HL Deb 16 March 1987 vol 485 cc1285-305

8.10 p.m.

House again in Committee.

Clause 8[Applications for authorisation.]

[Amendment Nos. 33 and 34 not moved.]

Lord Williams of Elvel moved Amendment No.35:

Page 6, line 24, after ("accountant") insert ("qualified under section 389 of the Companies Act 1985").

The noble Lord said: I beg to move Amendment No.35 standing in the name of my noble friends Lord Bruce of Donington and Lord Morton of Shuna and myself. If the Committee will allow me, I should like to speak also to Amendment No.36.

In Clause 8 we are dealing with applications for authorisation. There is a provision in Clause 8(5) referring to "an accountant". Furthermore, there is a provision in that clause referring to "other qualified person approved by the Bank". These amendments are in the nature of probing amendments. We should like to have some definition from the Government. In our own amendment we give our own definition of what "an accountant" is. Speaking to Amendment No.36, we wonder what other "qualified person approved by the Bank" can be charged with providing information or a statement. What information would the Bank require which could not be provided by an accountant? We are assuming that an accountant is one who is qualified under Section 389 of the Companies Act.

There may be precedents for simply referring to "an accountant" in previous legislation but we should like to make sure that such an accountant is not one who holds himself to be an accountant or pretends to be an accountant, but that he is a properly qualified accountant recognised as such. We should like to ask the Government what other type of qualified person approved by the Bank might be relevant under the circumstances.

Once the Government have given their response on those points, we shall decide what to do with this amendment. I beg to move.

Lord Winstanley

Before the noble Lord replies, perhaps I may ask the noble Lord, Lord Williams, whether, if an accountant is to be defined in the way specified in this amendment, we still need the words "approved by the Bank" in the clause.

Lord Williams of Elvel

I am grateful to the noble Lord, Lord Winstanley. Probably we do not need those words if the accountant is as specified, because it is already approved under the Companies Act.

Lord Beaverbrook

The noble Lord has asked me a few questions which I shall come to from a slightly different direction after having set out our position. The effect of the noble Lord's first amendment would he to restrict the choice of account-ant able to provide reports on information submitted in connection with applications for authorisation under this clause. The only eligible accountants would be those qualified under Section 389 of the Companies Act 1985—that is to say, accountants who are members of a United Kingdom body of accountants which is recognised by the Secretary of State, or accountants recognised by the Secretary of State as having similar qualifications obtained overseas.

The noble Lord's second amendment would have the effect of removing the ability of the Bank to require a report from a person who is "qualified", to use the language of the Bill, but who is not an accountant.

These amendments would have the effect of restricting the Bank's ability to approve persons who may be eminently suitable for the task. For example, a report may be required on matters outside the normal competence of accountants, if I may say that without causing offence to the noble Lord, Lord Bruce of Donington. An example would be where a valuation of property was required, when it might be appropriate for a surveyor and/or valuer to be involved. I think that answers one of the questions which the noble Lord asked me, concerning which other persons could be suitable to give advice under this clause.

With respect to United Kingdom accountants, it is unlikely that the Bank would approve an accountant who was not a chartered or certified accountant, but reports might be required from overseas accountants in respect of overseas companies or overseas-based controllers of those companies. I would not wish to restrict the Bank from approving such an accountant where, in its judgment, that person was suited to the task in question.

I hope that I have covered the questions which the noble Lord asked me, but if I have not perhaps he can come back to me.

8.15 p.m.

Lord Bruce of Donington

I can assure the noble Lord that as a qualified accountant I take no offence at any part of the Bill which might conceivably be thought to cast any reflection upon my profession. We are not sensitive in that respect.

In subsection (5) there is a requirement "to provide a report by an accountant". I fully appreciate that if the matter involves anything that is covered by the Companies Act the definition in Section 389 of the Companies Act would be appropriate. I suppose I should declare a personal interest here in case it is not known, although I do not think it is possible that any governor would seek to invoke my services in this connection, particularly after the exchanges today, but I am a little puzzled by the wording of the subsection, which speaks of, "an accountant'. I should have thought that the minimum that would be required would be "a qualified accountant". That applies not only in the United Kingdom but if the services of an overseas accountant were required, for example. I can quite see the circumstances where one might require the services of a certified public accountant in the United States, or one might find it necessary to have a comptable from France. I should have thought that the words "an accountant" ought to be qualified by the word "qualified" itself rather than leaving the wording merely as "an accountant".

As your Lordships know, there is no registration of accountants in the United Kingdom and anybody, including the noble Lord himself, if he is not already a chartered or incorporated accountant, can call himself an accountant. I should have thought that it would have been better to have inserted the word "qualified".

I accept the point that the noble Lord has made concerning "or other qualified person". The noble Lord mentioned estate agents or valuers. That point may present problems also because not every estate agent or valuer belongs to one of the recognised professional bodies for that purpose. I can envisage circumstances in which a lawyer would be required, but that is covered by "qualified". I should have thought that in such an important matter one might have been a little more specific. The amendment has been put down for clarification. There is nothing hostile about it and, I hope, nothing offensive. If the noble Lord could provide a little further information it would assist us in our consideration.

Lord Beaverbrook

I have listened to what the noble Lord had to say on this subject. I think it is inconceivable that the Bank would engage anyone other than a qualified accountant, but there is no legal definition which would apply worldwide and it would be better to leave the matter to the Bank's discretion. I should like to look at the matter further and perhaps write to the noble Lords once I have had a chance to look at the points they have made in Hansard.

