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Credit Institutions

10.15 pm

The Economic Secretary to the Treasury (Mr. Peter Lilley) : I beg to move,

That this House takes note of European Community Documents Nos. 4794/88 on credit institutions, 9224/86, 4339/88 and the Supplementary Explanatory Memorandum submitted by the Treasury on 22nd July 1988 on the Own Funds of credit institutions and 6033/88 on a solvency ratio for credit institutions ; and supports the Government's intention to ensure that the Commission's action in this field takes full account of United Kingdom interests.

I welcome the opportunity to debate these complex measures, which together will establish a single European market in banking. I take the opportunity to pay a tribute to the ever vigilant members of the European Select Committee, who have helped bring about the debate today. These are important measures. They will bring a significant benefit to a major British industry.

I will endeavour to be reasonably brief, in view of the obvious great interest in this subject in the House. These are complex measures, and to understand such measures it is often helpful to contrast them with the alternative approach that could have been taken.

There were in theory two paths that the Community could have followed to create a single market in banking : the path of harmonisation and the path of deregulation.

A harmonised banking regime would have meant each country discarding its existing regime, which had evolved to meet national needs and to which its own banking industry had adapted. To replace them it would have been necessary to agree on uniform procedures for authorising banks, common systems of prudential supervision, common rules for depositor protection, common standards of capital adequacy and solvency, and so on. There might even have been calls to establish a new central regulatory authority to ensure uniform application of those many standards which require subjective interpretation.

The chances of ever reaching agreement on such a harmonised regime by 1993, if ever, would have been slim, if not non-existent. If agreement had been reached the outcome would have been rigid and unadaptable. The transition to the new regime would have been very disruptive. Such a harmonised regime would have fitted each country's banking industry as badly as if everyone were obliged to wear the same sized shoes. Fortunately, the Community has trodden the alternative path of deregulation and has achieved it by two major steps.

The first is the mutual recognition of each country's banking authorisation. This is enshrined in the second banking directive. It ensures that a bank authorised in any member country can operate in any other member country without further authorisation--the so-called banking passport Communitywide.

Secondly, minimum standards are to be agreed for initial authorisation and continuing supervision. So the purpose of the own funds directive and the solvency ratios directive, which are before the House tonight, is to set the minimum standards for capital adequacy. The directives will prevent any regulatory undercutting. That is, they will prevent any country from giving its banks an unfair and distinctly unwise advantage by setting capital adequacy requirements below the agreed minimum. The British Government consider it important that this capital

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adequacy regime should be compatible with the international standards agreed in Basle at the Bank for International Settlements last July, based on the earlier work of the Committee chaired by Peter Cooke of the Bank of England.

Under the proposals before us, member states will remain free to set stricter standards of capital adequacy if they so wish. They will make their own arrangements for prudential supervision and authorisation, subject to the minimum requirements of the directives.

We believe this approach should be the paradigm for extending the single market in similar areas. I welcome the Commission's adherence to this approach in its White Paper concepts of harmonisation of minimum essentials, mutual recognition and home country control, both here and in other sectors.

Mr. Bowen Wells (Hertford and Stortford) : I wonder whether my hon. Friend can tell the House whether these measures can be adopted simply by majority vote or whether it is necessary to have unanimity in the Council of Ministers before they can be implemented?

Mr. Lilley : This is not an area where we or any member state has a veto. It is on majority voting.

In the first place, the approach that I have outlined--that of mutual acceptance of authorisation in the home country--makes it far easier to achieve an agreement. That is not to say that it is easy and my hon. Friend the Member for Hertford and Stortford (Mr. Wells) has just said that he recognises that there may be difficult issues at stake which will affect a country's national interests. However, it is far easier to agree on mutual recognition and minimum standards than to agree to a common standard on every particular aspect of banking regulations. Under the approach adopted by the Community, states are free to retain most of the systems that they already have.

