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The bar protocol of 1983, the international banking settlement, gave the option for a college of regulators to be set up when a banking problem was pan-national. In relation to BCCI, that college was set up in 1987-88. If it was set up in response to the bar protocol of 1983, why did it take so long? If it was not, what was there about BCCI in 1987-88 that led to the setting up of the college of regulators? Such clarification would make a great difference to the debate.6.30 pm
It would be interesting to know about the keenness of local authorities to get to the bottom of some of the difficulties. As I said in an intervention, the Treasury had a meeting with the committee on local authority borrowing on 10 May this year at the Treasury chambers in Parliament street. The minutes of that meeting show that a representative of the Bank of England, Miss Jean Noble, "commented that the bank had a statutory duty to step in as soon as depositors' funds appeared to be at risk."
I am sure that the Minister will quibble over the word "appeared". The minutes continued :
"They acted on the behalf of depositors to minimise losses even though it might take time for depositors to get their funds back." There is therefore a clear commitment by the Treasury that the bank should step in as soon as depositors' fund are at risk. At that meeting local authorities voiced their concern. The Association of British Counties said :
"They worried about the risks for smaller banks' liquidities if local authorities lost confidence in this area of small banking as they switched deposits in larger banks."
We should not blame local authorities if, as a result of the speech by the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark), they shift their deposits to mainland banks and cause problems. Local authorities were aware of such problems and asked about them in May. One issue has not been debated since 5 July. Local authorities, small investors and small businesses had money in BCCI. It is odd to say the least that none of the big clearers had any open exchange trade with BCCI at the time of its closure at 3 pm on 5 July. Why was that? Normally there are open exchange trades of deposits and lending between clearers and secondary banks. There have been no reports of any of the clearers sustaining losses. We can either conclude that the clearers had spoken to the Bank of England some time ago and were well aware of BCCI's problems and were not exposed in the same way as local authorities, or--a more damning indictment, although I am sure that the Minister will clarify the matter--the clearers were tipped off and told to get out by 5 July because there would be a closure and local authorities would be left to stew. I am sure that the Minister will tell us whether some of the clearers got out 18 months ago. If they did, the message that prompted them to do so should have been passed to others in the financial system.
Some Conservative Members spoke about the role of brokers. Does the Treasury intend to look again at the grey code governing brokers and their actions? Is there a need to look at the regulations on brokers or to publish the rates that brokers are paid? It would be useful to know whether the Minister proposes even to look at such matters. A Conservative Member said that auditors should have a duty rather than a right to report fraud or
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potential fraud. I put that question last week to the Department of Trade and Industry and was told that the Department had no intention of examining the issue.As hon. Members have said, we are facing a serious banking crisis and some knock-on questions should be examined. Auditing and the question of duty versus right to report fraud is one of them. The other question relates to qualified reports by accountants on companies. The hon. Member for Dover (Mr. Shaw) nods. He raised that matter. Price Waterhouse is on record as saying that it could not qualify accounts because the whole system would crack up. Surely it is incumbent on the Treasury or the DTI to say that if qualifying will rock the boat the Government will look at an alternative way to send a signal to local authorities and others about problems with accounts. We either change the system and have another flag, another indicator, or say to Price Waterhouse that it has not acted within the present legislation and is at fault. The Minister cannot have it both ways. Either Price Waterhouse has not done the job properly or the Government's legislation is inadequate.
Hon. Members have spoken about the status of the bank list and the hon. Member for Selly Oak said that Opposition Members are arguing that that list should authorise the deposits of local authorities. Even if the hon. Gentleman had been here for the whole of the debate, he would not have heard one Opposition Member argue for that. Local authorities thought that that list had some meaning. Why should they not? The Department of the Environment sent it to them and it had the Department's imprimatur. I do not suggest that the list guarantees deposits, but it indicates which banks are authorised.
Surely the hon. Member for Selly Oak can see that there was confusion and misunderstanding. Local authorities thought that it meant more than the bank thought it meant. Plainly the bank did not think much of it because by June it had not removed from the list Chancery or Edington, although they were in liquidation or administration. As the right hon. Member for Hertfordshire, North (Sir I. Stewart) said, we should look at that again. We should also look at the quality of the advice that the Bank of England gives to local authorities. We are asking only that the quality of information on the list should be examined.
The right hon. Member for Hertfordshire, North raised an issue that has not been mentioned much in the debate or in the press, although it is crucial for the future, and that is the whole question of Europe. In a year there will be a single passport on banking, and banking systems in other countries may not have even the bare necessities of banking regulations that exist in Britain. The Minister must tell us whether he is prepared to support a push for the levelling of banking regulations throughout Europe so that we are not exposed to the weakest link in the European chain.