Lord Williams of Elvel

I am grateful to the noble Lord for his undertaking to look at this matter again. I can do no more than reiterate the points that have been made both by myself in introducing this amendment and talking to Amendment No.56 and also by my noble friend Lord Bruce of Donington. If we are to have something on the face of the Bill it seems to me that it should be specific and quite clear in what it intends. If the noble Lord is prepared to look at it again in that light, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No.36 not moved.]

Clause 8 agreed to.

Clause 9[Grant and refusal of authorisation]:

Lord Williams of Elvel moved Amendment No.37:

6, line 47, after ("any") insert ("relevant").

The noble Lord said: For the convenience of the Committee I should like to speak also to Amendment No.38. If the noble Earl, Lord Limerick, will agree, I shall speak to Amendment No.39; or perhaps the noble Earl would like to take that separately.

The Earl of Limerick

I have no objection. I shall wish to make my own observations when we come to Amendment No.39.

Lord Williams of Elvel

I did not wish to prevent the noble Earl from making his observations but I thought it would be useful and time-saving for the Committee if I put forward our view in speaking to Amendment No.37.

There are three points. Our Amendment No.38 in some way marches alongside the amendment of the noble Earl though it is not exactly in the same terms. Amendment No.37 is a restrictive amendment. It requires the Bank to take into account "relevant matter" rather than "any matters". This may seem to be a small amendment and indeed it is not meant to be a point of great principle. We are all quite certain that the Bank will exercise its powers in a responsible manner. Nevertheless, I came back to what I said on the previous amendment. If legislation is to be passed by Parliament we should make it as comprehensible and watertight as we possibly can. I do not for a moment mean to suggest that the Bank will take into account any irrelevant matters, but there are irrelevant matters and there will be irrelevant matters. I believe that the Bill would be improved by inserting "relevant" at that point.

With Amendment No.38 I shall speak to Amendment No.39 in the name of the noble Earl. In contrast to Amendment No.37, Amendment No.38 is a widening amendment. In other words, the Bank should be able to take into account not only the matters relating to any person who is or will be employed by the applicant but matters relating to, any minority shareholder controller, majority shareholder controller, or principal shareholder controller as defined in section 103 below". In that respect the Bill is somewhat defective. As I understand it, the noble Earl says in his amendment that it is the affairs of the directors of the holding company of the organisation that are properly relevant to the consideration of grant and refusal of authorisation. I beg to move.

Lord Beaverbrook

For the convenience of the Committee I shall speak to Amendments Nos. 37 and 38. I should prefer to speak to the noble Earl's amendment separately if there is no objection.

Amendment No.37 would introduce an unnecessary word into the Bill. It would purport to restrict the Bank to taking into account only relevant matters relating to persons who will be connected with the applicant institution in the way specified in subsection (4). But of course as a matter of law the Bank may only properly consider relevant matters when reaching a decision. If it were to take irrelevant matters into account its decision would be liable to be reversed on an appeal under Clause 27 or even quashed on judicial review. I believe that the Bill already achieves what the noble Lord wishes in this respect.

The effect of Amendment No.38 would appear to result in the Bank being enabled to consider matters relating to a wider group of persons—namely, the controllers of the applicant institution where this is a body corporate—than is already provided by the subsection. However, the Bill already provides the Bank with this discretion. Under subsection (2) of the clause the Bank is not permitted to grant authorisation unless it is satisfied that the authorisation criteria in Schedule 3 to the Bill are fulfilled. Those criteria include the requirement that the shareholder controllers are fit and proper persons to hold their position. The qualities which are included in fitness and properness are widely drawn and it is thus unnecessary to provide the additional discretion offered by the amendment. For these reasons I hope that noble Lords opposite will feel able to withdraw the amendments.

Lord Williams of Elvel

I am grateful to the noble Lord for his response. If he assures me, as he appears to be doing, that Amendment No.37 is not necessary I am perfectly happy with that explanation. It needs a slightly complicated mind to work its way through the provisions of the Bill to decide that it is not necessary, but if the noble Lord tells me that I am prepared to accept it.

The position is somewhat different with Amendment No.38. I do not want to anticipate arguments that we shall have on the question of principal shareholder controllers, but if the Committee decides that the arrangements in the Bill relative to minority shareholder controllers and principal shareholder controllers are not adequate as at present drafted there will have to be a consequential amendment. It would be wrong for me to anticipate that discussion but I may well come back to it in the light of the decisions which are taken at that time. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No.38 not moved.]

Clause 9 agreed to.

8.30 p.m.

Schedule 3[Minimum criteria for authorisation]:

The Earl of Limerick moved Amendment No.39:

81, line 34, after first ("directors") insert ("of that institution or of its holding company")

The noble Earl said: In moving Amendment No.39, I declare the interest well known to the Committee that I am a practising banker. I was unable to be present on the Second Reading, but my noble friend Lord Boardman put down a flag to this point of which I have given notice to my noble friend on the Front Bench. I hope he may be able to give me some comfort.

There has been much discussion lately on the role of the non-executive director, sometimes referred to as the independent director. Indeed, the merit often lies in the independence shown by such a person, either from management or from any group of shareholders or indeed any major single shareholding interest.

Paragraph 3 of Schedule 3 was introduced into the Bill during proceedings in another place. It adds another criterion to the former criteria required under Clause 9(2) upon which the Bank may decide upon the grant of a banking licence. The new criterion is the inclusion of, such number (if any) of directors without executive responsibility for the management of its business as the Bank considers appropriate having regard to the circumstances of the institution and the nature and scale of its operations.

Certainly I have no quarrel with the principle of non-executive directors; and I have no quarrel with their involvement, for example, in audit committees about which the Bank of England is currently consulting the banking community. Several groups, including my own, are already moving in this direction.