More important than the ease or difficulty of achieving agreement, we believe that a single market, based, as these directives intend, on mutual recognition of different systems and common agreement on minimum standards, is superior to one based on a common regulatory regime. That is because, in a single market with different regimes, there is competition not just between banks but, to some extent, between banking regulatory regimes.

It is sometimes assumed that such competition between regulators must automatically lead to a reduction in standards. A sort of Gresham's law is thought to apply, whereby bad regulation will automatically drive out good. That is not so. It is of course necessary to set minimum regulatory standards to ensure the continuing soundness of financial institutions and to safeguard the interests of depositors. However, it is a mistake to suppose that a good regulatory regime will generally make banks authorised under it less competitive than those authorised under a weak regulatory regime. On the contrary, most customers would prefer to deal with banks which they know to be authorised and supervised by a strict and prudent regulator rather than banks authorised by a lax and incompetent regulator.

No supervisor, however good, can supersede the customer's ultimate obligation to be cautious about who he deals with. Caveat emptor still applies. However, he will be guided in his judgment by the standards applied by the

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supervisory body. The expression "as safe as the Bank of England" still quite rightly carries weight in people's minds. It lends an extra attraction to British banks.

People like to do business with those they can trust. I remember when I studied economic history being taught that the reason why the Quakers prospered was not that they were particularly assiduous in pursuing material wealth, but because they were known to be scrupulously honest and people liked doing business with them because of that. Therefore, in general, a good, strict regulatory regime may be a competitive advantage for those who are authorised under it. Although we fully endorse the general approach of these directives, there are a number of issues about which the United Kingdom is concerned. The most serious issue is reciprocity. The provision as drafted requires that before a credit institution whose parent company is outside the Community can be authorised by any member state, the Commission must first decide whether the country concerned offers reciprocal treatment to Community credit institutions. No non-Community bank could be authorised to establish a subsidiary in London until the Commission was satisfied that its home country offered reciprocal freedoms to banks from each and every member state. The Commission inserted this provision into the draft directive without any consultation and at the last minute before submitting it to the Council last February. The result is that the draft provision is muddled and unclear. But it is clear that the Commission's proposals are potentially very damaging.

The potential for delay is horrifying. The potential for protection is even worse, and the threat to London's position as a major international financial centre, should the provisions in the draft directives be accepted, would be incalculable.

London has built up its pre-eminent position in this time zone by attracting banks from all over the world. Indeed there are, for example, more American banks in London than there are in New York. But although London has the most to lose, all EC countries are likely to find that foreign financial institutions were more reluctant to operate in the Community if the reciprocity provisions were incorporated in the final directive.

What is more, British banks operate throughout the world. They might face retaliation in non-Community countries if access to the British market were restricted because the Commission felt that particular overseas countries were not offering satisfactory reciprocal freedoms in other member states which have traditionally been more restrictive themselves.

The Commission has argued that the reciprocity provision is essential to strengthen its negotiating hand in the GATT Uruguay round. This I find a very worrying argument. It would be perverse in the extreme if the Uruguay round were to become a pretext for erecting new protectionist barriers.

All member states have indicated that they consider the Commission's proposals on reciprocity to be impractical as drafted. We have expressed the view that the second directive would be a far better measure without the Commission's proposed reciprocity provision and that we would like it removed. In the light of these comments, the Commission will be revising its proposals over the coming months.

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Mr. William Cash (Stafford) : Can my hon. Friend indicate the balance of opinion in the Council on majority voting on reciprocity? Has he any idea how it might go?

Mr. lilley : As I mentioned, every member state was critical of the provisions, to different degrees and not always on the same aspects, but all found it unsatisfactory. Therefore, my hon. Friend can be reasonably confident that the Commission went away well seized of the need to change its initial proposals. We look forward to the Commission coming back in due course.

