HL Deb 19 July 1991 vol 531 cc420-7

3.8 p.m.

Lord Brabazon of Tara

My Lords, with the leave of the House I shall now repeat a Statement on the Bank of Credit and Commerce International which is being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

"With permission, Mr. Speaker, I should like to make a Statement about the Bank of Credit and Commerce International. My honourable friend the Economic Secretary informed this House on 8th July of the action taken by the Bank of England and the supervisory authorities in a number of other jurisdictions to secure control of the assets of the Bank of Credit and Commerce Group. Subsequently, last week in the course of the Finance Bill proceedings he answered points put to him by a number of honourable Members. The Governor of the Bank of England has met a number of MPs to explain the background and reasons for the action; and I met the honourable Member for Leicester, East and a group of other honourable Members yesterday to discuss the matter.

"The immediate priority following the closure has been to bring about as orderly a rundown of its operations as possible to help the many individuals and businesses which had accounts at the bank. I can assure the House that everything we can do to resolve their difficulties we are doing. In particular the Bank of England is putting an enormous effort into bringing the deposit protection scheme into action as soon as is humanly possible. The Deposit Protection Board will be writing to depositors immediately inviting them to make claims. Our latest estimate is that the UK branches at the bank had some 50,000 sterling accounts, although some customers may have had more than one account.

"The arrangements to make payments cannot commence until the winding-up order has been granted, but the bank has obtained an expedited hearing for the order which is to take place on Monday. Once the order has been granted the board will act as quickly as possible to meet valid claims.

"As my honourable friend explained, the provisional liquidator, the Bank of England, and the main high street banks have put in place arrangements to aid the banks in assessing applications by BCCI customers for alternative facilities. I am glad to hear that a number of the high street banks have set up special centres for dealing with applications from such customers and I hope very much that they will be able to respond helpfully in these cases.

"The Bank of England and the liquidator have also kept in close touch with the majority shareholders in BCCI in order to seek their co-operation in securing an orderly rundown of the company and to minimise losses to depositors.

"Looking further ahead, the Government and the Bank will be considering carefully what lessons this case has for the system of banking supervision in this country and for the framework of international co-operation among banking supervisors.

"A number of questions have been raised both in the House and elsewhere about the events leading up to the authorities' action on July 5th. In particular, it has been suggested that the Bank ought to have taken action earlier to seek the closure of BCCI. Others have argued that the Bank acted prematurely and should have sought the co-operation of the shareholders in restructuring BCCI and putting it on a sound footing. There have also been questions about the Government's role in the affair, although, as the House knows, under the 1987 Banking Act the supervision of banks is unambiguously the duty of the Bank of England and not of the Government.

"My honourable friend in his earlier Statement set out the general grounds for the Bank of England's action and for its timing. However, in the light of widespread public concern the Governor and I have agreed that there should be an independent inquiry into the supervision under the Banking Acts of the Bank of Credit and Commerce International to establish the facts and to make such recommendations as arise from them.

"The report will be made public, subject to such restrictions as may be needed to avoid prejudicing any criminal proceedings and subject to the provisions of the Banking Act. I shall announce shortly the precise terms of reference of the inquiry and who will conduct it.

"The Government would like to make plain that the establishment of the inquiry is not to be taken as a criticism of the Bank of England. I have no reason to doubt that the Bank acted properly and promptly in the best interests of the depositors. Unfortunately it will never be possible to prevent fraud and deceit. Nonetheless, both I and the Governor believe that an independent assessment of the case is appropriate and I hope all those who have evidence bearing on the matter will co-operate with it fully."

My Lords, that concludes the Statement.

Lord Peston

My Lords, I thank the noble Lord for repeating the Statement made in another place. I congratulate him on making his third speech today. On my reckoning he has at least another three to make before our business is concluded. I am quite exhausted, although this is only my second speech.

