Banking Bill (Standing Committee Proceedings) (Hansard, 19 February 1979)

§ Mr. Denzil Davies

The following is the text of the letter:

Treasury Chambers

Parliament Street

SW1P 3AG

12 February 1979

Ian Stewart Esq MP

House of Commons

London

SW1A 0AA

Dear Ian,

BANKING BILL

In Standing Committee on the Bill, I promised to consider a number of points; and I am writing now to let you know the results.

We are making some amendments for Report stage as a result of our discussions and I deal with these first, insofar as they need comment. On Schedule 1, we are doing some tidying-up, and the Letchworth Garden City is now covered. Water authorities are no longer considered to come within the scope of the Bill so have been deleted. The police authorities are covered by the revised paragraph, so no longer need a separate entry. The paragraph also covers miscellaneous bodies such as Joint Crematorium Boards and National Parks.

We are also proposing to add stockbrokers to Schedule 1. So far as other professions are concerned, we would propose to exempt them by regulations under clause 2(1), if they should indeed be within the scope of the Bill. You will recall that the question of solicitors was raised. The circumstances in which solicitors may hold money for their clients are of considerable variety and complexity; and we have concluded that in order to provide certainty on the point there should probably be a specific exclusion for them under 2(1).

Turning now to some of the general questions raised on clause 1, you raised the question of the Bill's impact on the inter-company market. As you know, the Bill seeks to regulate the acceptance of deposits by persons carrying on a deposit-taking business. The definition of a deposit in clause (1) has necessarily been drawn in wide terms. It would cover the taking of repayable monies by one company from another, whether the transaction was effected directly or through brokers and whether or not it was evidenced by notes, provided that the lender was not a recognised bank or licensed institution or a connected company. This would not in itself make the borrowing company subject to the prohition 30W in sub-section (1). That would depend on whether it was a deposit-taking business under sub-sections (2) and (3). Insofar as its activities were not financed to any material extent out of the proceeds of deposits, it would not be a deposit-taking business; and, even if it were not excluded on this ground, it would still not be regarded as a deposit-taking business if it satisfied both the conditions in sub-section (3). The first of those conditions is that it should not hold itself out to accept deposits on a day-to-day basis. A company which entered the market to obtain a sum of money and then withdrew would not fall foul of this condition; but a company which told a broker that it stood ready on a continuing basis to take all deposits offered would (in that remote contingency) be caught. The second condition in subsection (3) addresses itself to what transactions take place in fact. It is largely a test of frequency (although it is also concerned with the extent to which a transaction may be atypical by reference to the normal activities of the borrower). Thus a company which borrowed occasionally on the inter-company market (or the market for fixed-interest securities) would not be accounted a deposit-taking business. How frequently it could borrow in these ways before needing to be licensed as a deposit-taking institution or to curtail such activities is a matter for interpretation by the Bank of England and, in the last resort, by the courts. A mechanical test of frequency would be too rigid and anomalous in its effects.

It follows that the Banking Bill would not put an end to the inter-company market. It would, however, discourage the development of a market in which some participants borrowed from others on a significant and systematic basis. This is desirable on prudential grounds since it is difficult for ordinary trading companies to reach a proper appreciation of the risks involved in lending through this market to companies with which they have no business relationship; and in some circumstances it may also make monetary policy more effective and remove a grievance not unreasonably expressed from time to time by the banking system.

Partly in this connection, you asked whether companies could discuss with the Bank the implications of the legislation, when it is in operation. The Banking Supervision Division of the Bank of England would always be willing to discuss with interested persons whether their present activities or a proposed course of action might bring them within the scope of the legislation. I do not consider it necessary to provide for any formal procedures in this respect. Presumably any persons who felt that the pursuit of a particular activity might be adjudged to make them a deposit-taking business within the meaning of the Bill would also consult their legal advisers. In the last resort, of course, a final decision in the matter would lie with the courts.

John Moore also raised the question of back-to-back lending. The principle behind this is that a company deposits money with a bank (or some other institution) and the borrower (or a company connected with the 31W borrower) lends a similar amount of money to another party named by the depositor. The definitions in clause 1(3) and (5) of the Banking Bill are such that borrowing by way of back-to-back loans should not be affected by legislation.

In order to be subject to the provisions of the Bill a person has to accept a deposit in the course of carrying on a deposit-taking business. The definition of a deposit excludes loans made by recognised banks and licensed institutions, by persons in the business of lending money (such as overseas banks which need no deposit-taking authority here) and by connected lenders. Moreover, a company would not be accounted a deposit-taking business provided that it did not hold itself out to accept deposits on a day-to-day basis and in fact took deposits only on particular occasions.

Back-to-back loans are complex in nature and the occasions on which any one company might borrow by this means are infrequent. Even where such borrowing fell within the definition of a deposit, the company in question should have little difficulty in demonstrating that it was not a deposit-taking business as the funds were received only on a particular occasion. On this basis back-to-back borrowing by comparies generally—like their borrowing through fixed-interest securities on the capital market—will be unaffected by the passage of the legislation.

