Sitting of 28 November 1986

Preamble
The House met at half-past Nine o'clock
PRAYERS
[MR. SPEAKER in the Chair]
BILL PRESENTED

  TEACHERS' PAY AND CONDITIONS
  Mr. Secretary Baker, supported by Mr. Secretary Edwards, Mr. Secretary Ridley, Mrs. Angela Rumbold and Mr. Bob Dunn presented a Bill to repeal the Remuneration of Teachers Act 1965; to make temporary provision with respect to the remuneration and other conditions of employment of school teachers; and for connected purposes.
  And the same was read the First time; and ordered to be read a Second time upon Monday next and to be printed. [Bill 10.]

Orders of the Day

  Banking Bill
  Order for Second Reading read.
  9.35 am
  The Economic Secretary to the Treasury (Mr. Ian Stewart): I beg to move, That the Bill be now read a Second time.
  This debate comes almost exactly eight years after the Second Reading of the first Banking Bill, introduced by the then Labour Government, which became the Act of 1979. On that occasion my hon. Friend the Member for East Lindsey (Sir P. Tapsell) and I, speaking for the then Opposition, drew attention to the difficulties which we thought would arise from the two-tier structure of authorisation—of recognised banks and of licensed deposit-takers—on which that Bill was based. Unfortunately, our misgivings did not prove unfounded, and I welcome the opportunity to introduce a Bill to revise, update and improve the original legislation.
  Like the 1979 Act, the present Bill is primarily devoted to supervision in the interests of depositors, and certain related matters. It does not deal with questions concerning transactions between banks and their customers, with consumer protection, or with the consequences of technological change on the provision of banking and other financial services. Simultaneously with the publication of the Bill, I announced in a written answer on 14 November the Government's intention to set up a committee to review these matters.
  There are, at the latest count, about 290 recognised banks and just over 300 licensed deposit-takers in the United Kingdom. Most of the major foreign banks around the world are represented here. Even since 1979 the international dimension of the City of London has become significantly more important. The volume of transactions conducted in London in foreign exchange, in Eurocurrency deposits, in new issues and underwriting, in stocks and shares, in options and futures and in commodities and insurance has been growing rapidly, confirming London's leading position among European financial centres.
  At the same time, global markets have come into being with continuous trading around the world and around the clock from the far east through London to the United States. At a time of such rapid and fundamental change in financial markets, it is important that we should have appropriate legislation in place for the regulation of financial institutions.
  One purpose of the Bill is accordingly to ensure that the supervisory regime for the banking sector is compatible with the systems which have been established for investment and securities business and for building societies by the Financial Services Act 1986 and the Building Societies Act 1986, which were passed by Parliament in the previous Session.
  To be comprehensive, the regulatory framework for the supervision of financial institutions requires an appropriate degree of consistency between the three pieces of legislation in a number of different areas such as the role

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  of auditors, disclosure of information between supervisors, and the application of new offences and penalties. In particular, supervisors need to be able to communicate and co-operate without needless red tape.
  Furthermore, the legislation needs to be flexible enough to cope with rapid change in market behaviour and structure and, just as under the Financial Services Act 1986 the definition of investments can be adjusted to meet changing circumstances, so will that of deposits be under the present Bill. The next purpose of the Bill is to update and improve the arrangements for authorisation and supervision of deposit-taking businesses in the light of experience gained since the Banking Act 1979 came into operation.
  The remaining and most fundamental purpose is to introduce a number of policy changes which are desirable either to take account of developments in the banking sector, or to remedy deficiencies in the previous Act.
  In those respects, the Bill draws especially on the lessons learnt from the collapse of Johnson Matthey Bankers in 1984. As hon. Members will recall, my right hon. Friend the Chancellor of the Exchequer set up a committee under the chairmanship of the Governor of the Bank of England, and including representatives of the Treasury and the commercial banking sector, to review the operation of the Banking Act, taking account of the implications of the Johnson Matthey Bankers affair, and to make recommendations with a view to a new Banking Bill. The committee reported in June 1985, and last December the Government published a White Paper foreshadowing the present Bill. During this entire period these matters were the subject of extensive consultation, and I express my thanks to all those who have contributed constructively to this process, including the Bank of England, the British Bankers Association, the Committee of London and Scottish Bankers, the Finance Houses Association, the Institute of Chartered Accountants in England and Wales, and many individual persons and institutions who have submitted their comments.
  The Johnson Matthey Bankers case showed vividly the need to strengthen the powers of the supervisors and to impose more exacting duties on supervised institutions. It also exposed serious defects in the 1979 Act relating to the availability and accuracy of information provided to the supervisors, and the Bill is addressed especially to those points.
  The main changes should come as no surprise, since they follow closely the proposals set out in the White Paper a year ago. The White Paper itself received a general welcome and I hope that the Bill will meet the same response. The Bill provides for a new Board of Banking Supervision to advise the Bank of England in its exercise of the powers conferred upon it, and the majority of the members of the board will be independent of the Bank of England. The distinction between recognised banks and licensed deposit-takers will be ended, and with it the separate systems of supervision and regulation which applied to the two categories. The provision of information to the supervisor will be subject to statutory reserve powers, and there will be specific requirements in relation to the notification of large exposures. The legal constraints on dialogue between supervisor and auditors
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  will be removed, and the submission by an institution of incorrect information will put those responsible at risk of conviction for a new offence of misleading the supervisors.
  In other respects, the Bill for the most part follows the main provisions of the 1979 Act. Thus, the Bill continues the arrangements for deposit protection, the control of advertising, arrangements for authorisation, revocation and exemption.
  Mr. Anthony Nelson: My hon. Friend mentioned deposit protection. Can he explain why the limits for deposit protection in this Bill remain exactly the same as in the previous legislation, which is effectively a reduction in protection? Is there not a case for a significant increase?
  Mr. Stewart: The present limits have proved entirely adequate in practice and there is provision to change them if necessary. That is the short answer. If other hon. Members wish to take up that point during the debate and I am fortunate enough to catch your eye later, Mr. Deputy Speaker, I shall have more to say about it.
  A new form of conditional authorisation is proposed, and there are some modifications to the appeal system, but the substance of the technical provisions in the 1979 Act is incorporated in the Bill without major differences. In theory, it might have been possible to introduce an amending Bill, but, in practice, because the separate treatment under the two-tier system is so pervasive throughout the 1979 Act, the case for rewriting the Bill was overwhelming. However, since so many of the provisions are repeated from the existing legislation, and as a comprehensive explanatory memorandum is attached to the Bill, I do not propose to go through its contents item by item. Instead, I shall concentrate on the three important areas where changes are being introduced: the position of the supervisor, the arrangements relating to authorisation and the provision of information.
  Through the 1979 Act, Parliament entrusted the supervision of the banking sector to the Bank of England. It would be wrong to suggest that the Johnson Matthey Bankers affair did not reveal the need for some changes within the Bank of England itself. Following the Leigh-Pemberton committee's report, therefore, the Bank of England introduced several changes in the organisation of its banking supervision division, set out in its 1986 report under the Banking Act. Staff numbers have been increased by more than 60 per cent. and the number of institutions for which each manager has responsibility has been reduced. More frequent supervisory visits to institutions will, therefore, be possible, and a programme of inward and outward secondments to strengthen the commercial experience of supervisory staff has been introduced.
  Although in some countries banking supervision is conducted by bodies independent of the central bank and the Government, international practice varies widely and it is clear that each country should make the arrangements most suited to its circumstances. For many years before the 1979 Act, the Bank of England was engaged in informal supervision and since 1979 this has been put on to a statutory basis. Following the decision to establish an independent board to deal with other financial activities, the Government considered whether it would be sensible to establish a separate supervisory body for the banking sector. However, given the knowledge and experience of banking supervision built up within the Bank of England

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  in recent years, we concluded that the bank should continue to be the supervisory authority in this area but that the system should be strengthened by introducing an element of independent advice and judgment into the process.
  Therefore, the Bill establishes a new Board of Banking Supervision, which provides for advice to be given to the governor and his senior colleagues on supervisory matters. The board will consider individual cases and more general matters of supervisory policy. The rules for the board will require that its outside members are always in a majority at its meetings and the board will make its report to Parliament through the annual report of the Bank of England. If, in any case, the Bank of England decides not to follow the advice of the independent members, the ex-officio members of the board will be required to notify the Chancellor of the Exchequer.
  The conduct of supervision will be subject to continual review by the board, which the Government believe will add greatly to the experience available to the Bank of England in taking what are inevitably sometimes extremely difficult decisions. The board will perform a function in relation to the banking sector which is in many ways comparable to that of the Building Societies Commission, and just as the commission began to operate informally before the Building Societies Bill was enacted, so the Board of Banking Supervision is already functioning on a non-statutory basis.
  The process of supervision will need to respond to developments both at home and abroad. Like the 1979 Act, the new Bill is based on regulation of the activity of deposit-taking. The definitions of "deposit" and of a "deposit-taking business" are broadly as in the existing Act, but to enable the statutory framework to adjust to the changing market place, provision is made for those definitions to be amended by statutory instrument if it proves necessary to do so.
  At the international level there has been greater discussion between the supervisory authorities in different countries in the last few years than ever before. The question is attracting keen interest in Europe, and nothing in the Bill cuts across current developments or thinking in the European Community. Several major countries, including the United States and Canada, are examining closely their systems of supervision, and we believe that it will be important in the years ahead to ensure closer understanding and co-operation between national supervisory authorities and to aim for the application of similar standards in different financial centres.
  Subject to the abolition of the two-tier system, the principles and most of the procedures relating to the authorisation of deposit-taking institutions will remain substantially the same as they were in the 1979 Act. An institution will have to demonstrate that its management is not concentrated in the hands of one person, that its directors and managers are fit and proper persons to carry out their functions, and that the business is generally conducted in a prudent and responsible fashion. All institutions meeting the criteria set out in the Bill will fall into a single category of "authorised institutions" and be subject to the same system of supervision.
  The 1979 Act concentrated the Bank of England's statutory powers of supervision on licensed deposit-takers, while the supervision of recognised banks continued to operate more informally. We should not forget that JMB, as a recognised bank, was accordingly subject to a less
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  stringent statutory regime than a licensed deposit-taker. Indeed, one of the effects of the two-tier system was often to encourage over rapid diversification and expansion of balance sheet totals in order to qualify an institution for recognition in the higher tier. With the benefit of hindsight, as well as foresight, it can be seen that the two-tier structure of the 1979 Act was fundamentally misconceived.
  One of the difficulties which the two-tier system created was in the use of banking names and descriptions, which since 1979 have been available only to recognised banks. Under the Bill, the only requirement for the use of a banking name by an authorised institution will be a minimum paid-up equity capital or its equivalent of £5 million, while all authorised institutions will be allowed to use banking descriptions. For authorisation, the minimum qualifying capital will be £1 million. Institutions already authorised under the 1979 Act will retain their authorisation.
  Sir Eldon Griffiths: My hon. Friend will be aware of the burden of my questions to him. Why is there to be a distinction between the £1 million figure for authorisation and the £5 million figure for the use of the name "bank"?
  Mr. Stewart: My hon. Friend's intervention is not entirely unexpected, as we have already communicated on the subject. The case for having a substantial capital qualification for the use of the name "bank" rests on the need to ensure that only bodies of considerable substance should be regarded as banks and allowed to describe themselves specifically as such. There is also a case for saying that institutions should not be prevented from taking deposits, thus obtaining authorisation, even if they fall far short of the level deemed appopriate for that. I know my hon. Friend's views about that in relation to certain institutions, but there are considerable pressures from another direction, suggesting that the threshold for the use of banking names should be higher than £5 million. I think that the figure we have chosen is the right one. We can return to that subject if my hon. Friend wants to pursue it further.
  In order to increase the Bank of England's flexibility in dealing with cases where it is dissatisfied with the position of a particular institution, it will be able to impose conditions on authorisation without having to go through the full process of revocation. We have also decided that the appeal system should be modified, so that decisions of the tribunal will in future be binding, rather than in the form of advice to the Chancellor of the Exhequer, and that the right of appeal will be extended to individuals whose fitness and properness, to use the technical terms, may be questioned by the supervisors.
  The Bill also provides a new power enabling the Bank of England to block a proposed merger or takeover on prudential grounds. Anyone proposing to acquire, or substantially increase, a controlling interest in a deposit-taking business will have to give adequate notice to the Bank of England, which will then have the power to object to the transaction if the intended controller does not meet its prudential standards. Failure to notify the Bank of England under such circumstances will be a criminal offence, and powers are included in the Bill for restrictions to be applied to the shares in question if these procedures are contravened. The Bill itself contains no reciprocity

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  provisions, but this is because the Financial Services Act already covers deposit-taking businesses as well as investment businesses in this respect. Under that Act the Government will have the power to refuse, restrict or withdraw the authorisation of a foreign-owned deposit-taker, if equivalent opportunities are not available to British firms in its country of origin in either the banking or the securities sector.
  The whole supervisory process depends upon relevant, accurate and timely information being provided by institutions to the Bank of England. Although most of such information will continue to be supplied on a voluntary basis, the Bill, unlike the 1979 Act, enables the Bank of England to obtain the necessary information under statutory powers from all authorised institutions, if need be on a regular basis, and backed up by criminal penalties for non-compliance. The supervisors will also have a right of entry to obtain such information on the spot, where a request to provide it has not been complied with, or, in exceptional cases, if it is suspected that papers might be tampered with or destroyed.
  As in the JMB case, large exposures to the same or connected borrowers are a characteristic feature of banking problems. The Bill, therefore, contains new proposals requiring exposures above 10 per cent. of an institution's capital base to be reported to the supervisors post hoc, and the supervisors must be notified in advance before an exposure exceeding 25 per cent. of the capital base is undertaken. Criminal sanctions will attach to deliberate non-compliance with these provisions, in addition to the new criminal offence of knowingly or recklessly providing any information to the supervisors which is false or misleading in a material particular.
  Under the existing Act, the Bank of England's powers to investigate cases of suspected illegal deposit-taking are virtually non-existent. The Bill greatly strengthens the powers of the supervisor in this area and, because of the ease with which evidence can be destroyed, it is proposed that there should, again as a last resort, be a power of entry for this purpose. The Bill also contains new provisions to help depositors recover funds held by illegal deposit-takers.
  There is, and will continue to be, an overriding obligation of secrecy on supervisors and those who acquire supervisory information. As in the 1979 Act, it will continue to be a criminal offence to break this trust, but the Bill contains new provisions to enable information to be disclosed through strictly controlled gateways to other supervisors. This is essential if supervisors in the new framework are to be able to cope adequately with the affairs of financial conglomerates and with the global nature of financial and banking services today.
  The provisions concerning auditors are parallel to those contained in the Building Societies and Financial Services Acts. The Bill provides that auditors and reporting accountants may communicate information about their client company to the Bank of England without breaching any obligation of confidentiality or loyalty which they would otherwise owe to their clients. We hope that the accountancy profession will bring forward satisfactory rules or guidance specifying the circumstances in which such information should be communicated, but the Bill
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  contains a reserve power for the Treasury to bring forward regulations imposing such a system if the profession fails to do so.
  Those are the main provisions of a Bill which will complete the trio of statutes covering the regulation of banking and financial institutions. During recent years the business of the City of London has increased in scope and multiplied in volume.
  Mr. John Browne: My hon. Friend has summarised well the provisions included in the Bill. As financial supermarkets are growing, can he tell us why the Bill does not include an amendment to the Consumer Credit Act 1974 to facilitate the development of electronic fund transfer at the point of sale, which he has rightly outlined? I wholly support the controls and monitoring of banks. However, that measure, which would be favourable to the banks and would increase their security, is not included. Can my hon. Friend explain why?
  Mr. Stewart: My hon. Friend will recall that at the outset of my speech I announced that, along with publication of the Bill, the Government plan to set up a committee to review that and related subjects. I appreciate that my hon. Friend's point is one that the banks may regard as being more important and more urgent than certain other items in that area. I have therefore asked them to let me have further evidence showing what progress the banking sector is making in that direction and to let me know whether they feel that there is an absolute case for saying that such a matter should be brought forward and separated from the rest of the related subjects that are due to be dealt with under that review.
  During recent years the business of the City of London has increased in scope and multiplied in volume. In 1979, when the first Banking Bill was enacted, it yielded an estimated £1·6 billion in foreign earnings. Last year it reached the huge figure of £7·6 billion. The banking sector has played a significant part in this contribution to our national economy and to our balance of payments from foreign business. If the British banking system is to continue to serve its customers satisfactorily at home and to command confidence abroad, we must ensure that the framework of supervision within which it operates is realistic, comprehensive and up to date. That is the purpose of the Bill and I hope that it will command general support. I commend it to the House.
  10.11 am
  Dr. Oonagh McDonald: The Economic Secretary to the Treasury rightly referred in his speech to the background against which we should consider the Bill. I have two aspects to add to that background. The first is the post-big bang City of London. The second is the context of the JMB affair. I begin by referring to the first.
  In the changing financial world, banks, particularly the smaller banks, will naturally feel encouraged to go for areas of lending that initially show high rates of return. In recent years, the banks have greatly extended both personal credit and mortgage lending. Since 1979 there has been an enormous expansion of personal credit. Up to the end of 1985, growth was of the order of 85 per cent. in real terms. By the end of the second quarter in 1986, outstanding consumer credit amounted to almost £28 billion. That means that the growth in the ratio of household debt to annual household income has increased

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  very considerably. During the period of the Barber boom in the early 1970s, it reached a peak of 45 per cent. Since 1980, it has risen very sharply to almost 70 per cent. That represents an enormous explosion of consumer credit, some of which is causing a great deal of concern.
  I regret that it is not causing any great concern on the Government Benches, but it is causing great concern outside the House of Commons, particularly to those agencies that seek to assist, either voluntarily or as their statutory duty, families who are now in very serious debt. All this is being allowed to run in order to feed the pre-election boom and to make people feel well off in the run-up to the next general election. One sees exactly what the Government are doing by allowing this consumer boom to run in that way.
  It has also led to comment by the Governor of the Bank of England. In his recent Loughborough speech he outlined many of the changes in banking practices and bank lending. Having reviewed the extent of the changes in bank lending he said that two years ago he
  "envisaged the possibility that the unpredictability of the relationship between money and nominal incomes could reach a point…at which we would do better to dispense with money targetry altogether, and I shall be considering with the Chancellor whether that point has arrived in relation to broad money when we come to review the MTFS framework around the turn of the year."
  it is therefore causing concern outside, but apparently it is of no concern to the Government.
  The Economic Secretary rightly referred to the review that was announced in a written answer on Friday 14 November. There is to be a review of various ancient Acts that apply to the provision of banking services. He said:
  "The law should provide the necessary legal framework for the provision of banking services"—
  which would include consumer credit—
  "on fair and efficient terms."—[Official Report, 14 November 1986; Vol. 105, c. 8.]
  I welcome that review. However, I should like to know when the Economic Secretary expects it to be completed. Perhaps it is unfair to ask, as the full report is not yet available, but does he not consider that proposals for legislation should be made? Reference has already been made to the need for electronic services. The provision of consumer credit and the way in which cheques are treated by banks have already caused concern. Therefore we need to be told about the Economic Secretary's legislative plans.
  Consumer credit has been allowed to grow apace, as has mortgage lending. The Economic Secretary knows that the Governor of the Bank of England has already expressed concern in one of the Bank of England reviews about the extent of bank lending going into property and about the terms upon which that money is lent, which leads to difficulties for certain families. In the past, there has been very little repossession of homes by building societies, banks or other lending institutions. That percentage, admittedly from a very low base, is increasing rapidly.
  In a written answer this week the Department of the Environment said that at the end of June 1986 over 60,000 households were over six months in arrears with mortgage payments. That is worrying, and some of the Government's plans in other areas are not helping to overcome that problem. I refer to the proposal to delay the payment of mortgage interest to those receiving supplementary benefit for the first three months of unemployment. The Government's actions are making the problem worse. Both sides of the House want people to be
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  able to buy their homes. Nevertheless, the Opposition do not want people to have to struggle to make high mortgage repayments, and we do not want them to be cast out of their homes because the building societies or banks have repossessed.
  The extension of mortgage lending and personal credit has been at the expense of bank lending in other areas. For example, in 1979 London clearing banks and their subsidiaries lent 27·4 per cent. of their total lending to manufacturing industry. By August 1985 the percentage had fallen to 14·7. That is a substantial drop and no doubt partially explains why the levels of investment in manufacturing industry have not yet reached the levels of 1979. There may be temporary reasons for that, such as the phasing out of capital allowances and the fact that in 1985, company profitability began to rise sharply and companies began to invest out of retained profit rather than by way of bank borrowing, However, it is a significant trend.
  Mr. William Cash: Will the hon. Lady give way?
  Dr. McDonald: No, I do not need to give way on that point. We are worried about the changes in bank lending and about the way in which consumer credit and mortgage lending is being expanded so rapidly. At some point, especially in the case of personal credit, that sort of lending must grind to a halt because we all know that at some point we have to stop borrowing and pay back the money that has been obtained through personal loans or credit cards. That is an area of concern.
  My third point is about the big bang. As the Minister rightly said, this is the third part of the regulatory system that the Government put in place through the Financial Services Act 1986 and the Building Societies Act 1986. In this new situation we are faced with severe problems of regulation. As we know, all financial institutions, including banks and building societies, are extending their range of services and in so doing each institution falls under a range of self-regulatory organisations and under one or other lead regulator.
  Rules are now being drawn up. For example, the Securities Investments Board and the banks are in the process of agreeing the rules under which banks may advise people about insurance and sell insurance policies, and under which they may advise on and sell securities. We are all anxious about precisely how this will work. In the case of financial conglomerates, which banks are obviously becoming, as are many other institutions, the legislation lays down that there will be a lead regulator and that the various self-regulatory organisations, including the lead regulator, will be able to exchange information. The Financial Services Act 1986 enables such an exchange of information to take place.
  The Opposition have expressed their anxiety about the whole system because it depends on a range of self-regulatory organisations knowing what sort of information to convey to each other and when. How can they ensure that it is conveyed quickly enough and with sufficient urgency, because a failure in one area of a financial conglomerate can affect the business of the whole? Since the big bang, the City has faced major scandals. Insider trading was discovered in the case of Morgan Grenfell and we are still waiting to know the full implications for trading in this country as well as in America of the Boesky affair.

