Lords Sitting of 23 March 1987

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Chelmsford.

Stephen Ward: BBC Film
Lord Grimond: My Lords, I beg leave to ask the Question standing in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government whether the BBC has approached the Home Secretary or the Law Officers with evidence of a possible miscarriage of justice over the case of Mr. Stephen Ward.
The Minister of State, Home Office (The Earl of Caithness): No, my Lords.
Lord Grimond: My Lords, I am not sure whether I am grateful for that Answer, but I quite appreciate that the Government have no responsibility and I am glad to hear that there have been no representations. However, do the Government agree that the BBC—for the Government are not responsible—has a public responsibility, and its intention to make a film of the events concerning Ward, which are now 20 years old, was extremely irresponsible? If the BBC had evidence, it should have produced it to the appropriate authorities, and if it does not have sufficient evidence, as it now alleges, surely it would be quite improper even to suggest making a film which could only cause pain and could serve no conceivable public purpose?
The Earl of Caithness: My Lords, the noble Lord is absolutely right. If anybody, including the BBC, has any such evidence or allegations, he should present them to my right honourable friend the Home Secretary; but nothing has been presented to him.
Lord Denning: My Lords, are Her Majesty's Government aware that quite recently I was
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approached by the BBC with a suggestion that I should take part in a programme concerning the case of Mr. Stephen Ward and that I refused, because over 23 years ago I heard all the evidence in that case in great detail and was quite satisfied that there was no miscarriage of justice at all?. Here is my report. Mr. Stephen Ward was found guilty of living on the earnings of prostitution but before he could be sentenced he took an overdose of drugs and died. Do Her Majesty's Government deplore the recent conduct of the BBC in raking up cases from the past, alleging that it had found fresh evidence and putting them over as miscarriages of justice in our courts? Such programmes are called "Rough Justice" and the like. Does not this conduct tend to shake people's confidence in the courts and in the police, and is it not therefore to be condemned?
The Earl of Caithness: My Lords, with regard to the noble and learned Lord's main question, this is a matter for the BBC and not for the Government. But I am sure that the BBC will hear his words.
Lord Bottomley: My Lords, is the Minister aware in connection with the Ward case that ever since the regrettable incident Mr. Profumo has worked tremendously hard for Toynbee Hall? As a past student and a member of the council, I know what he tries to do for the university settlement of the East End of London. Is he further aware that this recurrent publicity causes much pain and suffering to the Profumo family?
The Earl of Caithness: My Lords, I am grateful for the noble Lord's question. Yes, we are fully aware of the excellent work that has been done and are grateful to him for drawing it to the attention of the House.
Lord Avebury: My Lords, with regard to the question of the noble and learned Lord, Lord Denning, is it not a fact that the BBC programme "Rough Justice" resulted in a review of certain convictions and the freeing of people who were, as a result of the evidence produced in those programmes, found to be innocent after approaches had previously been made to the Home Secretary without producing the result which he now claims—that all evidence

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given to him of alleged wrongful convictions is carefully scrutinised and he is satisfied that any miscarriages of justice come to light?
The Earl of Caithness: My Lords, I think that the noble Lord wanders far from the Question on the Order Paper. But I assure him, in case he has any misapprehension on the point, that if any evidence is put to my right honourable friend the Home Secretary he will consider it.
Lord Annan: My Lords, does the noble Earl agree that, whatever may have been the intentions of the BBC in the past, it is a tribute to its new chairmanship under Mr. Hussey and to the new director general, Mr. Checkland, that the BBC no longer intends to make any such programme as the noble Lord, Lord Grimond, was asking about?
The Earl of Caithness: My Lords, that is a matter for the BBC, and I can assure the noble Lord that the Government have not interfered in any way whatever.
Lord Mellish: My Lords, is the Minister aware that there are a number of us in the House who strongly support the views expressed by the noble Lord, Lord Bottomley? We think that Mr. Profumo has taken more than enough punishment for a so-called crime committed many years ago and the sooner people leave him alone the better.
Earl Ferrers: My Lords, does my noble friend agree that it is dangerous ground when the BBC uses its influence to become a body of inquisition?
The Earl of Caithness: My Lords, what the BBC does is a matter for it, within the guidelines set out by the Government.

Motor Cyclists: Test Statistics
2.42 p.m.
Lord Nugent of Guildford: My Lords, I beg leave to ask the first Question standing in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government how many provisional motor cycle licences were issued in each of the last three years, and how many passes of each of the two-stage test for a full licence were issued during the same period.
The Parliamentary Under-Secretary of State, Department of Transport (Lord Brabazon of Tara): My Lords, comparable figures for provisional licences issued containing motor cycle entitlement over the last three years are not available. During the year ending 30th September 1986, 387,641 provisional licences were issued with motor cycle entitlement. In 1984, 58,317 riders passed part 1 of the motor cycle test, and 45,403 passed part 2. In 1985, 49,961 passed part 1 and 42,502 passed part 2; and, in 1986, 44,004 passed part 1 and 40,070 passed part 2.
Lord Nugent of Guildford: My Lords, I thank my noble friend for that somewhat incomplete Answer, though there were a lot of figures. The fact that there is only one year of provisional licencesߞ1986—is rather a pity for the purposes of the record. However, is my noble friend aware that those figures are enough to make the point in which I am interested—that since provisional licences have had only a two-year validity since October 1982 there seems to be an alarming disparity between the number of provisional licences issued in 1986, of which there is a record—nearly 400,000—and the number of passes of the two-part test, which is only about 10 per cent. to 15 per cent. of that total?
Is my noble friend aware that there is a strong implication that a large number of provisional licence holders are riding around on motor cycles after their licences have expired? They are therefore illegally on the road and no action is taken. What plans do the Government have to check the use of provisional licences, and to find out how many have expired and how many motor cyclists are riding illegally?
Lord Brabazon of Tara: My Lords, it is of course an offence to ride a motor cycle without a provisional licence or after it has run out after the first two years. It is not known how many licence holders use their motor cycle entitlement to ride a motor cycle on the road. I believe that many people apply for a provisional licence and possibly never use it, as they go directly to driving a car. We are conducting a review at the present time of motor cycle safety and the effects of the Transport Act 1981. There is also a discussion paper entitled Safer Motor Cycling which was issued in August 1986. The responses are now being considered.
Lord Nugent of Guildford: My Lords, is my noble friend aware that it is not much use Parliament having passed the 1981 Act limiting provisional licences to two years if his department does not take the necessary action to enforce validity? Will my noble friend accept that he has an obligation to see that the law is made effective and that provisional licence holders either take their tests or remove themselves from the road?
Lord Brabazon of Tara: My Lords, I accept that. That is one of the reasons that we are having a review. It is an offence to ride a motor cycle without a provisional licence, just as it is an offence to drive a car without a licence. Anyone who is caught will be subject to the usual sanctions.
Lord Underhill: My Lords, I am sure that the Minister recognises that many of us appreciate the review that the Government are undertaking. However, will he also recognise that there is considerable concern at the massive numbers of fatalities and injuries suffered by motor cyclists? Can he say whether, as a result of the two-part test, there has been any decrease in fatalities and injuries?
Lord Brabazon of Tara: My Lords, I do not have to hand the figures for fatalities and injuries involving motor cyclists. As the noble Lord will be aware, they are published regularly by my department. I think I am right in saying that the last figures showed a slight decrease. However, there is no doubt that they are still

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too high. At the same time, it should be borne in mind that motor cycling is less popular now than it was a few years ago, if popularity is measured by new machine registrations. Those registrations have gone down from 175,000 in 1983 to just over 103,000 last year.
Lord Somers: My Lords, can the Minister say whether, when a provisional licence has expired, it is justifiable to issue another licence and so allow motor cyclists to continue riding ad nauseam with only a provisional licence?
Lord Brabazon of Tara: No, my Lords. That was one of the points of the changes that were made. If the test is not passed within two years, that licence lapses and another licence cannot be obtained for another year after that.
Baroness Gardner of Parkes: My Lords, can my noble friend explain the position before the obtaining of a provisional licence? Is it simply a situation of paying your money and taking delivery of a motor cycle, or is some degree of skill and training required at that stage? Surely that is of even more concern.
Lord Brabazon of Tara: My Lords, I think the situation is the same as the situation with a motor car. One can get a provisional licence on application and then drive with L plates. In the case of a motor cycle, the licence is valid for only two years.
Baroness Gardner of Parkes: My Lords, will my noble friend not agree that in a motor car one is not allowed to ride or drive unaccompanied during the period of the holding of a provisional licence, and that that is a very different situation?
Lord Brabazon of Tara: My Lords, I agree. It is a different situation.
Lord Brougham and Vaux: My Lords, will the Minister tell the House whether the Government have any proposals to introduce compulsory training in the future?
Lord Brabazon of Tara: My Lords, that is indeed one of the proposals being considered in the review.

Motor Cyclists: Off-Street Training
2.47 p.m.
Lord Nugent of Guildford: My Lords, I beg leave to ask the second Question standing in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government what progress has been made in the provision of off-street driving areas for training new motor cyclists, and what steps they are planning to increase this provision.
Lord Brabazon of Tara: My Lords, there are over 900 approved off-road sites throughout the country on which appointed motor cycle training bodies can provide training and conduct Part 1 of the motor cycle
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test. There is no shortage of facilities, and training groups seek approval for new sites as demand requires.
Lord Nugent of Guildford: My Lords, I thank my noble friend for that encouraging Answer. Is he aware of the point, just made by the noble Lord, Lord Underhill, that the incidence of accidents on motor cycles is still terribly high—about eight times that of accidents in motor cars—and that fatalities and serious injuries are almost 24 times greater than fatalities and injuries in motor cars? Therefore, the need to make off-street training compulsory is urgent in order that youngsters may have a chance to learn how to ride motor cycles safely before going on the road. Can my noble friend say what the prospects are for making off-street training a compulsory part of training before a provisional licence is issued, as was contemplated six years ago?
Lord Brabazon of Tara: My Lords, I have already said in answer to the previous Question that the compulsory training of novice riders is being considered within the review.
Lord Gainford: My Lords, can my noble friend tell me where the sites are situated? Can schools he encouraged to use their grounds for such training and can expenses be provided for damage that might be incurred?
Lord Brabazon of Tara: My Lords, I cannot tell my noble friend where all 903 sites are situated, but we are satisfied that the number and location of sites gives good coverage over the whole country. As regards schools, there are certain requirements for the off-road sites intended for Part 1 of the test but they are not especially difficult to comply with. There is no particular requirement for other training sites.
Lord Brougham and Vaux: My Lords, is my noble friend aware of the recent decision that RoSPA's training section for motor cyclists, although losing quite substantial sums of money, should be carried on for another year? Will the results of short course training by the Transport and Road Research Laboratory and BITER be made available?
Lord Brabazon of Tara: My Lords, in answer to my noble friend's second question, I cannot give him a date. If I can find any further information, I shall certainly write to him. We very much appreciate the efforts made by RoSPA and all other training organisations to train riders throughout the country.
Lord Underhill: My Lords, we appreciate the work that is being carried out by RoSPA. Can the Minister say whether there has been a reduction in the number of motor cyclists taking the training compared with the old scheme which was run by the Royal Automobile Club?
Lord Brabazon of Tara: My Lords, there has been a small reduction in the number of motor cyclists taking training. It is down from 51,200 in 1983 to 44,000 last year, but that is probably a smaller reduction than the reduction in the number of motor cycles. Those figures I gave the noble Lord during the previous Question.
Lord Nugent of Guildford: My Lords, is my noble friend aware that a good deal of expert knowledge is required to run these training schemes and that RoSPA is particularly well qualified to operate them? Is he aware that, if the Government were to provide more funds for RoSPA, it could extend this training and thus make it possible to introduce the compulsory qualification before riders got their provisional licence?
Lord Brabazon of Tara: My Lords, I cannot give any figures showing help which the Government give to RoSPA at the moment. I understand that the position is under review, but I shall certainly bear in mind my noble friend's remarks.

Birkbeck College
2.53 p.m.
Lord Fletcher: My Lords, I beg leave to ask the Question standing in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government whether they will endorse the report of the Committee under the chairmanship of Sir Barney Hayhoe on the future of Birkbeck College which advocated a new structure for this institution; and in particular whether, as a matter of urgency, they will take steps to exempt part-time students from university fees in all cases where full-time students are exempt.
Baroness Hooper: My Lords, the Government welcome the initiative by the college in commissioning the report, which is for the college to consider in the first instance. As to fees for part-time students, the issue is not one of exemption but of how these are to be met. This will be considered in the context of the current comprehensive review of all aspects of financial support for students studying at first degree or equivalent level.
Lord Fletcher: My Lords, failing the granting of total exemption from university fees for part-time students, does the noble Baroness agree that there is at any rate a strong case for granting tax relief on university fees paid by part-time students? In this connection will she bear in mind the very considerable contribution to the national economy and welfare that has been made over the years by part-time students?
Baroness Hooper: Yes, my Lords. We are aware of and we welcome the contribution made by a college such as Birkbeck. We believe that exemption from fees is a matter for the college and the student. As I have said, the issue here is how the college can be recompensed in respect of students who cannot pay their fees. That is why the question comes under the comprehensive review of student support of my honourable friend Mr. Walden which is currently under way.
Lord Grimond: My Lords, may I congratulate the Government on, as I understand it, giving an assurance that part-time students and particularly those at Birkbeck will not be penalised? Are we to
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understand that they definitely intend to put part-time students on as good a basis as full-time students? Will they agree that they get extremely good value, to put it at its lowest, from part-time students and from Birkbeck College, and that it is much cheaper to educate them there than it is to educate full-time students?
Baroness Hooper: Indeed, my Lords, and we have always acknowledged that. That is why the report was commissioned by the college. After consideration by the college in consultation with London University, and thereafter with the University Grants Committee, the recommendations of the report will be taken into account in future policies.
Baroness Seear: My Lords, does the noble Baroness agree that there is a strong case for giving special encouragement to part-time students? Not only do they make better use of facilities, as has already been said, but they do so under great pressure and in difficult circumstances, and are therefore a self-selected sample of very determined people who should be encouraged and not discouraged.
Baroness Hooper: Yes, indeed, my Lords. The review which has been initiated by my honourable friend will take all views into account and will lead to the publication of proposals in the form of a consultative document. This is a most important subject and one on which the widest consultations will be taken.
Baroness Lockwood: My Lords, in response to my noble friend Lord Fletcher, the Minister said that this is not a question of exemption but of how fees are to be met. Can she explain what she means by that? Does it mean that the Government are prepared to accept responsibility for paying the fees of part-time students who at the present time are paying them themselves out of taxed income?
Baroness Hooper: My Lords, as I have tried to explain, the allotment of finance is made by the University Grants Committee, which does not identify separately the different elements in block grant to institutions. In the case of Birkbeck, this is a matter for London University. The block grant to London University for 1987–88 was £248.1 million, with £238.81 million in 1986–87. This represents a percentage increase of 3·9 per cent. compared with the Great Britain average of 3·2 per cent.
Lord McIntosh of Haringey: My Lords, is there not a danger that we are playing with words here? Will the noble Baroness not accept that in the past 12 months Birkbeck has been under exceptional financial strain and exceptional financial threat? Under those circumstances, to quibble over whether the word "exempt" is the right one is not appropriate. Surely part-time students should be entitled to mandatory grants for their tuition in the same way as full-time students.
Baroness Hooper: My Lords, it sounds to me as though noble Lords opposite are advocating more centralisation of funding. As I have explained, the

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University Grants Committee is an intermediate body. In its grant allocations for 1986–87 the committee originally adopted a standard weighting of 0.5 for part-time students at all universities. To show that it is possible to make changes, following representations, and about Birkbeck in the main, the committee reverted to the formula used in previous years in calculating the element of block grant attributable to Birkbeck for 1986–87. For 1987–88 and the following two years Birkbeck is being treated as a special factor in the committee's resource allocations procedure to allow for the completion of various inquiries now taking place. In due course the committee will be discussing with the university the funding of the college in the longer term. I believe that the Government are taking this very seriously.
Lord Diamond: Will the noble Baroness say whether the comparison which she was good enough to give the House is in real terms or in cash terms? If it is the latter, can she tell us what the comparison is in real terms?
Baroness Hooper: My Lords, I believe it is in real terms.
Lord Fletcher: My Lords, will the Minister acknowledge that it is not good enough to shuffle off the Government's responsibility onto either the University Grants Committee or any other body? Surely he should realise that it is the responsibility of government to ensure that justice is done to these hard-working, part-time students. The Government can only discharge their obligation by giving them either tax relief or total exemption from university fees.
Baroness Hooper: Yes, my Lords. Perhaps I should have acknowledged earlier that the idea of tax relief is an interesting one. However, I must repeat that, in addition to the review just completed by my right honourable friend Sir Barney Hayhoe and that of my honourable friend Mr. Walden which is under way, there is a review by Professor Dorothy Wedderburn on the university's whole policy of continuing education. An examination will take place by the university of the feasibility and merits of some sharing of resources between Birkbeck and University College. Therefore, a very full inquiry has been initiated which I believe is largely as a result of Questions in this House.
Baroness Lockwood: My Lords, can the Minister tell the House when the consultative document will be available? Is she aware that if it is not available in the very near future some of these institutions may be bankrupt before it is?
Baroness Hooper: My Lords, as I think I mentioned earlier, the review will lead to publication of proposals in the form of a consultative document, but I cannot say whether that will be next week or the week after. The research will he completed as speedily as possible because it is recognised that the situation is urgent.
Lord McIntosh of Haringey: My Lords, will the noble Baroness recognise that concerns have been expressed this afternoon from a number of quarters in
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the House? Will she be good enough to draw the attention of her honourable friend to those concerns to see whether anything can be done to reach a speedy conclusion? I ask her to recognise that if nothing is done we shall be forced to return to the matter.
Baroness Hooper: Yes, my Lords.
Viscount Davidson: My Lords, it may be for the convenience of the House—
Noble Lords: Order!
Lord Annan: My Lords, I am grateful to the noble Viscount, Lord Davidson. I was expecting the noble Baroness to reply before I asked my question, which is simply this. Does she accept that no university in the land has done more than the University of London to try to rationalise its resources? Five colleges have been amalgamated with other colleges. Rationalisations of this kind—such as the recommendations in the Hayhoe Report to which the noble Lord, Lord Fletcher referred—cannot be implemented properly unless the Government make some special grant. That is due to the fact that tenure makes university finance so extraordinarily inflexible. I shall not ask the noble Baroness a question on tenure, but I ask her to bear that in mind.
Baroness Hooper: My Lords, I will bear that in mind. I assure your Lordships that the views expressed will be brought to the attention of my honourable friend.

Business
Viscount Davidson: My Lords, I apologise to the noble Lord, Lord Annan, for jumping the gun. It may be for the convenience of the House if I announce that the Committee stage of the Banking Bill will be adjourned at approximately 7 p.m. for aproximately one hour and that during this adjournment the Civil Defence (Grant) (Amendment) Regulations 1987 and the Civil Defence (Grant) (Scotland) Amendment Regulations 1987 will be taken.

Business of the House
The Lord President of the Council (Viscount Whitelaw): My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That if the Consolidated Fund Bill is brought from the Commons, Standing Orders 38 (Arrangement of the Order Paper)and 44 (No two stages of a Bill to be taken on one day)be dispensed with to enable the Bill to be taken through all its remaining stages on Wednesday next.—(Viscount Whitelaw.)
On Question, Motion agreed to.

Banking Bill
3.4 p.m.
The Secretary of State for Employment (Lord Young of Graffham): My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
Moved, That the House do now again resolve itself into Committee.—(Lord Young of Graffham.)
On Question, Motion agreed to.
House in Committee accordingly.
[The BARONESS SEROTA in the Chair.]
Clause 22 [Objection to new or increased control]:
Lord Elton Lord Elton moved Amendment No. 50:
Page 17, line 42, at end insert—
("( ) Where the Bank believes that a person who would be required to give a notice under section 21 above in relation to his becoming a controller of any description intends to become a controller of that description without having given the notice it may serve him with a notice of objection under this section.")
The noble Lord said: This is very much a small Committee point on which I do not intend to keep the Committee for long. The purpose of Clause 22, which is where the amendment strikes, is to enable the Bank to prevent unsuitable persons becoming shareholder controllers of authorised institutions. It can do so by issuing a notice of objection, preceded by a preliminary notice giving the grounds.
Subsections (1) to (6) provide for the Bank to give such notice where it has itself been given notice of a person's intention to acquire 15 per cent. or more of the shares. That person has a duty to give notice under Clause 21 and he is liable to prosecution if he does not. I therefore accept that most such persons will give notice. However, some may not, and in subsection (7) the Bank is also given powers to act in those cases where a person has not given statutory notice of his intention; but that power comes into existence only when the person has actually become a controller. The Bank cannot act before the event. It can only act to put matters right afterwards.
It occurred to me that even those intending shareholder controllers who do not give notice may signal their intentions in a way which the Bank might pick up. If it wants to act before they have acquired their 15 per cent., at the moment all the Bank can do is to write to the people and say, "Hey, you are breaking the rules. Look at the penalties. Will you please write and give notice?" It cannot take any steps until that notice is received. I have quickly drafted a proposal which will enable the Bank to act more swiftly and appropriately and to which I bring my noble friend's attention. I beg to move.
Lord Young of Graffham: I understand the point that my noble friend makes. It is a thoughtful point which has been given consideration. The Bill allows objections to be made on the basis of notification in advance. This will deal with the great majority of cases where people obey the legal requirements to give advance notice.
There may be less common cases where people fail to give notice, whether accidentally or deliberately. In
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such cases the Bank of England may object after control has been acquired and, if necessary, take steps to remove that control. That is the basic situation and it is thoroughly provided for in the Bill.
What my noble friend suggests in his amendment is that there should also be the possibility of making formal objections to the intention of acquiring control even if notice of that intention is not given and before control is actually acquired. I do not believe that such a provision is necessary, and nor would it be practical. It would not be possible for the supervisors to define the intentions of undeclared acquirers, and so it would not be right for the supervisors to take what is, after all, severe action on the basis simply of a belief about what a person's intentions might be.
In some cases it could be argued that a person's actions reveal his intentions—most obviously if he were to make a bid for a listed company. However, in such cases the intention to acquire control would be public and would become known to the supervisors. It is hardly conceivable that a person would mount a formal takeover bid without seeking to obtain clearance from the Bank of England, as required by law. Nevertheless, if a person were to do so the Bank of England would notify that person of his legal obligations under the Bill and of the sanctions available if the bid were to proceed. Indeed, it is likely that those responsible for the conduct of takeovers would refuse to allow such a bid to proceed, even if the person were foolhardly enough to risk the losses that would be entailed by the Bank of England's formal objection after an acquisition.
I do not believe that there is any difficulty in practice; nor have the equivalent provisions in the Insurance Companies Act 1982, on which these clauses are based, been found to be inadequate. I hope that I have been able to satisfy my noble friend that the Bill deals effectively with these matters.
Lord Elton: I will of course read my noble friend's words with care between now and Report. Having listened to them, they sound fairly convincing; but on the understanding that I may not be convinced when I read them, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 22, as amended, agreed to.
Clause 23 [Objection by direction of the Treasury]:
Lord Elton Lord Elton moved Amendment No. 51:
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: This amendment is designed to raise with the Committee an issue of principle to which I referred, as did my noble friend Lord Boardman, at Second Reading. It is a matter, I believe, of considerable importance and was also raised in another place. I know that my concern is shared by a number of my honourable friends as well as by noble friends in this Chamber.
The purpose of Clause 23 is to empower the Treasury to direct the Bank to issue a notice of objection where a person either intends to become or

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has become a shareholder controller. The grounds for issuing such a direction are important. They will be justiciable and therefore have to be set out in statute. And so they are; but not in this draft statute. This is legislation by reference, and the reference given at lines 4 to 8 on page 18 of the Bill is to Section 183 of the Financial Services Act 1986.
Before turning to that Act, let us consider what we might expect to find in it. The clause into which this list of grounds must be slotted is the clause providing for cases where the acquisition of a controller shareholding is such a sensitive matter or has such important implications that it cannot be left even to the Bank of England to decide whether or not to intervene. These cases are so sensitive and so important that they have to be dealt with on a higher authority than that of the Bank, which, in this case, must act under its direction. That authority, of course, is Her Majesty's Treasury, presided over by the Chancellor of the Exchequer. In matters fiscal and financial under Parliament it is the highest executor authority in the land, and one would expect it to be called in for the protection of the most fundamental interest in the land; namely, the national interest.
Yet when we turn to Section 183 of the Financial Services Act, on page 159, and look at the criteria—that is, the grounds—for this majestic intervention, we find that the only reference to the national interest is a negative one. Subsection (2) states that the Treasury shall not intervene unless it is in the national interest to do so. The prime ground—in fact the only ground-—for intervention is that acquisition of the shares in question is by nationals of a foreign country in which British nationals or bodies corporate cannot make acquisitions on equal terms. That, which is the requirement for what is described in the Act as "reciprocity", has the effect of the reference in subsection (2) of Section 183—merely to set aside even that requirement if it is not in the national interest to insist on it.
My first comment on this provision is that it means that neither the Bank of England nor the Government of the United Kingdom themselves have any power in the proposed Bill to intervene in a takeover bid solely on the grounds that it would be against the national interest for it to succeed. I accept that competition is the only infallible medicine to keep the economy healthy and that any restriction on that competition which does not go back to the need to protect the shareholders must be suspect. But the interests of shareholders within the British economy are bound up inextricably with the interests of that economy itself; in other words, with the national interest.
So I have to ask my noble friend whether he is utterly confident that there are no circumstances under which the acquisition of a controller shareholding—one that is perhaps many times greater than the 15 per cent. specified in the Bill—would be against the interests of the economy as a whole? The obvious and now, I admit, rather hackneyed example of the sort of event that could be considered to be against that interest is of course the takeover of one of the very small number of our clearing banks by a giant foreign concern.
My noble friend might say, "Well, it would not hurt at all for one of them to be taken over. A touch of
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Japanese competition, German efficiency or American know-how would do wonders for the system". But what if it were two or three? I do not want to enter with my noble friend into the sort of exchanges on the subject of clearing banks that Abraham got into with God on the subject of the citizens of the plain. But suppose that only three British controlled clearing banks were to remain—or two or only one—and suppose that those going abroad went to different countries, so that competition was preserved and the Monopolies and Mergers Commission was therefore without a prima facie ground on which to resist, could we rely with confidence on what is now in the Bill to ensure that those key institutions, when controlled by interests wholly outside the United Kingdom, still acted in conformity with the interests of the United Kingdom? That means of course that they are acting not just in accordance with, but in the spirit of, what the Bank of England and the Treasury determine.
If, as I suspect, this Bill is no defence, where are our defences to lie? I suspect that other countries are either overtly protected, as I believe is the case in Spain and Canada, or covertly protected (my noble friend Lord Boardman suggested France as an example), or somewhere in between. My noble friend may very well leap upon this point and use it against me. Quite fairly, he might say that where there is protection of that sort in other countries, the test of reciprocity will not be met and the bid will fail because of the test in Section 183 of the Financial Services Act 1986.
If he does that, I must ask him to remember that most of the defences to which I have referred have a very low profile and depend upon administrative decisions under enabling statutes. The defence against bids by nationals of those countries supported by the best lawyers that the exchange rate of the day will permit them to buy, will be far from certain.
3.15 p.m.
Lord Boyd-Carpenter: To hire, not to buy.
Lord Elton: My noble friend is right, as always. We must ask whether it would be near enough certain to justify not putting a further defence such as I propose in the Bill that is now before us.
Secondly, and still looking at foreign bids, I must ask my noble friend to explain exactly where the protection of reciprocity lies, if we are to depend on it. As I understand it, its requirement is that intending purchasers must be established within a national system into which a British person would be able to buy on similar terms. That certainly ensures equality but it does not ensure that that equality is between equals.
If Barclays or Midland, or indeed both, were swallowed by some gigantic Japanese bank, it scarcely protects the national interest—does it?—to know that Lloyds or the Royal Bank of Scotland could acquire in return a fractional percentage of the Japanese system. Can my noble friend tell us on the record that the Japanese banking laws do not offer reciprocity, and so the Japanese are subject to this possible restriction, if no other?

