The Minister of State, Department of Transport (The Earl of Caithness)
My Lords, with the leave of the House, I shall now repeat a Statement made in 860 another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:
"Madam Speaker, the collapse of BCCI was a severe blow to many thousands of depositors all over the world. It was the result of a fraud unparalleled both in scale and cunning. Many honourable Members have seen the problems it has caused and is still causing to businesses and individuals alike although I am pleased to report that approaching 9,000 payments have now been made to UK depositors under our deposit protection scheme.
"It was against this background that I decided, with the Governor of the Bank of England, to ask Lord Justice Bingham to carry out a full and rigorous inquiry into the conduct of the authorities that supervised BCCI.
"Lord Justice Bingham had access to all the material he needed from the Government and the Bank. Nothing was withheld. Much of this was confidential and the inquiry was held in private to avoid any prejudice to criminal proceedings and to encourage witnesses to give evidence.
"Since receiving the report, I have had to weigh carefully the public interest in maintaining that confidentiality against the public interest in disclosure. After taking legal advice, I have concluded that the balance lies in favour of publishing Lord Justice Bingham's report unamended and in full but without the supporting appendices. Once honourable Members have had an opportunity to digest the report, there will be a debate in government time in this House.
"Madam Speaker, Lord Justice Bingham's terms of reference were:
'To enquire into the supervision of BCCI under the Banking Acts; to consider whether the action taken by all the UK authorities was appropriate and timely; and to make recommendations'.
"Accordingly, his report does not attempt to describe the full story of BCCI's activities, nor does it seek to judge how overseas authorities, the directors of the companies, or the auditors, carried out their duties. What the report does provide, Madam Speaker, is a clear and thorough account of the role of every official UK authority which had any involvement in the affairs of BCCI.
"Madam Speaker, Lord Justice Bingham concluded that the conduct of Treasury Ministers and officials was not, in his view, 'open to criticism in any respect'.
"However the main focus of the report is banking supervision. With the Banking Acts of 1979 and 1987, Parliament placed responsibility for banking supervision on the Bank of England. So the bulk of the report deals with the way the Bank discharged its responsibilities from 1972, when BCCI opened its first branch in London, to its closure last year. It may be helpful to the House if I summarise briefly the report's main conclusions.
"First, I should make clear that the closure of BCCI was instigated by the Bank after it had 861 received a report last June from the auditors which revealed the largest fraud in banking history. Responsibility for that fraud and the consequent losses rests squarely with those criminals who devised and carried it out. They are being pursued by the authorities in a number of countries.
"Secondly, BCCI's opaque group structure was established before there was a statutory system of banking supervision in this country. The report accepts that a bank established today could scarcely hope to assume the form it did or last so long.
"But Lord Justice Bingham is critical of a number of judgments made by the Bank over the years. He argues that the Bank was slow to impose on BCCI an appropriate supervisory regime, and he concludes that the Bank continued for too long to rely on the Luxembourg authorities to play the leading role.
"Next, the report concludes that communication between supervisors, auditors, and shareholders was not as good as it should have been. The Bank did not grasp the scale of the fraud that the majority shareholders and auditors had uncovered until it received Price Waterhouse's report in June last year. The report came as a surprise to the Bank, but Lord Justice Bingham argues that it should not have done.
"He concludes that it would not have come as a surprise had Price Waterhouse more plainly and comprehensively brought the various elements of the fraud to the notice of the Bank as they emerged; or had the majority shareholders made a full and timely disclosure of all the facts known to them. But Lord Justice Bingham also concludes that the Bank itself should have been more alive to the significance of those messages it did receive and that it should have pursued the leads it was given more vigorously.
"Turning to the summer of 1991, he concludes the Bank's action in closing BCCI was an appropriate course of action, as was its decision not to give effective advance notice to the majority shareholders. In his view, all the options were unattractive and the Bank had to act on its judgment of what was in the interests of depositors.
"Madam Speaker, some wild allegations have been made—both in this country and abroad—in the last 18 months about the Bank's role in this affair. Lord Justice Bingham's report shows that there was no duplicity or bad faith; the Bank was party to no conspiracy and to no cover up. Nonetheless, he concludes that mistakes were made and that in certain respects the Bank's supervision was deficient. That is a matter of very serious concern and I am determined that all the lessons from this case should be learnt.