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  The last Bank of England report was published in May. In the course of describing the bank's activities the report spoke of the enormous scale and nature of their involvement in facilitating large mergers and acquisitions in the United Kingdom corporate sector and noted that a number of banks or banking groups had arranged to acquire significant strategic shareholdings in the companies involved. The report commented on how these will be viewed in terms of the capital adequacy of banks. However, I do not wish to pursue that point at the moment.
  It may well be that if some banks, and especially the ones that are sometimes called bucket shop banks, engage in buying shares like this, insider trading will go on. Obviously, the Bank of England will be alert to that because it will be on the lookout to ensure that insider trading does not take place. If it does take place what will happen? Will the individual or the bank itself carry the can if insider trading is discovered?
  Mr. John Butterfill: Surely the hon. Lady appreciates that we dealt with insider trading in the Financial Services Act 1986 which has only just been passed. That answers all the queries that the hon. Lady has raised.
  Dr. McDonald: Of course that topic was discussed during the course of the Financial Services Bill, but a fortnight after the big bang there was a scandal involving a reputable company. That is why I am sure the hon. Gentleman will agree that when discussing banking supervision and noting that banks are engaged in buying shares in companies and in advising people about what shares they should buy, it is entirely proper to raise the whole issue of insider trading again and to ask not just whether the individual will carry the can but what will happen to the bank concerned.
  I spoke specifically about the small bucket shop type of bank. Will the Bank of England take such a bank under its wing by issuing directions about how it should conduct its business, or will it withdraw authorisation from a bank discovered to be engaging in extensive insider trading? Quite naturally, people are extremely worried about what is happening in the City, and to suggest that all the problems have been solved by the Financial Services Act 1986 is taking too optimistic a view.
  Mr. John Browne: Will the hon. Lady give way.
  Dr. McDonald: No, I should like to move on.
  The third point about which the Minister spoke was the Johnson Matthey Bankers affair. As he quite rightly recognised, that affair illustrated the gross incompetence of JMB in the conduct of its affairs and the failure to supervise by the Bank of England. The JMB affair was much debated in the House. I was careful to accuse the Bank of England simply of a failure to supervise and I suggested that the extraordinary and gross incompetence of JMB was the cause of the affair.
  I should like the Minister to bring us up to date on the last Bank of England report which shows that police investigations are continuing into the lending business undertaken by JMB in the period before October 1984. If the Minister knows, I hope that he will tell us the up-to-date results of the police investigations. Will he also give
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  us the latest view, beyond the £25 million that is mentioned in the report, on the losses involved in the acquisition of JMB following its collapse?
  I shall now address myself to the Bill. The Opposition will be looking for improvements in the depositor protection scheme.
  Mr. John Browne: The hon. Lady was talking about liability for insider trading between the institution and the individual. Surely, as my hon Friend the Member for Bournemouth, West (Mr. Butterfill) said, the issue has been catered for by the Financial Services Act, which was enacted last Session. If the insider trading is for the benefit of the personal account of the individual, why should the institution suffer? If the insider trading is for the benefit of the institution, it is clear that the institution should be liable.
  Dr. McDonald: I do not think that it is considered satisfactory that when insider trading is taking place one person alone should carry the can. We do not know the full implications for Britain of the events of the past few weeks. These events have caused some of us to think again. It may be that the hon. Gentleman and others are perfectly happy with matters as they stand, but there is disquiet elsewhere, and it is proper that it should be raised from the Opposition Front Bench.
  The Minister has referred to foreign takovers, and we want it spelt out much more clearly in the Bill that such takeovers should not be allowed where there are no reciprocal arrangements. For example, a Japanese bank may seek to take over a British merchant bank or even one of the major clearing banks. We know that there are extremely substantial financial organisations in Japan and we contend that such institutions should not be allowed to take over a British bank when our institutions cannot get into the Japanese market.
  Secondly, considerations of national interest should be taken into account. The major clearers play an important part in the management of the British economy and we intend to raise this issue in Committee——
  Mr. Ken Weetch: And on Report.
  Dr. McDonald: Undoubtedly we shall return to it when that stage is reached.
  The Bill deals with the reporting of large exposures. There is voluntary reporting of exposures of 10 per cent. or less, and the reporting of a 25 per cent. proposed exposure to a single person or collective persons to the Bank of England will have to take place before the event.
  Mr. Ian Stewart: Perhaps the hon. Lady made a slip of the tongue when she said that there would be voluntary reporting at 10 per cent. That reporting will be after the event and will not be voluntary.
  Dr. McDonald: Yes, the Minister is right. That reporting will be after the event, and that is what I have in my notes. I was thinking of other remarks that the Minister made.
  We shall be examining carefully the reporting provisions in Committee. I hope that the balance is right and that the 25 per cent. provision is not too much of a relaxation and is not over generous. Two of the main sources of the problems with JMB was its failure to report on time and its under-reporting. The bank allowed JMB to report late and then to postpone a meeting between the bank's directors and the Bank of England from July to

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  August. That was followed by under-reporting, which was quite substantial. In its 1985 annual report, the Bank of England claimed that the reported figures for the two exposures at the end of June 1985 were 15 per cent. and 12 per cent. of capital and that the true figures were 26 per cent. and 17 per cent. respectively. At the end of June 1984 the reported figures were 38 per cent. and 34 per cent. while the true figures were 76 per cent. and 39 per cent. There were enormous disparities and sloppy reporting.
  There are two areas of concern. The first is whether such misreporting can be detected by the Bank of England's supervisors. The Minister has referred to the increase in the Bank's staff, and I understand that the staff now stands at 160. A considerable recruitment programme has taken place over the past year or so and, interestingly enough, it has been directed largely to graduates. I should like to see more secondments from the banking industry into the Bank and for those secondees to act as supervisors. That would be a way of getting practical experience into the Bank's own supervision.
  Secondly, there is a problem with the banks detecting the degree of exposure to connected persons, which was the position with JMB. I do not think that JMB was necessarily aware of the extent of its loans to companies run by Shamji because it did not necessarily know, or did not look too hard to see what the connections were. The Bank of England should ensure that banks' internal control systems are designed so that they can pick up exposure to connected persons. We shall need to examine closely the reporting of large exposures when we come to consider the Bill in Committee.
  I still find enormous problems in auditors being expected to inform the Bank of England's supervisors about the conduct of business by the bank of which they are auditors. This is understandable for two reasons. First, an auditor's final duty is to the shareholders. Secondly, large accountancy firms provide auditors and act as management consultants to the same bank. There is obviously a conflict of interest if an auditor's firm has provided advice on internal control systems and management systems, perhaps assisting the bank with the installation of a new computer system, and then finds that he is expected to say to the Bank of England's supervisors, "I do not think that the internal control systems of the bank are working effectively." It seems that there is a conflict of interest and I do not think that auditors who are appointed to a particular bank should be expected to act in the way that I have described, except in the last resort, and as any of us would, if we saw that there were clear examples of serious negligence and fraud. It is obvious that the Bank of England has a right to expect that of auditors. The role assigned to auditors in the Bill is not only the last resort role of reporting gross negligence or whatever but also the role of alerting Bank of England supervisors to possible problems. Of course, one needs a mechanism for that, but the auditors do not provide the right one.
  Obviously, the Opposition welcome any strengthening of banking supervision, particularly in a rapidly changing financial world. We all want the City to be seen to be operating honestly and fairly, as it is detrimental to its business if it is not. In Committee, we shall examine every aspect of the Bill closely to ensure that it succeeds in its aim of making sure that banking supervision is carried out
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  fully, properly and exhaustively, and that it goes as far as possible towards preventing the occurrence of fraud and towards alerting people to the possibility of collapse.
  10.30 am
  Mr. Anthony Nelson: I join the hon. Member for Thurrock (Dr. McDonald) in what I understand to be her general welcome for the Bill. I also congratulate my hon. Friend the Economic Secretary and his Treasury colleagues on introducing it, and on giving careful consideration to the recommendations of the Leigh-Pemberton committee and to the considerable representations made subsequently by many organisations.
  The Bill is important. It follows scandals in the banking sector and a great deal of public concern that needs to be allayed. In introducing the Bill, my hon. Friend the Economic Secretary struck an important balance between the need for financial institutions and banks to continue to prosper in the new era of financial services, and ensuring that depositor protection is enhanced. Customers of banks should continue as such, secure in the knowledge that there is an adequate regulatory framework, means of redressing grievances, and obtaining compensation.
  About 600 recognised banks operate in this country. They make a vital contribution to our economy, to industry, and to our balance of payments. They are increasingly important both in terms of employment and the provision of financial services. The Bill is the last of a trilogy of measures to try to ensure that the major expansion in financial services and banking generally in the City and elsewhere in Britain is subjected to a new, more adequate and up-to-date system of regulation.
  We may all have ideas as to minor areas in which the provisions of this legislation could be improved or amended, but we must generally give the Bill a warm welcome. It was prompted by periods of crisis and banking scandals. However, it is important to emphasise that the Treasury has an obligation to frame legislation not just in response to the most recent scandal but for future circumstances that may arise. It is generally recognised that some of the inadequacies now apparent in the Banking Act 1979 are due to the fact that it was designed specifically to redress the problems of the fringe banking crisis of the early 1970s. Similarly, if this legislation were designed largely to redress the inadequacies that became apparent through the collapse of JMB, it might not be well framed for dealing with the next crisis, whether that involves a default in a bank's foreign exchange department, a fraudulent activity within a bank, or problems of loan concentration or of overlending in the future.
  The problems of competition and credit control that partly led to the banking collapses of the 1970s, and the problems of culpable credit analyses and exposure that led to the collapse of JMB, should be born in mind, but they are not the only criteria on which to judge this legislation. The main reason for JMB's failure was the high concentration of loans to relatively few borrowers. Its loans increased nearly tenfold, to £296 million by 1984, and the bulk of them went to the connected companies of one shipping group.
  The Banking Act 1979, which introduced the two-tier system of recognised banks and licensed deposit takers, was shown to be deficient when it came to supervising large exposures monitoring the financial adequacy of

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  banks and the general probity with which they fulfilled their responsibilities. The new structures in the Bill go a long way towards dealing with those problems.
  Nevertheless, the Bill covers several important issues that should be addressed on Second Reading. The most important of those issues is the judgment of the Leigh-Pemberton committee, and the Government in their response to that document and in the framing of their legislation, that there should be no fundamental change in banking supervision. Given the problems that have occurred and the possible risks for the future, it is only proper that Parliament should ask whether a more stringent system of banking supervision should be introduced. It is not that I have serious misgivings, but I am not yet entirely clear why, if the interests of depositors are to remain paramount, it will be necessary to change the definitions of deposit and deposit-taking businesses.
  I am worried about the possibility of secondary legislation being used in this regard, as is proposed in the Bill. I should not wish to see any undermining of our principal objective of securing the interests of depositors. Some hon. Members now in the Chamber took an active interest in the passage of the Financial Services Act, and just as in that Bill our principal criterion was to protect the interests of investors, so in this Bill we must always keep uppermost in our minds the need to protect the interests of depositors. Everything else should flow from that.
  The Bill is not necessarily concerned with making the City work better or with making banks more profitable, although we hope that those things will come to pass, but is principally concerned with seeking better protection for depositors. I have therefore asked a question rather than expressed a misgiving about the proposal to change the definition of deposit and deposit-taking businesses.
  The fundamental judgment that there should be no change in the structure of banking supervision involves a major decision to set up the Board of Banking Supervision within the Bank of England. My hon. Friend the Economic Secretary addressed the issue of whether there should be a supervisory authority that is separate from the central bank. That question exercised both the Leigh-Pemberton committee and many others. The eventual decision seems to be that there should be no separation along the lines that have been developed in many other countries. However, there are some arguments in favour of at least strengthening the independence and role of a supervisory authority within the central bank, even if it is not to be entirely separate.
  It is suggested that where a supervisory authority is within the central bank, and where the Board of Banking Supervision is within the Bank of England, conflicts of interest could arise between the regulatory responsibilities of the board, and the central bank's prudential role. Some people would argue that the separation of a supervisory authority might promote the building of a professional core of supervisors with an ability to investigate and to hold to account those banks that were moving outside the lines of legislation or of prudential activities. That might prevent problems from arising and save having to deal with them once they had become apparent.
  It is clear that the more separate a supervisory authority is from the central bank, the more accountable it is to Parliament. That is something that we should consider carefully. Sadly when things go wrong in the banking
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  sector, a lot of egg lands on the face of the Government of the day, rightly or wrongly, and people come to Parliament to seek redress. Therefore, we should be able to exert some control and accountability and should have the right to question a supervisory authority, and that is obviously diminished by the extent to which it remains part of the central bank, the Bank of England, which we are not able to question, as my hon. Friend the Economic Secretary will know.
  There is something to learn from foreign comparisons. What we are proposing to continue in this legislation seems to run counter to the experience of many other countries in terms of separating the roles of the central bank and the supervisory authorities. The arguments against that and in favour of keeping the two roles together seem a little weak in that they give priority to the administrative upheaval that would be involved in separating the two.
  I do not seek to make a strong case for separating the new board from the Bank of England. However, in the House and in Committee we should look carefully at ways of trying to ensure that the new board fulfils the purposes that we have in mind for it. It seems to me that there is a danger that if the governor is able to appoint the members of the committee—indeed the governor, the deputy governor and the executive director have ex officio places on the board—there could by a rather cosy club. The board will have an advisory role to the governor. This may give the impression to the public and the City that there is a board and that it is doing something, but, in fact, it will be business as usual. The people who will be taking the executive decisions about banking supervision will be the Governor of the Bank of England and the Banking Supervision Division of the Bank of England, not the new board which will have a purely advisory role.
  Mr. Cash: In the context of the significance that has been placed on the independence of the board's supervisory role and, having experienced sitting with my hon. Friend on the Financial Services Bill recently, does he agree that it is not simply a question of having people who are apparently independent? We should be quite sure that the functions that they are given and the criteria by which they are chosen ensure that they really are in a position to exercise that element of independent judgment which will be certain to avoid any question of there being a cosy club.
  Mr. Nelson: I am obliged to my hon. Friend. I take his intervention to be broadly in support of the sentiments I expressed. Of course, this is not uncharted territory. I understand that a shadow Board of Banking Supervision has already been set up with a membership, apart from the governor, the deputy governor and the director, of some five independent members. When one looks at the list of those members and their backgrounds, one sees that, far from being lay members, they are very much people involved in the banking sector. I make no complaint about that. To have the chairman of Standard Chartered Bank and a director of Kleinwort, Benson Lonsdale is probably a very good thing. One needs experts. However, as my hon. Friend the Member for Stafford (Mr. Cash) was saying, one needs a lay element, a common-sense element, to provide some input. I fear that we might end up with a cosy club of governor appointees; of people with whom he

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  is doing business on a day-to-day basis. That will not necessarily ensure what we want, which is better depositor protection.
  Sir Eldon Griffiths: Is there not one safeguard in that, although the governor will propose, it will be for the Chancellor of the Exchequer to agree? To that extent, I would have thought that my right hon. Friend the Chancellor and his successors would ensure that a cosy club was not created by the banking industry and that some proper outside independent advice was available to the board.
  Mr. Nelson: My hon. Friend is right. The Chancellor of the Exchequer does have to agree. However, it is interesting that in the case of the Securities and Investment Board—I think that this is a fair analogy—which supervises the investment sector as opposed to the banking sector, the chairmanship and the membership has to be agreed not just by the Chancellor of the Exchequer but by the Governor of the Bank of England acting jointly with him. There is no reciprocal requirement that members of the Board of Banking Supervision should be agreed with the chairman of the Securities and Investment Board. I do not necessarily suggest that there should be such a requirement.
  However, although the Chancellor has an effective veto, which is what my hon. Friend was saying, he does not, as I understand it, have the right to nominate, propose and insist upon a certain membership. I feel that this is an issue that is worth some debate at a later stage in the Bill's progress.
  There is the question of whether the Governor of the Bank of England should be able to disregard the advice of the Board of Banking Supervision. As I have said, it will have a purely advisory role and it will still be for the governor to decide what he wants to do. What will the relationship of that board be, not only to the banking supervisory division within the Bank of England, but to the new Standing Committee and the Standing Committee of Court which have been set up?
  I welcome the board's establishment and the work that it is doing. However, I question whether we are involved in the cosmetic exercise of setting up a supervisory board to persuade people that something is happening but, in the end, it will be business as usual. We want to ensure through legislation and what we say in the House that the governor—he is a sensitive and able governor, in my judgment—is aware of the need for the board to fulfil the independent incisive role of scrutiny and that there should be compelling reasons before the governor rejects its advice.
  There are some 300 foreign banks in the City of London alone. We have more foreign banks than any other capital of the world. They are welcome here and they make an important contribution to our invisibles, to employment and to our economy generally. However, there are serious difficulties in excercising prudential control of foreign banks. The governor is not able to exrcise the same degree of control and supervision over them as he is over United Kingdom banks.
  As I understand it, foreign institutional banks are able to set up branches and do business in London provided only that they give two months' notice of their intention to do so to the governor. Indeed, there is not necessarily a need for them to seek authorisation in the same way as
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  a domestic United Kingdom bank. That is fine in the case of some of the major international banks. However, in recent years we have seen the establishment of some banks in the Cayman Islands and in other tax havens abroad which use their foreign banking status as a means to set up branches in this country and elsewhere which become the main centres of their activities. If those become a means of circumventing the authorisation provisions of this or other legislation or the prudential control that the governor has to exercise, it is a legitimate matter for concern.
  My concern extends beyond that. The overriding feature of the development of the banking industry in recent years has been the enormous increase in the activities and the deposit-taking business of the foreign banks in London. They are the ones now, and in the future, who will wield massive financial muscle power. The ability of the governor and the regulatory bodies to control them and to ensure that their asset base and the nature of their activities complies with the stringent requirement placed on United Kingdom authorised banks is a matter about which we need to be satisfied. Of course, I acknowledge immediately that this is not an easy matter.
  In this connection, I should like to see—I hope that the legislation will bring it forward—a contingent right to prevent foreign banks from coming in and taking over British banks. Of course, such takeovers can already be referred to the Monopolies and Mergers Commission, but in the new financial environment in which banks will be operating, there are legitimate concerns about the objectives of some overseas predators coming into the United Kingdom market and taking over long-established and important United Kingdom banking companies. At the very least, we should have a clause in the Bill that allows the Chancellor of the Exchequer to make a judgment on whether such a takeover is in the public interest and I am not sure that clause 21 goes this far.
  Mr. Butterfill: Does my hon. Friend agree that we would need to be circumspect in the way in which we dealt with that? One of the aspects of the development of British banks of late has been that they have themselves made substantial overseas acquisitions, notably in the United States of America, and we would not want to put anything into British legislation that would inhibit that process. I am sure that my hon. Friend will agree with that.
  Mr. Nelson: I agree with my hon. Friend. That is why I tried to couch my proposals in a tempered way. I mention the words "contingent" and "in the public interest". I reassert that there may be instances when major British banks or important companies in the financial sector should not suddenly be taken over by a little-known foreign predator, the objectives of which may be wholly different from the public interest. I do not think that what I am proposing in that regard need mean that the important investment of foreign banks over here will diminish or that there will be a reciprocal restriction on British banks making acquisitions abroad. My hon. Friend is right to say that British banks have been active in acquiring interests in banks abroad, but it has not been easy for many of them. When the Americans have wanted to restrict our investments in financial and other sectors in the United States, they have been willing and able to do so.
  Mr. Cash: Will my hon. Friend also note that whereas, up to fairly recently, we tended to talk very much in terms of the United States of America, now when we are talking about financial markets and the sheer volume of money circulating in the world, and where much of it is controlled, we talk of Japan? It is extremely important to bear in mind the role of the Bank of Japan. We do not want to preclude the Japanese from coming here. We want quite the opposite. We want to be sure that there is reciprocity in the liberalisation of the financial markets as they affect the entrepot in the City of London, as between ourselves, Japan and other parts of the world.
  Mr. Nelson: I readily accept what my hon. Friend says. I, too, believe that there is a need for more global co-operation between reserve and central banks. Both the Department of Trade and Industry, in its negotiations with the Japanese Government, and the Treasury have been exemplary in the way in which they have tried to promote this.
  I should like to underline the point that I made in an intervention about the need to improve the level of depositors' protection that is allowed. In 1979, under the Banking Act, the maximum level of a depositor's protected deposit with one institution was set at £10,000. The deposit protection scheme set up in that legislation offered compensation of 75 per cent. of the deposit up to £10,000 so that, for example, a depositor with £5,000 would receive £3,750. Under the new Banking Bill, the money limits in the scheme remain exactly the same. That represents a considerable reduction in the real level of protection available to depositors now compared with 1979.
  Over the past year, there have been considerable discussions on investor protection schemes, mainly in regard to financial services. The compensation scheme to be drawn up by the SIB is likely to offer maximum compensation of between £30,000 and £50,000. the Stock Exchange offers compensation of up to £250,000. It seems anomalous that the banking sector, which is regarded as being so much safer, should offer so much less. I hope very much that my hon. Friend the Economic Secretary to the Treasury, during the passage of the Bill or later,will have an opportunity to review the matter, on the advice of, and taking into account, the comments of other hon. Members who wish to participate.
  Having made those remarks, which I hope are not taken in any way as undermining my support for the Bill, I reiterate my congratulations to my hon. Friend the Economic Secretary on bringing forward this much-needed legislation, with the important contribution that it will make towards keeping our banking system secure and respected.
  10.55 am
  Mr. David Penhaligon: The speech by the hon. Member for Chichester (Mr. Nelson) was extremely interesting. I suspect from his general approach that his knowledge of how banks work and function is a shade in excess of mine. I hope that he can continue to make contributions of that nature in the House.
  The hon. Gentleman referred to the necessity for real independence on the body when we set it up. That is true not just in the Bill but in quite a lot of legislation. I certainly support him on that. I could not help remembering listening to the radio nearly 20 years ago when it was said that in a council in south Wales 16 people
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  were standing as Labour candidates, 16 as Independents and the Rev. somebody or other as an independent Independent. We need independent independents with some real knowledge. It is easy to pick somebody who is just independent of all interests, but one has to find that peculiar combination of someone who is genuinely independent but who has real knowledge as well, otherwise he is nothing more than baggage, looking good and respectable, and giving people confidence when in reality it is not justified.
  The combination of the Banking Bill and Friday is not exactly Utopian for me. However, the Bill is important and deserves a great deal of consideration.
  I get the feeling that it may well get that, at least from those who have some expert knowledge.
  I welcome the independent review announced by the Economic Secretary to the Treasury. Several issues are raised by electronic banking, which give one reason for concern. I say that as much from what I have received in my mailbag as for any other reason. I am sure that many hon. Members at one time or other have had a constituent complaining that money has been taken from his credit account when the constituent claims that he never went to the bank and withdrew it. The bank claims that it can never be wrong. One writes to the bank and to the constituent, and after a week or two one admits that one is hopelessly confused about the rights and wrongs. At the moment there is no satisfactory resolution of the problem. One hopes that the Committee will apply its mind to that.
  I should appreciate it if the Economic Secretary explained what consumer representation there will be on the body. It is important to me that the consumer interest is fairly strongly represented. I should appreciate hearing whether the Government have it specifically in mind to cover that aspect.
  The whole Bill is an attempt to maintain some freedom in banking as well as regulation. Many would argue that one cannot have a system of freedom with regulation. I am not convinced we can but the Government are right to try and I support their efforts. Many of the advantages that accrue to Britain arise from our ability to maintain freedom with some regulation, and this has not been altogether unsuccessful over the years, although it is not difficult to think of one or two cases that give reason for deep concern. Trying to maintain that contradiction is at the root of many of our difficulties.
  Of all the careers augmented by the Bill, the career of auditor has been raised at least 30 steps on a 10-step ladder. It will be interesting to see whether someone is willing to take on the responsibilities involved. The role of the auditors is desperately important and significant.
  The clause telling auditors of a bank that they have a duty from hereon to report to the Bank of England supervisory board whatever they see is of key importance. It could be argued that auditors have had that duty for some time by implication, because their responsibility is to audit, but from this moment on they will be liable to be sued by the third party interest if it believes that the auditors have failed to inform and carry out their responsibilities. It must be said——
  11 am
  Mr. Peter Lilley: On a point of order, Mr. Deputy Speaker. It arises out of early-day motion 195, which is on the Order Paper today. Several times this week, Mr. Speaker has pointed to the misuse of early-day