The point of my amendment is this: the wording of the Bill would be appropriate if the institution seeking a banking licence is the principal company in its group. That is not always the case. In the case of my own group and a number of other major merchant banking groups, among others, it is not so. Our structures are such that the licensed banking company is a wholly owned subsidiary of a plc. That quoted holding company has non-executive directors on its board and these non-executives will be involved in independent roles such as those which paragraph 3 evidently envisages.

The board of the banking company, on the other hand, is wholly executive. It is a large board, a full-time working board, and it would not be a natural or even an appropriate place in such a group structure to include non-executive directors.

I have not overlooked the words in paragraph 3 "such number (if any)". I anticipate the reply that the Bank would not insist on non-executive appointments unless it deemed them to be appropriate. That, of course, I accept. However, as the Bill stands, it seems that if the Bank thinks that the appointment of the non-executives would be appropriate it can only require that they be appointed to the board of the banking institution itself, where they may be inappropriate; whereas it cannot require that they be appointed to a holding company board where their presence might be wholly appropriate.

Therefore, those are the anomalies which my amendment seeks to remove: first, that a banking group should not be required to put non-executive directors where their contribution cannot best be made; and secondly, that the Bank of England is alternatively empowered to require the appointment of non-executives to a holding company board when that is the more appropriate place for them. The Bill, as I read it, does not permit that. This is a humble but I believe wholly meritorious amendment drafted by a Back-Bencher with no professional advice and I hope that my noble friend will make my day be accepting it.

Lord Beaverbrook

I think that I may be able to make part of my noble friend's day, although I am not sure about the whole day.

This amendment reflects a question raised by the noble Lord, Lord Boardman, on Second Reading. He asked how the provisions inserted in paragraphs 3 and 4 in Schedule 3 in another place, which refer to non-executive directors and—without naming them—to audit committees, would affect a group which included an authorised subsidiary. There is widespread interest in this question; most major UK authorised institutions, including for example every member of the Accepting Houses Committee, are subsidiaries of holding companies.

The concern which the noble Earl, Lord Limerick, has expressed is similar. To summarise, his question is this: will the effect of the Bill be to require each authorised institution to have its own non-executive directors, where, in many instances, the relevant directors are presently directors of the holding company? This would be an unnecessary distortion of structure, since such directors regard themselves—as no doubt does the group audit committee—as having a direct responsibility for the authorised subsidiary.

We fully recognise this concern and I can give the noble Earl the reassurance that it is more than likely that the Bank, in applying the Bill, will accept such arrangements as satisfying the purposes of the Bill provided that those purposes are indeed satisfied. Certainly neither the Government nor, I am sure, the Bank of England have any intention of seeking rigid solutions to the perceived and generally agreed desirability of bank operations being overseen by directors, or by persons of equivalent rank and status, independent of management and, as far as possible, independent of other dominant interests. The Bank of England has issued a consultative paper on this subject, and has asked for comments by 30th April. I am sure that we can leave it to the Bank in the light of those consultations to work out practical arrangements on our institution by institution basis.

Turning to the amendment itself, it would appear to offer the Bank greater flexibility in agreeing appropriate structures in individual cases. However, the schedule, as it stands, does no more than lay an onus on each institution to have such number "if any-of non-executive directors as are considered appropriate by the Bank having regard, inter alia, to the circumstances of the institution. I stress the "if any". the Bill clearly, and deliberately, contemplates that in some instances an institution will need to have no non-executive directors. Those instances will be where the Bank considers that the particular circumstances of the institution make it unnecessary. The most obvious example would be the cases which concern the noble Earl and I can assure him that the provision was drafted with these in mind. On that basis I hope he will be happy to withdraw his amendment.

The Earl of Limerick

I am grateful to my noble friend for his comments. This is a probing amendment, and of course I have no intention of pressing it. I am somewhat reassured by his words, but only somewhat, because they do not really address the question. My question was this. If the Bank of England does not insist, which of course it will not, on such appointments where they are not appropriate; and if it has no power, which it might wish to have, to insist upon it in cases where they would be appropriate on a holding company board, would it not be better to spell out that power as provided in my amendment? I should like to leave that question with my noble friend for further consideration because I do not think that his reply, informative though it was, gave the answer to that point. Nevertheless, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Bruce of Donington moved Amendment No.40:

Page 82, line 26, after ("maintain") insert ("proper and").

The noble Lord said: I beg to move the amendment standing in my name on the Order Paper. The Committee will be aware that, in Schedule 3, paragraph 4(7) provides that: An institution shall not be regarded as conducting its business in a prudent manner unless it maintains or, as the case may be, will maintain adequate accounting and other records of its business and adequate systems of control of its business and records".

The amendment seeks to insert in each case before the word "adequate", "proper and" so that the appropriate description becomes "proper and adequate". An institution may or may not be a company, plc or otherwise, which comes under the ambit of the Companies Act 1985. If the institution is a company coming within the ambit of the Companies Act 1985, then quite clearly Section 221 applies. Perhaps I may remind the Committee of the accounting requirements of Section 221 of the Companies Act, which reads as follows:

  1. (1) Every company shall cause accounting records to be kept in accordance with this section.
  2. (2) The accounting records shall be sufficient to show and explain the company's transactions, and shall be such as to
    1. (a) disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
    2. (b) enable the directors to ensure that any balance sheet and profit and loss account prepared under this Part comply with the requirements of this Act as to the form and content of company accounts and otherwise.
  3. (3) The accounting records shall in particular contain—
    1. (a) entries from day to day of all sums of money received and expended by the company, and the matters in respect of which the receipt and expenditure takes place, and
    2. (b) a record of the assets and liabiities of the company".

