House of Commons Hansard Debates for 15 Jul 1991

Mr. Campbell-Savours : It is not a point of order.

Madam Deputy Speaker : Well, if it is a point of order to me, I must hear it.

Mr. Sumberg : On a point of order, Madam Deputy Speaker, is it in order for the hon. Member for Workington (Mr. Campbell-Savours) to make comments about my conduct in this matter and then to refuse to give way? Is that not a disgraceful way to behave?

Madam Deputy Speaker : Order. It is for the hon. Member who has the Floor to decide whether to give way. I will do my best to ensure that the hon. Member for Bury, South (Mr. Sumberg) is called later.

Mr. Campbell-Savours : I want now to consider why local authorities invested in the way that they did. First, they were given assurances that the bank was being restructured. Secondly, they were given assurances that a major cash injection into the bank had taken place. Thirdly, the terms offered by the bank were special not only with respect to the premium interest rate on deposit accounts, but they provided an arrangement under which local authorities could put their money into the bank overnight and draw it out in the morning. A call arrangement existed at that bank which, I am told, is not generally available in all the institutions. The fourth

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reason was that BCCI was on the banking list that the local authorities regarded as approving investment. Fifthly, the local authorities justify their actions on the basis of the regulations to which I referred.

I want to ask Ministers about the role of the brokers. If we cannot have an answer today, I should like to think that we can have an answer within the next couple of weeks. Were the brokers paid inflated commissions? Do Ministers know the answer to the question? Have they set out to establish the truth? If the brokers were paid inflated commissions, do Ministers believe that the size of those inflated commissions should have been revealed to the local authorities that were placing such large sums on deposit? What is the role of the Sterling Brokers Association which was drawn in over the Chancery affair? To what extent are the recommendations or statements that it makes to be taken seriously by local authorities? Will the Bank of England carry out its own inquiry into the actions of the money brokers involved in the affair?

I understand that BCCI purchased insurance from a Pakistani insurance company based in Karachi called Adamjee Insurance. To some extent, that insurance should cover losses. I ask the Minister whether it is effective. We are told that the policies that were taken out with Adamjee were reinsured on the London market through a subsidiary of Commercial Union-- British and European--and were also reinsured in Italy through the Company Generali. May we also be told what were the links between BCCI and the life assurance London-based holding company CCL? I understand that CCL had money on deposit with the bank. It is a life assurance company. Will the collapse of BCCI affect the liquidity of CCL? Policy holders would like to know the answer to that question.

May we also be told about the position of Westminster city council? The treasurer there has drawn a distinction between lending and placing money on deposit. I am unable to understand the distinction. May we also be told about the status of the Bank of England in the affair? Mr. Ian Brindle of Price Waterhouse has said that the Bank of England was repeatedly informed of irregularities. There must be a stage in the unwinding of the whole affair at which the substance of the reports--I understand that there were 10--from Price Waterhouse to the Bank of England is made public and certainly at which it is made available to the Government so that we can hold Ministers accountable at the Dispatch Box on those matters.

Did the Bank of England ask Ernst and Whinney why it gave up its £2 million lucrative BCCI auditing contract in 1988? That is an important question. Had Ernst and Whinney found evidence of fraud which it felt that it did not want to reveal by qualifying the accounts? Perhaps it gave up the auditing contract to place on its successor, Price Waterhouse, the responsibility for qualifying. Did Ernst and Whinney tell Price Waterhouse why it gave up the contract? Is it true that Sheikh Zayed Bin Sultan al- Nahayan sent £375 million to the bank only two weeks ago? Is it true that Ghanem Al Mazrui, the secretary general of the Abu Dhabi investors' authority, offered to invest £2.3 billion in the bank immediately prior to its collapse? If that is true, is it fair to say that the bank was trading insolvent? May we have an assurance from the Dispatch Box that none of the 10 Price Waterhouse reports warranted earlier intervention? I am sure that Ministers have had access to the reports--at least, I hope that they have--so may we

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have that assurance today? A BCCI director has said that Price Waterhouse was informed as early as 1988 of fraud in the bank and he says that his evidence for that is that Price Waterhouse was asking questions about fraud at that time.

May we have assurances about deeds held in the bank as security against mortgages? May we have an assurance that those who have mortgaged their properties will receive back their deeds? Furthermore, should mortgagees be paying money to the bank now? They need to know the answer.

Another question has been raised with me repeatedly, although I have no evidence in connection with it. Did the Foreign Office press for a delay in the appointment of Price Waterhouse? It may have pressed for a delay in the appointment of Price Waterhouse to carry out the inquiry into fraud until after the Gulf war had ended. I ask the Minister whether that is true ; if it is not, I am sure that he can give the House assurances.