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  motions to vilify people who have no right of reply. This early-day motion, by contrast, makes serious and important allegations about the Leader of the Opposition. The right hon. Gentleman has the right of reply, and I ask you whether we can ensure that he makes a statement responding to the accusations that he, his office and his colleagues, have been in contact with and have been offering and receiving advice to and from, an opponent of the Crown in a court case in Australia, and that senior members of his entourage have been out in Australia collaborating with people there. These are important matters, and the House has a right to a serious reply from somebody who has the right to reply.
  Mr. Deputy Speaker (Mr. Ernest Armstrong): Order. If the early-day motion is on the Order Paper, it is in order. However, the making of a statement is not a matter for me, and I think the hon. Gentleman realises that.
  Sir Ian Lloyd: Further to that point of order, Mr. Deputy Speaker. I appreciate your ruling that these matters are not for you, but this is of such grave national importance that a number of us have made it clear, and I have written to the Leader of the Opposition this morning saying, that we wish to have a statement from him. Have you received no notification from him that he proposes to make a statement about what is in the newspapers?
  Mr. Deputy Speaker: Order. I have received no sign from any right hon. or hon. Member that he wishes to make a statement.
  Mr. Jerry Wiggin: Further to that point of order, Mr. Deputy Speaker. An allegation of this sort against a Privy Councillor, setting out in considerable detail what appears to be unprecedented, irresponsible and, on the face of it, unpatriotic behaviour, surely calls for a personal statement from the right hon. Gentleman, who is present in the Chamber.
  Mr. Tony Marlow: Further to that point of order, Mr. Deputy Speaker.
  Sir John Biggs-Davison: Further to that point of order, Mr. Deputy Speaker.
  Mr. Deputy Speaker: Order. I remind the House that when the occupant of the Chair is on his feet all hon. Members must resume their seats. These matters may be of intense importance, as they are, but it is clearly understood that the making of a statement is not a matter for the Chair.
  Mr. Neil Kinnock: Further to that point of order, Mr. Deputy Speaker. Perhaps I can shorten these proceedings and ensure that the business of the House is resumed. As you may have observed, I have with me a statement which I deliberately brought into the House as a consequence of an early-day motion put on the Order Paper yesterday for malign and mischievous reasons that have no connection with matters relating to national security, and everything to do with efforts on the part of Government Back Benchers to cover the Government's exposed tail.
  The events of this morning and the news that has become generally available through the BBC about the evidence given by Sir Robert Armstrong ensures that additional attention will be given to this case, and therefore to matters relating to national security. In these
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  circumstances, it is important that I make this point of order to give hon. Gentlemen an opportunity to withdraw their early-day motion.
  I would be more than happy Mr. Deputy Speaker, if you were to find it acceptable, to provide, either in written form or before the House, a full statement of exactly what has transpired, the reasons for what has transpired and the extent to which I have used quotations, which I drew to the attention of the House on Monday last, of the transcript of the case in Australia.
  Mr. Deputy Speaker: Order. If this is a personal statement, the right hon. Gentleman should send it to Mr. Speaker.
  Sir John Biggs Davison: Further to that point of order, Mr. Deputy Speaker. That was the purpose of the point of order that I wished to put to you.
  Mr. Deputy Speaker: Then we need not pursue the matter and we can return to the important debate.
  Mr. Marlow: Further to that point of order, Mr. Deputy Speaker. If the Leader of the Opposition is to make a personal statement, will it be in order to question him? Would it——
  Mr. Deputy Speaker: Order. The hon. Gentleman cannot have heard what I said. If this is a personal statement, it should be sent to Mr. Speaker.
  Mr. Marlow: On a further point of order, Mr. Deputy Speaker. You will know from "Erskine May", on page 342, paragraph 9, that it is always the habit, quite properly, of Governments not to answer questions on security. It appears that a lickspittle of the Leader of the Opposition's private office, Miss Helen Hayman, a member of the Australian establishment, is in Australia because the Leader of the Opposition——
  Mr. Deputy Speaker: Order. We are in the middle of an important debate, and the hon. Gentleman is raising matters that could easily be raised at some other time.
  Mr. Kinnock: Further to that point of order, Mr. Deputy Speaker. I feel that the comments made by the hon. Gentleman—I suppose that I have to use that term—are unworthy of the House, and that the House is in danger of being misled as a consequence of the specious and, to say the least, ungentlemanly, comment made by the hon. Member for Northampton, North (Mr. Marlow). The person to whom he referred, erroneously, using the wrong name, is no lickspittle. Miss Patricia Hewitt, who does work for me, is not in Australia. At this moment, I presume that she is at home, tending to her baby of a few months' age.
  Mr. D. N. Campbell-Savours: Withdraw.
  Mr. Frank Cook: Withdraw. A gentleman would.
  Mr. Browne: Further to that point of order, Mr. Deputy Speaker.
  Mr. Deputy Speaker: Order. We should now proceed with the debate on the Banking Bill. Mr. Penhaligon.
  Mr. Penhaligon: I was trying to discuss the role of auditors in banking. We could do with a few auditors within the confines of the House sometimes. By applying my mind to the Bill rather than to the more interesting

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  shenanigans that may or may not be taking place somewhere else I have clearly missed the main news story of the day.
  Auditors are gradually being given a new role, which is being given strength and meaning by the ability of third parties to sue the auditor should the bank collapse. The argument will be that the auditor should have warned the system that something odd and peculiar was happening in the bank, as he should have had reason to know that. Therefore, if something goes wrong and he has failed in his role, he is responsible for a person's unfortunate financial position.
  This is an important and significant job. The hon. Member for Thurrock (Dr. McDonald) suggested that the job should go to someone else, because the auditor is paid by the people on whom it could be alleged that he is spying. I am not certain that that is right. It is important that these responsibilities and jobs go to someone who is likely to know what is happening. Two parallel systems of auditing would have to be set up, one reporting to the bank and one reporting to somebody else when the sheer cost of auditing and checking is terrifying in any case.
  However, there is a risk that, in difficult circumstances, the auditor will reach the point of semi-hysteria and feel that the only thing that he can do is report everything that comes to him just to protect himself. If that situation should arise would the supervisory board have the capacity to deal with the information with the necessary speed to alleviate people's worries? It may well trundle along rather nicely, but how would it deal with an emergency? I have no solution to that problem. However, because of the legal responsibilities on the auditor he may feel that the only way to protect himself is to report everything. At times when confidence is not high, there is a real danger of the whole system simply and absolutely becoming overwhelmed.
  My next point relates to the role of the independent members of the supervisory board. I note that the legislation states that if the independent members disagree with the Bank of England members, they can report to the Chancellor. Does that mean that they meet separately and independently? As a member of a single political thrust that is divided into two entities, I can advise them not to meet separately too often. Sane, intelligent and rational people meeting separately have a tendency to reach marginally separate conclusions. If they do not meet separately, how can independent members show that they take a different view to non-independent members? They should make representations, as the Bill permits.
  It is important to have independent members because it is crucial that the system is seen to be operated well by people of high calibre. I would like a litte more information about how the Minister thinks that the system will work in practice. Several hon. Members referred to the deposit protection scheme which is inadequate. There cannot be any justification for not indexing it at the earliest possible opportunity. The only satisfaction is the statutory instrument regulation means that it may be changed fairly easily.
  I can think of no reason why the opportunity could not be taken to increase the £10,000, 75 per cent. limit. I am sure that many of my constituents do not realise that if they have £30,000 deposited in a bank and that bank gets into difficulties, the most that they can hope to recoup
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  under the scheme is £7,500. If they understood that, the banks might find themselves slightly lighter on one or two deposits. We must be concerned mainly about the small depositor. Millionaires receive advice and know the risks, although it is obvious from the odd cases that they do not always get it right. For those investing £30,000, possibly from a life insurance policy or savings, the safeguards are inadequate. Why did the Government decide not to do anything about that?
  I cannot help but take a rather cynical approach to the clauses that prevent people from taking over our banks. By training I am an engineer and I make no apologies for that admission in a debate on banking. Sometimes a person with no direct involvement in the matter can make an important contribution. The powers to which the Minister referred already apply to Japan for engineering. Everyone said at the time that they would ensure that trade was fair, but in reality they did nothing about it. We have allowed a great slice of our industry to be undermined—admittedly by superb engineering, but with pretty dubious practices at the fringe.
  Following the big bang, the fear in the City is that the Japanese will obey every rule, like no one has ever obeyed them, until they get too big for anyone to do anything about it and they will then act in the way that I have described. I am very worried about that. We should have an absolute assurance that the Japanese will not be involved in British banks until there is a considerable change in their attitude. By no involvement I mean no involvement. I wonder whether we are really wise to allow them to operate within the City, given their attitude and history. I put that point on the record.
  My final point has nothing to do with the Bill. However, the hon. Member for Thurrock raised it, so I cannot see why I should not do so as well. It is the current consumer credit boom. That has enormous political attractions for the Government. For example, if someone borrows £1,000 and buys a television set—a rather expensive television set—the Chancellor immediately receives 15 per cent. in VAT. It is highly probable that the company that sold the £1,000 worth of goods will be profitable and the Chancellor will receive another cut from it. If it was purchased from a shop, someone would have served the customer, so there is an element of job creation. That is Utopia—a circle of events designed to please everyone, but it will in the end collapse and there are many reasons why we should worry about that. Clearly, many individuals are becoming so deeply involved in credit that often the only result is repossession.
  I am not sure what the hon. Member for Thurrock was proposing. It appeared that she was getting very close to suggesting that the Government should in some way set up a supervisory board to examine the problem of individual debt. Certainly that would be an intrusion into the rights of individuals to organise their affairs as they want to, is over the top.
  Dr. McDonald: The hon. Gentleman engaged in a flight of fancy when he described what I am alleged to have proposed. My point was that social workers, citizens advice bureaux and other bodies already assist people who are deeply in debt. Those agencies, as the hon. Gentleman must know, are very worried about the extent of debt that some people have taken on and their liability to fall into the hands of loan sharks. I made nothing like the proposals that the hon. Gentleman mentioned.
  Mr. Penhaligon: I accept that the hon. Lady did not say what I thought she had said. Of course, the hon. Lady did not offer any solutions to the problem. I hope that she will take another opportunity to tell us what the Labour party proposes to do about the problem.
  As a layman, I believe that the Bill is useful. I think that those who are not laymen also think that it is useful. We accept the legislation in principle, but we are worried as to how it will stand up to the test of time. When it has stood the test of time, it might be that some modification will be needed.
  The role of independent observation is crucial to the whole operation, as is the role and the marginally peculiar position in which the auditor finds himself. Those are two of the major keystones that hold the legislation together, if it is held together. The Minister today should give us some information on the independent role, even if the questions that I have raised regarding auditors are not easy to answer. They are vital to the whole matter. If that part goes wrong, my fear is that we will produce a Bill which, in five or six years, we will have to replace. We must get it right.
  My party will not oppose the Bill. Indeed, we cannot oppose any Bill on a Friday as we disperse to our various parts of the country. As is well known, however, the usual channels would not have put the Bill down for a Friday if there were fundamental opposition to it. As there is broad agreement, the Committee stage may be a fruitful one, as is so often the case in these circumstances.
  11.20 am
  Mr. John Browne: First, I must declare a financial interest in the finance industry.
  The key importance of the banks in both international and national economies is well known. As my hon. Friend the Member for Chichester (Mr. Nelson) and others have said, people trust the banks with their entire savings. the Government therefore have a duty to ensure the maximum prudent protection by preventing banks from taking imprudent risks, as was done, for example, in the case of the international debt crisis.
  A number of key changes have affected the banking industry in recent months and years. First, there has been the growth of financial supermarkets. This has been enhanced by the big bang, of which I entirely approve. Now, instead of just being lenders, banks are becoming dealers in securities.
  Mr. Weetch: And underwriters.
  Mr. Browne: Yes, although that happened to some extent in the past.
  Two other developments have greatly changed the whole environment in which banks work. To use two buzz words, they are securitisation and globalisation. The first means that more and more debt obligations are not just between two parties but are traded as securities among many parties, so that in the world system there is a huge inherent and increasing risk of a settlement default and the ripple effect that such a problem would cause.
  Globalisation means not only that a problem in one country could spin into many others, as in the tin market crisis, but that one has to consider the effect of cross-border transactions. A dealer in Thailand may not fully understand financial instruments in the London and New York markets. There are also physical settlement risks.
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  The international legal system may also not be keeping up with the speed at which cross-border transactions are developing throughout the world.
  Mr. Butterfill: Will my hon. Friend give way?
  Mr. Browne: I should love to give way to my hon. Friend, but I cannot do so as I am trying to be brief.
  Commercial and financial risks are well known and have existed for years, although they are now larger. However, the commercial banks got themselves into a great new area of risk by moving into international lending. That is still a very serious risk. They are now getting into yet another area of risk—quasi-security markets. As a result of financial engineering over the past two or three years, the banks are now not just in the futures market, but in the options market and the swaps market. Indeed, they are now getting into future options on swaps! That involves very great risk, which the bank regulatory authorities may be willing to tackle, but are not yet able to tackle.
  Three years ago the swaps market turnover amounted to about $15 billion. It now involves some $300 billion per year. The image of that market is that everyone makes a profit and huge salaries are paid to swaps dealers, but who is making the losses to provide those profits? It is also believed that everyone, from corporate treasurers to banks, avoids all risks. In that case, who is taking on the risks? Most swaps are done through banks, so banks are becoming increasingly involved in the underlying synthetic quasi-security dealings. Indeed, often they do not match the current transactions of the parties but warehouse the unmatched trades. In other words, the banks are now getting into the warehousing of security risks rather merely warehousing securities.
  There are forward swaps, zero coupon swaps and even put-and-call swaps. The main risks are risks of practice and agency and the legal, systemic and process risks.
  First, the practice risk arises because there is a genuine lack of understanding of this new, complex and fast-moving cross-border market. People may not understand what the transaction is about and what their commitment really is in a future swap or a put-and-call swap. They may be advised to engage in such dealings without any bona fide understanding of what exposure is involved. There is also the risk of malpractice. I do not say that this is taking off in a big way, but we know that it occurs, and in this market it can have an exponential effect involving many innocent people who may have no idea of the underlying transaction.
  Secondly, there is the agency risk. A person involved in malpractice may dash from one firm to another, out of the business altogether or across to another country, taking with him the computer discs on which the trades were recorded. How can we catch that individual and the on-line records? Some of the transactions are extremely large.
  Thirdly, there is the legal risk. I have yet to find a legal definition of a swap, yet this forms the basis of a $300 billion market. One thinks of London and New York, but what about the Japanese, Chinese or Australian definitions of cross-border swap transactions? There is also uncertainty as to the legal practices involved in all the quasi-security operations undertaken by the banks. Then there are the new markets in which there is little or no legal precedent for transactions of this kind. There is also the

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  cross-border problem arising because international legal accords are way behind the actual transactions taking place, especially by electronic means.
  Fourthly, there is the systemic risk. Spreads of seven basis points on average for a swap deal seem to me, as a virtual outsider, too small to cater for the inherent risk of warehousing risks rather than securities; just as one may argue with hindsight that Lloyd's charges for the risks that it was undertaking three or four years ago were not high enough, or that some banks in the international debt market were not charging high enough spreads for the risks they were undertaking. There is also an over-concentration of risk in the hands of major banks and investment banks in the big capital markets, especially London and New York. The risk taken on by financial supermarkets represent big risks for the public and for the economy generally. With the systemic risk, to, there is the cross-border problem.
  Fifthly, there is the process risk, or back office settlement risk. There may be a lack of genuine understanding, not just by those doing the deals, but by the back office people who have even less ability to understand the theory, let alone the practice and the physical settlement aspect. That, too, is a very high risk. It is an exploding market and involves high turnover, so it will load the back offices heavily in an area which they might not fully understand. We must also consider the cross-border problem, there being different ideas about and methods of settling.
  I strongly support the Bill. I congratulate my hon. Friend the Economic Secretary and the Government on their initiative, but I believe that, in some areas, the Bill does not go far enough with regard to supervision of the banks. We must ensure that the banking regulatory authorities are brought more up to speed with today's trades, and do not just follow and react to reports of yesterday's trades. That is urgent, and the Government must face it for the national and international good.
  11.30 am
  Mr. Ken Weetch: The House has heard some interesting speeches this morning and I have followed them with great attention, especially that made by the hon. Member for Chichester (Mr. Nelson). As a result of listening to his speech, I scrapped a good deal of the text that I had prepared. It is now rolled up on the floor at my feet.
  I sincerely hope that the hon. Gentleman follows through much of what he said and that we shall see him in Committee. He made some valid points which should be expanded a great deal.
  I could not follow the intricacies of the swap market, to which the hon. Member for Winchester (Mr. Browne) referred. It is an arcane area which I have never followed, and I shall need more guidance on it.
  On 20 June, the Chancellor of the Exchequer said: "serious shortcomings in the management of JMB led to its collapse—over-rapid expansion of the loan book, heavy concentration of exposures, and lack of adequate control systems. JMB was also guilty of serious misreporting to the supervisory authority."—[Official Report, 20 June 1985; Vol. 81, c. 452.]
  Is there enough in the Bill to give us a strong assurance that the same crisis will not be upon us again? That is the key question. My contacts in the City are limited in
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  number, but I can tell the Economic Secretary that many of them think that the Bill is not drawn stringently enough. I share that view.
  It is a sad fact of recent banking legislation in Britain that regulation comes only in response to serious breakdowns in the financial system. To a non-professional such as me, banking legislation in modern times seems to have been only a response to serious events rather than a grasped opportunity to give a strong and effective lead to the banking fraternity and the City of London. We have lagged behind events, and not put down strong markers.
  It seems that banking legislation has been only a few notches down from ad hoc problem management. Surely that is not right. We have had two good examples recently. In the mid-1970s, the City of London was rocked by the fringe banking crisis which occurred in the wake of the collapse in property values, and some fringe banks went to the wall. That disreputable episode was largely responsible for the Banking Act 1979.
  In a similar way, the Johnson Matthey scandal has had much to do with prompting this Bill. Just as the 1979 Act related to previous omissions and gaps in official financial control, the present Bill relates to omissions that have been discovered since 1979, not least of which are critical weaknesses in control systems. Once again, we are reacting to events rather than trying to shape the future.
  I am the first to admit that, when the Treasury approaches these problems, it is in difficulties because it must try to reach a compromise between flexibility, so that the City can develop to meet the needs of growing financial markets, and firm regulation. It is never easy to strike that balance.
  There will always be banking collapses. The Government can lay down as many regulations as they like but, in the end, banking, like much else, depends on the quality of the individuals involved. How much regulation can there be against an incompetent who makes ill-judged investments? How much regulation can there be against people whose conception of everyday ethics is pretty flexible?
  As my hon. Friend the Member for Thurrock (Dr. McDonald) said, after the big bang the City of London contains a diverse range of people from old world financial rectitude to financial riff-raff. The Economic Secretary does not have an easy task, but a more rigorous approach than is evident in the Bill is needed.
  I support the Bill as far as it goes. It says something new and something old in that we have debated some issues before. There is to be the Board of Banking Supervision. I appreciate everything that the hon. Member for Chichester said about that. I listened to him carefully. A good deal of what he said should be explored thoroughly when we examine the Bill line by line.
  I am not convinced that abolition of the two-tier system is the right way forward. I am not saying that it is not, but I shall require a great deal more convincing before I believe that it should be abandoned. I accept the proposals concerning authorisation criteria, large exposures, relations between supervisors and auditors and banking names and descriptions. We are arguing about what will happen in practice rather than what is set down on paper.
  The House should support the Bill, but in Committee we should scrutinise it carefully to make it as strong and effective as possible. However, that should not prevent us from asking some critical questions about the make-up of the Bill now.