The section goes on to particularise even further. So it will be observed that the requirements of the Companies Act in relation to an institution which is a plc or is a limited company are already covered. One can understand the Government's difficulty, in that certain institutions may not be companies—they may be partnerships. Therefore one has to put into this particular clause some coverage of the nature and extent of accounting records. The way the Government have chosen to cover this is by the insertion of the words, adequate accounting and other records, of its business and adequate systems of control of its business and records".

It is for consideration whether the word "adequate" is sufficient. In some respects the Government have already pre-empted the position because in the course of the Local Government Finance Bill, which also dealt with accounting matters, they ventured, in describing the allocation of revenue for accounting purposes, to refer in Clause 2(2)(b), (c) and (d) and subsection (3) to "proper practices applicable to accounts", by whatever name known.

The word "proper" is, in my respectful submission, a little more incisive and descriptive than the word "adequate". I should have thought that, in default of laying down more detailed prescriptions as required under Section 221 of the Companies Act and covering the position of institutions which are not limited companies and therefore not subject to it, it would have been far better to have put "proper".

Baroness Seear

If the noble Lord will allow me to intervene how can it be "adequate" if it is not "proper'"?

8.45 p.m.

Lord Bruce of Donington

I believe "adequate" implies a sufficiency, but it can involve a bare sufficiency, whereas the definition of "proper" is a little more precise. If one refers to the Oxford Dictionary, one finds the meaning, "Strictly belonging or applicable; that is in conformity with rule, strict, accurate, exact, correct". That may be, I think, a little more than a bare adequacy or sufficiency. The point is one of semantics. I should have thought that the Government would have sought greater precision and I am offering them a way of making this more precise and perhaps a little more refined that it is at the moment. To some minds "adequacy" means bare adequacy without the more strict requirements which I should have thought, in the light of Section 221 of the Companies Act, were strictly required in this case.

Lord Beaverbrook

We had thought paragraph 4(7) to be wholly satisfactory in requiring accounting records to be "adequate", whose meaning is spelt out in paragraph 4(8). The addition of the word "proper" would imply something different from the word "adequate", but I am not sure that it would be clear what. It might imply that the accounting records should be such as to comply with other legal requirements, for example, under the Companies Act. It would, however, be unnecessary and inappropriate for the Bill to duplicate requirements under other legislation. This is not the purpose of the Bill. Further, if the institution were to fail to comply with other legal requirements, whether on accounting records or otherwise, that would cast doubt on whether it was carrying on its business with prudence, integrity and professional skills, and perhaps on whether the directors or managers were fit and proper persons.

However, in the light of the eloquent explanation by the noble Lord, Lord Bruce, of the difference between these two words, if he would be willing to withdraw this amendment, I should, without commitment, like to look at these definitions again and perhaps write to him with a considered opinion.

Lord Bruce of Donington

I am most grateful to the noble Lord. The amendment was intended to he helpful rather than otherwise. One likes to have precision in an Act of Parliament, if possible. Perhaps the noble Lord will write or perhaps he may be prepared to consider something further on Report. It depends on the nature of the correspondence. I ask leave of the Committee to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No.41 not moved.]

Lord Williams of Elvel moved Amendment No.42:

Page 82, line 45, leave out ("£ l million") and insert ("£10 million").

The noble Lord said: I beg to move Amendment No.42, standing in the name of my noble friend Lord Bruce and myself as well as of my noble friend Lord Morton. For the convenience of the Committee, I should like to speak also to Amendment No. 92.

The matter which this amendment addresses was raised on Second Reading and it is very simple: at what point do the Government draw the line as to what are the proper resources of an institution to be authorised under the Bill? It seems to us and others that £1 million is rather a limited figure and we have put £10 million as a probing figure, to discover what is the Government's reasoning in this. I beg to move.

Lord Beaverbrook

The £1 million threshold in paragraph 6 of Schedule 3 to the Bill is included primarily to ensure that institutions that are moving into deposit-taking have an adequate cushion of their own resources against start-up costs and a reasonable financial commitment from their backers. It is a minimum requirement and only applies on initial authorisation. By virtue of paragraph 1(c) of Article 8 of the EC First Credit Institutions Directive, it is not permissible for the supervisors subsequently to withdraw authorisation solely on the ground that the initial minimum net asset criterion is no longer met.

The Bill's provision relating to the capital adequacy of authorised institutions is set out in paragraphs 4(2) and (3) of Schedule 3 to the Bill, which in turn reflect paragraph 1(d) of Article 8 of the directive. They provide that an institution at all times must have net assets and other appropriate financial resources commensurate with the nature and scale of its operations. Thus the Bank of England may require substantially more than £1 million, depending on the size of the business concerned and the risk inherent in the proposed operations. It may require more than £10 million, but there is no reason why an institution with very modest plans for deposit-taking cannot be run prudently with net assets of £ 1 million or even less. Size is only one, and not the most important, of the factors which will determine the safety of depositors.

There remains the question of the level appropriate as a cushion against start-up costs and as an indication that the new entrant to the market has sufficient backing. The figure of £ 1 million in the Bill is already a fourfold increase on the figure in the 1979 Act and is more than twice that figure adjusted for inflation. We believe that it is pitched about right. The danger of a higher limit such as the £10 million proposed by the noble Lords' amendment is that it will bar significant numbers of new British entrants to the deposit-taking market. If such a figure had been in force over the past two years, 12 out of 19 of the new British entrants to this market would have been prevented from entering.