"It is to the key question of how to make the supervisory system more effective in the future that Lord Justice Bingham turns in the final chapter of his report.
"He does not call for any radical recasting either of UK legislation or of the international framework 862 developed by the G10 countries. Nor does he find any substantial flaws in the new regime for banks within the European Community which comes into effect next year. He believes that the Bank's traditional supervisory techniques have generally served the community well and he does not recommend any change in their responsibility for supervision. Nonetheless, he makes a number of recommendations for strengthening our current arrangements. The Governor and I accept them all.
"First, we must ensure transparency of structure. Lord Justice Bingham says that the most important lesson of the affair is that banking group structures which deny supervisors a clear view of how business is conducted should he outlawed.
"To put the position in the UK beyond doubt, I will introduce legislation to give the Bank explicit powers to refuse or revoke authorisation of banks whose supervision is obstructed by a complex structure, or by undue secrecy in the financial centres in which they operate. In Europe, I will urge our Community partners to agree that similar powers should be taken by all banking supervisors; and we will press for the adoption of similar standards more widely.
"Next, we need better communication and co-operation between supervisors internationally. Few substantial banks now operate only in one country, or even on one continent. It is vital that all the supervisors concerned with a single group should communicate openly, co-ordinate their efforts, and should impose similar standards.
"The latest Basle Concordat is an important step forward, as is the Community consolidated supervision directive. But we need to go further in clarifying the arrangements for exchange of information internationally. We will ask our European partners to look again at the confidentiality provisions of the banking directives to ensure that they do not impede the exchange of information between supervisors and other authorities. We will also propose a system for reviewing supervisory standards within the Community and more widely.
"But it is not just a matter of co-operating internationally. An increasing number of banks form parts of wider financial conglomerates; fraud is by no means confined to banks. So we must also ensure that all the different authorities at home that are responsible for deterring, investigating, and prosecuting fraud work together to greatest effect. I am therefore establishing new machinery within the UK to strengthen communications and co-operation between supervisors and all the other relevant authorities.
"Fourthly, BCCI has emphasised how vital it is that auditors should speak plainly and freely to the Bank. Hitherto, their duties have been laid down in professional guidance. Lord Justice Bingham has concluded, as did the Treasury Select Committee, that it would be better for the duty to be a statutory one. I accept that conclusion. I have decided that a similar approach would be appropriate for financial services and building societies and the 863 President of the Board of Trade considers that it should also be extended to insurance companies. The necessary consultation with the professional auditing bodies and others on the formulation of such a duty and its enforcement will be taken forward urgently.
"Finally, Lord Justice Bingham concludes that it would be a mistake to respond to BCCI by intensifying supervision of all banks. The overriding need is to ensure that the supervisors' attention is concentrated on suspect banks and that, where appropriate, vigorous action is taken. The Governor and I take very seriously the criticisms of the Bank. So the Governor is announcing today important organisational changes and a strengthening of his supervisory team. A special investigations unit and a legal unit are being set up; as recommended by the Select Committee, the Bank's capacity for on-site examination is being strengthened; greater use will be made of the Board of Banking Supervision which brings outside expertise to bear on the Bank's work; and training for supervisors is being enhanced.
"Madam Speaker, an effective system of banking supervision is essential to any advanced economy. It cannot eliminate risk, but it can make bank failures less likely and frauds more difficult. In that way it sustains the confidence on which sound banking, and the economy more generally, depends.
"BCCI was not typical in any respect, but its failure has caused great damage and distress. It was important to review the UK authorities' role in the affair dispassionately and thoroughly.
"I am sure honourable Members will join me in thanking Lord Justice Bingham for producing a masterly account of a complex subject. He has not hesitated to make criticisms where he considers them appropriate, and he has been constructive in his recommendations for the future. The Government are determined to learn all the lessons from this unhappy affair. We accept all the Bingham Report's recommendations and we will pursue them vigorously".