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  One of my criticisms about financial legislation is that it leans far too heavily on informal understandings as a basis for control and on the old-boy network in the City, which is always assumed to understand such matters. I am the first to accept that the hallmark of the developments in the City and in the banking system has been a heavy emphasis on informal and intuitive understandings among people who know the system. The standard argument is that informality has always been the strength of the system, but that argument can be pushed too far. It is all very well to have informal understandings, but when something goes seriously wrong, we reach for the levers of formal control. We are pushed into reacting to serious events when we should have tried a little foresight.
  In banking, we have always relied on the minimum legislation necessary. The formal powers given to the Bank of England in the Banking Act 1946 were seldom used. That may be a strength, but over the years it has also become a weakness. After the big bang in the City, there will be more opportunities for those who have speculative intentions, which will do no good to the City and its earning capacity in invisible exports or to the long-term purpose of financing British industry and commerce. There is considerable potential for a casino in the new system just down the road. That applies, to some extent, to the banking framework as well as to operations in other financial markets.
  The Bill is not rigorous enough. It should take steps to establish a stronger framework of statutory regulations. I do not intend to make a Committee-style speech, because I shall pursue that point in Committee and examine the Bill line by line, but I should say now that the Bill is not formal enough, as I have said. Nor is it rigorous enough. It is still permeated by the mentality of a nod and a wink, as was obvious from the tone and temper of the report of the committee set up to consider banking supervision.
  The old-boy network and the informal understanding are still very much with us, to the detriment of more effective regulation. With the new financial jet set in the City, that approach is clearly not enough. I was not impressed by the report of the committee. It was weakly argued, it was casual in its approach, it lacked a sense of urgency and it belonged to the easy world of yesterday rather than to the competitive jungle of today and tomorrow. The hon. Member for Winchester described part of that competitive jungle, and I was interested to listen to him. I do not know how we could ever regulate against that, but I strongly agree with him that we should at least think seriously about it and try to follow developments in the new operation, which throws up stark challenges to us.
  The hon. Member for Chichester mentioned the Board of Banking Supervision and the independent advice on it. It is my experience that, if they are not careful, non-executive directors are always out-manoeuvred in serious matters and are often short-circuited when it comes to providing information. The hon. Gentleman mentioned a banking establishment. There was no greater banking establishment than this committee, three members of which came from the Bank of England. Indeed, 50 per cent. of the committe members came from institutions whose previous supervisory activities and records were not exactly covered in glory.
  After the Johnson Matthey Bankers fiasco, we need more regulation, not less. Therefore, I wish to know more about why the previously considered protective device of
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  two-tier regulation has been dismantled. From what I have heard, I understand that it was dismantled more because of its operation and mangement that because of inherent difficulties in its nature, and I remain to be persuaded on that point. The committee's report was certainly unconvincing. The suggestion that the two tiers made supervision more difficult was stated repeatedly in the report—indeed, it was stated repeatedly today—rather than convincingly argued. As a layman—one of the laymen welcomed by the hon. Member for Chichester—I know that there is a public perception of the word bank. To ordinary people, it suggests caution, prudence, safety, financial rectitude and soundness, much more than does an ordinary licensed deposit institution. The report said that two-tier supervision caused administrative difficulties. Administrative difficulties are meant to be solved. Administration is a tool of Government, not a end in itself. The fact that there were administrative difficulties, as a conceptual argument, is neither here nor there.
  Nor was I impressed by the argument about lowering the status of banks to that of licensed deposit-takers. The report said that this was a useless tool of discipline because it questioned confidence in the institution, which could cause a run on the bank. If, after fair warning from the supervisory authority, a financial institution or bank does not mend its ways, it must face the financial consequences. That is the purpose and part of the mechanism of financial regulation. A major criticism of the informal system of regulation before 1979 was that it was too easy to become a bank. The 1979 legislation responded to that criticism and made it more difficult to become a bank. I ask the Economic Secretary a question. There has been a serious banking collapse and a desperate rescue operation. Why then should we change the criteria now when the situation is becoming more serious, not less, and will need more regulation, not less?
  I am not convinced about the safeguards in the provisions on exposures. Can the Minister tell us whether the provisions of clause 35(1)(a) and (b) mean less regulation of exposures or more? Are the criteria being more tightly drawn, or less? If they are less tightly drawn, we are moving in the wrong direction. Clause 35 states that a report shall be given to the Bank of England if a bank under supervision intends to enter into transactions that will lead to an exposure to risk of losses in excess of 25 per cent. of the capital base. Is that less regulation than before, or more? I understand that the Bank's current guidance on exposure is related to 10 per cent. of the capital base. I have not had a chance to compare the proportions of exposure to the capital base in the United Kingdom with those of the European Community and elsewhere. Are our regulations more tightly drawn?
  The Minister was right to emphasise the adequacy, calibre and quality of control systems together with the nature of the supervisory personnel who will have to operate those mechanisms. Some vital questions must be answered and I hope that we shall explore this matter further in Committee. What steps will be taken to change and improve the flow of information from supervised banks? The Chancellor of the Exchequer said that one of the things that went wrong in the JMB case was that the Government received duff information from the bank when they were trying to exercise some supervision. What is there in the Minister's statement today to assure us that

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  we shall tighten up on the quality of information that is given to supervisors, so that we can rest more easily in our beds?
  There is need to explore much further the nature of the relationships betwen supervisors and auditors. My hon. Friend the Member for Thurrock has promised a close scrutiny of that and other matters when the Bill is examined line by line. I support her in that, especially as at present both financial procedures and financial ethics in the City of London are becoming much more flexible.
  11.53 am
  Sir Eldon Griffiths: The House must be grateful to two cathedral cities of England. My hon. Friend the Member for Chichester (Mr. Nelson) spoke with great authority and perception and I am sure that my hon. Friend the Minister will wish to reply to his various points. My hon. Friend the Member for Winchester (Mr. Browne) made a highly technical and impressive speech which, to use one of his phrases, will overload the back office of my hon. Friend the Minister.
  I was surprised at the speech of the hon. Member for Truro (Mr. Penhaligon), although I agreed with his central point. He said that whatever else we do, the Japanese must be kept out. That is an odd view for a Liberal. I do not propose to comment on the speech of the hon. Member for Thurrock (Dr. McDonald), because I am sure that my hon. Friend the Minister will do so. However, I hope that the Labour party will avoid reacting to the immediate headline. There are problems in the City of London and they deserve to be condemned, but a Bill of this nature which fits into the Government's general strategy deserves to be examined more maturely than on the basis of the most recent scandal—deplorable though it certainly is.
  As a non-banker, I understand the Government's broad strategy to be, first, to liberalise, deregulate and free the environment in which our financial institutions operate—that objective is to be commended warmly—and, secondly, to provide more competition and open wider the gates of the City of London to small new firms and perhaps more specialised, diversified firms so that the range of services is broader, discipline keener and the choice to the consumer wider. That second objective is also entirely right.
  But as this Bill and others demonstrate, the Government also seek to provide a clearer, simpler and, hopefully, more effective system of control and supervision. That cannot be put more effectively than it was by my right hon. Friend the Chancellor of the Exchequer in his foreword to the White Paper when he said:
  "An effective system of banking supervision is as important as the banking system itself. For without it there will not be the confidence on which sound banking depends—from the confidence of the individual depositor that his money is safe, to confidence in Britain as one of the foremost financial centres in the world."
  I, too, warmly welcome the Bill. I remind the House that only last night we agreed to the establishment of the new serious fraud office under the Attorney-General. That was a wholly proper response to the recent rash of improprieties which have disfigured the City. It will be welcome to the hard-pressed fraud squads of the City of London police and the Metropolitan police.
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  There is only one main flaw in the Bill. I see that my hon. Friend the Minister is wearing his Hawks club tie, which on other occasions I am proud to wear. He will therefore be aware of the matter worrying me. The worm in the wood is part III, particularly clause 63. This would prevent licensed deposit-taking institutions from using the name "bank" and from giving any indication in their names that they undertake banking business unless they have more than £5 million paid-up capital. Foreign-owned banks however are to be excepted and the Bank of England will be able to do nothing about them as they do not fall under clause 63.
  The Government's cut-off figure of £5 million for the use of bank names will have a damaging effect on many of our small institutions, especially the Reliance Trust—the Salvation Army's bank—and the Manchester Exchange Trust. I have no personal interest in either, but it is right that the anxieties of both these institutions should be known. Their complaint is, first, that there was insufficient consultation and, secondly, that it is inconsistent to set a figure of £1 million as the net assets criterion for deposit taking and a figure of £5 million to use the name bank. Thirdly, there is, as a result, the prospect of our continuing with two tiers of financial institutions that are to be separated by no more than the arbitrary prohibition of the smaller ones from describing themselves as banks. There will be sheep and goats—those above £5 million who can call themselves banks and those below £5 million who cannot. This is bound to damage the public reputation and business of well-established smaller institutions, whose customers henceforth will be unable to indentify them as banks.
  As to the failure to consult, the basis of the Bill is the report of the Leigh-Pemberton committee. I do not accept the strictures of the hon. Member for Ipswich (Mr. Weetch) about this committee. It did a first-class job and ought to be commended, not reprehended in this House, but as far as I can discover, the smaller institutions were given no formal consultation opportunity to make known their objections when the Government decided to shift from the Leigh-Pemberton recommendation regarding the figure that would be appropriate for banking names to the White Paper recommendation that changed that proposal.
  My hon. Friend the Economic Secretary has been most courteous in listening to me in private on this matter. He told me that it was open both to Manex and Reliance to make known their feelings at any time after the publication of the White Paper. Manex did so, directly to the Bank of England. Perhaps the Bank of England was unable to convey this to my hon. Friend or to the Treasury, in which case there may have been a failure of communication between the City and Westminster.
  Howsoever that may be, both these companies are deeply affronted. Rightly or wrongly, they have drawn the inference that the Treasury sought opinions on this matter only from those larger institutions that have, the House might think, an obvious interest in preventing their smaller competitors from calling themselves banks.
  I turn from consultation to the substance of the complaints made by these smaller but highly reputable institutions. Both Leigh-Pemberton and the White Paper are united in believing that there should be a single threshold of £1 million as the basis for authorisation of deposit-taking institutions. What baffles me is the decision to raise the threshold for the use of the name bank to a level that is five times higher than this.

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  The tests that are set out in the White Paper, as by Leigh-Pemberton, to justify any financial institution being authorised are very clear: adequate capital and liquidity, a high reputation and standing, prudent operation by appropriate persons and the provision of a wide range of banking services. These are very proper criteria. And Manchester Exchange Trust and Reliance Trust unquestionably meet these criteria. Indeed, I would argue that they do so more effectively than certain institutions whose equity exceeds the £5 million mark, which is to be used to exclude Manex and Reliance from describing themselves as banks.
  I remind the House that a very large number of overseas banks will continue to be established in the City of London and will not be caught by the £5 million cut-off for use of the name "bank". Many of them—I hope not to cast aspersions on them—certainly cannot be described as having greater probity, better quality staff or a higher reputation than Manex or Reliance. That is why I find it impossible to reconcile the insistence in the Bill that a £5 million threshold must be used to justify the use of the term bank with the statement in the White Paper, paragraph 7.13, that
  "It is important to avoid the requirement which frustrates market entry and the benefits of competition… Adequate substance is only one and not the first of the requirements for a prudent deposit-taking institution."
  I believe that Manex and Reliance are entirely prudent deposit-taking institutions and that it is wrong to deny to them the right to describe themselves as banks.
  Let me now quote very precisely to my hon. Friend the Economic Secretary the clear recommendation of the Leigh-Pemberton committee. Recommendation 13.2 says that
  "The present two-tier system of authorisation should be replaced by a single authorisation… All the powers given to the Bank under the Act should apply to all authorised institutions and all authorised institutions should be entitled to use banking names".
  I do not think that Leigh-Pemberton could have put it more clearly and precisely than that, but the Bill abandons that advice.
  The White Paper offers a variety of reasons but it comes to the clear conclusion that
  "The popular understanding of the word 'bank' lends a more substantial aura to certain institutions than their size and standing merit."
  I suppose it was this that led the Government to limit the use of the word bank to institutions with paid-up capital of more than £5 million. But my hon. Friend has accepted in the White Paper and in his converstations with me that this figures is wholly arbitrary. It is bound to be.
  I am well aware that there was pressure for the figure to be higher as well as pressure for it to be lower. However, it is unjust to the Salvation Army's bank and to Manex to suggest that their size and standing are such as to make them unsuitable to enjoy what the Government describe as the "aura" that the word bank lends to their operations.
  One result of my hon. Friend's proposals will be to recreate two tiers: £1 million for licensing and £5 million for nomenclature. The consequence of this, in practical terms, is bound to be that two lists will be kept by the Bank of England and, no doubt, by the Securities and Investment Board and the other institutions. One list will be headed "banks". The other will be headed by some other term of art. For shorthand purposes, I shall use the term non-banks. So there will be the authorised banks—over £5 million—and the others under £5 million.
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  By my calculation, there will be only a few British institutions which fall below the £5 million threshold—save for the large number of foreign banks that are operating in this country—and two of them will be Reliance and Manex. This will surely damage them. For whereas until now there has been a fairly large number of licensed deposit-taking institutions in the second category, henceforth that minority will be very small indeed.
  From the point of view of corporate treasurers, local authority treasurers and building societies, there will assuredly be the tendency not to treat those on the second list—the non-banks—in the same way in the market place as those who can use the term bank.
  Fund managers with cash to deposit for a short period will be reluctant, to put it mildly, to place their funds with institutions which are statutorily denied the use of banking names. As a consequence the competitive position of Manex and Reliance may well he damaged. We shall be making it less easy for small new institutions to add to the competitive environment of the City.
  I turn now to my suggestions for tackling this problem. My hon. Friend the Minister is aware of at least two of them, but the third may be rather better. One possibility would be to reduce the proposed £5 million to perhaps £2·5 million. I understand the difficulties that the Government would face over that, but it is certainly a possibility.
  Secondly, the Minister could allow the Bank of England or the supervisory board to exercise a measure of discretion. That is to say, if they were satisfied that an institution was up to the mark in every respect in probity and reputation they could allow it to use the name bank even though its capital was somewhat below what my hon. Friend himself acknowledges is the purely arbitrary figure of £5 million. That second option of the supervisory board being able to use its discretion has a great deal to be said for it, but since discussing this with my hon. Friend I have come up with a third possibility. It is what I would call broadly the grandfather approach. As my hon. Friend knows, since the Banking Act 1979, institutions entitled to use banking names have been limited. I propose that this Bill should accept another category, namely authorised institutions that used banking names prior to the 1979 Act.
  My hon. Friend may wonder why I wish to go back to the position that existed before that Act. I make no bones about it. He has acknowledged, and I think it is common ground in the House, that the 1979 Act did not do the job properly. We are getting rid of most of it. For that reason, there can be nothing sacred about the arrangements made under that Act to distinguish between the licensed deposit takers and the banks.
  As my right hon. Friend the Chancellor of the Exchequer said, the 1979 Act has serious weaknesses. That was one of them and it would be quite reasonable to return to the situation in which authorised institutions which used the name bank prior to the 1979 Act should again be allowed to do so. That would certainly solve the problems of the Salvation Army's bank and Manex.
  My hon. Friend has already undertaken to consider carefully the following points. First, small institutions which by any measure meet all the relevant tests of competence, high reputation and demonstrated achievement in the market place, ought not to be damaged solely because they do not possess the arbitrarily established figure of £5 million of equity capital. It is the quality and not simply the quantity of a bank's assets that ought to determine its standing.