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My third point is that in all the arguments on this issue so far we have been much too concerned with one particular scenario—and admittedly it is the only one to which I myself have referred—which is the undesirable or threatening takeover of British institutions by foreign institutions. We have thought of the national interest as something to be defended solely by protection against takeovers from outside. But is it entirely impossible that some other takeover from within our own economy, for reasons that could not yet be apparent to us, might prove to be against the national interest even though it were done by a person who was in all other respects a fit and proper person within the meaning of this Bill?
When my noble friend comes to reply, will he please tell us whether he is convinced and can in turn convince us that no takeover of a British authorised institution by a foreign person could be against the national interest if the native country of that person satisfied the reciprocity test?
As a supplementary question, can he tell us whether the Japanese economy satisfies that test? Further, can he explain to us where the protection of reciprocity lies when there is a total lack of equality of size between the participants? Thirdly, if he is not convinced that a foreign bid which passed the reciprocity test would always be in the national interests, will he please tell us where else our defences against such a development lie and how they work? Fourthly, can he assure us that there are provisions in the Bill that make it unnecessary to provide a national-interest test for bids originating from within the United Kingdom economy, possibly, but not only, by subsidiaries of foreign national institutions?
I had geared myself up to deal with the amendment tabled in the names of the noble Lords, Lord Bruce of Donington and Lord Williams of Elvel, as Amendment No. 51A, but when I turned my attention to it this morning I saw in my sights nothing but a row of dots. It has been withdrawn and occupies now a slot on the Order Paper called Amendment No. 52A, but which is slightly different. It will be for one of them, or knowing them as we do, probably both, to explain how it works.
The procedure which I put into the Bill in my amendment merely triggers powers already contained in subsection (1), whereas their amendment introduces a new procedure, as I see it, with a fairly widely drawn caveat at the end:
"and may make such incidental or supplementary provision in the order as appears to him to be necessary or expedient".
That is a phrase which appeared to act on the noble Lords like a red rag to a pair of bulls when they saw it in legislation that I put forward from the Dispatch Box in the past. I therefore suspect that my noble friend may find my approach to the problem more profitable than theirs, but we are all concerned to see whether he accepts that there is a problem and whether it needs to be dealt with before we decide how it should be dealt with. I beg to move.
Lord Williams of Elvel: It may be for the convenience of the Committee if I speak to Amendment No. 51 and also Amendment No. 52A.
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The noble Lord, Lord Elton, introduced Amendment No. 51 and pointed to a problem to which a number of us referred on Second Reading. It is a problem which exercises a number of people in the banking community. I understand that it exercises the Bank of England itself and exercised a number of Members on both sides in another place when the matter was being debated.
The facts are simple, though the problem is complex. If we look at the market capitalisations of various banks and securities companies in the world, we see that the largest British bank comes No. 30, and that the Sumitomo Bank, which comes No. 1, had at the end of 1986 a market value of just over 35 billion dollars, whereas No. 30, the National Westminster Bank, had a market value of 6 billion dollars. There is the disproportionate relationship between market values—I emphasise that I am using market values rather than net asset values—of Japanese, German, some American and other foreign banks and, worse still, securities companies.
In another place it was clearly stated that under present arrangement it would be possible for Nomura Securities to make a takeover offer for the National Westminster Bank without substantially diluting the equity of Nomura Securites and certainly not diluting its price earnings figure which at the end of 1986 was 52.9. We may think that that is an excessive price earnings ratio, but that is how the Japanese market valued Nomura Securities. It valued the Sumitomo Bank at 71½, times earnings.
The noble Lord, Lord Elton, rightly asked what the Government's position was and whether they can satisfy us that they have the problem properly covered in the Bill as drafted. I share the noble Lord's doubts about the reciprocity provisions of the Financial Services Act being called into play. Having debated that clause in this Chamber when the Bill was being considered, I am still a little uncertain about its exact meaning. The clause invokes the possibility of persons connected with the United Kingdom being unable to carry on investment, insurance or banking business in or in relation to that country:
"on terms as favourable as those on which persons connected with that country are able to carry on any such business in, or in relation to, the United Kingdom".
There is a major problem as to what "terms as favourable" means. Does it mean that someone can carry on business—form one, two or three branches—or, as the noble Lord, Lord Elton said, buy a small piece of a Japanese or American bank and we can then allow Japanese, American or Brazilian banks, or anyone else, to come in and buy a major clearer?
The second problem in the reciprocity section of the Financial Services Act is contained in subsection (2), which refers effectively to consultation before issuing a prohibition order. It says:
"the Treasury shall so far as they consider expedient consult such body or bodies as appear to them to represent the interests of persons likely to be affected".
Let us consider one of the scenarios painted by the noble Lord, Lord Elton, where a Japanese bank makes an offer for Barclays Bank and the Treasury wishes to invoke the reciprocity provisions of Section 183 of the Financial Services Act. The Treasury is almost bound

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to consult the Japanese authorities and those affected—Japanese banks or British banks—fairly widely. Before too long, I fear, that will be an item in the political arena. It would be the object of intense public and somewhat undesirable debate.
The third problem related to the reciprocity provisions of the Financial Services Act is that they may cover Japan, Brazil, Spain, and for all I know possibly France; but there are a number of countries where the reciprocity provisions would be met, such as the United States of America, where a British bank can make acquisitions (British banks have done so) and yet, as the noble Lord, Lord Boardman, pointed out on Second Reading, the ability of British banks to buy a substantial slice of the United States market, as opposed to the ability of American banks to buy a substantial slice of the British market, is severely limited by the physical size of the United States and by the size of its financial markets.
If we move on from the reciprocity powers, there are—and as I understand it the Government rely on these—residual powers of reference under the Fair Trading Act 1973. That was invoked in the case of the Hong Kong Bank's attempted acquisition of the Royal Bank of Scotland. There are two problems with that procedure. I believe—I shall respond to the noble Lord, Lord Elton, in this way—that that would be appropriate in the case of a domestic takeover. I can see that the criteria contained in Section 84, to which I shall return in a minute, would cover the problem that he mentioned of a domestic takeover by a fit and proper person who may not be in the banking business. In my view, that would be a proper object of reference to the Monopolies and Mergers Commission.
However, for foreign organisations trying to take over British banks we must depend, first, on the Section 84 criteria of the Fair Trading Act and on the result of the competition review which the Government are at present undertaking. We do not know and cannot know the results of that in advance. It is possible that the Government may wish to change the public interest criteria of the Fair Trading Act. At this stage of debating this Bill, we do not know what those new criteria may be.
Section 84, as it stands, requires the commission to take into account all matters which appear to it, in the particular circumstances, to be relevant. One can argue that the national interest—the survival of a British banking system, the survival of a clearing banking system largely in British hands—is a matter which the Monopolies and Mergers Commission could in the circumstances consider to be relevant. Nevertheless, the detailed criteria go on to speak about competition, facilitating the entry of new competitors into existing markets and maintaining and promoting competitive activity on the part of suppliers of goods and services in the United Kingdom.
As the noble Lord, Lord Elton, said, in the event of a Japanese bank making an acquisition of a major clearing bank, it is perfectly possible for the Monopolies and Mergers Commission to come down on the side of the Japanese bank and to say, "On balance, with the new power that the Japanese bank will give Barclays Bank, all the criteria under Section
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84 would come out on the positive side". The Monopolies and Mergers Commission would therefore recommend to the Secretary of State that nothing should be done. That does not seem to give what we regard as the proper protection to the British banking system. We should like to look at an alternative formulation.
I come now to Amendment No. 52A, which tracks the wording of Section 13 of the 1975 Industry Act. The Secretary of State already has the power under that section to make an order if it appears to him,
"that there is a serious and immediate probability of a change of control of an important manufacturing undertaking; and
(b) that that change of control would be contrary to the interests of the United Kingdom, or contrary to the interests of any substantial part of the United Kingdom".
In explanation to the noble Lord, Lord Elton, the wording in the follow-up in the amendment tracts almost exactly the section that 1 mentioned in the Industry Act. Our amendment goes a little further than the Industry Act because "shareholder control-ler" in the Bill in front of us is defined in Clause 103 in such a way as to include a minority shareholder controller, whereas the Industry Act would bite only on a majority shareholder controller. We therefore wish to extend this to allow for the provisions, which are partially in the Bill, that nobody can come in and buy a minority controlling interest in an important authorised institution without—
Lord Bruce-Gardyne: I apologise for interrupting the noble Lord. I find this part of his argument extremely interesting. He reminded us that the reference in the 1975 Industry Act applied exclusively to manufacturing industry. I wonder whether he could enlighten us why the Government—of which he was such a distinguished supporter—restricted the Industry Act 1975 in this respect to manufacturing industry and did not include the financial services industry as he suggests?
Lord Williams of Elvel: I am grateful to the noble Lord, Lord Bruce-Gardyne. I was not a Member of the Government although I was a supporter of the Government at the time. I cannot explain why the Secretary of State of the day—who happened to be Mr. Tony Benn, if my recollection is right—did not include banking or other services. I suspect that it was because the Title was "Industry Act" and to include services in the Industry Act might have been considered wrong. I cannot answer for him. The noble Lord will have to ask him why he devised that formula.
The other problem is that the Banking Act 1979 was not yet in existence. That came along rather later. The Banking Act 1979, so far as I know (the noble Lord may be able to correct me) did not impose any restriction on the acquisition of banks.
The formulation that we have here therefore tracks something that is already in the legislation relating to manufacturing industry. We should like to see it put into the Banking Bill. Indeed there is argument—although I shall not pursue it—that there is a case for having analogous provision in the Financial Services Act. However, I shall not pursue that particular hare at this time.

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The only problem we can see with this is that there might be some form of retaliation in other countries' legislation if we introduced such a provision into this Bill. The noble Lord, Lord Elton, has pointed out that there are either overt or covert restrictions in a number of countries. This provision has been in the Industry Act and has never to my knowledge been challenged. It has never been considered to be contrary to the Treaty of Rome. It clearly would depend on the use to which it was put.
The section that is in the Industry Act—and indeed the clause that we are proposing for the Banking Bill—is, I have to admit, an enabling clause. That is to say it is not compulsory on the Chancellor of the Exchequer to do anything: it means that he has the power should he so wish and it is clearly the way in which he exercises that power that may provoke retaliation elsewhere. Nevertheless, we believe that this provision should be inserted into the Bill. Whether the Government prefer the formulation of the noble Lord, Lord Elton—which, to be honest, seems to me to fit uneasily within the reciprocity provisions of the Financial Services Act—or our own, is for them to say. But we believe that one of the two formulations must be accepted if the banking system is to have the protection that we believe it needs.
Lord Elton: We are in Committee. We can therefore bob up and down as we like. Perhaps I may tell the noble Lord that the way in which my amendment is drafted does not seem to me to involve us in reciprocity at all. It goes straight to subsection (1). The Secretary of State has two tests either of which has to be satisfied before taking action. One is, under my amendment, that the interests of the United Kingdom or of any substantial part thereof would be damaged. That is the new test. That brings in its train everything that he can presently do under the domestic system. The other is what is already in the clause and is subject to the inhibitions to which that part of the clause is subject.
As I said earlier, I do not want to get drawn into the niceties of drafting. I have a very humble view of my own drafting abilities and a very exalted one of that of the government draftsmen—until they produce something with which I do not agree. I would rather that they had a chance to look at the provision at a later stage than that I should fall out with them now in defence of my own amendments.
Lord Williams of Elvel: I am grateful to the noble Lord for his explanation. It seems to me to fall almost directly within the provision. If I read his amendment aright, and incorporate it into the Bill as drafted, which reads:
"the Treasury …in the event of his becoming or, as the case may be, as a result of his having become, such a controller, a notice could be served on the institution by the Treasury",
the national interest provision will be inserted in line 4 after the word "controller". However, it is still the Treasury issuing a notice under Section 183 of the Financial Services Act, as I understand it. Perhaps the noble Lord will clarify the point if he disagrees with me.
Lord Elton: I do disagree. As I see it, the notice that is issued is a notice under this section. The words that the noble Lord has picked up are the words comprised in the test. Under the Bill as drafted, if the situation satisfies the test which appears in Section 183 of the Financial Services Act 1986 then he can issue a notice under this Act, not under that Act. That is the point I am trying to make.
Lord Williams of Elvel: I am grateful to the noble Lord. I shall have to reread his amendment and put it into context. I tried my very best to understand what he was getting at.
Lord Elton: May I try once more, if the noble Lord will bear with me? The Bill as drafted states:
"The Treasury may direct the Bank to serve a notice of objection under this section [if]",
and then the test is a reference to another piece of legislation. As I read it, it says quite distinctly at the beginning of the section "a notice of objection under this section". Then one has later in the Bill what happens if notice is given under that section, not under Section 183.
Lord Williams of Elvel: I am happy to accept the explanation of the noble Lord. As he says, it is probably the result of drafting that is not entirely clear. I certainly could not understand it. I hope that the Government understood it in the way that the noble Lord has expressed it. Nevertheless, we are dealing with the same point, and, however it is put, we are trying to get at the same problem. I should simply like to leave it there. I accept that there may be problems between myself and the noble Lord, Lord Elton, about its meaning, but nevertheless the problem still remains.
Viscount Chandos: As the noble Lord, Lord Williams, said, a little more time may be needed to agree the ideal drafting to reflect what both the noble Lords, Lord Elton and Lord Williams, are trying to achieve and, indeed, what I and my colleagues would like to see. At this stage, in the first instance we should like to support the amendment of the noble Lord, Lord Elton, if for no other reason than that I suspect that Amendment No. 52A moved by the noble Lord, Lord Williams, may be tarred with the brush of the Industry Act 1975, thereby gaining rather less support on all sides of the Committee than the amendment of the noble Lord, Lord Elton.
There seems little to add to what noble Lords have said already on this point. Nonetheless, I should like to say a few words. The United Kingdom is in a unique position in terms of its need to consider measures to protect its domestic banking industry precisely because of the position of London as the major international financial centre. Banks from every part of the world have international business operations in London. A move into the domestic UK banking market is a natural step for them. They have the fixed overhead, the infrastructure, to carry on business in London and can easily add a domestic business. The easiest way of adding that domestic business could be through the acquisition of a United Kingdom bank.

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No major developed country in the world has a banking industry which is controlled or dominated by foreign-controlled banks. In view of all the problems that there have been in manufacturing and other industries in the last 20 or 30 years, this country could ill afford to have its banking industry controlled by outside interests, however benevolent they may seem at the time that any acquisition was proposed.
I should like to take this opportunity to correct something which was discussed at the time of the Second Reading of the Bill. I stressed that in supporting the principle of an amendment such as this the Government should pay due regard, in its implementation, to the extent to which any bank that might be subject to a contested bid had acted genuinely in the national interest. The noble Lord, Lord Williams, suggested, fairly, that that provision would be difficult to include in any legislation or in any amendment to the Bill. In fact, I had never intended that. As the noble Lord himself said, this is enabling legislation; it is reserve powers to enable the Treasury and other interested parties to prevent a large part of the banking industry falling into the hands of those who cannot be absolutely relied on to consider the UK national interest first and foremost.
I still believe most strongly that while this amendment, or something very close to it, should be passed, when it comes to the implementation the government of the day should look very closely at the way in which any bank seeking this form of protection has performed in the national interest.
3.45 p.m.
Lord Campbell of Alloway: Reference has been made to Section 84 of the Fair Trading Act 1973. On three previous occasions, I have raised the definition of that section in this Chamber, and I should like to ask a question of clarification of my noble friend the Minister.
The noble Lord, Lord Williams of Elvel, quite rightly said that it can be argued that Section 84 is wide enough. We all know it covers domestic takeovers, but it is also to cover foreign bank takeovers. It is not quite good enough to say that it can be argued. It has been accepted for about six years—I remember it being first accepted in this Chamber by my noble friend Lord Cockfield—that Section 84 is overripe for clarification and redefinition of the public interest. So it is not just a question that it can be argued, as the noble Lord put it; it requires to be made clearer.
If Section 84 were to be redefined, if the public interest were to be clarified effectively, would there be any need for the type of amendment to which the noble Lords have spoken? I am not sure about that, and I should like to have the assistance of my noble friend.
Lord Bruce-Gardyne: First of all, I should acknowledge an interest which I have revealed before as a director of the TSB. It may be thought that the TSB is in a somewhat privileged position in this context because we have written into the Act a substantial period of insulation against external acquisition, whether from within this country or elsewhere. I acknowledge that privilege right away. I also entirely
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accept the queries that my noble friend Lord Elton raised and those that the noble Lord, Lord Williams, raised. I am sure that we shall all listen with interest and care to the response of my noble friend on the Front Bench.
I have a few modest reservations about the arguments which have been put forward by my noble friend in support of his amendment and by the noble Lord, Lord Williams of Elvel, in support of his amendment. I found it slightly whimsical that when the Banking Bill appeared in another place it was the saintly figure of Mr. Wedgwood Benn whose voice was raised in complaints about the drafting of this part of it. I must admit that I found somewhat interesting the idea that Mr. Wedgwood Benn was to be regarded as a saviour of the capitalist system. However, what particularly concerns me at this moment is—
Lord Williams of Elvel: I hope the noble Lord will not think me rude, but I am sure he would agree with me that Mr. Tony Benn has always been a defender of the national interest.
Lord Bruce-Gardyne: I am sure he has always been a defender of the national interest as he interprets it. Of course that is always a matter of interpretation. At present, I am principally concerned about the international aspect of this matter. My noble friend Lord Elton made it quite clear that there was a domestic aspect to his amendment. I wonder whether we should not discuss that more carefully on his subsequent Amendment No. 52. I should like to concentrate essentially on the international aspect.
During this debate there have been references to the situation that we faced when there were two rival bids for the Royal Bank of Scotland in late 1981/early 1982. The question of what was described as national interest arose very plainly at that time. I remember it well because I was then involved in the Treasury. We had the proposition put to us in the light of what was considered to be the predatory bid from Hong Kong and Shanghai Bank—which was not the preferred bid, I think it fair to say, by the Bank of England for the Royal Bank of Scotland—that there should be a short Bill introduced which would give the Bank of England a comprehensive veto over any external takeover bids. I remember that at that time we in the Treasury pointed out that that was not in any sense a practical proposition, first because our UK banks had been acquiring banks overseas on quite a vigorous scale, athough perhaps not always overwhelmingly happily.
It is possible to argue that it would have been rather nice for the shareholders in the Midland Bank if we had had a situation whereby the Senate of the United States had been provoked by our action into banning the acquisition by the Midland Bank of Crocker National. However, that was not the situation. The situation that we faced, and I submit the situation that we face today, is that our banks are in a position to go out and acquire, for instance, American banks. We would certainly have to expect that there would be some rather vigorous response, for instance, from Congress if we passed an amendment along the lines that my noble friend suggests.
My noble friend points out quite rightly and quite fairly—and the noble Lord, Lord Williams, made the

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same point—that the impact of the acquisition by Citibank (my noble friend referred to Nomura but it could equally well be Citibank) of one of our clearers would have a vastly different impact on the British banking system from the impact of the acquisition by Midland of Crocker National, California. I must honestly say that that is by no means clear to me, although it would be seen that way by the Congress of the United States and understandably so.
However, there is a more serious point and that concerns the European Community. As I understand it we are campaigning, and I believe rightly, for a Europe sans frontières and above all for an opening of financial services markets in Europe, which does not, unfortunately, at present exist. As we all know, there are very severe restraints and restrictions upon the acquisition of financial businesses by, for example, British companies or the penetration by British financial services of markets elsewhere in the European Community, notably in Germany. We have been seeking—I believe entirely rightly—to break down those barriers.
It seems to me that it would sit a little oddly against that position if at the same time we were passing an amendment such as that which my noble friend is suggesting. My suspicion is that my noble friends in the Government have the position roughly right in Clause 23 in insisting on reciprocity. I accept all that my noble friend has said about the question marks on the real meaning of reciprocity, and my noble friend on the Front Bench has an obligation to answer those propositions. But reciprocity must be the right concept so that we can back our right demand for the opening of markets within the Community to financial services. That would be greatly to our benefit in this country because of the sophistication of our financial services, and it is backed up by a provision in Clause 23 which may have been drafted rather more with the Japanese in mind but which could equally well be used to pressurise, for example, the Germans for a greater openness.
It seems to me, and I shall listen with care to my noble friend's reply, that if we go down the road suggested by my noble friend Lord Elton or the noble Lord, Lord Williams, we shall in a sense frustrate our assault upon the Community to get a greater opening of financial services.
Lord Bruce of Donington: The noble Lord sits down on that point. He is doubtless aware that the existing draft provisions relating to financial services in Europe cover the provision of services within the countries concerned. They do not cover changes of ownership as such. Surely the whole drive of the European legislation is the freedom to provide services. It is not necessarily a matter of taking over other firms.
Lord Bruce-Gardyne: With great respect to the noble Lord, I am not sure that that necessarily diminishes the thrust of the argument. I am suggesting that first we do not want to introduce into our legislation provisions which, to put it mildly, would sit uncomfortably with our drive for freedom of financial services markets within the Community.
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In any case I should argue that if, for instance, one can get one's foot in the door in the German financial services market, that might be a very substantial way of breaking down the limitations on the present rules about acquisitions within that market. However, the essential point to my mind is that we should not draft legislation in this House which could be argued to make nonsense of our campaign for greater openness in financial markets in the rest of the Community.
Lord Campbell of Alloway: That is entirely right. The substance of the argument of my noble friend Lord Bruce-Gardyne on Community law is assuredly right because, putting it quite simply, Articles 85 and 86 extend to the banking services. One would have to take considerable care not to produce in our domestic legislation a type of law which the Court of Justice would say was contrary to the treaty obligations.
Lord Elton: Of course I take my noble friend's points about the Common Market and the European Community. I am grateful to him for making them and we should not brush them aside. However, we must do two things. First, we must ensure that what we do is legal within the Community; my noble friend Lord Campbell of Alloway has shown that it would fail if it was not—but it would be to our embarrassment if it did. Secondly, within what is legal, we must strike a balance between getting the Europe that we want and keeping the United Kingdom that we want.
Viscount Chandos: I wish to remind the Committee that three of the four largest clearing banks in this country have acquired German banks, admittedly relatively small ones. But I believe that the German authorities and the German banking industry would not regard the amendment proposed by the noble Lord, Lord Elton, as provocative. They would not expect the German authorities to allow a British, American or Japanese bank to buy the Deutschebank or the Dresdner Bank and they would therefore regard it as reasonable for the United Kingdom authorities to take reserve powers to protect the equivalent banking institutions in the United Kingdom—the major United Kingdom clearing banks.
Lord Williams of Elvel: The noble Lord, Lord Bruce-Gardyne, has raised a very important point and we must recognise that and be grateful to him. There is a distinction between financial services in the broad run and banking itself. It may be a fine point but I believe that there is a distinction.
We are all in favour of the reciprocity provisions in the Financial Services Act which deal with investment businesses. We were slightly surprised, and in debates on the Bill when it was before your Lordships' House we remarked that banking had somehow slipped into the reciprocity clause in the Financial Services Act, probably deliberately on somebody's part, but it was an Act that was dealing with financial services. That was probably the only point other than the exemptions where banking was mentioned. Nevertheless, I believe that the noble Viscount, Lord Chandos, is right. I do not believe that what the noble Lord, Lord Elton, is suggesting would be contrary to provisions that exist in other countries in the Community. I suspect that the

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noble Lord, Lord Campbell of Alloway, may be right in saying that the application of some of this may he contrary to certain provisions in the treaty, but the actual introduction of legislation may be consistent with the treaty. I wonder whether—
Lord Bruce-Gardyne: Again I apologise for interrupting the noble Lord. I was not at all suggesting that it was contrary to the treaty, but I was certainly suggesting that it might be rather contrary to the spirit of our ambitions to obtain freedom of financial services throughout the Community.
Lord Williams of Elvel: I take the noble Lord's point. He will remember that when Paribas was floated again on the French Stock Market, it had a golden share, as did TSB. TSB has certain provisions to make sure that it cannot be taken over by other people for a certain period of time. I used the phrase "golden share" to explain that.
I believe that other French banks which are to be floated will also have similar provisions. I agree with the comments of the noble Viscount, Lord Chandos, in respect of German banks. I do not believe that it is possible for a British bank to acquire a major Italian bank without severe hostility from the Government in Rome, so I do not believe that this amendment as proposed would damage the course that the noble Lord. Lord Bruce-Gardyne, wishes to promote, as do we all.
4 p.m.
Lord Young of Graffham: I have listened carefully to the arguments on this important issue. There is understandable and proper concern that the law should provide an appropriate degree of control over the ownership of banking institutions. The Government support that aim. The prime purpose of this Bill is the regulation of banks in order to ensure the protection of their depositors. Regulation of controlling shareholders in banks is an important part of that protection and this is why the Government included in the Bill—from the start—a series of very effective powers to prevent, or undo, the acquisition of controlling shareholdings where the acquisition might be to the detriment of depositors.
Clause 21 of the Bill therefore requires any person who intends to acquire a controlling interest in an authorised institution (defined by reference to control of 15 per cent. or more of voting rights) to give advance notice of that fact to the supervisors. Clause 22 then empowers the Bank of England to object to any proposed acquisition on prudential grounds. If an acquisition proceeds contrary to an objection by the Bank of England, there are powers—in Clause 26—for improper control to be neutralised and if necessary for the courts to direct the sale of the relevant shares. These are very effective powers.
In addition to these provisions, the Government have responded positively to comments made during proceedings in another place. As a result, the original provisions dealing with the regulation of controlling shareholders have been further buttressed, in three important respects, in the Bill which is now before the Committee. First, Clause 24 now empowers the Bank of England to object on prudential grounds to
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shareholder controllers at any time and not simply at the point of acquisition. This will safeguard the position of depositors where a controller is subsequently found to be unfit, or subsequently acts in such a way as to render himself unfit.
Secondly, provisions later in the Bill—Clauses 37 and 41—provide an early warning system for changes of control. Under these provisions any person who acquires a shareholding of 5 per cent. or more in an authorised institution will be required to give notice of the fact to the supervisors, who will he empowered to require information from, or investigate, such significant shareholders. These powers will enable the supervisors to receive early notice of the possible build-up of a controlling shareholding by an undesirable person.
Finally, Clause 23, with which we are now concerned, deals with the question of reciprocity. The noble Viscount, Lord Chandos, is a practising banker and claims to know exactly what the German authorities think. I could not be quite that positive.
Members of the Committee will be aware from their consideration of the Financial Services Act that that Act contains powers designed to encourage other countries to allow free and open access to their financial markets—access which has traditionally been available to businesses from overseas seeking to carry on banking, investment or insurance business in the United Kingdom. The disparity of size—whether Sumitomo can swallow Nat West but Nat West cannot swallow Sumitomo—is no ground for reciprocity. Referring to the test raised by my noble friend Lord Bruce-Gardyne and other noble Lords, Section 183 applies only where discrimination is either by law or by government practice, or by practice of authorities in that particular country. Reciprocity is not that all institutions must be of the same size. That Act provides for the refusal, restriction or removal of authorisation to carry on banking business if the institution's country of origin does not allow reciprocal access in the ways that I have outlined for UK institutions.
Clause 23 of this Bill builds on those provisions and by explicitly providing for objection to acquisitions of shareholder control on reciprocity grounds makes the provisions more appropriate to banking businesses.
The purpose of reciprocity provisions in both the Financial Services Act and this Bill are importantly aimed at opening up the markets of others and not at closing our own. It is very much to be hoped therefore that these powers will never be used, but they are there if they are needed. It has been suggested, not only in this Chamber but in the course of debates in another place, that there is insufficient reciprocity in the case of Japan. My honourable friend the Economic Secretary said in another place that he would find it difficult to disagree with that analysis, as would I. I shall look closely with interest at the consortium in Japan, in which Cable and Wireless are at the moment playing a part, to see exactly how well they define reciprocity. That is a point which I have no doubt we shall look at with care and attention in the future.
The existing provisions can be seen to be very substantial and wide-ranging. They have been widely welcomed, as has the Government's willingness to

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listen to legitimate concerns in this area and to act on them.
The argument in support of the amendments under consideration is that the provisions in the Bill are inadequate to deal with acquisitions of control which raise concerns not of the interests of depositors, or of reciprocal access, but rather concerns about the general national or public interest. I need not go into the technical differences of the two proposed amendments. They would have essentially the same effect. It is neither necessary nor desirable for the Bill to contain such provisions.
This issue has of course been the subject of extensive debate in another place. During the course of that debate it has been made very clear—if it was not before—that the control of takeovers on grounds of general public interest is already provided by existing legislation. Statutory procedures exist—I give the example of the Fair Trading Act 1973—for takeovers to be referred to the Monopolies and Mergers Commission. The legislation charges the commission to consider whether any proposed takeover would be likely to operate against the public interest. If that is indeed the finding then appropriate powers are available to the Government. These provisions apply to banks as to any other sector, or type of enterprise. I ask Members of the Committee to consider whether it would be necessary or proper for special new procedures to be created for banks alone.
Lord Elton: Will my noble friend elicit what is the public interest in the criteria in the Act to which he is now referring? Am I right in thinking that it depends on the latest government statement of policy? Is it therefore known what that is now, and, more particularly, is there any certainty as to what that will be in the future? My noble friend has so far adduced only prudential grounds for control of the takeovers. This is the first time that he has introduced new ground and I believe that we should know what it is.
Lord Young of Graffham: I am grateful to my noble friend. I shall turn to that point in a moment. I believe it is of central concern to his amendment.
To continue, the legislation charges the commission to consider whether any proposed takeover would be likely to operate against the public interest. The Government have powers to deal with that matter. There has been a relevant banking case—that of the proposed acquisition of the Royal Bank of Scotland by the Hong Kong and Shanghai Banking Corporation. In this case it was found that the acquisition would be likely to be against the public interest. Concern has been expressed today about acquisition of our major clearing banks; yet it is surely difficult to conceive of such a case which would not raise issues of public interest at least equivalent to those on which the Royal Bank of Scotland case was decided. My honourable friend the Economic Secretary to the Treasury has already stated in another place that the public interest criterion will remain a part of these procedures.
To summarise, the Bill deals fully with takeovers which might raise concern for the interests of depositors—
Lord Williams of Elvel: I apologise for interrupting the noble Lord. Is he telling us that the criteria which were used in the case of the Hong Kong and Shanghai Bank attempted acquisition of the Royal Bank of Scotland will remain in the Fair Trading Act and will be used in the future in analogous acquisitions?
Lord Young of Graffham: If the noble Lord will exercise a certain degree of patience I hope to be able to mention what we shall be doing. In fact, I shall deal with it now. In regard to the existing statutory procedures for consideration of public interest factors which could emerge from the proposed acquisition of British companies, including banks, there is a review taking place. I have also referred to the undertaking given in another place by my honourable friend the Economic Secretary on behalf of my right honourable friend the Secretary of State for Trade and Industry that there is no reason to suppose that the general public interest will not remain part of these procedures.
However, in the light of what has been said from all parts of the Committee, and in particular by my noble friend Lord Elton, I shall draw to the attention of the Secretary of State the points that have been made during this debate. I shall ask that the position of the banks and the banking system as a whole be taken into account in the course of the current general review of these matters. I can give that assurance, but I do not believe that a case can be made for these particular amendments and I invite my noble friend to withdraw his.
To summarise, the Bill deals fully with takeovers which might raise concern for the interests of depositors: it also builds on the provisions of the Financial Services Act to ensure that reciprocity considerations could be applied properly in the case of banks; and existing legislation already contains procedures covering general public interest considerations and these apply to banking as to all sectors. I do not believe that a case for further takeover provisions in the Bill has been made. For the reasons I have given, similar amendments were conclusively rejected in another place.
The noble Lord, Lord Williams, referred to the 1979 Act. That Act does not contain any form of national interest powers in regard to bank takeovers. That of course was not a piece of legislation which emanated from my side of the Chamber. That was in those dim and distant days in the early part of 1979. Perhaps I may say to the noble Lord, Lord Williams, again that the wording of the Financial Services Act provision does not work narrowly on, for example, bank takeover opportunities for a particular country. Instead, it works very generally on the overall ability to pursue banking investment or insurance business in that country.
The wording of the reciprocity provisions of the Financial Services Act is wide. It has tended to be wide to avoid tying the hand of the Government in a particular case. The danger of greater precision is that some form of discrimination may be excluded. I believe that the noble Lord, Lord Williams, would find that even more undesirable.