§ My Lords, that concludes the Statement.
§ 4.33 p.m.
§ Lord Peston
My Lords, I thank the noble Earl for repeating the Statement of his right honourable friend the Chancellor of the Exchequer. The short interchange we shall take part in today will be no substitute for a full debate on the report based on a careful, considered reading of it. It is a matter which your Lordships are well qualified to debate, on which we have a great deal of expertise and—dare I say it?—perhaps even more so than the other place. I understand that the Government have committed themselves to a full debate in the other place. I hope that the usual channels will hear my remarks that we equally require a full debate and one that is not too long delayed.
As your Lordships will see, I shall be extremely critical of the Statement as well as the report—in considering the matter, we should remind ourselves 864 that we are discussing the largest fraud in the history of banking. We are not discussing a minor matter; it is the largest fraud in the history of banking. As I understand it, the bank was involved in drugs trafficking, illegal arms sales, financing of terrorists, in prostitution, and much more. The list is endless. All that was going on for many years and it was going on under the nose of the Bank of England which was referred to in the report in rather mild terms to say the least.
I received the report only a short time ago. I have dipped into it. It contains a great deal of factual material of a useful nature. But I for one find it impossible to move from what is known to have taken place to the conclusions, let alone the rather complacent Statement we have just been given. I must warn the House therefore that when we come to debate the matter more fully we shall need to be a great deal more vigorous than the Government seem to wish to be. Therefore in joining the noble Earl in welcoming the work of Lord Justice Bingham, and in looking forward to reading every word of his report—and while showing all due deference to Lord Justice Bingham—I do not believe that that requires us necessarily to accept his conclusions either in whole or in part.
When the noble Earl replies to the questions which will follow, perhaps he can refresh my memory on one point. I seem to recall that when we received the Statement on setting up the inquiry, we were told that not only would we be given a report, but we would be given also—except for one or two commercially sensitive matters—all the evidence. I understand that the report before us is all there is. I was in touch with the Printed Paper Office to ask whether there are other volumes and I was told that there are not.
I am puzzled by that. We are told that we receive the report unamended and in full but without the supporting appendices. Perhaps the noble Earl can tell me what the supporting appendices are. Specifically, do they contain all the evidence? If so, perhaps I can be reminded why, except for one or two matters that may be commercially confidential, we are not allowed to see all the evidence. That is an extremely important point.
My next query concerns the extraordinary statement that,the conduct of Treasury Ministers and officials was not, in his view, open to criticism in any respect".I can only say that apart from what we know was happening, a quick glance through the report suggests that that is an impossible conclusion to reach. For example, it is perfectly clear that the famous case which alerted people to certain worries in regard to the bank—namely, the prosecutions for drug trafficking in Tampa, Florida—were well-known to the Treasury. That is actually documented in the report. When one knows that drug trafficking is happening and that a bank is involved, is one not open to criticism if one does nothing about it? What are we coming to when that is thrust aside on some kind of technical ground?
There are many other examples. It certainly eludes me how it can remotely be said that Treasury officials 865 and Ministers are not open to criticism "in any respect". Those are the words in the report. I should like to hear the noble Earl comment on that aspect.
My next point is to query the role of the Bank of England in the matter. I do not believe that we can let the Bank of England off the hook. We are told that the Bank did not grasp the scale of the fraud, and so forth. But what does that mean? Are we being told that they did not grasp that any fraud was taking place? Are we being told that they did not realise they were dealing with terrorists and crooks or that the fraud had to reach a critical level before the Bank of England could possibly think of acting? I find that extraordinary.
The remarks made in the report that attempt to move the burden on to Price Waterhouse and the auditors as though that were the central question are not attractive. Looking briefly at the report and more deeply at the Statement, we seem to have a Treasury which is ultimately responsible. The Bank of England is certainly directly responsible. But they are both passive. They sit there waiting for something to come to them and that is their concept of supervising a bank involving the largest fraud in banking history.
I feel too that the Government's position is somewhat contradictory. The Government said that they do not need any major recasting of legislation. But if the legislation is right, it can only mean that those who use it failed us. It means that the Bank of England failed us. I should like the noble Earl to comment in that regard.