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  Secondly, if we believe, as I do, in fair competition, it cannot be right to handicap our smaller financial institutions vis-à-vis their larger competitors, simply because they do not meet some purely arbitrary figure for their paid-up equity capital.
  Third—and the House may think that my third point is most important—it is wrong to allow the subsidiaries of foreign institutions operating in Britain to call themselves banks, despite the fact that in Britain they own considerably less than the £5 million required, while at the same time denying this advantage to our own well-established indigenous licensed deposit taking institutions.
  Finally, it is unreasonable to legislate to prevent a respectable and properly constituted business from incorporating into its name an accurate description of the nature of its activities, especially when it has been specifically authorised by the Bank of England—as it will have to be—as being competent to undertake that business.
  As a civilised and astute Minister, my hon. Friend will recognise that there is no point in deeply offending by this Bill two small but immediately reputable institutions one of which, the Salvation Army's Bank, has a specially wide appeal, and the other, Manex, which for 103 years, since 1876, called itself a bank without any adverse consequences whatsoever. I should like the Minister to make good the damage that the 1979 Act caused to those institutions, in other words to make reparation to them for a mischief that was never right.
  12.16 pm
  Mr. John Butterfill: One of he disadvantages of catching your eye at a late stage in a debate such as this, Mr. Deputy Speaker, is that many of the points that one would have made have been by other hon. Members, and in many cases they have been made much more eloquently than one could make them oneself. I pay tribute to the contributions of my hon. Friends the Members for Chichester (Mr. Nelson) and for Winchester (Mr. Browne), whose knowledge of the subject is quite outstanding.
  The hon. Member for Thurrock (Dr. McDonald) could not resist having a swipe at Government economic policy, but I was encouraged to hear her say that, for any Government, there comes a time when borrowing has to stop. That is a refreshing change of heart by the Labour party, especially when one looks at the future spending plans outlined by the shadow cabinet. It also causes one to recollect the time when the borrowing had to stop under the last Labour Government, when the right hon. Member for Leeds, East (Mr. Healey) was recalled from the airport to talk to the IMF.
  The hon. Member for Thurrock said that she was worried about insider dealing. Perhaps I can assist her. She played a distinguished part on the Committee which considered the Financial Services Bill, as did many hon. Members who have spoken in the debate. Perhaps I can refresh her memory by referring her to sections 173 to 178 of the Act. She suggested that there was a problem in that under the Act only individuals would be subject to sanctions, and that there was a need for further action. Section 174(2) deals with market makers. It refers to
  "a person (whether an individual partnership or company)".
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  The Act goes on to detail the penalties that can be applied to companies and individuals and specifically sets out what they can be. They include imprisonment for individuals and removal of authorisation for companies.
  Dr. McDonald: I am aware of the legislation that already exists, but we are worried about the use of such legislation. All too often it appears that when insider trading is discovered an individual is found guilty of the offence and he or she resigns from the company or organisation, and that seems to be the end of the matter. We need to make sure that organisations which benefit from such dealing are penalised as well. We have already had two cases of insider dealing, one of which probably affects Britain, and many commentators expect many more cases of such dealing to occur. We do not want individuals merely to resign gracefully from the organisation involved, to suffer their own penalties and for nothing further to happen.
  Mr. Butterfill: We would all agree entirely with the hon. Lady on that score. That was the purpose of our debates on what is now the Financial Services Act 1986. It has been law for only a matter of weeks, but I am sure that it will be enforced rigorously. The signs that are coming from the Securities and Investment Board are that that will be the case.
  I endorse what has been said about the importance of the banking sector to the economy and to the prosperity of us all. It is especially important in my constituency, where many clearing banks have established major offices. We are fortunate that the European headquarters of Chase Manhatten are being established there. This diversification is providing welcome employment opportunities for those of my constituents who have, sadly, been finding themselves the victims of the relatively high levels of unemployment that have existed in Britain over the past few years.
  The Bill will build upon what we have already done with the Building Societies Act 1986 and the Financial Services Act 1986. The discussions that we have had so far are encouraging and suggest that our discussions in Committee will be as constructive as those that took place in Committee when we considered what was then the Financial Services Bill. I echo what my hon. Friends have said about the Board of Banking Supervision. We know that there will be five independent members of the board, and we appreciate that they will need to have a high level of expertise in, and knowledge of, the banking system. I am sure we all hope that they will accurately and fairly represent the lay public. It would be helpful if my hon. Friend the Economic Secretary to the Treasury could set out the sort of criteria that he envisages will be required for membership of the board.
  The immunity provisions for the Bank of England in exercise of it supervisory and regulatory functions echo very much the debates that we had on what is now the Financial Services Act. I was pleased to see that it was proposed to give immunity to the bank as an institution and to its employees. It would be impossible for the bank to carry on adeqately its supervisory function unless it and its employees had immunity.
  I welcome the revised basis of supervision and the powers of direction that will exist. Undoubtedly there were deficiencies in the 1979 Act. It seemed rather anomalous that the requirements for licensed takers of deposits were

  577
  in many instances a good deal more strigent than for those who were able to call themselves banks. It is right that included in the Bill is the right of appeal to an independent tribunal for any person who is aggrieved by an action of the supervisor.
  I am interested to see in clauses 30 to 33 that the Treasury will have power to place restrictions on advertising and cold calling. These were subjects to which we turned when considering what was the Financial Services Bill. I am a little concerned, however, that it is merely a general power. I appreciate that it is right to reserve the ability to deal with situations that arise in future, but I hope that it will be possible in Committee at least to consider what the criteria should be in the exercise of those functions. I hope that we will be able to have a detailed discussion on the types of advertising that might be objectionable, and especially on the controversial issue of cold calling.
  The extension of the role of auditors in passing information to the Bank of England is a vital extension of the protection that will be given to depositors. The exemption that they will enjoy from the normal requirements of client confidentially is an essential adjunct. We are placing heavy responsibilities on auditors in a variety of Acts, and it may be that a general consideration of their profession in relation to a number of pieces of legislation might be appropriate at some time in the near future.
  The provisions in clauses 78 to 93, which relate to the lifting of restrictions on disclosure by certain persons, contain an interesting omission from the schedule of the circumstances in which disclosure may be made. I note that, although the Director General of Fair Trading, in exercising his functions under the Consumer Credit Act 1974, can make disclosure, there is no provision—I understand why this may be—for disclosure direct to the commissioners of Inland Revenue. I know that such disclosure would cause great concern in the banking sector, and when we examine these clauses more closely we realise that that might be disclosure.
  There is a provision in clause 80 for disclosure in the "public interest". The "public interest" might be deemed in future, and perhaps should be, to include the collection of taxes. Furthermore, disclosure is permitted
  "with a view to the institution of, or otherwise for the purposes of, any criminal proceedings".
  As cases involving the Inland Revenue might involve the institution of criminal proceedings, perhaps my hon. Friend the Economic Secretary will refer to the Government's view on that when he responds to the debate, or alternatively in Committee.
  I am slightly worried by clause 35 and the exposure provisions, and my concerns have been amply demonstrated by my hon. Friend the Member for Winchester. With the esoteric instruments which now exist in international banking, and with the globalisation and securitisation which he so ably described, it will become extremely difficult for a supervisor or for a bank to make an accurate assessment of the degree of exposure. It seems that the concept behind clause 35 needs to be examined in much more depth. There are differences in international practice and in many instances American banks are more closely regulated than our banks. There are particular regulations dealing with loans to developing countries. That is not covered by the Bill, but it is something that should be considered for the future.
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  I put my hon. Friend the Economic Secretary on notice that I hope to move a modest amendment to the Bill, dealing with the Cheques Act 1957. This Bill's primary purpose is to protect depositors, but the Cheques Act fails, in part, to fulfil that desirable objective. A constituent of mine, an elderly widow, had a deposit with a local authority in the north of England, and wrote to it asking if she could withdraw £1,500. The local authority sent her a cheque for that amount, but sadly it was stolen in Bournemouth by somebody who took the mail hag containing the letter. The thief opened the mail, saw the cheque, and decided to appropriate the money. He went to a branch of a well-known clearing bank, opened an account with it, and paid in the money. Shortly afterwards, he drew it all out.
  When he opened the account, the thief gave as his name the name of the person to whom the cheque had been made payable. My constituent's solicitors said that under section 4 of the Cheques Act the bank could claim immunity. That section states that a banker is protected where he acts
  "in good faith and without negligence".
  Nobody would suggest that the reputable clearing bank involved had acted in anything other than good faith. One must therefore consider whether it was negligent. In that respect history is unfortunate, as several cases dating from the early part of this century reflect an attitude towards consumer protection that is no longer prevalent. The tests of negligence then imposed by the judiciary were extremely severe.
  As a result, it has been held that a bank does not necessarily have to establish the strict identity of the person opening an account with it. I believe that we should amend the Cheques Act to say that negligence would be deemed unless a bank had taken reasonable measures to establish the identity of a customer who was previously unknown to it.
  Having said that, I very much welcome the Bill. It will perform a valuable function in regulating banks and in instilling much greater confidence in the market. That will be to the nation's benefit, and I wish the Bill well.
  12.32 pm
  Mr. William Cash: I welcome the Bill, and congratulate my hon. Friend the Economic Secretary and his team on it. Perhaps this is the opportunity to look not merely at the Bill's technical aspects, which have been dealt with so expertly by other hon. Members, but at its objectives, given the explosion that has taken place in financial services and the opportunities offered in the new international markets in which we shall be operating.
  To some extent, we could become bogged down in the technicalities of the issues before us. There can be no doubt that the majority of commentators have given the Bill a fair wind. However, we must strike a balance between the opportunity that is offered and the controls that are to be imposed. I have confidence in the Government's ability to make the right choices, but I must stress the importance of the role of the independent members of the Board of Banking Supervision. That is important, and I have no doubt that the matters that have been mentioned so frequently in this debate will be observed by those who have responsibilities in that regard.
  During the past few centuries some of the swings in the banking system have reflected new opportunities. I hope that I have got my history right, as I think particularly of the time when the Bank of England was first instituted in

  579
  the 1690s. There were opportunities in the East Indies and other countries. We were effectively providing an entrepot financial service for the world. Merchants wanted to come here and we were in competition with other countries. I believe that the position of the banks in this country, complementary to the banks of other countries now seeking to use the entrepot facilities provided in this country, gives us an opportunity to provide a worldwide service which will be extremely good for the prosperity and enterprise of this country. However, there is an inherent risk in having a large proportion of foreign investment and foreign money in this country, which is the balance of the other argument I put forward between opportunity and control. The need for control—if I recollect aright, I think that this is dealt with in sections 21 and 35—needs to be looked at in Committee so that, in line with the remarks of other hon. Gentlemen, we ensure that the foreign companies which come in do so on a basis which is not only reciprocated in their own countries but is fair on those banking institutions which already exist in this country. There is a balance to be struck there.
  There are extremely important reasons why we need an effective banking service. Of course the banks must be technically sound. However, we must also concentrate on why the bank is there at all. It is there to provide a good financial service. Banks providing banking services for other banks would not be terribly productive. Banks are not provided in order to help themselves, but are there as a service for the manufacturing and commercial interests of the country and they have grown up on a mutaul and complementary basis to them. Therefore, it is essential that we keep the long-term interests of prosperity and enterprise of this country in the forefront of the consideration of a Bill of this kind.
  Looking back into the 19th century one remembers the Glasgow banking case in the mid-19th century, the collapse of the country banks, the over-speculation in South American banks in the 1820s mirrored only by the over-speculation of the United States banks in South America in the past 15 or so years. All those things came down to one essential question, which is the need to ensure that things which could go wrong do not go wrong. I hesitate to mention Johnson Matthey. I think that there were special circumstances in that case which have been reviewed by the Bank of England and others very successfully. I also feel that there is much misguided criticism of the banking system in this country.
  I welcome the Bill because the balance provided in it is just about right. At the end of the day, banks have to be there to provide an opportunity to spot the winners, to provide stability and to provide a back-up to companies, whether they are in manufacturing, farming, commerce or whatever, where we are going to have quality enterprise in this country. As I see it, there is no way in which we will be able to go on with the old idea that volume production is what is required. The banks are there to provide the means for liquidity in the capital markets to enable investment for quality companies. I believe that it is the ability to spot the winners that will be the acid test for the banking system.
  A further point cropped up in the area of financial services when I had the honour to serve on the Committee on the Financial Services Bill with other hon. Members who have spoken in this debate. There was an enormous
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  explosion of capital, for example in the building of the railways in the 19th Century. My family founded the London-Brighton railway in the early 1830s. They needed capital, and they went off to the then bankers and got the money to provide the network of communications, and now there are the new technologies, information technology and so on. Money must also be provided for this country's present manufacturing core.
  The manner in which regulation is exercised in conjunction with the opportunities for enterprise which the banking system offers has to be weighed against the people who will run the regulation. I do not want to make a meal of this, and I certainly do not want to moralise—that is absurd—but at the end of the day, as with financial services, the professions and all the self-regulatory organisations—whether it is banking, Lloyd's, the Law Society, the accountancy bodies, medicine, journalism, or broadcasting—in providing the service, there is the opportunity to give an objective assessment and to make the right decision. In self-regulation one not merely spots the winners, but ensures that there is no monopoly, no cosy club, and that proper standards of impartiality are observed.
  All along there is one main, consistent theme. It is that the people who are running those organisations, who have obtained pivotal positions in them, or who are providing those services, are themselves aware of the fact that they are not just engaged in a technical exercise, but are providing a service, which is a balance between the private and public interest.
  Some of the scandals that we have heard of recently are characteristic of a new speculative entrepreneurial age, which I entirely welcome because of the opportunities that it offers for changing our economic direction. At the same time, we must be sure that the people who are engaged in the business of regulation and self-regulation are aware that they will need to be pretty tough with the aberrant situations that occur from time to time.
  I should like to take this opportunity to pay a tribute to Sir Kenneth Berrill, who is in financial services, which will complement and dovetail this sector, for the line that he has taken to ensure that the rules are properly observed. I welcome the Bill because I believe that the people who will be chosen to run the banking system will need also to have regard to those important factors. I have no doubt that they will.
  Of course, there is at the bottom of such a Bill a protection in law for the banking system. That is precisely what such a Bill provides. In other words, not only does it protect the consumer who comes into the bank, but it protects the banking interest. As with all cartel monopolies—we do not need to avoid that point—one needs to protect one's banking system, because only by doing so can one provide sound money and confidence for the investor and a sound, enterprising society. So I welcome the basic underpinning of the Bill, which is protection of the banking system itself.
  The Japanese have made remarkable progress in capital markets. They were fairly described as being backward in their capitalisation and capital market programme, but contrary to the position in this country and the United States, where the stock exchanges have tended to lead in those areas, Japan has now moved into an era when the targeting of capital markets within a much more liberal international market is becoming increasingly important. If one looks at the back page of The Economist in any given

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  week and compares the Japanese performance with that of the United States, one sees the extent to which the Japanese have taken off. We have a great deal to learn from them.
  I spoke earlier about the pivotal role of the Bank of Japan. Although we cannot copycat the Japanese in any way, we should look carefully at the way in which they have oriented their markets, because they provide, both through the way in which they have established their market structure and through the establishment of the Bank of Japan, a strategic role. There is an umbrella system, of which the centre pole is the bank, and the struts and the fabric are extended.
  There are no hostile bids in Japan. There may be differences of opinion about hostile bids, but the banks themselves play a mutual or complementary role between industry and the banking system. The banks play a positive and enterprising role in the Japanese system and we find a reluctance there to engage in short-term profits. There is a greater insistence on research, which leads to a stable economy, and we could learn much from that. The break up of the Japanese cartels which is in progress is a sign of the way in which the Japanese are responding to the greater liberalisation in the world.
  The back pages of The Economist also show the strength of the West German economy and the central role of the Bundesbank. West German bankers also play a significant part in industrial management and sit on the boards of industrial companies. In other words, there is a complementary relationship between the banking system, investment, research and the capacity for enterprise in those countries, which is developing here. I wish to encourage more of that. Banks are not there just to make money. They provide investment for their shareholders, but they must also be a mechanism and an opportunity for the making of money as engines of wealth.
  Over-provision of financial services may seem a strange subject to mention, as we now have a trilogy of Acts, concerning banks, building societies and financial services. However, I am concerned that if banks go, as I hope they will, into the financial services sector on a significant scale, they will be competent and provide a high quality service. We dealt with this matter on what is now the Administration of Justice Act as well, in the context of conveyancing. I served on the Committee that considered that measure. Although it is important that the banks should be going into a variety of different services, quality and competence are more important.
  Mr. Butterfill: Would we not do well to look at the United States of America, where banks are precluded from certain sectors where it is perceived that a conflict of interests might arise, and that includes the insurance market?
  Mr. Cash: My hon. Friend makes a valid point, and conflicts of interest, Chinese walls and other such matters must be kept closely under control. I welcome the Bill because the opportunity for regulation, within the enterprising framework and in relation to financial services, is the key to the whole thing. Nothing is more absurd than to have rice paper thin Chinese walls. We must make sure that we have an effective system of proper supervision. The manner in which the regulatory system is followed will largely depend on information—the
  582
  speed of information, spotting when things go wrong and new technologies. I think that it was Bacon who said, "Knowledge is power."
  There is an opportunity now to use the new technologies to ensure that the principle "Who guards the guardian?" is genuinely understood in the City of London and in banking circles. We have a tremendous opportunity, with the entrepot of financial services, to ensure an engine of wealth for this country. We must ensure that everyone—the domestic banking market and the foreign banking market entering this country—is properly regulated, without too much smothering control, but with the means to ensure that enterprise and the spotting of winners are the key criteria. I welcome the Bill and I wish the big bang and all that accompanies it every possible success.
  12.51 pm
  Dr. McDonald: With the leave, of the House, Mr. Deputy Speaker, I should like to reply. I shall not delay the House for long at this stage of what has been a full and useful debate, but I should like to comment on one or two points that have emerged from the debate.
  Reference has been made to the use of new financial instruments, such as swap arrangements, and to the problems created by bad debts. Of course, it was right that such reference should be made. As I understand it, schedule 3 gives the Bank of England, as the supervisory body, greater powers to advise and guide banks over new financial instruments. It would plainly be difficult to specify these in legislation, because that would appear as an exclusive list and banks might be encouraged to believe that they were free—with the imagination and ingenuity characteristic of many banks—promptly to invent new financial instruments which the Bank of England, as the supervisory body, would find it difficult to control. Obviously that must be left, as at present, to the guidance of the Bank of England and to the assessment that it continually makes of new financial instruments and capital adequacy.
  The only doubts that I have lie in the speed of the operation, and possibly about some of the judgments that have been made—for example, concerning capital adequacy. I also understand that the Bank of England, as a member of the Group of 30, is in fairly constant contact with other central banks over issues such as bed debt and the use and spread of new financial instruments. Perhaps the Minister would comment on that when he replies.
  The other issues that have plainly emerged concern the independence of the supervisory board. We intend to table amendments to give the supervisory board a certain degree of independence. However, at least in terms of representation on the board, the question of how far it should be independent of the Bank of England is a matter that should be discussed thoroughly in Committee.
  Reference has also been made to large exposures, and doubts were raised on that matter from both sides of the House. I have my own doubts about the role assigned to auditors. When we examine the Bill in detail in Committee, we shall have much constructive work to do. The intention is to have an efficient supervisory body and sufficient supervisory arrangements for banks operating in this country.
  12.54 pm
  Mr. Ian Stewart: With the leave of the House, Mr. Deputy Speaker, I should like to reply to this brief but interesting debate. I shall certainly welcome further discussions in Committee, because many of the detailed technical provisions are of general relevance and will determine the way in which the arrangements work in practice.
  I listened with much sympathy to the comments of my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) about his unfortunate constituent, but I think that it may be difficult for him to table an amendment on that point that will be in order, as the Bill is devoted to other matters. Nevertheless, it is just the kind of point that should be taken into account in the review of other legislation relating to the provision of banking services. As the hon. Member for Thurrock (Dr. McDonald) pointed out, not only the Cheques Act 1957 but various other statutes, some dating from the 19th century, are not up to date in every respect with today's practices. I therefore take note of my hon. Friend's point, although I cannot encourage him in the thought that the Bill might be the right place to put it right.
  We have had a wide-ranging and interesting debate, but in my reply I shall concentrate on matters specifically related to the Bill. The review deals with a number of matters outside the scope of the Bill, but I was rightly asked about the likely timetable. We want to get the review under way as soon as possible, by the beginning of next year or very shortly thereafter, but I think that it would be optimistic to expect it to take less than a year, or perhaps a little more, to cover the very complicated area that it has to consider. I cannot say at this stage whether it will make recommendations for legislation. Some of the matters covered are embodied in statute, but others are questions of practice which might be better dealt with by rules, codes of conduct, and so on. Moreover, if the review made recommendations for legislation, they would not necessarily be for a single piece of legislation, as they might be items which could be dealt with in other Bills.
  The hon. Member for Truro (Mr. Penhaligon) referred to consumer interests. Perhaps I could make a general reply to that. I hope that the review team will be a small one dealing with technical matters, and not a large body of people representing particular interests. I envisage that those interests would make representations to the reivew body. It would otherwise be impossible to draw a line and I believe that it would complicate the technical and legal task of the review body if it comprised representatives of all the various interests. The review body will, however, want the widest possible representations from all interested parties, as the range of activities related to general legislation on banking services is enormously wide.
  Mr. Penhaligon: I did not suggest that there should be a consumer representative on the review body. I sought the assurance that when the small number of people are selected, there would be someone with specific knowledge and responsibility for that aspect of the review. I seek not the appointment of a "statutory consumer", but the appointment of someone with specific knowledge in that area.
  Mr. Stewart: I am sorry if I misunderstood the hon. Gentleman's exact point.
  The hon. Member for Thurrock raised one or two matters in relation to JMB. I believe that police
  584
  investigations are continuing. I have no means of knowing, either personally or through my post, whether those investigations relate to JMB itself or to its customers—those are matters for the police and not for me—but most of the matters raised in the House a year or so ago, and which have been subject to investigation, related to customers of JMB rather than to JMB itself.
  The hon. Lady also asked about the £25 million—the potential ultimate cost to the bank. I gather that the figure is not likely to be higher, and could be lower, depending on recoveries for the outstanding business and the outcome of the court case.
  My hon. Friend the Member for Chichester (Mr. Nelson), the hon. Member for Truro and others asked about deposit protection provisions which are carried forward from the 1979 Act. The Minister at the time said that £10,000 was a high figure, which he thought would last for a long time. If we thought that it was too low, we would consider changing it by using means in the Bill and existing legislation. More than 90 per cent. of the accounts affected in the relatively few cases when the fund has been called upon have been below £10,000, and 80 per cent. of accounts are below £5,000. We would have to demonstrate the need for change.
  The figures covered in the Financial Services Act 1986, such as the £30,000 for investments, relate not to the failure of the investment, but to fraud or breaches of rules. They are not comparable to the limits in the Bill. That matter must be reviewed from time to time, but I am not convinced that a higher figure is appropriate.
  As was fully debated when we considered what became the Banking Act 1979, the vast majority of resources put up for deposit protection are put up by large banks, especially high street banks, which are the least likely, we hope, to run into financial trouble and therefore to cause difficulty for depositors. The two-tier system, as established by the 1979 Act, meant that many of the smaller institutions received protection from the new fund to which the clearing banks were contributing, but they did not have the advantages of using banking names and had more stringent regulations which applied to licensed deposit takers.
  If we sweep the two-tier system away, the argument points rather in the opposite direction. Almost all authorised institutions would be able to use banking names, whereas the protection which was afforded as part of the quid pro quo for setting up the protection fund would be taken away.
  My hon. Friend the Member for Bury St. Edmunds (Sir E. Griffiths) suggested two or three means by which to get round the inability of institutions with capital of between £1 million and £5 million to use banking names. He used the word "henceforth", implying that the change was adverse. I think that he gave that impression accidentally, because he clearly recognised that it was the 1979 Act, not the Bill, which caused the original difficulty.
  No institution will be worse off in regard to banking names if the new Bill is enacted. Indeed, institutions will be better off, because provision for using banking descriptions is substantially more liberal under the Bill. I shall consider the points that my hon. Friend has made today, although I do not wish to give an instant answer. I shall need much convincing that even what I accept is an arbitrary figure should be changed. As he will accept, there is a difference between the Leigh-Pemberton committee's reommendations and the White Paper, because this and

