House of Commons Hansard Debates for 22 Jul 1991

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regulatory authorities, and the right to decide issues of compensation, the period for compensation, and any appeal procedures.

Will the Minister accept that the commission's main responsibility will be to undertake a thorough examination of all the events leading to the Bank of England's decision to close down the BCCI's operations and to assess whether the Bank of England examined all possible options to contain the situation? Will the commission of inquiry undertake an analysis of the economic and social consequences of BCCI's closure both in the United Kingdom and throughout the world? Will it be able to propose essential reforms, including reforms of the Bank of England and the other authorities? Will it be able clearly to identify the criminal and civil responsibilities of all concerned, including the auditors? Finally, will the commission be able to give us an interim report so that any findings can be the subject of parliamentary debate or legislation?

I pay tribute to the frankness of the Governor of the Bank of England, who I believe will eventually become the unfortunate scapegoat for the whole problem. In the two meetings that he has held with hon. Members, on Wednesday 10 July and on Thursday 18 July, to which he readily agreed and at which he was unfailingly courteous and frank, he gave us details and answered questions about events. However, if there has been a failure to regulate, no matter how nice and courteous the Governor may be, he must take full responsibility. He knew the seriousness of the situation. That is why he went to Downing street on 28 June to give the news of the proposed closure. We are entitled to know whether the bank, as the watchdog, had carried out its duty adequately--not whether it acted too early or too late, but whether it acted properly. The same considerations apply to Ministers.

The Bank of England has certain statutoryresponsibilities, and while the rest of us can raise rumours and other points of concern, the bank has the power to act. For example, did the Governor know about BCCI's alleged terrorist links? What action was taken after the two Price Waterhouse reports in March and October 1990? We know from our meeting with the deputy Governor on10 July that 10 special reports were commissioned by the Bank of England, ending with the report of 25 June.

Does the Minister unequivocally endorse the role of the Bank of England? Is there nothing that it did or failed to do which causes the Government concern? The Chancellor said in his statement on Friday :

"I have no reason to doubt that the Bank acted properly and promptly in the best interests of the depositors."--[ Official Report, 19 July, 1991 ; Vol. 195, c. 716.]

Does the Minister agree?

It is also important to know when Ministers and Treasury officials knew, and what action was taken. Last year, in a debate in another place, the noble Lord Henley said :

"Treasury officials have been in touch with the Bank of England to emphasise to it the degree of public concern about the case, not least that expressed by noble Lords, and to ask it to take full account of the concern in its continued supervision of BCCI. The Bank of England has confirmed that it is doing this and will continue to do so."--[ Official Report, House of Lords, 23 April 1990 ; Vol. 518, c. 421.]

What action did the Treasury take to ensure that the situation was being monitored? When the Price Waterhouse report was received in October 1990, the

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Governor told us that it did not contain any fraud or anything to warrant the action now being taken. Does the Minister agree? Yesterday in the House, there was an exchange between my right hon. Friend the Leader of the Opposition and the Prime Minister. On Thursday, I chaired two cross-party meetings. At the meeting with the Governor of the Bank of England, the Governor clearly stated when pressed by two colleagues that he always kept the Chancellor of the Exchequer fully informed of all major developments. He said that it was his job to do so, but that he could not divulge the nature of the conversations.

That course of action was confirmed in a written reply to me this evening from the Minister. I asked the Chancellor to list the dates on which we had discussed the trading position or other matters relating to BCCI with the Governor of the Bank of England in the past two years. The Minister replied that the Chancellor had discussed a number of supervisory cases, including BCCI, with the Governors of the Bank of England on a number of occasions since becoming Chancellor, but was not aware until 26 June that fraud had been uncovered.

Clearly the then Chancellor, now the Prime Minister, had similar meetings with the Governor. It is inconceivable that the Prime Minister was not informed of the circumstances of BCCI. BCCI was going through the most important development of the time, which resulted in the resignation of the president and chief executive of the bank, and a major reconstruction of the bank was taking place. At that time of hostilities in the Gulf, the Chancellor would have wanted to have that information and to act on it in defence of the leader of a friendly Gulf state. The Prime Minister must return to the House and make a statement about his true knowledge of events. He cannot keep hiding behind the old lady's skirts.

I accept that the Prime Minister did not know about the fraud until 28 June, but he has been reticent about telling the House what else he knew. The final report from Price Waterhouse arrived on 25 June. By 26 June, the gist of the report had been given to a Treasury official, John Geeve. On 28 June, a special meeting was held at Downing street, which was attended by both the Prime Minister and the Chancellor, and both were informed of what was to be done. There is then an extraordinary seven-day gap, in which there was no political or diplomatic initiative.