For the convenience of the Committee I shall speak also to Amendment No. 92. Under the 1979 Act only recognised banks, together with the Bank of England and other European Community central banks, are permitted to use banking names and descriptions freely. As a general rule a licensed deposit-taker is not allowed to use a banking name and an overseas licensed deposit-taker can only use its banking name qualified by the words "licensed deposit-taker" in immediate conjunction with its name.

Under this Bill, with the abolition of the two-tier system all authorised institutions will be able to use banking descriptions. However, it has been decided to restrict the use of banking names broadly to institutions which have over £5 million paid-up equity. This is a reasonable test to help ensure that the public are not misled.

It has been argued that in banking terms £5 million is not very much and that a figure of £10 million would be appropriate. The Government do not share that view. Whenever a distinct line has to be drawn in this way it is inevitable that there will be debate about its precise path and there will always be two sides to the argument. There will always be those who fall just on one side or other of the line and always those who stand to benefit from finding themselves on the right side while others, possibly commercial competitors, are on the wrong side.

The £5 million test which is appropriate to the effect of the existing requirement has been extensively debated in the other place. As a measure of the difficulty of the line-drawing exercise to which I have referred, much of that debate was concerned with the effect of the test on smaller institutions and whether it might not be unfair to reputable authorised institutions to prevent them having banking names. The Government clearly need to strike a balance. Some have argued that the test figure should be lower or removed altogether; others have argued that it should be doubled. I take heart from the fact that pressure has been exerted in both directions, and I conclude that the balance is probably about right. I hope that that explanation clarifies the direction of our thinking for the noble Lord.

Lord Bruce of Donington

I am grateful to the noble Lord for his detailed explanation of the Government's intentions in this matter. One point requires a little clarification and perhaps the noble Lord can provide it. In paragraph 6(2) of Schedule 3 it is stated that: In this paragraph 'net assets', in relation to a body corporate, means paid-up capital and reserves". The more conventional concept of net assets and certainly one that is widely used in the accounting profession and in commerce is contained in Section 264(2) of the Companies Act: 'net assets' means the aggregate of the company's assets less the aggregate of its liabilities (liabilities' to include any provision for liabilities or charges within paragraph 89 of Schedule 4)". The noble Lord will appreciate that the definition contained in Section 264(2) of the Companies Act differs from the concept of net assets as comprising merely the equivalent of the paid-up capital and reserves.

Lord Beaverbrook

I am not able immediately to give the noble Lord a full explanation of that matter and I shall write to him on the subject. I understand that the definition of "net assets" for banking regulation purposes varies from that used for defining shareholders' assets within a corporation. I believe that it has to do with withdrawability of those net assets-. A different definition may be appropriate for the purposes of regulating minimum capital requirements. The definition of "net assets" used in this Bill is that used in the 1979 Act and has given no difficulty. However, I shall write to the noble Lord to confirm what I have said to him.

The Earl of Limerick

Before the noble Lord withdraws his amendment, if that is his intention, concerning net assets may I ask whether it would not be the case that to use that definition of net assets would mean including loan capital together with capital and reserves among the amounts to be determined? That would have the opposite effect from the one that I thought he was examining, namely, whether the amount written into the Bill was an adequate amount.

Lord Williams of Elvel

That technical discussion was very interesting. It brings into play the whole question of permanent floating rate notes, which are regarded as the capital of banks by the Bank of England, and raises all sorts of technical questions which I do not want to go into at this stage. I am grateful to the noble Lord for his response, which was worth putting on the record. This matter was discussed quite extensively in another place, as he said, and I do not intend to pursue this amendment. I beg leave to withdraw it.

Amendment, by leave, withdrawn.

Schedule 3 agreed to.

Clause 10 agreed to.

9 p.m.

Clause 11[Revocation of authorisation]:

Lord Williams of Elvel moved Amendment No.43:

Page 7, line 48, leave out from first ("fulfilled,") to end of the line.

The noble Lord said: This is, again, a probing amendment. I do not understand what Clause 11(1)(a) as drafted means. I do not understand how it can be applied. The third schedule outlines the minimum criteria for authorisation. Clause 11 provides: The Bank may revoke the authorisation of an institution"—

I shall leave out some words to make the point simple— if it appears to the Bank that any of the criteria"— in that schedule— may not he or may not have been fulfilled".

I do not understand how that can be applied in practice.

I understand that the Bank is the final arbiter as to whether the criteria may not be or may not have been fulfilled, but the criteria are complicated. I do not understand how, at any given point in time, the Bank can arrive at that judgment. If it does not arrive at that judgment, it is in danger of not revoking an authorisation which it might otherwise revoke. It may also arrive at the conclusion that the criteria may not be or may not have been fulfilled, and yet it turns out on subsequent investigation that they have been fulfilled. I am not clear as to what that means. I should be grateful if the noble Lord could tell me. I beg to move.

Lord Beaverbrook

The 1979 Act enables the Bank to revoke an authorisation if it appears to it that any of the authorisation criteria are not or have not been fulfilled. Those words were included to deal with the situation where the Bank may have been unable to obtain all the information that it needs to establish beyond doubt that the institution does not fulfil the criteria. One could envisage, for example, a shadowy overseas controlling shareholder resident in the Netherlands Antilles being reluctant to answer all of the Bank's questions. In another case, it may be that a third party refuses to supply information relevant to confirming that a principal controller was not fit and proper. In such instances, the Bank would be on safe ground in proceeding to take action if it considered that depositors' interests were or might be threatened.

