HL Deb 14 December 1992 vol 541 cc420-5

4.50 p.m.

Lord Henley rose to move, That the draft regulations laid before the House on 17th November be approved [12th Report from the Joint Committee].

The noble Lord said: My Lords, continuing our European and single market theme, the regulations we are debating today bring into effect the Second Banking Directive, which is the key banking measure in the single market programme, and which will bring a fundamental change in the system for authorising and supervising banks and building societies operating throughout the Community.

The Second Banking Directive builds on the foundations established by a series of Community directives setting common minimum standards by which all EC supervisors will be bound in supervising their banks. These directives open the way for a framework where each member state will recognise the banking authorisations granted in the others. EC banks, and certain of their subsidiaries, can now benefit from a common banking "passport" which enables them to conduct a wide range of banking and financial services throughout the Community, on the basis of the authorisation obtained in their home member state.

All this means that there will be a major rationalisation of supervisory responsibilities within the Community, with home states taking on responsibility for supervising the activities that their banks carry on under their passport throughout the Community.

The role of the "host state" is correspondingly reduced. But host states retain a general duty to co-operate closely with home supervisors, and have specific responsibilities in certain areas such as the supervision of liquidity. The host state also retains the right to act in emergencies to prevent an incoming institution from making any further transactions, and host states can continue to apply to incoming institutions the consumer protection and conduct of business rules which they have adopted in the interests of the general good. Depositors and investors with UK branches of EC institutions operating here under the passport will continue to be protected by UK depositor and investor protection schemes. This will continue to be the position until and unless there is agreement within the EC on common minimum standards of deposit and investor protection, which would enable protection to be moved on to a home state basis.

The single market in banking clearly offers great competitive opportunities for banks and building societies. But consumers also stand to gain from the new regime. The prospect of greater competition from elsewhere in the Community may be no bad thing in terms of keeping banks on their toes. If customers are not getting the choice and competition they expect from their domestic banks, the Second Banking Directive should make it easier for banks from another member state to enter the fray and try to do better.

Turning to the regulations themselves, and looking first at the operation of the passport in the UK, institutions which operate here on a passport basis are given the name "European institutions". The activities for which the passport may be granted are listed in Schedule I to these regulations. They start with the familiar banking activities of taking deposits and lending, but include also a variety of activities regulated under the Financial Services Act, the Consumer Credit Act, and—in one small respect—the Insurance Companies Act.

The regulations set out in detail the powers the UK supervisors will be able to exercise as host states. Responsibilities for co-operating with home supervisors will be shared between the Bank of England and the Financial Services Act supervisors, and the Director General of Fair Trading, in his Consumer Credit Act role. All those authorities are provided with powers of restriction and prohibition over European institutions within the area of their respective responsibilities.

The provisions of the regulations dealing with UK institutions mirror the procedures for incoming institutions as regards the procedures for obtaining the passport. However, for our own institutions we also need to implement the few changes required by the directive in terms of the general framework for authorising and supervising all credit institutions. For example, the directive requires us to introduce new trigger levels of shareholding at which the UK supervisors must be informed of the controller's identity, and must be satisfied of his fitness and properness. Also new minimum capital levels have to be introduced for both banks and building societies.

These regulations also make the provision that is necessary to implement the EC Second Consolidated Supervision Directive. The purpose of that directive is to extend the range of circumstances in which supervision of a credit institution has to be conducted on a "consolidated" basis. Consolidated supervision means, in this context, that supervisors have to be satisfied about the solvency of the credit institution not only in its own right, but also taken together with other credit institutions or financial businesses elsewhere in the same group structure.

The bulk of the Second Consolidated Supervision Directive will be implemented through prudential notes, to be issued shortly, but these regulations provide the investigation powers that are necessary for other EC supervisors whose exercise of consolidated supervision requires them to investigate entities in the UK.