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My noble friend Lord Campbell of Alloway referred to Section 84 of the Fair Trading Act 1973. If the question is whether the phrase "public interest" used in the monopolies and mergers legislation is adequate to cover these concerns, then I believe it is. I believe that the procedures are also adequate to cover both domestic and overseas takeover bids. Indeed, in the case of the Royal Bank of Scotland it was essentially a bid from overseas.
With the leave of the Committee I shall refer also to Amendment No. 52. It is important to distinguish between the requirements for significant shareholders —that is, shareholders ['biding between 5 per cent. and 15 per cent.—and controllers for the purposes of the Bill who hold 15 per cent. or more. It is absolutely right that controllers are subject to the full requirements of fitness and properness under the Bill and that they can be removed, or their shareholding neutralised, if they do not meet these requirements. The Bill achieves that effect. However, the clause proposed by the noble Lord would apply such requirements and similar sanctions also to 5 per cent. shareholders.
Lord Williams of Elvel: Is the noble Lord speaking to Amendment No. 52? I did not understand that it was grouped with No. 51.
Lord Elton: It is Amendment No. 52A.
Lord Young of Graffham: Forgive me; 52A. I apologise for that. I am grateful to the noble Lord. I say finally to my noble friend Lord Elton that where the legislation says "public interest" it means that, and the matter is considered by the Monopolies and Mergers Commission. It is not really accurate to say that the phrase only means the latest government statement on the scope of that matter. I have said already that I shall ask my right honourable friend the Secretary of State for Trade and Industry to look at the matter of "public interest", and I hope that he will take that into account.
4.15 p.m.
Lord Elton: My noble friend has produced a number of arguments for the withdrawal of the amendment that I have put before the Committee. Most of them relate to the ability of the authorities to resist a takeover on prudential grounds. I have no quarrel with that, and that is not the area at which this amendment is aimed. It is aimed at a threat to the national interest residing principally, but not only, in a takeover bid by a foreign national for a British clearing bank or institution of similar size and importance.
To this area—my noble friend will correct me if I am wrong—my noble friend has directed only the two tests. One is the test of reciprocity. I await with interest his reply to my question as to whether or not reciprocity in fact exists between the Japanese and the British for this purpose, because I notice that it is to the Japanese that all of us look over our shoulder. The second test is in regard to decisions taken by the Monopolies and Mergers Commission.
When we come to that we should remember that even if he can give us the assurances for which we hope on the interpretation of the test, for which my noble friend Lord Campbell of Alloway has asked for so
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long—and if he can give it to us before the enactment of this Bill things will be much easier—we also need to consider who is going to execute the test. So far as I can see, transferring the defence of the fundamental British interests means that it is transferred out of the safe, accustomed, and indeed prestigious hands of the Bank, the Treasury, and the Chancellor into the doubtless effective but unaccustomed hands in banking terms of the Department of Trade and Industry, the MMC, and the Secretary of State for Trade and Industry. If I am right in that, perhaps I may say that I remember with some anxiety the difficulties that one is apt to fall into when one area of government policy is subject to two departments of state. I notice that the timescale for the decision on the Royal Bank of Scotland case was from 17th March 1981 to 15th January 1982. That seems to bear out the point I am making.
I do not want to embarrass my noble friend by pressing this amendment at this stage. However, I hope he will read Hansard and look at the five specific questions I asked him, only one of which I ticked off as I was listening to his reply. I should like answers to those questions before the next stage. I should like to know when we can expect clarification of the Section 84 test for which my noble friend has asked, and when that may be available.
I should like my noble friend's observations on the transfer of the essential banking interest into non-banking hands within the Government, and I should like to know whether he feels that in all the circumstances the Bill as drafted now meets the case. If my noble friend can give me an assurance that he will give careful attention to these matters and reply to me before the next stage, it would be only courteous for me to wait until the next stage before I decide what to do about this matter and whether this is the correct drafting. I would encourage the noble Lord, Lord Williams of Elvel, when he replies, also to consider the prudence of such a delay.
Lord Young of Graffham: I am not in a position to say that any bid from Japan would be blocked using the reciprocity powers, because I do not know what will happen in Japan or how open Japan actually is. We have to wait to see the circumstances and the facts of the case, although my honourable friend in another place has cast doubts on whether such reciprocity exists today in Japan. As I have already said. I look forward with considerable interest to see what the future will bring, particularly in the case of Cable and Wireless, which is an analogous case but in another area.
Concerning the test of national interest, I have asked my right honourable friend the Secretary of State for Trade and Industry to consider the state of the banks and the banking system during his current general review of these matters. I shall consider that and look at the other points that have been raised. I undertake to write to my noble friend before the next stage of the Bill.
Lord Williams of Elvel: There is only one point on which I wish to press the Secretary of State—the terms of his request to his right honourable friend the Secretary of State, in his competition review, to look at

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the banks and the banking system. I am sure the noble Lord has made that request in good faith, and I am sure that his right honourable friend will take all his remarks in the spirit in which they are meant. But we are dealing with legislation at the moment in the Committee. We shall be looking for rather stronger assurances on Report that not only has the message been passed along to his right honourable friend but that his right honourable friend has taken the message on board. We shall be looking for something a little more positive than the noble Lord has been able to give us today.
Lord Young of Graffham: 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.
Lord Elton: That seems both as general as one feared and as narrow as one could hope. We must preserve ourselves in hope until the Report stage. I am most grateful to my noble friend for the care with which he has dealt with our approaches. I hope that it will be even more evident in the correspondence which follows, and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 51A had been withdrawn from the Marshalled List.]
Clause 23 agreed to. Clause 24 agreed to.
Lord Elton Lord Elton moved Amendment No. 52:
After Clause 24, insert the following new clause:
("Restriction of significant shareholders.
.—(1) The Bank may, unless it is satisfied that a person who is a significant shareholder in relation to an authorised institution within the meaning of section 37 below is a fit and proper person to exercise the rights of such a shareholder in relation to the institution, serve a notice of restriction on the person directing that, unless and until the notice is withdrawn, no voting rights shall be exercisable in respect of any specified shares to which this section applies, and a copy of any such notice of restriction shall be served by the Bank on the institution to whose shares the direction relates.
(2) A notice of restriction under this section:—

(a) shall, subject to subsection (4) below, specify the reasons for which the Bank is not satisfied that the person to which it relates is a fit and proper person to exercise the rights referred to in subsection (I) above; and

(b) shall give particulars of the right to make representations conferred by subsection (3) below.

(3) A person served with a notice of restriction under this section may make written representations to the Bank, and where such representations are made, the Bank shall take them into account in deciding whether to withdraw such notice.
(4) Paragraph (a)of subsection (2) above shall not require the Bank to specify any reason which would, in its opinion, involve the disclosure of confidential information the disclosure of which would be prejudicial to a third party.
(5) This section applies:—

(a) to all shares in the authorised institution in relation to which the person served with a notice of restriction under this section is a significant shareholder; and

(b) to all the shares of any other institution of which the authorised institution is a subsidiary
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being in either case shares which are held by the person in question or any associate of his in excess of those which entitle him either alone or with any associate of his to exercise or control the exercise of 5 per cent. of the voting power at any general meeting of the institution concerned.").

The noble Lord said: This amendment proposes a new clause directed against acquisitions of significant shareholdings, where such acquisitions may be thought to be undesirable. A significant shareholder. I remind the Committee, is defined in Clause 37 as one who has acquired at least 5 per cent. but less than 15 per cent. of the voting powers, which is to say the shares, in the authorised institution in question. I can best explain my concern in this matter if I first remind the Committee of how the Government propose to deal with acquisitions of shareholdings in the next size upwards in the scale, that is to say those of controller shareholders. They are defined in Clause 103(3)(c) as those possessed of at least 15 per cent. of the voting power at general meetings.
The Government have made it clear, in the course of many debates both here and in another place, that they are fully aware of the importance of controller shareholders. The expression of this concern is to be found in Clauses 21 to 26. In these clauses we find that no person who wants to become a controller shareholder may do so until he has told the Bank of England that that is his intention. Unless the Bank then gives him a green light he is thereafter forbidden to acquire the necessary shares for a further three months. This is in order to give the Bank time to find out all about him and to make up its mind as to whether or not he is in fact a suitable person to be a controller shareholder. If he does not give his notice or if he does not wait out the full three months, then, by virtue of Clause 25(1) and (4), he may be subjected to a fine on summary conviction. If however he waits long enough for the Bank to make its inquiries and then has the temerity, if the result is not a green light but notice, or even a preliminary notice, of intention to serve a notice of objection, to acquire a controller shareholding, he does not merely get a fine on summary conviction, but is liable upon conviction on indictment not only to a very much bigger fine—the maximum in fact permitted by statute—but also to be sent to prison for two years. Those members of the Committee who take the Observer will know what awaits him there!
This response to transgression goes far beyond mere finger-wagging. It is a real and painful punishment that can only be justified by the need to protect authorised institutions in this field from a very real threat. The Government therefore accept the reality of the threat. What again is the threat to an authorised institution? It is the threat of an undesirable person getting hold of 15 per cent. of the shares. The justification for equipping the Bank of England, and in some instances the Treasury to intervene in such cases, backed by powers of criminal prosecution and the threat of imprisonment, is the accepted fact that a self-seeking holder of such a proportion of shares could use it to manipulate the market in those shares to his own advantage. That would be destabilising to the institution in question and that in turn would be bad for the whole banking sector.
When the Bill was introduced into another place, I understand that those provisions I have recited were

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the end of the matter. But it was then agreed that there were lesser shareholdings which, though they do not rate the full protective treatment, merit the concern of the authorities. My noble friend referred to these concessions in our discussions on my last amendment. Hence we have the next category of shareholder, below the controller shareholder, that is to say the significant shareholder—the man with 5 per cent. but not as much as 15 per cent.
The Government recognise that the acquisition of such holdings could be a matter of concern and they agree that the Bank ought to know about them. Thus, Clause 37 places upon a person intending to acquire one of these shareholdings the same obligation to alert the Bank to his intention as is elsewhere laid on the intending controller shareholder. But there the similarity stops. There are provisions, flawed, I believe, as I shall later seek to show, but provisions none the less, for the Bank to make inquiries both about the potential and about the existing significant shareholder. But having identified him, having investigated him and having decided that he is not a suitable person for this level of influence, it does not appear to me, or to those I have consulted, that the Bill then entitles the Bank to do a single thing more about him, except, I suppose, to utter a cry either of deprecation or alarm, neither of which would help the institution and either of which could do it considerable harm.
Even if we had no past experience to guide us on the matter, this would seem a little odd. If the acquisition of a holding of 15 per cent. by an undesirable person is so potentially lethal that we must line up the whole panoply of the Treasury, the Secretary of State, the Bank and Her Majesty's Prison Service to keep him out, how could we argue, even without the wisdom of hindsight, that the possession of 14 per cent., 144 per cent., or 14.95 per cent. of the same shares in the same institution held by the same person is so innocuous that we need do nothing about it except to know that it exists? That is what to my eye the Bill appears to provide.
If a known predatory arbitrageur came into the market and he were to buy his 5 per cent., with permission, and to go on buying (not with permission, but with knowledge of the authorities) amid increasing professional and public interest and his holding grew by leaps and bounds to 6 per cent., to 9 per cent., to 13 per cent., and to 14 per cent., would the market not be affected? Does my noble friend not think that there would be any reaction? Would not the buyer, this now very significant shareholder, be acting simply in the hope of a white knight hoving over the horizon, fully caparisoned and equipped to buy his holding at a handsome profit? And would that not have precisely the effects that this Bill is designed to guard against?
In case the mention of the White Knight makes my noble friend think that we are in the realms of imagination or fairy story—mere Alice In Wonderland stuff and unlikely to happen—let me remind him that something very like it has already happened and that this is one of those occasions when he can act with the wisdom of' hindsight.
Let him cast his mind back, for instance, to Mr. Steinberg's foray into the Mercury International
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Group and how he acquired over 14 per cent. but just under the very 15 per cent. threshold which is now in the Bill. He will remember, I dare say, both that it was Canadian Pacific that eventually took the shares off him and what happened to the market in those shares during the whole proceedings.
It is not for me to judge between practitioners in the market, because I do not practise in the market at all. But if I have not given my noble friend sufficient food for thought, let me ask him to re-run in his head the scenario that I have just described and this time place, for instance, Mr. Ivan Boesky in either of the central roles. Does my noble friend feel that a Bill that gives the Bank of England no powers whatever to intervene in cases of that sort is entirely adequate for the purposes stated in the Long Title? Or is there perhaps a provision that I and those who advise me have missed?
There may be, but if there is not I feel that something is called for, something, I accept, much less severe than the catalogue of actions set out in Clause 26 and elsewhere to deal with controllerships. But something which can, when necessary, effectively curtail the influence of this particular shareholder both upon the policy of the institution and upon the behaviour of the market in its shares: something which should also indicate clearly both to the shareholder and especially to the market what the Bank's response would be to a notice from that shareholder that he intended actually to acquire a controller shareholding. I am advised that the least that can be done to achieve these purposes is to remove from that proportion of shares that is above the 5 per cent. threshold the voting rights that they normally carry and not to restore them until they have been placed in acceptable hands.
That is the intention of my amendment. If the drafting does not entirely achieve it, I apologise. But I think it is fairly effective and, in any case, it is to the intentions and the reasons behind it that I ask my noble friend, now refreshing himself on the latest points, to address himself in the first instance. If we can agree about the ends, we can of course come to the means at our leisure. I beg to move.
4.30 p.m.
Lord O'Brien of Lothbury: As my name is associated with this amendment, perhaps I may speak briefly on it. First, I should remind the Committee, as I did a week ago, that I am still associated with one of our principal merchant banks. However, as I also then said, any views which I express to your Lordships are entirely my own.
The noble Lord, Lord Elton, has most cogently, and with his usual elegant lucidity, expressed the arguments in favour of this amendment. I merely wish to add that if it is decided that a person is not a fit and proper person to exercise the rights of a shareholder in a particular institution when that person has 5 per cent., he is not likely to become more fit and proper as the shareholding increases to 15 per cent. It is wise, that person having been identified, that action should be taken early rather than late to thwart him or defer any plans which he may have for increasing his hold over a particular institution, very probably to its detriment. By this amendment such action would be

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possible earlier than under the Government's present plans. I therefore recommend it to your Lordships.
Lord Roll of Ipsden: Let me briefly support the amendment moved by the noble Lord, Lord Elton, and my noble friend Lord O'Brien of Lothbury. I, too, speak as a merchant banker. I know it has been said in certain quarters that this amendment reflects in some way a concern—perhaps an unreasonable concern—on the part of merchant banks to preserve their independence, but even if this were so I do not think it necessarily invalidates the arguments in favour of the amendment. I do not honestly think that we need to debate that point at all.
The argument put by the noble Lords who have spoken before me is a very simple one. This Bill accepts the principle that the conditions of ownership of certain financial institutions may in certain circumstances become a legitimate matter of public concern. I think for that reason it makes sure that the powers of supervision and control of the Bank of England are sufficient to cover that area of ownership as well.
I have no quarrel with the conditions as regards a controlling shareholder. It is entirely right that the very formidable powers which the Bill confers on the Bank of England in that regard, to which the noble Lord, Lord Elton, has referred, should be available to the Bank of England only in the case of a controlling shareholder; that is, one of 15 per cent. or more.
But the Bill has another threshold in Clause 37 of 5 per cent. ownership—if I may say so, significantly termed a "significant" shareholding. If it is a significant shareholding, and if therefore a significant shareholding anywhere between 5 per cent. and 14.9 per cent. could, by explicit recognition in the Bill, become a matter of concern, what does it provide for? It provides for the Bank of England to be informed and, as the Minister said a few moments ago in connection with the debate on another amendment, it then enables the Bank of England to watch developments and makes it possible for the Bank to become aware—maybe it can become aware—of the build-up of a larger shareholding.
But is that enough? As I think the noble Lords, Lord Elton and Lord O'Brien of Lothbury, pointed out, there is a logical gap in these provisions. There is no provision whatsoever for any action—I am not for a moment suggesting that it should be such formidable information as that applying to a controlling shareholder—in the case of a build-up of a shareholding between 5 per cent. and 14.9 per cent. The amendment is designed to make this Bill more logically consistent within itself, because it confers on the Bank of England certain powers to be exercised in certain carefully defined circumstances for an intervention of much less scope than that in the case of the controlling shareholder and subject to very considerable safeguards. I very much hope that in those terms as a matter of making the Bill logically consistent within itself, the Minister may be prepared to consider the amendment favourably.
Lord Bruce-Gardyne: As I have already mentioned on a previous amendment, I speak from the
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background of a bank which is for some years to come insulated from these problems, and therefore it may be felt that I have no right to intervene. Nevertheless I venture to suggest to the Committee that we need to be a little careful in handling propositions of this kind that we do not give to the outside world the impression that there is one law for bankers—and, dare I say to the noble Lord, Lord Roll, for merchant bankers—and another for lesser breeds down in the industrial workplace.
We are, of course, here talking about significant and not controlling shareholders. There is no dispute among us about that. But I remind the Committee of what the governor had to say just a week ago in an address to celebrate the grant of a Royal Charter to the Institute of Bankers, no less. He said this:
"The fact remains that there are companies that shareholders are prepared to back unreservedly and without any prospect of immediate return. To ask for protection against the threat of unwelcome takeovers, whilst to deny the members of the company the essential rights attaching to their shares, the right to vote and the right to sell".
As I said, I know that we are not talking here about controlling shareholdings; we are talking about significant shareholdings. We are talking very much about the thin end of the rump. But it seems to me that what we are being asked to accept is a special cover for the thin end of the rump in the case of one rather small part of the market; namely, the banking sector and, as has been made very clear, in particular the merchant banking sector.
There have been a number of references to the activities of Mr. Saul Steinberg. It occurs to some of us sometimes that merchant banks are remarkably reluctant to see inflicted upon themselves threats which they help to organise on others. For my part, I think that we should be very cautious about providing a specially privileged status or a special insulation for that particular part of the market.
I also think that we should be aware there has been a sentiment and even the Bank of England itself has sometimes taken the view that those tender buds in the banking sector need special care and attention which is not displayed on behalf of the industrial and commercial sectors. Only weeks before the rescue—or perhaps I should say the "catch"—of Johnson Matthey Bankers, the governor himself warned that commercial businesses which got themselves into trouble must not look to the Bank as the lender of last resort. I was one of those who thought at the time that it was difficult to reconcile that view with the view that the Bank took, whether for good reasons or bad, towards the JMB collapse.
All I wish to say about this particular amendment is that I wonder whether it would give the right and appropriate signal to the market about a special status relating to those who generate takeover bids but who are not always all that keen to see themselves the victims thereof.
Lord Elton: I am not an expert on rumps. My noble friend is the first person I have come across to refer to the thin end of the rump. We are discussing the special role of the banking service and my noble friend has argued principally that we should not treat banks as though they were different from other services. As I

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say, I am not a practitioner. I nonetheless have a feeling that in certain respects banks are different, and I hope that the Minister will consider that when he comes to reply.
The other point, to which my noble friend did not address himelf, is the stark absurdity, as I see it, of having the whole phalanx armed to the teeth in the defence for 15 per cent. and absolutely nothing but an empty field with somebody with a pair of binoculars in the corner of it for the man with the 14.95 per cent. It seems to me that some kind of provision is required. However, I do not want to hold up proceedings because I wish to hear what the Minister has to say.
Lord Williams of Elvel: Perhaps it is time for the Opposition Front Bench to have a word in this argument. It has been difficult to get a word in edgeways. However, I have been interested to hear what noble and distinguished Lords have had to say about the problem. It is probably the first occasion in this Chamber when I have found myself in almost total agreement with the noble Lord, Lord Bruce-Gardyne. It is gratifying that that should be so.
I accept what the noble Lord, Lord Roll, has said, in that the problem is one of coherence between the various steps or thresholds in the Bill. But surely there is a difference between the 5 per cent. to 15 per cent. bracket and the rest, particularly if somebody else has a controlling shareholding. Clearly if the shareholding is widely dispersed, all noble Lords will recognise that someone piling up 14.9 per cent. will get a privileged position, though not perhaps as strong as some noble Lords have maintained and the scenarios may not be quite so lurid as those painted by the noble Lord, Lord Elton.
Nevertheless, if there is another shareholder with, say, 51 per cent. or 55 per cent., then the acquisition of between 5 per cent. and 15 per cent. does not seem to me to matter all that much. If we start to legislate for the area between 5 per cent. and 15 per cent., not only do we run into the problems which the noble Lord, Lord Bruce-Gardyne, outlined but we also have to say that if it is provided there is undue influence exercised by the acquisition of this particular shareholding below 15 per cent. I think that would run the legislation into enormous difficulties.
I also have great problems with the proposal to disfranchise shareholders. It is a very serious step to disfranchise shareholders who have legitimately acquired their shares. I think that we must be very careful before allowing the Bank, simply on its say-so, to do just that. Lastly, I do not see any mechanism for appeal in most of the clauses in the Bill as drafted. There is a mechanism for appeal beyond the decision of the Bank. I do not see that in the clause, though perhaps the noble Lord, Lord Elton, will correct me.
Lord Elton: I am happy to concede that and also to concede, as I normally do at this stage, that the drafting could be improved upon. I accept that such a step would warrant an appeal system, in my present state of mind.
Lord Williams of Elvel: That was my last point, and since there have been so many contributions I shall let the matter rest there.
4.45 p.m.
Viscount Chandos: Like the noble Lord, Lord Williams, I find it unusual to be in agreement with the noble Lord, Lord Bruce-Gardyne, and even more unusual to be in disagreement with the noble Lord, Lord Roll. Nonetheless, while I agree with the noble Lord, Lord Elton, that banks are special, they do not seem to be special enough to warrant the measures that his amendment proposes. As I said in the Second Reading debate on this Bill, the protection that is given to banks already and the further protection that was either proposed or contemplated leaves me and many other people feeling quite uncomfortable relative to the protection which is given to industrial and other commercial companies. For that reason, whether or not there is a gap or a hiccup between the measures available for shareholders up to 14.9 per cent. and those above, I think it would be totally wrong to accept the amendment.
Lord Harmar-Nicholls: This is a great place to live and learn—and to be demoralised, particularly when we have someone so lucid and expert as my noble friend Lord Elton! Having listened to this debate, and without having any background experience before looking at the amendment, my problem is that the words in the amendment say:
"The Bank may, unless it is satisfied that a person who is a significant shareholder in relation to an authorised institution".
How can that be done if there is more than one person who has 4½ per cent. to 5 per cent.? The Westland affair was a good example of a situation where people got together and concerts came about. If these dangers exist—I am convinced that they do, and I recognise the importance of seeing that the right people have the power—the amendment should not be confined to one person. If something wrong is going to be done in holding more than 5 per cent., or even 15 per cent., as was discussed on the last amendment, the danger is real and I should like to see the point which my noble friend has made covered, if that is possible, not for just one person with 5 per cent. but for a group of persons with 5 per cent. Such a situation might well exceed the 15 per cent. which we have been talking about.
Lord Elton: All the shareholders together will come to 100 per cent., and that is a difficulty throughout the Bill. If the fears of my noble friend are to be satisfied in that direction he will have to tear up the Bill and start again. We have used the criteria already in the Bill and applied those to the problem. I am sorry that the amendment is not better; perhaps my noble friend can improve upon it.
Earl Cowley: I should like to speak in support of my noble friend Lord Elton but not with regard to manipulation, arbitrage, Saul Steinberg or Ivan Boesky. I should like to speak about the danger of influence and the influence that 5 per cent. to 15 per cent. can represent. Close protection of the integrity of the banking system is required today as perhaps never before. It is required because of the vast changes being experienced by the world's financial markets. These changes, engendered in part by rapid technological change in telecommunications and computerisation and in part by deregulation, have led to a shrinking of

39
world banking markets, increased complexity and intense competition. In this atmosphere, competition is transcending national boundaries as never before and competition and deregulation are blurring the distinction between traditional banking, brokerage, corporate finance and government funding.
In this new and intensely complex environment, international joint ventures, mergers and attempts to purchase portions of companies to influence or buffer competitive advantage are taking place in order to broaden markets and strengthen competitive positions. In this revolutionary—one might say unstable—environment, it is terribly important that the Bank of England has powers to control the essential health of the City of London's domestic and international banking industry and to protect it against untoward influences. If the Bank's powers are not sufficient, the City's position as a prime international centre could be undermined to the detriment of the whole country.
Although a shareholder interest in a United Kingdom bank of less than 15 per cent. would not normally represent control, it could represent a sufficient interest to elect directors and to influence business strategies adversely to the interest of the individual bank, its shareholders and depositors, the Bank of England and the country. This amendment would give the regulator sufficient power to negate such adverse influences. Such negation is required in the rapidly changing revolutionary banking environment with which the Bank of England is now faced. I commend the amendment to the Committee.
Lord Young of Graffham: I listened with great care to my noble friend Lord Elton, to the noble Lord, Lord O'Brien, and to the noble Lord, Lord Roll, who I am delighted to see in the Chamber today. My faith in the judgment of my noble friend Lord Bruce-Gardyne was undermined a little when I found the noble Lord, Lord Williams, and the noble Viscount, Lord Chandos, in agreement with him. I then recalled that he was supporting the Government's line and so my faith has been fully restored.
I have a certain feeling of déjà vu when I say it is important to distinguish between the requirements for significant shareholders—that is, shareholders between 5 per cent. and 15 per cent.—and "controllers" for the purposes of this Bill who hold 15 per cent. or more. It is absolutely right, and no one in the Committee will disagree, that controllers are subject to the full requirements of fitness and properness under the Bill and that they can be removed, or their shareholdings neutralised, if they do not meet those requirements. The Bill achieves that effect in respect of controllers.
However, the clause proposed by my noble friend would apply such requirements, and similar sanctions, also to 5 per cent. shareholders.
Lord Elton: With respect, not similar sanctions. Only one of the battery of sanctions. That I made very clear.
Lord Young of Graffham: I accept my noble friend's assurances, but sanctions nevertheless. I am not sure
40
whether such requirements would be appropriate for these shareholders. They exercise only a small minority of voting power. As such, it would not only be inappropriate to treat them as if they controlled an institution, but in practice it would probably be impossible to mount a case—given their degree of influence—that their presence was objectionable as a threat to depositors. The purpose of this provision is not to stabilise the market in bank shares but to protect depositors by ensuring that banks are properly run and controlled. Even so, in saying that, the powers we are suggesting would have a stabilising effect for the reasons to which I shall now come.
I do not argue that no powers should be available in respect of the smaller shareholders. Persons who become significant shareholders are required by the Bill to notify their shareholding. As soon as they notify their shareholding they are subject to the powers to require information under Clause 39(10). This gives full powers to the Bank to require information and documents and such persons may be subject to investigation under Clause 31(5). I believe that these are adequate safeguards for shareholdings of this size.
My honourable friend the Economic Secretary—
Lord Elton: I am sorry to intervene. My noble friend might like me to preserve my questions to the end but it is easier for us to remember what the questions are if we ask them when they arise.
My noble friend thinks that being subject to the power of investigation is a sufficient control. I have accepted that the Bank can make enquiries. I do not think that they are sufficient but the Bank can make enquiries. However, so far as I can see there is nothing that it can do thereafter and that does not amount to a control. Is my noble friend going to tell us that arising out of those discoveries the Bank can then take action against this sort of person?
Lord Young of Graffham: Yes, I am, because I believe very much that the new provisions to regulate shareholder controllers have an effect beyond the strict range of their application. Any would-be controller now knows that he cannot expect to build up a controlling shareholding without the approval of the supervisors. These new powers therefore cast their shadow back. They will influence, say, a 5 per cent. shareholder in the way he conducts himself. If he acts in such a way that he is revealed to be unsuitable to exercise a controlling role, any subsequent attempt to obtain control can now be blocked. There need be no concern about small shareholders in the sense that they are embryonic controllers or have their foot in the door. The Bill already covers that situation. For these reasons, and for some of the reasons which my noble friend Lord Bruce-Gardyne, outlined, the Government do not believe that provisions of the kind proposed by my noble friend in his new clause are needed.
Lord Elton: I think I understood my noble friend aright in saying that no powers are needed up to 14.999 per cent. because everybody knows that at the 15 per cent. point powers exist, and that a person who has been identified as unsuitable to have a 15 per cent. shareholding will be labelled as such while he still has