We must also examine compensation schemes throughout Europe. We do not say that they should all be the same, but there should be convergence and understanding and the present consolidated supervision directive on compensation throughout Europe, which is in the bowels of the Commission, should be brought to light and politically backed so that when we are in the single market we are not faced with banking problems.
My hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) spoke about the compensation scheme. Conservative Members tried to portray us as if we
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were saying that people should have 100 per cent. protection and that we would then get into the savings and loan position of the United States Government. Not one Opposition Member argued for that. The least that any of us has asked for is an increase in the investment protection scheme so that in real terms it will be at the 1979 level when the £15,000 maximum was set. That maximum was reintroduced in the Banking Act 1987 and the original maximum was set 12 years ago. Surely that should be index linked in line with inflation. That is asking not for 100 per cent. protection but for a basic improvement in the investment compensation scheme.Small investors and Asian business people in particular have been exposed to great problems. If the Government are committed to small businesses, the least that they can do for small businesses, which are going to the wall as a result of this banking collapse, is to give them a package. They need more than helplines, which are merely a sign of blowing in the wind. The only sensible part of the speech of the hon. Member for Selly Oak was his call for a package. Such a commitment would mean something to people.
Mr. Calum Macdonald (Western Isles) : I was not a member of the Committee that examined the Finance Bill, and I speak as a Member who represents a constituency that has been badly affected by the collapse and the crisis.
I was dismayed by the attitudes shown by Conservative Members, which were exemplified in the speech of the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark). Labour Members and local authorities are not denying that mistakes and errors were made and that there were misjudgments, but, despite what the hon. Member for Selly Oak said, it has to be remembered that local authorities and their finance divisions are amateurs in the money markets. I do not know what the finance director in Selly Oak is paid. If it is £70,000, that is not the case in the Western Isles. The only people earning that kind of money of whom I know are those who are supposed to be running the Bank of England and looking after the interests of the depositors.
The professionals dealing with the money markets are the Bank of England regulators, who look after the interests of the public. As my hon. Friend the Member for Redcar (Ms. Mowlam) said, brokers who gave advice to local authorities in these matters have some responsibility as well. If it is a matter of surprise and concern that a local authority such as Western Isles placed £23 million in a bank like BCCI, what about the nature of the professional advice received by that local authority, particularly when it now emerges that the local authority expressed to its brokers doubt and concern about the bank? The brokers came all the way to Stornoway to persuade the local authority that BCCI was a legitimate bank and that it was all right to leave the £23 million in the account there.
It is no surprise that people whose day-to-day expertise is that of a director of finance in a local authority have had their fingers burnt in a crisis of this sort. The real surprise, and the cause for concern and dismay, is that the much-vaunted financial professionals in London and in Edinburgh also got their fingers burnt, and that their advice caused local authorities to get their fingers burnt. There is a contrast between the attitude taken by local authorities in the middle of the crisis and that taken by the regulators, the Government and the brokers involved. In every local authority, there is a searching inquiry as to why
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things went wrong and money was lost, nowhere more so than in the Western Isles where there has been an honest admission of error, self-criticism and a determination to put things right so that such mistakes are not made again. However, the professional brokers who advised the local authorities have produced nothing but a stone wall of silence. There has been no hint of self-criticism or admission of failure or an apology for the bad advice that they gave. The Bank of England and the Government have exhibited the same stone wall of silence. It is not good enough for the Government and the Bank of England to wash their hands of the matter and to claim that it is up to the local authorities.The people who will suffer if that attitude is taken will be the only innocents in this affair--the old folk who rely on home services, the children in schools who rely on continuing levels of expenditure to provide them with an adequate education, and poll tax payers. The impact of these losses will fall on their backs unless the Government take a more positive and constructive attitude. Somebody will have to pick up all the bills for this. Either the receivers of local authority services and poll tax payers will pay for all, or the burden will be shared so that the Government and the general public take on some of it. The Government will have no moral or political credit if they continue stonewalling in the way shown by the Prime Minister last Tuesday and Thursday and by Ministers today. 6.45 pm
Ms Diane Abbott (Hackney, North and Stoke Newington) : There are several categories of losers from the BCCI collapse, and I believe that this debate has not sufficiently distinguished between them. One of the big losers is the Sheikh of Abu Dhabi. I have read that his father was accustomed to keeping his money in a suitcase under the bed. The present sheikh may wish that he had stuck to that. Another category is local authorities. I do not intend to repeat all that has been said about them, but I shall point out that the finance department of one local authority had the presence of mind, the expertise and the skill to withdraw its money from BCCI--that of the London borough of Lambeth. That borough is much maligned in the Chamber, so I am glad to put that fact on record.
