, L.||Harmar-Nicholls, L.|
|Belhaven and Stenton, L.||Hesketh, L.|
|Beloff, L.||Home of the Hirsel, L.|
|Belstead, L.||Hooper, B.|
|Blyth, L.||Hylton-Foster, B.|
|Boardman, L.||Ingrow, L.|
|Brabazon of Tara, L.||Kaberry of Adel, L.|
|Caccia, L.||Kemsley, V.|
|Campbell of Alloway, L.||Killearn, L.|
|Campbell of Croy, L.||Kinloss, Ly.|
|Carnock, L.||Kinnaird, L.|
|Constantine of Stanmore, L.||Lauderdale, E.|
|Cork and Orrery, E.||Lawrence, L.|
|Cottesloe, L.||Layton, L.|
|Craigavon, V.||Long, V.|
|Cullen of Ashbourne, L.||Lucas of Chilworth, L.|
|Davidson, V. [Teller.]||Lyell, L.|
|De Freyne, L.||McAlpine of Moffat, L.|
|Denham, L. [Teller.]||Manton, L.|
|Denning, L.||Margadale, L.|
|Derwent, L.||Marley, L.|
|Dundee, E.||Melville, V.|
|Eden of Winton, L.||Merrivale, L.|
|Ellenborough, L.||Mersey, V.|
|Elliot of Harwood, B.||Molson, L.|
|Elliott of Morpeth, L.||Morris, L.|
|Elton, L.||Mowbray and Stourton, L|
|Erne, E.||Munster, E.|
|Fanshawe of Richmond, L.||Nathan, L.|
|Fortescue, E.||Newall, L.|
|Fraser of Kilmorack, L.||Nugent of Guildford, L.|
|Gainford, L.||O'Brien of Lothbury, L.|
|Peyton of Yeovil, L.||Strathspey, L.|
|Portland, D.||Sudeley, L.|
|Rankeillour, L.||Terrington, L.|
|Reay, L.||Teviot, L.|
|Reigate, L.||Teynham, L.|
|Russell of Liverpool, L.||Thorneycroft, L.|
|St. Davids, V.||Todd, L.|
|Saltoun of Abernethy, Ly.||Trumpington, B.|
|Sandford, L.||Ullswater, V.|
|Sempill, Ly.||Vaux of Harrowden, L.|
|Shannon, E.||Whitelaw, V.|
|Sharpies, B.||Young, B.|
|Shaughnessy, L.||Young of Dartington, L.|
|Shrewsbury, E.||Ypres, E.|
§ Resolved in the negative, and amendment disagreed to accordingly.
§ Clause 34 [Unsolicited calls]:
§ 5.8 p.m.
§ Lord Williams of Elvel moved Amendment No. 8:
§ The noble Lord said: My Lords, I beg to move Amendment No. 8 standing in the name of my noble friend Lord Bruce of Donington and myself in the words as appear on the Marshalled List.
The amendment concerns unsolicited calls, about which your Lordships had a discussion when the Bill was in Committee. At that time I raised the problem of the client who goes along to see his bank manager and in an unsolicited manner the bank manager asks for a deposit, or whatever it might be. I asked the noble Lord, Lord Beaverbrook, to write to me about that matter and he was kind enough to do so. I should like to quote the relevant paragraph in full. He writes:
But with regard to your particular example, our view is that it would not be an unsolicited call within the meaning of the clause if the bank manager, approached by a customer to discuss one subject, broadens the scope of the conversation to embrace other financial topics".
Your Lordships have had frequent and lengthy discussions on the subject of polarisation. As I understand it, the Government's view on polarisation—which is also the view of the Opposition—is that there should be a clear distinction between those who are offering their own products under the Financial Services Act and those who are offering advice on other people's products. As we know, that has caused a good deal of trouble in the banking community because we have had discussions not only at the Committee and Report stages when the Bill was passing through your Lordships' House, but have since had an Unstarred Question on polarisation which revealed a certain amount of disquiet.
§ It seems to me that the paragraph in the noble Lord's letter raises the possibility that a bank manager may broaden the scope of the conversation to embrace other financial topics. If he does so, he may well find himself in contravention of regulations made under the Financial Services Act. In other words, he may well find himself in the polarisation net.
§ The problem might rest there were it not for the fact that, as I understand it, contravention of regulations under the Financial Services Act is not a criminal offence whereas contravention of any order made by 826 the Treasury under this clause would be a criminal offence, and probably for good reason. But there seems to be an oddity which is inconsistent with the Government's view on the Financial Services Act and its operation. I believe that an amendment such as the one I have tabled, or a similar amendment, would remove that oddity and make sure that the banking community knew exactly where they were. I beg to move.
§ Lord Beaverbrook
My Lords, I wrote to the noble Lord, Lord Williams, on this subject, and I confirm to him that it would not be an unsolicited call if a bank manager, approached by a customer to discuss a subject, broadened the scope of the conversation to embrace other financial topics. Since the definition of a "cold call" is the same in the Financial Services Act, the situation would be the same under that Act.
I am advised that this amendment is unnecessary because the similar prohibition on unsolicited calls in the Financial Services Act, which is contained in Section 56, defines "unsolicited call" in identical terms to subsection (4) of this clause. Therefore, if the call is of a type that would, if it related to investment agreements, be contrary to Section 56 of the Financial Services Act but is concerned with the making of deposits, it would be contrary to regulations made under this clause.
I appreciate the noble Lord's concern that sharp operators should not be able to evade the prohibition on cold calling, but I am satisfied that there is no gap between the two provisions. I hope that that goes some way towards satisfying the noble Lord.
§ Lord Williams of Elvel
My Lords, I am sorry to return to the point but the noble Lord did not seem to answer the question I was putting. I understand that the definition of "unsolicited call" in this Bill is exactly the same as the definition of "unsolicited call" in the Financial Services Act. I was not making the point that there was any difference. I accepted that in Committee.
The problem I wish to put is that of the bank manager who may be making an unsolicited call—or may not, according to the wording of the noble Lord's letter—under this Bill. He may get away with it, as it were, under the Bill, but he would not get away with it under the SIB regulations, which are derived regulations from the Financial Services Act, because he would be contravening those regulations. This is the heart of the polarisation dispute.
If I may repeat myself, the problem is that any event under Clause 34 of the Bill as drafted is a criminal offence but offences against—if I may put it this way—polarisation under the Financial Services Act are not criminal offences. There seems to be an oddity there. I am sorry to repeat my original introduction to the amendment but I do not think that the noble Lord addressed himself to that problem.
§ Lord Beaverbrook
My Lords, I apologise to the noble Lord if his exact point was not answered. I should like to look into this more carefully and write to him on the subject. The noble Lord can then perhaps decide what to do at the next stage of the Bill.
§ Lord Williams of Elvel
My Lords, I am most grateful to the noble Lord. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ 5.15 p.m.
§ Clause 35 [Fraudulent inducement to make deposit:]
§ Lord Williams of Elvel moved Amendment No. 9:
§ Page 27, line 35, after ("is") insert ("materially").
The noble Lord said: My Lords, this again arises from a passage in the letter I received from the noble Lord, Lord Beaverbrook, following our Committee stage discussions. The House will be aware that we had quite long discussions about the position of somebody who recklessly—let us leave the word there—makes a statement about somebody else and that somebody else happens to be a bank manager and, as a result, the bank manager cuts the facility available to a third party. I do not want to go over the whole story as I related it in Committee. That would waste your Lordships' time. The noble Lord, Lord Beaverbrook, replying to me, explained—if I may quote from his letter again—that it would be a criminal offence if there were a reckless statement of the kind I have described. But he went on:
The Bill affords some protection in this area. But, of course, the clause only deals with cases where the information is materially false, misleading or deceptive and when the person providing it does so knowingly or recklessly,
The noble Lord underlines the word "materially".
I accept that there is a passage in the Bill which refers to misleading information. But as I read Clause 35 it does not say "materially false." Clause 35(l)(a) refers to making,
a statement, promise or forecast which he knows to be misleading, false or deceptive, or dishonestly conceals any material facts".
But paragraph (b) does not use the word "material" and simply refers to,
a statement, promise or forecast which is misleading, false or deceptive".
The purpose of this amendment is to line up the two paragraphs of Clause 35(1) and to make sure that a reckless statement has to be materially false, in the words of the noble Lord's letter to me. This seems to me to be a sensible amendment. I think that the noble Lord was right to put it in his letter, and I should like to see it in the Bill. I beg to move.
§ Lord Beaverbrook
My Lords, I am grateful to the noble Lord for explaining his amendment. In my letter I reassured the noble Lord, Lord Williams, that there is no risk of immaterial actions being subject to prosecution. This is partly, of course, because the prosecuting authorities would not bring such prosecutions. But it is also the case that the element of materiality will come into the second part of the test; namely, whether the person making the statement has done so for the purpose of inducing another person to make a deposit, or whether the person making the statement is reckless as to whether this might be the effect. A wholly immaterial statement is unlikely to satisfy a court that this part of the test has been met.
828 For these reasons, the amendment is not necessary in order to achieve the desired effect. I am also advised that the amendment could have a damaging effect in that the test is identical to that contained in Section 47 of the Financial Services Act. It would be unhelpful to introduce a disparity between the two similar provisions since this would cast doubt on the meaning of the provisions in existing legislation and so put their effectiveness in doubt.
I can assure the noble Lord that I have taken legal advice on this point, and there really would be a danger of undermining provisions which are important and clearly expressed both in the Bill and in the Financial Services Act. I hope that this puts the case satisfactorily to the noble Lord. Indeed, I used the word "Materially" in my letter to him, but I think that this was in an attempt to explain the position to him rather than using language that would be of a more legal nature.