41
a lesser shareholding. Somehow or other the Bank, following its inquiries, has to inform the market that there is something ratty about this person. It has to give out information which is not actionable, which can if necessary be tested in the courts and which will have the effect of alerting the market to the fact that this person is a raider and not a reputable investor and that he will not be able to increase his shareholding beyond a certain point. It will therefore hope that the market will not rise in the way that it did in the Boesky case—by more than 50 per cent.—as a result of that raid. Is that the extent of the reassurance that my noble friend is giving us?
Lord Young of Graffham: I do not think it helps our discussion to use names such as Boesky and others, because the Bank itself has found ways to supervise without running into many of the dangers which my noble friend outlined. It is a very strong test indeed and a rigorous requirement to be a controller. As soon as you become a significant shareholder, as soon as you go over 5 per cent., the Bank is aware of you. It has the powers to investigate you, to watch you, and very quickly the Bank will let it be known whether you are a suitable person to be a controller. I am not sure whether the market as a whole has to know. Certainly the significant shareholders will be aware how far they can take their own interests. We have, after all, to defend the market operating as a market, and the more we interpose restrictions the more I suspect in the fullness of time we will actually militate against London operating as a proper market.
Lord Elton: I am a decontroller by nature or I would not be sitting immediately behind my noble friend. Therefore the last remark he made struck the loudest chord in my listening bosom; if bosoms can indeed listen. I am not sure.
Therefore, between now and Report stage, I should like carefully to consider what he has said. I did not find it very sustaining material at first blush but perhaps I shall draw more comfort from it when I have seen it in print and have taken some advice on it. Although I can give my noble friend no reassurance about what I shall do at a later stage, and provided that my noble friend whose distinguished name appears with mine on the Marshalled List agrees, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 52A not moved.]
Clause 25 agreed to.
Clause 26 [Restrictions on and sale of shares]:
Lord Young of Graffham Lord Young of Graffham moved Amendments Nos. 53 to 55.
Page 20, leave out lines 10 and 11.
Page 20, line 16, at end insert ("in a case where the notice of objection was served under section 22 or 24 above").
Page 20, line 39, at end insert—
("( ) A copy of the notice served on the person concerned under subsection (2) above shall be served on the insititution or company to whose shares it relates and, if it relates to shares held by an associate of that person, on that associate.").
On Question, amendments agreed to.
Clause 26, as amended, agreed to.
Clauses 27 to 31 agreed to.
5 p.m.
Clause 32 [Advertisement regulations]:
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 56:
Page 25, line 33, after ("is") insert ("circulated or")
The noble Lord said: This is a small drafting amendment which I suggest would probably make subsection (5) a little more comprehensive. I do not intend to speak on it. It merely occurs to me that there are ways of an advertisement coming into a person's hands other than it being addressed to him personally. If the noble Lord does not particularly want to accept the amendment, I am not much concerned; I seek just to be helpful if that is of any use. I beg to move.
Lord Beaverbrook: I am grateful to the noble Lord, Lord Bruce of Donington, for bringing this to the attention of the Committee. We have looked carefully at the amendment and I can reassure the noble Lord that the Bill as drafted is adequate.
It is important that the ambit of the clause is drawn widely so that shady characters cannot escape prosecution by claiming that they had not "issued" an advertisement. I have therefore considered the point and taken legal advice. I am advised that in this context there is no doubt that the term "addressed" has a wide meaning which would cover all advertisements including those addressed to the world at large rather than to particular persons. I hope that gives the noble Lord some assistance.
Lord Bruce of Donington: I entirely accept the noble Lord's assurance and I ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 32 agreed to.
Clause 33 agreed to.
Clause 34 [Unsolicited calls]:
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 57:
Page 27, line 4, leave out ("or") and insert ("and").
The noble Lord said: Here again, the intention of substituting the word "and" for the word "or" is intended to clarify the Bill. If, from the noble Lord's standpoint, it does not, I shall not press the amendment. I beg to move.
Lord Beaverbrook: Again, I am grateful to the noble Lord. However, I am advised that in this context the word "or" is correct. The effect of Clause 34(2) is to specify some examples of the type of regulation that may be made. Paragraph (a) cites regulations which can either prohibit the soliciting of deposits from persons who have been cold called or prohibit the making of agreements with them to make deposits, for example, at some time in the future.
The tailpiece to which the noble Lord's amendment applies adds that such examples may also prohibit the procuring of such persons to make deposits or their entering into deposit-making agreements. For example, if a particular regulation prohibited the actual making of an agreement during a cold call it

43
could also prohibit an attempt to persuade that person to enter such an agreement. If the noble Lord's amendment were accepted, it would imply that a regulation about agreements had also to prohibit the actual taking of a deposit, which would not be relevant. I hope that that explanation covers the point for the noble Lord.
Lord Bruce of Donington: Yes, the explanation does cover the point, and I ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
On Question, Whether Clause 34 shall stand part of the Bill?
Lord Williams of Elvel: Before we leave this clause, I should like to express some concern since this is a new clause in the Banking Bill which was not in the 1979 Act. I refer to the phrase in subsection (4):
"a personal visit or oral communication made without express invitation".
I realise that this tracks exactly the wording in the Financial Services Act, but I understand that it has given rise to a number of problems and difficulties on exactly what is meant by that phrase.
I shall be glad if the Minister, if not now, then by letter, could explain what the Gvernment have in mind so that we can have a proper definition bearing in mind the problems that have arisen in the Financial Services Act but given that the Financial Services Act is obviously addressed to a different type of industry. It is important to have this straightened out. It has caused difficulties under the Financial Services Act and I suspect it might cause difficulties in banking unless clearly and carefully defined.
Lord Beaverbrook: I am grateful to the noble Lord. I will write to him on the subject but, unlike investments, deposits are capital certain. Therefore, there should be no risk to the depositor in allowing them to be held until maturity. Conversely, the nature of banking is such that risks would arise for those last in the queue if some depositors were able to demand immediate repayment. That could create a liquidity crisis in which some depositors would lose.
That is a fundamental difference in the banking industry. The Financial Services Act deals with matters where the capital is not, as I said, capital certain. There is no certainty that the amount of money invested is going to be returned in full. It may well be returned with profit but, conversely, there could be a loss.
Lord Williams of Elvel: I am grateful to the noble Lord but he addressed the question of why the treatment of unsolicited calls in this Bill is different to the treatment in the Financial Services Act which I fully understand and the reasons for it. That is not my question. In the light of the problems under the Financial Services Act, I asked what is the Government's definition of the expression,
"a personal visit or oral communication made without express invitation".
I give an example of what I mean. Let me suppose that I go to my bank manager and I say to him, "You
44
know perfectly well that I have £10,000 in unit trusts" and he says to me, without express invitation, "Why not sell them and put the money on deposit with our bank in Guernsey?". Is that an unsolicited call under the definition in this clause? I mention that as an example. It may be ridiculous—in fact, I do not have £10,000—but I think there is some need for greater definition in this context.
Lord Beaverbrook: I fully understand the noble Lord's question and I will write to him on the subject.
Clause 34 agreed to.
Clause 35 [Fraudulent inducement to make deposit]:
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 58:
Page 27, line 25, leave out ("(dishonestly or otherwise)").
The noble Lord said: In moving this amendment I speak also to Amendment No. 59. Indeed, Amendment No. 59 is almost a part of Amendment No. 58. Once again, this is a suggestion for making Clause 35 a little clearer, at any rate from my point of view. If my amendments are accepted subsection (1)(b) will read:
" "recklessly makes a statement, promise or forecast which is misleading, false, dishonest or deceptive".
I think that is possibly a little more direct than the present wording.
Once again, it is only my view on the matter and I have no strong feelings about it. If the noble Lord feels that subsection (1)(b) is clear then I have no objection to it remaining as it stands. I am seeking to be helpful. I beg to move.
Lord Beaverbrook: With the leave of the Committee, I shall speak to Amendment No. 59 as well as to Amendment No. 58. I am grateful to the noble Lord, Lord Bruce, for bringing this matter to our attention. There is an important point here but I have to say that I cannot agree with him in advocating the restriction of an offence which is designed to discourage financial malpractice.
In the Government's view a person who goes about recklessly inducing others to make deposits on the basis of misleading, false or deceptive statements should be guilty of an offence. If that offence appears to be committed without dishonest intent, no doubt the court will impose a much lighter penalty than if there had been such an intent, but I think that that could be left to the court.
The wording of the provision in the Bill is identical to that of a similar provision in Section 47 of the Financial Services Act and I think that it is perfectly clear. It has the intended effect of preventing persons who induce deposits by means of misleading, false or deceptive statements from escaping conviction solely because of doubt as to whether active dishonest intent had to be proven. Therefore I prefer to retain the existing formulation in the Bill.
Lord Bruce of Donington: I am in complete agreement with the noble Lord in wishing to retain the

45
wording as it is. After his explanation, I ask leave of the Committee to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 59 not moved.]
On Question, Whether Clause 35 shall stand part of the Bill?
Lord Williams of Elvel: Before we leave Clause 35, there are two questions that I should like to put to the noble Lord. Am I right in thinking that, because of the wider definition of "deposit" in subsection (4) of this clause, Clause 35 covers fraudulent inducement to make a loan as well as a deposit? Clause 5 defines "deposit" and in that clause subsection (3) excludes deposits made by authorised institutions, the Bank etc.
That subsection is specifically excluded from the operation of Clause 35 by subsection (4). Therefore a sum paid by an authorised institution (i.e., a bank) would appear to fall within the definition of a deposit for the purposes of this section and a sum paid by an authorised institution (i.e., a bank) can easily be a loan, of course. If that is the case, and I think I am right, would it not be better for the Government to say so and affirm that there is a penalty for fraudulent inducement of' an authorised institution to make a loan?
My second question concerns a possibly bizarre circumstance, but one which may occur, and I ask the noble Lord whether I am right in thinking that if it does occur there will be a problem. Does Mr. A commit an offence if he makes a statement to Mr. B, who is a banker and works in an authorised institution, about Mr. C, who happens to be a customer of Mr. B's bank, and he is reckless as to its truth and to the outcome, if it results in Mr. B, the banker, cutting Mr. C's facility; in other words, is Mr. A liable under this section and is he liable to imprisonment for a term not exceeding six months?
Perhaps the noble Lord cannot answer this question now, in which case he may wish to write to me. It seems to me to be important to have clarification on this point.
Lord Beaverbrook: In answer to the noble Lord's first question I can confirm that loans as well as deposits are covered. I shall look at the drafting of this passage and see why it does not say so. Perhaps I may write to him on that question. The answer to his second question is yes, it is correct. Mr. A is reckless.
Clause 35 agreed to.
5.15 p.m.
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 60:
After Clause 35, insert the following new clause:
("Foreign country lending.
—.(1) For the purposes of this section—

(a) "foreign country lending" means lending entered into in any country or territory outside the United Kingdom whether directly with the government or administration of that country or territory or indirectly with any banking institutions or agencies which exercise in such country or territory functions corresponding to those of the Bank and which assume an obligation in respect of such foreign country lending or with any person or persons corporate or non-corporate in such country
46
or territory for which the government or administration thereof directly or indirectly assumes full or partial liability therefor or provides financial facilities therefor;

(b) "foreign country borrower" means any government or administration, banking institution or agency or other person or persons corporate or non-corporate in any country or territory outside the United Kingdom which incurs an obligation for foreign country lending.

(c) "foreign loan transaction" means a transaction entered into by an authorised institution under which:—

(i) a foreign country borrower incurs an obligation to the institution or as a result of which it may incur such an obligation; or

(ii) the institution will or may incur an obligation in the event of a foreign country borrower defaulting on an obligation to a third party; or

(iii) the institution acquires or incurs an obligation to acquire or as a result of which it may incur an obligation to acquire an asset the value of which depends wholly or mainly on the foreign country borrower performing its obligations or otherwise in its financial soundness:

and the risk of loss attributable to a foreign loan transaction is in a case within paragraph (i) or (ii) above the risk of the foreign country borrower concerned defaulting on the obligation there mentioned and in a case within paragraph (iii) above the risk of the foreign country borrower concerned defaulting on the obligation there mentioned or of a deterioration in its financial soundness.

(2) An authorised institution which:

(a) has entered into a foreign loan transaction or a series of such transactions with a foreign country borrower or more than one foreign country borrower as a result of which it is exposed to the risk of incurring losses in excess of 25 per cent. of its available capital resources; or

(b) proposes to enter into a foreign loan transaction or series of such transactions with a foreign country borrower or more than one foreign country borrower which either alone or together with a previous foreign loan transaction or series of such transactions entered into by it in relation to that foreign country borrower or more than one foreign country borrower would result in its being exposed to the risk of incurring losses in excess of 25 per cent. of those resources.

(3) The report required to be made by an authorised institution under subsection (2) above shall be made in a case within paragraph (a) of that subsection in respect of such period or periods and in a case within paragraph (b) of that subsection at such time before the foreign loan transaction or transactions are entered into as may be specified by notice in writing given to the institution by the Bank; and those reports shall be in such form and contain such particulars as the Bank may reasonably require.
(4) The Bank may by notice in writing served on an authorised institution in circumstances in which subsection (2) above applies require the institution to adopt such policy for foreign country lending and comply with such conditions for foreign loan transactions as the Bank shall reasonably specify.
(5) The Bank shall after consultation with the Treasury formulate a policy on foreign country lending for each authorised institution and such policy shall pay due regard to—

(a) the total level of exposure of the institution concerned to foreign country borrowers

(b) the participation of the institution concerned with other authorised institutions in foreign country lending

(c) the total indebtedness of all foreign country borrowers to the institution concerned or to other authorised institutions.

(6) In formulating the policy referred to in sub-section (5) above the Bank shall pay due regard to—

(a) the policy from time to time of the Government of the United Kingdom in relation to foreign country lending and in particular for dealing with and limiting the indebtedness of foreign country borrowers

(b) the international obligations of the Government of the United Kingdom in regard to foreign country lending and the provisions of all relevant international conventions

(c) the exposure of the authoried institution to foreign country borrowers, the participation of the institution with other authorised institutions in foreign country lending and the exposure of all such institutions to foreign country borrowers

(d) the standing of the foreign country borrower, the nature of the institution's relationship with such borrower, the nature

47
and extent of any security taken by the institution and the institution's expertise in the particular type of lending

(e) the prudent level of provision to safeguard the interest of depositors and

(f) the exposure of all institutions whether or not incorporated or having a principal place of business in the United Kingdom to foreign country borrowers and the consequences for the United Kingdom banking system of a complete or partial failure to repay foreign loans.

(7) Any question whether an institution is or would be exposed to risk as mentioned in subsection (2) above 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 and 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 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.
(10) The policy formulated by the Bank as referred to in subsections (4), (5) and (6) above may make different provision for different institutions.
(11) An institution which fails to make a report or fails to adopt the policy or comply with such conditions for foreign loan transactions laid down by the Bank as required by this section shall he guilty of an offence.
(12) An institution guilty of an offence under this section shall be liable on summary conviction to a fine not exceeding the fifth level in the standard scale.
(13) If an institution is found guilty of an offence under this section on two separate occasions the Bank may revoke the authorisation of the institution.").
The noble Lord said: I should like Amendment No. 60 to be considered in conjunction with my manuscript Amendment No. 60A. I beg to move.
Lord Bruce of Donington Lord Bruce of Donington moved, as an amendment to Amendment No. 60, Amendment No 60A:
Subsection (2), line I, leave out ("which") and insert—(", other than one whose principal place of business is outside the United Kingdom, shall make a report to the Bank if it—").
The noble Lord said: I apologise to the Committee for having delivered Amendment No. 60A so late. On re-examining my Amendment No. 60 I found that subection (2) contained no operative part. I had omitted the words after line 1 as in Amendment No. 60A. Without those lines, subsection (2) would have no meaning at all. Again I offer my apologies for not having noticed the error at the time that the amendment was tabled. However, Amendment No. 60A now makes subsection (2) operative and in certain circumstances imposes an obligation on an authorised institution to make a report to the Bank.
In Clause 38 of the Bill, which we shall be considering a little later this evening, there is some endeavour to control the exposure by banks on loans made to individuals. Doubtless we shall be considering that provision in due course. This amendment seeks to lay a responsibility on an authorised institution to make a report to the Bank of England in regard to its loan exposures overseas. The reason is very clear.
I think we are all familiar with the circumstances over the past few years in which very many banks, including United Kingdom banks, have made large loans overseas and in particular have become very heavily involved with countries in South America. The present amendment seeks to lay a responsibility on an authorised institution to report to the Bank of England on entering into a foreign loan transaction in circumstances which are set out in subsection (2)(a); namely, that it:
"has entered into a foreign loan transaction or a series of such transactions with a foreign country borrower or more than one foreign country borrower as a result of which it is exposed to the risk of incurring losses in excess of 25 per cent. of its available capital resources".
Subsection (2)(b) carries the same measure through if an authorised institution:
"proposes to enter into a foreign loan transaction or series of such transactions".
The definitions as to exactly of what a foreign loan transaction consists are set out at subsection (1)(c) of Amendment No. 60, which requires an authorised institution to comply with the policy laid down by the Bank in relation to such loans after consultation with the Treasury.
Subsection (4) gives the Bank power,
"by notice in writing served on an authorised institution in circumstances in which subsection (2)"—
applies, which is where the authorised institution makes or proposes to make a loan, to,
"require the institution to adopt such policy for foreign country lending and comply with such conditions for foreign loan transactions as the Bank shall reasonably specify".
As I said, subsection (5) lays down the matters on which the Bank should consult the Treasury. Subsection (6) provides,
"In formulating the policy … the Bank shall pay due regard to"
various matters; for example:
"the policy from time to time of the Government of the United Kingdom in relation to foreign country lending"
and
"the international obligations of the Government of the United Kingdom in regard to foreign country lending"
and so on.
It has been thought necessary to put forward the amendment for the protection of bank depositors. Some of the largest banks in the United Kingdom were, at any rate in 1985, exposed to considerable risk in the case of Mexico, the Agentine, Brazil and Venezuela. I shall quote some figures. They are subject to two qualifications. The first is that they relate only to the years that I mentioned, and the second is that I have not had an opportunity to verify the data from the source from which they are quoted. That is an action which I normally prefer to undertake.
There is still some possible ambiguity about the definition of "capital resources" for this purpose. For the purpose of the figures quoted, they comprise an aggregate of the bank's subscribed capital and its disclosed reserves. It may well be—I should not wish to be dogmatic about this— that the Bank or the Government may prefer another definition. If that is the case, so be it. In 1985 142 per cent. of Lloyd's capital resources, subject to the reservations I have already made, were to those countries. In the case of the Midland Bank it was 198 per cent., and in the case

49
of Barclays Bank it was 56 per cent. The only figure I have for the National Westminster Bank is 80 per cent. for 1984.
The figures I have given may well be subject to a degree of correction, and the definition to which I have referred may be subject to a degree of modification. However, I am satisfied that whatever the figures may be, there is a substantial exposure of the banks concerned. That is by no means confined to this country's banks. It is probably even more so in the United States. They are the two countries which have considerable loan difficulties.
A substantial default in any of those loans would have catastrophic effects on the banking system. In saying that, I have no wish to cause undue alarm or express undue apprehension, but the risks are there. When the noble Lord, Lord O'Brien, addressed the Committee earlier he referred to the disastrous consequences of the collapse of the Credit Anstalt before the war and the repercussions that followed. There is a risk. It may not be precisely definable at present; few risks are. I am acutely sensible of the fact, and wish to emphasise, that the figures that I have given, with I hope a reasonable degree of approximation (as I say, I have not verified the particulars) may have significantly improved since 1985, in the case of the three banks that I mentioned, and since 1984 in the case of the National Westminster Bank. Nevertheless, my general impression, which is fortified by having followed the whole of the international debt scene for some years, is that there remains a considerable exposure to the Latin American countries and others.
Before arriving at an assessment of the risk (I have no wish to be alarmist) one must consider the position of those countries. We are all familiar with the fact—or if we are not we should be—that many of those countries arc finding it difficult, and have so found for many years, not only to pay the interest on their outstanding loans (made to them when the interest rates were very high, as they became in 1979 and 1980 through to 1981) but also the instalments of principal that are required in order to enable the loans, as they say in the United States, to perform.
A large number of those countries have had to devote a large proportion of their net export earnings to enable them to continue to pay interest on their loans and to repay the principal. As we know, over the past few years those difficulties have caused the indebted states perpetually to make approaches to those that advanced them money to reschedule the loans. In other words, they found it impossible to meet the terms upon which the loans were originally negotiated. That caused the various banks, institutions and in some cases the governments concerned to consider the alternative. If, for example, for any reason a substantial creditor—by "substantial" I mean substantial—had declined to reschedule, it was faced with the alternative of default, and in some cases, although it was expressed much more politely, the creditor was threatened with default.
A real default, as distinct from a technical default, would necessitate writing the complete indebteness out of the bank's account. That might present the bank with considerable difficulties with regard to its balance sheet. Very large loans, regarded as non-performing
50
and in default, would in certain circumstances present those banks with enormous difficulties. Members of the Committee are probably already familiar with the case of Continental Illinois. If default occurred on any scale—and I am talking now of official as distinct from technical default—the result not only on the Bank but on the banking systems in the countries concerned (and we are by no means exempt from this, although I should think our position is a good deal less parlous than certain banking institutions in the United States) would be very bad.
Indeed, as the noble Lord, Lord O'Brien, knows perfectly well, the collapse of Credit Anstalt to which he referred had a knock-on effect in the United States and throughout Europe. It was conventional wisdom that deflationary policies had to be pursued, and in consequence we had possibly one of the most potent forces in the rise of Nazism in Germany. There was widespread distress, discontent, and, in some cases, civil disorder, even in the United States, when these collapses occurred.
I am not trying to make anybody's blood curdle. I certainly would not wish to say that the present situation is of that kind although from time to time in this Chamber I have felt bound within broader economic debates to draw attention to the ever-present danger that arises at this time from the nature and extent of international lending. The purposes for which money has been lent and the circumstances of the debtor countries have made repayment of those loans very difficult. Perhaps I may indicate some of the effects that have taken place in the countries concerned.
Members of the Committee will be aware no doubt that even in today's Financial Times there is a report from the Inter-American Development Bank which says:
"In most of the countries of the region"—
it is referring particularly to Latin America—
"growth will be difficult to sustain unless productive capacity, including its supportive infrastructure, is modernised and expanded".
The bank is quoted as saying:
"The austerity programmes of the past several years have hobbled the expansion of public social services".
The article adds:
"Spending on health, education, nutrition and housing had declined while real wages had been falling and unemployment rising."
That is merely the conventional banking survey of the situation.
However, one must be aware that despite the valiant efforts that have been made by the countries concerned to meet their obligations to their banking creditors, their efforts have resulted in widespread distress within the countries—to which the bank I have just quoted has referred in comparatively bland terms—and has indeed faced the people themselves with very considerable hardships. This has led to the beginning of a breakdown in social cohesion in the countries concerned. Members of the Committee must be aware of that, whichever sections of the press one may read. It has meant the discharge of interest on principal obligations with very high interest rates. It has absorbed so much of their net export earnings that

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it has imposed very great hardship on the people themselves. Sooner or later, unless factors of that kind are relieved, it is reasonable—and I trust not too scaremongering—to suppose that much disorder will eventually occur. It may be against the law, but it may still occur. When one realises the state of affairs in some of these countries, then it is perhaps understandable.
I shall give Members of the Committee only four examples to illustrate the kind of problem with which we are faced. In Mexico the number of suffering from malnutrition has reached an estimated 33 million. That is over a third of the population and double the rate of five years ago. In Peru, 63 per cent. of households do not earn enough for an adequate diet. In Bolivia, six out of 10 live below the proverty line. Half of all Bolivian children are malnourished. In Brazil 300,000 children die of malnutrition every year. In the north-east only 20 per cent. of the 30 million population have sufficient food.
This is neither the time nor the place to seek to evoke sympathy although I am quite sure that noble Lords have it in abundance. It is to indicate the kinds of pressure that are bound to build up within these countries. The question to which we have to address ourselves is whether a free enterprise banking system should have any policy responsibility in this. The banking system operates quite freely and in competition. If the banks feel that it makes good sense—even though it may not—and that it will make money (and the purpose of banks, I am reliably informed, is to make money for their shareholders) then is it right for us to request in these circumstances that there should be some overall policy responsibility?
I venture to suggest that there is a responsibility here. We are the ones who are capable of controlling the policies that are carried out. The Bank of England ought to be empowered—empowered, that is all—to seek this information, not necessarily with the objective of interfering unnecessarily in the affairs of British banking institutions (although it has an overall responsibility under the Banking Bill) but to lay down some policy if it thinks that in the national interest, and I am sorry to use the term again, guidance is required. Before it gives guidance it must obtain the information. As I have said, this amendment gives the Bank power to obtain the information. Then, based on its own judgment and after consultation with the Treasury, if the Bank thinks it right, then it can see that the appropriate directions are given.
With an eye on the longer-term perspective of a society that is well, and, in the full knowledge that our own prosperity will increasingly become intertwined with the developing world and other countries, I hope that Members of the Committee will accept that such a move as set out in this amendment, modest though it is, ought to be taken. It is in the interests of the depositors themselves, certainly in the interests of the countries which are affected by the overexposure and also in the defence of the banking system. I beg to move.
Lord O'Brien of Lothbury: This amendment is by far the longest on the Marshalled List. In my opinion
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it is by far the most important. Moreover, I have a great deal of sympathy with those who have moved it. Nevertheless, I do not think that I can support it.
About a year ago we had a great debate in this Chamber about the international debt problem, in which I remember the noble Lord, Lord Lever of Manchester, in particular taking part. He and others were very much inclined to propose a comprehensive approach to the debt problem which, in effect, would have meant taking it out of the hands of the banking system, reliquifying the banking system, so to speak, and putting the debts into hands which could only be those of the taxpayers of this country and many others, no doubt. I did not support that view; many of your Lordships did not support it.
Since that time the banking system has been doing its best to deal with the problem. I expect Members of the Committee will have seen in last week's Economist an admirable supplement on international banking which included many figures and opinions on the international debt situation. It did not make very happy reading. As the noble Lord, Lord Bruce of Donington, said, some of the figures are daunting. It is quite clear that the solution of the present system, even if it can be completely solved, will take a very long time. In the course of that review it was mentioned that Mr. Lamfalussy, the general manager of the Bank for International Settlements, believed that the banking system would cope with the problem over the years, if to some extent rather messily. I think that that is what will happen.
As the noble Lord, Lord Bruce, said, this country is high up in the league of those that have debts from the underdeveloped and the poorer countries. The United States of America comes first, Japan second and we come third.
In regard to the capital resources of some of our large banks, the figures involved are daunting. Nevertheless—I say this in all modesty as a private citizen; it is 14 years since I left the Bank of England—I still believe that the best way to solve the existing problem is to allow the banking system, with reasonable guidance, informal for the most part, to deal with it gradually over the years.
The ability to pay of the many countries concerned will have to be considered. It is sometimes forgotten that the countries which overborrowed so much must have had the benefit of that borrowing, and although poverty may exist in those countries one hopes that it might be rather less than it would have been without the borrowing. Nevertheless, the borrowing is very illiquid now and it must be dealt with carefully and cautiously over many years.
There may be doubt as to whether eventually all of the loans will be repaid, but that is the banks' problem and I think it should remain their problem. If we had taken it off their shoulders, what incentive would the banking systems of the world have had to pay regard to their experiences, which should be salutory and should teach them better and more sensible ways in the future?
That is dealing with the past. As I see it, this amendment is an attempt to deal with the future, in effect, by getting the central bank to orchestrate the whole of the foreign lending of the banking system of