I draw your Lordships' attention to the comment that we need "better communications and cooperation". That is not what this is about. It is about a major failure of the Bank of England to deal with the biggest fraud in history.
That leads me to what must be a central question. We are told that the Governor and the Chancellor of the Exchequer take very seriously the criticisms of the Bank. But, as I understand it, their idea of taking criticisms seriously is to introduce some organisational changes and to strengthen their supervising team. Taking it all seriously does not seem to involve anybody resigning or getting the sack. I ask the noble Earl whether the Government asked for the resignation of the head of the banking supervision department of the Bank of England. Was that matter raised? After all, he is the person directly responsible.
I ask the next question in the way that I do because we must not consider the issue in terms of personalities. Has the Governor of the Bank of England been asked to submit his resignation? Ultimately, the responsibility for supervision in this case lies with him. Clearly we cannot disguise the fact that something went seriously wrong. I have to repeat the point: we are not discussing here a minor matter but the biggest fraud that has ever occurred. We are told that as a result of it the Governor of the Bank of England is thinking of reorganising a little part of his department.
I hope that I have got the point across. I am somewhat dissatisfied both with what happened and a fortiori with what the Government seem to wish us to do in terms of a response. The preface to my copy of 866 the report by Lord Justice Bingham is dated July 1992. I take that to be the date when this report was given to the Chancellor of the Exchequer. Therefore, the Government have had August, September and October to deal with this matter. They seem to have made a damp squib of a Statement after three months. To be told that what is going to happen will happen in the future is not good enough.
In particular, I refer to a matter not mentioned in the Government's Statement and, as far as I can see, it is not in the report; namely, the allegations in the Senate Report on these matters. I would like to believe that what I have read in the newspapers of what the Senate sub-committee said about the Bank of England and our role is not true. In order to believe that I would have liked to have seen a direct rebuttal of everything that the Senate said, because its criticisms are even stronger than my own. I am rather disappointed that the Government have not felt able to say anything about that. Therefore, I ask the noble Earl whether we can expect to hear more from the Government on all of these issues.
In the end, one's concern comes down to the detail and we shall have to come back to that. I refer to the detail of what the Bank of England knew and when. What was the Bank of England trying to do? Was it more concerned about protecting, as it were, the owners than about anything else at all? What kind of supervisory place is the Bank of England if it does not get itself triggered into action immediately when it finds itself involved with drugs, money laundering and such matters, none of which it could possibly have been unaware of?
There are many more matters that I could raise. I find the Statement unsatisfactory. For the moment I am not in the least happy about the conclusions which the report draws. However, having said all that, I believe that I should pause in the hope that we can come back to this matter in the very near future so that we can really scrutinise the issues. I also hope that more than one or two heads will roll.
§ 4.45 p.m.
§ Lord Bonham-Carter
My Lords, I too would like to thank the noble Earl for repeating the Statement made by his right honourable friend in another place on this serious and complicated matter. As the noble Lord, Lord Peston, has said, we are certainly in no position this afternoon to deal with the major matters raised by this report in a short period of question and answer. Neither have I had an opportunity to read the report or even to leaf through it. Therefore, it seems to me extremely unwise to come to any conclusions about it at this stage.
I welcome the fact that the report is to be published in full. Like the noble Lord, Lord Peston, I would like to know whether the evidence is also to be published. That would make it much easier for us to assess the report if it were also available to us. I assume that there will be an opportunity in your Lordships' House to debate the report in full in government time, which is the proper time at which to come to conclusions and to make substantial criticisms should they be warranted.
867 However, there are one or two questions which I should like to put to the noble Earl and to which I hope he will be able to provide answers. The first and perhaps most urgent one is whether individuals and local authorities who have suffered as a result of this massive fraud will receive compensation. Quite reasonably, in the past it has been the practice that central government did not compensate local authorities for losses on investments of one kind or another for the excellent reason that they should be responsible for those losses.