What is the position of local authorities affected by what has happened? They have few options open to them, although I will outline some. Some local authorities will have to sell assets to cover their losses. Some local authorities will use reserves, if they are available, to overcome the immediate funding crises. In some local authorities, a higher poll tax may be levied. I hope that that is not the case because it would have a severe effect on much of our community. The Government may decide to increase the borrowing limits of local authorities to help them to supplement their losses. Who should pay the servicing costs of those borrowings? I have no answer to that and I remain strictly neutral. It will have to be either the Government or the local authorities. In my local authority, if my local poll tax payers have to pay off the £1 million debt which has been incurred as a result of what I can only regard as negligence on behalf of the Government and of the Bank of England authorities, they will pay £3 a year extra in poll tax for the next 10 years, if the loan extends over a 10-year period.

Mr. Nelson : The hon. Member for Workington (Mr. Campbell-Savours) does a service to the House in raising these matters and in tabling new clause 37. I oppose the new clause for reasons that I shall adduce, but I believe that his questions and the respect that he has paid to the integrity and security of the banking system in our economy are well made, responsible and worthy of the House. I shall confine my remarks almost exclusively to new clause 37. My hon. Friend the Member for Carshalton and Wallington (Mr. Forman) dealt extremely well with new clause 3, although I pay respect to the hon. Member for Islington, South and Finsbury (Mr. Smith) who raised a number of important points about small businesses.

I do not share the view of the hon. Member for Workington that his new clause is timely or worth while. Far from showing that the system of regulating our banks has been brought into question, this latest episode, tragic, hurtful and loss-making as it is for many individuals, has shown that that system is actually working and that the Banking Act 1987, which was introduced to redress the inadequacies in the supervision of our banking system, is also working, because it is bringing to book and closing down banking businesses that are acting fraudulently.

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5.30 pm

The question that the House is addressing--not, I hope, in an unduly party political fashion--is when one should blow the whistle. Does one blow the whistle too soon and risk a run on the banks and bringing into question confidence in our entire banking system, or does one blow the whistle too late and jeopardise the deposits and interests of many people which otherwise might have been saved? If the whistle had been blown a year ago, many individuals would have lost out then, just as many have lost out now. On the other hand, many individuals have been saved because it happened a year later.

It is important for the House, which talks incessantly about accountability, to be sure that when we call people to account we can do so with justification. How can we ask the Bank of England to close down an authorised bank, a private enterprise or a company unless there are sound reasons for taking such action so that we can then hold it accountable? If the Bank of England were to take such action on the basis of suspicion, and if either the House or one of its Select Committees brought that into question how could we pillory the Bank for taking such action peremptorily?

In my judgment, and in so far as I observe these matters, it appears that the Governor of the Bank of England and the department of banking supervision at the Bank of England have behaved in an exemplary and wholly proper fashion in this matter, as have the Government of the day

Mr. Greville Janner (Leicester, West) : Does the hon. Gentleman consider that, as part of behaving in an exemplary fashion, the Governor of the Bank of England owed any--and, if so, what--duty to pass on his suspicions to the Government of the day, and did the Government of the day have any--and, if so, what--duty to investigate those suspicions?

Mr. Nelson : The Banking Act 1987 deals clearly with those matters. The important matter to which the hon. and learned Gentleman has drawn attention was the subject of an extensive debate when that Bill was in Standing Committee and subsequently when it was considered on Report--

Mr. Janner : What is the answer to the question?

Mr. Nelson : The answer is that the primary responsibility for banking supervision rests with the Governor and with the department of banking supervision at the Bank of England. Undoubtedly, some informal discussion takes place--it is not required by statute--with the Treasury and with Ministers. To stiffen that process and to ensure that decisions would not be taken in a laggardly or neglectful fashion, this House and that Act established a board of banking supervision in the Bank of England, which is quite different from the department of banking supervision at the Bank. I am sorry that this is so esoteric, but it is an important point. To try to ensure greater accountability and greater supervision in our banking system, the House established-- [Interruption.] I suggest that this is an answer to the hon. Gentleman's question--a board of banking supervision in the Bank of England to stand alongside the Governor, of which he would be a member, to which he would report, and the composition of which we discussed at length, as I am sure my hon. Friends will agree.

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The Bank of Credit and Commerce International has a considerable history beyond the last year of suspicion. Many hon. Members will know that when it was first established in this country its wholesale expansion within a matter of months on some prime sites throughout the capital gave rise to suspicions about the way in which it was financed. When assurances were forthcoming that major depositors from the Gulf states were supporting it, the matter was laid to rest for some time. However, some doubts remained about the bank's ethics, objectives and deposit base.

Until 1987, this country differentiated between major authorised banks that could offer the whole range of banking services and the secondary or fringe banks that were licensed deposit-takers. It was only in 1987 that one category of bank was established--authorised banks. One major problem was that when authorising banking status we could not differentiate between domestic banks and foreign banks with branches in this country. That involved some risk, but there had previously been a risk with the licensed banking system.