Our second main concern is the interaction between the second banking directive and the investment services directive which is on the stocks. On the continent most investment services are provided by banks, and the Community passport created by the second banking directive will enable banks to offer services throughout the Community. In the United Kingdom a large part of our financial service industry is not part of a bank. It is carried out by specialist investment institutions. Non-bank financial services firms will be given a similar Community passport under the investment services directive. But if the second banking directive were enacted before the investment services directive, continental banks offering investment services could be given an unfair headstart over the specialist firms. Fortunately we have been reassured by the Commission's clear statement that its intention is for both directives to be implemented at the same time.

We have one final concern which relates to the procedures to be adopted for amending the directives. Member states have unanimously rejected the Commission's proposed amendment procedure, since it fails to reflect the complexity of banking issues, and risks the adoption of new prudential requirements without the full agreement of banking supervisors. For the own funds directive an interim solution has been found, which reserves to the Council of Ministers the right to amend directives. For the other directives, we are now awaiting new proposals from the Commission.

Mr. Tim Smith (Beaconsfield) : My hon. Friend has said that he is unhappy about the reciprocity provisions in the directive. What is the position of the Government generally on reciprocity? Are they unhappy about the reciprocity provisions? If so, have they second thoughts about the provisions on reciprocity in the Financial Services Act 1986?

Mr. Lilley : The provisions in the draft directive are substantially different from those in our Financial Services Act or elsewhere on our statute book. They give the British Government the right to take a decision which will be politically sensitive--the Government taking the decision if there is even a need to do so. But we have never seen the need to operate those provisions. The provisions in the draft directive require in every case, prior to authorisation by a member state, the Commission to take a decision, for which it has three months in the first instance and longer in many circumstances. That is plainly a potential nightmare recipe for bureaucratic delay.

These are important measures which give the British financial services sector a chance to build on its strengths. We must ensure that the important reservations that I have discussed frankly this evening are put right, and with the support of other member states which feel as we do on such subjects as reciprocity we shall be negotiating hard to achieve that result.

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We have been helped throughout by comments from and discussions with banking practitioners in this country, and it is right that that should be so, as it is on their enterprise and initiative that the success of the single market will depend.

10.30 pm

Mr. Stuart Holland (Vauxhall) : The Economic Secretary to the Treasury has just lauded reward for effort, and I certainly congratulate him on the effort with which he has stated his case. While the proposals appear technical, they amount in fact to the terms and conditions under which finance capital will operate in the Community from 1 January 1993. They are therefore not simply matters concerning credit institutions : they are of major importance. Let us take, for example, the solvency ratio for credit institutions. The Economic Secretary addressed that in a rather effortfully laid-back way, considering only the technical questions, but the solvency conditions of financial institutions in the Community are of the first importance as we approach the 1990s.

It is a long time, for example, since major banks in western Europe went bust. It is over half a century since the Kredietanstalt failed in Austria, with repercussions not only in Europe but in the United States. At present, however--as hon. Members know very well--the United States banking system is in considerable difficulties. It owes as much in farm debt as it owes to developing countries. It is important for the Community--certainly its Finance Ministers--to address solvency issues, not simply in terms of harmonising down to, or up from, 8 per cent. or any other percentage but in the context of what problems banks in Europe will face in relation to banks in the United States or elsewhere in the 1990s.

The latest press reports on the committee reporting to the President of the Commission--a committee composed mainly of governors of central banks--say that it is considering United States Federal Reserve-type arrangements, but with the powers that the Federal Reserve had prior to the Roosevelt new deal reforms in the 1930s. That should also be considered in relation to solvency questions, and I urge the Government to bear in mind the fact that such a Federal Reserve bank proved impotent to counter the collapse of the United States banking system or the ensuing slump in the 1930s.

I am not saying that we shall have a slump in the 1990s, but we may have a considerable protracted period of recession in the world economy. If we are to take advantage of a European dimension to conditions involving solvency in financial institutions--this, of course, concerns all financial institutions in the Community : banks, credit institutions, building societies and so forth--we should address the likely creditworthiness of Europe's private financial institutions through a decade that could be one of very low growth in the world economy, or one of considerable pressure from developing countries on the debt question and other such issues. Ultimately the subject concerns not just the big investors--the big banks-- but the small-league investors : the wage and salary earners making monthly payments to a mortgage account or pension fund, or weekly payments into a building society.