However, where there is a question of incompetence or negligence on the part of an organ of central government, it seems that there is good reason for that principle to be abandoned. Indeed, the Treasury Select Committee argued on those lines some time ago. It said:
Exceptions to this principle [of no compensation] would only arise if it could be shown that central government had used its powers or authority to cause local authorities to make such investments, or that the Bank of England had failed to discharge its supervisory duties.Therefore, it seems that this is a case where compensation of some kind is justified. If compensation is to be offered to local authorities, it should also be offered to individuals. I would like the noble Earl to reassure me on that point.
I welcome the fact that the auditors' duties are now to be made statutory. It is high time for this to be the case since it is clear from the Statement that a possible cause of the delay in investigating this fraud was the somewhat opaque advice provided by the auditors in question.
Those are the two points to which I would like answers this afternoon. Meanwhile, I would like to reserve opinion until I have had an opportunity to read the report and, I hope, the evidence.
The Earl of Caithness
My Lords, I listened with great care to what the noble Lords, Lord Peston and Lord Bonham-Carter, said. I most certainly disagree with the noble Lord, Lord Peston, saying that I had repeated a complacent Statement. It was certainly anything but a complacent Statement. It was a very serious analysis of a situation which led to the acceptance of all the recommendations made by Lord Justice Bingham.
The noble Lord, Lord Peston, said that there is no need to accept the recommendations in whole or in part; at the moment he was not minded to accept them. I know that he will read the report diligently and I look forward to hearing what his recommendations would have been.
The noble Lord raised the point of the Treasury being culpable. I remind him of what was said in the Statement. He will know better than I do that through the Banking Acts of 1979 and 1987 Parliament placed the responsibility on the Bank of England. That is why Lord Justice Bingham, having interviewed people and taken all the evidence, doubtless came to the conclusions that he did.
The noble Lord also asked about resignations at the Bank. That is a matter for the Governor himself who is in charge of the Bank. There is no question of the Governor resigning because, although Lord Justice Bingham makes a number of criticisms of 868 particular decisions, he does not make any personal criticisms or recommendations that personnel should be changed.
The noble Lord also referred to the senator's report in America. It is known also as the Kerry Report. It is worth reminding the House that there is a substantial difference between the Bingham Report and the Kerry Report. Senator Kerry made no attempt to check his conclusions or allegations with the UK authorities, especially the Bank, or to ask for any evidence. Moreover, Senator Kerry had no access to witnesses and documents, unlike Lord Justice Bingham. I am therefore sure that it is right to look to Lord Justice Bingham's report as the right report in those circumstances.
I turn now to two points raised by both the noble Lord, Lord Peston, and the noble Lord, Lord Bonham-Carter. The first refers to the debate which, judging by the mood of the House, will be welcomed. I shall of course repeat to my noble friend the Lord Privy Seal exactly what the noble Lords said and I am sure that that is a matter for the usual channels. Both noble Lords asked about publication of the appendices. As I said in the Statement, my right honourable friend the Chancellor of the Exchequer has taken careful legal advice on this question and believes that it is clearly in the public interest not to publish more detailed material because it would prejudice criminal proceedings and the effective working of the supervisory system.
The noble Lord, Lord Bonham-Carter, asked about compensation. I can advise him that there is a UK statutory deposit protection scheme which pays compensation for sterling deposits with UK branches at 75 per cent. of the protected deposits under £20,000. The maximum pay-out is therefore £15,000. It excludes foreign currency deposits and deposits by other banks. The statutory scheme was triggered by the winding-up order made on 14th January. I can tell the House that, as at 19th October, some 8,827 payments had been made to the value of £51.7 million.
The noble Lord, Lord Bonham-Carter, also welcomed the acceptance by my right honourable friend the Chancellor of the Exchequer that auditors' duties should be made statutory. I thank him for that.
§ 4.52 p.m.
§ Lord Boyd-Carpenter
My Lords, will my noble friend treat very seriously the request of the noble Lord, Lord Peston, for an early debate on this matter in this House? So often we are promised debates after a Statement of this kind but then a long time is apt to elapse before we hold them. This is an enormously important matter. As the noble Lord, Lord Peston, said, it is the biggest fraud, the biggest breakdown in our financial system, that there has ever been. It is important that your Lordships' House, which includes so many people with great experience in matters of finance, should have the opportunity of making an early contribution. Will my noble friend urge on the normal channels the need to take this matter early even if it involves disrupting nicely arranged programmes.