§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord. He seemed to me to be relying on the courts to determine materiality under Clause 35(l)(b) and since the courts are clearly instructed on material facts under Clause 35(1)(a) there seems to me to be a dissonance, if I can put it that way, between the two subsections. Nevertheless, I accept that this is repeating the language of the Financial Services Act and obviously that is not something one would wish to disturb. The noble Lord might like to bear in mind of course that "recklessly" is a word which gave us a great deal of trouble in connection with that Act and "recklessly" in Scottish courts, so I am advised by my noble friend Lord Morton of Shuna, has a meaning rather different from its meaning in the courts of England and Wales. That was a debate we had in connection with the Financial Services Act but I see that it has not had much impact on the Government. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 38 [Reports of large exposures:]
§ Lord Bruce of Donington moved Amendment No. 10:
§ Leave out Clause 38 and insert the following new clause
("Reports of large exposures
—(1) For the purposes of this section—
(2) An authorised institution, other than one whose principal place of business is outside the United Kingdom, shall make a report to the Bank, if—
(3) Subsection (2) aboves applies also where the transaction or transactions relate to different persons if they are connected in such a way that the financial soundness of any of them may affect the financial soundness of the other or others or the same factors may affect the financial soundness of both or all of them.
(4) If an authorised institution to which subsection (2) above applies has one or more subsidiaries which are not authorised institutions the Bank may by notice in writing to that institution direct that that subsection shall apply to it as if the transactions and available capital resources of the subsidiary or subsidiaries, or such of them as are specified in the notice, were included in those of the institution.
(5) The reports required to be made by an institution under subsection (2) above—
(6) The Bank shall, after consultation with the Treasury, formulate a policy on foreign country lending and shall issue instructions to every authorised institution required to report to the Bank under the provisions of subsection (2) above in any case in which such institution is exposed to either of the risks mentioned in the subsection and such instructions may—
(7) Any question whether an institution is or would be exposed to risk as mentioned in subsection (2) above (or in that subsection as extended by subsection (3)) shall be determined in accordance with principles published by the Bank or notified by it to the institution concerned; and those principles may in particular make provision for determining the amount at risk in particular circumstances or the extent to which any such amount is to be taken into account for the purposes of this section.
(8) For the purposes of this section the available capital resources of an institution (or in a case within subsection (4) above, of an institution and its relevant subsidiary or subsidiaries) and the value of those resources at any time shall be determined by the Bank and notified by it to the institution by notice in writing; and any such determination which may be varied from time to time shall be made by the Bank after consultation with the institution concerned and in accordance with principles published by the Bank.
(9) The principles referred to in subsections (7) and (8) above may make different provision for different cases and those referred to in subsection (7) may, in particular, exclude from consideration, either wholly or in part, risks resulting from transactions of a particular description or entered into in particular circumstances or with persons of particular descriptions.
(10) An institution which fails to make a report as required by this section shall be guilty of an offence; but where an institution shows that at the time when a report was required to be made it did not know that the facts were such as to require the making of the report it shall not be guilty of an offence by reason of its failure to make a report at that time but shall be guilty of an offence unless it makes the report within 7 days of becoming aware of those facts.
(11) An institution guilty of an offence under this section shall be liable on summary conviction to a fine not exceeding the fifth level on the standard scale.
(12) The Treasury may after consultation with the Bank by order—
(13) For the avoidance of doubt it is hereby declared that references in this section to "one person" include references to a partnership.")
§ The noble Lord said: Your Lordships will observe that the amendment I seek to move today follows very closely the amendment which was considered in some detail by your Lordships at the Committee stage. It is of course concerned with the broad national interest, and I use the term "national interest" in the same sense as it is used in the Industry Act, as distinct from the term "public interest", which has a slightly narrower connotation: otherwise the words would not have been used in the Industry Act in the wider sense of the term.
At the conclusion of the debate on the amendment that took place in your Lordships' Committee on 23rd March, the noble Lord, Lord Young of Graffham, said (at col. 61 of the Official Report:)
The Bill already contains all the necessary powers for the Bank to obtain that information statutorily, if powers were needed, and for the Bank to require prudential corrective action to be taken if that also were necessary".
Armed with that indication, I looked again diligently at the text of the Bill and I found it would be necessary to clarify the position beyond all doubt. It did not seem to me that Clause 38 as it stood gave the Bank specific powers to intervene in the case where British banks were over-exposed in terms of the indebtedness of foreign countries to the United Kingdom. Nor did it
seem to me that there were sufficient powers within the Bill to make it quite clear that in the circumstances of foreign exposure there was any power, or need, for the Bank of England to consult the Treasury on questions of policy.
§ It is for this reason that the new amendment, which is in effect a redraft of Clause 38, seeks to incorporate in one clause, and in a consistent manner, the principles that I endeavoured to lay before your Lordships on the last occasion. I am bound to say that they were based upon the supposition that the interests of the developing countries, which owe the world banking system vast sums of money, are very closely bound up with our own. I endeavoured to explain on the last occasion, and I shall not elaborate further, that if there were to be any large-scale default, or perhaps even a smaller-scale default, on the part of countries that were indebted to us on quite a large scale, it would have a very damaging effect upon the whole of the banking system, including the banking system of the United Kingdom.
§ Your Lordships will recall that the noble Lord, Lord O'Brien, was kind enough to remind the Committee of the effect of the collapse of Credit Anstalt before the war. We have to look at this problem from two points of view. The first is the possible collapse of or severe damage to, the banking system, with all that that would involve not only for the people of the United Kingdom but for people elsewhere. We also have to consider the developing countries themselves. If in our desire to avoid default purely from interested motives—and not even that, but on what we may broadly conceive to be the stability of the banking system—we still neglect the fate of the developing countries, that too could ultimately redound on our economies in the Western world and in the United Kingdom and have just as disastrous an effect in the long term.
§ Therefore this new clause is moved with a view, first of all, to giving the Bank of England the right to obtain information from the authorised institutions for banks that are heavily involved in regard to debts from foreign countries. Secondly, there is the need to consult the Chancellor of the Exchequer in regard to the determination of the policy that ought to be pursued. The Bank determines the policy after consultation with the Chancellor of the Exchequer, and I should have thought, broadly speaking, that that was something which we ought to consider in the national interest. I shall not weary your Lordships by citing the same figures, or anything like them, that I cited on the last occasion when I revealed the extent of certain exposure by British banks expressed as a ratio of their capital resources. Suffice it to say that we ought to be aware of the enormousness of the problem globally.
§ The global indebtedness of 109 developing countries as at the end of 1986 was 775.6 billion, of which 383 billion was owed by a very limited number of countries, mainly in South America. Some of your Lordships may have had the opportunity of reading the Financial Times on 6th March. It is there revealed how the trend is developing.
§ The amount of indebtedness is progressively increasing, for the simple reason that the new credits 832 that were accorded to these countries in 1986 amounted to 75.7 billion, whereas the debt-servicing for the same year was 148.7 billion. That left them with a net worsening of 73.6 billion. That means under the current arrangements, with the desire of these countries—mainly, but not exclusively, in South America—to avoid default by securing roll-overs or new credits to pay off current interest at current interest rates, and bearing in mind that much of the old loans still remaining outstanding were taken at very high interest rates indeed (much higher even than the high rates which exist now) they are, literally speaking, on a treadmill.
§ There have been a number of developments during the past few months. For example, the Philippines are making certain plans for converting what is possibly only a few hundred millions of debt into equity. In regard to Mexico, AMEX has agreed to convert 100 million of its debt into equity. In the case of Brazil, the Bank of Montreal has agreed to convert 100 million of its debt into equity. This is an extremely important development—
§ 5.30 p.m.
§ Lord Boardman
My Lords, perhaps it would help if the noble Lord would say whether the figures he is quoting are billions of pounds sterling or—as is more usual in such matters—billions of US dollars.
Lord Bruce of Donington
My Lords, I am most grateful to the noble Lord. I mean billions of dollars. The dollars are clearly set out. I sincerely hope that I have not misled your Lordships by quoting these figures without the prefix "dollar". Possibly I was harking back to the day when the dollar looked the pound in the face and the value of one dollar was one pound. But that was some two years ago. Matters have progressed since that time, and the last time I saw the table of current rates the rate was 1.62 dollars to the pound. Your Lordships may make your own conversions with your pocket calculators.
There have been other ways by which countries have sought to get out of their difficulties. There has been rescheduling. In the case of the Philippines, some 13.2 billion dollars have recently been rescheduled. But I am given to understand, and I am subject to correction by those in British banking circles who are more familiar with the present circumstances than I am—and I count among that number the distinguished noble Lord, Lord Boardman—that according to a Financial Times report, British banks have so far declined to reschedule the Mexican debts. In the case of Brazil, there are also measures to endeavour to secure a reduction of interest and rescheduling. In the case of Chile, better interest rates have been obtained. In the case of Brazil, regrettably, its debts have now been downgraded. That has had repercussions not only in British banks but in United States banks. They therefore have to put a different figure on them in their balance sheets, as I indicated in the speech that I was able to make to your Lordships at Committee stage. In the case of Ecuador, my latest information is that it defaulted or has indicated a cancellation, but I am open to correction on that point.
833 Those are the developments that have taken place and the question is whether they are matters of which the country as a whole, represented by the Chancellor of the Exchequer and the Bank of England, should take some account and should together determine a coherent policy towards this problem. We have the question of long-term rescheduling to consider as distinct from what is very often short-term rescheduling. We have the question of the alternative of conversion of debt into equity. This may present very considerable difficulties concerning the ownership and the nature of the various enterprises that incurred the original indebtedness. Certainly we may have to consider drastic reductions in the rate of interest that is charged to the developing countries. This may well have to be done as an alternative to allowing the position to worsen.