It is beyond belief that the Prime Minister, who a few months ago had been fighting on the same side as the sheikh, could not even pick up a telephone or send an official to visit the sheikh to see what could be done to save the bank. That crucial gap, that seven-day silence, has still not been explained. Both the Prime Minister and the Chancellor must have known the consequences, both financial and political, of that gap. They had a duty to act. The shiekh makes it clear that, had he been asked, he would have provided financial support to save the bank, but no approach was made.

Mr. Tim Smith (Beaconsfield) : Listening to the hon. Gentleman, anyone would think that the head office of BCCI was regulated by the Bank of England. It was not--it was regulated by the Luxembourg authorities. As we know, the bank operated in a large number of different countries. Is not the reason why there was some delay once the Bank of England had decided to act in the United

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Kingdom the fact that it had to communicate with all the regulators so as to ensure that there was concerted action throughout the world?

Mr. Vaz : As the hon. Gentleman will find out from my speech, negotiations were taking place and the College of Regulators was already fully informed of what was being proposed.

BCCI Holdings is a member of a substantial group of companies which carried on a banking business in over 60 countries, where it had more than 1.25 million depositors and approximately 12,000 staff. his Highness Sheikh Zayed bin Sultan an-Nahayan has always maintained that he was more than prepared to co-operate with any scheme and any initiative by the Bank of England to maintain BCCI. Can the Minister confirm that he has no information which casts any doubt on that statement? Last Thursday, the sheikh went to the trouble of taking out full-page advertisements in national newspapers citing his outrage at what had happened. The statement speaks of his shock at the abrupt action taken by the Bank of England, without any consultation with either the shareholders or the central bank of the United Arab Emirates.

The sheikh, as the majority shareholder, was well aware of the troubles in the bank, and he tried to implement new measures. Their implementation involved close co-operation and consultation with the Bank of England and other members of the College of Regulators. As the investigations were pursued, further losses and certain irregularities were uncovered. These were reported on a regular basis to the College of Regulators to keep it informed of the developing situation.

In the light of those discoveries, Price Waterhouse was instructed by the sheikh to prepare a refinancing and restructuring plan designed to reorganise the group on a sound footing. A first draft of this plan was presented to the College of Regulators in October 1990. Members of the college, and the Bank of England, made it clear that they welcomed and were willing to co-operate fully in implementing the proposals for restructuring on the basis that this would best safeguard the interests of the group, depositors, shareholders and staff, and avoid the other alternative. The other alternative was liquidation, which, it was recognised by all concerned, would have catastrophic effects, given the size and extent of the group's liabilities.

In a letter to the department of finance dated 11 April 1991, the Bank of England stated :

"The college did form the view that the proposed overall framework of the new structure appears to acceptable basis for restructuring All the relevant supervisors stand ready to engage in the necessary dialogue in the near future."

On 5 July 1991, the latest in a long series of meetings was due to take place between representatives from the Bank of England, the Luxembourg monetary Institute and the majority shareholders so that the finalised restructuring plan could be presented to the majority shareholders. A new chief executive, Mr. Kingshott, had been appointed, and a new name--the Commercial Bank of Europe--had been found, but that plan came to an abrupt end on 5 July as a result of the Bank of England's decision.

As the House knows, this morning's High Court hearing was adjourned. I attended the hearing, and was amused to see that the judge was having as much difficulty as some of the lawyers in following this complex case. I strongly believe that it is not impossible to save the bank, or at least to protect the depositors and staff. The

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adjournment has provided ample opportunity for consideration as to whether something can be done to ameliorate the situation. It is disgraceful that a rush to wind up the bank should prevent a possible rescue of parts of the group by the sheikh. I understand--I should be grateful if the Minister would confirm that it is his understanding, too--that on Saturday the Abu Dhabi-based BCC (Emirates) conditionally approved a takeover of BCCI's three branches in Pakistan. It is possible that attempts are being made to construct a new regional bank out of the remains of BCCI.

Even now, at the eleventh hour, it would be possible to arrive at a formula to help the depositors, investors and staff. The answer may well be a freezing of the bank's assets and the payment of interest with the long- term aim of creating a new bank, allowing those who wish to take the statutory compenstion to do so. To achieve that, the Governor of the Bank of England must continue his dialogue with the Sheikh of Abu Dhabi, and the Bank of England must show a willingness to do that. Will the Minister confirm that the Government would support such an initiative?