A third category of loser is distinct from the first two categories. It encompasses ordinary small business men and depositors, notably Asian business men and shopkeepers. Conservative Members and those speaking from the Treasury Bench have adopted a sneering tone towards the depositors in BCCI. The hon. Member for Chichester (Mr. Nelson) said that anybody who had put his money into BCCI would need his head examined, and that everybody knew about BCCI. But how were ordinary shopkeepers in Southall, Bradford, east London and Glasgow supposed to know the gossip at City cocktail parties?
Furthermore, those people banked with BCCI not because they wanted a greater return but because BCCI, literally and figuratively, spoke their language. They received what they saw as a more welcoming and supportive service than that offered by the main clearing banks. It was not greed that led Asian small business men to bank with BCCI but the fact that they found it a supportive and understanding environment. Those shopkeepers do not go to the same cocktail parties as the
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Economic Secretary or the hon. Member for Chichester. They were in the hands of the supervisory and regulatory authorities. And there is a growing suspicion among commentators and amongst Labour Members that those authorities failed this category of loser.We have read in the newspapers today that, before this wave of Bank of England and Price Waterhouse investigations, United States regulators had complained about the Bank of England's reluctance to co-operate in investigations on BCCI. Last week, the Economic Secretary said that the Bank of England could not be expected to act on rumour. It cannot be stressed enough that BCCI's problems were not rumours. In 1988, it was indicted in the US for laundering drug money. It was indicted for fraudulently acquiring a US bank. There were well-documented connections with Noriega. Furthermore, as my colleagues have pointed out, Ernst and Young, the bank's former auditors, voluntarily gave up a huge account. As my hon. Friend the Member for Workington (Mr. Campbell-Savours) wondered, did the Bank of England ask why Ernst and Young chose to give up BCCI? This scandal raises a number of questions, and it is as well to put them on record again. One involves the role of the auditor. Several hon. Members have suggested that, in future, the auditor should have not just the right but the duty to point to fraud. There are questions about the role of the Bank of England and about the powers of the Serious Fraud Office, which can act only on referrals. There have also been questions about the deposit protection scheme and suggestions that it should be raised in line with inflation. Thousands of ordinary, hard-working Asian people throughout the country with small businesses put their trust in BCCI. They believed that if the bank had the support of the Bank of England it was safe to do so. These people have contributed greatly to our economy in extremely difficult times. We believe that they deserve more from the Government than an assumption that they should have known about City gossip.
Mr. Ian McCartney (Makerfield) : As the House will know, Wigan metropolitan borough council has been caught up in the demise of the Bank of Credit and Commerce International. Many Conservative Members represent banking, but they seem not to realise the damage that banking can inflict on local authorities by making short-term political attacks upon them. In this instance the local authorities do not, in the main, represent the political party with which banking is associated.
Last year, Wigan metropolitan borough council handled over £400 million, and it will probably handle even more than that this year. The only money that it will lose this year will be what it invested in BCCI, having taken the advice of brokers in the City and the advice contained in circulars submitted to local authorities by the Department of the Environment. Local authority treasurers act with professional integrity and give proper advice to councillors, but on this occasion they have found themselves misled and misinformed. Only one class of person had the opportunity in the City to receive a nod and a wink or advice in advance about the position of BCCI. Local authorities, people with small businesses and other ordinary depositors are the innocent victims. Conservative Members argue that individuals have a duty of care and must be mindful of that responsibility. In terms of reasonable action, there is the individual depositor and the local authority treasurer who
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places moneys in a bank. Do Conservative Members suggest that if a marginally higher rate of interest is paid there must be additional risk? Why is it that every night on television the big four banks and building societies are advertising marginal increases in interest rates to encourage depositors to place their money with them? Is it suggested that anyone who deposits with the big four banks and building societies is running a risk?Mr. Barry Porter (Wirral) : Will the hon. Gentleman give way?
Mr. McCartney : I think that the hon. Gentleman has been downstairs somewhere looking at his deposits. I shall not give way to him. I normally allow others to intervene in my speeches, but I shall not give way to someone who has come into the Chamber at the tail end of the debate to cat- call hon. Members who are speaking on behalf of their constituents.