The position of BCCI, however, was special, if not unique. To some extent and to some people, it was rather objectionable, because it tried to establish a banking basis that was different from all others. It sought to move beyond the financial facts of life and to talk about "moral profits" and "spiritual growth". It persuaded employees to work overtime for no remuneration at the weekend so that it could pay their moneys elsewhere. It was a crusading bank--a new phenomenon--which was attached to an ethnic background in this country and had an understandable appeal. I do not decry the sentiments behind it, although, in retrospect, we see that it was a scam like many others. In reality, it appears that those "moral profits" were being siphoned off into Grand Cayman and into a so-called charitable foundation that itself had an interest in BCCI. This and other irregularities subsequently brought about the downfall of that bank. The disappearance of significant funds which undermined the security of depositors and customers alike.

Therefore, although one rightly has enormous sympathy with those who, as employees, as well as depositors put their trust in that company, one must conclude that there can be no departure from the financial facts of life. Cardinal rules are that one should look at the spread of assets and liabilities of a banking organisation. One has to trust to the authorisation of the regulatory system and one should ensure that, when it comes to investing money, one does not put all one's eggs in one basket.

The United Arab Emirates and Sheikh Zayed al-Nahayan have behaved completely honourably. They may have been ripped off by Mr. Abedi. Time and time again, the sheikh has been asked to pay up to that bank. Let it not be forgotten that he donated generously and willingly to our country when we came to the aid of the Gulf militarily. He, personally, has behaved generously and honourably. I believe that, up to a certain level, he may yet be prepared to act again in that way towards the bank's non-sterling depositors. However, why should we limit our own liability and yet call upon him to idemnify without limit all others who have lost in this case? He may do more, but he has behaved entirely properly and we should be grateful for the role that he has played in stabilising the international banking system.

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The hon. Member for Islington, South and Finsbury asked why there should be a differentiation between the depositor protection scheme that operates for the banking system and the investor protection scheme that operates in the financial services industry. There is a difference between liquid money and any equity investment. It is fair enough for the House to decide--as it did--that those who invest in banks shall be indemnified up to a certain level to try to protect the small depositors who may not have the benefit of reading the Financial Times every day and who cannot be expected to know which bank might be dodgy.

In 1987 we set that limit at £20,000 and for the time being decided that 75 per cent. of that should be the limit of the amount against which any individual depositor could be indemnified. So the sum was £15,000. That was not unreasonable at the time and it is not unreasonable now. It could perhaps be increased to £20,000, but it should not be increased to significantly more than that.

However, in the case of equity investments, the financial services industry and the vast range of organisations that operate as authorised businesses under a variety of recognised professional bodies and self-regulating organisations, people are probably entitled to greater recompense and security. But let us never forget one important factor. In both cases, it is not the taxpayer who indemnifies or guarantees the investor. It is not us or those whom we represent who pay depositors or loss makers in the banking or investment sectors. It is the rest of the banking industry which, under the depositors' protection scheme, have to pay up or, under the Financial Services Act 1986, as authorised investment businesses have to pay into compensation funds.

If the House took a decision significantly to increase the amount of compensation made available to depositors, the cost would fall on the banks and their customers rather than our constituents. Therefore, it is a decision about which we should be careful--

Mr. Paul Boateng (Brent, South) : People would pay higher bank charges.

Mr. Nelson : Well, it would cost the rest of the industry money. Let us take the banking sector as an example. If we raised the compensation under the scheme from £15,000 to, say, £50,000 or £100, 000, on whom would the cost fall? It would fall not on the taxpayer or the Government but on the banks and their customers. Let us consider for a moment the consequences of that, not only the benefits for unlucky depositors. Let us consider the principle of the matter. Surely the reputable, the conservative, the trusty and the responsible banks and financial service companies would end up indemnifying the least responsible, riskiest and fraudulent businesses in the same industry. The banks may well be prepared to cover that to a certain extent. So they should, because things can go wrong and there are bad apples in every tray. However, there must be a limit to the extent to which we can ask any bank or investment business to provide massive subvention to cover the losses of people who seek to take business away from them. It is true that banking is a market, that it is competitive and that there will be good as well as bad. However, it is impossible to create a failsafe system in which no one loses.

If bad decisions are made and if fraud takes place, someone must carry the loss. This House and the relevant industries can go too far in indeminifying people. At the

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end of the day, we as well as the industries must send out the firm message, "Depositors beware. Investors beware. Nothing that this House can do can indemnify you against the possibility of loss. We will do our best to authorise institutions and ensure that fit and proper persons run them, but you must balance and cover your risks, and make your own judgment about with whom you invest."

I have sought strenuously today and on previous occasions to defend, indeed strongly to back, what the Governor of the Bank of England and the Government have done in this matter. Their action was absolutely responsible and right. As far as I can assess, their timing was wholly right.