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  other matters were extensively discussed and many representations were made. We resisted putting the figure as high as many of those representations suggested.
  By no means do we accept the position of the big battalions as against that of the small battalions. We have tried to take into account both sorts of representations. I shall reconsider the matter, but I do not wish to encourage my hon. Friend to think that, at this stage, there is a good case for departing from the provisions in the Bill.
  Sir Eldon Griffiths: My hon. Friend said, fairly, that no one would be worse off than he was before, and I understand his point. However, there is this difference: henceforth—to use my own term—the deposit-taking institutions which are excluded from using the name "hank" will be many fewer in number and will be part of a much tinier minority. They will have less sway and recognition in the market place and, to that extent, they will be disadvantaged.
  Mr. Stewart: That shows the unwisdom of giving way, even if one is in the most generous of moods. I was about to deal with my hon. Friend's point about separate lists of authorised institutions which could be described as banks and those which could not. There were two lists of recognised banks and licensed deposit-takers because entirely separate regimes operated in relation to each of them. There is no point in putting into a single list those institutions which do not or are not permitted to use the name "bank". It has no operational significance for the normal purposes for which such a list would be prepared.
  That is my immediate reaction to the question, without having considered the background. From the point of view of other investors who might decide to place their money in an institution, I do not believe that such a public separation would be required. Indeed, many reputable banks—most of the accepting houses—do not have the word "bank" in their titles. It has never been a central feature of the system that a bank must be called a bank. Many have got on without it. However, the matter obviously requires attention and I am glad that my hon. Friend raised it today.
  My hon. Friend the Member for Chichester asked about takeovers and the national interest. I noted that my hon. Friend the Member for Bournemouth, West and the hon. Member for Truro took a slightly contrary view. We should pause before introducing provisions on general grounds such as those suggested in relation to foreign takeovers. I remind hon. Members that a range of powers will relate to foreign takeovers. First, the Monopolies and Mergers Commission must take into account the public interest. Trade Ministers are conducting a review of the policy of the Monopolies and Mergers Commission. It has concentrated heavily on domestic competition, but other factors could be taken into account. Secondly, new provisions in the Bill will enable the Bank of England to say no to a takeover if it is not satisfied with the credentials of the potential controller. Those are important provisions.
  Thirdly, there are the provisions on reciprocity in the Financial Services Act 1986 which cover the banking sector and other types of financial institutions. Taken together, that is a formidable group of provisions. I shall not elaborate further on that now because we can consider it at a later stage, but, by way of prelimary remark, I should say that one should not underestimate the weapons that are already at hand.
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  Large exposures have attracted a good deal of interest. As the hon. Member for Ipswich (Mr. Weetch) said—he was courteous enough to tell me that he could not be present for the reply—the JMB case involved serious misreporting. That is one of the factors which have informed our decisions on what to include in the Bill. The large exposure provisions which cover exposures to connected persons are rather important. If the Bill had been enacted before the JMB case, those responsible in the management of the institution would clearly have been at grave risk of being convicted for misleading the supervisor. That is a new offence that we are introducing. It is only with hindsight that one can see how important such a provision is. That is an important improvement.
  I was asked whether the exposure provisions in clause 35 operated more tightly than previous provisions. They do. First, the offence is established, and secondly, whereas in the past there has been a requirement to report after the event only, whatever the size of the exposure, now anything over 25 per cent. will have to be notified to the Bank of England in advance and there will be specific statutory provision for reporting any exposure over 10 per cent. Those figures are somewhat arbitrary, but they are appropriate and can be changed by statutory instrument if they are found not to be so.
  Mr. Cash: I agree that those provisions are important, and my hon. Friend is right in saying that they represent a tightening in the regulations. However, clause 35 does not apply to those whose businesses are outside the United Kingdom. I recognise the difficulties involved, but could my hon. Friend comment on that residual question, now or later?
  Mr. Stewart: As that would take us into another area of technical questions, I shall leave it to another occasion.
  The large exposure provisions are a means of concentrating on one of the particular areas where difficulties have arisen. It is right that they should be spelt out in statute, because of their importance.
  I listened with interest to what my hon. Friend the Member for Winchester (Mr. Browne) said about swaps, options and futures. I do not know whether it is likely that either the hon. Member for Thurrock or I will leave the Chamber, go to our banks and fix swaps, options or futures. They are not frequently the business of ordinary personal customers of banks; they are at the professional end of the scale. It is right to say that all banking supervisors in the world, especially the Bank of England, which, often to its great credit, takes the lead in these matters, are paying much more attention to general off balance sheet commitments. The contingent risk in those transactions is considerable and needs to be taken into account in assessing general management and the overall exposure of the institutions concerned. I was, indeed, interested in what my hon. Friend had to say.
  The next general area that commanded great attention was auditors. The general principle is that we want to unblock the lines of communication between auditors and supervisors. It remains to be seen whether the profession will be able to work out a satisfactory basis. I hope that it will be able to do so, but we should not forget that the institution being supervised will usually be present at any discussion that involves the auditor. It would only be in exceptional cases, perhaps involving suspected fraud or serious developments, where there needed to be a direct

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  dialogue between the auditor and the supervisor without the knowledge of the institution, that the provision would be brought into effect. One will only be able to tell how that works as it is tried out in practice, but one hopes that occasions of that kind will be relatively infrequent.
  Mr. John Browne: I thank my hon. Friend for what he has said, but I emphasise that the person at the retail end does not normally engage in these relatively sophisticated financial transactions. However, this is a large professional market of $300 billion a year which involves the banks in inherent risks. If, therefore, the banks are involved in this risk, their retail customers are involved because the security of their deposits is at risk—as is the whole economy. Will the Government please look urgently at this problem, because it is extremely difficult to monitor?
  Mr. Stewart: I had hoped that I had reassured my hon. Friend that these matters are being looked at very carefully by the supervisors. They appreciate the importance, for the stability of institutions, of not being drawn too much into this type of contingent risk. The contingent risk is not usually the value of the whole transaction. It is usually the difference between the rate at which it was taken on and the closing rate. Nevertheless, the scale on which this business is now being undertaken make it very important that these matters should be recognised in policy terms, particularly in relation to the supervisor's assessment of the management competence of particular institutions.
  Mr. Browne: In this case one is trying to get at the risk of settlement, particularly cross-border settlement. If there is a failure in settlement, the whole transaction is at risk.
  Mr. Stewart: I appreciate my hon. Friend's point, and I am sure that the supervisors will do so also.
  On the general question of regulation and the Board of Banking Supervision, a matter which was covered in more of the contributions to this debate than any other, my hon. Friends the Members for Chichester, for Stafford (Mr. Cash) and for Bournemouth, West and also the hon. Member for Ipswich referred to the importance of independence. The Bill provides quite deliberately that the majority of the members of the Board of Banking Supervision will be outside members. They will be in a position to exercise independent judgment and an independent view.
  The hon. Member for Truro asked me whether the board members would have separate meetings. I imagine that if there were a difference of view between the ex officio Bank of England members of the board and the outside members, that would rapidly become apparent in the course of the affairs of the Board of Banking Supervision. They might then decide among themselves whether they wanted to press the matter more strongly. If they did and agreement was not reached, the bank would have to report to my right hon. Friend the Chancellor of the Exchequer. This matter would be recorded in the report to Parliament and to the Board of Banking Supervision. That introduces a considerable element of independence to the affairs of the board, and it is designed to do so. It is the counterpart to the fact that, on balance, we felt it was right that the responsibility for supervision should remain with the Bank of England rather than be transferred to a new and separate organisation.
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  The hon. Member for Ipswich asked about that and said that it appeared to be only for administrative conveniecnce. It goes a good deal further than that, because, quite apart from not wanting to break up an existing structure unless one is absolutely certain that another structure would be better, and not wanting to cause a lot of upheaveal, if one removes supervision from the Bank of England there would be a lack of general cross-fertilisation of banking information.
  Financial services and banking are changing. They are evolving so rapidly that there is a positive advantage in an understanding between the other parts of the Bank of England and the banking supervision division, and it is advantageous to have this happening within the one institution. The Board of Banking Supervision will give an actual and visible independence to the process of ensuring that the provisions of the Bill are implemented as Parliament would wish. I shall be glad to discuss the matter further when we debate the clauses in Committee. The idea is right, and we have probably struck the right balance in the method that we have followed.
  Our general approach to supervision is to build on successful parts of what has already been developed, while at the same time trying to make corrections in areas where problems have arisen.
  I was asked whether we were reacting to the past or trying to shape the future of supervision. We are certainly reacting to experience, but the fact that we set up a wide-ranging review of the whole subject means that we took into account the developments that are likely to take place in future. One can never anticipate exactly what will happen or what sort of supervision will be needed for future developments. We have tried to make the Bill flexible so that we can take account of changes in the market place.
  My hon. Friend the Member for Chichester asked why we proposed to alter the definitions of a deposit-taking business. It is being done for the very purpose of flexibility. My hon. Friend the Member for Winchester asked about securitisation and the changes that that will bring about. It may not always be possible exactly to define in advance what should be regarded for this purpose as deposit taking. For example, when we introduced the provisions to permit industrial and commercial companies to issue commercial paper we had to look at how that would accord with the definitions in the Banking Act 1979 of deposits and deposit-taking businesses.
  As instruments change, and as new techniques are developed, we will have to make changes, but we hope that the legislation will be flexible and that in general it will strengthen, improve and modernise the system of banking supervision. That is important, given the rapid growth of that sector in the economy and in the City of London.
  I am grateful to the hon. Member for Thurrock and to other Opposition Members for welcoming the general purpose of the Bill.
  Mr. Butterfill: Can my hon. Friend give me some advice about the point that I raised on permitted disclosure and whether this will be extended to include the commissioners of Inland Revenue under sections 80 and 81? Is that envisaged? Perhaps my hon. Friend intends to comment on that later.
  Mr. Stewart: The provision specifically refers to the Secretary of State and does not include the Inland

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  Revenue. The matter of disclosure is rather detailed and technical, and perhaps we could refer to it at another stage. There are many detailed matters which we shall have to consider further, an example being the issue which my hon. Friend has raised, and I hope that we shall be able to do so in Committee. Meanwhile, I commend the Bill to the House and hope that it will be given an unopposed Second Reading.
  Question put and agreed to.
  Bill accordingly read a Second time and committed to a Standing Committee pursuant to Standing Order No. 61 (Committal of Bills).

  Banking Bill

    BANKING BILL [MONEY]
    Queen's Recommendation have been signified—
    Resolved,
    That, for the purposes of any Act resulting from the Banking Bill, it is expedient to authorise—

    (1) the payment out of moneys provided by Parliament of fees, allowances and expenses in respect of tribunals constituted under that Act;

    (2) any increase attributable to that Act in the sums payable out of such moneys under any other Act.—[Mr. Peter Lloyd.]

    BANKING BILL

      WAYS AND MEANS
      Resolved,
      That, for the purposes of any Act resulting from the Banking Bill, it is expedient to authorise—

      (1) the imposition of charges to income tax and corporation tax by provisions of that Act relating to the treatment for the purposes of the Tax Acts of any payments made to institutions by the Deposit Protection Board;

      (2) payments into the Consolidated Fund.—[Mr. Peter Lloyd.]

      Mr. Speaker: Motions 4 to 10 are in the name of the Chairman of the Committee of Selection. If the House agrees, they will be taken together.

    COMMITTEE OF SELECTION

      AGRICULTURE
      Ordered,
      That Mr. Derek Conway and Mr. Richard Livsey be added to the Agriculture Committee.—[Sir Marcus Fox, on behalf of the Committee of Selection.]

      EDUCATION, SCIENCE AND ARTS
      Ordered,
      That Mr. Robert Key be discharged from the Education, Science and Arts Committee and Mr. Michael McNair-Wilson be added.—[Sir Marcus Fox, on behalf of the Committee of Selection.]

      ENERGY
      Ordered,
      That Mr. Michael Portillo be discharged from the Energy Committee and Mr. Michael Brown be added.—[Sir Marcus Fox, on behalf of the Committee of Selection.]

      ENVIRONMENT
      Ordered,
      That Mr. Robert B. Jones be discharged from the Environment Committee and Mr. Andrew Hunter he added.—[Sir Marcus Fox, on behalf of the Committee of Selection.]

      SCOTTISH AFFAIRS
      Ordered,
      That Mr. William McKelvey be discharged from the Scottish Affairs Committee and Mr. Ron Brown be added.—[Sir Marcus Fox, on behalf of the Committee of Selection.]

      TREASURY AND CIVIL SERVICE
      Ordered,
      That Mr. Mark Fisher be dicharged from the Treasury and Civil Service Committee.—[Sir Marcus Fox, on behalf of the Committee of Selection.]

      DEFENCE
      Ordered,
      That Mr. John Cartwright be added to the Defence Committee.—[Sir Marcus Fox, on behalf of the Committee of Selection.]

  Bexley Health Authority (Funding)
  Motion made, and Question proposed, That this House do now adjourn.—[Mr. Peter Lloyd.]
  1.25 pm
  Mr. David Evennett: I am most grateful for the opportunity to raise on the Adjournment the important subject of the funding of the Bexley health authority. I do so because it affects the health care that is being provided to my constituents, those of my hon. Friend the Member for Bexleyheath (Mr. Townsend) and those of my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath), and because, to date, there has been a noticeable lack of response to the crisis in Bexley, especially from the Government and the South East Thames regional health authority. This lack of response, in spite of the efforts of my right hon. and hon. Friends and myself, has been bitterly disappointing to the people of Bexley, who feel disinclined to accept the Government's exhortations that the Health Service is in good hands when they see both a lack of facilities in their area and the curtailment of the limited existing facilities in an effort to balance the underfunded budget in Bexley. Regardless of whatever happens elsewhere in the country, my constituents are experiencing a reduction in the all-important area of health care.
  For my part, I accept that the Government have achieved a great deal in their management of the National Health Service. I know that there has been a major investment in the NHS and that nationally there are more doctors and more nurses than before; that more patients are being treated, and that more surgery is being performed than ever before. All this costs a great deal of money, so no one can argue that the funds are not being made available to the NHS, yet somehow in Bexley we are not reaping the benefits of this spending. In Bexley, we are not experiencing these advances. We are not even in a position where the standards of care are being maintained from year to year. We are experiencing a reduction in service caused by the closure of wards, the closure of operating theatres and clinics and the curtailment or reduction of other services.
  Locally, the service has declined to the point where the district health authority's aim is to try to provide a service at the level that prevailed in 1984–85. Therefore, we are definitely not seeing any advance. Instead, we are seeing rather a regression. Despite the appointment of a new and enthusiastic health authority chairman, why are we experiencing such difficulties in Bexley? That is a question that I ask myself regularly, as I am sure my colleagues ask themselves. It is one that my constituents regularly raise, and to date I have received no satisfactory answer. I can point to a number of factors that contribute to the underprovision which exists, but I cannot explain, either to my own satisfaction or to that of my increasingly sceptical constituents, why action has not been taken to remedy the situation.
  I accept that one reason is geographical location. Bexley is on the edge of Greater London, and the fact that it is near to the centre of London and the main teaching hospitals clearly is of significance. There is a tendency for people to say,"If facilities locally are not that good, we can always travel into town." What they forget is that for most people in my constituency central London is at least an hour away. It is a journey which can be trying at the best
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  of times. To make that journey is the last thing that ill people would wish to do, especially as follow-up treatment at outpatient clinics would probanly mean making the journey during the rush hour. That attitude also takes no account of families or of the difficulties that hospitalisation brings, including the problems of travelling long distances by the elderly relatives of patients.
  Bexley is not an inner-city area and is not that near to central London. It is not an area of declining population. On the contrary, it is a area of population growth, and a significant part of that growth is formed by an increase in the number of elderly people. In my constituency, there is a great deal of housebuilding, not only in Thamesmead and Crayford, but in Belvedere, where I have a home. That growth, and the fact that people quite rightly expect to receive local health care when they are sick or injured—unless they require some highly specialised treatment that can obviously be provided only at a limited number of locations—demand that the district's health care provision should increase, not decrease.
  Regrettably, the reality is different, and the poor state of the district's budget has meant that many essential services have had to be cut to make ends meet. That must be wrong. Bexley's proximity to central London, and the fact that it is within the South-East Thames region, mean that it is within the resource allocationworking party formula a "losing" part of the country. The effect of RAWP, as we know, is regularly raised in the House by many right hon. and hon. Members, along with its effect on health care provision in their constituencies. In respect of RAWP and of the Bexley health authority, my colleagues in Bexley and I have raised this matter in the House and with the previous Minister several times. However, so far, we have received little response. It is true that we have been given tea and sympathy and a lot of shoulder-shrugging, but that is why RAWP is an acronym that I have come to dread.
  This debate is not the occasion to discuss the wider merits of the NHS's resource allocation policies. But the concept behind RAWP was basically acceptable and I have supported it in the past. It is only right that we should ensure that there is a parity of service in all parts of the country. However, I do not support the reality of the manner in which that concept is put into operation or the effect that the allocation of resources under RAWP has had on health districts such as Bexley.
  In Bexley, the effect of RAWP is that perfectly good wards and operating theatres in an up-to-date hospital are out of commission because of a lack of money with which to run them. There can be absolutely no sense in a policy that allows vast sums to be spent on capital projects, such as hospital building, if the revenue is not provided to run these services.
  If we are looking for national parity—what RAWP is supposedly all about—it must be achieved by levelling up and by improving the service provided across the board. There should not be a reduction in, or levelling down of services, and parity should never involve the closure or mothballing of modern hospital facilities. We should be looking to match health care facilities nationwide, and not the lack of them. Some of Bexley health district's problems are also historical. Before the recent Health Service reorganisation, Bexley health district was part of the larger Greenwich and Bexley health authority. That area authority had two modern authorities at either end of the area: one in Greenwich and one in

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  Sidcup, together with the Brook hospital, Woolwich, and a number of other smaller hospitals scattered within the area boundaries.
  When the area was split into two districts, with boundaries conterminous with the London boroughs of Greenwich and Bexley, the facilities in each district were uneven. The bulk of the area's hospitals was sited in Greenwich, with the result that Bexley has only three hospitals, two of which are within its geographic area. I refer to Queen Mary's,Sidcup, Erith and District hospital, and Bexley hospital, which is a psychiatric hospital. Thus the facilities in Bexley are limited. Queen Mary's hospital, which is in the constituency of my right hon. Friend the Member for Old Bexley and Sidcup, is the district general hospital and the other mainstream hospital is Erith and District hospital, which is in my constituency, and which is a very small hospital with limited facilities. Erith hospital has been an important part of the local community for many years. It is much loved and much needed by my constituents and I have raised the precarious future of that hospital in a previous debate in the House.
  Queen Mary's hospital is a modern hospital about 10 years old with 556 beds. It houses many specialist departments, including the district's maternity unit and an excellent accident and emergency department. By contrast, Erith and District hospital, a small unit, was originally built, as a cottage hospital, from public subscriptions. It has 31 beds, provides many out-patient clinics and what is best termed as a walking wounded accident unit.
  Proposals for the upgrading of Erith hospital have existed for some time now, but so far no work has been carried out because of the district's financial predicament. Indeed, the local people have now come to doubt not only that Erith hospital is to be upgraded but that it will survive at all. In fact, its closure has been mooted in the recent past as another way of saving money. I have fundamentally disagreed with and opposed such proposals for closure and I shall continue to do so. For many of my constituents the temporary shelving of the upgrading proposals appears to be indefinite and they rightly cannot see any difference between indefinite and permanent.
  As I have said, those hospitals are the only mainstream hospitals within Bexley and they both play a vital role. Obviously Queen Mary's hospital, as the district general hospital, meets the bulk of the demand for health care within the district. However, Erith also has a vital role to play, especially since Queen Mary's is in the south of the district while Erith is in the north and the roads, railways and bus routes tend to run from east to west to and from central London.
  Although the two hospitals are just about sufficient to provide adequate care to meet the needs of the local people when full use can be made of all their facilities, reductions in services such as we are experiencing at present strain resources to the limit and mean that some people are undoubtedly not receiving the treatment they should be, that we want them to receive, and that I am sure my hon. Friend the Minister would agree that we should be providing. We must never forget that we are dealing with the health, welfare and well-being of individuals, not bald statistics.
  The financial predicament of Bexley health authority is such that in May of this year the authority had drastically to cut services in an effort to save money. The list of cuts is extensive and includes the closure of an operating
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  theatre and a ward at Queen Mary's, a limitation on outpatient prescribing, a reduction in out-patient bookings, dental clinic services, assessment clinics and family planning clinics, including family planning surgery. It also included the closure of an operating theatre and consultant beds at Erith hospital, a reduction in the number of general practitioner beds at Erith hospital, a reduction in the casualty services and a number of other reductions.
  Anyone who doubts that that catalogue of reductions can have only disastrous consequences, need merely consider one item on the list to see what damage is being done. The closure of an operating theatre at Queen Mary's hospital has reduced the amount of surgery that can be performed in the district by up to 20 per cent. As the annual total for surgical procedures performed in the district is about 9,000, it means that the closure of that one theatre will cause up to 1,800 operations to be cancelled or delayed. That means that 1,800 people will have to wait even longer for surgery possibly in pain, probably in discomfort. Those 1,800 people will be added to a waiting list that is already too long in Bexley and which the Government are committed to reducing. In other parts of the country we have seen waiting lists successfully reduced.
  That is the result of only one item on the list of closures and reductions. The combined effect of the cuts in services is too awful to contemplate but it can mean only one thing, we in Bexley have a poorer standard of health care than we had or we want.
  The obvious question is what more can the district do to save money or provide more treatment by increasing efficiency. It is a question I have put to the present chairman and the previous chairman of the district health authority.
  However, the finger cannot be pointed at Bexley in respect of a failure to improve efficiency. Far from it. The authority has very low costs per patient and manages to maintain a high number of patients treated per bed. Bexley health district is probably one of the most efficient and cost-effective authorities that there is, and the authority has rigorously applied every effort to achieve all the efficiency savings that it can, but the one obstacle that its efforts cannot and will not overcome is a basic lack of funds from the South East Thames Regional health authority.
  The district is under funded. I received a letter about a year ago from Sir Peter Baldwin, the chairman of South East Thames regional health authority. He said, in admitting that Bexley is underfunded, that
  "My Authority is, as you know, constrained by the overall level of revenue resources allocated by the Secretary of State. In comparison with many other Regions the South East Thames Region is deemed to be better provided and therefore has received, and will continue to receive, revenue reductions year on year until national parity is reached. Similarly within this Region there is an unequal distribution of revenue resources and I am committed to making this distribution more equitable. Bexley District should have more revenue. It is presently receiving only some 89 per cent. of the revenue which we believe it should have; by 1993–94 this will have risen to 95 per cent."
  The regional chairman's commitment to seeing Bexley receive the funding that it should is commendable, but regional finances seem to be such that all that the regional health authority can do is promise to try to improve the level to 95 per cent. by 1993–94. What the state of the Health Service in Bexley will be then I do not know. I feel that such comments are unacceptable, as do my constituents.