It is important to note that the ground contained in Clause 11 provides the basis for the Bank not only to revoke an authorisation but for it to use the lesser power to restrict under Clause 12; for example, to place formal limits on the balance sheet, or to require the removal of a manager. The trigger for the Bank to take action to revoke or to restrict an authorisation has a double pressure. First, the facts (or the lack of facts) which lead the Bank to conclude that its powers are exercisable must be present. Secondly, there must exist adequate reasons, involving a tangible threat to depositors, which make the Bank's prudential actions an appropriate response in the circumstances. The Bank's actions under Clauses 11 and 12 are appealable to the tribunal under Clause 27. I hope that that explanation has been helpful to noble Lords opposite and enables them to see the point of the clause.

Lord Williams of Elvel

I am most grateful to the noble Lord. I hear all that he says. I understand every word that he says, but it does not seem to answer the point, which is that the Bank has powers under the Bill as drafted to revoke an authorisation under circumstances where it is, as he says, uncertain as to whether the criteria may or may not have been fulfilled. Although that may be open to appeal to a tribunal, to have the threat of revocation, even on an appealable basis, hanging over an institution seems to be a powerful weapon. I am not sure that the words in the Bill as drafted, although they repeat previous legislation, are entirely satisfactory; nevertheless, I shall read carefully what the noble Lord says. If there is anything that he wishes to say to me before I decide what to do with the amendment, perhaps he would like to intervene.

Lord Beaverbrook

May I come back on one point? The key point here is that the present wording would cope with a case where there was uncertainty and where the Bank is concerned for the protection of depositors, but cannot ascertain with any certainty whether the criteria are met. That point was unclear under the 1979 Act.

Lord Williams of Elvel

I accept that the Bank should intervene where there is a problem related to the protection of depositors. That was not clear in the 1979 Act. I accept the noble Lord's explanation. Revocation of authorisation is a big gun. Unless the Bank is satisfied that it has the appropriate backing for that rather dramatic step, it should not take it. I am sure that the Bank will operate in a wise manner, but if we are to write legislation, it should be properly expressed. That is the point that I was making.

Lord Bruce of Donington

May I just ask the noble Lord one further question? If he turns to Clause 13(4)(a) he will see that there are grounds which use the same words: the ground or a ground for a proposed revocation or for a proposal to impose or vary a restriction is that it appears to the Bank that the criterion in paragraph I of Schedule 3 to this Act is not or has not been fulfilled, or may not be or may not have been fulfilled". One would have thought that if notice were given to the person concerned under Clause 13, it would have been unnecessary to pre-empt the action that it is proposed to take in Clause 11. Surely it would only be if there were an unsatisfactory response to the information required under Clause 13 that action under Clause 11 should be contemplated. Is not the critical point at Clause 13 where a notice is given? If that notice is not complied with, there will be every reason for action to be taken under Clause 11. Clause 11 seems to pre-empt an unsatisfactory response to the requirements of Clause 13. Perhaps the noble Lord will give his observations on that. We are trying to be helpful. We are not making any other particular point.

Lord Beaverbrook

I am grateful to the noble Lord for putting this point. I should like to look at that matter. I do not have an immediate response except to say that the principle of the protection of depositors is very high in our priorities here and we feel that the Bank should have powers to do this. The point is the same under Clause 13 but Clause 13 covers only notice of revocation once the decision has been taken. It is therefore a slightly different point. However, I shall look at it again and if there is further explanation that I can give the noble Lord I shall write to him on the point.

Lord Williams of Elvel

I am most grateful to the noble Lord for his assurance. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 11 agreed to.

Clause 12[Restriction of authorisation]:

Lord Williams of Elvel moved Amendment No 44:

Page 10, line 38, at end insert— ("( ) The Bank shall make public in an appropriate form any restriction that it imposes on an institution's authorisation.").

The noble Lord said: It may be for the convenience of the Committee if I speak to Amendments Nos. 44 and 45 together. I beg to move Amendment No.44 in the names of my noble friend Lord Bruce, myself, and my noble friend Lord Morton. Amendments Nos. 44 and 45 return to a fairly familiar theme that we have put forward in the Building Societies Bill and the Financial Services Bill which went through this Chamber. The measure is even more important in this case where we are dealing with the protection of depositors, as the noble Lord opposite has quite rightly reminded us. I do not believe that depositors can be properly reassured about their interests if they do not know what restrictions may or may not have been imposed on the authorisation and if they do not know that a notice of revocation or restriction has been served by the Bank. It therefore seems to us to be logical and sensible in the interests of depositors that these events should be made public. I beg to move.

Lord Beaverbrook

I can understand the reason behind these amendments. Depositors should so far as is practicable be in full knowledge of the facts. There are, however, good reasons why these facts should not be mandatorily disclosed.

For the convenience of the Committee perhaps I may take Amendment No.44 first. This would require the details of the restrictions on an authorisation to be published. Restrictions are imposed on an authorisation in depositors' interests. An example would be where an institution is judged not to be fitted to take deposits but—because it is capital solvent—an orderly run-down is possible in which assets are steadily realised to repay deposits as they fall due. Restrictions would be imposed to bring this plan about. A premature, forced announcement of the fact that the institution's authorisation had been restricted would be likely to cause depositors to seek early withdrawal of funds. This could precipitate a liquidity crisis and closing of the doors, with consequent probable loss to the remaining depositors, the very event that the Bank was seeking to avoid. As the noble Lord opposite knows well, a forced realisation of assets is likely to be less beneficial than a freely negotiated one.