There are reports that British exporters are in danger of losing at least £2 billion as a result of the closure, and that some of those firms may themselves close. What action does the Minister propose to take to assist them? Clearly, the plan presented on 5 July--which had taken many months to develop--is wholly inapplicable, due to the Bank's action. If the group, or any of its constituent

elements--including BCCI--is to avoid liquidation, an alternative plan must now be developed by the sheikh, in conjunction with the commissioner appointed by the Luxembourg court, Mr. Smouha, and the Bank of England.

Is the Minister aware that, in the past 10 days, a number of meetings have been held by Mr. Smouha and those representing the sheikh? Those meetings have involved constructive discussions intended to explore whether there is any alternative to liquidation. The adjournment of the case in the High Court allows the sheikh to conduct a review, and to enable the discussions to continue, with a view to establishing whether there is any viable means of preserving the value of the group for the benefit of all interested parties--depositors, employees and shareholders. The possibility of a viable alternative to liquidation is, in the sheikh's view, a real one.

The majority shareholders have already taken active steps to secure that objective, and apparently wish to continue to do so for as long as may be necessary. If, however, the court ordered that BCCI be wound up, the majority shareholders would have no continuing interest in rescuing that element of the group. The negotiations and discussions are continuing at the highest level. Is the Minister aware of those discussions, and does he support them?

Did the Minister know that a meeting had taken place in Abu Dhabi on Tuesday 16 July 1991--attended by Mr. Jaans, the director-general of the Luxembourg Monetary Institute, the Governor of the Bank of England, Mr. Leigh-Pemberton, and Brian Quinn, the director of finance, together with the ambassador to the United Arab Emirates? Mr. Jaans referred to the six- month period that Mr. Smouche had been given by the Luxembourg court to do what he described as a thorough stocktaking intended to enable him to tell the court whether a reconstruction of BCCI should be attempted.

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Mr. Jaans stated expressly that he regarded the stocktaking operation as being necessary to establish the true position of BCCI and that it must be completed before a solution could be found. Will the Economic Secretary confirm what he said to me earlier--that if there were any means by which a reconstructed group could be viable, by removing those who have committed the fraud and bringing them to justice, the Government would support it? Is he aware that there are only eight days in which to do so?

As the Economic Secretary knows, the issue was raised earlier in the House. Serious allegations have been made in some main newspapers about alleged terrorist links with the bank. Will the Economic Secretary comment on those allegations and tell us whether the security services have indeed informed Ministers? Has the matter been reported to the Cabinet's joint intelligence committee? I understand that the British security services first warned the Bank of England over a year ago of terrorist links and of accounts used by terrorists, including Abu Nidal. It is important that Ministers should take early opportunities either to confirm or to deny those rumours. Did the security services tell the Prime Minister? If so, the Prime Minister had two different channels of communication--first from officials from the Bank of England, in his position as Chancellor of the Exchequer, and secondly, from the security services in his position as the Prime Minister.

I wish to refer finally to two points. The first is the position of local authorities. My hon. Friend will speak later, if he catches your eye, Madam Deputy Speaker, about local authorities, which have been severely affected. They invested their money on the basis of an authorised list provided by the Bank of England and with the approval of the Department of the Environment. When we met the Governor on Wednesday 10 July he said that the list was not a guaranteed list. Both my colleagues and I disagreed. A list from an authoritative body such as the Bank of England must be assumed to be authoritative. Unless it carries an exemption notice, there is, in my mind, no question that it cannot be acted upon. Can the Economic Secretary confirm what action has been taken by the Government to ensure that the list has been checked and that all the listed insitutions are sound? What compensation is he proposing to offer to local authorities?

Depositors--the Economic Secretary was pressed about this on 8 July when he made his first statement to the House--must be given an assurance that the amount being offered by the Deposit Protection Board will be increased from the present level of £15,000. The average portfolio of investors in this bank is £15,000. They cannot possibly be expected to accept less than that. The Government must consider increasing that figure. If they cannot do so out of their own funds, they must pay even more attention to the initiatives currently being undertaken by the sheikh and others so as to ensure that they succeed.

This has been a fiasco which has degenerated into a shambles. The pivotal role of the Prime Minister and the Governor of the Bank of England needs to be carefully examined. I welcome the Treasury and Civil Service Select Committee inquiry. I hope that the Committee will invite the Prime Minister and the Chancellor of the Exchequer to give evidence. The Prime Minister had the audacity in the House this afternoon to accuse my right hon. Friend the Leader of the Opposition of muckraking. How can raising the hardship and misery of individuals and others, and the

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possible failure to act properly, be regarded as muckraking? In my view, the Prime Minister ought to apologise to those whom he has insulted.