869 Perhaps I may also ask my noble friend to remind us, because I do not have it clearly in mind, what criminal proceedings have so far been initiated in this connection? That is relevant because he gives those proceedings as a reason for not publishing the appendices which we would be interested to see.
Finally, perhaps my noble friend will tell your Lordships whether, in the light of the very poor performance of the Bank of England in this matter, any resignations in that direction have been tendered?
The Earl of Caithness
My Lords, I apologise to the noble Lord. I was just making a note of what my noble friend said so that I could try to answer the three points.
With regard to the debate that my noble friend requested should be held urgently, he will know that I cannot make that decision. I shall pass on what he says to my noble friends the Lord Privy Seal and the Chief Whip.
With regard to proceedings, there have been a number of proceedings in the United Kingdom, Abu Dhabi, France and the United States. As regards the United Kingdom, the Serious Fraud Office investigation announced on 8th July 1991 has to date resulted in the arrest of three people and people in other countries have been charged. Perhaps I may deal with that matter more fully at another time which might help my noble friend.
With regard to resignations, so far as I understand it there have not been any.
§ Lord Benson
My Lords, this is a complicated report. A number of fair criticisms have been made and, as one would expect, a number of recommendations. In no sense do I minimise the deplorable conditions that have been disclosed. I want to ask one humble question as to whether we can remember to exercise a little restraint in the criticisms that are likely to be offered.
When there is collusive fraud by top management, it is almost impossible to discover it. It is greatly exacerbated when the concern operates all over the world and when money can be switched from one place to another at the drop of a hat and all traces of the movement either eliminated or fabricated with great success. This company was apparently domiciled in Luxembourg. Its owners appear to have been resident somewhere in the Middle East. I have never been able to find out from a study of the papers which first came before us where the seat of management existed.
On the whole, the Bank of England's record in its supervisory activities has been good. I speak with a little modest knowledge because I had some knowledge about it at the time. If the House knew the difficulties and frustrations that are suffered by the Bank in trying to get to the bottom of these transactions, it would perhaps show some slight trace of sympathy.
Therefore, all I ask is that, before we all give way to the bursts of criticism which are traditional on these 870 occasions, we should bear those facts in mind and should remember that, unlike the Bank of England, we have the precious gift of hindsight.
The Earl of Caithness
My Lords, I am sure that the whole House listened carefully to the wise words of the noble Lord. I have tried to answer the noble Lord's questions on fraud from this Dispatch Box for many years. My noble friend Lord Boyd-Carpenter mentioned the expertise of the House in this matter. Perhaps the noble Lord, Lord Benson, has a greater knowledge of some of the complications that are involved than some of the rest of us. His words are well worth heeding.
Lord Bruce of Donington
My Lords, perhaps I may question the noble Earl a little further on his announcement that the appendices to the report will not be published. I understood him to say that there had been consultations with the Government's legal advisers and that the Government had decided that, in view of possible prosecutions, it would not be in order to have them published. I was not quite clear as to whether the legal advice received by the Government was to that effect or whether the Government themselves, after taking legal advice, had come to that conclusion. I would have thought that in general it would be difficult to arrive at any conclusions about the report without having some sight of the appendices. Surely, even though some of the appendices may not fairly be published on the grounds that it might prejudice subsequent trials that might conceivably arise, there would nevertheless be some appendices or some parts of the appendices to which those considerations would not apply. I invite the Minister to give some further consideration to the matter.
The report is set out most clearly and I should like to congratulate Lord Justice Bingham on the clarity with which he has expressed himself. However, surely any full consideration of the report which would enable us to arrive at a judgment as to its merits requires that we should have sight of as much material as possible. Will the Government reconsider that point?
I agree with the noble Lord, Lord Boyd-Carpenter, that this matter should be considered at the earliest possible date. On the other hand, while agreeing with the noble Lord, such consideration of those matters, particularly if the appendices do become available, would require a fair amount of study, taking a protracted period of time, before any Member of the House, let alone those who are professionally qualified, could come to some conclusion.