In the course of the Committee stage on the same kind of clause, the noble Lord, Lord O'Brien, without in any way lacking compassion, quite legitimately mentioned that of course the countries themselves incurred the debts originally, and, therefore, they could hardly complain if the debts ought to be repaid on the proper terms. I sympathise with that straightforward business view.
But your Lordships are no doubt aware, particularly in the years in which very large sums of indebtedness occurred following the recycling of OPEC money, that many of the countries involved had those in power who were not there by the elected will of their peoples. It was indebtedness that was incurred for the purchase of armaments, for the prestige of the rulers of those countries. It can hardly be said, in the case of quite a number of these countries, that we ought to visit the sins of their rulers upon their own heads.
This is not the occasion for me to reiterate to your Lordships some of the hardships that are at present being endured by the peoples of these unhappy countries whose lot has been worsened to the point of misery, to the point of death, to the point of desolation by the absolute necessity to devote so much of their present productive resources in terms of exports to the settlement, first, of the interest on their outstanding loans and, secondly, of the principle.
It would not be appropriate for me to reiterate those hardships, but I would respectfully draw your Lordships' attention to the words that fell from the lips of the right reverend Prelate the Bishop of Birmingham on the last occasion, when he gave a very accurate account—as I endeavoured to do—of some of the misery and hardship that the present position is occasioning.
This is not in itself a clause that is designed to bring any relief to these unhappy peoples in quite considerable sections of the world. It is, however, a clause that enables the Chancellor of the Exchequer and the Bank of England for the time being to play their full parts, both nationally and internationally, in seeking to pursue policies and in procuring the carrying out of those policies by the other authorised institutions which, however gradually they may work and however possibly unbusinesslike they may appear within the narrow concept of immediate interest, may serve to bring some relief to the peoples of these 834 countries. We can always be insular, but there is a saying which I commend to your Lordships,Ask not ye for whom the bell tolls,It tolls for thee".
§ My Lords, I beg to move.
§ Lord Hatch of Lusby
My Lords, like my noble friend Lord Bruce of Donington, I too believe that the national interest of this country is essentially bound up with the national interests of the developing world, just as theirs is with ours. There is a global interdependency. Again like my noble friend, I have failed to find after listening to the debate on a similar amendment at Committee stage the powers which the noble Lord, Lord Young, suggested were in the Bill—powers for the Bank to demand the kind of information and make the kind of reports which are contained within this amendment.
More than that, I was shocked by what appeared to me to be the complacency of the noble Lord, Lord Young, at Committee stage when he first said, at col. 60 of the Official Report of 23rd March,The Government maintain a keen interest in the resolution of the third world debt problem".The third world does not require a keen interest from the Government. It needs action and it is action which this amendment is proposing to take. The noble Lord, Lord Young, went on to say,All the prophesies of doom and gloom which we have heard on occasion in your Lordships' House have happily so far not come to pass".They may not have done so for the noble Lord, Lord Young; they have done so for millions of people throughout the world. They have also done so for an important number of British people who have suffered as an indirect consequence.
I wish to concentrate for a moment or two on subsection (6) of the amendment on page 5. The first sentence reads,The Bank shall, after consultation with the Treasury, formulate a policy on foreign country lending".It seems to me that that is the very least that this country and this Government can do in the face of a crisis which threatens not just the lives—and it has already exterminated millions of lives of people in the third world—but also the future of the people of this country and of the developed world.
It is appropriate that this debate should take place in the same week as the biannual meeting of the IMF and of the World Bank. The attitude of those international organisations, governed by their members, including the British Government, has shown a lack of understanding, a lack of forethought and a lack of perception about what is happening to the economy of the world which threatens all of us. It is no exaggeration to say that we are seeing and shall see this week at the World Bank meeting the beginning of an economic war between the developed and the developing countries. That economic war is breaking out because the commercial banks have taken some note of the dangers that have become apparent over the past five years. They have therefore taken precautions against them and increased their reserves against default. They are beginning to take a tougher line towards the developing world.
835 However, the developing world has also had its experience of the past five years. That experience has shown it that even the desperation of default can be more productive for its people than continuing to pay the kind of interest rates and the return of principal which has been the cause of so much impoverishment, starvation and death in the third world over the last five or six years.
Perhaps your Lordships have read or heard on the External Services of the BBC of the event which took place on 20th February of this year. I think that it is worthwhile to bring to the notice of your Lordships' House that on the evening of 20th February President José Sarney of Brazil said on the radio to his people,Good evening, Brazilians. I want to announce that the country is suspending the interest payments on its foreign debt".He continued,In the past five years Brazil has paid US $55.8 billion in debt interest alone… we cannot pay the debt with the people's hunger".Perhaps even more significantly, he then added,Our debt paid with misery would certainly be paid with democracy instead".That bears out, as my noble friend Lord Bruce of Donington said in his speech, that much of third world debt was incurred by authoritarian, dictatorial, militarist regimes and spent on arms, instruments of torture and prestige projects. Today, their successors in democratic government are in danger because of the compulsion to pay so much of their national product, as my noble friend has said, in exports which can then be appropriated by the banks at the expense of the hunger of their own people.
To continue the Brazilian story, two days later on 22nd February, the Brazilian Finance Minister, Dilson Funaro, whom some noble Lords will have met when he visited London, told questioners in Washington,Brazil is not in crisis. It does not need monitoring. It has the third largest trade surplus in the world and a lower public sector deficit than most of its creditors".The problem is that out of the expected trade surplus of something like 7 billion United States dollars this year, Brazil would have to pay over 5 billion United States dollars in interest payments alone.
That is the hottest example of what is happening so far as international debt in the third world is concerned. However, if we expand that to the whole of the third world, last year the total third world debt reached the figure of 775 billion United States dollars. In that figure there is concealed an even greater menace, because that figure of 775 billion United States dollars in 1986 was only some 429.6 billion United States dollars six years ago in 1980. What has been happening during that ensuing six years? Has the third world wildly borrowed to increase indebtedness? My Lords, no. During that six years, the developing countries paid back 658 billion United States dollars in principal and interest. They paid that back—more than their original debt—and yet at the end of the six-year period their indebtedness was still greater.
In other words, the more you pay, the more you owe. I suggest that there are two principal reasons for this. The first is the floating interest rates which can be changed unilaterally and have been changed unilaterally by the creditors. Noble Lords in the 836 banking world will know that those interest rates are tied to the London inter-bank offered rate. The changes in interest rates are tied to that rate and are not controlled at all by the debtor nations, the third world nations. The second reason is the variable exchange rates. Between 1985 and 1986 the indebtedness of the developing countries increased by some 40 billion United States dollars simply through the revaluation of their currencies.
To return to the original theme, nobody would underestimate the misery that this is bringing to some half of the world's population but what is too often neglected is that that misery has an effect within this country. This kind of debt is a danger to the depositors in British commercial banks. We know that with regard to the Brazilian debt, both Lloyds and the Midland have been exposed by recent events. It goes further than that. Because the developing countries are having to pay back to the developed world so much of their own production in interest and principal, because Africa is exporting capital to Europe, because Latin America is exporting capital to Europe and the United States, so the economic development and the purchasing power of hundreds of millions of people in the world is being strangled.
I remind noble Lords, as I have reminded them so many times in the past few years, of Bathgate and Leeds, of the example of British Leyland, which had to close down those plants because the Nigerians for whom its lorry products were manufactured could no longer afford to buy them. Admittedly, that had something to do with oil, but it has a great deal more to do with the rising debt of the Nigerian nation. I unhesitatingly commend this amendment both for its national interest and for its international interest and I suggest that the two are identical.
§ Lord Elton
My Lords, I wish to intervene only very briefly to make two points. First, the premise of the noble Lord, Lord Bruce of Donington, that the welfare of the developed world depends on the welfare of the underdeveloped world, or the less developed world as it is now called, is well taken. Secondly, on the other hand, history seems to show that using regulation of the private sector financially to act as an instrument of government policy is ineffective and actually destroy's the effectiveness of the private sector. As I said at Committee stage—and I shall not detain your Lordships long by repeating it now—it seems to me that support for the developing world is deserved from the developed world but it should be done government to government and the private sector should be left to function in the most efficient manner it can. That usually is the best thing to do.
My noble friend will make a longer speech than I, but I want it to be clearly understood that we on this side resist the proposal of the noble Lord opposite not because we do not wish the third world to flourish but because we do and we think there is a better way of achieving it.
Lord Bruce of Donington
My Lords, before the noble Lord sits down, will he agree that this amendment relates to the Bank and that the Bank is a national institution under the control of the Government by virtue of the Bank of England Act 837 1946? This gives the Government powers of general direction over the activities of the Bank and Her Majesty's Government are shareholders of the Bank of England?
§ Lord Elton
My Lords, the provisions in the noble Lord's amendment filter down in a manner which we could dissect at leisure if we were in Committee. I addressed myself simply to the bold principle which I think is important. It is Report stage and I have not the right to speak further.
§ Viscount Chandos
My Lords, as I said at the Committee stage, it is with regret that I cannot support the amendment moved by the noble Lord, Lord Bruce. Like the noble Lord, Lord Elton, I should like to emphasise that the desperate poverty and deprivation prevailing in many countries of the third world to which British banks are lenders give rise to legitimate and acute concern about the effects of the burden of foreign debt on the economies of those countries. But if this amendment is well intentioned, it is 1 fear also contradictory and potentially counterproductive.