In a democracy, we demand the right to know the truth. The depositors, the investors, the staff--indeed, the whole country--want to know the truth. Those in high office who have breached their duty of care should consider their position in the light of the revelations of the past few days. This astonishing banking scandal will live to haunt the present Administration and taint the reputation of the Bank of England for years to come. Even at this late stage, I hope that the Government will act.

1.58 am

Mr. Michael Knowles (Nottingham, East) : I thank the hon. Member for Leicester, East (Mr. Vaz) for the kind words that he said about me. We started together on the scheme in the somewhat vain and naive hope that, in an election year, BCCI could be kept out of the party political bull ring. Inevitably, it was bound to be dragged in. Bank failures in the United Kingdom are rare compared with countries such as the United States, where banks go to the wall not every day of the week but reasonably frequently. In the United Kingdom, such failures tend to be rare because of the Bank of England system, which has been very effective. With the more open international banking system, which has grown and I suspect will continue to do so, BCCI could happen again--and all too easily.

Mr. Quentin Davies (Stamford and Spalding) : Will my hon. Friend acknowledge that there are two salient points to this affair? The first is that BCCI was not registered in this country, so the prime regulatory authority was not based in this country. Secondly, bank regulation is not for the Government but for the Bank of England. That has always been true, and presumably would be if, God forbid, we had a Labour Government.

Mr. Knowles : That is right. The Bank of England is not an independent central bank like those in Germany and the United States. In the Banking Act 1987, the House deliberately give it great powers of independence. The alternative is for the Chancellor to look after it, but I am sure that no Chancellor would like to do that. As far as I am aware, no hon. Member has had the opportunity to read the auditors' full 800-page report. In the Governor's opinion, that report of 26 June left the Bank of England with no choice but to move immediately. It revealed not inefficiency or poor management but fraud on a massive scale. The phrase used was "a bank within a bank".

The Bank of England has been subject to similar criticism in the past. The Johnson Matthey case showed that the Bank of England will lean over backwards to save a bank if it is humanly possible. However, the Bank of England believed that nothing could be done to save BCCI. It may have been right or wrong, and that will be tested in the courts in eight days' time and certainly in the investigation, but the fact that it had to act is irrefutable, because that responsibility is laid on it.

Did the House get it right in not only the 1987 Act but the Banking Act 1981? I suspect that the answer to that will emerge in the report.

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With the internationalisation of banking, and given the amount of money in that system, the problem will be how a single nation state polices an international bank such as BCCI. We could tighten the 1987 Act and the Bank of England could close any institution not on proof of fraud or any wrongdoing but on suspicion alone. Is anyone going to argue for that power to be given to the Bank of England? That might also have an effect on the operation of the City of London. There might suddenly be a massive growth in Frankfurt and Paris as international centres.

Pre-1987 and in the old days, the Bank of England worked very much on an old boy network. We moved away from that as we saw a changing international environment. We wanted to move the Bank more towards having to work on a basis of law and of being able to prove its suspicions rather than having a quiet word in somebody's ear. That means that situations like the present one can occur. One cannot have the best of all systems ; one will always have to make hard choices. We made choices when we passed the 1987 Act.

Can BCCI be rescued? As the hon. Member for Leicester, East said, there are eight days in which to decide that. Who can rescue it? There would seem to be only one man--his excellency the Sheik. How much will it cost? No one knows, because no one has yet been able to quantify the amount that has been extracted fraudulently from the bank. We have no idea what funds are left in it. The amount could be anything up to the book value of £20 billion, which is a horrendous sum.

Should the Bank of England have acted sooner? Some argue not that it has acted precipitately, but that it left it too long. I suspect not, because the Bank hoped to have some proof on which to operate. The gap from 28 June to 5 July does not seem unreasonable. There had to be consultations with Luxembourg, where the bank is domiciled. When the Luxembourg authorities had agreed that action had to be taken, it then had to be agreed with all the other regulators and central banks around the globe, and they all had to move together. I remember it being explained clearly at one meeting that, if one loophole had been left, funds would have flowed out of the bank so fast that nothing but an empty shell would have been left. The whole point was to try to save at least some of the investors' money.

The hon. Member for Leicester, East mentioned local authorities and investors. No lists are issued by the Bank of England with hard guarantees. No Government could give a guarantee to anyone investing on a market anywhere that he will be totally safe. If somebody offered someone else a gold brick for 50p, he would do well to investigate it and look at it closely. The same applies if someone offers 2 per cent. or 3 per cent. more interest. Why is he doing that? How is he able to do that? The responsibility lies with all of us individually when we invest our money. It is still a matter of caveat emptor--the buyer has to beware. No one can or will give a guarantee.