I must say immediately that we are pleased that there will be an inquiry. I hope that we can agree that first and foremost the mess must be cleared up, in particular because it affects small depositors. Therefore, I welcome the statement that the Bank of England will act expeditiously and that the other joint stock banks are trying to help. I hope that means that the Bank will act very quickly, because banking facilities should be available to small businessmen and to customers who will need funds during the coming week. I hope that something will happen in the coming week.

When we had the earlier statement on BCCI, apart from revealing my ignorance on insurance protection, I said that I felt that 100 per cent. protection for the small depositor made good economic sense to me. I am aware that it was the Treasury under a Labour Government which established the basis of the present law of lack of 100 per cent. protection. As an economist I do not see that that is a valid position. I should like to see 100 per cent. protection for small depositors. I hope that in due course the Government and/or the Bank of England will look at that matter.

I did not know at the time of the earlier Statement about local authority involvement in all this. I note that there is nothing in this Statement about that involvement. I ask the noble Lord whether we shall hear, before your Lordships rise next Thursday, anything about help to local authorities that have loaned money to this bank on a grand scale.

The central question is concerned with supervision. I ask the noble Lord to confirm that it is supervision as a result of fraud. This is not a banking collapse connected with incompetence or not having an optimal portfolio of assets. The noble Lord, Lord Harris, has focused on the fact that it seems to have been a fraudulent undertaking almost from start to finish.

Obviously some of that fraud is connected with the fact that banking must take place in an international framework with branches located in many different places. The Minister says that he cannot give us the remit of the inquiry. However, I ask him whether special attention will be paid to supervision in a fraudulent environment in setting out the remit for the inquiry.

I am glad to hear that the report will be independent and that, subject to one obvious proviso, it will be in public. Shall we have the terms of reference before next Thursday? My central question in connection with the remit is to ask what additional matters the inquiry will look at.

The Statement says: The Government would like to make plain that the establishment of the inquiry is not to be taken as a criticism of the Bank of England". It does not say, but clearly means to say, that the establishment of the inquiry is not to be taken as a criticism of the Government. I am rather more open-minded on both those topics. Prima facie the inquiry would not take place if the situation involved no possible criticism of the Bank of England. There is no avoiding the possibility of criticism of the Government. I hope that the remit of the inquiry will not prevent it from looking into both of those matters.

The noble Lord is quite right that the Banking Act 1987 leaves supervision of banks as the unambiguous duty of the Bank of England. However, unless I misunderstand the more general position of the Bank of England, the Government have a fair amount of responsibility for the Bank of England. Perhaps the Minister will confirm that that is still the case.

Those are difficult questions but I do not wish to end on a note of difficulty. I repeat our welcome for an inquiry. The Government are right to respond to outside pressures for an inquiry. I hope that we shall have the report in good time and certainly by the time we return in October.

Lord Harris of Greenwich

My Lords, I join the noble Lord, Lord Peston, in thanking the noble Lord, Lord Brabazon, for repeating the Chancellor's Statement. I shall reserve more detailed questions to the debate on the Unstarred Question in the name of the noble Lord, Lord Bruce of Donington.

Is the noble Lord aware that we all welcome the fact that there is to be an independent inquiry? Admittedly we are not told what are the terms of reference or who is to conduct the inquiry. The Statement contains the words: I have no reason to doubt that the Bank acted properly and promptly in the best interests of the depositors". I should have thought that that was a matter for the inquiry to determine, not for the Chancellor to determine before the inquiry has been set up.

Is the Minister aware that we shall look with care at the person selected to conduct the inquiry? Many of us believe that it should be at least a High Court judge with substantial experience of fraud cases. I hope that, despite the fact that a final decision has apparently not been taken in that regard, the noble Lord will be able to give us an indication as to whether a judicial figure will be asked to conduct the inquiry.

Is the noble Lord aware also that we welcome the fact that the report will be made publicly available, subject to the qualifications entered? Perhaps I may ask whether any part of the inquiry is to take place in public.