Surely it is not being suggested that a marginal increase in the rate of return is a sign that a deposit is less safe than it would be with any of the other 499 banks on the list submitted by the Bank of England. If the list that was prepared by the Treasury and the Bank of England and submitted to local authorities on 28 June was meaningless, why was it ever issued? Why was it not issued along with a letter from the Department of the Environment asking local authority treasurers to set out by return of post the investments made in the previous quarter with the banks on the list? Such a request would show that the Department of the Environment and the Treasury regularly seek information that is based on the banks on the list that is sent to local authorities. It would be reasonable for local authority treasurers to take the view that, on that basis, the risk of placing a deposit with a bank on the list would be minimal. We are not talking about share speculation, when a share can increase in value or lose value. We are talking about individuals making deposits in a bank that was recognised by the Bank of England as one that was operating effectively, though we know now that it was not. As far back as 1987, shortly after the publication of the Banking Act 1987--section 12 is especially relevant-- advice was being given to the Bank of England that showed that the BCCI was operating in a fraudulent manner, or that that could be so. Ernst and Young decided to stop acting for the bank. It decided that it would forgo £2 million a year because it was not prepared to continue with the cover-up of the bank's activities. In March 1990, Price Waterhouse suggested clearly to the Bank of England that there was serious fraud taking place within BCCI. It believed that in the circumstances it was unable to make such a statement in its report.
Individual depositors, local authorities and even finance directors of large private companies have to rely on information that is gained in the public domain when it comes to making deposits. Since 1987, the Bank of England has deliberately conspired to ensure that information that should properly be available in the public domain would not be disclosed. As my hon. Friend the Member for Redcar (Ms. Mowlam) said, that was done to protect the secondary banking system. New clause 37, in the names of my hon. Friend the Member for Workington (Mr. Campbell-Savours) and others, provides an opportunity to protect the banking system from a bank or a group of banks when information
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that is made available in an investigation is found to be incorrect. The new clause would also provide protection for depositors, be they institutional depositors such as local authorities or individuals, such as people running small businesses. If the relevant information is available at an early stage, logical decisions will be made about deposits and the Bank of England will be able to step in to protect depositors.At the end of the day, the Bank of England is the regulator, and it must be an effective one. Instead, we have seen a failure of regulation. Individuals, many of whom deposited hundreds of thousands of pounds, which was hard earned, have not been protected. As a result, they have seen their businesses fail and their lives have been ruined. Local authorities' trust in the banking system has been undermined. The Government must not underestimate the capacity of institutional depositors, such as local authorities, to remove their deposits from other areas of the secondary banking system, particularly when they are being vilified constantly by Conservative Back-Bench Members. Their integrity is being attacked as their banking practices are criticised.
If the attacks continue, there could be an immediate political response. Institutions could withdraw substantial funds from the secondary banking system, causing further problems for banking and the City. Surely Conservative Back-Bench Members are acting irresponsibly in what is already a crisis. They are making attacks on local authorities in the short term which in the long term will undermine the banking system and the way in which it is operated.
Mr. Roger Stott (Wigan) : The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) has been highly critical of the behaviour of local authority treasurers. Does my hon. Friend agree that under current regulations and legislation local authority treasurers have a duty to maximise the amount of money that is at their disposal? That applies especially to the Wigan authority, which is poll tax capped. It cannot raise any extra money because it is capped, so the borough treasurer, under the relevant reguations, has to maximise the amount of money that is at his disposal. That is precisely what he was doing when he invested in BCCI.
Mr. Beaumont-Dark : It is not true.
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Mr. McCartney : Will my hon. Friend let me answer the hon. Gentleman who is heckling from a sedentary position? Perhaps he is on your deaf side, Mr. Deputy Speaker.
My hon. Friend said that local authorities have a duty to maximise their funds, and in 1990 the Government introduced capital finance regulations to ensure that that happened. At that time, my right hon. Friend the Leader of the Opposition prayed against the regulations in order to allow the Opposition an opportunity to question the Government about their scope and effect and about whether the list of institutions issued on a quarterly basis by the Bank of England had some validity. However, the Government did not allow a debate and the regulations were put into effect without being publicly scrutinised, thus preventing the Opposition from questioning directly
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the consequences and practical effects of regulations which are now operated by local authorities, irrespective of their political colour.I shall be brief, because many hon. Members may wish to make further contributions to the debate. If the Minister does not respond today, the Government need to respond at the highest level before the House rises for the summer recess. It would be intolerable--if not negligent--if the House did not consider further Government proposals between now and the summer recess but left over the summer not only local authorities, which will cope one way or another, but individuals who are affected by the banking collapse with no idea of what is happening. It will be intolerable if people have no idea whether there will be an investigation, why the failure occurred, no idea of the Government's position or of the decisions taken by the Bank of England and no idea whether the Government are prepared to mount a rescue operation such as that following the Barlow Clowes affair or to accept the necessity of protecting small business people for the sake of jobs and of the long-term future of communities and of protecting individuals who have other forms of deposit with BCCI, including deposits relating to their private dwellings. It is absolutely essential that those people are not left to sit--as it were--sweating until the House resumes in the autumn or until there is a general election and a change of Government- -the new Government would never allow such a situation to arise.