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That brings me to the second provision, on the co-ordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of credit institutions, and the amending directive before the House.

The provision suggested by the Commission is potentially very powerful. First, I believe that it gives the power, in essence, to block authorisation of the takeover or establishment of a financial institution by a company from a non-EC country. If the Minister believes otherwise, I should be glad to hear his views on that point.

The useful Treasury briefing paper on the matter says that, as drafted, the provisions would appear to prevent further subsidiarisation or takeovers by third country banks even when they are already established in the EC. Perhaps the Minister will clarify whether that is the Government's interpretation of the provisions. Some people are understandably concerned. As ever, we are grateful to the Select Committee on European Legislation for giving some information about other people's views. My original understanding was that the briefing came from the Treasury Select Committee, perhaps because of the difference between the in-depth analysis from the Treasury Select Committee and the briefing documents relating to this regulation.

The third report of the Select Committee on European Legislation has a very brief summary of a submission made by the American Banking and Securities Association of London, expressing its concern on reciprocity, and a submission by the Bank of Tokyo Ltd., which welcomes the move but is very concerned about the reciprocity conditions.

It is clear that if the provision is passed there could be constraints on banks such as Namura, which has perhaps $30 billion of assets in the latest figures I have seen, extending their operations in the European Community.

I would not share, nor do the Opposition share, the Minister's attitude towards this, or the sort of observations he made about the Uruguay round of talks. Let us not be naive about this. In the Uruguay round, the United States has chosen to insert into all those negotiations intellectual property rights, which should not normally come within the GATT procedures. In other words, the United States wants access to Latin American countries and others for patents and licences of United States companies, with a comparative technological advantage in relation to Latin America.

We should have a much fuller debate on the open question of what role Europe should take in relation to foreign investment and/or takeovers of its financial services sector by other financial institutions based in other countries. That is so not least as the Japanese in particular have built up such a massive structural surplus in their visible trade and are seeking outlets for it. They have been creating financial institutions in the past 15 to 20 years so that they are now the leaders in financial operations, including credit institutions and insurance, on the world markets.

I should like to deal with the provisions for disclosure of anyone holding more than 10 per cent. of the capital or voting rights in a company. I do not recall that the Minister addressed his remarks to that issue. This should be debated in detail and considered seriously. Many people would regard it as a worthwhile move that nobody should be able to hold more than 10 per cent. without that

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matter becoming transparent. But evasion in these matters is notorious, through nominee holdings in financial institutions.

Mr. Hugh Dykes (Harrow, East) : I am puzzled, because the hon. Gentleman does not seem to be talking about the documents before the House. Since he and I sponsored the early-day motion, if he had been able to make those free telephone calls to Brussels, and speak to officials there, presumably he would have been able to find out what the documents were about.

Mr. Holland : I am glad to give the hon. Gentleman the opportunity to raise so important a matter as right hon. and hon. Members having the advantage that even an executive officer in the Treasury may enjoy, of telephoning someone to clarify a particular point. The hon. Gentleman raises an important issue. If any right hon. or hon. Member, other than those on the Government Benches, were to seek the views of members of the Bundestag or of the Assemblee Nationale on the measures, they could do so only at their own expense. Those of us having inner-London seats who do not enjoy the additional cost allowance find that difficult to do.

The point I make is raised in the explanatory memorandum from the Treasury. In that sense, it is either directly relevant, or we are not getting a decent brief from the Treasury. I do not wish to impugn people who cannot answer for themselves--unless the Minister himself claims responsibility for the words in question. In taking that responsibility, perhaps the Minister will say what his views are on the provision.

Our view is that the provision is worth while but easy to evade by using nominee holdings, and so on. What consideration has been given to those aspects by the British and other Governments, in relation to other Governments, to ensure that transparency can be achieved in respect of the Community's financial institutions? It is nothing less than that point which we address tonight.