Lord Brabazon of Tara

My Lords, I am grateful for the welcome given by the noble Lords, Lord Peston and Lord Harris of Greenwich, to the Statement which I repeated and to the setting up of an inquiry. I cannot go into more detail of either the terms of reference or the person who will lead the inquiry. I hope that those announcements will be made—every effort will be made to do so—before the House rises for the Recess.

At this stage I can give no indication of when the inquiry will report. That depends on what it finds itself looking into and what it uncovers. One cannot say how long that will take.

The noble Lord, Lord Peston, commented on the position of small businesses. I hope that the arrangements described in the Statement take place expeditiously. The noble Lord also commented on the possibility of 100 per cent. protection for small depositors. The principle that there should not be 100 per cent. compensation was established for very good reasons. Where that policy has operated—for instance, in the United States—it has not proved to be a success. It encourages people to deposit money with less safe institutions by taking the risk away from where they deposit their money.

The noble Lord, Lord Peston, mentioned local authority deposits. I shall say something more in that regard in due course when I answer the Question of the noble Lord, Lord Bruce of Donington. I believe that covers the immediate questions asked by the two noble Lords.

3.23 p.m.

Lord Cockfield

My Lords, I too welcome the setting up of an independent inquiry. However there is an important lacuna in the Statement—there is no reference to the European dimension. Under the terms of the European Communities Act 1972, European law takes precedence over national law.

When I was at the Commission one of our main objectives was to create a Europe-wide banking system. That depends on mutual confidence among member states in the efficacy of their prudential supervision. Perhaps I may ask my noble friend whether the Government are satisfied that they have discharged their obligations under European law. I realise that the second Banking Co-ordination Directive adopted in 1989 does not necessarily come into force until the end of next year. Nevertheless, the United Kingdom Government always maintain that their standards of prudential supervision are greater than those required by the directive.

I invite my noble friend's attention specifically to Articles 13 and 17 of that directive. They go much further than any question of fraud. I hope that those matters will be fully considered by the inquiry.

Perhaps I may make one other comment. It is important because of a sentence which appears in the Statement. If at the end of the day anyone finds themselves in the dock of the European Court, it will in fact be the British Government and not anyone else. What is more, in recent months they have been pressing for sanctions to be introduced against people who breach European law. I fear that, in the light of this event, an undue number of people may be found who are prepared to support the initiative by our Government.

Lord Brabazon of Tara

My Lords, my noble friend makes a number of interesting points which I do not believe I am qualified to answer. I shall draw the attention of my right honourable friend to what he has said. I am sure that whoever conducts the inquiry will read with interest what has been said.

Lord Bruce of Donington

My Lords, the noble Lord will be aware that the Unstarred Question on the Order Paper that we are to debate a little later this afternoon originated in a proposed Private Notice Question which I submitted to the noble Lord the Leader of the House two or three days ago. He declined to accept it as such. That resulted in agreement through the usual channels for having the debate today. It is extremely gratifying that I did not have to walk seven times around the walls of Jericho in order to obtain a partial result. One time was evidently sufficient to shift a little.

I say "shift a little" because all the Statement has indicated is that the Government are prepared to institute an investigation and that the report will be made public. My Question relates to a public inquiry, not merely to an investigation. It seems that the argument for a complete public inquiry into the whole matter remains just as strong now as before the Statement was made. It is just as strong as when I originally sought leave in the earlier part of the week.

Lord Brabazon of Tara

My Lords, I am rather surprised at the noble Lord's remarks. The Question which he is to ask me later today—though I hope that by the time it comes to be answered many of the points will already have been dealt with—requests the institution of a public inquiry into the circumstances. I have just announced that an independent inquiry is to take place and that the report will be made public, subject to the obvious restrictions. I should have thought that the noble Lord had almost everything that he wanted.