I shall add only one further point. Indeed, I have ventured to make this point before in the past. It did not need the Banking Act 1987 to give the Bank of England powers of investigation. Such powers have been in the Bank's hands ever since the passing of the 1979 Act. One would have to be satisfied that this is not purely a consideration of any breaches of the 1987 Act. I hope that the Minister will give these matters his urgent consideration with a view to providing the House with as much further information as the Government might consider it proper to provide.
871 The Earl of Caithness: My Lords, I have listened with care to the noble Lord, Lord Bruce of Donington. I say to him, as I said to the noble Lord, Lord Benson, that I have answered a lot of questions on fraud and that I know of his concern and of his wish to improve the system both in this country and throughout Europe.
On the appendices, at this stage I can only repeat what I said in the Statement—that my right honourable friend the Chancellor of the Exchequer had to weigh carefully the issue of maintaining confidentiality against that of the public interest in disclosure. After taking legal advice, he concluded that the balance lay firmly in favour of publishing Lord Justice Bingham's report, which is self-standing and self-contained, unamended and in full, but without the supporting appendices. However, I take note of what the noble Lord has said and shall draw it to the attention of my right honourable friend.
§ Lord Elton
My Lords, did I correctly hear my noble friend say in about the ninth minute of his Statement that the Government are either intending or considering extending the statutory approach from the regulation of banking to the regulation of financial services—a declaration of such importance that I should have thought that it might be given more prominence? Many of us have regarded the self-regulatory system that has been applied to the financial services by the Financial Services Act 1986 as experimental in nature; the success of the experiment depending on the success of the various parts of the financial services sector developing wholly professional standards of their own. If I did hear correctly, can my noble friend tell us whether the experiment is to be abandoned in whole or in part and, if in part, which part?
Finally, if there is to be a statutory approach, will my noble friend note that that, too, deserves discussion in this House and that that discussion should not be obscured by or absorbed into that on the major question of banking, which was the principal subject of his Statement? If I have got it wrong, I apologise, but it is still an issue of which I hope the Government will take note.
The Earl of Caithness
My Lords, I think my noble friend has got it right. In the Statement I said that my right honourable friend the Chancellor of the Exchequer had decided that the statutory approach would be appropriate for the financial services and the building societies. Indeed, my right honourable friend the President of the Board of Trade considers that the statutory requirement should also be extended to insurance companies. I also went on to say that consultation with the professional auditing bodies and others on the formulation of such a duty and on its enforcement would be necessary. That work will be taken forward urgently.
§ Earl Russell
My Lords, may I ask the noble Earl and his right honourable friends to give some further thought to the points made by my noble friend Lord Bonham-Carter about compensation? Of course, we appreciate the point about the present level of the 872 compensation that is available, but £15,000 is not very much money. I do not know when that sum was fixed—perhaps it was once bigger in real terms. For a private individual, however, it represents probably less than one-tenth of the value of a house and it is not very much even for a medium-sized business, while it is almost nothing for a local authority. This is not the best time to increase the number of business bankruptcies. One local authority has already been close to bankruptcy and the bankruptcy of a body bearing statutory obligations is likely to cause some confusion. There is, of course, force in the point that this cannot become a general rule. The question is whether the Government's agents discharged their regulatory duties sufficiently or whether there was, in effect, a lack of care which involves them taking, ex gratia, some share in the responsibility.
The Earl of Caithness
My Lords, many of the noble Earl's concerns are addressed in the Bingham Report and I am sure that he will wish to read it with very great care. I know that he will agree with me that, whatever the supervision, it cannot prevent a bank from failing. It was precisely for that reason that the deposit protection scheme was established to protect small depositors. It has been very helpful in this case. I understand the noble Earl's concern that the amounts of money should be looked at again to see whether they are appropriate. I shall draw that point to my right honourable friend's attention.