Finally, those who are interested in protecting the integrity of the City of London or the banking institutions should look not to Tory bankers, but to the Opposition.
Mr. Bob Cryer (Bradford, South) : The collapse of the Bank of Credit and Commerce International has raised a number of awkward questions, not least that raised by the Economic Secretary to the Treasury who is now lounging on the Front Bench. If a bank is registered within the Common Market, it apparently has immunity to establish itself in any other member state and to rip off its customers. I do not agree with that and I suspect that many other people would be critical of such a view. It has raised some serious questions about the position of banks within the Common Market and, because of the greater integration proposed by the Government and the move towards 1992, something should be done quickly before it gets worse.
The list issued by the Department of the Environment has been mentioned several times, and rightly so. There is no point in the Department of the Environment sending out a list to seek information about how local authorities are investing their money unless some credibility is given to that list. Although the information was provided by the Bank of England, the list of approved institutions sent out by the Department of the Environment must have carried some weight with local authorities. Moreover, two banks on that list were in grave financial difficulties--and were known to be so--and were near liquidation, and yet they were incorporated in the Department of the Environment's list. There is a legitimate argument for saying that the Government should make a contribution to the local authorities that have been affected since they invested in BCCI because the Government implied that it was safe to invest in that institution. It was merely an indication, but the Government cannot escape the fact that if they issue a list of institutions, it is likely that those
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institutions will be taken to be sound in wind and limb. The Government are at fault as far as local authorities are concerned. I support new clause 37 because many people affected by the collapse are not professional investors. They are small business men and business women who are absorbed in the operation of their company, which arises as a matter of course in small businesses because the managing director is also the major shareholder, or the sole proprietor is also the marketing manager, the planner, the designer and the production engineer all rolled into one. Such people cannot be expected also to be financial experts. The provisions thrown up by the liquidation facilities to protect depositors are inadequate. A Conservative Member said that it was not for us to pick up the pieces and that people must make their own way. That is arrant nonsense because the community as a whole picks up the pieces. If small businesses or medium-sized businesses--and I use the term "small businesses" in the sense of the Bolton committee report to mean companies employing up to 200 people--go into liquidation because of the collapse of the bank, the community as a whole picks up the pieces through unemployment benefit, income support and other benefits provided by the nation. The community will be called upon to save from abject poverty the people who are thrown out of work. It will not be good on the dole but at least it will not mean abject poverty. Why do not the Government consider whether they can save some of the small businesses and prevent them from going into liquidation by providing better protection for them and for small deposit holders? I am not suggesting a blanket indemnity--I am stating merely that if a lot of businesses go to the wall, the Government will have to provide support through unemployment benefit. Another issue is what the Bank of England did. It is amazing that the people on telephone number salaries-- such as the Governor of the Bank of England who recently received a 17 per cent. increase--never bear the responsibility when something goes wrong. That is certainly true in this case. Under the front page heading "CIA challenged on BCCI role", the Financial Times makes it clear that the information received from the United States Federal Reserve and the Bank of England about BCCI had been singularly lacking. It states : "Mr. von Raab's complaints about official stonewalling have been echoed"--Mr. von Raab is a former United States commissioner of customs-- "by Mr. Robert Morgenthau, the New York district attorney who for several months has vented his frustration at the lack of co-operation he has received from the US Federal Reserve and the Bank of England."
Why is that so? Why did not the Bank of England co-operate with the United States authorities to ensure proper and adequate scrutiny and information? Was it because the Bank of England wanted to keep the bank alive and dared not provide the information in case the United States authorities pulled the plug in view of the Bank of England's inactivity and in case it was exposed as being less than zealous in the performance of its duties?
Mr. Barry Porter rose --
Mr. Cryer : I will not give way, because I am sure that everyone wants to hear the Minister's detailed replies to all the points that have been made.
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Curiously enough, it appears from a story on the front page of the Financial Times that there has been a degree of fraud even at one of the joint stock banks. Under the headline,"Midland operated secret defence offshoot",
is this report :
"A trade finance arm of the Midland Bank, one of whose subsidiaries had secret links with Britain's security services, incurred losses of at least £75 million over the past decade. The losses arose in part from undisclosed fraud at one of the trade offshoot's customers." It seems that fraud is to be found not only in the secondary bank system, but the Midland. Sir Kit McMahon's reign as chairman of the Midland bank was not exactly distinguished, and apparently he did not know of the existence of that subsidiary. Nevertheless, he left the bank with telephone number compensation. He was described as a marvellous banker, but they still got rid of him. The same has happened with other people--such as the former Prime Minister, the right hon. Member for Finchley (Mrs. Thatcher). The Government put their faith in the Bank of England, but it seems slow and unwieldy, and failed to take action for far too long.