It is contradictory because it seems to seek to increase the security of banks' depositors through the monitoring and control of sovereign exposure on the part of those banks at the same time as setting in place a mechanism for co-ordinating potential concessionary action by those banks towards developing countries. My understanding of the Bill and of existing reporting practice of banks to the Bank of England is that adequate safeguards for the protection of depositors from excessive exposure to sovereign governments seems to be provided.
As for the alleviation of hardship in debtor countries, I am deeply sceptical that an expanded government or central bank role would actually improve matters. As I said at Committee stage, the supranational agencies, such as the International Monetary Fund, the World Bank and the Inter American Development Bank, have often pursued tougher policies towards their customer countries than the commercial banks. For this reason I suspect that government intervention in this area would not necessarily be helpful.
Increased aid and support for the developing world is vitally necessary, and my noble friends and allies on these Benches have long supported such substantial increases, but that is the way to alleviate in the short term the suffering in the developing world, with expanded liberalised world trade the way in the long term.
§ 6 p.m.
§ Lord Young of Graffham
My Lords, we debated at length at Committee stage the provisions of this amendment concerned with foreign country lending and to that extent there is little more to add. The issues are important and I understand the strong feelings on them. However, I shall endeavour to persuade the noble Lord, Lord Bruce of Donington, that his amendment is unnecessary for the Bill already meets the major part of his concern.
The proposed clause would add to the existing Clause 38 provisions to deal with two aspects of 838 lending to foreign governments, their agencies and central banks: first, notification to the supervisors of the amount of such lending and, secondly, the control of the loans requiring the Bank in consultation with the Treasury to formulate a policy on such lending for each institution. In moving this amendment, the noble Lord, Lord Bruce, does, I presume, consider that the powers given to the supervisors elsewhere in the Bill are inadequate to deal with these questions. In my view, this is just not so.
Perhaps I may first correct a statement by the noble Lord, Lord Bruce, at an earlier stage of the Bill. On re-reading the account of the debate in Committee on the then amendment of the noble Lord, Lord Bruce, designed to achieve a result similar to today's amendment, I note that he said that Clause 38 as it now stands in the Bill applies only to individuals. That is not so. I can put the mind of the noble Lord, Lord Bruce, at rest. The term "person" applies not only to natural persons, such as Members of your Lordships' House if I may make so bold, but also to artificial ones as well; and under Schedule 1 of the Interpretation Act 1978,'person' includes a body of persons corporate or unincorporatedI am advised that the term thus applies to governments, both central and local, to their agencies and to banks, whether central or commercial.
I am also advised that the definition of connected borrowers—as in Clause 38(2) of the Bill and in subsection (3) of the noble Lord's amended version of the clause—is sufficiently wide as to enable the Bank to require lending to a particular overseas country's public sector borrowers and its central bank to be regarded as a single risk and to be reported as such. I can further reassure the noble Lord. The Bank, in preparing for the introduction of the Bill, has recently issued a policy document stating that it will require lending to individual overseas sovereign borrowers to be reported under the 10 per cent, and under the 25 per cent, provisions of the clause as now in the Bill.
It is neither necessary nor appropriate for the Bank of England to be under a specific statutory duty to consult the Treasury on a matter of provisions for individual banks. The Bank is, of course, the authority given statutory responsibility for these aspects of supervision. No doubt if the Government of the day were to issue a statement of national policy that affected the Bank's overseas lending, the Bank of England would need to take account of that in the application of its supervisory judgments about particular banks' individual lending. However, it must be remembered that the Bank of England's responsibility under the Bill is the protection of depositors and generally for the stability of the banking system itself.
Although the problems of some other countries are tragic, the Bill is not the vehicle to provide the solutions to those particular authorities. That does not mean that the Bill as it now stands is not relevant to foreign country lending. I assure the House that the proper, prudential control of lending by the banks—not, I stress, by the authorities—is a key priority for supervisors.
839 The Bank of England's consultative papers state that each institution must set out its own policy for large exposures, including exposures to individual borrowers and also to overseas countries. These policies must be discussed with the supervisors and the change notified. If a particular institution's lending, including its proposed lending and that to overseas countries, were to be imprudent to the extent of seriously threatening to impair the institution's capital, the Bill already provides adequate powers in Clauses 11 and 12 for the Bank to revoke the authorisation or to impose conditions designed to prevent any repetition of imprudence. Similarly, paragraph 6 of Schedule 3 requires institutions to make adequate provisions for bad or doubtful debts. A failure to do so also triggers the Bank's powers of intervention in Clauses 11 and 12.
The new clause would seek to introduce into the Bill a national economic perspective and a measure of central planning. However, this Bill is about the protection of depositors and the Government cannot accept such an alien provision as that set out in the new clause. The matter was debated at length in Committee and in another place, but the Bill was not altered. I do not think that it would be right to do so now. Therefore, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Bruce of Donington
My Lords, I am grateful to the noble Lord for his reply. I was not aware that I had interpreted the word "person", referred to in the original text of Clause 48, in any other way than already applies under the Interpretation Act. I am well aware that the term "person" includes a body corporate but I have taken legal advice on the term "person" in the light of the Interpretation Act. I am advised that the term does not include a foreign government. If the noble Lord has any information to the contrary, I should be greatly obliged to hear it because, as he knows, I am keenly interested in these matters.
The noble Lord rejects the amendment on the ground that it introduces an alien element into the Bill—the consideration of national economic policy. In the broadest sense I agree with him that it does; and in my view it should. I can, of course, understand the Alliance wishing to dissociate itself from any such concept. We note the attitude of the Alliance with great interest and will give it considerable publicity.
On that basis, and regretting that I cannot meet the mind of the noble Lord, Lord Young, I must test the view of the House on this amendment.
§ 6.5 p.m.
§ On Question, Whether the said amendment (No. 10) shall be agreed to?
§ Their Lordships divided: Contents, 38; Not-Contents, 94.840
|DIVISION NO. 3|
|Ardwick, L.||Bruce of Donington, L.|
|Blease, L.||Carmichael of Kelvingrove, L.|
|Blyton, L.||Carter, L.|
|Bottomley, L.||Cledwyn of Penrhos, L.|
|David, B. [Teller.]||Peston, L.|
|Dean of Beswick, L.||Phillips, B.|
|Elwyn-Jones, L.||Pitt of Hampstead, L.|
|Fitt, L.||Prys-Davies, L.|
|Hatch of Lusby, L.||Ross of Marnock, L.|
|Houghton of Sowerby, L.||Shackleton, L.|
|Jenkins of Putney, L.||Silkin of Dulwich, L.|
|John-Mackie, L.||Stoddart of Swindon, L. [Teller.]|
|Kirkhill, L.||Strabolgi, L.|
|Llewelyn-Davies of Hastoe, B.||Taylor of Blackburn, L.|
|Longford, E.||Underhill, L.|
|Milner of Leeds, L.||Wells-Pestell, L.|
|Mishcon, L.||White, B.|
|Mulley, L.||Williams of Elvel, L.|
|Alexander of Tunis, E.||Kinloss, Ly.|
|Arran, E.||Lawrence, L.|
|Bauer, L.||Layton, L.|
|Beaverbrook, L.||Lindsey and Abingdon, E.|
|Belhaven and Stenton, L.||Long, V.|
|Beloff, L.||Lothian, M.|
|Belstead, L.||Lucas of Chilworth, L.|
|Blyth, L.||Lyell, L.|
|Boardman, L.||Margadale, L.|
|Brabazon of Tara, L.||Marley, L.|
|Bramall, L.||Marshall of Leeds, L.|
|Broxbourne, L.||Melville, V.|
|Butterworth L||Merrivale, L.|
|Campbell of Alloway, L.||Mersey, V.|
|Campbell of Croy, L.||Molson, L.|
|Carnock, L.||Mowbray and Stourton, L.|
|Clitheroe, L.||Norfolk, D.|
|Colwyn, L.||Nugent of Guildford, L.|
|Constantine of Stanmore, L.||O'Brien of Lothbury, L.|
|Cork and Orrery, E.||Peyton of Yeovil, L.|
|Craigavon, V.||Portland, D.|
|Craigmyle, L.||Rankeillour, L.|
|Cullen of Ashbourne, L.||Reigate, L.|
|Davidson, V. [Teller.]||Renwick, L.|
|Denham, L. [Teller.]||Russell of Liverpool, L.|
|Denning, L.||St. Davids, V.|
|Derwent, L.||Saltoun of Abernethy, Ly.|
|Dundee, E.||Sandford, L.|
|Eden of Winton, L.||Sempill, Ly.|
|Elliot of Harwood, B.||Shannon, E.|
|Elton, L.||Sharples, B.|
|Faithfull, B.||Shaughnessy, L.|
|Fortescue, E.||Sherfield, L.|
|Fraser of Kilmorack, L.||Skelmersdale, L.|
|Gibson-Watt, L.||Strathclyde, L.|
|Gridley, L.||Sudeley, L.|
|Hailsham of Saint Marylebone, L.||Swansea, L.|
|Harmar-Nicholls, L.||Trumpington, B.|
|Hesketh, L.||Ullswater, V.|
|Home of the Hirsel, L.||Vaux of Harrowden, L.|
|Hooper, B.||Whitelaw, V.|
|Hylton-Foster B.||Windlesham, L.|
|Ingrow, L.||Wyatt of Weeford, L.|
|Kaberry of Adel, L.||Young of Graffham, L.|
|Kemsley, V.||Ypres, E.|
|Killearn, L.||Zouche of Haryngworth, L.|
§ Resolved in the negative, and amendment disagreed to accordingly.