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this country, taking account of government policy, of government views and of the state of affairs, political and economic, in all the countries which are debtors and seeking by those means to direct banks to paths which will produce fewer problems in the future than have been raised in the past.
That is admirable, and I think it will happen anyway, but I doubt whether it would be possible to get the central bank to take over the foreign lending function of the banking system and to direct, either generally or in particular, how it should be done. Therefore, while I recognise the admirable sentiments which have led to this amendment, I do not feel that I can support it.
5.45 p.m.
The Lord Bishop of Birmingham: This amendment on foreign country lending is very important indeed. I agree with the noble Lord, Lord Bruce of Donington, that the present Clause 38 as the Bill now stands is insufficient because it is concerned with individuals. So much money has been lent overseas that a national policy is now required. The great banks are so interconnected that the problem is not just one of individual banks but of banks as a whole and therefore of national policy.
I am reliably informed, though I have not made my own researches of this matter, that the largest banks are already exposed over the 25 per cent. limit proposed in Clause 38. It is not always appreciated that the sums that they have lent are beyond the capacities of countries to repay within the terms of the agreement that they have made. The rescheduling of the debts means that the developing countries will be tied down for many decades. If the countries default the whole banking system is in danger of crashing. I am sure that no one in this Chamber would wish that to happen. Indeed, no one would wish it except perhaps countries in Eastern Europe and China.
As has been said, British banks seem to have made less provision for foreign country loans than other comparable nations, apart from the United States of America and Japan, as the noble Lord, Lord O'Brien, has just told us. In addition, it seems to me that the amounts of money required to be repaid by debtor countries in servicing those debts are unreasonable. Without doubt, I should call it immoral. (Some people think that morality has nothing to do with banking. I do not.)
In 1986 the net transfer of funds from Latin America to its creditors was equivalent to 24 per cent. of export earnings, according to the CEPAL conference held in Mexico City in January this year. How can any developing country pay its way into the third millenium with that kind of extortion, to say nothing of the dangers of disintegration which the noble Lord, Lord Bruce of Donington, mentioned? It has to be said that that is immoral. That is why I disagree with great reluctance with the noble Lord, Lord O'Brien, although he has so much learning, knowledge and experience in this matter.
Of course I do not speak to the Committee as a banker. We do not—like certain other Churches—have banking. I speak as one who in the past has taken particular interest in this ethical aspect
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of international loans. In my judgment I am bound to say that this aspect shows the unacceptable face of modern capitalism more clearly than any other aspects because of its implications for millions and millions of people.
I do not denigrate capitalism as such, and I hope that I shall not be thought to do that in this Committee. It can be exceedingly useful, but I object to it when it takes advantage of the poor. When I was asked to air these views in the banking world a couple of years ago I received plenty of reaction but, I am bound to say, no reasoned refutation. I am not surprised because I do not think it is possible.
Not everyone in the Committee may be aware of the scriptural teaching on charging interest. I wish to quote from the Book of Exodus. Chapter 22, verse 25:
"If you lend money to any of my people who is poor, you shall be to him as creditor and shall not exact interest from him".
The prohibition on interest which we find in the Old Testament was to protect the poor from extortion. It was taken very seriously in the Church. In fact, interest on loans was forbidden here until the Reformation and in France until 1789. It was not until the days of John Calvin, the reformer, that it became realised that the charging of interest could be wealth-creating so as to be of benefit to the common good. Nowadays we do not think so much of the common good in this respect. We approve of it because it is of benefit to the lender, individual or corporate, and because it is of benefit to the borrower, individual or corporate.
However, when we look at what is happening in the developing countries and especially in Central and South America we see that, as the noble Lord, Lord O'Brien, mentioned, although these vast loans were no doubt of benefit when they were first made to the countries concerned, they have now become intolerable because they are the cause of crushing poverty and a means of preventing rather than assisting development.
I have already quoted from the Scriptures and I hope that noble Lords will bear with me if I give another quotation. In Deuteronomy, Chapter 23, verse 19, we read:
"To a foreigner you may lend at interest, but to your brother you shall not".
I suppose that the underlying philosophy was that you were permitted to soak the foreigner but had to look after your own. If that was the philosophy we must disown it because we have a moral obligation to treat the poor properly, wherever they are.
I have spoken mostly of debtor countries because most of the concern about these foreign loans relates to the integrity of our banking system and to the protection of our own depositors in our large banks. That is very proper, as the noble Lord, Lord Bruce of Donington, has shown, but I note that subsection (6)(a) speaks of the responsibility of government to formulate a policy of foreign country lending and subsection (6)(b) speaks of the international obligations of the United Kingdom.
It is to those two subsections that I have particularly addressed myself this evening. It is not for me to lay down any national policy about foreign country lending. I am quite incompetent to do so, but I am sure that it has now reached such proportions and has

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become a threat to so many millions of people that we must have, if we are to be responsible, a government policy and a Bank of England policy on it. Such a policy should take note of ethical considerations as well as the practical, social and commercial matters which have just been mentioned.
I shall be interested to hear the response of the Minister to these suggestions. I hope that he will be moved to accept the spirit of the amendment, although naturally perhaps not the exact wording. As I say, if this particular amendment is considered, as the noble Lord, Lord Bruce of Donington, said, against the whole canvas of world history, it is far and away the most important amendment on the Marshalled List today.
Lord O'Brien of Lothbury: Before the right reverend Prelate sits down, I shall just say one word about compassion and bankers. He must not think that bankers have any less compassion than the members of his cloth. They have every bit as much compassion, but compassion in the banking field is bounded by the realities of life as they face a banker. It is no good a banker being so compassionate that he goes bankrupt and all his depositors lose their money. In the end the financial figures are something from which he cannot get away. The loans were taken by all these countries. They borrowed the money, presumably to improve the wherewithal of their citizens. What have they done with the money? It is all too easy to take an ethical moral line and leave it at that. There is much more to it than that.
The Lord Bishop of Birmingham: Before the noble Lord, Lord O'Brien of Lothbury, sits down, perhaps I may remind the Committee that I did not mention the word "compassion". I spoke of morality, and it is very important to distinguish between the two. I should not dream of suggesting that anyone has no compassion. Indeed, I hope that many people have more compassion than I have, knowing my own limitations. However, I take it that one of the reasons persons such as myself are here in this Committee is that we should, without fear or hindrance, set out the moral aspects of this matter as we see them.
Lord Elton: The right reverend Prelate has raised a matter on which he could scarcely have remained silent on this occasion. However, I ask him to consider whether loans at low interest, as advocated in either Exodus or Deuteronomy, constitute banking and therefore fall within the Long Title of the Bill. That is not an entirely frivolous comment because the amendment seeks to produce an engine of policy within what is meant to be an instrument of policy.
I do not wish to speak at length on the morality of international banking. I hope that the right reverend Prelate will read what the noble Lord, Lord O'Brien of Lothbury, has said with care and perhaps substitute the word "morality" for the word "compassion" in what he said because it seems to me that they are on common ground in one respect; that is, that the transaction of lending and borrowing ought to be mutually beneficial. The complaint which the right
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reverend Prelate understandably and properly raises is that it does not appear on all occasions that it has been mutually beneficial.
If one takes that argument further one comes to the failure of a loan. It first becomes a non-performing loan and then is written off. That is not only a mark of the extreme discomfort of the borrower but a mark of the extreme embarrassment of the lender. Therefore, prudent banking ought to add to the benefit of both parties. In that respect none of us would have any differences with the right reverend Prelate. Where some of us might differ would be in taking what ought to be an area of government policy which should be flexible to meet changing circumstances and putting it in the relatively inflexible terms of a statute, frozen at a particular moment in time.
I say that to take a little of the burden off my noble friend's reply because he will be under pressure of time and if he is left simply, as it were, to shoulder aside that aspect of things it will appear that he also is without either morality or compassion, and I am sure that he is not without either.
6 p.m.
Lord Oram: I should briefly like to support the amendment moved by my noble friend. It was a relief to see that he had tabled a manuscript amendment. I puzzled for quite a while over the earlier sentences and could not make sense of them. However, I am assured that the manuscript amendment clarifies the position.
Thinking of the problems of the developing countries, to which my noble friend and other noble Lords have called attention; thinking of the burden that they suffer as a result of the too liberal lending that took place a decade or so ago; and bearing in mind, as the noble Lord, Lord O'Brien, rightly says, that that money has not always been properly spent, I remind myself that the resources which flow from the developed world to the developing world are of two kinds. There is the official aid, which, in this country, is provided through the mechanism of the overseas development administration, and there is the private sector. We have not done too well as regards United Nations targets in respect of official aid. But we have done very well in terms of providing resources through the banks.
Government lending through the official aid programme can be and is being dealt with in a sophisticated way. There is a machine and there are criteria to make sure that the resources are properly administered. There are provisions for such things as grace periods before interest or repayment of capital take effect. There are also preferential interest rates. If a country falls into difficulty it is comparatively easy for the donor country to re-schedule the debts, or in many cases to transfer them or change them from loans into grants. That is the official aid mechanism.
The suggestion in the amendment of my noble friend is that we should have a policy in regard to the private sector which takes into account the needs of the developing countries. I hope that I am right in reading in subsection (4) of the amendment (referring to conditions for foreign loan transactions being laid down by the bank) that the conditions can be of two kinds. My noble friend emphasises conditions which

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tend to safeguard the depositors in banks in this country and to limit the extent of exposure in overseas lending. I hope that the subsection and the word "conditions" can be read as meaning that the bank would establish a policy taking into account the needs of the developing countries. There should be a policy not only as I have described in relation to the official aid programme but also in relation to the private supply of resources. I feel sure that that double-reading of subsection (4) is perfectly correct and it is for that reason that I warmly support the amendment.
Lord Harmar-Nicholls: I had some doubt about the manuscript amendment being a worthwhile contribution. There were also doubts that turned to dismay when I heard the right reverend Prelate's understanding of what he thought the amendment was likely to achieve. My doubts are that it suggests that somewhere there is a neat answer that can be identified, put into words and included in a statute, to deal with the intricate problem that has grown up and causes so much trouble all over the world.
I do not believe that there is a neat answer. The right reverend Prelate left no doubt about the fact that he thought it was neat. However, I was dismayed because, having made his points which I appreciated, coming from the Bishops' Bench, the right reverend Prelate said that there must be a policy. It is as though somewhere there is a policy in a pigeon-hole which someone has not fetched out to put into operation.
The position is not like that. Nobody is forced to take loans from the private sector. They wanted loans which they thought would be helpful when they received them. Arrangements and terms were entered into and afterwards things went wrong. Sometimes, perhaps, they were extravagant and did not do their job properly; or world circumstances may have changed, so that it was really nobody's fault. However, to suggest that there is a neat answer to stop that kind of thing happening—if one concedes that there is a need for borrowing through private banks in order that the pump can be be primed in various countries of the world—is no good.
Lord Bruce of Donington: I am grateful to the noble Lord for giving way. If he does not appreciate it now, he will appreciate when reading Hansard that nowhere have I suggested, either especially or by implication, that there is a neat solution.
Lord Harmar-Nicholls: The noble Lord, Lord Bruce of Donington, is getting off lightly. We have had many exchanges but on this occasion I am merely saying that what he said had caused me to doubt. I have in the past made comments much stronger than that as regards some of his suggestions. The noble Lord made his point very well, and described the circumstances that I am saying are inevitable if we are to have borrowing to help the various countries of the world.
I hope that I am not over-simplifying the situation. But, recognising that it is an intricate matter, that these things will and are happening, and that they will cause many problems all over the world, we must decide whether it is a government's responsibility to work out the answers. We must decide whether, in this case, it is the Government of the United Kingdom who must
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give the answers, or whether we should leave the general guidance as to what the answer should be to the bank. That is the decision that we must make.
I began by saying that I was doubtful. If it were possible for a government to do something that the banks could not do to alleviate these problems, my doubts about the amendment would be removed. However, I do not think that it will make any difference at all. When we reach the impasse described by the right reverend Prelate and the noble Lord, Lord Bruce of Donington, it will merely be a question of who is most likely to be able to extricate everybody involved with the minimum of trouble. The noble Lord, Lord O'Brien, has vast experience and knowledge of these matters. On balance I believe that the Bank, with its past experience and desire to produce the answer—and banks are often more compassionate that some governments in terms of accepting certain moral standards—is more likely to give the guidance and leadership to extricate the world from the problems that have been described than any one government, even the Government of the United Kingdom.
Lord Mackie of Benshie: Can the noble Lord tell me who got the banks into the trouble that they are now in?
Lord Harmar-Nicholls: I am sorry, I did not hear that comment.
Lord Mackie of Benshie: Who got the clever banks into the trouble, if they did not get into the trouble themselves?
Lord Harmar-Nicholls: I do not think that the banks are all that clever. Banks are made up of human beings who are full of frailties. The boards of the banks, with the experience and knowledge that they must pay the piper if they make a mistake, are less likely to make mistakes. Usually, somebody else must pay the fine for government mistakes.
The Lord Bishop of Birmingham: As we are in Committee I hope I shall be excused for popping up again. Since this is the last time I shall speak in your Lordships' House I should hate the noble Lord, Lord Harmar-Nicholls, to leave with such dismay at my words, because he has misunderstood me. I did not say, nor did I intend to show, that there was a neat solution to this problem. When the noble Lord comes, if he does, to read my speech, in the Official Report he will see some of the many difficulties I tried to point out on both sides.
I do not want him to be under any misapprehension about the point I was trying to make. I was trying to say that the problem is now so large, the sums of money so vast, and the millions of people affected so many, that for those reasons there should be a national policy. I appreciate that this may be something about which we can honourably disagree, but at any rate that was the point I was trying to make.
Viscount Chandos: As this subject is, as all Members of the Committee tonight have agreed, so important, I feel that the views of these Benches should be

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expressed. My heart would like me to support the amendment of the noble Lord, Lord Bruce, but my mind makes me feel that this is not the way to achieve what the noble Lord would like to achieve.
The noble Lord, Lord O'Brien, is right in suggesting that even without this amendment the Government and the Bank of England will be involved informally in the policies of the major banks towards lending to foreign countries, and the third world in particular. Any increase in that role cannot necessarily be relied on to be to the benefit of the LDCs and the countries to whom the banks are lending.
The policies of government and quasi-governmental institutions such as the IMF and the World Bank have not necessarily been more liberal or more generous than the commercial banks, rightly or wrongly. I believe, as the right reverend Prelate said, that this is a matter of vital and critical importance, but I think that at the moment the problem can be tackled far more effectively through a commitment to the increased aid to which a Member of the Committee earlier referred than by imposing almost impossible conflicts of interest on the regulators in terms of preferential treatment for loans to LDCs as opposed to other exposures that a bank may have.
Viscount Torrington: One biblical allusion that the right reverend Prelate might have made in relation to the third world debt problem is that to a certain extent it is a matter of the economic sins of the fathers being visited upon the sons. In my opinion much of the third world debt problem results from the discouragement by governments of fixed equity investment by the private sector, such that many of those governments have progressively had to rely on borrowings to create new investments to finance projects in their countries and have not in effect created the climate to foster or bring in either domestic or foreign management.
A lot of the problem could be solved in the future by trying to encourage third world countries to create a better climate for foreign investment and to replace debt with equity; to create a climate where their present debt burden could be replaced by equity; where they could privatise undertakings and provide stock to lender countries in effective repayment of loans. That is a better solution than trying to police further debt issues in the way that this amendment suggests. We have not always—even the Bank of England—been all that successful in running our own debt position in' the past.
6.15 p.m.
Lord Young of Graffham: We have certainly strayed a considerable way from the consideration of a clause in the Banking Bill. We have ended up with a small, but nevertheless interesting, debate on the morality of international lending. I, for one, shall very much miss the right reverend Prelate the Bishop of Birmingham from your Lordships' House, and for that reason I shall read extremely carefully his contribution to today's debate. But I must confess that at the moment I can hardly find a single word to agree with.
I say that on good grounds. I say it not to waste too much of the Committee's time on this point but it is
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important. To say that it is immoral to charge interest and that that is somehow the unacceptable side of capitalism undermines the very basis upon which our industry and commerce are based not only in this country but in the whole of the West.
To say that it is bad business is something I would certainly accept, but not morality. Indeed, to look at those biblical sources it might be as well to recollect the source of all this borrowing. The cause of all this borrowing was certain other countries in the early 1970s where, under their tradition, there was a total prohibition against borrowing, but who actually advanced the money around. They did not seem to be so inhibited by it.
If it is immoral to lend and charge interest, then it must be equally immoral to borrow, and I think we move away from the ways in which we can cure this particular problem by looking at the moralities of lending or borrowing. What we have to do is to look at where we are today. It is a regrettable position with loans far too high, as we can see with all the virtues of hindsight. We have to look at ways to move forward step by step in order to help the third world countries. It would do very little good to the third world countries in the future if they were limited to the amounts of money they would get by grant aid alone and not by loans made in a prudent way.
This is a long way from this particular clause, because what it seeks to do is to establish a special regime for a certain kind of bank lending; that is lending overseas to foreign governments, their agencies and central banks, not to individuals but as what is known as "sovereign risk lending". Not only does it lay down notification requirements for each institution when its lending to foreign governments reaches 25 per cent. of its capital resources. It would also require the Bank, in consultation with the Treasury, to formulate a policy for each institution for such lending; and the clause apparently makes it an offence for an institution not to comply with that policy.
The Government maintain a keen interest in the resolution of the third world debt problem. We support the current strategy as proposed by US Treasury Secretary Baker in the autumn of 1985. This emphasised the importance of the pursuit of growth-oriented structural economic policies by the debtor countries. These policies are being pursued in conjunction with extra support from the international financial institutions—that is the IMF, World Bank and regional development banks—and from commercial creditors. This so called "Baker Initiative" was widely welcomed, and has shown some signs of bearing fruit.
Secretary Baker identified 15 countries as most affected by debt problems. Most are pursuing adjustment programmes to enhance their rates of sound growth; and are moving towards being able once again to raise funds in the market in more conventional ways. The international agencies are playing an important role, and I note for example that in the year to last June commitments from the World Bank to these countries have risen sharply, up some 38 per cent. Although, negotiations between banks and the debtor countries have often been tough, agreement

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on additional commercial finance has been reached between the banks and Mexico and Nigeria; and further rescheduling relief has been given to many other countries. All the prophecies of doom and gloom which we have heard on occasion in your Lordships' House have happily so far not come to pass.
The Government support the strategy in a number of ways. These include our support for the international financial institutions; the easements or deferment of the official debt burden through the Paris club group of government creditors; the restoration of export credit cover to debtors who have rescheduled debts and are pursuing adjustment policies; and the giving of economic aid to the poorest countries.
I recognise that the international debt problem continues to pose risks to the banking system. Nevertheless I am glad to note that the position of the banks has strengthened markedly over the past few years. With the strong encouragement of the supervisors, banks have raised their capital levels significantly and have increased provisions against doubtful international loans. They are in a far stronger position to cope with the uncertainties of the current world than they were a few years ago, although I have no doubt that the supervisors will continue to encourage further prudence where they judge this necessary.
Lending to foreign countries, and in particular to third world countries, is an important subject. It raises a number of issues. as I have indicated. But we must be careful not to be diverted from the Bill. This is a Bill concerned with the framework of prudential supervision of banks, and not with the resolution of a major problem affecting the economies of many developing countries. The Government are well aware of the debt problem, and so is the Bank of England, and I am sure that the worries voiced by Members of the Committee are fully reflected by the Bank in the conduct of its supervision. The Bank already obtains on a voluntary basis all the information necessary to monitor the position with regard to overseas lending, country by country, large debtor by large debtor. 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. I hope that all in the Committee will recognise this and will not pursue the amendment.
Lord Bruce of Donington: I should like, on behalf of those who sit behind me, to express our regret that the right reverend Prelate will not be in this Chamber with us for much longer. I should like to reassure him, if I may do so personally, that his last contribution here was a very notable one indeed. I regret that an endeavour was made to take some remarks made by the right reverend Prelate out of context and without regard to the broad general thrust of his argument.
I noted what the noble Lord, Lord O'Brien, said. I am very glad that on this occasion at least he did not venture the remark that I was somehow being offensive to the Bank of England. Indeed, on this occasion this amendment seeks to give the Bank extra powers—not the Government, as the noble Lord, Lord Harmar-Nicholls, indicated in his remarks. If he reads
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the amendment he will find that the powers for which I am asking are powers to be given to the Bank, which will, in respect of certain matters, consult the Treasury on the formulation of policy.
Lord Harmar-Nicholls: Subsection (6)(a) asserts that, if one reads it.
Lord Bruce of Donington: I think I have addressed myself to the noble Lord and I do not think he really misunderstands me in any way.
I was a little sorry that the noble Lord, Lord Elton, for whom I have great respect, referred to the undesirability of placing the Bank of England within a degree of inflexibility because it had to comply with the statute. I should have thought that on reading through the amendment I am commending to the Committee, he would have found that the Bank of England, subject to the normal process of consultation with the Treasury, has a great degree of flexibility. I can recall the argument, before Johnson Matthey, that any endeavour to cause the reporting of individual loan exposures by a bank would have been dubbed in exactly the same way, as a desire to constrain the Bank within certain limits.
It is precisely because there was a degree of undue flexibility in the case of certain banks that it has been necessary in Clause 38, to which we shall come, to lay down certain conditions. It was spoken of at some point in connection with the United Kingdom, as though the risk to which we were exposed—and which I hope the Committee will agree I did not seek to exaggerate—was adequate. I sincerely hope so, but European banks have made provision of some 30 per cent. to 50 per cent. of the exposures, whereas the larger British banks have made only between 5 per cent. and 10 per cent. provision for their exposures. The United States has set aside 5 per cent. or less. Without wishing to be unduly alarmist about this, I think we ought to consider whether the provisions that have been made against some of the loans I have mentioned are, in the Bank of England's view, adequate provisions for the purposes of this Bill, which after all is concerned with banking supervisions.
Lord Elton: While the noble Lord is on this point I wonder whether he can clear my mind of a question that I did not intend to ask him but which now has become relevant. As I read the amendent and the Bill, all the transactions referred to in the amendment would fall to be caught by Clause 38(1)(b), but he has added a new description to them to apply new criteria which the Bank may use to control them. If that is the case, then it is not necessary for him to argue the necessity for protection which he is now arguing for the British banks. That is why I and I think noble friends took it that the whole gravamen for his amendment was towards introducing a machinery to protect the developing countries from onerous—
Lord Bruce of Donington: May I—
Lord Elton: I hope the noble Lord will allow me to continue, because this is not Second Reading; we are in Committee. The whole gravamen of his amendment is to provide a machine by which the

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Government through the Bank of England can control private sector lending to public and private sectors in third countries. The purpose of my intervention earlier—I hope that if I can tempt the right reverend Prelate to his feet yet again it will simply be for the pleasure of hearing his voice positively for the last time.
Noble Lords: Oh!
Lord Elton: That was intended to be a friendly remark, not a prejorative one. My purpose in intervening then was to ask whether, in the view both of the Government and of the noble Lord on the Front Bench opposite, that is the proper way to control these exchanges. Is it not the function of government to intervene with their own funds and their own policy to protect or assist or in other ways co-operate with less developed countries and for them to do that within the climate created by the private sector borrowing, which the noble Lord, Lord O'Brien, described? The system would then be able to operate without this sort of intervention, and presumably more efficiently. It seems to me that there is a means both of helping the LDCs and of keeping the private sector working.
Lord Bruce of Donington: I am grateful to the noble Lord for his further explanation of his own point of view. All I will say is that the purpose of this amendment, which he may have misread, is rather different from Clause 38, which relates specifically to individuals and requires disclosure in certain well defined circumstances. All this amendment is seeking to do—I had rather hoped for the complete sympathy of the noble Lord—is to make sure that a policy is laid down according to the various circumstances—determined, by the way, on the initiative of the Bank of England and not that of the Government—as a means of applying guidance to those authorised institutions which under this Bill the Bank is responsible for supervising. Nor is it done in precise and inhibiting terms. It does not say what kind of policies. But as my noble friend Lord Oram has pointed out, it is necessary unless one accepts the position that unbridled free enterprise banking shall be responsible for the destiny of the world, without any rules whatsoever and without any governmental or intergovernmental intervention or guidance. Surely the amendment is perfectly reasonable.
The noble Viscount, Lord Chandos, withheld his approval from the thrust of this amendment, which did not particularly surprise me. At least on this occasion, because I am sure he was speaking for the Alliance, we know where he stands. I come back to the proposals contained in the amendment itself—
Lord Lloyd of Kilgerran: I hesitate to intervene at this stage and I apologise for arriving rather late. But let me say, before I ask the noble Lord, Lord Bruce of Donington, a question, that when I saw his amendment I found it very interesting from a general point of view and possibly a useful amendment to debate and consider. But what worries me is that the noble Lord has now said that the purpose of the amendment is to make sure that a policy is laid down as a means of applying guidance. He then went on to say something about the unbridled activities of free
64
enterprise. Would he not agree that it might be helpful to introduce into this amendment some details of the guidance that he has in mind, particularly in relation to technology and that aspect of loans that have been made? I take the view that some banks have gone wrong, if that is the correct expression to use, through inadequate knowledge and expertise in relation to technology in this age.
Lord Bruce of Donington: I am very sorry that in view of the time I cannot go through those parts of my original speech which, unfortunately, for very good reasons the noble Lord was not able to hear. The main purposes of this amendment have, I hope, already been adequately dealt with by me and I trust that they were clearly expressed. They appeared to arouse little antagonism, although some criticism.
I cannot accept the view of the noble Lord, Lord Young of Graffham, that things are improving to such a point that we have nothing or little to worry about. Those of us—and there are many—who have studied this aspect of the loan indebtedness of developing countries and of the countries of Latin America over the past few years, have reason to have grave apprehensions. The purpose of this amendment is to give the Bank of England powers to exercise a degree of what it conceives to be prudent discipline over the British banking community in order that the banks pursue policies, or are persuaded to do so, that are broadly consistent with the opportunity for the developing countries to recover and, at the same time, preserve the soundness of the banking system. I am very sorry that in the broadest national interest I must insist on pressing this amendment.
6.35 p.m.
The Deputy Chairman of Committees (Lord Murton of Lindisfarne): The amendment under consideration is the manuscript amendment, No. 60A, as an amendment to Amendment No. 60. The Question is that Amendment No. 60A be agreed to. As many as are of that opinion will say "Content"; to the contrary "Not-Content". I think the Not-Contents have it. Clear the Bar.
Tellers for the Not-Contents have not been appointed pursuant to Standing Order No. 51, and a Division therefore cannot take place. I declare that the Contents have it.
The Question is that the main amendment, Amendment No. 60, as amended, be agreed to. As many as are of that opinion will say "Content"; to the contrary "Not-Content". I think the Not-Contents have it. Clear the Bar.
6.39 p.m.
On Question, Whether amendment (No. 60), as amended, shall be agreed to?
Their Lordships divided: Contents, 43; Not-Contents, 96.

DIVISION NO. 1

CONTENTS

Ardwick, L

Boston of Faversham, L.

Birmingham, Bp.

Brockway, L.

Blease, L.

Bruce of Donington, L.

Blyton, L

Carmichael of Kelvingrove, L

65

Cledwyn of Penrhos, L.

Monson, L.

David, B.

Nicol, B.

Dean of Beswick, L.

Northfield, L.

Elwyn-Jones, L.

Oram, L.

Ewart-Biggs. B.

Phillips, B.

Galpern, L.

Pitt of Hampstead, L.

Graham of Edmonton. L.

Ponsonby of Shulbrede, L.

[Teller.]

[Teller.]

Hatch of Lusby, L.

Rea, L.

Heycock, L.

Ross of Marnock, L.

Irving of Dartford, L.

Russell, E.

Jeger, B.

Silkin of Dulwich, L.

Jenkins of Putney, L.

Stewart of Fulham, L.

John-Mackie, L.

Stoddart of Swindon, L.

Kilbracken, L.

Taylor of Mansfield, L.

Kirkhill, L.

Underhill, L.

Llewelyn-Davies of Hastoe, B.

Wheatley, L.

Lockwood, B.

Williams of Elvel, L.

Lovell-Davis, L.

NOT-CONTENTS

Alexander of Tunis, E.

Layton, L.

Ampthill, L.

Lindsey and Abingdon, E.

Beaverbrook. L.

Long, V.

Belstead, L.

Lyell, L

Blake, L.

Malmesbury. E.

Boyd-Carpenter, L.

Margadale, L.

Brabazon of Tara, L.

Marley, L.

Brougham and Vaux, L.

Marshall of Leeds, L.

Caithness, E.

Maude of Stratford-upon

Campbell of Croy, L.

Avon, L.

Carnock, L.

Merrivale, L.

Coleraine, L.

Mersey, V.

Colville of Culross, V.

Monk Bretton, L.

Colwyn, L.

Montgomery of Alamein, V.

Constantine of Stanmore, L.

Munster, E.

Cowley. E.

Murton of Lindisfarne, L.

Cox, B.

Newall, L.

Craigavon, V.

Nugent of Guildford, L.

Craigmyle, L.

O'Brien of Lothbury, L.

Cross, V.

Onslow, E.

Davidson, V. [Teller.]

Pender, L.

De La Warr, E.

Portland, D.

Denham, L. [Teller.]

Rankeillour, L.

Dilhorne, V.

Reigate, L.

Dundee. E.

Renton, L.

Eccles, V.

Renwick, L.

Elton, L.

Rochdale, V.

Erroll, E.

Russell of Liverpool, L.

Faithfull, B.

Savile, L.

Ferrers, E.

Sempill, Ly.

Fortescue, E.

Shannon, E.

Geddes, L.

Sharples, B.

Gibson-Watt, L.

Skelmersdale, L.

Gray of Contin, L.

Slim, V.

Greenway, L.

Somers, L.

Gridley, L.

Strange, B.

Hailsham of Saint Marylebone, L.

Strathclyde, L.

Sudeley, L.

Harmar-Nicholls, L.

Swansea, L.

Hesketh, L.

Swinfen, L.

Home of the Hirsel, L.

Torrington, V.

Hooper, B.

Tranmire, L.

Hylton-Foster, B.

Trumpington, B.

Kaberry of Adel, L

Vickers, B.

Kimball, L.

Waldegrave, E.

Kinnoull, E.

Ward of Witley, V.

Lane-Fox, B.

Whitelaw, V.

Lauderdale, E.

Wyatt of Weeford, L.

Lawrence, L.

Young of Graffham, L.

