HL Deb 23 March 1987 vol 486 cc11-70

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 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 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 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 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 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?

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. 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 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 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.

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.

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 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 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.

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 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 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 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.

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 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 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 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:—

  1. (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
  2. (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:—
  1. (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
  2. (b) to all the shares of any other institution of which the authorised institution is a subsidiary 32 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 moved Amendment No. 60:

After Clause 35, insert the following new clause:

("Foreign country lending. —.(1) For the purposes of this section—

  1. (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;
  2. (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.
  3. (c) "foreign loan transaction" means a transaction entered into by an authorised institution under which:—
    1. (i) a foreign country borrower incurs an obligation to the institution or as a result of which it may incur such an obligation; or
    2. (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
    3. (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:
  1. (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
  2. (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—
  1. (a) the total level of exposure of the institution concerned to foreign country borrowers
  2. (b) the participation of the institution concerned with other authorised institutions in foreign country lending
  3. (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—
  1. (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
  2. (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
  3. (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
  4. (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
  5. (e) the prudent level of provision to safeguard the interest of depositors and
  6. (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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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


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 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.

Ardwick, L Boston of Faversham, L.
Birmingham, Bp. Brockway, L.
Blease, L. Bruce of Donington, L.
Blyton, L Carmichael of Kelvingrove, L
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.
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 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 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 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 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 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.