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  The Health Service cannot be run on promises of jam tomorrow. Tomorrow may never come.
  Against that background, the authority had little option but to agree the package of service reductions that I mentioned which were implemented earlier this year. The authority was faced with an overall deficit of around £750,000 for 1986–87. Unless the authority had cut services to patients the district would be facing a deficit of £1·5 million by 1989–90. Balancing the books by reducing services has meant that the authority will be lucky to provide the same services as in 1984–85, so instead of services being improved, they are being reduced.
  Bexley health authority's annual expenditure is about £35 million. That is a great deal of money, but in real terms spending in the district is lower than it was in 1982. The exciting and imaginative scheme put forward for the redevelopment of Erith hospital, a scheme that would revitalise that hospital as a centre for health care in the north of the district, would have cost about £3 million. It takes little arithmetical ability to work out that the 11 per cent. deficit in regional funding would be sufficient to pay for that scheme if only the money were forthcoming. What Bexley health authority needs is sufficient funds to operate Queen Mary's hospital fully and to begin the redevelopment of Erith hospital.
  Earlier this week I asked my hon. Friend the Minister for Health in a written question whether he would come to Bexley to see the situation for himself and, in particular, visit Erith and district and Queen Mary's hospital. I am delighted that my hon. Friend has agreed to visit us early in the new year. I thank him for that most sincerely.
  I know that my hon. Friend is concerned about the Health Service and its patients and is determined to see that those in real need obtain the best facilities and services from the NHS. I beg him to look long and hard at the funding of Bexley health authority, to observe the consequences of the situation that I have outlined and to take action to remedy what is at present a depressing state of affairs.
  1.43 pm
  Sir Geoffrey Finsberg: I am grateful to my hon. Friend the Member for Erith and Crayford (Mr. Evennett) and the Minister for allowing me to intervene in the debate.
  My hon. Friend the Member for Erith and Crayford rightly points to the problems that are affecting the health authority in his constituency and says that they derive basically from the policy of the resource allocation working party. He is right. He is also right to say that it affects the four Thames regions. What he has said is that what was introduced by the Labour Government, one of whose Ministers is now a leading Social Democrat, is now under attack. Some of us have attacked it from the beginning. What saddens me is the hypocritical way in which the Labour party now decides that it does not like the system about which it made no comment when it was introduced.
  My hon. Friend the Minister knows how grievously this RAWP issue is affecting my constituency. I might have applied for an Adjournment debate and had a long one, matching what my hon. Friend the Member for Erith and Crayford has said, but I did not want to do that for two reasons. First, I know from my experience how grossly
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  overworked Ministers in this Department are, unlike many of my colleagues in other Departments, and I do not want to impose the burden of yet another Adjournment debate. Secondly, I ask my hon. Friend, in considering what he will say about Bexley, to try to accept that there is an enormous gulf in perceptions of the NHS. He and I know that we are spending an enormous amount more in real terms on the National Health Service, nearly 30 per cent., but the public's perception is different. In Bexley, as in Camden, closed wards in new hospitals make it virtually impossible to make any real breakthrough in public perception.
  I shall not ask my hon. Friend the Minister to visit me, because he knows the problem, but I hope that he can assure the House that the review that has been undertaken on RAWP will soon be completed and that it will recognise that the time has come to stop RAWP. I hope that he will accept that if one is improving services within the Health Service, one can no longer reduce the good ones to improve the poorer ones, nor decide that the standards of excellence in the London teaching hospitals can be carved away.
  1.47 pm
  The Minister for Health (Mr. Tony Newton): I begin by expressing, perhaps with some wryness, my gratitude to my hon. Friend the Member for Hampstead and Highgate (Sir G. Finsberg) for not threatening me with yet another Adjournment debate. That move may reflect his long experience as a Minister in the Department, and one who probably stood at the Dispatch Box replying to such debates more often than anybody else, except possibly his immediate predecessor as a Health Minister. I have noted what my hon. Friend said.
  My hon. Friends the Members for Hampstead and Highgate and for Erith and Crayford (Mr. Evennett) will know that I am the Member of Parliament for part of one of the Thames regions, so I am more than familiar with some of the comments about the problems perceived to exist in the Thames regions. Beyond that, I would not wish to be drawn at this stage into a wide-ranging discussion on the RAWP formula, not least because it is clearly one of the issues of what is known, in this dreadful jargonised world, as sub-regional RAWP, which is in some respects a distinct issue from national RAWP.
  I would probably carry both my hon. Friends with me in acknowledging that while it is not a particularly pleasant acronym, RAWP, when translated into commonsense English, simply represents a policy of trying to ensure equity of access to health services throughout the country. As a general proposition nobody would wish to depart from that, although there is a great deal of argument about how that general proposition is carried through into practical reality, and in particular about the financial allocations that go with it.
  I begin conventionally, although perhaps more than that, by congratulating my hon. Friend the Member for Erith and Crayford on having secured this Adjournment debate and the opportunity to put, as he has done with great force and clarity, the concerns of his constituents. I hope and expect that his constituents fully realise how much effort he has put in over the months to make sure that their interests are so strongly and clearly represented in the House. In that, of course, his hard work is shared by his colleagues, to whom he referred—my right hon.

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  Friend the Member for Old Bexley and Sidcup (Mr. Heath) and my hon. Friend the Member for Bexleyheath (Mr. Townsend).
  My right hon. Friend the Member for Old Bexley and Sidcup, in the debate on 16 June, eloquently described the difficulties and challenges of funding Bexley health authority. That attracted considerable attention, not least among Ministers—my predecessors in the Department. Earlier this year my hon. Friend the Member for Bexleyheath led a deputation to Ministers from the Bexley community health council, at which many of these issues were addressed. I ought perhaps to mention the fact that I know that some of the issues are of concern to my hon. Friend the Member for Chislehurst (Mr. Sims), who, although his constituency is across the border from Bexley health authority, is concerned about his constituents who receive treatment within that authority. My hon. Friend has gone out of his way to speak to me about those matters during the past week or two.
  I wish briefly to put some of the issues into context. Obviously, because of the time factor, I shall not be able to speak at length about the national background. However, in 1987–88 the allocation to the hospital community health service is no less than £10,963 million—in other words, very nearly £11 billion. That is an increase of more than £600 million over the total funds available in the current year and includes—and this point is of considerable importance to any discussion on this matter—two special funds.
  One fund is worth £50 million over two years, and is to tackle waiting lists. This problem was referred to by my hon. Friend the Member for Erith and Crayford, and is clearly related to the general concerns expressed by my hon. Friend the Member for Hampstead and Highgate. The other fund is for £30 million over two years to provide transitional help for regions receiving less than the national average growth rate, which we are calling—in the Department's shorthand—the RAWP bridging fund. That is directed at alleviating some of the anxieties that have been expressed here today.
  That latter new fund will be directed principally at the four Thames regions, although not exclusively, because there are similar problems in one or two other places. It will help those regions bridge transitional costs and undertake schemes to unlock resources for the future. That does not undermine the principles of RAWP. It is directed towards some of the problems that have been raised. I must emphasise that the extra money, whether the general extra money, waiting list money or the RAWP bridging fund money, will be given to regional health authorities, which, in turn, will fund their various districts.
  It is my judgment—and I hope that my hon. Friend the Member for Hampstead and Highgate will endorse this—that it would be hopeless for Ministers to second-guess everything throughout the Health Service in trying to decide the exact pattern of services locally. It is a matter for regional health authorities to determine allocations to districts. Our objective is to ensure that regional health authorities have adequate funding to run an expanding Health Service and make it possible for them to allocate funds between their districts in a way that is then reflected at every level.
  The other point that I wish briefly to make was curiously reflected in some of the comments made by my hon. Friend the Member for Erith and Crayford. In terms of access to hospital treatment for Bexley residents as
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  acute in-patients and day-patients, the district's record is actually good when compared with the national average. I understand that it is among the best 20 per cent. in the country. Throughput for major acute specialties is also in the top 20 per cent. and maternity provision is well above the national average.
  I mention those points not to sound complacent in any way—as my hon. Friend knows, that is the last thing that I would wish to do—and I am conscious of the fact that when any Minister uses statistics in that way the ghost of Disraeli hovers at his elbow muttering about
  "lies, damned lies and statistics."
  Nevertheless, we must measure the situation in some way, and according to some measures the position of Bexley is not unreasonable. I say that, not to dismiss the concern that has been expressed, but to show the difficulty of forming a balanced view as to the precise cause of the problems and what can best be done about them.
  As I have said, the authority's problems have been ably and eloquently brought to the attention of Ministers and of the House. I therefore hope that, whatever else he may think, my hon. Friend will accept that those concerns have not been lost on Ministers or, indeed, on the South East Thames regional health authority and its chairman, to whom specific reference has been made. Indeed, I spoke to the chairman this week after undertaking to visit the authority. I should point out that the regional director of finance and his staff have been and are giving an amount of time and attention to Bexley's problems which, might be described as disproportionate by comparisons with other authorities in the region, but which neither I nor they regard as such. The amount of time being devoted to these matters reflects the recognition of the anxieties that have been expressed.
  Another oddity in all this was reflected in my hon. Friend's remarks. Compared with many authorities in the South East Thames region and throughout the country, on the face of it Bexley lends itself to being a fairly smoothly run and effective district. It is compact, it does not have a legacy of old, badly sited hospitals, and it has a modern district general hospital at Queen Mary's. I acknowledge the problem of the mental illness hospital, which is over the border in Dartford and Gravesham but managed by Bexley, and that may have played some part in the situation that my hon. Friend described.
  Against that background, I understand that Bexley has a recurring budget shortfall of £942,000 for the next three years. With the non-recurring potential overspend for 1986–87, the overrun for this financial year was estimated at around £1·7 million out of a total budget of £36,731,000, although I shall qualify that point in a moment.
  Discussions at senior levels in both the district and regional health authorities have taken place over a long period to try to resolve the problem. One result has been that an inquiry team headed by the region's director of finance is going to Bexley—it may already be there—to examine the district's finances in detail and to suggest positive courses of action to put it on a firmer financial footing. I emphasise that the aim of all this is entirely positive. The intention is to offer a high level of practical and professional help to the district, although clearly I cannot prejudge the results of that inquiry.
  In the light of what my hon. Friend has said, I should give a couple of examples of what the regional authority has already sought to do to try to help Bexley. As was confirmed at the district review meeting on 26 June, the

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  region has offered Bexley £480,000 bridging finance, chiefly to facilitate the launching of its competitive tendering programme, which in turn will generate benefits for the district in years to come. That finance depended on Bexley's presenting to the region a realistic and affordable short-term programme. I understand that a preview of that programme has been received and is being assessed by the region.
  The region has tried to help also by providing £450,000 in grant for the development of mental handicap support services. I understand that the district authority has developed an ambitious "ordinary life" programme of resettling mentally handicapped people in three and four-bedroom surburban houses near shops and facilities. Such a policy is expensive. Indeed, Bexley has the highest unit cost for resettling mentally handicapped people in the region. To be eligible for the help offered by the region, Bexley must provide it with essential details of the programme's dependency and assessment costs.
  I am not suggesting that those contributions are overwhelming, but they are clear examples of how the region has tried to help.
  Since the offers were made, there has been a major development. I am told that, rather than have a projected overspend of £1·7 million, Bexley will break even. That change in its fortunes, if that is the right word, is attributed chiefly to some planned savings and difficulty with nurse recruitment, which is proving to be a problem for several health authorities. The region's director of finance will want to consider those factors also.
  As a result of the change from a projected large overspend to a projected rough break even, Bexley has asked the region for only £192,000 of the £480,000 bridging finance which was offered, and I understand that the money has been transferred to the district's account.
  As for the £450,000 grant to help develop mentally handicapped support services, I gather that details of the dependency and assistant costs are still awaited by the region.
  My hon. Friend said with some vigour that the district had brought forward a package of measures which, in the words of the district general manager—I am afraid that
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  DGMs have as much awful jargon as Ministers—will "reprofile" services in a way that will produce the greatest benefit to patients from available resources.
  The measures are designed primarily not to reduce expenditure but to focus it on what are thought to be priority services in the acute sector and to improve services for the elderly, the mentally ill and the mentally handicapped, who have previously been neglected.
  I understand that the local community health council has expressed opposition to most of the proposed measures. Consultation on the measures was completed on 8 September and the Bexley community health council reported back to the authority on 13 November, having considered all the comments that had been received. I believe that a special meeting of the health authority is to be held early in December to agree a course of action.
  My hon. Friend will know what I am about to say next. In view of the community health council's opposition to the proposals, there must be a good chance that they will land on Ministers' desks for decision, so I am pre-empted from offering views on them as I shall have to consider them with care later. I can only assure my hon. Friend, as I have assured others before him, that Ministers do not regard their role as rubber stamping whatever is presented by health authorities—I certainly do not. If proposals come to us, they will be examined with great care, and the views of local interests, my hon. Friend and others will be weighed.
  I hope that I have been able to assure my hon. Friend, and through him, his constituents, that we are not ignoring the health authority's problems. They are being addressed at senior level by the regional health authority with active indications of ministerial interest. I thank my hon. Friend for reinforcing that interest and making me even better informed today.
  My hon. Friend asked me earlier this week to visit some hospitals in the Bexley area. I hope that I have demonstrated my interest in the matter by saying that I hope to do that early in the new year. I have no doubt that I shall have further contact with my hon. Friend then, if not before, and I look forward to that. Meanwhile, I hope that the work now continuing will help to overcome the problems to which my hon. Friend referred, and I assure him that I and other Ministers will not lose sight of what he said.

  The Channel and Irish Sea Fisheries
  2.5 pm
  Mr. Anthony Nelson: I welcome this opportunity to debate the closure of the Channel and Irish sea fisheries, and I express my gratitude to my right hon. Friend the Minister of State, Ministry of Agriculture, Fisheries and Food for rearranging a busy programme so that he could answer this debate. It is a reflection of the gravity which he, too, attaches to the plight of many fishermen that he has found the time to be present this afternoon.
  On 22 November, a prohibition on the fishing of cod was introduced for the area between New Romney and Fishguard. At a stroke, this has banned the livelihood of hundreds of fishermen, especially those who operate inshore in the eastern Channel, not least my constitutents who fish in the Selsey and Emsworth areas, who were quick to approach me on this issue and who visited me in the House this week. As the Minister will know, several of my constituents formed part of a large delegation which lobbied Parliament yesterday. When I received those delegates, there was no disguising the irate atmosphere and their belief that they had been treated regrettably, in that the period of notice before the prohibition was introduced was extremely short, and that they had been deprived of their livelihoods. There was no doubting the importance that they all attached to the separate delegation to the Minister, led by my hon. Friend the Member for Brighton, Kemptown (Mr. Bowden), of fishermen from the Sussex area.
  The European Community's fisheries conservation policy centres on a system of total allowable catches which are fixed annually and from which the United Kindom is allocated national quotas for the various stocks. With the agreement and the participation of representatives of the fishing industry, fisheries departments attempt to manage the quotas so that fishermen can enjoy fishing opportunities for as much of the year as possible without exceeding the annual allocation. For the majority of stocks in the Channel and the Irish sea, especially sole and plaice, they have so far succeeded in those objectives, although it has necessitated the suspension of fishing from time to time in line with by-monthly seasonal quota targets.
  In the case of Channel and Irish sea cod, for which the annual quota is about 1,330 tonnes, there was no restriction on fishing in previous years, and until the end of September 1986 there had been no overshoot in the seasonal targets. I am told by the Ministry that because of good weather in October and early November, together with an unexpected abundance of cod, mainly codling, there was an abnormally high catch and, as a result, the United Kingdom quota was exhausted. The overshoot when the prohibition came into force was about 100 tonnes. Fishermen and the Ministry dispute the weather conditions that prevailed then. Most of the fishermen off the Sussex coast contend that the conditions were appalling and allowed only a short period of fishing, but earlier in the summer the weather was reasonably good. The Minister has already recognised that the quota has curtailed opportunities for many fishermen, especially those who operate inshore in the eastern Channel.
  I appreciate the importance that the Minister attaches to observance of national quotas in the interests of long-term conservation of fish stocks. The European
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  Commission has now apparently confirmed the closure by regulation which applies to all United Kingdom vessels, whether or not they are operated by commercial fishermen. That also means that anglers are bound by the prohibition. With the exception of the Republic of Ireland the other member states which have a cod quota in this area were obliged to close their fisheries at an earlier stage this year. I understand that the Republic of Ireland was not able to accede to requests that have so far been made to it for a quota swap which would have enabled my right hon. Friend to extend the United Kingdom fishery.
  The problem and plight of the Sussex and Channel fishermen can be summed up no better than by a letter which I have received from a constituent earlier this week. He says:
  "I do not normally involve myself in protests of any kind but feel I have to write to you now regarding a matter of decision, taken by others which affects me personally, putting not only myself but hundreds of other people as well in serious financial trouble without our fishing business…
  I only learnt of this decision '—to ban the fishing of cod in the eastern English Channel'—by chance through a report by the media network, and this ban takes effect from midnight tonight.
  I am a full time (not a part time) fisherman, registered since 1974 and always fished from my home village of Selsey. I have no other source of income to fall back on as I am fully committed with my time and money to fishing.
  'Somebody' has made a decision which is going to help ruin a lot of people who rely on fishing for their living, without any prior warning or consultation with those who it will affect. Coupled with an already disastrous season so far due to weather, a lot of people will not have built up any cash reserves to 'ride' this latest ban until the new year.
  Being an individual and self employed I do not have any 'big voice' or 'organisation' to look after my interest when things go wrong, and normally do not want or need them.
  What I do not want, need or expect is for 'some…gentlemen'…with the stroke of their pens, taking my living away from me, least of all without showing the basic courtesy of discussing it or at least warning me in advance so that I might, if possible, prepare alternative arrangements for myself.
  If there is a need for conservation of a species in this area then I am quite sure that the people who made this decision were aware some time ago of what decisions they would need to make. These decisions could not have resulted from recent fishing activities as this has been severely limited by continuous bad weather for the past few weeks. I myself have only managed six days fishing since 17th October, my vessel pinned down in Chichester Harbour sheltering for most of the time.
  Fishing in this local area is governed by seasonal patterns. Cod being a species that mainly arrives in any quantity inshore by late autumn and departs again by January. To date we have lost most of our cod fishing this year to bad weather. A species which is relied upon by a lot of people to help see us through a long winter.
  This year has been an exceptional year with a large showing of immature codling being evident for most of the year. I have avoided catching these small fish with selective use of my 'trammel' nets with larger meshes. The market value of these small fish is very low. Unfortunately…a number of larger craft have been engaged in a continuous effort to catch large quantities of these small fish, making their money by sheer weight of catch, almost all being small but still legal codling. A lot of fish being consigned to fish meal plants. The authorities should have acted much sooner to bring to a halt this wasteful slaughter of these young fish, which if left to grow would provide a valuable crop in the future.
  Those fishermen involved cannot really be blamed. The catch is legal and they have 'cashed in' on a bonus bounty. What does seem criminal to me is the pathetic minimum measure of a legally caught codling, twelve inches total length, a fish of less than one pound in weight and worth about 12–15p on the market. These are rapid growing fish which would reach considerable size and weight in a few short years.