Resolved in the negative, and amendment disagreed to accordingly.
Clause 36 agreed to.
Clause 37: [Notification of acquisition of significant shareholding]:
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 61:
Page 28, line 21, after ("institution") insert ("incorporated in the United Kingdom").
The noble Lord said: This amendment relates to the clause dealing with notification of single shareholding introduced during proceedings in another place. The clause requires shareholding in an authorised institution of between 5 per cent. and 15 per cent. to be notified to the supervisors. Such significant shareholders are then subject to the powers to require information and to mount investigations which appear later in the Bill.
We have already debated the general purpose of these provisions, which is to provide an early warning system or trip wire for shareholdings which, while not amounting to a controlling shareholding, may nevertheless be significant, particularly in the sense of being a sign of the build-up of controlling shareholding. However, in the same way as the Bill's requirements for shareholder controllers apply only to United Kingdom-incorporated banks, which is clearly the area of concern, the provisions of this clause were also intended to apply only to significant shareholders in United Kingdom-incorporated banks. The amendment achieves that effect.
It would not be practical to retain a requirement for notification of 5 per cent. shareholdings in overseas institutions that were authorised in the United Kingdom by virtue of their branches there. A purchaser on, say, the New York Stock Exchange would not be likely to be aware of the provisions of this Bill. His transactions would be perfectly lawful in the United States. Any sanctions under the Bill could not be expected to be applied successfully to such an overseas purchaser. I beg to move.
Lord Williams of Elvel: This amendment obviously makes sense. I am glad that the Government are not trying to extend United Kingdom jurisdiction into foreign jurisdictions. Nevertheless, I wonder whether it covers fully the point that the noble Lord is getting at. I understand that if the amendment is accepted the authorised institution has to be incorporated in the United Kingdom. If it is incorporated in the United Kingdom but is the subsidiary of a foreign institution—an American, Spanish or French bank or whatever it may be—and if a significant shareholder of, say, 5 per cent. is introduced, does that transaction fall under the clause as amended, if the government amendment is accepted? In that case it may well encounter the same problem as we had before in that the US institution which is taking 5 per cent. of the bank incorporated in the United Kingdom may not he aware of the requirements.
I can see the point of the amendment. All I am asking is whether the amendment succeeds in doing what the Government expect.
Lord Beaverbrook: Yes. The instance portrayed by the noble Lord would be covered under the amendment.
On Question, amendment agreed to.
Clause 37, as amended, agreed to.
Clause 38 [Reports of large exposures]:
Lord Elton Lord Elton moved Amendment No. 62:
Page 30, line 17, leave out ("it") and insert ("its central management").
The noble Lord said: I am sure that we should all like to dispose of this amendment before dinner, and I shall be as brief as I can. An offence is described in subsection (1) of Clause 38 which looks quite simple on the face of it, and it also appears fairly clear who is culpable if it is committed. However, if you look at it more closely the whole matters falls into doubt. The amendment is intended to enable the Government to resolve that doubt if they can, and if not to amend the Bill themselves.
The offence is a failure to report single transactions of certain kinds and values with single persons. That is in subsection (1). When we move from subsection (1) to subsection (2), however, we find that a transaction falls to be treated in the same way if it is not a single transaction with a single person but a series of transactions with,
"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".
Unqualified, of course, the description of interdependence would embrace almost every institution operating in the same monetary system, and the Bank is therefore properly given the power of definition which appears in subsection (6).
My first concern is this. No matter how simple the criteria eventually set out by the Bank under subsection (6) to describe what is and what is not a connection within the meaning of subsection (2), the arrangements to which those criteria are applied will be very far from simple and the authorised institutions which must comply with the clause on pain of criminal prosecution in default will have to understand those arrangements just as well as they understand the criteria if they are to stay within the law. The authorised institutions with which we are dealing are themselves very large and complex organisations, often operating through many subsidiaries in several different countries, and incidentally must comply with the often very different laws of those countries as well.
If the Bank so chooses—and we must assume that it will—those subsidiaries are aggregated with their parent institution even if they are not themselves authorised institutions in their own right by the operation of subsection (3) of the clause. So what we have is a large and complex organisation carrying out transactions world-wide with other large and complex organisations. It will of course be aware of the connections between its own parts but it will not always and necessarily be aware of the connection between the parts of other organisations, or indeed connections set up by binding but confidential agreements between different organisations with which it is conducting business at the same time.
Thus far in my explanation my noble friend could (and perhaps he is planning to) set my mind at rest by referring to subsection (9), in lines 16 to 19 of which ignorance is made a defence. The authorised institution is permitted to plead, if charged with criminally failing to report a transaction, that it did not know of
68
the connections linking a number of smaller transactions below the 10 per cent.-plus or the 25 per cent.-plus threshold and bringing them collectively above it. The question of when ignorance ceases to be a just excuse and becomes the fruit of culpable negligence is a nice one, but we need not pursue it here. My question is not: when is ignorance permitted? It is: to whom is it permitted?
I shall give the simplest of examples. An institution lends to separate borrowers in three different countries. It may do so through subsidiaries. None of the loans, even when aggregated with past advances, comes above the threshold. Nor would two of those loans together so do. But all three would. Suppose that the borrowers were connected according to the criteria laid down by the Bank under subsection (6). Suppose that both the authorised institution and its subsidiaries understand those criteria; and suppose, finally, that each of the subsidiaries is aware of the connection between its client and the client of one of the other subsidiaries, but that none of them is aware of the second connection and none of them therefore has alerted head office.
In this simple case the knowledge of every transaction was present within the corporate person of the authorised institution upon whom the duty is laid to make the knowledge known to the Bank. It would also, if it were prudently run, be available at its head office responsible to the Bank within the clause. The knowledge of all the three connections which together brought the transactions above the threshold and within the scope of the duty created in subsection (1) was also within that body corporate but that knowledge was not itself aggregated and not therefore passed up to head office.
What I do not know—and this is one of the questions I ask my noble friend to answer when he replies—is whether the possession of information of itself comprises knowledge within the meaning of the Bill or whether that information does not become knowledge until it is aggregated? Does knowledge consist of the possession of all the necessary information by one physical person, or one corporate person, or by a class of persons within that corporate body, or by a particular person with a particular responsibility, such as a member of the main board of the institution?
My amendment very probably does not resolve this question but I think it is necessary for us to know, first, when an offence is committed because the knowledge exists; and, secondly, who is answerable and who must therefore carry the label of the criminal offender for which the penalties are modest in the Bill but very considerable in terms of a banking career. I beg to move.
Lord Beaverbrook: I understand my noble friend's concern in this matter, but I am advised that the amendment is not necessary. As a corporation has no physical existence and can act or form an intention only through its directors or employees, the common law has developed satisfactory rules to cover the point. The noble and learned Lord, Lord Denning, stated the principle in a judgment in the Court of Appeal. With the leave of the Committee, I shall quote:
"A company may in many ways be likened to a human body. It has a brain and a nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions

69
from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such".
It will therefore be only in cases where knowledge can be imputed to the management—that is to say, a director, manager, secretary or other similar officer, or a senior employee to whom their functions are delegated—that an offence will be committed. It will be a matter for the courts to decide in each case whether, on the particular facts, the knowledge reached a sufficiently senior level for the defence to be unavailable.
As I have said, the general law deals adequately with the question of when a company can be said to know something. Beyond that, I feel it would be a matter for judgment in individual cases, and therefore there is nothing more in the way of rules with general application that need be offered.
In the example given by my noble friend Lord Elton, it would not be until the information is aggregated at a sufficiently senior level that knowledge would result. I hope that my noble friend will feel reassured by my explanation and will be able to withdraw his amendment.
Lord Elton: That was probably a very helpful answer and I am sure I will find it more helpful still when I read it again. I hope my noble friend will take advantage of the available elasticity of Hansard to insert the name of the judgment which the noble and learned Lord gave, because I do not think he actually read it out. I am sure that will be useful to people following this debate. I am obliged to my noble friend and I shall read his reply with interest. I ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
On Question, Whether Clause 38 shall stand part of the Bill?
Lord Williams of Elvel: Before we leave this clause may I quickly ask the noble Lord to confirm that my understanding is correct? In Clause 38(1)(b), the Bill as drafted refers to,
"risk of incurring losses in excess of 25 per cent. of those resources".
Will the noble Lord confirm that that includes losses on foreign exchange transactions and that the extent of the risk involved in foreign exchange transactions, which is normally considered to be much lower than that on credit transactions, will be determined by the principles published by the Bank which come in Clause 38(6)? If that is the case, and I think it is, that is a departure from current practice where the principles on risk exposure, particularly on anything other than 100 per cent. exposure on a credit, are a matter for discretion. Now they have become a matter for statute, as it were, with a criminal penalty attached in the case of breach.
Lord Beaverbrook: With regard to the question of the noble Lord, Lord Williams, on foreign exchange transactions, the answer is, yes, to the point about the
70
25 per cent. exposure. Secondly, on the principles of the Bank under Clause 38(6) the answer to that is also, yes; that it is followed.
I will have to write to the noble Lord on his third point as I wish to look into the matter more closely before answering.
Clause 38 agreed to.
Viscount Long: I think it will be convenient for the Committee to adjourn until 8 o'clock, when we can return to the Bill. I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.

Registered Establishments (Scotland) Bill
Brought from the Commons; read a first time, and to be printed.

Civil Defence (Grant) (Amendment) Regulations 1987
7.3 p.m.
Lord Beaverbrook Lord Beaverbrook rose to move, That the draft regulations laid before the House on 4th March be approved. [14th Report from the Joint Committee]
The noble Lord said: My Lords, I beg to move that the draft Civil Defence (Grant) (Amendment) Regulations and Civil Defence (Grant) (Scotland) Amendment Regulations 1987 be approved.
These regulations—which have been considered by the Joint Committee on Statutory Instruments—have the common purpose of increasing the rate at which civil defence specific grant is payable in support of staff costs. The Scottish Regulations have some additional provisions applicable only north of the Border. I shall mention them in a moment, but should like to concentrate first on the primary purpose of the regulations.
Under the Civil Defence (Grant) Regulations 1953 —and their equivalent in Scotland—specific grant is payable to local authorities (and to fire, police and water authorities) in support of the expenses they incur in carrying out their civil defence functions. Grant is payable at either 75 per cent. or 100 per cent. The balance between the two rates of grant has been changed over the years and a number of categories of expenditure are fully reimbursed already: principally the provision of communications equipment, expenses relating to staff training and exercising, and the use of volunteers. The proposal now is to add staff costs to that list.
Local authorities have substantial and important responsibilities under the Civil Defence (General Local Authority Functions) Regulations 1983. They must prepare plans on specified subjects, provide emergency centres, train staff, take part in exercises and make use of volunteers. The consistent fulfilment of those responsibilities is vital to the preparedness of the country as a whole.

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Last year the Government made an assessment of progress so far in the implementation of the 1983 regulations. A number of local authorities have done a great deal, but much remains to be done and the range of achievement between different authorities is great. To encourage further and more consistent progress the Government have issued a planned programme for implementation of the regulations. This is a rolling three-year programme setting broad priorities and providing a framework for systematic monitoring of the work of local authorities. Within this framework there will be annual discussions with individual authorities.
This will mean that the Government's expectations can be clarified, and difficulties encountered by local authorities can be resolved. But no local authority can be expected to respond satisfactorily without an adequate number of staff and it is clear that many do not presently have enough emergency planning officers to enable them successfully to tackle the range of tasks set out in the regulations.
Local authorities must balance many conflicting demands on their resources. There are difficulties in appointing emergency planning officers and maintaining these posts. The Government believe that further help and encouragement is needed to help ensure that crucial emergency planning tasks are properly addressed.
The Government are not simply throwing money at the problem and there will be no uncontrolled explosion of local authority manpower. Under the civil defence legislation prior approval must be sought for all grant eligible expenditure. What is more, the detailed annual discussions with individual authorities I described earlier will allow a very close examination of their staffing needs. The controls are there to ensure that proper value for money is maintained.
I now return briefly to the distinctly Scottish provisions in the draft regulations. The proposed amendment to Regulation 1 is for the purpose of clarification. First, it makes clear that grant is properly payable for the civil defence functions of police authorities. Secondly, it restates in clearer form the circumstances in which civil defence grant is not payable; namely, when the relevant expenses would in any event have been incurred by the authority even if specific civil defence functions had not been conferred on it. The proposed amendment to Regulation 6 will allow grant to be withheld from any local or police authority in Scotland which fails to provide the Secretary of State with information about its civil defence activities at his request. This does no more than put the grant arrangements in Scotland on the same footing as already exists in England and Wales. The objective is to ensure that government can be informed about an area of local or police authority activity supported by specific grant, particularly when the intention now is to support so substantial a proportion of that expenditure with 100 per cent. grant.
Taken as a whole, these regulations constitute a useful boost to central government's support for important emergency planning work in local authorities, fire brigades, police forces and water
72
authorities. That support is already considerable, but in the key area of staffing the Government believe that they can and should do more. I commend these regulations to your Lordships' House. I beg to move.
Moved, That the draft regulations laid before the House on 4th March be approved. [14th Report from the Joint Committee]—(Lord Beaverbrook.]
Lord Mishcon: My Lords, I am sure that those present in your Lordships' House at the moment will welcome the regulations. Indeed, local authorities outside the House will equally see that the Government are supporting the very essential civil defence work that those authorities ought to do. We pray that they will never have to use those powers in an emergency regarding civil defence. On these Benches we think that the regulations come appropriately and we are glad that full 100 per cent. grants will be made in the circumstances that the noble Lord, Lord Beaverbrook, so clearly explained.
I wish to put a couple of questions. I should know the answer to the first, but I do not. The noble Lord said that at present the two amendments to which he referred in the Scottish regulations were operative in regard to the United Kingdom outside Scotland. I was looking particularly at the regulation that now applies to Scotland which states that grant would not be available where the authority concerned would have incurred relevant expenses in the exercise of non-civil defence functions. Can the noble Lord confirm—and again I apologise for my ignorance—whether this is a regulation applicable outside Scotland; in other words, that the grant is not available where there is the exercise of non-civil defence functions by staff?
If that is so, I pass to a question in respect of which I do not think I have to apologise for my ignorance. Does it mean that where civil defence staff deal with a local emergency—the kind referred to by the noble Lord, Lord Renton, in the past when I have been pleased to support him from these Benches, or the kind to which I have referred when the noble Lord, in his great kindness, has been pleased to support me—there will be a deduction from the grant in regard to expenses paid for staff? I am here referring to staff who have dealt with a local or even a national emergency which does not come strictly within the definition of civil defence?
Subject to those two matters, we, on these Benches, welcome the regulations.
Lord Renton: My Lords, I, too, welcome the regulations and I am very glad that the noble Lord, Lord Mishcon, asked those questions. I wonder whether I may broaden the subject a little. Local authorities are required by law to help protect their people in the event of any serious emergency in war, and indeed, as I understand it, in peace as well, although that comes under different legislation. In these days, peacetime emergencies include industrial accidents, which can occur on a vast scale such as happened at Flixborough in Lincolnshire and at Bhopal in India, where I happened to be last month.
Peacetime emergencies also include the danger of radioactive fall-out from explosions at nuclear power

73
stations, whether on the Continent or in this country. It is a solemn thought that the explosion at Chernobyl, which is well south in Russia, only a few miles north of Kiev and the Ukraine, caused traces of fall-out to appear even in the North-West, the west and southwest of Scotland and in north Wales; so much so that for some weeks farmers from those regions were not allowed to sell their sheep.
It is quite useless for some local authorities to say that they will not worry about fall-out in peace or war and that their areas are nuclear-free zones. That is nonsensical and irresponsible. We have not yet had a major nuclear accident in the United Kingdom but there are now scores of nuclear power stations on the Continent and we may as well be prepared for the worst while hoping for the best.
Civil defence does not cost much. The Government already pay 100 per cent. of the cost of a number of services that have been mentioned and about which I shall say a little more in a moment. They pay 75 per cent. of the cost of the rest. I wonder whether, when replying to the debate, one of my noble friends can confirm my understanding that last year the whole body of local authorities in England and Wales had to find only £4 million towards the cost of what is now called civil protection but is sometimes still known as civil defence—a solecism perpetuated by these regulations. It means only a few coppers per man, woman and child in the whole of England and Wales, and I do not think it costs any more in Scotland.
When these regulations have been passed—indeed, in the coming financial year—local authorities in England and Wales will only have to find £1 million as their contribution towards the much larger cost of maintaining these arrangements for dealing with emergencies in peace and war that is borne by the taxpayer. The sum of 1 million is chickenfeed.
In order to protect our people in the event of peacetime and wartime hazards, there are four essential requirements. First, there must be a professionally efficient but fairly small number of public officers, including various specialists. To the extent that those people are solely performing their functions under the civil defence regulations, their salaries will be met 100 per cent., and so will their expenses. Secondly, we need a large number of volunteers. The arrangements for training and organising volunteers already attract 100 per cent. grant. Thirdly, we need enough of the right kind of equipment, especially communications equipment, for those concerned to use, and that carries 100 per cent. grant. Fourthly, and by no means least, every civil defence or civil protection authority—that is, every county and every joint authority for fire and civil defence purposes—should have a purpose-built operating centre. Most of them have such a centre; some are in mothballs. I do not know what some authorities have done with them, but all authorities need such a centre. Those are the four essentials.
I should like to congratulate the Government for easing the burden on local authorities and their ratepayers to the tremendous extent that they have done already and, in addition, by these regulations. Of course the fact that the burden is now so negligible provides no excuse whatever for any local authority of
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any political complexion to refuse to carry out the duties laid upon it by Parliament.
I should like to ask my noble friend this question: which local authorities are still not fulfilling their duties? If he is not able to tell us now, I hope that an early opportunity to do so will be taken by the Government in order to inform the public, and in particular the people whom local authorities have a duty to protect, so that everyone knows. My noble friend may not be able to answer my next question yet. although most of us know the answer because it is in the statute. What will be done about those local authorities which fail to do what is required of them?
My last two questions are purely technical and relate to the form of legislation. As I said, civil defence is now becoming known as civil protection. Those working in the field know that. The National Council for Civil Protection, of which I have the honour to be president. changed its name last year from the National Council for Civil Defence. When will the Government put that technically right so that, even if we do not amend the name of Civil Defence Act we at least provide that the regulations are known as civil protection regulations? I cannot expect answers to those questions now because they will have to be considered. They are questions to be answered by the Government in due course following usual, mature consideration. Has not the time come to consolidate these regulations and re-name them civil protection regulations?
7.15 p.m.
The Earl of Dundee: My Lords, we have had a welcome opportunity to address civil defence issues. I am grateful to the noble Lords who have commented on them. I shall begin with the comments of the noble Lord, Lord Mishcon, who asked me whether the arrangements to withhold grant for aspects of civil defence, which would go ahead irrespective of civil defence responsibilities, apply outside Scotland. The answer to that is that they do. This is a separate measure to provide clarification in the Scottish Regulations. However, there is already a power for Scotland, as there is for England and Wales. Thus the present Scottish measure is for clarification only.
Lord Mishcon: My Lords, I hesitate to interrupt the noble Earl. I hope that he will not feel that I am being discourteous. Can he tell me, if not now, by letter, what provision makes that measure applicable outside Scotland? He broadly said that that happens to be the position outside Scotland. Will he refer to the regulation, measure or provision in some statute where that is clearly laid down? I shall understand if he cannot do that now.
The Earl of Dundee: My Lords, I am grateful to the noble Lord. I shall write and give him the details, but I can assure him that the matter has been covered for England and Wales.
The noble Lord also asked me about staff involved in peacetime emergencies. There is no financial provision. The Civil Protection in Peacetime Act 1986, in which my noble friend Lord Renton played such a useful part, allows civil defence resources to be used for peacetime emergencies. The provision is aimed at expenditure that would be incurred by local authorities with no civil defence responsibilities; for

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example, the basic cost of maintaining a fire brigade. A fire brigade would be useful in war but it would be needed in any case in peacetime.
Lord Mishcon: My Lords, I am being a nuisance and I apologise for intervening, but these matters are of some importance. The Minister is being his usual helpful self. I asked whether members of staff, who are being paid for by a 100 per cent. grant by the Government in the civil protection department, and who are called out on a civil emergency and spend, for example, three days out of one week dealing with that civil emergency, would have their salary for the three days, which is not civil defence, deducted for the purpose of grant? It would seem to be absurd if that were the case. That was the question I was asking.
The Earl of Dundee: My Lords, I am grateful to the noble Lord. I appreciate the point that he makes. The financing of an example such as he gave comes out of the rate support grant. I shall of course draw his comments to the attention of my right honourable friend.
I am also grateful to my noble friend Lord Renton. It may be helpful if I give some figures. Local authority civil defence expenditure for 1986–87 is expected to be about £19 million, of which £16.9 million is for England and Wales. That is 33 per cent. greater than for 1985–86 and 118 per cent. more than the expenditure level in 1981–82. It reflects a steady improvement in the level of civil defence preparedness and confirms the Government's commitment to civil protection.
A report on local authority preparedness was made available last July and a copy is in the Library. It makes it clear that, despite encouraging progress in many areas, a great deal remains to be done.
I am not aware that any local authorities with nuclear-free zones are actually refusing to meet their statutory obligations. A planned programme for implementation, and monitoring will help ensure that all local authorities fulfil their responsibilities. We see the way forward as a partnership between central and local government. There is a vital role for local councils to play.
Lord Renton: My Lords, I am reluctant to interrupt my noble friend. From my local knowledge of East Anglia, I am aware that the borough of Cambridge and the town of Peterborough are still calling themselves nuclear-free zones. I cannot say to what extent they are refusing to fulfil their responsibilities. There is non-co-operation to the extent that they have failed to provide proper control centres.
The Earl of Dundee: My Lords, I am grateful to my noble friend. The areas that he mentioned and others continue to take that line. However, the Government are confident that the present measures—the PPI and the regulations—which provide improved grant, will see a greater level of co-operation than has perhaps been evident until now. Local councils have a vital role to play in an emergency. They have resources which they could put to good use and a host of useful contacts with local bodies, communities and voluntary
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organisations, all of which would have a central function to fulfil. It is for central government to provide encouragement, guidance and support. This we have done and are continuing to do.
We have made additional resources available since this Government came to power, and expenditure is now running at about £100 million a year, with some £19 million of this spent by local authorities, as I mentioned a moment ago. This local authority spending has been supported by civil defence grant and with your Lordships' approval of the draft regulations before you the major part of local authority spending on civil defence will enjoy full Exchequer support.
I believe that the regulations will be welcomed by those authorities which have taken their responsibilities for civil defence seriously in the past and which will continue to do so with the continued support that we propose to offer. I hope that other authorities which may not have been committed to the extent we believe necessary will be encouraged to implement more progressively the civil defence functions that Parliament has laid on them. I have already expressed this hope to my noble friend Lord Renton.
That is the purpose of the planned programme for implementation of the civil defence regulations to which my noble friend Lord Beaverbrook referred in his opening remarks. There are encouraging signs that local authorities are now looking constructively at the state of their preparedness and how this can be improved. We shall be watching the situation carefully in the future to see how we can ensure that work is taken forward and that we get the best value for money in terms of the protection of the public. The additional support for staffing to which these regulations would give effect is particularly important for the preparation of civil defence plans, which we see as a major priority for action to remedy the deficiencies in our present situation.
There are many benefits to be secured from this additional encouragement. Not only shall we be better prepared to help the population in wartime—which is the principal objective of civil defence grant—but these civil defence preparations will also help to provide civil protection to deal with peacetime emergencies. Civil protection in peacetime is not, however, an alternative to civil defence against hostile attack. The one is bound up with the other. The resources which are provided for civil defence can be used to protect the population in a peacetime emergency, and the plans made for civil defence can be prepared in order to cater also for peacetime emergencies.
This approach to emergency planning—which is known as the "All Hazards Approach"—was made possible by the Civil Protection in Peacetime Act which my noble friend Lord Renton introduced to your Lordships last year and which received Government support as well as a sympathetic response from all sides of this House. I believe that these regulations, which provide further encouragement to local authorities in their civil defence functions, should enjoy the same measure of support. I commend the draft regulations to the House.
On Question, Motion agreed to.

Civil Defence (Grant) (Scotland) Amendment Regulations 1987
7.33 p.m.
Lord Beaverbrook Lord Beaverbrook rose to move, That the draft regulations laid before the House on 4th March be approved. [14th Report front the Joint Committee]
The noble Lord said: My Lords, I beg to move.
On Question, Motion agreed to.
Lord Beaverbrook: My Lords, I beg to move that this House do now adjourn during pleasure until 8 o'clock.
Moved accordingly, and, on Question, Motion agreed to.
[The sitting was suspended from 7.34 until 8 p.m.]

Banking Bill
House again in Committee.
Clause 39 [Power to obtain information and require production (#. documents]:
Lord Strathclyde Lord Strathclyde moved Amendment No. 63:
Page 31, line 39, leave out ("or subsidiary") and insert (', subsidiary of related company").
The noble Lord said: In speaking to this amendment, I should like to speak also to Amendments Nos. 65, 70 to 75 and 110A. Although these are relatively technical amendments, they are no less important for being so. They were first proposed in another place by the honourable Member for Richmond and Barnes but were withdrawn to consider the Government's response. They are supported by the Chartered Institute of Accountants of England and Wales.
The problem lies in the fact that, when the Bank of England or the authorised qualified person is sent to investigate an institution, it is limited to investigating the holding company or subsidiary of the institution as laid out in the current provisions in the Bill—in other words, those companies in which the parent has a 50 per cent. shareholding or more—but subsequent investigations may show up transactions by an associated or a related company. These transactions could not be investigated because they come below the 50 per cent. threshold. Therefore, this is a loophole by which institutions can avoid investigation.
Under the Companies Act 1985, an associated or related company is deemed to have an element of control where a parent has a shareholding of 20 per cent. or more. Since that is the case under existing law, surely those companies should come under the investigating powers of this Bill. These amendments include associated or related companies as defined under the Act—those with shareholdings of 20 per cent. or more—and fit them into the relevant sections of the Bill. Then if or when the time comes that they need investigation, the investigating authorities can follow through. The net effect would be to make investigations more meaningful and ultimately fairer. I beg to move.
Lord Williams of Elvel: I am grateful to the noble Lord, Lord Strathclyde, for moving his amendments and explaining them. When he put down this amendment I was uncertain whether "related company" included an associated company, but he says that it does. I am now uncertain as to whether it moves upwards as well as downwards. I can understand that outside a group in terms of the Companies Act it is sensible to have powers of investigation into a company that is not controlled in the full Companies Act sense of the term. I am wondering whether he means by "related company" a company that is a shareholder which has a relation with the authorised hank into which it is to conduct the investigation. No doubt the Minister will be able to satisfy us all that this is either covered by the Bill or else that it requires the amendment in question.
Lord Beaverbrook: In supporting the amendments of my noble friend Lord Strathclyde, I can confirm that these amendments slightly widen the power under Clause 39 for obtaining information by including "a related company" among the connected companies from which information and documents can be obtained. A related company is defined in the Companies Act. It is, in brief summary, a company in which the authorised institution holds 20 per cent. or more of the nominal value of the shares in the company. The amendments also significantly widen the reach of the powers of investigators appointed under Clause 41 to include companies in which the authorised institution or its shareholder controllers have a 20 per cent. or more stake, rather than just 50 per cent. as is the case with the Bill as it stands.
As a general rule, the information which the Bank needs for supervision will be provided by the authorised institution whether it relates directly to the institution or to a closely connected institution, but there could be circumstances in which the Bank could not obtain adequate information via the parent bank. The Government recognise these risks and accordingly the Bill already provides for powers to obtain information from subsidiaries, holding companies, subsidiaries of holding companies and companies in which shareholder controllers have a 50 per cent. or more stake. Investigators appointed under Clause 41 may also investigate such companies. However, as my noble friend, Lord Strathclyde has pointed out, the scope of the powers is limited and does not extend to other connected companies whose state and activities may be highly relevant to the health of the authorised institution. The Government agree with that and thus support my noble friend's amendments. The choice of 20 per cent. as against the 50 per cent. at present in the Bill is perhaps somewhat arbitrary, but, in the Government's view, it represents a substantial stake and is in line with United Kingdom accounting practice. As I said previously, the Government agree with my noble friend's amendments and support them.
Lord Williams of Elvel: Perhaps I may respond to the Minister and say that I think he is right. On the whole, I believe that these amendments are right. Nevertheless, it would be wrong to allow the amendments to be accepted as they are by the Government without noticing, as the noble Lord has