In the case of BCCI's collapse, which affected thousands of people, the Government and the Bank of England were apparently taken by surprise, while auditors turned a blind eye. However, when it was suggested that two trade union officials were not handling comparatively paltry sums of money absolutely properly, there was an outcry. The Government told the certification officer to prosecute Arthur Scargill and Pete Heathfield and to leave no stone unturned. However, they were vindicated on every charge.
There is a stark contrast between the way that National Union of Mineworkers' officials were dragged through court after court, largely at the Government's instigation, and the attitude taken towards BCCI--where fraud was known of by Ministers, Government officials, the Bank of England, and Price Waterhouse. The fear was that if someone made a statement, the whole thing would collapse like a pack of cards. That is why there was so much inactivity for so long.
The Government must take some responsibility for that mess, and it is time that they exercised it in respect of small depositors, small businesses, and local authorities that took the Government's implicit advice. The lesson for anyone is, never trust a single word that the Government say.
Mr. Maples : We are all concerned about the stories we have heard in our own constituencies of the somewhat high-handed and insensitive way--to say the least--that many banks have treated their small business customers. As a result, the Treasury and the banks undertook a study. We are finalising our conclusions. That has taken time, but we expect to make a statement soon. I cannot say now what those conclusions are, but we have found no evidence of collusion, or any suggestion that the major banks are conspiring with one another to treat small businesses in the same way. Certainly most businesses received the 3.5 per cent. cut in the base rate up to last Friday. 7.15 pm
Although there have been many complaints, when one remembers that the banks have 4 million small business customers--about half of which are in credit, and half in debit--they still represent a small overall percentage. Nevertheless, there is clear evidence that some customers
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have been treated insensitively, and perhaps even outside the terms of their contractual arrangements with their banks. We will address that problem in any recommendations that we make.We also found in some instances that what the banks told us was that their policy has not necessarily translated into action at branch level. However, there is a fair amount of competition, and customers can move their accounts. I appreciate that at present, in the middle of a recession, it is probably impossible for a firm to move if it owes money to its bank. However, when that time ends, banks which treated their customers in a high -handed way will suffer for it. One must remember also that the relationship is the subject of a commercial agreement between banks and their small customers.
Mr. McCartney : Is the Government's intervention an indication that the banking ombudsman scheme is a farce and a failure, and has done nothing to protect individual depositors with complaints about their banks or individual branches?
Mr. Maples : As the hon. Gentleman may know, the recent Jack report recommended a code of conduct, and I will deal with that in the context of new clause 35.
Mr. Nigel Griffiths (Edinburgh, South) : The Economic Secretary said that central bank policy may not have filtered down to branch level, but that is the very level at which businesses and individuals transact their borrowing. It is at that level that businesses and individuals suffer, if not malpractice, then unfair practices that penalise their interests. What explanation did the banks give in that regard? Why did they allow that breakdown in communications to affect their customers so badly?
Mr. Maples : If that is the impression that the hon. Gentleman gained, I could not have expressed myself very well. I meant to convey the information that we did not always find that that which head offices told us was their policy was happening on the ground. In some cases, activity at branch level did not accord with what the head office thought was happening or intended to happen. We shall draw such instances to the attention of the banks concerned. New clause 3 would impose huge administrative burdens on banks, for little discernible benefit. Those burdens would inevitably be reflected in higher costs, which would have knock-on effects for the banks.
Mr. Campbell-Savours : Will the Minister give way?
Mr. Maples : I have listened to the debate for three and a half hours. If I am not allowed to respond without an intervention every 45 seconds, we will be here for a very long time. The hon. Gentleman made an extremely long speech.
Mr. Campbell-Savours : I am sorry to press the Economic Secretary, but could it be that the targets set for bank managers are such that the only way that they can be met is by ignoring the advice given by their central offices?
Mr. Maples : It is for the banks concerned to diagnose the causes and decide what to do.