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  A large cod would exceed 30 lbs and be worth 50–60p per lb on the same market, as indeed would similar fish of over 4 lbs in weight. I consider it a short term gain and madness for this situation to remain unchecked in the future. With the present arrangement, the fishery will be reopened and there will be another mad rush to fill the boxes again, until another stop is enforced on us. Nobody knows where they stand, or is able to plan ahead. No business can plan or survive in that atmosphere. The 'trammel' nets used by most of us along this part of the coast are not selective in the species they catch, although small fish can be avoided by using suitable sized mesh netting. Most cod brought to the surface are dead or die before removal from the net. A cod ban is a fishing ban, unless we wish to keep other species and throw back dead cod, to be wasted. They would form some 85 per cent. of total catch for fish this time of year. Where is the conservation in that legal option? These people who make such decisions are completely out of touch with the realities of needs of small communities to survive, and this 'heavy hand' of 'big brother' does nothing to enhance relations between ordinary people and this organisation. Applying this 'blanket ban' is like 'killing the dog to get rid of the fleas.' They can distance themselves from the effects of their actions to satisfy various statistics."
  The letter continues in that vein. I make no apology for reading it at length, because my right hon. Friend the Minister of State will be the first to understand that when the livelihood of individual constituents is affected and they write in such a vein they have a right to be represented clearly in this House, in the way in which they have written to their Member of Parliament.
  The problems that have been described in my constituent's letter go beyond that. The problem of lack of notice is difficult to resolve, and this grievance is felt widely by other fishermen. Many of them also encounter serious problems over paying for their investment in gear and over decisions that they should now take about invesment in gear for the spring fishing season. Are they to extend themselves further by borrowing money for fishing gear, only to find that a ban is suddenly introduced when shoals of fish come into the Channel in which they are active? Moreover, 70 per cent. of the boats in this area are small. They are not nomadic trawler vessels that are able to follow shoals of fish, thereby ensuring that the fish are not caught in the same area. Trawler vessels are not susceptible to a ban, as my constituents have been.
  The weather was bad during the first few days when the Sussex fishermen were able to go out. However, further along the coast, as the cod migrated down from the North sea in July and August, the fishing conditions were very good. It is very difficult to manage any total allowable catch or any quota system on a fair basis to all concerned, but this ban has had a disproportionate effect on the livelihood and interests of my constituents and other Sussex fishermen. However, those fishing further along the coast earlier in the year had some fairly rich pickings.
  It is not sufficient just to quote and emphasise the problems as my constituents have asked me to do. I seek my right hon. Friend's comments on certain solutions that have been put to me. First, there should be a transfer of quota from the North sea area, where the quota for cod fishing is overestimated and is likely to be under fished. That is area 4C. Why cannot that deficit or shortfall be transferred to the Sussex coast, area 7D?
  Secondly, my constituents and others have put it to me that there may be a case for raising the minimum size of cod that can be caught from 12in. I appreciate that this has implications for mesh nets and for other parts of the
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  equipment of inshore fishermen and trawler fleets. However, with an eye to conservation and to the need to try to prevent a repetition, this suggestion is worth considering.
  Thirdly, fishermen have also put to me the case for registering boats under 10m, thereby enabling catches to be logged. I understand that vessels over 10m have to be registered. Their catches are logged and form part of the statistics that are used by the Ministry when ascertaining whether the quotas have been exceeded. Their assumptions are based on the extent to which cod and other species have been landed by inshore fishermen and anglers. My fishermen dispute whether these assumptions and estimates are correct and would like to know the estimate of the catch by small fishermen used to assess whether the quota target has been exceeded.
  Fourthly, a number of fishermen have put to me the case for better management of the total allowable catch in order to allow for the migration of fish. They say that this was a freak season and that there has not been one like it for about seven years. They face the absurd situation that they have been denied their livelihoods because they cannot go out to fish, while just offshore the fish are teeming. There are plenty of cod in the Channel at present. Many of them are well above the minimum size and many are slightly above it. There is a market for the cod and because there are such large stocks—in the view of the fishermen because of migration from the North sea—the fishermen feel that the ban imposed on them is unreasonable.
  I understand that there is some scientific dispute about whether it can be proved that the stocks of fish have come down from the North sea. My right hon. Friend may say that the fish will go back there. However, if there has been such movement of fish and if the area is under-fished in one part, surely it is reasonable and pragmatic for us to transfer some of the under-utilised quota elsewhere.
  Fifthly, it is not surprising to hear the fishermen say that in future years they want a bigger quota, especially of cod, to protect the inshore fishermen. Following discussions with my right hon. Friend, and in view of the consideration and the sympathetic replies that he has given to me, I appreciate the difficulties of implementing any of these changes. However, at the very least we should approach the Republic of Ireland to see whether there is a case for some swap arrangement for the quota. The Republic of Ireland has not yet banned the fishing of cod and may have some under-fished quota at its disposal. Surely, in a co-operative way we could try to resolve the problem to the benefit of local fishermen, and that could be done if the Republic of Ireland was prepared to allow some sort of swap arrangement.
  I hope that my right hon. Friend is in no doubt about the immediate deprivation and the plight of the fishermen along the Sussex coast. They are in serious difficulties and the fall in their livelihoods comes at the worst possible time, about a month before Christmas. The burden of the ban is disproportionately borne by them.
  Fish is the staple diet of many families on Fridays. My hon. Friends may have noticed that fried cod fillets are on the menu of the Refreshment Department of the House. If my right hon. Friend can give me a favourable reply to the debate, I shall be more than happy to stand him a fried cod fillet steak later today. I hope that he will not regard that as an improper offer. I shall close with that conciliatory gesture. I look forward to hearing what my

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  right hon. Friend has to say and the extent to which he feels able to alleviate this serious and immediate problem. I know that the problem is shared by the constituents of many other hon. Members in the area, not least my right hon. Friend the Member for Worthing (Mr. Higgins) who is in his place today and who, like me, yesterday met a large number of constituents to discuss this matter.
  2.23 pm
  The Minister of State, Ministry of Agriculture, Fisheries and Food (Mr. John Selwyn Gummer): I am sure that the House will be keen to acknowldege how important it is that my hon. Friend the Member for Chichester (Mr. Nelson) has taken the opportunity afforded to him to raise this important matter, because nothing is more important than the occasions on which Government actions directly affect the lives of constituents.
  By the case that he presented, my hon. Friend has shown how closely he is in touch with his fishing constituents. I am sure that he will agree that the same must be said of my hon. Friend the Member for Brighton, Kemptown (Mr. Bowden), who brought to me a delegation of leaders in the fishing industry on the south coast. We must also pay tribute to those other hon. Members, including my right hon. Friend the Member for Worthing (Mr. Higgins), who met their constituents at a large meeting of fishermen who came to the House of Commons yesterday.
  I am sure that my hon. Friend the Member for Chichester realises that I take my responsibilities very seriously in deciding when fishing may continue and when it should stop. The common fisheries policy, which is an outstanding success, has shared out the stocks available among the countries that fish in these crowded waters, so that fishing can be protected for the future. It is only because we wish to save the livelihoods of those fishermen and their sons that we are trying to protect the stock from overfishing.
  My hon. Friend the Member for Chichester has raised a serious matter. He will recall that we could not take the measures that should have been adopted for herring and that, as a result, herring was almost extinct in certain parts of the waters around this island. That cannot be allowed to happen again, and that is why we must take severe measures. The arrangements are just as my hon. Friend the Member for Chichester described them. The total allowable catch is shared proportionately among those nations that have historic rights to fish.
  It is fair to say that following the negotiations on the common fisheries policy, the United Kingdom had to accept that we were very properly treated in the share that we obtained. Although it is not too large, we have a perfectly reasonable share. The problem is that the arrangements mean that the pressure on stocks has grown considerably. Cod is a particularly difficult stock. We arranged a total allowable catch that was much lower than the industry wanted, but it was still too high for the real demands of conservation. The problem is that in strictly scientific terms, we already allow too much fishing. Indeed, the United Kingdom was prepared to go further than other countries with restrictions, not least because we believed that to adopt a harder line now would save opportunities for the future.
  Nevertheless, the Community as a whole set a TAC that was higher than we thought advisable but to which we now work. Consequently, when there is overfishing, we are in
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  a serious position. It cannot just be passed over. It is not a question of getting near the target, because we have taken more cod than is within our quota.
  There is a problem, because Britain has been the leader in the conservation battle in the European Community. It was we who insisted upon an inspectorate, because we began to believe that some countries were not as good at maintaining the rules as we were. We now have a Community inspectorate that has done sterling work. Because of the Government's demands and the pressures that we applied in the European Community, there are, this year, additional powers so that we can stop some of the scandalous abuse of the rules by other countries, although I am happy to say, not by Britain.
  We have done much to improve conservation, and consequently I know that my hon. Friend the Member for Chichester will understand when I say that I cannot take measures that would leave Britain open to the accusation of being in favour of conservation for others but not for ourselves. The decision to close the fishery had to be taken.
  My hon. Friend's constituent wrote an appealing and understandable letter which showed just how hard these decisions are on individuals. But I hope that his constituent will accept that I had no other choice. We had overfished. It was not merely that we might do so. My hon. Friend will probably say, "Why the blazes didn't you know beforehand? Why were you not able to make a decision earlier, or to warn people earlier?" I must remind him of his constituent's letter, which refers to the way in which stocks change rapidly, the migration of fish producing huge changes. When these changes take place, we have to move quickly.
  This is the first time that we have been in the present position. I must say to my hon. Friend that we cannot criticise entirely those——
  It being half-past Two o'clock, the Motion for the Adjournment lapsed, without Question put.
  Motion made and Question proposed, That this House do now adjourn.—[Mr. Garel-Jones.]
  Mr. Gummer: We must accept that a remarkable change took place in October, and the experience of my hon. Friend's constituent was different from the general. The figures are clear. In October 1985, less than 30 tonnes of cod were fished. This October, 90 tonnes of cod were fished. We are talking about a huge change in a short period.
  Mr. Terence Higgins: My right hon. Friend is talking about the overall position, and no one is disputing the need for conservation. The crucial issue is whether the arrangements are fair between those who are fishing some distance offshore and the important group of fishermen, from our point of view, who are using boats that are less than 10 m in length. Nothing that my right hon. Friend has said so far has been addressed to that. I hope that he will consider carefully the position of those who until now have not taken the fish to which he has been referring. As I understand it, the fish have been taken almost entirely by those fishing further away.
  Mr. Gummer: My right hon. Friend is right to say I hat, and I apologise for not yet having reached that issue. I want to approach it carefully.
  In the curious and archaic practice of having to sit down and then stand up again on the Adjournment, I read

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  out the wrong figures. I shall correct myself immediately. The total catch in October of this year was 150 tonnes compared with 60 tonnes last year.
  I shall addres myself now to those who did the catching, and I understand the concern of my right hon. Friend the Member for Worthing. Faced with such a change, I think that he will understand what would normally happen. If 60 tonnes are taken from 150, there is sufficient tonnage for the fishery to remain open. Most of the fishing takes place at this time, as it has not heretofore, by the smaller inshore boats which cannot go out very far. The men who work from these boats wait for the fish to migrate, which is aided by the bad weather. It is curious that these boats are not able to leave shore for part of the time because of bad weather and that the bad weather helps to drive the fish into an area where they can be caught from the small boats. That is the mix.
  Until very shortly before imposing the ban we expected the normal pattern to continue, which would mean enough fish for eveeryone. We have always taken the view—I hope that my right hon. and hon. Friends will agree with me that it is the right one—that the worst decision to take would be to close a fishery in advance of the quota being exhausted, when the fish are still there, in the hope that at some later stage it will be possible to reopen the fishery, when perhaps the fish are not there. That is a position in which fishermen have found themselves caught in the past and I was not prepared to let that happen again. That is why the decision was made at such a late stage. We could not have known beforehand how close to the quota we were runing.
  The ban falls unevenly because of the pattern of fishing. The larger boats have profited from the presence of cod up to now because they have been able to take the larger catches. It is only at this stage of the year—this is especially so for those fishing off Worthing and other ports along that stretch of the couth coast—that the smaller boats can participate. This fishing involves few men, few boats and few ports, but each man is dependent commercially upon his catch. I am particularly concerned because they have not had a fair deal up to now. It is not a question of me being able to say, "You have fished well for the rest of the year and, if you have not put aside a certain amount in case things went wrong, you should have." I cannot say that because they have not fished better during the earlier part of the year. Therefore, I take very seriously what was said by my right hon. Friend the Member for Worthing and my hon. Friend the Member for Chichester.
  To try to meet this concern I could not hold off the closure of the fishery, because that would have broken the rules. It would have invited the Commission to take action, which would have been wrong, and it would have made it extremely difficult for me to stand up in the fisheries Council next Wednesday and continue our policy on conservation, which is so important to the United Kingdom.
  We tried to turn to the one country which had not up to then closed its fisheries. The French had, the Belgians had and the Dutch had because they had all run out of quota, much earlier than us. The only country that had not, as my hon. Friend the Member for Chichester said, was the Republic of Ireland. We approached that country to see whether it had any fish that we could swap; whether
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  we could give it some of our fish from another area and, in exchange, it could help us with the cod in the area concerned. It said that it was impossible because it was running very close to quota.
  We could not do anything ourselves, because to move cod from one area to another is contrary to the rules. It is not contrary to the rules for some bureaucratic reason, but for a good reason because the quotas are divided specifically on scientific grounds. It is important where one picks the fish. Once one allowed that, some unscrupulous Government might easily move from one to another and juggle the books in such a way that we would find it more and more difficult to see whether they were keeping the rules at all. It is terribly important that this is transparent, that nobody fiddles and that the conservation rules that we need so much are kept. That prohibits us from making the changes mentioned by my hon. Friend and which others have pressed upon me.
  Once the fishery was closed I felt it right to go back to the Republic of Ireland and ask, in the light of its latest figures, whether there was any possibility of it accommodating us. I am pleased to say that even as I speak a note has been passed to me saying that the Republic of Ireland has agreed to a quota swap whereby we will have 200 tonnes of cod from the Channel. That will mean, given that some of it will immediately be used up because we have already overfished, that we will be able to reopen the fishery and lift the ban with effect from Tuesday 2 December. That should enable my right hon. and hon. Friend's constituents to continue to fish in that urgent and important period between now and Christmas.
  Mr. Nelson: That major announcement will be received with great joy by my Selsey and Emsworth fishermen and by the constituents of my right hon. Friend the Member for Worthing (Mr. Higgins) and other colleagues along the south coast. I am absolutely delighted. I congratulate my right hon. Friend on the speed and persuasion that he has deployed in wresting this swap for us. It will bring much needed alleviation of a plight that would otherwise have been severe for so many. It is good news indeed.
  Mr. Gummer: I thank my hon. Friend. I should like to pay tribute to my officials who have spent a great deal of time on this matter. It involves not only persuasion but finding some other area that can be swapped. We do not wish to see a series of these Adjournment debates in which other people ask where the fish that they once had have gone and why the Irish are taking them and not us. I am sure that my hon. Friend will understand that the chain is more complicated than it appears on the surface.
  I should like to refer to a serious factor in the discussion. We have acted throughout with the utmost probity and we have tried to maintain the important responsibilities that arise from being part of the Community's common fisheries policy. That policy works extremely well, and increasingly so, yet this has come to my notice. There was an attempt to make political capital on this matter, which I deeply deplore. This should be said in the Chamber, which at the moment does not contain any representatives of the Social Democratic party or a single representative of the Liberal party. The press was informed by the prospective Liberal candidate for Arundel—I hardly dare to say this, but it is so serious a matter—that he had every sympathy with the fishermen who will defy the ban and risk £50,000 fines, and with fisheries inspectors who may not impose the ban.
  Mr. Nelson: Disgraceful.
  Mr. Gummer: It is conservation that we are talking about, the saving of fish for future generations, yet someone, for party political advantage—one can hardly say other—has encouraged people to break the laws of conservation and, indeed, has encouraged servants of the Ministry of Agriculture, Fisheries and Food to turn a blind eye to the conservation rules. That has been done in a grubby attempt to gain votes.
  That is wholly unacceptable, particularly as it is in a document that contains suggestions that the decisions were made arbitrarily. There is nothing arbitrary about them. This matter is about the protection of people's livelihood in future, not just now, next year or the year
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  afterwards. I could have made party political decisions that would have been comfortable for now but that would have been dishonest with regard to the future.
  I hope very much that anybody who has received or publicised the document will ask, as I shall ask the official Liberal spokesman on fisheries—who is not present now, but I shall ask him when he returns from his weekend—whether he will dissociate himself publicly front that attempt to undermine conservation rules that are for the benefit of the whole nation, all fishermen and the European Community, an organisation which, in this area at least, has shown itself extremely effective in providing a system that protects the fish not only for people now but for their sons and grandsons.
  Question put and agreed to.
  Adjourned accordingly at eighteen minutes to Three o'clock.

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  Animal Welfare
  Animal Welfare
TRADE AND INDUSTRY
  Intellectual Property
  Intellectual Property
  Shipbuilding (Intervention Fund)
  Shipbuilding (Intervention Fund)
  British Telecom
  British Telecom
DEFENCE
  Chinook Helicopters
  Chinook Helicopters
  Japanese Prisoners of War
  Japanese Prisoners of War
  Ship Refits
  Ship Refits
  Chemical Weapons
  Chemical Weapons
  RAF Welford
  RAF Welford
  Binary Weapons
  Binary Weapons
FOREIGN AND COMMONWEALTH AFFAIRS
  South Africa
  South Africa
  United Nations (Budget)
  United Nations (Budget)
  Human Rights
  Human Rights
  Council of Ministers
  Council of Ministers
  Animal Welfare
  Animal Welfare
  Moses Mayekiso
  Moses Mayekiso
  Biological and Toxic Weapons Convention
  Biological and Toxic Weapons Convention
ENERGY
  Energy Research
  Energy Research
  Offshore Oil Extraction
  Offshore Oil Extraction
  Oil Production and Drilling Platforms
  Oil Production and Drilling Platforms
  North Sea Oil (Technical Equipment)
  North Sea Oil (Technical Equipment)
  Power Stations
  Power Stations
  North Sea Oil
  North Sea Oil
  Coal Industry
  Coal Industry
PRIME MINISTER
  Westland plc
  Westland plc
  Hearing-impaired People (Committee)
  Hearing-impaired People (Committee)
  State Security
  State Security
  Engagements
  Engagements
EMPLOYMENT
  Restart Scheme
  Restart Scheme
  Benefits
  Benefits
  Job Training Scheme
  Job Training Scheme
  Taster Course (Deptford)
  Taster Course (Deptford)
  National Advisory Council on Employment of Disabled People
  National Advisory Council on Employment of Disabled People
  Manchester
  Manchester
ATTORNEY-GENERAL
  State Security
  State Security
NATIONAL FINANCE
  Housing (Taxation)
  Housing (Taxation)
  VAT
  VAT
  Freeports
  Freeports
  Arms Embargo (South Africa)
  Arms Embargo (South Africa)
  Earnings
  Earnings
  British Petroleum
  British Petroleum
  Privatisation (Advertising)
  Privatisation (Advertising)
  North Sea Oil
  North Sea Oil
  Manufacturing Industry
  Manufacturing Industry
  Commercial Bills
  Commercial Bills
  Capital Allowances
  Capital Allowances
  Value Added Tax
  Value Added Tax
  Channel Tunnel (Customs Control)
  Channel Tunnel (Customs Control)
HOME DEPARTMENT
  Vietnamese Boat People
  Vietnamese Boat People
  Telephone Tapping
  Telephone Tapping
  Courts (Staffing)
  Courts (Staffing)
SOCIAL SERVICES
  Lyme Disease
  Lyme Disease
  Residential Care (Costs)
  Residential Care (Costs)
  RAWP (Future Operation)
  RAWP (Future Operation)
  Heating Additions
  Heating Additions
  Severe Weather Payments
  Severe Weather Payments
  Redundancy Pay
  Redundancy Pay
  Single Payment Claims, Liverpool
  Single Payment Claims, Liverpool
  Royal Association for Disability and Rehabilitation
  Royal Association for Disability and Rehabilitation
  Blood Donors (Bone Marrow Donations)
  Blood Donors (Bone Marrow Donations)
  Psychiatrists
  Psychiatrists
  Pathology Testing
  Pathology Testing
  AIDS
  AIDS
  Hospital Waiting Lists
  Hospital Waiting Lists
  Single Payments
  Single Payments
  Nursery Places
  Nursery Places
  Unemployment (Benefit)
  Unemployment (Benefit)
  Special Medical Boards
  Special Medical Boards
  Asbestos
  Asbestos
  Pensioners
  Pensioners
SCOTLAND
  Hospital Facilities (U.S. Forces)
  Hospital Facilities (U.S. Forces)
  Paediatricians
  Paediatricians
  Roads Expenditure
  Roads Expenditure
  Urban Programme Funding
  Urban Programme Funding
  Road Humps
  Road Humps
  Community Charge
  Community Charge
  Parole
  Parole
  Nuclear Installations
  Nuclear Installations
  Chiswick Report
  Chiswick Report
  Foodstores
  Foodstores
  Radiation
  Radiation
  Leukaemia
  Leukaemia
  Caesium 137
  Caesium 137
  Forestry
  Forestry