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said, that they constitute a wide extension of the powers of the Bank. If an authorised institution has 20.5 per cent. in a company, which brings it into the related company provisions, it is subject to Clauses 39(1) and 39(2). In other words, the Bank may serve notice and make an investigation, and may appoint an accountant or other person to make an investigation. It lays an onus on those companies which, for one reason or another. may be 20.5 per cent. controlled by an authorised institution to conduct their affairs in a way which has to have regard to that particular shareholding rather than the generality of its shareholders.
From the Opposition side, I have no particular objection to that. I just wish it to be formally noted that that is the Government's position and that they are prepared to extend the provisions of Clause 39 with the onus of subsections (1) and (2) on to companies who may, for one reason or another, find themselves 20.5 per cent. owned by an authorised institution. That could happen as a result of an underwriting which is an underwriting stick. It could happen in all sorts of circumstances on which I would elaborate if I had more time. But we have to be aware that this is a widening of the legislation, which I do not oppose but of which I think we should take note.
Lord Beaverbrook: The Government would agree that there is a limit to how far information and investigation powers should go. As I have already said, the Government consider that my noble friend's amendments have that balance about right.
Lord Strathclyde: I should like to thank the noble Lord, Lord Williams, for what he has said. The point is that even though a subsidiary or related company may find itself in the position of being owned 20 per cent. by an authorised institution it should have nothing to fear so long as there have been no transactions worth investigating by the authorised person. Therefore, these amendments will not prove to be as onerous as he may suggest.
Lord Williams of Elvel: May I ask the noble Lord and indeed the Government what will happen if there is an underwriting stick and there is a rights issue by a company which is underwritten by an authorised institution which does not sell in the market, as a result of which the authorised institution finds itself in the position of controlling 20.5 per cent. of a company? This can happen. In the past, it has happened. If the authorised institution is. for one reason or another, under investigation, is it proper and right that the related company which, through no fault of its own, has gone to that authorised institution for the underwriting and finds itself temporarily perhaps a related company should be in that position?
Lord Beaverbrook: I cannot believe that in the real world the authorised institution would not have disclosed to anyone who was underwriting an issue of stock of its shares the material fact that it was under investigation.
Lord Williams of Elvel: All that may be true, but all these things can be said after the event. An authorised
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institution conducts its affairs in whatever manner it decides. It may decide to underwrite. Then there is an underwriting stick which takes a month or two to work itself out. In the month or two, the authorised institution comes under the provisions of Clause 39. There is a very minuscule technical point here, but it is something to which I should not like companies to be subject unless the Government are doing it with their eyes open.
Lord Beaverbrook: As I have said, any institution doing such underwriting should be aware of the possibility of it ending up with a stake of more than 20 per cent., if indeed it had underwritten an issue of shares to that extent. However, I point out that the Bank can only use the powers under Clause 39(1) in the interests of depositors. If an underwriting unfortunately got left with the underwriters, it is very unlikely in those circumstances that the Bank would need to use its powers.
On Question, amendment agreed to.
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 64:
Page 31. line 44, after ("entitled") insert ("directly or indirectly")
The noble Lord said: This is a very short amendment which is also concerned with the exercise by the Bank of its powers under Clause 39 with particular reference to subsection (6)(d) which states:
"a body corporate in the case of which a shareholder controller of that institution, either alone or with any associate or associates, is entitled to exercise, or control the exercise of, more than 50 per cent. of the voting power at a general meeting".
All that I seek to insert immediately following "entitled" is "directly or indirectly". It would then read:
"is entitled directly or indirectly to exercise, or control".
The noble Lord may say that the existing wording is sufficient. If he tells me so, I shall immediately accept it.
Lord Beaverbrook: I am grateful to the noble Lord for putting down this amendment. I have looked at it very carefully. The Government's view is that Clause 39(6)(d) already covers the two cases where the shareholder controller himself or itself directly controls the voting rights or does so indirectly through a subsidiary of the company of which he has direct control. That is the meaning of "control the exercise or' in subsection (6)(d).
It may be helpful if I gave an example. A person who is a shareholder controller of a bank is also a shareholder owning 70 per cent. of the voting shares in a company. The shareholder, through his power to appoint and dismiss all the directors of the company, would effectively be able and entitled to control how that company exercised the voting rights attaching to any shares which it owned. Thus, where that company owned over 50 per cent. of the voting shares in another company, the shareholder in the first company would have indirect control of the second company and would therefore fall within the terms of Clause 39(6)(d).
I hope that that explanation is helpful to the noble Lord and that he will be able to withdraw his amendment on that basis.
Lord Bruce of Donington: I am glad to accept the explanation offered by the noble Lord and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
8.15 p.m.
Lord Strathclyde Lord Strathclyde moved Amendment No. 65:
Page 32. line 6, leave out ("50") and insert ("20").
The noble Lord said: I have already spoken to this amendment with Amendment No. 63. I beg to move.
On Question, amendment agreed to.
Lord Elton Lord Elton moved Amendment No. 66:
Page 32, line 17, after ("or) insert ("or who is a significant shareholder in relation to").
The noble Lord said: It may be for the Committee's convenience if I speak also to Amendments Nos. 68 and 69. All these proposed new provisions relate to significant shareholders; and we have discussed at some length who they are.
It was in Committee in another place that Her Majesty's Government conceded that shareholdings of this order could be a matter of concern. At Report stage, they introduced into the Bill requirements on those acquiring such holdings to notify the Bank of their acquisition. They also provided in Clause 39 for the Bank to acquire information. That power resides in Clause 39(1) and (3) and is exercised by the service of a notice.
However, it will be noticed from page 30 line 36 that the notice can only be served on an authorised institution—not upon an individual shareholder. It is true that in subsection (9) the power is widened a little. The Bank is there empowered to serve a notice demanding information from,
"a director, controller or manager".
That will bring in the 15 per cent. shareholder, but there is still no power to serve a notice on, and so get information from, the significant shareholder who has a shareholding of 5 to 15 per cent.
My noble friend Lord Young of Graffham laid so much emphasis on the availability of this information when he was resisting my amendment to give the Bank some control over these people that my interest is sharpened as to why the power to get that information from the people themselves is not in the Bill.
The implication of this to directors as such, controllers as such and managers as such, specifically in subsection (9), is that the Bank can only serve notices on classes of person listed in the clause. There is no point in listing them unless the purpose is to say that these are the people from whom the information can be obtained. The list stops short of the significant shareholder.
The Government have already said that they think that the information should be obtained in another place and have said in this place how important it is that it should be obtained. My amendment is to enable them to save their embarrassment by enabling them to obtain the information.
Lord Young of Graffham: I am grateful to my noble friend Lord Elton. I believe that I can at long last give him some comfort on the points about which he is
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concerned. He is clearly concerned that the supervisors should be able to obtain information and documents from significant shareholders as defined by the Bill. That is already provided for in subsection (10) of Clause 39 which gives full powers to the Bank to acquire such information or documents as it considers necessary. I understand my noble friend's concern that the power to obtain information should be exercised in respect of the significant shareholder directly and not simply that the Bank in which he is a shareholder is required to provide information. I am assured that this is indeed the effect of the drafting of Clause 39. Indeed the Bill goes further. I draw my noble friend's attention to Clause 41(5) where he will see that significant shareholders may also be subject to investigation by investigators appointed under that clause.
Lord Elton: I am grateful to my noble friend especially for his latest reference to Clause 41 (5) which I shall look at in conjunction with his earlier speech. I should like my noble friend to explain a little more fully why it is that significant shareholders are not included in the catalogue of people who may be interrogated under subsection (9). They are presumably for some specific reason shunted into Section 10. The difference between Sections 9 and 10 should presumably give a clue to the reason for putting them there. The difference appears to be that in this case, but not in the other, the Bank considers that the exercise of those powers is desirable in the interests of depositors or potential depositors of that institution. That test does not appear in subsection (9) and I remain interested to know why it is applicable in that case but in no other. It is obviously a carefully thought out piece of drafting.
I am speaking at length on the assumption that my noble friend will need a little support in answering my question. I notice that no such support has yet to come to his hand. I am aware of the difficulties in which one finds oneself in this situation and I am prepared to carry on talking at some length until that support is given.
Lord Williams of Elvel: I am astonished that the noble Lord, Lord Elton, should think that the Secretary of State needs any support on this issue. It seems to me that the Secretary of State is perfectly able to respond to the intervention of the noble Lord without any support whatsoever.
Lord Young of Graffham: I am extremely grateful to my noble friend and I should also like to express my gratitude to the noble Lord, Lord Williams of Elvel.
Inspiration has suddenly struck me from on high that the power to acquire information applied to significant shareholders by Clause 39(10) is dealt with in a different way because that power is wider and more specific. The reason is that controllers are subject to the full prudential requirements of the Bill and full sanctions or removal or revocation. Much flows from that in terms of supervisors' ability to obtain information or co-operation generally in a way that does not apply to significant shareholders. The information requirement for significant shareholders is made more specific. I hope that will satisfy my noble friend Lord Elton, but if not perhaps he will write to me and give notice that he will raise the matter at a later stage.
Lord Elton: I am grateful to my noble friend, who has now advanced both the excuse that the power is there and the reason for its being different. I shall read with great pleasure and interest tomorrow what he said. I beg leave to withdraw my amendment.
Amendment, by leave, withdrawn.
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 67:
Page 32, line 19, after ("information") insert ("or documents").
The noble Lord said: This amendment remedies a deficiency in Clause 39(9) by empowering the Bank to require the provision of documents as well as information from a director, controller or manager in order to assist it to determine whether that person is fit and proper. This brings the subsection in line with the other provisions in the Bill relating to the obtaining of information and to investigations, all of which include powers to require the furnishing of documents. I beg to move.
Lord Williams of Elvel: I cannot quite understand why the amendment is necessary but no doubt the noble Lord will explain. Is not information also in documentary form? It can be information in whatever form is appropriate. If the insertion is "or documents", why not "or in recorded telephone conversations, or in tapes", or whatever? I believe that the expression "information" is as broad as one can get without having to qualify it by putting in the expression "or documents". No doubt the draftsman had in mind something which I have missed.
Lord Beaverbrook: I believe that the amendment is necessary to bring the subsection in line with other provisions. I believe that the draftsman wanted to include it after taking legal advice. I think that it should have been included in the Bill at an earlier stage, but by a simple oversight it was omitted.
Lord Williams of Elvel: I am sorry to press the noble Lord on this matter but I cannot understand why it is necessary. If it is necessary to specify documents, should we not specify other forms of information which are required?
Lord Beaverbrook: I am informed that the definition "documents" in Clause 104 refers to this matter, and that may help the noble Lord to understand why the amendment is required.
On Question, amendment agreed to.
[Amendments Nos. 68 and 69 not moved.]
On Question, whether Clause 39, as amended, shall stand part of the Bill?
Lord Williams of Elvel: I raise a small point in relation to Clause 39 in the light of amendments moved by the noble Lord, Lord Strathclyde, which widen the scope of the clause. I refer to Clause 39(3)(b), under which,
"The Bank may … authorise an officer, servant or agent of the Bank".
The noble Lord, Lord Strathclyde, moved an amendment to Clause 39(6) which the Committee accepted. It extended the powers under Clause 39(3) to related companies. On a number of earlier occasions I
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raised the problem about the position of an agent of the Bank. Now that the amendments of the noble Lord, Lord Strathclyde, have been accepted, under authorisation from the Bank and to specific instruction from the Bank he is able to enter a company of which an authorised institution holds 20·5 per cent. or 20·1 per cent.
Clause 39(3)(b) is a new subsection and is not in the 1979 Act. I have the problem that the position of the agent, who may be a firm of accountants, enters a company of which for one reason or another the authorised institution happens to hold just over 20 per cent. On the instructions of the Bank, and showing his proper authority, he asks for all kinds of information. The related company in question must provide the information under the instruction. However, because the information is provided, or the implication is that it is in some way involved in a nefarious transaction of which the authorised institution may be suspected, it has a grievance against the Bank or its agent.
From earlier clauses in the Bill we know that it will have no case as regards damages against an officer or servant of the Bank. However, it will have a case as regards damages against an agent of the Bank. The problem I have is whether, in these circumstances, the agent of the Bank should not be offered some form of protection.
Lord Beaverbrook: I have listened carefully to what the noble Lord, Lord Williams of Elvel, has said. At the Committee stage last Monday we debated the level of immunity which was appropriate under the Bill. I shall study carefully what the noble Lord has said in respect of Clause 39. I should like to think about the matter in the light of the previous debate, and I shall write to the noble Lord on this subject.
Lord Williams of Elvel: I am most grateful to the noble Lord. My question relates to the case of an unwitting related company. It is a narrow question.
Clause 39, as amended, agreed to.
8.30 p.m.
Clause 40 [Potter of entry to obtain information and documents]:
On Question, Whether Clause 40 shall stand part of the Bill?
Lord Bruce of Donington: Clause 40 says:
"Any officer, servant or agent of the Bank may, on producing if required evidence of his authority, enter any premises occupied by a person on whom a notice has been served".
I should like to refer the noble Lord back to Clause 39(5), to which this clause applies, and draw his attention to subsection (5)(b):
"if the documents are not produced, to require the person who was required to produce them to state, to the best of his knowledge and belief. where they are".
Does the authority under Clause 40 give power to the Bank or its agent, on being notified where the documents are, to enter those premises, as distinct from the authority to enter the premises occupied by the institution concerned?
Lord Williams of Elvel: Perhaps the noble Lord might also consider a point in Clause 40(2). It says:
"Any officer, servant or agent of the Bank may, on producing if required evidence of his authority, enter any premises",
of any authorised institution, because that is what it says in Clause 39.
"The Bank may by notice in writing served on an authorised institution".
Clause 42 says that they may enter any premises occupied by anybody on whom a notice might be served. That is any authorised institution.
We get to the delicate point here of banking secrecy, where an agent, an officer or a servant of the Bank can go into another authorised institution and demand to see documents if the Bank reasonably believes that they may have been removed, tampered with or destroyed.
We all know that computers foul up things, and we all know that at the end of one day foreign exchange transactions are cleared off the computer and it may be that no record is kept. Normally what would happen would be that an investigator would be required to get a specific court order in order to go into another authorised institution—that is, another bank—to get the information it wants. Perhaps the noble Lord can satisfy us on this point.
Lord Beaverbrook: On Clause 40 I shall take the question of the noble Lord, Lord Bruce, first. The short answer to his point is, no. This clause gives power of entry only to premises occupied by those on whom a notice has been, or may be, served. Those are listed in Clause 39(1) and (6). In respect of the point raised by the noble Lord, Lord Williams, the safest route would be for me to look at this question further and write to him.
Lord Bruce of Donington: May I press the noble Lord a little further? Under Clause 39 the Bank is empowered to be told where the documents are. What is the use of being told where documents are if, for example, the documents are not on premises occupied by the institution? What is the use of that knowledge if you cannot get in to get them?
Lord Beaverbrook: In granting these powers of entry we have been careful to ensure that they are of a nature likely to be required. I think that previously it was found, with experience, that this level of power of entry was about what was necessary and therefore what should be given, and no further than that.
Lord Elton: The noble Lord, Lord Williams of Elvel, has ensured a restriction of the use of this power by relating it back to Clause 39(1), which says:
"The Bank may by notice in writing served on an authorised institution".
He has made the understandable assumption that it can only be served on an institution and that we are therefore looking at inspectors from the Bank calling at other banks or offices.
However, subsequent subsections go on to attract the powers of subsection (1) in other instances. If we look at subsection (10) we find them attracted to:
"any person who is a significant shareholder of an authorised institution".
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It may or it may not be beyond the bounds of possibility that that would be a private individual. My interest in pursuing this is to ask my noble friend whether the authorisation from the Bank would in that case have exactly the same status in law as a warrant sworn before justices of the peace. That would seem to be an unexpected widening of the powers of the Banking Bill that we ought to consider.
Lord Beaverbrook: I am grateful to my noble friend for his question. If he turns to Clause 41 he will see that there is a much tougher power of investigation which requires the involvement of a magistrate to issue a warrant.
Lord Elton: That is not the point that I am making. The point I am making here is that a similar power appears to be available without the intervention of a magistrate. That is what I wanted to know.
Lord Beaverbrook: I was about to say that I do not believe it to be a similar power. The powers of entry are in fact rather modest. There is no power to force entry. It has not been thought necessary to provide a power to force entry in the case of supervisory inquiries. We believe that the penalty, as stated, of possible imprisonment ought to be sufficient to enable the Bank to gain entry. But, as I said, where entry is refused, these penalties apply. Of course that would have to go through the legal process.
Lord Williams of Elvel: I am sorry to press the noble Lord a little further. This is a new clause which was not in the 1979 Act, and therefore it is worth while spending a little time on it. I am grateful to the noble Lord, Lord Elton, for pointing out that my original objection should have been slightly wider than it was. Nevertheless, I should like to know how the Government see the officer, servant or agent of the Bank with proper authority going into a completely different bank without a court order and saying, "We have reasonable cause to believe that there are certain documents which may be in your possession and which you may have removed, tampered with or destroyed".
This seems to me to be a very wide power indeed. I want the Government to be certain that that is what they are asking for, and that it does not contravene what I have always been brought up to believe is proper banking practice, that you never give away information about a client's business other than on a court order.
Lord Beaverbrook: The power under this clause is not entirely new. Sections 16(1) and (2) of the 1979 Act can be interpreted as giving equivalent power in respect of licensed deposit takers where they require information or documents at such time and at such place as is specified in a written notice. I am sure that Members of the Committee who have spoken on this matter will also note that Clause 40 does not give officials of the Bank the right to force entry, as I said. Therefore, I do not think that it can be described as a very draconian power. It is a modest reserve power for hard cases, and I hope that on reflection Members of the Committee will be able to accept that point.
Lord Williams of Elvel: I am not talking about forced entry or people breaking the door down. I am talking about an agent or a servant of a bank going round with a proper authority to another bank. If someone from the Bank of England arrives at a bank and says, "I should like this, that and the other information", nobody will close the door and say, "You can't have it", because that authority comes from the Bank of England. It is not a question of forced entry or anything like that. It is a question of whether these powers are right to require a third party bank to betray what is normally known as banking secrecy without an order from the court. While the noble Lord, Lord Elton, is making a case for the individual, I am making the case for a bank. That is all.
Lord Beaverbrook: I have gone as far as I can this evening in trying to justify the powers under Clause 40. It would probably be better if I looked at all that has been said and perhaps wrote to the noble Lords who have spoken on this subject.
Clause 40 agreed to.
Clause 41 [Investigations on behalf of the Bank]:
Lord Strathclyde Lord Strathclyde moved Amendments Nos. 70 to 75:
Page 33, line 23, leave out ("or subsidiary") and insert (", subsidiary or related company").
Page 33. line 25, after ("subsidiary") insert ("or related company").
Page 33. line 30, leave out ("50") and insert ("20").
Page 33, line 42, leave out ("50") and insert ("20").
Page 33, line 45, leave out ("50") and insert ("20").
Page 33, line 47, leave out ("or holding company") and insert (", related company or holding company").
The noble Lord said: I spoke to these amendments when I moved Amendment No. 63. I beg to move.
On Question, amendments agreed to.
8.45 p.m.
Lord Young of Graffham Lord Young of Graffham moved Amendment No. 76:
Page 34, line 6, after ("above") insert (", any person appointed to make a report in respect of that body under section 8(5) or 39(1)(b) above").
The noble Lord said: The purpose of this amendment it to enable investigators appointed under Clause 41 to question accountants, and other professionals, who provided a report for the Bank in connection with an application for authorisation or pursuant to the use of the information gathering powers under Clause 39. Such persons will, like the auditors and solicitors of an authorised institution, have a considerable amount of information about the institution. It would be unsatisfactory therefore if investigators were not empowered to seek that information and question the persons concerned. The amendment remedies this by putting reporting accountants and the like on a similar footing to the auditors, bankers and solicitors of the institution. I beg to move.
Lord Bruce of Donington: One cannot express any particular dissent from the amendment moved by the noble Lord, but it carries certain implications with it,
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particularly so far as accountants are concerned—appointed to investigate. Under subsection (5), paragraphs (a), (b) and (c), auditors have to do quite a number of things. They may themselves have performed all their duties completely punctiliously. They may have copious notes, but here they are required to provide documents. There can be little exception to that.
They have:
"to attend before the persons so appointed at such time and place as they may require; and … otherwise to give those persons all assistance in connection with the investigation which he is reasonably able to give".
That is fair enough. I believe that the accountancy profession is at one with me in affirming its dedication to the public interest. If, however, this takes a tremendous amount of time, which in the case of an examination at an auditor's working pace would take a long time, including the questioning of the auditor and so on, who will pay for it? I am aware this is a mercenary question because most of my profession are anxious to discharge their public duty. But I draw the attention of the noble Lord to the fact that this could be quite onerous in circumstances where a firm of auditors is itself completely blameless in all respects. Apparently the more thoroughly the firm has done its job the longer all this will take it.
Can the noble Lord give a little explanation? I am not in general in dissent with the amendment that he has tabled.
Lord Young of Graffham: Yes, the noble Lord will no doubt wish to declare an interest as representing the entire body of auditors and accountants.
Lord Bruce of Donington: I have declared my interest many times.
Lord Young of Graffham: Of course, in those circumstances it would be the Bank which would pay when it asked the various accountants to prepare reports.
Lord Elton: Can my noble friend tell us where that is in the Bill? Is there some well-established convention that we take on trust, is it in some other statute, in a schedule or where?
Lord Young of Graffham: If my noble friend looks at Clause 41, I believe that he will find it there.
Lord Elton: I am prepared to take it on trust, as it happens. I hope my noble friend was not referring to a convention which we did not know about. If there is a difficulty he will write to me. If I do not hear from him I shall assume that there is none.
Lord Bruce of Donington: The noble Lord mentioned that I did not declare my interest. I am most anxious not to be remiss in this. I have declared my interest on so many occasions in this Chamber that I thought it was generally known by now. I am of course a partner in a firm of chartered accountants, Halpern and Woolf. My firm for the moment is unlikely to be affected by the operation of this clause.
Lord Young of Graffham: I am more than happy to take the noble Lord's assurances on that. I was gently teasing him. The cost of attending on the inspectors falls on the auditors. The Bank pays the inspectors' costs, but there is some lack of clarity about this whole matter perhaps. I shall write to the noble Lord to clear this matter up once and for all.
On Question, amendment agreed to.
On Question, Whether Clause 41, as amended, shall stand part of the Bill?
Lord Williams of Elvel: This is a very small point. It concerns Clause 41(5) and 41(11). Clause 41(11) enshrines the well known legal privilege:
"Nothing in this section shall compel the production by a barrister, advocate or solicitor of a document containing a privileged communication made by him or to him in that capacity".
Clause 41(5), on the other hand, says:
"It shall be the duty of every director, controller, manager, employee, agent, banker, auditor or solicitor of a body",
to produce the necessary documents. I quite accept that subsection (5) is qualified by subsection (11). In other words, where the solicitor is the object of a communication which is in confidence, he shall not be obliged to reveal it. Nevertheless, the banker may also be in a position where he has received a communication in confidence. The accountant may be in a position where he has received a communication in confidence, and he will be obliged to reveal it.
I know that the Secretary of State will declare his interest as a former—perhaps a practising—solicitor; I know not. But it seems to me rather odd that the legal privilege should be enshrined specifically in subsection (11) and yet the banker and the poor old auditor again will be caught.
Lord Young of Graffham: I happily disclose an interest. Well over 30 years ago I practised for a few months as a solicitor and that must make all I say subject to that disclosure. There is a clear difference about a privileged communication. A privileged communication is a communication made by a barrister, advocate or solicitor with his client. That puts it in one category, with some other confidential information which may be referred to in subsection (5).
Lord Williams of Elvel: Does the noble Lord regard conversations, or potential conversations, between a customer and a banker as not being privileged in that sense?
Lord Young of Graffham: Privilege is, I believe, a term of art of the legal profession and therefore covers a certain category of disclosure. I am not sure that it is necessarily the same between a banker and a customer or a banker and a client.
Clause 41, as amended, agreed to.
Clauses 42 to 44 agreed to.
Clause 45 [Audited accounts to be open to inspection]:
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 77:
Page 37, line 17, after ("accounts") insert ("including the Auditor's Report thereon").
The noble Lord said: This amendment is a very simple one. Clause 45(1) reads:
"An authorised institution shall at each of its offices in the United Kingdom at which it holds itself out as accepting deposits—(a) keep a copy of its most recent audited accounts"
together with other documents. I wish to insert the words "including the Auditor's Report thereon" after the word "accounts".
I sincerely hope the Government will accept this amendment, because under the Companies Act 1985 the auditor's report is quite separate in Section 236 from the accounts that are governed by Section 228. I am most anxious that the auditor's report shall be seen to have a status independent of the accounts themselves. They should have been audited; otherwise there would have been no auditor's report upon them. But I think that the accounts themselves, without the auditor's report, are not sufficiently comprehensive. I am quite sure the noble Lord will agree that the responsibility ought to be laid on the authorised institution to produce the auditor's report as well as the audited accounts. I beg to move.
Lord Young of Graffham: I am sympathetic to the amendment of the noble Lord, Lord Bruce of Donington, but I consider that the way it is drafted may not be exactly appropriate. This is partly because Clause 45 applies not just to United Kingdom-incorporated companies but also to all other authorised institutions, including overseas institutions and United Kingdom partnerships, not all of whose accounts necessarily have by law to include auditors' reports of the type required under the Companies Act. As the noble Lord is aware, Section 239 of the Companies Act provides for the purposes of that Act that a United Kingdom company's accounts must include an auditor's report.
However, I see the force of the noble Lord's point and accordingly we shall table an amendment at Report to put it beyond doubt that for United Kingdom incorporated companies the company's audited accounts should include the auditor's report.
Lord Bruce of Donington: I am grateful to the noble Lord. I am glad to have been of some help to him. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 45 agreed to.
Clause 46 agreed to.
Clause 47 [Communication by auditor etc., with the Bank]:
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 78:
Page 38, line 4, after ("duty") insert ("express or implied").
The noble Lord said: Here, once again, I have to redeclare my interest because auditors and accountants are involved. Subsection (1) of Clause 47 at present reads:
"No duty to which—

(a) an auditor of an authorised institution; or

(b) a person appointed to make a report under section 8(5) or 39(1)(b) 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".
This subsection will, I am afraid, have to be the subject of some further discussion, perhaps at Report stage, because I am not very happy with the responsibilities laid on auditors by this clause.
However, that is not the subject of this amendment. A number of duties are laid upon auditors, the position of whom is not always universally understood by those who think that they really do understand it. It is extremely important that the duty to which an auditor is subject under this clause should be a duty implied as well as express, because on one's reading of the present case law on the subject it appears that there are a number of instances where auditors are popularly supposed to have certain duties which are nowhere laid down by statute. Their responsibility grows and the insurance premiums they have to pay grow as well. One is therefore most anxious that the duty shall be qualified by "express or implied". I beg to move.
Lord Young of Graffham: The noble Lord, Lord Bruce of Donington, does his profession great credit in the way he is concerned for its wellbeing and interests. I understand the noble Lord's concern that auditors should not feel inhibited from disclosing relevant information to the Bank, but I am advised that this amendment is unnecessary. The clause absolves auditors from contravention of any duty to which they are subject whether that duty be express or implied, provided of course that they act in good faith when communicating with the Bank. It is in the same form as Section 109 of the Financial Services Act 1986 and is similar to Section 82(8) of the Building Societies Act 1986, which refers to "obligation" but without the qualifying words "express or implied". I hope the noble Lord, having heard my explanation, will feel that he can withdraw this amendment.
Lord Bruce of Donington: I am glad to accept the noble Lord's assurance on this matter. Whether in all the circumstances the courts will follow the advice that he has tendered here is another matter, because, as the noble Lord is well aware, the courts interpret the statutes very strictly and our proceedings here in this Chamber cannot be quoted or cited in support of any particular interpretation. The law is always interpreted as it stands. I hope that the noble Lord is right and I am grateful for such comfort as he has been able to give me. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Young of Graffham Lord Young of Graffham moved Amendment No. 79:
Page 38, line 41, leave out ("shall be subject to annulment in pursuance of a resolution of either") and insert ("no such regulations
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shall be made unless a draft of them has been laid before and approved by a resolution of each").
The noble Lord said: This amendment fulfils an undertaking given by my honourable friend the Economic Secretary in another place. My honourable friend agreed that if the Government wished to introduce rules specifying the circumstances in which the auditors of authorised institutions should communicate information to the supervisors, that was a matter more appropriately dealt with by an affirmative resolution of both Houses of Parliament. This amendment achieves that effect. I beg to move.
Lord Williams of Elvel: I am grateful to the noble Lord for moving this amendment, which we support. I can only express some surprise that the negative procedure appeared in the first place, because we had this debate on the Building Societies Act in your Lordships' House where we fought it out twice, once in Committee and once on Report, and we achieved in the end the affirmative procedure. We had this debate on the Financial Services Act in your Lordships' House and we fought it out twice to the same end and got the affirmative procedure instead of the negative one.
The Government are trying it on again. As I pointed out to my honourable friend Dr. McDonald in another place when this Bill was introduced there, this provision is inconsistent with the Building Societies Act and the Financial Services Act. Now the Government have finally moved to make it consistent with those two Acts. We are very grateful.
Lord Bruce of Donington: We do not believe in looking a gift horse in the mouth.
On Question, amendment agreed to.
Clause 47, as amended, agreed to.
Clauses 48 to 50 agreed to.
Schedule 4 agreed to.
Clauses 51 to 55 agreed to.
Clause 56 [Maximum and minimum contributions]:
[Amendment No. 80 not moved.]
Clause 56 agreed to.
Clause 57 agreed to.
Clause 58 [Compensation payments to depositors]:
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 81:
Page 44, line 7, leave out ("end of the deposit's original term to maturity") and insert ("the deposit is or becomes due and payable under the terms on which it was made").
The noble Lord said: With the leave of the Committee, I shall speak to Amendments Nos. 81 to 90 inclusive. All these amendments are technical. They are amendments to Part II of the Bill and involve no change of substance to the Bill as debated in another place. The amendments to Clauses 58 and 60 and Amendment No. 90 to Clause 62 are all concerned with the way deposit protection compensation payments should be calculated with respect to institutions where administration orders under the Insolvency Act have been made. The other amendments to Clause 62 will remedy an obscurity. The amendment to Clause