New clause 3 would impose expensive burdens on banks, and there is a likelihood that the added administrative burden of handling loans at higher interest rates might make banks unwilling to lend on riskier
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projects, which often involve small companies. Where information is needed, it can readily be gathered by the Government, and I hope that, on reflection, and in view of my following comments on the Jack report, the House will agree that it is not necessary to pursue that clause.New clause 34 seeks an inquiry into competition. As I said, we have found no evidence of anti-competitive practices. However, as one of his duties, the Director General of Fair Trading constantly keeps an eye out for anti- competitive practices and behaviour. If he were to find any, I am sure that he would act. In the absence of convincing evidence, to undertake a study of the kind proposed would involve unnecessary time and expense. Again, I hope it is felt that enough is being done not to require a statutory inquiry into competition. I have some sympathy with new clause 35 and the suggestion that bank charges should be more transparent. As the House knows, the Jack report recommended a code of conduct. The banks have published a draft, and expressed willingness to institute a code of conduct. The banks are thinking again, and are talking constructively to consumer bodies. Although no timetable has been established, we regard the matter as important. If a satisfactory voluntary code is not forthcoming, we shall seriously consider implementing a statutory code : we feel that people are entitled to know how interest and bank charges are calculated.
I hope that those who tabled the new clauses will decide that enough is already being done to make it unnecessary to press them. Several of my hon. Friends spoke about new businesses. I hope that they, and Opposition Members, will forgive me if I do not deal with every point that was raised. I shall try to deal with most of them, but hon. members should let me know if they feel that I have left out anything about small businesses.
I think that the purpose of tabling new clause 37 was to institute a debate about bank regulation and BCCI. The BCCI fraud was complex and sophisticated, and took place within a group that operated in some 65 countries. Several companies sought to arrange the bank's affairs in a way that made it difficult to regulate. For a long time it had two auditors, and the arrangement was difficult to police. All that made the fraud easier to perpetuate than it would have been had the operation been limited to one country. It is not surprising that the auditors were fooled, and that it took a long time to discover the fraud.
We are not discussing whether a banking licence should have been granted. Under the legislation of the 1970s, the bankers were entitled to come to this country and open branches. We are discussing whether the licence should have been revoked earlier. As several of my hon. Friends have pointed out, the position is very difficult. We--or, at least, the Bank of England--should, apparently, have acted earlier ; we are being criticised by many Opposition Members for not having done so. According to others, however--given that a restructuring arrangement was being negotiated, and given that the major shareholder had indicated a willingness to invest additional funds--the problems might have been sorted out if the situation had been allowed to continue for longer.
In such circumstances, we always hear the same conflicting arguments. If, however, the Bank of England goes to the extent of revoking a banking licence and applying for a liquidation order against a company, it effectively puts that company out of business. Once the step has been taken, the company cannot possibly be put
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back on its feet. When they are in liquidation, a bank's assets nearly always turn out to be worth less than they are worth on paper. It is therefore difficult for a bank in such a position to be solvent. Action can be taken only when it is certain that the bank is insolvent, and there must be hard evidence, because the bank has the right to appeal against the Bank of England's decision. If its licence is revoked, it can appeal to a banking appellate body, and it has the right to a court hearing in respect of a liquidation order. The Bank of England has made it clear that it is satisfied that it acted as soon as it felt that it had the necessary evidence.Mr. Sheldon : Why was the bank authorised to be covered by the Bank of England in the first place? During the passage of the Banking Act 1979, we were given specific assurances that nobody would be given such authorisation unless it was composed of fit and proper people--and these were certainly not fit and proper people. A further obligation was imposed : that of continuing supervision. Neither of those requirements was met in this instance.
The Minister said that problems would arise once it was known that a bank was acting fraudulently. But the position could have been dealt with much earlier. Why was it not?
Mr. Maples : The right hon. Gentleman says that there has been inadequate supervision. According to him, the failure of a bank may be a definition of inadequate supervision, but he could not possibly know what the Bank of England has been doing since 1974, or whenever BCCI set up in this country.
When the bank set up here, it did not need any authorisation. It had been authorised in another European country, and was entitled to establish branches here in the mid-1970s. Under the Banking Act 1979 its licence could have been revoked, but I have already mentioned the difficulties involved in providing the necessary evidence. I have heard no one suggest that there was any evidence at the time of the problems that have now come to light. Under the Banking Act 1987, the bank was "grandfathered", and, as a bank that was already in existence, it was entitled to continue in existence. I do not believe that the right hon. Member for Ashton-under- Lyne (Mr. Sheldon) can have any evidence that the Bank of England has failed in its supervision.
Hon. Members have asked why no action was taken earlier. None of the earlier rumours, and none of the work that was done, brought any fraud to light ; all that we were told was that the bank had made losses.
Mr. Denzil Davies (Llanelli) : Will the Minister give way?
Mr. Maples : I cannot take an intervention in the middle of replying to an intervention from the right hon. Member for Ashton-under-Lyne.