§ 6.13 p.m.
§ Clause 39 [Power to obtain information and require production of documents:]
§ Lord Elton moved Amendment No. 11:
§ Page 30, line 49, at end insert ("or, for the purposes of subsection (10) of this section, on a significant shareholder")
§ The noble Lord said: My Lords, when we were in Committee it became clear in our exchanges that, 841 while there would be a whole battery of powers available to the Bank to prevent an undesirable person becoming a controller-shareholder by acquiring 15 per cent, of the shares in an authorised institution, it will have no powers whatever either to stop such a person's approach from the 5 per cent, level before he gets there or to advertise its opposition to the idea of his becoming a controller-shareholder before he actually arrives at the 15 per cent, acquisition point.
§ The amendment which I tabled at Committee would have given the Bank at 5 per cent, just one of the powers now proposed for it at 15 per cent. That was the power of disenfranchisement. I did not argue that that power was appropriate. I argued only that some means of alerting the market to the fact that a 5 per cent, significant shareholder was not the sort of person who ought to be permitted to become a 15 per cent, controller-shareholder would make sense and was desirable.
§ I invited her Majesty's Government to devise their own amendment for this purpose. In the event, my noble friend the Secretary of State told me that it did not make sense and was not desirable. In arguing the case against me my noble friend laid great weight upon the investigative powers already available to the Bank and upon the fiercely discouraging effect they would have upon such a bidder. If we have to be satisfied with that, we need to be certain that these investigative powers are complete and that they can be applied to the undesirable shareholder (that is, the one on his way from 5 to 15 per cent.) and that they can be applied to him in person even when he is not a significant shareholder.
The doubt arises—and I referred to this at an earlier stage—because, although Clause 39 (10) refers to the exercise of the powers of Clause 39 against a significant shareholder, the heading of the clause at subsection (1), where the powers actually reside, refers only to the service,
in writing … on an authorised institution".
There is therefore a reasonable doubt as to whether the powers can be used when the 14.95 per cent, shareholder is not an authorised institution.
§ My noble friend will probably argue either that Parliamentary Counsel assures him that he was right last time and I was wrong or, less probably, that I was right last time and he was wrong. But in either case it ought to be clear from the face of the Bill what the meaning is. I hope that he will accept my amendment or something like it for that purpose, if not now then later. The principal point, however, is for him to make the position clear. I beg to move.
§ Lord O'Brien of Lothbury
My Lords, I agree with the amendment put forward by the noble Lord, Lord Elton, at Committee stage and I accept and endorse the thought behind the amendment now. It seems to me still that if an unsuitable shareholder has been identified at 5 per cent., to have no powers to deter him until he gets to a controlling position at 15 per cent, is a loophole which ought to be closed.
I know the Government say that the Bank of England has very strong informal powers to deter people, but it seems to me that once something is put 842 in a statute which apparently gives liberty up to 15 per cent., it is that much more difficult for the Bank of England to exercise such powers. Therefore, I hope that the Government can come up with something which will bridge the gap between 5 per cent, and 15 per cent.
§ Lord Young of Graffham
My Lords, I am grateful to my noble friend for explaining his amendment. His concern is understandable and it is important that these provisions should work properly and indeed that the Bank should be allowed to obtain information from all relevant persons.
I have therefore taken legal advice on this point and Parliamentary Counsel has also been consulted. I am advised that the amendment is unnecessary because subsection (10) as currently drafted already allows the Bank to serve a notice directly on a significant shareholder, just as subsection (6) and (7) allow the Bank to serve a notice directly on holding companies, subsidiaries or other similar related bodies of an institution. I hope that this assurance will satisfy my noble friend and the noble Lord, Lord O'Brien, and that my noble friend will feel able to withdraw his amendment.
§ Lord Elton
My Lords, I should perhaps have expressed the reluctance with which I withdrew to this position at the end of the Committee stage, because your Lordships will know that my concern was the same as that of the noble Lord, Lord O'Brien. It was that there was a logically indefensible inconsistency between saying that all the powers available to the Bank should be deployed at 15 per cent, and none of them at 14.95 per cent. My noble friend then led me to suppose that the effects of the investigative powers applied by the Bank would be such as to deter the approach of the unacceptable bidder to 15 per cent. I noticed with regret that there was no such reiteration in the speech that he has just made. He may have the leave of the House if he wishes to elaborate on his remarks, and I hope that perhaps he will.
As to the substance of the amendment, as I said, I see that the Bill can be read in the way in which my noble friend has read it; no doubt he will see that it can be read in the way in which I read it. I had hoped that my noble friend, seeing that there was a doubt in the matter would resolve it by changing the drafting slightly so that it was no longer in doubt. It is no longer in doubt to parliamentary counsel; it ought not to be in doubt to members of the legal profession generally because they draw their fees—do they not?—from resolving such doubts. They draw their fees from practitioners in the field and eventually from the depositors through the Bank rate which the noble Lord's Bill is designed to protect. So I think that I am within the Long Title.
Before I seek leave to withdraw this amendment, I shall give my noble friend an opportunity to return to the question of how frightening to the potential shareholder will be the investigative powers and in fact how it is that they will signal to the market that it need not back this horse because it will not run beyond the 15 furlong mark. I shall sit down to see if my noble friend gets up.
§ Lord Young of Graffham
My Lords, with the leave of the House, I did not reiterate the arguments that I put forward at Committee stage because I thought that they were self-evident. There are two particular hurdles to cross; namely, the 5 per cent, and the 15 per cent. Wherever we set those hurdles they have to be passed because there have to be demarcation stages.
The Bank itself has significant powers at 15 per cent. The concern of your Lordships' House was that when people came over 5 per cent., there might well be some shareholders about whom the Bank could not find sufficient information because they might consist of a fairly anonymous shareholding. We have taken legal advice—and as a one time solicitor I cannot have a word said against legal advice—and parliamentary counsel has also been consulted (although all Members of your Lordships' House will know that neither of them are necessarily infallible). To the best of our knowledge today the Bank can serve the notice directly on a significant shareholder himself and thereby obtain the information which will be relevant to the Bank in forming a judgment should that significant shareholder seek to pass the 15 per cent, hurdle. Disapproval would be communicated to that significant shareholder. I suspect that we shall find that this measure will work as well as any in order to discourage some shareholders from going further.
§ Lord Elton
My Lords, my noble friend assures us that when the Bank may "exercise the powers conferred by subsections (1) and (3) above" in relation to any person, even though those powers relate to the serving on an authorised institution only, in fact the meaning of the Act is that they may be served on a person. I am glad that we have that on the record. I am modestly grateful for the other remarks he has made but not very. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 45 [Audited accounts to be open to inspection:]
§ Lord Beaverbrook moved Amendment No. 12:
Page 37, line 33, at end insert—
("( ) In the case of an institution incorporated in the United Kingdom the accounts referred to in subsection (1) above include the auditors' report on the accounts and, in the case of any other institution whose accounts are audited, the report of the auditors.").
§ The noble Lord said: My Lords, your Lordships will recall that in Committee the noble Lord, Lord Bruce of Donington, voiced his concern that Clause 45 should make it explicit that a copy of the auditors' report should be kept at each branch of a bank as well as a copy of the audited accounts. The amendment meets the noble Lord's concern and I am grateful to him for having raised the point.
§ The amendment puts beyond doubt that for United Kingdom incorporated companies the company's audited accounts should include the auditors' report. In the case of any other institutions which have audited accounts, it also provides that the branches should keep a copy of the auditors' report. I beg to move.
Lord Bruce of Donington
My Lords, I am most grateful to the noble Lord, Lord Beaverbrook, for 844 having put forward this amendment. I sincerely hope that on this occasion the Government's agreement with my suggestion will be a useful prelude to the next amendment which I shall have the honour of submitting to your Lordships.
§ On Question, amendment agreed to.
§ Clause 47 [Communication by auditor etc., with the Bank:]
§ Lord Bruce of Donington moved Amendment No. 13:
§ Page 38, leave out line 14.
§ The noble Lord said: My Lords, I must apologise in advance to your Lordships for introducing an amendment which, on the face of it, is highly technical. Amendments that are concerned with the accountancy profession are not capable of being enunciated in your Lordships' House in stirring or emotional terms. They affect strict legalities, and it is in that sense that I intend to move the two amendments that are designed to amend Clause 47 of the Bill.
As your Lordships will recall, Clause 47 deals with the duties of an auditor and his responsibilities. It also deals with the position in tort of a person appointed to make a report under Clauses 8(5) or39(1)(b) of the Bill. The amendment seeks to amend Clause 47 in order that the position of an auditor as distinct from that of a reporting accountant should be made absolutely clear. Therefore it seeks to delete paragraph (a) which refers to an auditor of an authorised institution, so that the new subsection (1) then reads:
No duty to which a person appointed to make a report under section 8(5) or 39(l)(i>) above may be subject shall be regarded as contravened by reason of his communicating in good faith to the Bank, whether or not in response to a request made by it, any information or opinion on a matter to which this section applies and which is relevant to any function of the Bank under this Act".
Then there will be a new subsection reading:
Any information or opinion communicated by an auditor to the Bank either on his own initiative or at the request of the Bank shall be protected by qualified privilege".