These regulations give effect to two directives which provide a welcome and sensible rationalisation of supervisory responsibilities. At the same time they enhance the competitive opportunities open to one of Britain's key export-earning industries and offering the prospect of greater competition and choice for consumers throughout the Community. For all those reasons, I believe that the new framework represents the right way ahead in this important area and I commend the regulations to the House.

Moved, That the draft regulations laid before the House on 17th November be approved [12th Report from the Joint Committee].—(Lord Henley).

Lord Desai

My Lords, on this side of the House we welcome the directive. As the single market is about to commence on 1st January, it is clear that we need regulations to look after the interests of consumers as well as investors.

The strategy adopted in the directive is more or less to take as adequate the member states' regulations on credit institutions and to hope that some form of co-ordination and consolidated supervision will take care of the problems. One must say that that is not the most satisfactory strategy. Therefore, we must think of the directive as a transition to a better state in which there will be more harmonisation and standardisation of the practices of credit institutions and the rules to which they are subject.

For the time being, the problem will remain that the different regulations adopted by different member states still allow for some shopping around for someone who wishes to find the weakest regulatory base at which to start his credit institution. Therefore, from that point of view what one may call the BCCI problem has not quite gone away. It will still be possible to look for the weakest link in the chain.

There is a related problem. As the BCCI case showed, the problem for the Bank of England was not so much that BCCI was a Luxembourg institution operating here but given the powers of the Bank of England, the dangers were not foreseen —or if they were foreseen, they were not acted upon. In the light of this directive and what has been learnt from the BCCI case, do the Government intend to amend and strengthen our present legislation as regards banking supervision?

Secondly, we must see that the same problem will extend to self-regulating financial institutions. Our regulations are stronger in many cases than those of other European countries; and of course we welcome that. Indeed, if we are to gain our new share of financial services business throughout the Community, it will be necessary that we should impress people everywhere that we have a strong regulatory framework. In that respect, I should like to know whether there are any further plans to correct the weaknesses that have already been discovered in the present self-regulatory framework. Do the Government have any plans to bring forward any overarching regulations which will have teeth?

On the problem of consumer protection, referred to by the noble Lord, I welcome the directive. However, as was mentioned by the Member in another place from Edinburgh Central, how is a consumer to know what is the home base of a particular credit institution with which he or she deals? Would it not be better for clear signs to be given such as, "BCCI Luxembourg" or "BCCI France Ltd."? That would tell customers in a simple way which country was the home base of the credit institution and act as a warning symbol of problems that may arise.

Finally, I notice that the investment services directive has been delayed; and that is to be regretted. It would have been better if the banking directive had come in at the same time as the investment services directive. I understand that there is to be a delay of three years. I gather that certain European institutions which are in investment services can arrive here through the passport system and have a three-year lead time. Our own industry is subject to much sterner regulations. Does the Minister think that may disadvantage British firms in that sector? If so, what do the Government intend to do about it?

5 p.m.

Lord Cockfield

My Lords, I do not in any way oppose the regulations. Indeed, as I was responsible for originally launching the matter, I can hardly be expected to do so. However, the BCCI case raises important issues and in some ways underlines certain anxieties that we felt at the time when the directive was originally drafted.

The matter was considered by Lord Justice Bingham in his inquiry of the BCCI case. I gave evidence to him, as is recorded in the appendix to the report. Lord Justice Bingham made certain recommendations, and the Commission put forward certain proposals. However, at this stage I go no further than to ask whether the proposals put forward by Lord Justice Bingham—which go further than those made by the Commission—go far enough.

The essential problem is that we are relying upon not only our own prudential supervision, which in our usual national way we regard as being beyond reproach, but we are also relying upon the prudential supervision exercised in 11 other member states. The issue involved is not essentially one of harmonisation, as the noble Lord, Lord Desai, suggested. Indeed, the whole drive of the initiative and the other matters with which I dealt in the single market programme was to get away from harmonisation. We were laying down the essential requirements only at Community level.