All the questions that were raised at that earlier stage concerned whether the bank had adequate financial controls, whether it had bad loans, and the fact that it had made losses. It was felt that the losses endangered the bank's liquidity and its equity base. In every case, the shareholders injected further funds to deal with the problems. The Price Waterhouse investigation, whose findings were given to the Bank of England on 27 June, provided the first evidence of fraud. It was on that
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evidence that the Bank of England acted. It could not have acted on rumours, or on the basis that the bank was inadequately capitalised and that, whenever losses were made, additional capital was injected.Mr. Davies rose --
Mr. Maples : I will give way, but I am afraid that this cannot go on. I am not getting around to answering any of the points that have been raised.
Mr. Davies : I am grateful. I do not know whether I should admit it, but I was the Minister responsible for the Banking Act 1979. Does not the Economic Secretary agree that, under that Act, the Bank of England had greater and better powers to police institutions such as BCCI than were conferred by the Act that followed it, which the present Government invoked to repeal the 1979 Act?
Mr. Maples : No, I do not agree. When the 1987 legislation was going through the House, every hon. Member agreed that it gave the Bank of England greater powers and tightened up the regime. I am not criticising the 1979 Act, which was a considerable step forward ; indeed, I gave way to the right hon. Member for Llanelli (Mr. Davies) because I knew that he had been a Treasury Minister at the time. The only difference of which I am aware is that, under that Act, the banks were not automatically "grandfathered", and the Bank of England was able to remove licences more easily than it could have done under the 1987 Act. Revoking licences involves problems, however, in relation both to obtaining evidence and to the consequences of such action.
Many people seem to think that the Government, or the Bank of England, can provide a guarantee. I am not ascribing that view to any specific Member, but some of the comments, especially those about local authorities, suggested that the Government or the Bank of England could guarantee that a bank would never go broke. It must be clear to the hon. Members for Workington (Mr. Campbell-Savours) and for Redcar (Ms. Mowlam) that that is not the case.
If it is accepted that a bank can fail, it must be accepted that people must bear the costs of that failure. The alternative is for the Government or the Bank of England to step into the breach and pay all the money--which is exactly the same as guaranteeing that the bank could not be insolvent, or go into liquidation, in the first place. If we accept that it can, and that it is not reasonable to expect public funds to guarantee every liability of every bank, we must also accept that the creditors must bear some of the costs.
Because that would have harsh consequences, successive Governments have introduced deposit protection schemes. The limit under the 1979 Act was £10,000, not £20,000 ; it was raised in 1987, partly as a result of overtures from Opposition Members, although the Government readily agreed to the move. Some could argue that the limit was too high, although others argue that it was too low. It could be said that a moral hazard must be created, and that the aim was to protect small depositors who could not be expected to be aware of the position. I believe that 75 per cent. of £20,000 is a reasonable scheme. We have no intention of making proposals to raise or change that sum. I am afraid that it is important that such a hazard is involved in doing business with banks.
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7.30 pmAs several hon. Members have explained, there is a risk-reward ratio in dealing with investments. If the Government were effectively to underwrite a far greater percentage, or if we had an American system whereby the first $100,000 in an account was underwritten by the Government, people would place their money with the institution offering the highest rate of return knowing that it was guaranteed by the Government. The Government would not be allowing the market to create any distinction between banks running their affairs conservatively and well and those running their affairs irresponsibly and taking greater risks.
It has been said that the deposit protection scheme could be more generous. I have now explained the consequences of that. In my statement last Monday, I was asked whether we should have a scheme like the American scheme and I have tried to explain how that could create problems in the United States which we would not want to repeat here.
Other hon. Members suggested that the Government should be responsible for standing behind local authorities. We cannot be. Others asked whether the scheme should be made more generous, and I have tried to explain why it cannot be. We should all realise that the collapse of any bank, particularly one with as many customers as BCCI, is clearly a tragedy for the customers, for the businesses doing business with them, for the depositors and for those who borrowed money, because I suspect that they will be called upon to repay it sooner than they expected.
The deposit protection scheme will be activated as soon as is conceivably possible. The Bank of England is taking steps with the full co-operation of the liquidators to compile lists of depositors and their addresses even in advance of the liquidation order. The bank has an accelerated hearing for the liquidation order ; it will now be heard on Monday 22 July. That is about as soon as it could conceivably have been heard. If it is granted-- and I have no reason to suspect that it will not be granted, but it is a court order that is being sought--letters and claim forms will be sent to depositors as soon as possible. It should therefore be possible to pay the vast majority of depositors extremely quickly. I cannot give a timetable because we do not know how many people are involved. It may amount to 100,000. Clearly there is a logistical problem in processing 100,000 applications.
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