The purpose is to differentiate sharply between the liability of an auditor who has a direct, close and contractual responsibility to his client, which is the authorised institution, for any information that he gives outside his duties to that client (the bank)—to ensure that he is protected by qualified privilege—and the actions of an accountant who reports to the Bank under the other clauses that are mentioned—Clause 6 for example. Clause 8(5) deals with authorisations and says:
Any information or statement to be provided to the Bank under this section shall be in such form as the Bank may specify; and the Bank may by written notice require the applicant or any such person as is mentioned in subsection (3) above to provide a report by an accountant or other qualified person approved by the Bank on such aspects of that information as may be specified by the Bank.".
§ That clause, which is quite properly applicable to an accountant or other qualified person, denotes a person who is under a responsibility to the Bank, rather than to the institution on whom he is reporting. Therefore, the protection of his action in good faith may be perfectly valid and is left undisturbed.845
Then we come to the position under Clause 39(1)(b), referred to in Clause 47, which states:
The Bank may by notice in writing served on an authorised institution … require the institution to provide the Bank with a report by an acountant or other person with relevant professional skill on, or on any aspect of, any matter about which the Bank has required or could require the institution to provide information under paragraph (a) above.".
§ This is a report by an accountant or other qualified person. It is not specifically the auditor of the institution.
§ I must here declare an interest. Although I am not at present an auditor to a prospective authorised institution, it is possible—thus I have a potential interest—that on some future occasion I might be appointed a reporting accountant to an institution. Let me from my experience in connection with the appointments of reporting accountants by banks inform your Lordships how it is done.
§ A bank, not on matters connected with any affairs discussed in the Bill, often requires an investigation to be made into a company to which it has lent money. That company may already have auditors. True enough, the Bank gives it the requisite information, including the accounts and so on. Often and quite properly, however, the bank, without wishing to cast any reflection on the auditors of the company, requires the appointment of an independent reporting accountant. That accountant, whoever it may be, is appointed by the bank although ultimately paid by the client. There is no question regarding to whom the independent accountant reports; it is direct to the bank. That is why I wish to make the position of the auditor quite clear.
The auditor is in a separate and distinct position. He is in a position of trust as between himself and his client. It may be desirable in the public interest—and, indeed, it is so incorporated in the Bill—for the auditor to give certain information to the bank as may be required by the bank. If that information is given, it is my submission that it should be under conditions of qualified privilege. Indeed, if I may refer your Lordships to the Government's own White Paper, Cmnd. 9695 of December 1985, Annex 4, paragraph A,
The basis of the relationship between the supervisors and the auditors",
one sees under sub-paragraph (ii) that the exchange of relevant information is protected by qualified privilege. Exactly the same sentiment is set out on page 18 at 8.2 (v):
qualified privilege shall attach to communications between auditors and supervisors".
§ That is all that this part of the Bill seeks to do.
§ 6.30 p.m.
§ Lord Harmar-Nicholls
Is the noble Lord saying that qualified privilege should be given only when the bank asks the auditor a question, or does it apply when the auditor voluntarily gives the information?
Lord Bruce of Donington
My Lords, at Annex 4 to Cmnd. 9695 there is set out guidance on the disclosure of information by auditors to the supervisors. This is envisaged in several circumstances. The information may be asked for by the supervisors of the auditors; 846 alternatively, the auditors may voluntarily provide it to the supervisors under circumstances of a meeting called between the client bank and the auditors, or even in bilateral exchanges between the supervisors and the auditors. In general, therefore, any disclosures made by the auditors to the supervisors in conformity with the intention in the document should be subject to qualified privilege.
There is a danger that the position of accountants as auditors in consideration of their specific confidentiality with their clients becomes confused when an accountant is acting in a totally different capacity and is responsible finally to someone else. There must, I fear, be some distress that the Government have not seen fit to make the distinction.
Let us imagine circumstances in which there are trilateral exchanges among the supervisors, the auditors and the authorised institution's management. There is the auditor sitting with his client on the one hand and the bank supervisors on the other, and there may be discussion of a variety of matters. Indeed, they are all set out in the Government's White Paper. I ask your Lordships to envisage that an auditor says something or reveals information that his client does not like, and it is said in front of him; or that he omits to say something that his client thinks he ought to have said. What are the consequences? I will tell your Lordships one consequence that is most distinctly possible.
If the authorised institution on whose behalf the auditor is acting dislikes it, it can get on to its solicitor under conditions of complete, unqualified privilege and tell him to write the complaint to the auditor. In extreme circumstances it may even authorise the issue of a writ concerning which the auditor knows nothing. What are the consequences? I sincerely hope that the Government have considered them.
The moment that an auditor receives a letter of mild complaint from the solicitor of the authorised institution or even a verbal indication from the client that he regards the auditor as being negligent in saying something that he has said or in omitting to say something, under his own contract of insurance, a contract of uberrima fides, he is bound to tell the insurance company that is covering him for professional indemnity. He must do that immediately. If he does not do it and a case is subsequently brought, he is likely to be held liable.
The immediate impact upon the firm of auditors is simple. The moment the insurance company is notified of the risk—and it is only a risk, a suggestion—the whole of the firm's cover for professional indemnity purposes is immediately reviewed. In some cases the rates of insurance—this has been the case in regard to quite a number of firms of practising auditors in the United Kingdom— covering the whole of the practice have been considerably increased as a result of just the hint of one complaint which has to be notified to the insurance company. In some cases insurance companies have been reluctant to give any cover whatsoever.
Professional indemnity cover for accountants, including some of the most reputable firms in the United Kingdom, are at such levels as to amount to between 10 per cent, and 15 per cent, of their gross 847 turnover. In some cases, insurance cannot be obtained. As a result, the reputation of the accountant put into the intolerable position of being unprotected by qualified privilege will undoubtedly suffer at the hands of the client who has his own friends and associates.
My complaint—I admit straightaway that it is a professional complaint—is that auditors have not been treated in the way it was envisaged they should be treated in the Government's paper. What seems to us to be happening is an extension of the audit function to include systems of internal control as distinct from an examination of accounting records or even accounting control. The auditor is now being put into the position of being the long stop at the end of the line. The Bank's supervisors can fail. The Johnson Matthey case indicated the frailty of some of the Bank's administration at that time. Managers can fail without any risk of suffering in the same way that professional accountants suffer, or would suffer, in fields where they are responsible.
Auditors as such are not responsible for the management of companies. They are not responsible for the organisational control, as distinct from the accounting records control, of any company or institution, and they should not be made so responsible. They have been put into an intolerable position.
At one time, we always said, "Watchdogs, not bloodhounds, are we." That was the code under which the accountancy profession and those involved in auditing operated for a long time. We accept, and the internal regulations of the Institute of Chartered Accountants accept, that there are certain public responsibilities we must fulfil from time to time. They are clearly laid down in the by-laws of the Institute of Chartered Accountants. We have one of the most strict, if not the strictest, codes of conduct of any of the professions in the United Kingdom, certainly much stricter than those of some professions which I could name but will not do so.
Under this clause, we shall become state sniffer dogs, as distinct from watchdogs fulfilling our normal and proper function as auditors. I know that when the noble Lord replies he will say that the professional bodies have, broadly speaking, agreed with the Government's approach to this matter. They may well have done so. I may have a degree of professional astringency which does not commend itself to the organised profession or certain sections of it. All professional bodies like to live on amiable terms, as far as possible, with governments. They like to be able to live alongside them. It is of course true that in the accountancy profession many large firms are to some extent subject to DTI patronage. Some firms are engaged by audit commissions and by the Public Accounts Committee. In broad general terms, therefore, it is desirable that the profession should remain on amiable terms with the Government.
I am concerned here with the principle. To me, the principle is clear. Notwithstanding the fact that the organised profession may go along with the Government's existing wording, my view and that of many independent professional colleagues is that there should be qualified privilege under the conditions I have described. I beg to move.
§ 6.45 p.m
§ Lord Denning
My Lords, this amendment is unnecessary. The words "qualified privilege" are a technical term in the law of libel. Whenever a master is asked for a confidential reference on his servant, whatever he says in answer to the question is protected by qualified privilege. He is liable only if he is activated by malice. All the instances given by my noble friend Lord Bruce of Donington are clearly protected by qualified privilege. If we put something into the Bill, we may cast doubt on the extent of our law on qualified privilege. The amendment is unnecessary. The profession is already adequately protected by the law on qualified privilege.
§ Lord Harmar-Nicholls
My Lords, the amendment opens the door pretty wide. The amendment states:Any information or opinion communicatedshall have qualified privilege. I might agree if it were confined to "any information". But I do not like "opinion" being included, whether it relates to a professional accountant or anyone else. If the amendment were confined to "any information", I should not have taken such an immediate objection to it. I do not think we should agree to "information or opinion". We already have the protection which is needed in our normal law.
§ Lord Marshall of Leeds
My Lords, I wonder whether what the noble and learned Lord, Lord Denning, said does not also apply to professional advisers, including accountants, who are asked questions by inspectors of taxes about their clients' financial affairs. There must be a time when a professional adviser has some protection in the face of what is an overwhelming demand made, for instance, by an inspector of taxes in respect of a taxpayer for whom the professional adviser acts as a chartered accountant.
§ Lord Young of Graffham
My Lords, I am grateful to the noble Lord, Lord Bruce of Donington, for explaining the purpose of his amendments. I am even more grateful to the noble and learned Lord, Lord Denning, for confirming the position, as I understand it, that qualified privilege is a common law privilege, which need not be conferred by any Bill, available to an accountant, auditor, or any other relevant person who acts in good faith when making the communication. It applies only to defamation, and therefore the amendment narrows an auditor's protection. It does not extend the protection.