Given the transparency insistence of articles 85 and 86 of the treaty, how relevant are they considered to be in relation to the provisions for harmonising conditions for the operation of finance capital in the Community from 1992 onwards? What transparency do the Government or the Commission seek to achieve? One of the problems arising from the concentration of financial institutions in western Europe is that the speculative operations of leading banks or the foreign exchange departments of manufacturing firms--one is speaking not only of financial institutions- -in hedging, and in the leading and lagging of payments, can force a currency that is under pressure to depreciate further when the Government do not wish that to happen. Inversely, and as the Germans know very well, those practices can force a stronger currency into even further revaluation when the Government may not need it. It is on those aspects that we want a Government response. They are aspects that relate to monetary policy and monetary management in a wider sense. Nothing in the provisions or in the Minister's comments suggests that those issues have been addressed.

The European Parliament amendment, for example--which I understand will be accepted--suggests that, pending translation of the directives into international legislation, the specific accounting techniques used should be left to member states. What accounting techniques will

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be adopted in the final proposals? On what will they be based? It may be a fine, sensible and pragmatic measure, but when will the House have an opportunity to examine the accounting proposals? As any accountant will agree, accounting is not just a technical matter but the basis of accountability. The institutions' accountability is of the first importance in a Community that has wider objectives than simply serving the interests of the institutions themselves. There is also the question of the relationship between the proposals and economic union. I was interested to hear the Minister's remarks, but their meaning was not entirely clear. Is he arguing that this is harmonisation or that it is not harmonisation?

Mr. Tim Smith : I am astonished that the hon. Member did not understand what my hon. Friend was saying. My hon. Friend made it absolutely clear at the beginning of his speech that this was a measure of deregulation and not a measure of harmonisation. Mr. Holland : I am very glad, although perhaps the Economic Secretary would like to confirm that. His confirmation would be very useful. Mr. Lilley : We have always known that the hon. Member has difficulty understanding things, but I do not think that any hon. Member on this side or any of the hon. Gentleman's hon. Friends has the least doubt that what I said was exactly as has been so succinctly summarised by my hon. Friend the Member for Beaconsfield (Mr. Smith)

Mr. Holland : Allegations about what one understands or does not understand are fine at this time of the night. By all means let us have more of them, and perhaps we can get further from the subject. The point is precisely that, by our interpretation, these are measures for harmonisation. I really do not understand why the Minister says that they are not. What is he going to say, for example, about the 8 per cent. reserve limit? Is he going to say simply that that is the minimum limit, that anybody can have any higher reserve he wishes? If so, what is he going to say about the provisions for third parties from other countries establishing or taking over financial institutions in the Community? Is it up to any member state to do what it wants? That is not what is in the proposals before us.

Mr. Lilley : Perhaps I can enlighten the hon. Member on that point. The provisions to which he refers fall under the reciprocity rule, about which I made my views very clear.

Mr. Holland : I do not want to suggest that the Minister is misleading the House, but I must say that by any normal standards these provisions are for harmonisation. We have the benefit of the Treasury's own briefing on the matter. At the moment, it appears that if any party from a non-member country wishes to set up a financial institution in the Community it can do so and thereby gain access to the rest of the Community market.

It is also clear from the provisions we now have that from 1 January 1993, this procedure could be blocked by any other Government not actually approving the establishment of the financial institution. The Treasury briefing says that authorisation could be delayed indefinitely by the failure to reach a consensus view. If that is not a harmonised policy, what is? Or are we to consider that these briefings, for which, after all, the Minister has

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said he is responsible, are not relevant? We are not talking simply about clearing the playing field and having equal opportunity for competition ; we are talking about harmonisation of the terms and conditions on which non-Community finance capital can operate in the Community.