However, I wish to make one point that I have made previously. It could be the answer to this difficulty. I urge the Government to listen to what I say, because I am sure that it will attract support from hon. Members on both sides of the House. There is a way of improving significantly the protection of depositors, investors and shareholders in businesses. It is called audit committees. Sir Brandon Rhys Williams, a former Member of the House, campaigned for years for the boards of companies to have a sufficient number of independent non-executives who would be forced by statute to form a cabal in order to ask difficult questions of the board and, in particular, sometimes of an autocratic chairman of a company. They could ask questions about extensive loans, faulty security for loans and the spread of risks. At the annual meeting of shareholders they could stand up and say what they had or had not asked during the year and what they received or did not receive by way of a reply. 5.45 pm

I challenge anyone to suggest that in the cases of Blue Arrow, Johnson Matthey, BCCI or virtually any other collapse in the past 10 years a stronger, more independent, forthright audit committee of non-executive directors could not have saved many ordinary people from losing out.

Mr. Beaumont-Dark : Although my hon. Friend's idea sounds good, is not there a flaw in it? BCCI had worldwide ramifications and hundreds of thousands of customers. Would not his idea end up with non-executive directors who were almost full-time directors and a large staff to serve them? My hon. Friend's idea sounds good, but I do not believe that it would work in practice.

Mr. Nelson : I understand my hon. Friend's intervention and the motives behind it. International companies have a better reputation than us for appointing non-executive directors and audit committees. They do not seem to have the apocalyptic scandals and collapses that we have from time to time. Where such committees exist in Britain and elsewhere they seem to have an extremely good record of looking after shareholders' funds, as well as the security of depositors and employers.

It is extraordinary to hear from the Opposition Benches calls which seem to be for the bailing out of an offshore banking organisation and for people to be defended from losses which they should be expected to incur. Often they are big enough to incur such losses and sufficiently wise to make their own judgments.

My right hon. Friend the Prime Minister was absolutely right to come to the House last week and say that local

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authorities that, for a marginal increase in the interest rate which they could obtain on deposits, decided to hold 100 per cent. of the value of the capital at risk could not be indemnified at public expense. It is not the job of the House or the Government to underwrite every local authority treasurer who runs amok. One can only question the motives of treasurers who put enormous sums of money--millions of pounds of local communities' money--into banks which were previously licensed deposit takers and were long regarded as dubious. It is extraordinary that such decisions were made with the public's money.

The Prime Minister and the Government were absolutely right to say that there was a limit to our competence and the extent to which the taxpayer can bail banks or local authorities out. That is why I hope that the Government will take a reluctant and resistant attitude to the new clause.

Mr. Robert Sheldon (Ashton-under-Lyne) : The hon. Member for Chichester (Mr. Nelson) should be careful that he does not go too far. Contrary to the views of the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark), the smaller banks have a role. If we end up with everyone putting their money into the top four banks, it would play the devil with the City of London.

Like the hon. Member for Chichester, I intend to speak mainly to new clause 37, for which we are grateful to my hon. Friend the Member for Workington (Mr. Campbell-Savours). Not only is it a good new clause but he made a fine speech. However, first, I wish to comment briefly on new clause 35.

The charges that banks impose on their customers are an outrage. The first a customer knows that he is being charged anything is when the statement shows a deduction. That is a scandal. If I buy anything or incur any cost, I expect, first, an invoice, and, secondly, the details of what I have purchased, giving me the cost of each item. Then I pay after a certain time. All right, the banks are paid a bit quicker, but they give no detailed information of any kind. It is an outrage that we have got used to. I have had discussions with the chairmen of the main banks who all accept that and say, "Yes, eventually we must move in that direction." I say, "Not in that direction ; we must give an itemised list of what the charges are for and some justification for them."

The Banking Act 1979 was the first legislation to lay responsibility on the Bank of England for granting a licence to a bank to take money from depositors. Section 3(3)(b) states : "the Bank shall not grant a full licence to an institution unless it is satisfied that the criteria in Part II of that Schedule are fulfilled with respect to the institution."

The said schedule 2 states that a licence shall be granted if "the institution enjoys, and has for a reasonable period of time enjoyed, a high reputation and standing in the financial community." Nobody could ever have said that the BCCI ever qualified in that respect. Right from the start-- this is not something new ; we all knew it at the time--it was astonishing that the Bank of England accepted that the BCCI was a responsible institution and gave it power to expand all over London. It was a scandal.

That having been done, it is clear from the debate of 23 November that it was understood that the Bank of England would supervise the activities of such banks. When the hon. Member for East Lindsey (Sir P. Tapsell) asked about that, he was assured that everything would be

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all right because the Bank of England would be supervising the banks. That allayed some of our doubts. We knew that the BCCI had been given these powers, but we were reassured by the supervisory role of the Bank of England. Moreover, as the BCCI was such a fraudulent concern--it was fraudulent in so many ways--we assumed that the Bank of England would watch carefully over all its activities. The Bank of England failed to carry out that elementary, continuing supervision. That was the burden on the Bank of England which it should have carried.