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59 will remedy a gap in the circumstances in which the deposit protection fund is triggered when a Scottish partnership is wound up. I beg to move.
On Question, amendment agreed to.
Lord Beaverbrook Lord Beaverbrook moved Amendments Nos. 82 and 83:
Page 44, line 36, leave out from ("it") to end of line 39 and insert ("the payments to be made by the Board under subsections (1) and (2) above, taken together, in respect of a depositor's protected deposits with the institution shall not exceed an amount equal to three-quarters of those deposits.").
Page 44, line 41, leave out ("and (2)') and insert (", (2) and (6)").
The noble Lord said: I have spoken to these amendments. I beg to move.
On Question, amendments agreed to.
Clause 58, as amended, agreed to.
Clause 59 [Meaning of insolvency]:
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 84:
Page 46, line 5, at end insert ("or on the making of a winding-up order against it by virtue of section 90 below").
The noble Lord said: I have spoken to this amendment and I beg to move.
On Question, amendment agreed to.
Clause 59, as amended, agreed to.
9 p.m.
Clause 60 [Protected deposits]:
Lord Beaverbrook Lord Beaverbrook moved Amendments Nos. 85 to 87:
Page 46, line 30, leave out ("whose original term to maturity ends") and insert ("which under the terms on which it was made is or becomes due or payable").
Page 46, line 32, leave out ("at the end of that term") and insert ("up to the time when it is or becomes due and payable as aforesaid").
Page 47, line 25, at end insert—
("( ) Where an institution becomes insolvent after an administration order has been in force in relation to it the maximum applying under subsection (1) above to a depositor's protected deposit with the institution shall be reduced by the amount of his protected deposit or deposits with the institution taken into account for the purposes of subsection (2) above.").
The noble Lord said: I have spoken to these amendments and I beg to move.
On Question, amendments agreed to.
Clause 60, as amended, agreed to.
Clause 61 agreed to.
Clause 62 [Liability of institution in respect of compensation payments]:
Lord Beaverbrook Lord Beaverbrook moved Amendments Nos. 88 to 90:
Page 49, line 37, leave out ("section") and insert ("paragraph").
Page 50, line 17, leave out ("section") and insert ("paragraph").
Page 50, line 24, leave out ("in respect of which the Board has received a payment") and insert ("to the extent to which the Board has received a payment in respect of it").
The noble Lord said: I have spoken to these amendments and I beg to move them en bloc.
On Question, amendments agreed to.
Clause 62, as amended, agreed to.
Clauses 63 to 65 agreed to.
Clause 66 [Tax treatment of contributions and repayments]:
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 91:
Page 52, line 47, after ("an") insert ("allowable").
The noble Lord said: I beg to move the amendment standing in my name. The object of the insertion of the word "allowable" before the word "expenses" is to put the matter beyond all doubt since the Tax Acts are referred to. It requires no further explanation and I beg to move.
Lord Beaverbrook: I am grateful to the noble Lord, Lord Bruce, for putting the amendment forward. I have to say that I do not see a great deal of merit in the change. However, I do not think that there would be any sense in objecting to it and, as the noble Lord says, it puts the matter beyond doubt. I shall be happy to accept the amendment.
Lord Bruce of Donington: I am grateful to the noble Lord.
On Question, amendment agreed to.
Clause 66, as amended, agreed to.
Clause 67 [Restriction on use of banking names]:
[Amendment No. 92 not moved.]
Clause 67 agreed to.
Clauses 68 to 73 agreed to.
Clause 74 [Meaning of "overseas institution" and "representative office"]:
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 93:
Page 59, line 13, at end insert ("and "establishment", in relation to such an office, includes the making of any arrangements by virtue of which such activities are promoted or assisted from it").
The noble Lord said: This amendment is intended to remedy a possible deficiency in Part IV. Clause 75 requires an overseas bank proposing to establish a representative office in the United Kingdom to give not less than two months' notice to the Bank. As the Bill stands, overseas banks would not clearly be required to give such notice if they had entered into an arrangement with an agent who had already established premises here for the purpose of conducting their representative activities through the agent. In such circumstances the agent's premises could constitute a representative office but would the overseas hank have "established" them, for example, by renting or purchasing the premises? It could be argued that it had not, in which case no notification to the Bank would be required and the various powers in Part IV of the Bill would not apply to such overseas banks.
Given that Part IV includes penal provisions, there is a real danger that the court would adopt a narrow interpretation. It would be plainly undesirable for there to be such a gap. The amendment seeks to put beyond doubt that an overseas bank would establish a representative office merely by making an arrangement whereby representative activities would be

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conducted from the premises constituting the representative office. I beg to move.
On Question, amendment agreed to.
Clause 74, as amended, agreed to.
Clauses 75 to 83 agreed to.
Clause 84 [Disclosure for facilitating discharge of functions by other supervisory authorities]:
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 94:
Page 64, line 4, column 2, leave out ("section 431, 432, 442, 446, 447 or 448") and insert ("Part XIV").
The noble Lord said: We now come to a series of minor and technical amendments on disclosure of supervisory information. Amendments Nos. 94, 95, 98 and 99 extend the purposes for which the Bank of England can disclose supervisory information for the purpose of investigations under the Companies Act 1985. Amendment No. 96 adds to the list of supervisory persons to whom information may be disclosed a person appointed by the Secretary of State to obtain a company's books or papers under Section 44 of the Insurance Companies Act 1982. Amendment No. 97 arises as a consequence of the approach adopted by the draftsman in the Building Societies Act 1986. In order to avoid any doubt that the Bank can pass information to the commission to protect the interests of shareholders and depositors, this amendment adds the appropriate words to the table in Clause 84(1). Amendments Nos. 100 to 104 delete provisions which I have been advised duplicate provisions already in Schedule 13 of the Financial Services Act 1986. Finally, Amendments Nos. 102 and 105 provide that the Secretary of State's consent must be sought before the Bank passes on to other supervisors information given to it by the Secretary of State under Section 449 of the Companies Act 1985. I beg to move.
On Question, amendment agreed to.
Lord Beaverbrook Lord Beaverbrook moved Amendments Nos. 95 to 99:
Page 64, line 10, column 2, leave out ("the sections of the Companies Act 1985 mentioned above") and insert ("Part XIV of the Companies Act 1985").
Page 64, line 12, at end insert—
("A person authorised by theFunctions under that Secretary of State under section 44 of section.")
the Insurance Companies Act 1982.
Page 64, line 22, column 2, at end insert ("and protecting the interests of the shareholders and depositors of building societies"). Page 64, line 42, column 2, leave out ("Article 424, 425, 435, 437, 439, 440 or 441") and insert ("Part XV").
Page 64, line 46, column 2, leave out ("the Articles mentioned above") and insert ("Part XV of that Order").
The noble Lord said: I have spoken to Amendments Nos. 95 to 99. I beg to move.
Lord Elton: I should like to make a small point for the record. I do not want to make any difficulty. I have already had occasion to criticise the print of the Bill. I do not know whether I have an odd copy, but on page 64 I have only one line number. I accept that it is a table but had we needed to refer to any of the amendments it would have been very helpful for the
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lines to be numbered. If there is a convention that tables are not numbered, I think it ought to be changed. It does not actually matter but it is worth having it right in case we ever have to debate such an amendment.
On Question, amendments agreed to.
Clause 84, as amended, agreed to.
Clauses 85 and 86 agreed to.
Clause 87 [Disclosure of information obtained under other Acts]:
Lord Beaverbrook Lord Beaverbrook moved Amendments Nos. 100 to 105:
Page 67, line 1, leave out subsection (2).
Page 67, line 6, leave out ("that Act") and insert ("the Companies Act 1985").
Page 67, line 8, leave out from ("disclosed") to end of line 10 and insert—
("(a) with the consent of the Secretary of State, in any case in which information to which section 82 applies could be disclosed by virtue of section 84(1) or (2) above; and
(b) in any case in which information to which section 82 above applies could be disclosed by virtue of any of the other provisions of this Part of this Act.").
Page 67, line 11, leave out subsection (4).
Page 67, line 16, leave out ("that Order") and insert ("the Companies (Northern Ireland) Order 1986").
Page 67, line 18, leave out from ("disclosed") to end of line 20 and insert—
("(a) with the consent of the Secretary of State, in any case in which information to which section 82 above applies could be disclosed by virtue of section 84(1) or (2) above; and
(b) in any case in which information to which section 82 above applies could be disclosed by virtue of any of the other provisions of this Part of this Act.").
On Question, amendments agreed to.
Clause 87, as amended, agreed to.
9.15 p.m.
Lord Elton Lord Elton moved Amendment No. 106:
Before Clause 88 insert the following new clause:
("Application of Financial Services Act 1986 to authorised institutions.
—(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) and section 28 (withdrawal and suspension of authorisation) of that Act, the Secretary of State may regard himself as satisfied that an authorised institution is a fit and proper person if the Bank informs him that it is so satisfied.
(3) The rules and practices of a self-regulating organisation shall not be deemed to be in breach of paragraph 1 of Schedule 2 (requirements for recognition of self-regulatory organisations: members to be fit and proper persons) to that Act by reason only of the fact that they provide that the organisation may regard itself as satisfied that an authorised institution is a fit and proper person if the Bank informs it that it is so satisfied.
(4) For the purposes of subsections (2) and (3) above, the Bank may regard itself as satisfied that an authorised institution which is an overseas institution is a fit and proper person if—

(a) the relevant supervisory authority in the institution's country of origin informs it that it is so satisfied; and

(b) the Bank is satisfied as to the nature and scope of the supervision exercised by that authority.

(5) In so far as they relate to the form and content of financial statements, rules made under section 48 (conduct of business rules) of that Act do not apply to authorised institutions.

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(6) Rules made under section 49 (financial resources rules) of that Act do not apply to authorised institutions.
(7) In so far as they relate to the financial position of the person concerned, regulations made under section 52 (notification regulations) of that Act do not apply to authorised institutions.
(8) An authorised institution shall not be regarded as in breach of the rules of a self-regulating organisation by reason only of its failure to comply with rules corresponding to those rules and regulations mentioned in subsections (5), (6) and (7) above.")
The noble Lord said: We have moved at a breakneck pace, which I thoroughly welcome. I regret that now it is necessary to dwell a little longer on an amendment because the matters with which it deals are technical. While I should like to be able merely to say "I beg to move" and rely on my noble friend and his advisers drawing the right inference from the drafting, the danger is that they will draw the wrong inference from the drafting and when I eventually get the letter that replaces the speech in the ideal proceedings in this Chamber it will be addressed to the wrong subject.
The clause is an attempt to deal with the overlap between the present Bill and the Financial Services Act which was passed last year. The main purposes of that Act were to set up a system of prior authorisation and regulation for investment businesses. The present Bill deals with the prior authorisation and supervision of banks. The overlap arises from the fact that many banks will find themselves caught up simultaneously in the requirements both of the Act and of the Bill.
The amendment is addressed only to the area of direct overlap—that is, the fit and proper requirement and the regulation of financial soundness. Sections 27 and 28 of the Financial Services Act require the Securities and Investments Board to ensure that investment businesses regulated by it are fit and proper when they are granted authorisation and that they remain fit and proper thereafter. The Bill actually refers to the Secretary of State but it is generally assumed that delegation will be to the SIB.
The Act does not say precisely what "fit and proper" means, but, in the case of banks, the test needed to establish fitness and propriety is surely very similar to, if not the same as, the criteria set out in Schedule 3 to the present Bill. They must, of course, be met in any case by a bank authorised under the Bill. Paragraph 1 of Schedule 3 to this Bill, for example, requires all the bank's directors, controllers and managers to be fit and proper for the positions they hold. It is made clear that they must possess the competence and soundness of judgment needed to discharge their responsibilities. This applies as much to their responsibilities for the bank's investment business as to any other part of its business.
Paragraph 4 requires the bank to be financially sound and prudently run. Paragraph 5 requires the bank's business to be carried out with integrity and skill. Again, this means all its business including its investment business. It is hard to see what more the SIB would need to satisfy itself that a bank is fit and proper for investment business. If there is anything else—and my noble friend may be able to say what that something else might be—I cannot at this stage see any reason why the Bank of England should not be able to obtain the necessary information and make the necessary judgment. The SIB could then rely on the
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Bank's judgment for the determination of fitness and propriety. I do not think a bank should have to convince two regulatory bodies of its fitness and propriety if the necessary judgments can be made by one.
I hope my noble friend can assure the Committee that this will not be necessary and that banks will not have to provide enormous amounts of information to two different regulators who then set about duplicating one another's judgments. I know that the stock answer is that the regulators will enter into agreement among themselves for one of their number to act as lead regulator. In the case of a bank the lead regulator will, presumably, be the Bank of England. However, very little information has been made public as to how this will work in practice. If my noble friend can enlarge on that and acquaint the Committee with the plans which are doubtless being formulated, he may be able to allay some of the anxieties felt by those on the receiving end of this multiple regulation.
It has been suggested to me that the Financial Services Act provides for the delegation of monitoring of fitness and propriety by one regulator to another lead regulator, but that it does not provide for the delegation of judging that matter. Subsection (2) of the new clause is designed to make clear that such delegation is lawful. Subsection (3) similarly allows SROs to delegate to the Bank. Many authorised institutions will be members of SROs rather than regulated by the SIB. I apologise for the tortuous drafting of this point but it seemed to be made unavoidable by the drafting of the Financial Services Act.
While we are on the subject of lead regulators, may I also ask my noble friend to clear up a point that may have been in doubt since January of last year? A Written Answer that month links the concept of lead regulator with the problems of financial conglomerates. However, there will be other cases where a single company will be subject to more than one regulator. Can my noble friend confirm that single companies, too, will have recourse to the lead regulator principle? If so, will my noble friend also confirm that this is the effect as well as the intention of the present drafting?
My noble friend may say that financial services regulators can, in fact, delegate to the Bank and that these subsections are unnecessary. However, if there is a problem I hope he will be able to accept at least this part of the new clause. As drafted, it says that the financial services "may" delegate to the Bank. I was tempted to say that they "must" but it occurs to me that, in theory, there could be a deposit-taking institution caught by the Bill, for whom investment business is, in fact, its principal business. Therefore, it might be right to have it the other way round.
Subsection (4) deals with delegation in the case of overseas banks. In their case it will usually be the banking supervisors in their home countries who are best able to judge fitness and propriety. The subsection provides for the financial services regulators to delegate to the Bank of England and for the Bank to sub-delegate to the overseas authorities if it considers it appropriate to do so. I have drafted the new clause in that way because it is the Bank which is in regular touch with the overseas banking authorities.
The purpose of the rest of the new clause is to disapply, in the case of banks, those parts of the regulatory apparatus in the Financial Services Act which deal specifically with financial soundness. Financial soundness is, of course, one aspect of fitness and propriety; and that, I again suggest, is appropriately judged by the Bank of England.
After all, it is Schedule 3 to the Bill which requires the Bank of England to satisfy itself that a bank has adequate capital and adequate liquidity. That being so, I do not quite see why the SIB or any other financial services regulator should need to impose its own capital adequacy or liquidity rules on banks as well. Such rules would only be superfluous.
Indeed, I am advised that the SIB's draft rules not only fail to marry up with the bank's procedures but are actually in a form that makes it impossible for a bank to comply with them. That is because they are based on a concept known as "liquid capital". I understand that the term is widely employed in the regulation of specialist securities dealers but I equally understand that it is entirely unsuitable for banks. I believe that this problem has been drawn to the attention of the SIB and my noble friend may be able to tell us the point to which that discussion has gone. It is for those reasons that subsection (6) disapplies the SIB's financial resources rules entirely. I may have gone too far, because there may exist banks for which the SIB's rules would be appropriate and for which the Bank of England's procedures need to be disapplied. Subsection (7) disapplies the requirements to provide financial information to the SIB since it need only go to the Bank. Subsection (5) disapplies the SIB rules relating to the form and content of accounts. This is appropriate because banks have a different structure of assets and liabilities from other businesses and the form of their accounts is the subject of an EC directive which in due course will be implemented by legislation in this country. Again I am advised that the draft SIB rules in this area are in a form that makes it not just. difficult but impossible for a bank to comply with them.
I should like to make one last point. It is important to be clear that a bank's financial soundness can be judged only by looking at its business as a whole. It cannot be done by pretending that its investment business and other businesses are separate and then applying separate and different liquidity and capital rules to each. To do that would be to lose sight of the interrelationships between the two and the strength that is gained by a bank from a diversified spread of business.
I make no pretence of having brought forward a perfect draft and that is why I have spoken at such length. It is a draft that addresses real problems which need to be resolved before Third Reading. My noble friend may have an equally lengthy reply. If he feels it appropriate merely to skim over it and put his response into writing so that I can read it before the Report stage, and if he feels that it is not controversial—and if Members opposite do not think that that is an underhand way of treating them or the Chamber—I should be perfectly content with that course. I shall want to read in the record what he has
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to say about this matter. I merely suggest that he, having heaved a sigh or two while I was speaking, may wish to curtail his remarks somewhat. I beg to move.
Lord Williams of Elvel: We do not think that the Opposition are being treated in an underhand way at all. I should have thought that almost all those points are matters which should be resolved at official level rather than in this Chamber. Nevertheless, the noble Lord has a prefect right to raise the points and carry on with them.
Lord O'Brien of Lothbury: In general I support the amendment that has been put forward by the noble Lord, Lord Elton, and I hope that the Government will find it acceptable. I think it is extremely important that the Bank of England, with the responsibilities that it will have under this Bill when it becomes an Act, should not find those responsibilities in any way vitiated, let alone undermined, by the views of other regulators. In matters where they overlap I think that there should be no doubt at all that the Bank of England is the prime regulator.
Lord Young of Graffham: The statutory arrangements for the regulation of financial institutions in the United Kingdom operate according to function. Accordingly, there are separate statutory requirements, for example, for deposit-taking businesses under the Banking Act and for investment businesses under the Financial Services Act. Similarly, there are separate supervisory authorities for the different sectors. This is a good system of regulation which promotes the kind of expertise that is required for adequate supervision.
With the permission of the Committee I wish to take advantage of my noble friend's offer and study his comments. Perhaps I may write to him to see how far we can get, particularly as he is joined in this matter by the noble Lord, Lord O'Brien. In the interim perhaps I may assure my noble friend that the lead regulator concept will be applied to multiple authorisations of a single entity as well as to multiple authorisations of a financial conglomerate. I hope that my noble friend will withdraw his amendment until we have dealt with the matter at a later stage.
Lord Williams of Elvel: I am sure that the noble Lord will recognise that there is another regulator—the Building Societies Commission. If the building societies were represented in this place they might have other points. I am sure that the noble Lord and his officials will wish to look at the single regulator in the light of not only the Banking Bill but the building societies.
Lord Elton: I hope that it is not irregular, but I shall read the detailed response of my noble friend which I hope will be in tune with the amendment's intentions as well as its drafting. I shall make the reservation I should have made had he made a lengthy speech. I shall read what he has not said, but written, with great care. These matters must be cleared up. If they remain unresolved, at a later stage I shall have to bring forward an amendment and may do so in a slightly less

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friendly but still helpful manner. With that understood, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 88 agreed to.
Lord Elton Lord Elton moved Amendment No. 107:
After Clause 88, insert the following new clause:
("Electronic transfer of funds.
— After section 187(3) of the Consumer Credit Act 1974 (arrangements to be disregarded in determining whether a consumer credit agreement is to be treated as entered into in accordance with prior or in contemplation of future arrangements between creditor and supplier) there shall be inserted—
"(3A) Arrangements shall also be disregarded for the purposes of subsections (1) and (2) if they are arrangements for the electronic transfer of funds from a current account at a bank within the meaning of the Bankers' Books Evidence Act 1879.").
The noble Lord said: This amendment implements one of the proposals contained in the White Paper on banking supervision which did not emerge in the Bill as introduced in another place. In speaking to it I shall, with the Committee's leave, speak also to Amendment No. 113 which is consequential. The proposal to which I referred was an amendment to the Consumer Credit Act to remove a possible constraint on the development of a nationwide system of electronic funds transfers at the point of sale, known as EFTPOS, by putting an electronic transaction, effected by means of a plastic card operating on a current account, in the same position as a cheque transaction.
I understand that when the Bill was first introduced the Government had reason to believe that that provision could conveniently be postponed to another occasion. Those responsible for the development of national EFTPOS have, however, reviewed the position and their timetable for bringing the system to the point of implementation. As a result, they have concluded that if the development is not to be delayed, and it should not be, it is necessary to clarify the legal position in the way proposed in the White Paper now rather than at some later time.
If I may put the need in plain words, the law on this point needs to be clarified and, if it is not, one certain result is that there will be an enormous amount of unnecessary paperwork once EFTPOS has been introduced. I hope that I have said enough to enable my noble friend to accept one of my amendments for a change. I beg to move.
Lord Young of Graffham: I congratulate my noble friend on bringing forward this amendment. It is not a point central to the supervision of banks but it is, nevertheless, a worthwhile clarification of the existing law as it affects banking transactions carried out with the latest of technologies. It can be difficult for the law to keep pace with such changes. An amendment such as this, designed as it is to remove a possible contraint on the development of an important project in electronic banking, is welcome to the Government. I am pleased to be able to accept it.
On Question, amendment agreed to.
[Amendment No. 108 had been withdrawn from the Marshalled List.]
Clauses 89 to 93 agreed to.
9.30 p.m.
On Question, Whether Clause 94 shall stand part of the Bill?
Lord Bruce of Donington: The noble Lord will agree that the Opposition, both in another place and here, have been generally helpful and constructive, or tried to be, in securing the passage of the Bill through the other place and this place.
As one would expect, there have been numerous discussions on the general purport of the Bill. I recently had the opportunity, as the Committee would expect, to discuss the Bill with those who presented the Opposition's case in another place. We were both agreed on one thing. Apart from the very minor modifications and changes of emphasis which we have sought to incorporate within the Bill—not always successfully—the main question arises as to how well it will be enforced.
Clause 94(5) stipulates:
"No proceedings for an offence under this Act shall be instituted … in England and Wales, except by or with the consent of the Director of Public Prosecutions or the Bank".
It is a question of how determined the authorities and the Director of Public Prosecutions are that this Bill shall be enforced and that any offences that are committed under it shall be vigorously pursued.
One has the impression from time to time that there are some offences, not always uncomplicated, which seem to be pursued with the greatest possible alacrity. The Director of Public Prosecutions, for example, had little difficulty, in spite of the dubiety of the result—a doubt which proved right in the end—with a practically instantaneous prosecution of Clive Ponting under the Official Secrets Act. The same applied to another comparatively junior civil servant even though the result must have been in doubt. There did not seem to be much difficulty in getting speedy prosecution.
When it comes to offences which take place in the City of London—thank goodness they only rarely occur, but when they occur they are serious—one does not find the same promptness or the same drive. There seems to be an attitude in some sections of the City, if I may say so with the greatest possible respect, that these offences are somehow a different kind of offence. I read in the press about three weeks ago that no less a person than the deputy director of the SIB itself referred to the recent Guinness offences—offences they undoubtedly were—as City escapades. There is a tendency when describing offences which take place in the City to talk of them as improprieties or irregularities rather than as criminal offences specified in the Bill.
I use this occasion when speaking on clause stand part to emphasise the fact that a very close watch will be kept on how offences under this Bill are dealt with, and how promptly. We are sensible of the fact that although the Stock Exchange, which is normally protective of its members—and very rightly so—referred no fewer than 87 cases of alleged insider dealings to the DTI, only seven prosecutions have so far resulted. These factors give the impression—it may be entirely erroneous, but I have to say this—that there is one kind of law rigorously pursued against what we

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shall term for the moment the lesser mortals within our society but another and less prompt method of dealing with those who commit offences of the type that I have mentioned.
I have spoken with some strength and feeling on this matter because I believe that that is an impression, and it is one which I certainly share. I hope that the noble Lord may be able to give the Committee an assurance, without equivocation, that offences under this Bill, as is required under Clause 94, will be rigorously pursued, and that where there is a prima facie infringement there will not be these long, dragged-out delays on the basis that the offences, although they are serious and although we have them in the Bill, have been part of a certain section of the City's habit of mind over the last ten years or so and therefore they can be treated on a rather more leisurely and less rigorous basis.
I hope that the noble Lord will be able to give the Committee and the country that assurance to which the Committee and the country are legitimately entitled.
Lord Beaverbrook: I am grateful to the noble Lord, Lord Bruce, for raising this point. I should like to say that there is more to it than just vigorous enforcement. Indeed, it is most important that there are adequate resources available for the investigation in seeking out contraventions. Without that, there are unlikely to be any prosecutions taking place.
I can reassure the Committee about the resources being made available to the banking supervision division of the Bank of England. Following a Leigh-Pemberton committee's report, the Bank introduced a number of changes in the organisation of its banking supervision side intended to strengthen its supervisory effort. These were set out in the Bank's 1986 annual report under the Banking Act, of which there is a copy in the House of Lords' Library.
I can also assure the Committee that the Government and the Bank of England, the Director of Public Prosecutions in London, his counterpart in Northern Ireland and the authorities in Scotland, are fully aware of the importance of vigorous enforcement of the provisions of the Banking Act. That will continue to be the case under this Bill.
Lord Bruce of Donington: Will the noble Lord give the Committee an additional assurance? The noble Lord speaks on behalf of the Treasury as well as for a number of other departments, and he will be aware of the reply given to me by the noble and learned Lord the Lord Chancellor when he referred to the resources available to the Director of Public Prosecutions and the Fraud Squad. Can we have an unequivocal undertaking from the noble Lord, Lord Young of Graffham, on this matter that adequate staff and adequate funding will be available to the Director of Public Prosecutions and all those who are required to assist him? Those who will the end must will the means. Despite the desire to economise on the Civil Service and all the other economies with which the noble Lord regales us from time to time (in addition to other necessary employment in various parts of the community, to which this Bill is not relevant at all) will
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the noble Lord give the Committee an undertaking that there will be no Treasury financial restraint on making this part of the Bill totally effective?
Lord Young of Graffham: I hear everything that the noble Lord, Lord Bruce of Donington, has said, although I can neither agree with the conclusions he is drawing from the comparison of different categories of civil action, nor give him the undertaking for which he asks. As he no doubt knows, I could not do that at such short notice. However, there is little purpose in having a Bill of this nature without seeking to enforce it. I will draw his remarks to the attention of the Director of Public Prosecutions and of my right honourable friend the Attorney-General. I have no doubt that he will pay full regard to some of the noble Lord's remarks if not to the inferences that he draws from them.
Clause 94 agreed to.
Clauses 95 to 102 agreed to.
Clause 103 [Meaning of "director", "controller", "manager" and "associate"]
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 109:
Page 76, line 45, leave out from ("has") to ("that") in line 48 and insert ("with any other person an agreement or arrangement with respect to the acquisition, holding or disposal of shares or other interests in that body corporate or under which they undertake to act together in exercising their voting power in relation to it").
The noble Lord said: This amendment seeks to tidy up the definition of the word "associate" for the purposes of identifying controllers and significant shareholders. It follows on changes made to the Bill in another place, particularly the introduction of the requirement for notification to the Bank by persons who become significant shareholders—that is, shareholders with 5 per cent. but less than 15 per cent. of the voting power of a UK institution or of another institution of which it is a subsidiary. This addition to the Bill has resulted in the Bank being required to pay more attention to persons who may be acting in concert for the purpose of acquiring shares, even though they may not be seeking to control the institution through the joint exercise of voting power.
The effect of the present amendment is to include within the definition of "associate" for the purposes of grouping persons who are in effect concert parties those who agree or arrange to buy shares together or to dispose of them together. The subsection had already provided that "associates" included those who exercised their voting power together. This is, of course, retained. I beg to move.
On Question, amendment agreed to.
Clause 103, as amended, agreed to.
Clause 104 [Interpretation]:
[Amendment No. 110 had been withdrawn from the Marshalled List.]
Lord Strathclyde Lord Strathclyde moved Amendment No. 110A:
Page 78, line 9, at end insert—
(" "related company" has the meaning given in paragraph 92 of Schedule 4 to the Companies Act 1985, taking references to a company as including any body corporate;")
The noble Lord said: I spoke to this amendment when speaking to Amendment No. 63. It also brings to

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an end what the noble Lord, Lord Williams of Elvel, called "the Strathclyde amendments". I beg to move.
On Question, amendment agreed to.
Clause 104, as amended, agreed to.
Clause 105 agreed to.
Schedule 5 agreed to.
Clause 106 agreed to.
Schedule 6 [Minor and consequential amendments]:
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 111:
Page 91, line 27, after ("54(4)") insert ("and (5)")
The noble Lord said: With the leave of the Committee, I shall also speak to Amendment No. 112. These amendments have the effect of deleting subsection (5) of Section 54 of the Building Societies Act 1986, which, together with subsection (4), made provision for disclosure of banking supervisory information to the Building Societies Commission by the Bank pending the coming into force of the relevant provisions of the Bill. By an oversight Schedules 6 and 7 only deleted subsection (4). Amendments No. 111 and 112 put this matter right. I beg to move.
On Question, amendment agreed to.
Schedule 6, as amended, agreed to.
Schedule 7 [Repeals and revocations]:
Lord Beaverbrook Lord Beaverbrook moved Amendment No. 112:
Page 93, line 47, column 3, at end insert ("and (5)")
On Question, amendment agreed to.
Schedule 7, as amended, agreed to.
Remaining clauses agreed to.
In the Title:
Lord Elton Lord Elton moved Amendment No. 113:
Line 4, after ("descriptions") insert ("to amend section 187 of the Consumer Credit Act 1974 in relation to arrangements for the electronic transfer of funds;")
The noble Lord said: I spoke to this with Amendment No. 107. I beg to move.
On Question, amendment agreed to.
Title, as amended, agreed to.
House resumed: Bill reported with amendments.
House adjourned at twelve minutes before ten o'clock.