Turning to Amendment No.45, I believe the amendment to be wholly inappropriate. The Bank of England's notice which the noble Lord wishes published is one concerning a proposal of the Bank to act, not a notice confirming the action. Moreover, that notice—as subsection (3) of Clause 13 makes clear—must contain the grounds on which the Bank proposes to act: it will thus contain details of the evidence, no doubt much of it confidential and concerning third parties, which explains why the Bank is concerned about the institution. Moreover, the institution would not yet have challenged the Bank's evidence and its proposal, which it might subsequently withdraw. I hope therefore that with these explanations the noble Lord may feel able to withdraw these amendments.

The Earl of Limerick

Perhaps I may make this comment. Having once witnessed a run on a bank in the Middle East which was precipitated by the merest rumour totally without foundation, and knowing as we do that market places can become very nervous—although not, we hope, as nervous as that in this country—I find the explanation of my noble friend in relation to Amendment No.44 quite convincing.

Lord O'Brien of Lothbury

I should like to say also that I believe that such questions should be handled with the greatest discretion because indeed the first whiff of any kind of trouble applying to any one institution is just the way to start a run. Once a run starts on one institution, it can very well spread. Any noble Lords who are old enough to remember the Credit Anstalt failure in 1931 will know how terrible these things can be.

9.15 p.m.

Lord Williams of Elvel

I am grateful to the noble Lord and the noble Earl, Lord Limerick, and the noble Lord, Lord O'Brien. I agree with the noble Earl when he said—as I said on Second Reading—that with the spread of modern technology it is rumours rather than actual action that cause modern runs on a bank. On Second Reading, I said that the Continental Illinois went bust in twenty seconds simply because there was a rumour that the Chicago Board of Trade had withdrawn a deposit of 40 million dollars. That rumour set off a whole series of market operations which nearly broke a very major bank.

To a certain extent I would take issue with the noble Lord, Lord O'Brien. These rumours are going to happen everywhere, and I think there is a case for saying that if there is a formal situation then it may well be better in the long run to bring the matter right out into the open because rumour feeds on rumour. If there is an official action it may well be better to make the whole matter public.

I am afraid I was not in this world at the time of the Credit Anstalt failure. I have read with interest the history of Credit Anstalt, and indeed about Baring Brothers in 1890—which is also very interesting in view of the fact that the noble Lord, Lord Young, says he was there! In the modern world it is rumour that breaks things rather than actual declaration of fact. The money market is so quick now that it does not like uncertainty. Declaration of fact removes uncertainty. However, I am not going to press Amendment No.44.

I should like to make one further remark concerning Amendment No.45. I understand what the noble Lord has said in response to Amendment No.45, and I do have a lot of sympathy with it. Nevertheless, if I may jog back for a moment first of all to Clause 9(3), which deals specifically with foreign organisations and establishes the principle of home country control, that is perfectly clearly set out and was referred to on Second Reading. On Second Reading the noble Lord, Lord Young, was quite categoric on the subject that there was home country control, as was set out in the Bill.

One then looks at Clause 11. Clause 11(1)(e) indicates that revocation of authorisation can be "for any other reason" by the Bank. So the principle there of home country control is damaged. There may be other reasons why the Bank wishes to revoke authorisation in the protection of depositors. I wonder whether it is not right in some way for account to be taken of this, particularly in the case of foreign banks. If the Bank of England comes to the conclusion that "for any other reason" depositors should be protected, and that a supervisory authority in the home country (which has home country control) is not adequate, then somebody should know about it. Having said that by way of explanation—I may come back on Report on this question of "for any other reason" in Clause 11—I do not wish to pursue this argument and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 agreed to.

Clause 13[Notice of revocation or restriction]:

[Amendment No.45 not moved.]

Clause 13 agreed to.

Clause 14 agreed to.

Clause 15[Surrender of authorisation]:

On Question, whether Clause 15 shall stand part of the Bill?

Lord Williams of Elvel

Before we agree Clause 15, I should like to seek an assurance from the Government that Clauses 48 and 49, in fact, apply even though an authorised institution may surrender its authorisation under Clause 15.

Lord Beaverbrook

I was tempted to say "not without notice". I am not able to answer the question at this moment and perhaps I may give the noble Lord an exact answer to his question in due course.

Clause 15 agreed to.

Clause 16[Statement of principles]:

Lord Williams of Elvel moved Amendment No.46:

Page 13, line 22, after ("as") insert (", after consultation with the Treasury,").

The noble Lord said: I beg to move Amendment No.46, standing in the names of my noble friends Lord Bruce of Donington and Lord Morton of Shuna and myself. The publication by the Bank of a statement of principles is an important part of the Bill and of the whole procedure of banking supervision. I do not wish to anticipate the debates that may take place at a later stage when dealing with the new clauses that we are suggesting. However, there may well be moments when the Government have a particular policy with respect to the criteria and the principles involved in banking supervision. Leaving aside the foreign lending clause, which we shall discuss later, there may well be a case for saying that the Government should have some input into the Bank's statement of principles.

It is for that reason that I move the amendment. I beg to move.

Lord Beaverbrook

The content of such publications is properly a matter for the Bank, as the authority given responsibility for supervision under the Bill. The situation was the same under the 1979 Act, and the amendment would not change that. I believe that the Bank of England has a first class record in respect of its obligations under the existing Act to publish these statements of principles. It will continue to have a statutory obligation to do so under the Bill and there is no reason to suppose that it will not discharge that obligation in a proper manner.

If the amendment is intended to require the Treasury to give advice to the Bank on the interpretation of the minimum authorisation criteria, the various grounds on which the Bank's powers to revoke and impose restrictions become exercisable, and the circumstances in which the Bank should exercise its discretions to grant authorisation, revoke and impose restrictions, then it would be wholly inappropriate. The Bank of England and not the Treasury is the statutory body charged with responsibility for supervision under the Bill, as under the existing Act.