I turn now to the more detailed points raised on the Bill.

Clause 1(5). I do not consider that it is necessary further to expand the definition of a connected depositor. This clause as drafted, read in conjunction with the definitions of director, controller and manager in clause 4 of the Bill, already provides for the bulk of cases where there is a close degree of connection, and to widen the exemptions further could reduce the effectiveness of the supervisory system and the protection of depositors I enclose a copy of a letter I have written to Mr. Pardoe on the representations of the Consumer Credit Trade Association.

Clause 6(1)(b). The Bank will take all relevant circumstances into account in deciding whether to proceed with revocation on the grounds that an institution has not carried on a deposit-taking business (as defined) for six months or more, and the provision will be interpreted flexibly.

Clause 6(2). I am confident that there is no need to provide for revocation on the grounds of a composition with creditors in the case of companies. Section 206 of the Companies Act 1948, which I assume you had in mind, is generally directed towards reconstructions and amalgamations, where the company is to continue as a going concern.

Clause 6(4) and (5). I am confident that the clause as drafted ensures that there will be no gap between the expiry of one authorisation and the grant of another.

Clause 12(4). The offence in this clause is judged to be similar to that in clauses 16 and 17 of failing to give information to the Bank (or person appointed to carry out an 32W investigation). The fine of £1,000 is the maximum for summary conviction under the Criminal Law Act 1977. Prior to that Act, the maximum fine was £400; and this is applied to similar offences under the Insurance Companies Act 1974, Sex Discrimination Act 1975 and the Race Relations Act 1976.

Clause 15. I do not consider it necessary to amend the phrase ' for each occasion '. It is designed to stop persistent flouting of the law; clearly the Bank or the DPP, as prosecuting authority, would not use that power unreasonably, nor indeed would the courts allow them to do so.

Clause 19. I promised to consider amendment 48, which would have prevented the Bank from disclosing information to overseas authorities where that might be prejudicial to overseas customers of the institution. As you are aware, the clause allows the Bank to disclose information to overseas authorities only for supervisory purposes. Circumstances in which the Bank might find it necessary to pass information touching on the affairs of individual customers to overseas supervisory authorities could be expected to occur very rarely, if at all. But however hypothetical the contingency, I am afraid that it would not be compatible with our obligations under the EEC Directive to debar the Bank from passing such information where this would assist the overseas authorities in their supervisory functions. Nor would it be possible to confine 19(5) to EEC authorities, since it could be argued that the extra degree of confidentiality thereby afforded to customers of third country institutions amounted to favourable treatment of these institutions, which is again precluded by the Directive. I would repeat that I am sure we are dealing only with very remote contingencies.

Clause 23. I have considered whether the term to maturity under which deposits would be excluded from the deposit base (and from protection) should be reduced to two years; but in the absence of conclusive arguments I prefer that the present wording should stand.

Clause 26(1) and (5). The difference in wording between ' may ' in (1) and ' shall ' in (5) is deliberate. Subsection (1) gives the Board the option of calling special contributions or of borrowing on a temporary basis. Subsection (5) ensures that the ' topping-up ' mechanism will come into play, notwithstanding that the Board has borrowed temporarily.

Clause 28(2). I have considered whether it should be obligatory for the Board to refuse payment to ' connected depositors ' under this clause. The subsection goes wide, in that it refers to persons who may have profited directly or indirectly from the institution's difficulties. I think that this is right, so as to catch persons whose profit is indirect but who nevertheless, in the Board's opinion, have a material connection with the institution. But this may also catch persons whose profit is indirect, but who are only connected with the institution in a purely technical sense. I am sure that the Board will in all oppropriate cases refuse payment. But I would not wish to 33W remove all discretion, given the wide scope of the subsection.

Clause 31(7). The rules will be essentially technical. It is unlikely that they will be finalised much before the end of this year.

Clause 33. Suggestions were made about the scope of the regulations relating to advertisements for deposits. We will bear these in mind for when we come to draft the regulations.

Clause 36(2) and (3). The question of exempt dealerships under the Prevention of Fraud (Investments) Act was raised. Under the Act, the Secretary of State may make Orders of Exemption. This is a matter for his discretion. A consultative document has been issued on the revision of the Act, which proposes that recognised banks, but not licenced institutions, should be exempted—although of course the latter could apply for a licence under the Act. Clause 36 of the Banking Bill as such has no impact on this.

Clause 36(4). It was suggested that the description ' banking services ' ought specifically to be related to the services listed in paragraph 2(2) of Schedule 2. I do not think an amendment is necessary here; the list in Schedule 2 is not intended to be an exhaustive list of banking services and a licensed institution ought not to be restricted to describing only the services in the Schedule as ' banking services '.

Clause 36. I have looked again at the use of the term ' investment bankers ' and see no reason to alter what I said in Committee. It is relevant that nothing in the Bill prevents an institution based in London from describing itself as an investment banker abroad; and conversely, if a foreign-based institution were to set up in London, it would be subject to the restrictions in the Bill.

I am sending a copy of this letter to all members of Standing Committee A.

Denzil Davies