In effect, these provisions fall within what is still widely recognised as an analytic and policy framework of negative integration. Basically, they are breaking down barriers to the free movement of capital and are not matched by measures for positive co-operation between Governments to build up from below rather than to harmonise down. What we need, in European financial terms, is the matching of a harmonised market for private finance with the capacity of Governments both to monitor such flows better, with better information, and to ensure a joint management of monetary policy in the Community itself. That, of course, is the bottom line, about which the Government are not clear what they want to do. In other words, they are proposing, in effect, to harmonise financial provisions in the Community at the private sector level without being at all decided on whether or not they actually want to join the exchange rate mechanism of the EMS.

Finally, I want to make an observation about the manner in which these proposals have been formulated and how they have been considered by this House. I am glad that they have been considered on the Floor of the House. Nonetheless, in terms of questions put to the Minister, I had to treat this virtually as a Committee stage because so much is unclear about the proposals and their implications. [Interruption.] No, it is not a superficial point, although I realise that Ministers would prefer to be in bed.

There are many unanswered questions in relation to the proposals. Arguably, the documents--which will affect the way in which financial markets will operate for all member states--are as important as any Finance Bill considered in Committee or on the Floor of the House. Yet in this case the Select Committee has given us the views of a handful of interested parties on a couple of pages. These measures deserve proper scrutiny, yet we have been given only an hour and a half to consider them, when most hon. Members have already gone home.

The Europe of 1992 as it is popularly known--1 January 1992 is not the key date except in respect of some of these documents ; what is important is what is achieved before 1992--will be created, but it will be created less with a bang than with a whimper. That whimper is hardly even being heard in this House, and it is being heard in only a few circles outside it.

10.50 pm

Mr. Ian Taylor (Esher) : As the hon. Member for Vauxhall (Mr. Holland) said, this important debate takes place late on Thursday evening, when speaking on any motion, let alone a motion to take note of European Community documents, is unpopular.

There is a vital role throughout the EC for the banking and financial services, which represent about 7 per cent. of the Community's gross national product and provide about 3 million jobs. Therefore, any potential directive is important to many people, and not least to the treasuries

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of the member countries, which are concerned with the flow of invisible earnings. It is because the London market is the most important market in the EC in that respect that the House should be particularly concerned with the contents of the documents. It is because invisible earnings are so vital to this country that hon. Members are in the process of forming an all-party committee to consider them. I hope that that will improve our debates on this very important subject.

The banking and building society industries represent a problem within the EC single market because there has to be regulatory control somewhere. This time--perhaps one might say "for once"--the Commission has done exceedingly well in its recommendation. This time it has not centralised regulation in some new central bureaucracy but instead has adopted the principle of mutual recognition of regulatory systems in individual member countries. In other words, in this case the single banking licence represents the minimum harmonisation based on home country, not Brussels, control. It is a commendable move with wide implications in the Community.

Mr. Fitchew, the director-general of DG 15 in Brussels, commented in September 1988 :

"The Commission has neither the capacity nor the wish in current circumstances to become responsible for the authorisation and supervision of banks and insurance companies throughout the Community."

That is very good news, and very sensible. I wish that the directors- general of certain other DG groups would take note. Mr. Fitchew continued :

"The host country, as the issuer of licences, would be incompatible with the idea of a single market because it would leave the host countries free to continue imposing all the barriers and restrictions on market access which we want to remove. So the only solution compatible with a single licence and a single market is home country control."

I can only say a profound "Hear, hear" to that. I hope that those in Brussels are taking note. The Commission is suggesting opening up a further aspect of the European Community to competition. I was very glad that my hon. Friend the Economic Secretary drew attention to that. There has to be competition between companies and institutions, but how much more successful the Community will be if there is also competition between regulatory systems within the Community, highlighting contrasts between Governments and between the various industrial and financial organisations such as the banking systems. I agree with my hon. Friend the Economic Secretary that competition in regulations does not necessarily mean that the ultimate winners will be those with the least protection for the consumer. Given the advertising and public inspection of the services provided by institutions, "caveat emptor" is increasingly the order of the day. Therefore companies which trade out of countries which are known to have a strong regulatory system will do very well throughout the Community compared with companies trading out of countries which may not have reached a reasonable standard. Obviously we must pay attention, and I am glad to note that the European Community is maintaining some supervision to ensure that there is no exaggerated competition in deregulation, but that ultimately the market will work intelligently and banking institutions in Britian will not suffer because of our very strong statutory self- regulatory system. I endorse the words of my right hon. Friend the Economic Secretary