It may assist your Lordships if I briefly summarise the purpose of Clause 47. This is an important provision designed to ensure that when an auditor or reporting accountant is required to report to the supervisors on any matter, or when he or she feels that there are matters which should be drawn to the attention of supervisors, they should not be constrained from doing so by any obligation of confidence or loyalty which they might otherwise have owed to the bank concerned or to any other party.
It is clearly desirable, as I am sure noble Lords will agree, that auditors who come across matters which should be placed before the Bank should feel able to do so freely and without fear of legal action. The noble 849 Lord, Lord Bruce of Donington, will know from my recent letter to him that the clause has been the subject of extensive discussions with the profession and follows the same formula as the Financial Services Act. The effect of the amendment would be to remove from an auditor of an. authorised institution this protection from breach of duty and to replace it with the defence of qualified privilege in relation to the communication by an auditor to the Bank of information or of opinion.
I am advised that qualified privilege exists only in relation to the law of defamation. Its effect is to provide a person acting in good faith with protection if he or she makes a statement about another which turns out to be untrue and defamatory. It applies only in certain limited circumstances. Basically a communication is privileged when the person making it is under some form of duty to make it to the recipient; and the recipient is similarly under a duty to receive it. I am advised, therefore, that it is highly likely that at common law the defence of qualified privilege would exist in any event to protect an auditor or one of the other persons mentioned in subsection (1)(b) from an action for defamation brought by an institution, provided that he has acted in good faith. However, qualified privilege is not a defence to an action for breach of duty. If the amendment of the noble Lord, Lord Bruce, were to be accepted it might result in the anomalous position of an auditor being able to rely on qualified privilege to defend him from an action for defamation but not being able to defend himself for an action for breach of duty, for example, of confidentiality brought in respect of the very selfsame communication.
Having heard my explanation—which I fear was necessarily somewhat legalistic—I hope that the noble Lord, Lord Bruce of Donington, will be reassured and will feel able to withdraw his amendment.
Lord Bruce of Donington
My Lords, I am most grateful to the noble Lord for his reply. I can set his mind immediately at rest by saying that I do not intend to divide the House on this. I shall have to study the reply that he has given, to which I hope the widest publicity will be given in the professional press. That will enable some more detailed examination to be made of the statements that he has made. Unhappily I am not a lawyer, but my own view, for what it is worth, is that the present position, even under this Bill, would expose the auditor to action where a breach of strict confidentiality takes place outside the terms of his own professional engagement and code of conduct.
The noble Lord may say that good faith may be a good defence. Actions of this kind very often take two years to reach the Queen's Bench. I do not know what will happen to the auditor's accountants' indemnity policy during those two years with this kind of action hanging over him. I should like to have the opportunity of studying the matter further. I should like the opportunity for the profession to pay very careful attention to what the noble Lord has said. It may be necesary for me to return to the matter again at a later stage. However, that will depend on what happens as a result of any further inquiries that I may 850 think it proper to make. I ask the leave of the House to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendments Nos. 14 and 15 not moved.]
§ Clause 62 [Liability of institutions in respect of compensation payments:]
§ Lord Beaverbrook moved Amendments Nos. 16 to 18:
§ Page 50, line 29, at end insert ("and").
Page 50, line 31, leave out from ("deposit") to ("where") in line 3 on page 51 and insert ("shall be reduced by an amount equal to that payment.
§ Page 51, line 7, leave out ("under subsection (5)") and insert ("by virtue of subsection (4)(a)").
§ The noble Lord said: My Lords, for the convenience of your Lordships' House I shall move Amendments Nos. 16, 17 and 18. It has been drawn to the Government's attention that the references in Part II of the Bill to duties on administrators imply that they would be under a statutory duty to make payments and consequently could be made personally liable. It was not the Government's intention to indicate that when an administrator is appointed the obligations of a company are formally transferred to the administrator, thus giving him a personal liability. The Bill is therefore defective in referring to obligations on administrators when they are in fact on the institution itself. These amendments remedy this point. I beg to move.
§ The Deputy Speaker (Lord Renton)
My Lords, unless any noble Lord objects, I propose to put these three amendments, Amendments Nos. 16, 17 and 18 en bloc.
§ On Question, amendments agreed to.
§ Clause 87 [Disclosure of information obtained under other Acts:]
§ Lord Beaverbrook moved Amendment No. 19:
§ Page 68, line 12, leave out from beginning to ("may") in line 13 and insert ("Any information which has been lawfully disclosed to the Bank").
§ The noble Lord said: My Lords, Amendment No. 19 is a technical drafting amendment to provide that any information which has been lawfully disclosed to the Bank of England may be disclosed on to the Board of Banking Supervision to enable or assist it in carrying out its functions under the Bill. It is necessary because information may have been disclosed to the Bank perfectly properly and lawfully but not by virtue of any enactment. The amendment therefore removes this unnecessary rigidity in the subsection. I beg to move.
§ On Question, amendment agreed to.851
§ Lord Elton moved Amendment No. 20:
§ Before Clause 88, insert the following new clause:
("Effect of Financial Services Act 1986.
—(1) The Financial Services Act 1986 shall have effect in relation to an authorised institution within the meaning of this Act with the following modifications.
(2) For the purposes of section 27 (grant and refusal of authorisation), section 28 (withdrawal and suspension of authorisation) and Rules made under section 49 (financial resources rules) of that Act, the Secretary of State may delegate to the Bank the task of financial monitoring necessary to satisfy him that an authorised institution is and continues to be a fit and proper person.
(3) For the purposes of subsection (2) above, the Bank may in relation to an authorised institution which is an overseas institution rely on co-operation with the relevant supervisory authority in the institution's country of origin to carry out financial monitoring on its behalf if the Bank is satisfied as to the nature and scope of the supervision exercised by that authority.")
§ The noble Lord said: My Lords, with this amendment I return to an issue which I raised in Committee. The area that was giving great concern to the banking community was the area in which the provisions of both the Financial Services Act and this Bill would bear on the same authorised institutions. The amendment that I have addressed to this matter was designed to ensure a reasonable distribution of responsibilities among the supervisory bodies and to avoid an unreasonable imposition of reporting duties on the banks. It fell to be discussed on our second Committee day, which was Monday 23rd March.
§ It was necessary to raise the matter with your Lordships because everybody was then in the dark because no official proposals were available for general discussion. As the matters involved were detailed and technical, the Committee agreed to my suggestion that, once I had put the thrust of my concern on the record, the matter should be carried forward by correspondence and meetings rather than on the floor of the Committee. The length of the subsequent letter of my noble friend made me realise how wise that decision was, and I acknowledge gratefully the care he put into it. The position has also been helpfully advanced by the publication two days after our discussion in Committee of the draft of a memorandum of understanding between the Bank of England and the Securities Association on their proposed arrangements to make this dual regulation effective.
§ I am grateful also for that progress. It has enabled me to narrow considerably the matters that need the attention of your Lordships. There are three. All of them will fall eventually to be decided by the regulatory authorities. But I make no apology for taxing the Secretary of State, or my noble friend, with them now because the passage of this Bill provides the only opportunity for parliamentary intervention and it is normal, established and indeed essential practice for your Lordships to satisfy yourselves as to how a body proposes to use the powers that the House gives it before those powers are delivered.
§ The first matter is the proposal that we believe to be current to hypothecate a bank's capital in order to establish the permitted scale of its investment business. I ought perhaps to explain that "hypothecation"—or "dotation" as some call it—of capital means the earmarking of a proportion of the whole of 852 the resource so that it relates to a particular function for the purposes of a particular calculation. It is the opposite of the "non-hypothecation" which some of your Lordships have come across in local government finance.
§ There are two objections to hypothecation in banking, and two queries. The first objection is that orthodox banking philosophy regards the diversification of risk as a source of strength rather than weakness. It is proper, therefore, for the whole of a bank's capital and activity—and not just a part thereof—to be considered when deciding the appropriate scale of any activity. If a part of the capital is now to be set aside to justify investment business, I must ask my noble friend this question: will it be ignored or will it be taken account of for assessing the permitted extent of its other activities? We need an answer, and the right one, before the Bill is passed.
The second objection arises from a couple of sentences in the letter under cover of which the draft memorandum of understanding between the Bank and the Securities Association was issued on 25th March. They read as follows:
I must emphasise that these arrangements are designed only for UK registered companies. The treatment of UK branches of foreign banks which may wish to apply for membership of the Securities Association has still to be resolved.".
This passage makes it clear that the draft applies only to UK registered companies and that no means of dealing with branches of foreign banks operating in the United Kingdom has yet been agreed on. In fact it is not at all clear that any such means is yet in sight. Whether or not the final decision is to rely on the equivalents of the Bank of England in the foreign banks' own countries, it seems very unlikely indeed that those institutions will use the system of hypothecation now apparently intended for fixing the scale of their British competitors.
§ Simple arithmetic suggests that hypothecation will result in a reduction of the permitted level of business of those to whom it is applied. At present it appears that it will be applied to British banks and not to those foreign competitors banks which choose to act through branches rather than through their subsidiaries. This must be very unfair to our own folk and clearly contrary to our present intentions. Will my noble friend therefore please assure us that no such handicap will be imposed on British banks by according them treatment which differs from that accorded to their foreign competitors?
§ My third matter of concern is of slightly less importance, but it is of some significance none the less. There is in the draft memorandum that I have already referred to a proposal that banks should be required to file a return of their securities position every other week. We must all be in favour of close supervision, but I ask my noble friend whether he thinks that this incessant questioning is as appropriate to banks as it is to the other wards and charges of TSA and, if not, that it should be modified. I await my noble friend's reply with very great interest. I beg to move.
§ 7 p.m.