The real issue is whether the essential requirements are sufficiently adequate. I know that sounds somewhat legalistic, but it is important to be clear as to what it is we are doing. I am not suggesting harmonisation. I am asking whether we are satisfied that the prudential requirements and the requirements for supervision as laid down in the second directive are adequate or whether they need reinforcing not only as suggested by Lord Justice Bingham, but possibly also a little further than that.

Lord Henley

My Lords, perhaps I may briefly respond to the comments made by my noble friend Lord Cockfield and the noble Lord, Lord Desai. Both the noble Lord, Lord Desai, and my noble friend are concerned that there is a need for tightening, in the light of BCCI and the comments made by Lord Justice Bingham (or the Master of the Rolls as he now is) in the report. Perhaps I may make a few comments on what the report says.

Lord Justice Bingham made it clear that nothing in that case called into question the new framework. His recommendation concerned points of detail that need to be looked at in order to ensure that all the lessons of the case are taken forward. First, he emphasised the importance of the principle that a bank's head office —the location of its mind management—should be in the same place as its registered office. The recital to the second banking directive makes clear that member states must require that. It is a principle which the Banks and Building Societies Commission will be applying in authorising and supervising UK incorporated institutions. However, Sir Thomas said that it would be more satisfactory if the principle were to appear in substantive articles of the second banking directive. The Government agree.

Secondly, Lord Justice Bingham recommended that added force be given to the principle currently reflected in the recital of the second consolidated supervision directive: that all supervisors should have powers to refuse authorisation or to withdraw it once given where banking groups are structured in such a way as to frustrate effective consolidated supervision. Both those potential changes to Community legislation have already been discussed in outline at ECOFIN on 23rd November and received a broad welcome. The Commission has undertaken to bring forward specific proposals with all possible speed.

Thirdly, Lord Justice Bingham said that the Community needs to look again at the issue of supervisory confidentiality and specifically at the exceptions to it—so called "gateways"—which enable supervisors to communicate as they need to with others engaged in regulating different aspects of the bank concerned or the banking and financial system more generally. Lord Justice Bingham highlighted the issue of exchanges of information between Community supervisors and those in third countries. I know that the Commission is keen to look at what can be done to facilitate co-operation and exchanges of information in that area.

The fourth recommendation on the EC framework was that there should be agreement as soon as possible on the Community directive on deposit protection, putting it on a home state basis to parallel supervision. The Government fully support that principle and a draft of such directive is currently being discussed. A considerable degree of progress has been made under the United Kingdom presidency and we hope to see more progress made in the future.

The noble Lord, Lord Desai, asked what plans we had to amend banking legislation. I believe we made it clear in response to the Bingham Report that we would introduce legislation on two matters. First, we would place a duty on auditors to report to the bank information relevant to their supervisory task. Secondly, we would give the Bank explicit powers to deal with banks with unsupervisable structures. Whether we go on to greater reform in that field—the noble Lord recognised that we have a relatively good framework for supervision of our structures—I can only repeat what was said by my honourable friend the Economic Secretary in another place. He talked of seeing no advantage in embarking on a hasty and wholesale reform of supervision of financial services. It would be foolhardy to embark on such a course without due consideration and consultation.

The noble Lord asked also about the investment services directive. We should have liked, and the Commission originally intended, the investment services directive to come into force at the same time as the banking directive to give investment firms the passport at the same time as banks. However, we saw no benefit in agreeing an early investment services directive which would restrict activities and damage markets. The United Kingdom and her allies were right to hold out for the liberalising directive which was agreed at the meeting of EC finance Ministers on 23rd November. My understanding is that the investment services directive will come into force on 1st January 1996. While we might have preferred an earlier date, that is realistic since implementation of the rules will require a great deal of work by both the United Kingdom and the other EC regulators and firms.

I hope that I have dealt with the points which have been raised by both noble Lords. Again, I commend these regulations to the House.

On Question, Motion agreed to.