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about the European Community draft directives on bank capital and solvency which play an integral part in the minimum regulations. The host countries have some control over advertising and marketing rules. The drafts of the banking directive contain a clear implication that the host country's powers in terms of monetary responsibility and other aspects related to the Consumer Credit Act 1974 would not be impinged. There is an overriding interest in the public good. That will be welcomed by people in Britain who will be pleased that we have a way of preventing institutions with dubious techniques from trading within the City.

Major questions remain about reciprocity. There have been justifications for reciprocity and there are different ways in which it can be used. As Professor Curzon Price stated in a recent Institute of Economic Affairs pamphlet, reciprocity of opportunity is preferable. However, I believe ultimately that even this is bound to be used in a protectionist manner. I endorse my hon. Friend the Economic Secretary's comments about the danger of reciprocity being used as a tool on the GATT and Uruguay rounds. It is almost inevitable that it will end up enforcing the views of the outside world that we are attempting to erect a fence around Europe and create a fortress Europe.

However, in the draft documents before us, the reciprocity provisions are a good deal weaker than those put forward some five months ago by Commissioner de Clercq who was talking about a fierce form of protectionism that now appears to have been dropped. The House must recognise that London would suffer disproportionately if virtually any reciprocity arrangements remained in the final directive.

We will endorse the Minister's statement that he will put a very strong case for the removal of such provisions. If there is a difficulty obtaining that, the only solution that could be acceptable to Britain is for London to be able to accept any bank's subsidiary from a non-EEC country and for the Commission to withold a licence pending its own clearance procedure to prevent that bank then trading through a further branch or subsidiary in any other European country.

I urge my hon. Friend the Economic Secretary to consider that closely. Bearing in mind majority voting in the EC, it is sometimes useful to be armed with a positive idea that enshrines a principle but nevertheless protects our national interests. There are occasions when the Government-- at least from what they reveal publicly--do not note that point. If one absolutely rejects something that will eventually be decided by majority voting, one may not be negotiating in the right frame of mind to win colleagues to one's point of view.

Mr. Dykes : What policy has my hon. Friend in mind?

Mr. Taylor : The policy of least resistance. I have advanced a view on reciprocity, but if my hon. Friend is talking of other policies, we may need to have further discussion on the witholding tax idea currently being proposed by the Commission, which may cause less damage to the City than has been implied.

We must be careful to ensure that the timing of the investment services directive is co-ordinated with the banking directives. They are being discussed at different times but they must be enacted at the same time because severe damage could be done to banking institutions that

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have securities business vis-a-vis those that are pure securities houses. The fair trade aspect of this must be carefully considered. I understand that the Commission has it in mind, but I urge my hon. Friend the Economic Secretary to keep his eye on it.

The banking directive and other related documents are much needed as it has been agreed within the Community progressively to abolish exchange controls. There will, therefore, be flows of capital between member countries. The fact that the Commission, instead of erecting new bureaucracy to deal with it, has adopted the minimum harmonisation, adopting the home country and mutual recognition principles, bodes well for the way that it will approach other matters resulting from exchange control deregulation.

11.2 pm

Mr. Nigel Spearing (Newham, South) : As the House knows, the Select Committee on European Legislation, which is commonly known as the Scrutiny Committee, has been considering various documents relating to this subject over the past year. My initial remarks are related to the quality of scrutiny that we are able to give the documents and the way in which we can help the House in this most important debate.