The amendments would involve the Treasury having an influence on the Bank in areas in which it had no direct experience or detailed expertise. It would give the Treasury a responsibility which it is not intended to discharge. The Bank has a unique authority in banking supervision, built on its day-to-day contacts with banks and its experience in dealing with their problems. It also has a detailed knowledge of complex technical issues, including capital adequacy and liquidity, which together make it the appropriate body to carry out supervision and therefore to be responsible for the statements of principles in question.

Lord Williams of Elvel

I am grateful to the noble Lord for stating what is perilously near the obvious. I do not want to anticipate the discussions that will take place at a later stage as regards where Government policy might impact on principles of lending. Therefore, at this moment I shall not seek to pursue the amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 16 agreed too

Clauses 17 and 18 agreed to.

Clause 19[Directions to institutions]:

On Question, Whether Clause 19 shall stand part of the Bill.

Lord Williams of Elvel

I should like to draw the attention of the Committee to Clause 19(2)(e). Under this clause the Bank may give an institution directions and those directions are spelt out. Clause 19(2)(e) states that the Bank, for the purposes of safeguarding its assets and so forth: may in particular … require the removal of any director, controller or manager". I can easily understand how the Bank can require the removal of a manager: that seems to me to be perfectly proper in any authorised institution. However, I find it less easy to understand how the Bank can require the removal of a director, because, as I understand it, a director is elected by shareholders and it is for shareholders to remove or re-elect a director as they feel fit.

I find it extremely difficult to see how the Bank can require the removal of a controller, because here we are talking about somebody who has a major shareholding in the authorised institution, and to say that the institution itself must remove its controller—in other words, must say to its controlling shareholder, a large shareholder, "You have to go"—makes the mind boggle as to what happens at this point. Suppose the controller says, "I am not going to go". I do not quite understand this clause, and perhaps the noble Lord will be kind enough to enlighten me.

Lord Beaverbrook

I think it would be helpful if I clarified the definition of "controller" in Clause 103. For instance, it also covers managing directors and chief executives who could be removed.

Lord Williams of Elvel

I am grateful to the noble Lord for clarifying the definition under Clause 103. The clause says: 'Controller', in relation to an institution, means— (c) a person who, either alone or with any associate or associates, is entitled to exercise, or control the exercise of, 15 per cent. or more of the voting power at any general meeting of the institution or of another institution". I do not want to read through the whole subsection. The noble Lord understands what I am saying. I do not understand how the Bank can say that you must remove a 15 per cent. shareholder just like that.

Clause 19 agreed to.

Clause 20 agreed to.

Clause 21[Notification of new or increased control]:

Lord Young of Graffham moved Amendment No.47:

Page 16, line 6, leave out ("which is a body corporate").

The noble Lord said: In dealing with Amendment No.47 I hope, with the leave of the Committee, that I may deal also with Nos. 48, 49, 53, 54 and 55 since these are a number of technical amendments to the clauses dealing with the section of the Bill on objections to controllers and are grouped together for the purpose of debate. I shall briefly describe their effect.

Amendment No.47 to Clause 21 simply removes some unnecessary words to make for consistency with similar references elsewhere in the Bill. Amendments Nos. 48 and 49 to Clause 22 correct the procedural provisions for the giving of notices of objection by the Bank of England. As currently drafted, the clause does not take into account the period allowed for representations to be made by a person who has acquired a controlling shareholding without clearance and is subsequently served with a preliminary notice of objection by the Bank of England. The Bank might therefore run short of time to consider the case, given that a final notice must be served within an overall time limit of three months. The amendments take account of this, and also clarify the Bank's authority to require information and documents in such cases. This is ambiguous in the present draft.

The amendments to Clause 26 are also technical corrections. Amendment No.54 is consequential on the introduction in another place of Clause 23— objections on reciprocity grounds. The decision to object on such grounds is a matter for the Government and is not subject to appeal to the tribunal constituted under the Bill. The existing reference to allowing time for appeal in subsection (4) of Clause 26 does not therefore apply to action under Clause 23.

Amendments Nos. 53 and 55 simply ensure that copies of notices of restriction made under Clause 26 are sent to all those affected by the notice, which may include a number of people acting as associates. The Bill as drafted failed to deal adequately with such cases. I beg to move.

Lord Bruce of Donington

I am happy to concur with the noble Lord in the amendments that he has put down, particularly that relating to Clause 21, where he seeks to eliminate "which is a body corporate". The elimination of that is not merely a question of redundancy: if it remained, it would in fact be in conflict with the provisions of Clause 103(3)(c). It would also be in conflict with the word "institution" as defined in Clause 104, which refers to partnerships. Thus we are pleased to accept the noble Lord's amendments, which improve the Bill.

On Question, amendment agreed to.

Clause 21, as amended, agreed to.

Clause 22[Objection to new or increased control]:

Lord Young of Graffham moved Amendments Nos. 48 and 49:

Page 17, line 25, leave out subsection (4).

Page 17, line 42, at end insert ("and may, for the purpose of deciding whether to serve him with such a notice, require him by notice in writing to provide such information or documents as the Bank may reasonably require. ( ) The period mentioned in section 21(1)(b) above (with any extension under subsection (4) of that section) and the period mentioned in subsection (7) above shall not expire, if it would otherwise do so, until fourteen days after the end of the period within which representations can be made under subsection (3) above.").

On Question, amendments agreed to.

Lord Beaverbrook

I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.