§ Lord Desai
My Lords, I agree with my noble friend Lord Peston not only that this was one of the biggest frauds which we know of but, more than that, about the fact that nearly three years before this happened not only was what happened in Tampa, Florida, public knowledge but it was also the subject of a Channel 4 documentary. There was a lot to suspect about BCCI. The Bank of England should have provided strong evidence to the effect that it knew something other than what the public had been talking about which led it to refrain from taking action. The Bank waited far too long before taking action and caused a great deal of damage.
I believe that that happened because the Bank's regulatory practices are old fashioned. It was regarded in the City as a nice, informal club. However, as a result of Big Bang and the emergence of the new global financial markets, although it may have the powers, the Bank no longer has the competence to discharge its duty properly. Perhaps we should consider whether the Bank's regulatory functions should be removed from it and placed somewhere else, along with all other financial services. Perhaps we should leave the Bank only with the duty to regulate the money supply—if it can do that properly.
The Earl of Caithness
My Lords, I listened with care to what the noble Lord, Lord Desai, had to say. Lord Justice Bingham had access to all the material and witnesses in a way that was designed specifically to ensure that nothing would be withheld from him, and he has written his report on that basis. The more I listened to what the noble Lord, Lord Desai, was 873 saying, the more I took into account what the noble Lord, Lord Benson, had said. Perhaps it might be sensible to allow time for a little quiet reflection.
§ Baroness Flather
My Lords, I listened with interest to the Statement. As a lay person, I have been greatly surprised by the fact that no blame attaches to the Bank of England—it has discharged its duties perfectly properly—but that a considerable amount of criticism has then followed. That is most interesting to those who are simply sitting and listening. I have not had a chance to look at the report. Indeed, even if I had had the report in my hands, I do not think that I could have become any better informed in just a few minutes. However, it is interesting that no blame attaches, but a lot of criticism has been made, and that there are issues which are to be taken up through legislation.
The Minister stated that the BCCI was set up before the Banking Act. I am not sure whether it was set up before both the Banking Acts or one of the Banking Acts. If it was set up after the Banking Acts, then the bank should not have been set up. Does that situation mean that there are banks operating now which could behave like BCCI, and that the Bank of England has no duty to look into their affairs? If that is the situation, it is extremely alarming. I hope that any proposed legislation will ensure that existing institutions come under the same regime as institutions that will be set up after the legislation; otherwise, legislation would be pointless.
I was intrigued by the subject of suspect banks. What is a suspect bank? If all banks are not looked at, it is possible that the next report that we will be listening to will be stating that,"It was not a suspect bank and therefore we did not look at it. It is only after the collapse that we realised that we should have looked at it and that it was a suspect bank."
Many questions need to be answered and I hope that there will be a proper debate on this issue very soon.
The Earl of Caithness
My Lords, quite clearly, Lord Justice Bingham has made criticisms of the Bank and there are lessons to be learnt. That is why the Government and the Bank have accepted the recommendations made by Lord Justice Bingham and are taking steps to implement them.
I should like to say that it is not so much the fundamental nature of the system that is under attack; it is the way that it is operated. That is why Lord Justice Bingham has set out a number of recommendations which we have accepted, that will improve matters, so that we are not faced with a situation such as the present one.
§ Lord Lyell
My Lords, I should like to thank my noble friend for taking us so quickly through this report, which I have had in my possession for the same length of time as other noble Lords. Three paragraphs were not covered by my noble friend. Can he assist me with paragraph 3.28 on page 186? That refers to,
the role of certain financial centres which offer impenetrable secrecy and tend, for that reason, to be favoured by those with something to hide.874 Noble Lords may have a great deal more to say about that matter when we debate the whole report.
Paragraph 3.41 concerns the duty of auditors to depositors. The last three lines of that paragraph go some way to giving us guidance. The noble Lords, Lord Benson and Lord Bruce, will be able to amplify that matter. If my noble friend would care to look at paragraph 3.47, I am sure that consultation and advice will be forthcoming from that sector.
The Earl of Caithness
My Lords, my noble friend will recall that I stated that my right honourable friend the Chancellor of the Exchequer would introduce legislation to give the bank explicit powers to refuse or evoke authorisation of banks whose supervision is obstructed by a complex structure or by undue secrecy in the financial centres in which they operate.