It is almost insulting to talk about all the treasurers of local councils and all the business men who were taken in when it was the Bank of England that was taken in. It is insulting to talk about those treasurers, including the treasurer of Westminster city council who is so close to all these events, being so naive, when the one body that was failing in its duty and was being naive was the Bank of England. We should understand that important point.

The Bank of England knew of the bank's actions on the other side of the Atlantic, yet it said nothing to anybody about them. The treasurers of our great local authorities and the business men of some standing assumed that such actions happened elsewhere. If the Bank of England thought that the actions would have these consequences, it should have done something there and then. It had a long period of notice that it was not dealing with ordinary bankers as we have traditionally come to expect them to be ; it was dealing with people who were trying to make money for themselves and, at the very least, to bend the rules.

We cannot leave the matter as it stands. We know that the Bank of England had a greater responsibility than it now admits. We see that it is trying to dodge the responsibility that we always assumed and that we were told by Ministers at the time that it had. If the Bank of England is trying to dodge its responsibilities, we need new provisions in a new banking Act.

Sir Ian Stewart : I declare an interest as for most of my working life I have been either a manager or a director of a bank, except when I was a member of the Government. My reasons for wanting to speak in this debate are not so much because of that connection as because in 1978-79 I was the Opposition spokesman on the then Banking Bill and in the last Parliament I was responsible for introducing the Banking Act 1987, which has been much in discussion this afternoon. I do not want to spend more than a moment on one or two of the issues raised about the relationship between banks and their customers, but I wish to take this opportunity to support the general purpose behind new clause 35. It suggests that banks should state on statements of account to their customers the rates of interest being charged and provide some explanation of bank charges. It is not necessarily time for that to be embodied in statute, but I hope that when my right hon. Friend the Chancellor of the Exchequer meets representatives of the banks shortly he will make it clear that there is a general feeling in the House that banks' customers have grounds for suspicion about how they are being treated by banks merely because such information is not readily available.

I shall give the House one practical example of that. Recently, a person came to me suspecting that the interest charges on an account were excessive. After I made some calculations, it looked as though the rate of interest was several per cent. above any reasonable rate that should

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have been charged on that account. I contacted the bank and after a considerable period it was established that the rate of interest had been much too high. It then took a great deal of time to work back over a long period to find out how much the bank had overcharged and to correct it. Had there been a simple statement on any of the statements of account in the interim showing what rate of interest was being charged, it would not have taken so long to resolve the matter. It is in the interests of the banks to avoid the misunderstanding and mistrust that can arise and to be more open with their customers about their charges.

My second point about the relationship between banks and their customers concerns the nature of the list of authorised banks. The very fact that some people can misunderstand the list to be some sort of guarantee of the automatic integrity of the banks listed suggests that some sort of health warning needs to be applied to it. I shall not suggest the form of words. In bare terms the list states that it is a list of the institutions authorised under the Banking Act. It would not come amiss if additional words made it clear that the statement did not go further than the bare words represented. There is no harm in giving people more information, particularly if a shortage of that information can mislead.

My third point about the relationship concerns the vexed question of deposit protection. My hon. Friend the Member for Chichester (Mr. Nelson) has just made a speech about that and I agreed with much of what he said. I must confess that during the passage of the Banking Act I was responsible for trying to prevent the deposit protection arrangement being set at too high a figure, because I believed that if we were not careful a version of Gresham's law would apply to banking. Hon. Members will recall that Gresham's law states that bad money drives out good.

I fear that if deposit protection is too extensive, bad deposits will drive out good. The reason for that is simple and has been dramatically illustrated by events of the past few years in America where deposits of up to $100,000 have been protected up to 100 per cent. Therefore there was no greater risk to the depositor from placing his money with a badly run organisation that paid higher interest rates than there was from placing his money with a well-run organisation that paid lower interest rates. Therefore, in that sense, bad deposits could drive out good.

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The end result of the protection offered in the United States was that the deposit-taking institutions, which are the equivalent of our building societies--the savings and loans institutions--were faced with comprehensive bankruptcy. In order to pay higher and higher rates of interest those institutions had to take on riskier and riskier business until the whole financial sector collapsed. It was beyond that sector to provide any deposit protection and that obligation will fall on the United States' taxpayers. They will have to finance that problem for many years to come.

I caution those who say, for perfectly understandable reasons, that more and more deposit protection should be provided. If one enables depositors to place their money without disadvantage with an institution that is less responsible, one will end up taking serious risks with the banking system as a whole.

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The BCCI case has raised a number of serious issues that have been aired this afternoon by a number of hon. Members. The big question that any supervisory authority must face is when it should act. When doubts have become apparent about an institution, at what point should the regulatory body move in and take disciplinary action? That will always be a difficult decision, but we must make sure that the necessary framework is available for the regulators to take such action when they deem it right.