I say "most important" because I fancy that in three or four years' time somebody trying to discover why certain things are happening will refer to this debate and read it with some concern. I recall that in 1974 I attended a debate even more thinly attended than this, when the House unknowingly amended the treaty of Rome. It was not on the Order Paper ; it was not mentioned on the statutory instruments that we were considering. It was buried in 700 pages of one of the treaties that we were designating a Community treaty. I hope that the results of this debate will not be so drastic, but nevertheless we do not know.

The Scrutiny Committee has issued no fewer than 10 reports since November 1986 on the documents that we are considering. In addition to the reports, with which the House has been efficiently furnished by the Deliverer of the Vote, we have five memoranda from the Treasury--not to mention the four texts, adding up to 100 pages of future statute.

I hope to take the hon. Member for Harrow, East (Mr. Dykes) with me when I say that the Scrutiny Committee does not have the power to consolidate the 10 reports that we have made on the documents. We can only report on each document, amendment and issue as it comes up. The House has not given us the power to consolidate. Even if we had it, I could not promise that we would be able to consolidate reports, although it is likely that we would, because most of the basic work would have been done on the documents as they came into our possession. Had we had these powers, we could have provided the House with a much better guide.

At least two years ago the Committee reported that it would like an adjustment to its terms of reference to enable it to fulfil the sort of tasks that I have mentioned--

Mr. Dykes : The hon. Gentleman is well known for his fair approach to these matters as Chairman of the Scrutiny Committee, despite other views that he may hold about the EEC, and he is held in tremendous respect by hon. Members on all sides of the House for the immense amount of work that he does.

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Is the hon. Gentleman implying that it would be useful if Government motions on these subjects referred to the contents of the report that applied to the debate? Of course, the Committee only recommends a subject for debate ; it does not go into its merits. Should Government motions refer to the subsequent report on the implications of the matters under discussion?

Mr. Spearing : I am grateful to the hon. Gentleman for his comments. The Government can table whatever motions they like, and hon. Members can table amendments to them. Sometimes references to procedure or to the Committee's reports can be included in motions and amendments. That would not be out of order, but it would depend on the circumstances and not on a change in the terms of reference. It can already be done--yet we cannot help the House by providing it with a consolidated report on these technical matters.

I speak here not as Chairman of the Scrutiny Committee but as the hon. Member for Newham, South. I do not claim to be an expert in banking. I contribute to pension funds, and like many people I have a bank account. Occasionally, we borrow money. We are told that one of the curses of our day is the amount of indebtedness into which people have fallen. This debate has to do with credit institutions in general. Sometimes they are politely called banks, sometimes credit houses, sometimes money lenders. Hon. Members will know from listening in their surgeries of the problems associated with the lack of credit controls, now and in the past.

Mr. Wells : I want to take up the hon. Gentleman's point about our being able to amend the Government motion. The motion is

"That this House takes note of European Community documents", and so on. We cannot amend a take note motion or direct the Minister on how he should vote when he discusses this matter in the Council.

Mr. Spearing : I would not make a procedural ruling. That would be up to you, Mr. Deputy Speaker. I can tell the hon. Gentleman only of my experience. Ten years ago I literally sat where he is sitting. The hon. Member for Harrow, East will confirm that I and my hon. Friends frequently tabled amendments to our Government's motions on this sort of subject. On one occasion we sought to delete the words "take note" and insert "disapprove" and to add some words. Whether such amendments are selected is a matter for the Chair, but between 1974 and 1979 such amendments were frequently selected, debated and voted on, and, on occasions, Her Majesty's Government accepted them. Therefore, I see no reason why amendments should not be tabled and, if proper, selected, and, if necessary, moved and voted on. Unless the House does that on EEC matters and is shown to be alive to its opportunities, the House is not using its scrutiny opportunities properly. A debate on the amendment, even if it is withdrawn, can sometimes pinpoint a weakness or particular aspect of the matter in hand which is for the illumination of all.

So far, much of the debate has been about reciprocity, which I shall come to, but let me continue with a not very controversial comment about credit, which I was about to make when the hon. Member for Hertford and Stortford

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