§ Lord Beaverbrook
My Lords, my noble friend Lord Elton in moving this amendment seeks certain assurances from me. He was good enough to write to 853 me in advance so that I should be better able to respond to him today. I am grateful, for these are somewhat complex matters. My noble friend was concerned to establish the position under the Financial Services Act for banks which also undertake investment business and so require authorisation under that Act as well as under this Bill.
I should first make one matter quite clear. The regime for the authorisation of investment business under the Financial Services Act is not yet in place. The agency—the Securities and Investments Board—to which it is proposed that the functions of the Secretary of State will be transferred has not yet been designated. My noble friend has said that this is the only parliamentary opportunity available to him to influence the matters which concern him. However, I can assure him that that is not the case. The Securities and Investments Board is to be designated by order: an order which requires an affirmative resolution of each House. Linked to that order, moreover, will be the draft rule book of the agency. It will be open to the noble Lord at that stage again to raise such matters as may concern him. The Securities and Investments Board accepts that its rules—
§ Lord Elton
My Lords, will my noble friend forgive me? When he says "the agency" does he mean the Securities Agency, the TSA? Is he telling me that the proposals which are now referred to are very much in the air and that the SIB will have to generate a set of rules which will be put before Parliament before they are enforced by the TSA? Is that the position?
§ Lord Beaverbrook
My Lords, perhaps I can help my noble friend Lord Elton. The agency I was referring to is the Securities and Investments Board. As I said that board will, it is hoped, be the agency to be designated by order. That will require an affirmative resolution. As I said, the draft rule book of that agency will be linked to that order.
§ Lord Elton
My Lords, I know this is not Committee stage and I hope your Lordships will forgive me. The matters I referred to in my speech and of which I gave notice related to the draft memorandum of agreement between the Bank of England and the TSA, which is on paper and from which I have quoted. I think it would be as well if my noble friend proceeded with his speech as he intended and we may get to the bit of it in which I am particularly interested later.
In the meantime if there is a difficulty my noble friend will have heard more of it from another quarter.
§ Lord Beaverbrook
My Lords, it would be helpful if I carried on with making the case because I am coming to a number of these points.
The Securities and Investments Board accepts that its rules concerning financial adequacy and the related reporting requirements may need further revision to attune them to the special needs of banks. They were formulated with investment business in mind. The board has power under the Financial Services Act to modify its rules in relation to particular categories of business. I understand that the board is considering modifications for banks taking into account the 854 supervision of the Bank of England to which they are already subject. The agency is statutorily required to publish any significantly different rules for consultation.
The second point I should make also relates to the Financial Services Act. That Act already contains powers of delegation of monitoring by the SIB and by SROs to, for example, the Bank of England, which are capable of similar effect to those in the amendment before us. I should refer my noble friend Lord Elton to Schedule 7, paragraph 3(1) of the Financial Services Act, which provides that the agency, the SIB, must have a satisfactory system for enabling it to determine whether persons regulated by it are complying with the rules.
Paragraph 3(2) then further provides that this requirement can be satisfied by other persons carrying out those operations on behalf of the agency. There is a similar provision in Schedule 2, paragraph 4 in regard to self-regulating organisations. As powers of delegation of monitoring already exist, it is clear that the matters which my noble friend has raised are matters for the regulatory authorities operating under the Financial Services Act to take forward in conjunction, for example, with the Bank of England operating under this Bill where banks are concerned. The noble Lord will therefore understand if I am unable to give him the categorical assurances that he seeks. These are matters which must be left to the regulatory authorities. I can however offer him my understanding of how it is intended that the legislation would operate.
My noble friend has referred to the difficulties which may be presented for banks subject to dual authorisation if they find themselves apparently forced to divide their capital among the needs of different regulators. In this respect the noble Lord referred to a recent draft agreement between the Bank of England and the Securities Association, a candidate to be a self-regulating organisation under the Financial Services Act. The agreement envisages the Bank undertaking on behalf of the association the task of monitoring the securities positions and financial resources of banks which are also members of the association. This monitoring would be based on a common approach to the measurement of risk and of capital adequacy for securities business. The Bank of England, it is suggested, should agree with each bank a capital limit for its securities business; a limit which would be reviewed at regular, perhaps quarterly, intervals. If a bank subsequently exceeded the previously fixed limit then the two regulators would agree on the corrective action to be taken by the institution.
The crucial point to recognise about the operation of this agreement is that it does not provide for the legal hypothecation of a bank's capital to meet particular risks. It proposes rather that where supervisors share responsibility for the operation of a single entity, that entity should in effect, for balance sheet planning purposes, allocate capital to its different activities. I would regard such forward planning as no more than is to be expected from any prudently run business. It certainly is wholly consistent with the principle that a diversified bank is less risky than one with all its eggs in one basket.
855 The capital limit referred to in the agreement therefore relates to the mechanism by which the Bank of England will be able to monitor the risks in the securities business of a bank on a similar basis to that which the securities regulator will be monitoring the business of a firm wholly engaged in investment activity.
If the monitoring reveals that the limit has been exceeded, the Bank of England must have ultimate regard to the totality of risks—banking risks and securities risks—of the institution in relation to its total capital before deciding on whether its powers of intervention have been triggered. The financial services regulator will be in the same position. Most likely the corrective action to be taken where the guidelines show that the securities business has outstripped the capital limit agreed will involve no more than a recalculation of the capital notionally supporting the investment side of the business.
The draft agreement is offered to the banks for consultation as a means by which they may avoid having to submit to a regular, detailed supervision by two authorities. It does not relieve them or the authorities of the statutory obligations associated with operating under the two statutes.
The noble Lord, Lord Elton, may fear that banks will be unable both to have their cake and to eat it. He has suggested that a bank's capital should be able to support any and every activity which it may undertake. I fear that I cannot go the whole way with him. I fully accept that one must look at a balance sheet in the round. But when measuring how stretched a bank's capital is, capital taken to be supporting one risk cannot be deemed to be available to support another. On that basis the proposed monitoring arrangements appear sensible.
My noble friend's second major point related to how overseas banks carrying on investment business in this country are to be regulated. He notes that no proposals have yet been published for dealing with this. Again I must stress that these are matters to be dealt with by the regulators under the powers conferred on them by the legislation.
The comments of my noble friend lead to the proposition that overseas incorporated banks and perhaps overseas incorporated securities businesses will operate here on a lighter rein than UK firms because it will not be possible or practicable to agree similar monitoring arrangements with the overseas supervisors as are in prospect between the Bank of England and the Securities Association.
At this stage it would be premature to reach such a conclusion. Level playing fields are a desirable aim and supervision which bears unevenly operates against that aim. However, the harmonisation of regulatory requirements across international boundaries is a matter which we must leave, with our encouragement, to the supervisors to take forward. I am sure that the Securities and Investments Board is well seized of this. Your Lordships' House will also be well aware of the significant step taken in this respect by the Bank of England and the United States banking supervisory authorities which was announced in January.
I should not wish to predict how quickly such arrangements can be applied to other countries or to 856 securities business, but the way forward has been shown. However, I can offer my noble friend one significant reassurance. Before an investment business can be authorised under the Financial Services Act, it must comply with the financial resources rules eventually to be made by the Securities and Investments Board or meet appropriately similar requirements of another supervisor. Therefore, before an overseas incorporated bank can be authorised, the supervision of the overseas bank must be deemed adequate by the Securities and Investments Board. How the board is to be satisfied on this matter is something which only it can comment upon, but I am advised that the SIB is in close consultation with the Bank of England on this point.
My noble friend asked me a third question about the frequency of monitoring. I must say that it would be inappropriate for me to comment on that. It is a matter for the regulators but it seems improbable that they would seek more information than they would deem necessary in order to discharge their functions properly. However, I hope that the noble Lord will recognise that I have gone as far as I can in seeking to meet his concerns. The fact is that the matters which he has raised are for the regulators and not for the Government. Therefore, I hope that on that basis he will feel able to withdraw his amendment.
§ Lord Elton
My Lords, I recognise the difficulties of my noble friend because he is speaking on behalf of another government department and that government department is not in charge of this area of policy anyway because it is delegated to a third government department. Therefore, there must be some reluctance for him to make any commitment whatever on policy, although it is perfectly respectable for him to say that all this will be for the regulators and they are not yet in position.
However, I am not at all clear that I received an answer to my question as to whether the hypothecation—what he called the notional relation—of part of a bank's capital to one of its activities would be deducted from the rest of its capital for deciding the extent of its other activities. Indeed, if I understood him aright, he finished up by saying that capital allocated to support one activity cannot be deemed to be available to support another. That seems to me to smack of heresy in banking terms and I shall have to read carefully what he said.
As to the other matters, I hope that he will take on board the fact that there is genuine concern among the sector which is to be regulated by this machinery that the regulation should not be unnecessarily onerous where it applies to banks simply because that is the way in which other sectors of the market are regulated. I hope that he will be able to transmit that message, however indirectly, down the wire to the people concerned with establishing the system.
I was also concerned to hear my noble friend clearly not undertake that the field on which the game is played will be level, or, if it slopes, that it will slope in favour of our own side. My concern, as I hope I made clear, is that the application of the existing proposal to foreign banks may have the effect of tilting the gound against British banks.
857 However it is late, your Lordships are getting hungry—all except the noble Lord, Lord Mishcon—and I shall therefore insert the normal saving sentence into my speech, which is that I shall read this with great concern in case I need to come back to it at Third Reading. I shall now leave your Lordships to get on with other business. I conclude by thanking my noble friend, and through him my noble friend the Secretary of State, for the voluminous and courteous correspondence that we have conducted between the stages of the Bill and also for a very helpful meeting. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.