From having read the published reports on the BCCI case, I believe that the Bank of England is to be greatly commended for mobilising international agreement at a difficult time on the contentious subject of the cessation of business in BCCI. However, one must ask a more difficult question--was it open to the regulatory authority to do something about the problem in the United Kingdom? It is especially timely to ask that question because we are about to be bound by the second European banking directive, which automatically extends mutual authorisation from one member state in the Community to all the others. I do not want to pick out Luxembourg as being particularly irresponsible, but the BCCI case has demonstrated that the regulatory authority in that country was not in a position to ensure that the worldwide business of a bank as complicated and as extensive as BCCI could be comprehensively and effectively regulated from one centre--let alone the smallest centre in the EC.

Once that second banking directive is implemented we must ask about its implications for branches of banks in countries other than those where those banks are authorised. We do not have long to think about that because the directive is coming in next year. The regulators and my right hon. and hon. Friends at the Treasury will have to think carefully about whether some adjustment must be made to our statute or whether we should propose some changes within the Community to ensure that we do not expose ourselves unwittingly to the risk of further problems with international banks where there is an obligation in this country or any other country to accept the authorisation granted elsewhere on grounds with which we may not be thoroughly satisfied.

I had a most unfortunate experience a few years ago because, in 1985, I was the Treasury Minister who had to look at the affairs of Barlow Clowes. At that time I wrote to the Department of Trade and Industry to say that, in my view, if the answers coming from that body were not entirely satisfactory it would be better to face the unpleasantness of a cessation of business than to risk collapse at any time. Those words were not drafted for me by any official in the Treasury and I wrote them because I felt so strongly. I felt that if one had a badly run company and if one knew that there were serious deficiencies in the way in which its business was conducted, it was likely that fraud would soon take place--if it had not yet taken place--because of the great opportunities to exploit inadequate accounts and a badly-managed business. In the financial sector that temptation is all the greater. Unfortunately, it seemed to me absolutely clear that it was right to close Barlow Clowes at that time. However, there was a natural reluctance on the part of the regulators and supervisors to allow things to be corrected. However, the danger is that by the time one gets sufficiently clear evidence that something is seriously wrong, it is too late to protect the money of investors or depositors. That serious problem has been highlighted again by BCCI.

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By the time that one can prove anything, the time to act has probably gone, and yet how can one identify what intermediate action one should take? I commend the hon. Member for Workington (Mr. Campbell-Savours) for his suggestions in new clause 37. I do not necessarily agree with them in the technical sense, as I do not know whether they would achieve the right result, but they certainly point to the crucial issue. How can one take intermediate action when one thinks things may be going wrong, when one does not have absolute proof that would stand up in a court of law?

It was because of my concern about such a problem that I pressed for the inclusion--I use those words carefully--in the Banking Act 1987 of a special provision, now section 12, for restricted authorisation. Under that section the Bank of England could impose conditions on the authorisation of a body about which it was unhappy without going to the length of requiring it to close its doors. At that time there was some resistance to the inclusion of that provision, but I had in mind exactly the sort of circumstances which have now arisen. In other words, a good deal of negative information would have been forthcoming that raised suspicion in the minds of those responsible for the regulatory system. Such information could be made available about any bank, but the fact that, in this case, it related to BCCI made things more difficult because that bank was not controlled directly in this country.

If the regulators are not satisfied with the answers that they are given in a particular country, they should be able to require that bank to incorporate in their own country so that there is an incorporated body that then comes under the direct control of the regulatory authority in the country concerned. If we have to "borrow" the authorisation made in other countries for the sake of our own control, we are never likely to be able to get all the information we need quickly enough about banks which have widespread business throughout the world, and which can move funds rapidly from one centre to another.

If a bank has dedicated capital in this country, an identifiable board of directors and management, and if its affairs can be supervised as intensively as those of any domestic bank, we could be more confident that the international banking system, as applied in this country, would not pose risks for depositors and investors of the kind that we have unfortunately witnessed in the BCCI case. I believe that there are urgent questions to ask about the way in which anticipatory steps can be taken before we reach the point at which a deposit-taking institution is likely to go bust or to close its doors. I hope that the inclusion of section 12 in the Banking Act 1987 offers a route that could be exploited in such cases. In the fullness of time, I shall be interested to learn whether it was invoked in that case and, if not, why not. Perhaps it was my fault because I did not ensure that the section was drawn up in such a way that it could be implemented in such a case. If so, we should revise the statute. The thinking behind the section covered just the circumstances that have arisen in the case of BCCI, where the supervisors were left with the difficult balance of judgment to which my hon. Friend the Member for Chichester referred. We were not in a position to know all the relevant information because of the world-wide nature of the business concerned.

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Mr. Dick Douglas (Dunfermline, West) : This has been an interesting debate and I am sure that the whole House is indebted to the hon. Member for Workington (Mr. Campbell-Savours) for tabling new clause 37.