Lord Morris

My Lords, I thank my noble friend for repeating the Statement made in another place. I too very much welcome the news that an independent inquiry is to be set up. I entirely agree with the noble Lord, Lord Harris of Greenwich. I believe that the more correct vehicle for this matter would be a judicial inquiry under the Tribunals and Inquiries Act. It is a small but very important point from the evidential aspect. I ask my noble friend to look into that.

The other point is a rider to what the noble Lord, Lord Harris of Greenwich, said. I find it slightly disturbing that Her Majesty's Government should, at this particular time and in the course of making the Statement, apparently prejudge the situation before they know all the facts by stating that setting up an inquiry per se is no condemnation of the Bank of England. I find that rather difficult to accept. However, I am sure that my noble friend will accept the point.

Lord Brabazon of Tara

My Lords, I listen to the points that my noble friend makes. If I am not much mistaken, the noble Lord, Lord Harris of Greenwich, was not so much criticising the type of inquiry, he was asking for a certain type of person to head it. That might be the answer to the point made by my noble friend.

Lord Harris of Greenwich

My Lords, I apologise for getting up again. I think the noble Lord misheard me. I did not suggest that this should be a particularly quick inquiry, because I would never advocate such a course of action. I asked whether the inquiry would meet in public for part of the time. That is a most important issue and I should be very grateful if the noble Lord could help us with an answer.

Lord Brabazon of Tara

My Lords, I am afraid I do not have an answer to that particular point at the moment; I hope to have one later.

Lord Marsh

My Lords, can the Minister go a little further and give some indication of the breadth of the inquiry? I have to declare an interest as chairman of a financial services group with about £1.5 billion under management. This is not a question of fraud; it involves the general vulnerability of the public to a financial situation which they are totally incapable of dealing with. Does not the Minister think that it is necessary to look at a number of issues of this type that have arisen within the past two to three years and to take a much broader look at the whole picture?

Lord Brabazon of Tara

My Lords, the noble Lord makes an interesting point. I said in the Statement that I was not able to announce the precise terms of reference of the inquiry. I can go no further than that at the moment.

Lord Monk Bretton

My Lords, I also welcome the Statement and thank my noble friend for repeating it in this House. I was particularly glad that he mentioned the need for lessons to be learnt regarding the system of banking. I believe that to be so. I also welcome intention that there should be an independent inquiry.

I want to ask the Minister how we are to fit in another banking matter which has perhaps been rather eclipsed by the events of BCCI, and which concerns the closing of the British& Commonwealth Merchant Bank last July. There are certain lessons to be learnt from that which should not be forgotten.

By way of declaring an interest, I should perhaps say that I managed to get my own deposits out of the British& Commonwealth Merchant Bank before the blow fell. I withdrew them approximately four months before. I am not an expert regarding these matters, but nevertheless it is perhaps worthy to record that I did achieve it without too much difficulty. However, I know of others who were not so lucky or so far-sighted. The bank closed with £300 million on deposit.

The British& Commonwealth Merchant Bank was put into administration at the behest of the Bank of England and the SIB, so I am informed, in the interest of depositors. I am also told that unlike BCCI, it was solvent then and is still. I would ask that we do not lose sight of this particular matter during the inquiries into the banking system.

Lord Brabazon of Tara

My Lords, my noble friend makes a number of interesting points, not all of which are connected with the Statement that I have made today, but no doubt they will be taken into account by the inquiry.

Lord Hollick

My Lords, the Statement describes the regulators' behaviour as "prompt". That is not a word that comes to mind. I believe it has been known, or widely suspected, for some 10 years that this bank has harboured criminal activities. The bank has long been suspected of indulging in fraud; it has been successfully prosecuted in the United States for being associated with drug transactions, and we now learn that in October 1990 Price Waterhouse told the regulators that there was evidence of systematic financial malpractice. Why did it take so long for the authorities to act?

Lord Brabazon of Tara

My Lords, I covered that ground in the recent Statement. There is little further I can add to that. The Bank acted as soon as it felt it had sufficient evidence under the Banking Act to do what it had to do.