Two former Treasury Ministers have spoken--one on each side of the House. I wonder what advice they would have given to local authorities that said that they were about to invest in the Bank of Credit and Commerce International. It is all very well to be careful and guided on the basis of 20 : 20 hindsight, but a treasurer of a local authority, especially a small local authority--I see that the hon. Member for Western Isles (Mr. Macdonald) is in his place--would not necessarily ask two former Treasury Ministers for advice, but would ask the Bank of England. The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) was perfectly right to say--I hope that I am paraphrasing him correctly--that in this instance the organisation within the British constitution with a duty of care was the Bank of England. Local authority treasurers would have asked the Bank of England what sort of organisation BCCI was, given that it had been authorised to take deposits. The Bank of England has issued a long list-- the hon. Member for Workington has trailed that list, of which we all have copies--and BCCI is on it.

Local authority members asking whether they should place such a deposit would be confronted with a treasurer who would consider the list as an indication from the Government's banker of organisations that have been examined and with which deposits can be placed. Although one should not put all one's eggs in one basket, and it is not for me to defend the actions of local authorities, the local authorities' public representatives, who are the custodians of local probity--local councillors--were placed in an extremely difficult position.

6.15 pm

Although new clauses 3, 35 and 37 have been linked on the amendment paper, they are not necessarily linked in reality, except in one sense. The Government have caused much of the difficulty. The Prime Minister speaks of a "duty of care" but the real thrust of the difficulties faced by the financial sector and small businesses relates to runaway inflation. The former Prime Minister, the right hon. Member for Finchley (Mrs. Thatcher), used to say that inflation was a crime and that it was cheating. That is absolutely true. Small businesses are placed in difficulties by other institutions and organisations because of the high rate of inflation and the fact that money falls in value, especially when inflation is high. That is why small businesses often encounter difficulties when they are waiting for payment from those to whom they supply goods and services. Most large companies find that it is to their advantage to delay payment because the value of money 100 or 200 days later is less than it is at the present time. The higher the rate of inflation, the less that value will be. The Government have a responsibility in terms of duty of care.

I represent a Scottish constituency and the Scottish National party and I want to know what the Government's intentions are in relation to their duty of care. Will they rest on the Prime Minister's argument and say that local authorities should know that if a premium is offered on a rate of interest, the risk is higher and that that should have been taken into consideration by the local

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authority treasurers and others? If so, that does not seem to be a safe case, because a health warning should have appeared on the list issued by the Bank of England.

I recall what auditors have done in some of the institutions with which I have been associated, particularly the Co-operative movement. Without wishing to blame Price Waterhouse for all the difficulties, auditors have dodged their responsibilities. Their responsibilities are not simply to protect the shareholders. They have a wider responsibility, and it is not good enough for Price Waterhouse and other companies simply to say that they were investigating the matter and told people about the results of their investigation. I should imagine that if a local authority treasurer looked at the auditors' docket on any of those institutions, he would find that they had used the common accepted phraseology "a true and fair view". Although I would not go as far as saying that we should have an internal audit within a bank or joint stock company, we should examine the role of auditors further.

Enormous difficulties are involved in monitoring financial institutions because of the international electronic transfer of money. What resources do the Treasury and the Bank of England have to get ahead of the game? My knowledge on this matter is limited to the public print, but there seems to have been an enormous swindle going on for many years. It was deeply hidden within the organisation on an international scale. It is extremely difficult to get ahead of that game unless the House, through the Treasury and the Bank of England, has resources such as international collaboration to keep ahead of the game.

I trust that the Treasury will not simply rest on the Prime Minister's words about a duty of care. Local authority councillors and treasurers will have relied on a view expressed through the Government's publications. Therefore, although I do not expect the Government wholly to indemnify local authorities, I hope that, in consultation with local authorities, they will look at the burden that will be placed on poll tax payers within the local authority concerned if the Government wash their hands of that affair.

Mr. Beaumont-Dark : I do not want to say too much about the Bank of England now as I have the honour to sit on the Treasury and Civil Service Select Committee and I am confident that next week we shall be making some inquiries of the Governor himself. It is easy, off the cuff, to say that it must be someone else's fault--that it must be the fault of the Bank of England. It may well be that the Bank of England will prove to have been somewhat at fault.

However, 20 years ago I had the pleasure of being the chairman of the finance committee of the city of Birmingham council. I followed that by being the chairman of West Midlands county council finance committee. All those years ago, we had rules and regulations. The sums that we had available then would amount to hundreds of millions of pounds today. We had rules about the sort of banks with which the money could be lent and the percentages of money that could be lent. If those rules were sensible then, surely they would be sensible today. To say that the county treasurers and finance directors depended, in all their innocence, on the wicked Governor on the hill in the Bank of England is nonsense because all those treasurers are members of the

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Chartered Institute of Public Finance and Accountancy, are all qualified public accountants, have all, I hope, been in other jobs before and all know about finance.

I am amazed that speakers in today's debate have used the word "authorised" by the Bank of England as though it were the same word as "guaranteed". It is not in any way. "Authorised" means that the Bank of England or anyone else gives a list ; "guaranteed" means that, whatever happens, someone will make a guarantee.

In this country and in America there is a list--the Standard and Poors-Bank rating system--which gives a number of banks. There are two organisations in this country that list banks and their credit worthiness. I am a director and adviser of Touch Remnant, which is only an investment trust, not a great local authority dealing with other people's money. It deals with shareholders' money. At the board meeting every month a list of banks and their credit rating is produced and we discuss whether a million pounds here or there should be lent to such banks.

Are hon. Members trying to tell me that a public official who is paid £60,000 or £70,000 a year should not show the same propriety with public money as other people use with shareholders' money? It is nonsense to talk as though there were some wicked plot. In the case of the Western Isles council, it is either criminal or folly, or both, that someone could lend £23 million--£750 per head of community charge payers' money --to such an irresponsible organisation.

Mr. David Shaw (Dover) : I take my hon. Friend's point and agree that a number of local authority treasurers may well have made mistakes. I agree that to lend about half the council's total financial resources, as the Western Isles council did, seems to show a high degree of negligence. However, has not my hon. Friend read reports that, apparently, the auditors did not qualify the accounts but insisted only on an amendment to the first note to BCCI accounts, which normally deals with accounting policies and would be the last place anyone would expect to have to pay serious attention to a question mark about the company's financial health? Does not that suggest that there may be something a little wrong, and some treasurers may have been innocently taken in ?

Mr. Beaumont-Dark : I rarely come across financial innocence, but I come across incompetence daily. Anyone in his right mind who heard what happened in Florida a few months ago, when Noriega drug money was talked about, who still thinks that a local authority should lend money in that way is incompetent in his job.

I was taught early, as an articled clerk, that one should never borrow long and lend short. That is precisely what some of the highly geared, fringe banks are doing, which is why they get into terrible trouble. Everybody should look not just at the bank balance sheet, but at the quality of the loan book--the rating system is involved when one checks the quality of the loan book.

I shall not say too much about BCCI because that has already been done and I agree with most of the comments. I shall deal with a suggestion that was mentioned last Monday. Many of us know that we cannot expect the ordinary bank depositor, particularly if there is a language problem, totally to understand the system. I am always frightened in foreign banks because I do not speak a

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foreign language. Many Asian investors and depositors have money in BCCI and under the bank deposit scheme they will get back 75 per cent., up to a maximum of £15,000, of it.

I hope that we can agree that the Government and the Bank of England could pay out money where deposits can be proved. That would help people in crucial difficulty and the money would then come back through the bank deposit scheme. The only loss involved would be the interest on the money-- a small sum when set against the amount of suffering that could be caused. Such a scheme might also provide a saving in unemployment benefit. We could help distressed depositors in the short term in such a way without actually bailing them out. We would not be breaking rules or setting precedents, but would save many people a tremendous amount of the tragic suffering which, to my certain knowledge as a Member of Parliament, exists.

Ms. Mowlam : I shall try to be brief and not repeat the comments of many hon. Members, particularly the long list of questions of my hon. Friend the Member for Workington (Mr. Campbell-Savours). We look forward to answers from the Economic Secretary to those questions. Much of today's debate has focused on the nature of systemic risk to the banking system. The Opposition have made it clear that they understand the arguments about systemic risk and getting sufficient information to take a case to the Serious Fraud Office with the legal backing and status to make it stick. We also understand the time needed for the Bank of England to put together a sufficient case. There is no disagreement about that.

However, the Opposition believe that fraud at BCCI was possibly ignored for far too long while the importance of avoiding systemic risk to the system was considered paramount. The Economic Secretary must explain that this evening. It would also be helpful if, when responding, he could clarify a number of issues raised in the press. There has been nowhere else to debate the matter during the past four or five days.

First, can the Price Waterhouse report of March 1990 be made public? It seems that the Wall Street Journal has more influence and the American press have better copies of that report than we do on this side of the Atlantic. Secondly, in last Monday's debate the Economic Secretary said that information came to light at the beginning of this year. He referred to a manager in the bank and used the pronoun "she".

The Economic Secretary to the Treasury (Mr. John Maples) : I saw the record, and it was a mistake. I do not think that I said "she". I certainly did not mean to imply any gender.

Ms. Mowlam : What information was it that that genderless person, or person of doubtful gender, provided in January of this year? The press seemed to suggest that the Price Waterhouse report of March 1990 was a pretty damning indictment of BCCI. If the Economic Secretary could give the House that sort of information tonight, we would then know whether the Bank of England acted with due diligence or was too tardy in its behaviour. As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said, it would be useful to hear about why Ernst and Whinney, now Ernst and Young, switched to Price Waterhouse in 1987-88. That debate between the two big accounting firms has been reported in the press.

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