I feel more sorry for the small investor who gets taken in by a fraud. I have less sympathy with professional investors and with borough treasurers, who are paid substantial sums to know their way around. If we could do something to help the smaller investor, I would be sympathetic. Some councils seem to have been trying to play the money market and have got their fingers burnt.

Mr. Alex Carlile (Montgomery) : Of all parties.

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Mr. Knowles : Of all parties. This is not a party political point. I have a fairly hard heart towards such councils, and that is probably true of most hon. Members. There will be a lot of lessons for a lot of people to learn from this, not least all hon. Members who have passed the Banking Acts. In many cases, they were bipartisan Acts which had been in the treadmill of legislation for many years. We may have got it right, but we may have got it wrong. Before we start trying to pass the buck to other people, we must look carefully at what we did right and wrong in the first place.

2.9 am

Mr. Ian McCartney (Makerfield) : I know that other hon. Members want to speak, so I shall make a relatively short speech. Many hon. Members present tonight have taken part in all, or almost all, the meetings that have been held so far with the Treasury and the Bank of England.

I shall deal with the issue of local authorities. Local authorities, whatever their political persuasion, are concerned at the interpretation, after the event, being placed by the Department of the Environment and the Treasury on the list issued by the Bank of England. Discussions between the Bank of England, the Treasury and the local authority associations were held in mid-May. Therefore, one can well understand why local authorities feel extremely aggrieved about the reinterpretation of events now offered by the Treasury and the Bank of England.

I should like to bring to the attention of the House a Press Association report issued earlier this evening. It records the disturbing claim by Sky News that it has documentary evidence to suggest that Abu Nidal was ferried between BCCI branches in London by the police, with the full knowledge of MI5, to oversee his accounts. That operation was allowed so as to ensure that MI5 had close contact with the terrorist to enable it to monitor his activities and that of his organisation. We should remember that this is the terrorist who planned and caused the destruction of the Pan Am aircraft over Lockerbie.

That allegation has not been made by a politician or an organisation known to be sympathetic to the Labour movement. We are talking about an organisation owned and controlled by Murdoch and his associates. According to the information from Sky, it is clear that the manager of the BCCI branch in north London provided information to the police and MI5 about the amount of money deposited on behalf of the terrorist in both of his accounts. He says that he gave information to MI5 about the activities of the bank in relation to that terrorist organisation.

According to the allegations, MI5 revealed the information to the Bank of England which set up an inquiry into Nidal's accounts in London code-named Project Q--Q for Qassem, the name of the Jordanian manager of the London branch.

Given the type of information that has filtered out, one can understand why the Opposition and the people cannot believe that the Prime Minister's sole knowledge of the events commenced on the morning of 28 June when he met the Governor of the Bank of England at Downing Street to discuss the latest Price Waterhouse report. That is inconceivable. In October 1990, the Governor reported to the then Chancellor, the present Prime Minister, on the

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Price Waterhouse inquiries. Since then, he has kept the Prime Minister and the current Chancellor abreast of events.

My local authority has so far lost £2.1 million, plus interest to the value of almost £26,000. My authority has banked on and off with BCCI since the early 1980s. At one stage, it withdrew its reserves from the bank following an investigation in the United States. Money was replaced in the bank following discussions and assurances from the authority's advisers, the brokers R. P. Martin, and from others in the City. One of the decisions we should reach as a result of this case is whether brokers should be regulated far more strictly. The Treasury and the Bank of England should at least support those local authorities. Organisations such asR. P. Martin should immediately provide their accounts to show all transactions between the local authorities and the bank. That would clarify, once and for all, whether R. P. Martin and other brokers received preferential treatment and, in the process, failed to carry out their duties on behalf of their clients, the local authority associations. It is vital to the brokers' organisations in the City that that happens urgently.

Last week, my local authority asked R. P. Martin, verbally and in writing, for that information. I understand that it has failed to respond to the request for information. Will the Minister respond by saying whether the bank will put pressure on brokers to ensure that such information is made available at the earliest opportunity? The Minister may also like to comment on the fact that, at 10 am on 5 July, in the normal course of events, my local authority sought to transfer its overnight deposit from BCCI to National Westminster Bank. BCCI acknowledged that request at 10 am, and at 12 noon it notified the local authority that the Bank of England had stepped in and was preventing the transfer of the funds to the appropriate account at NatWest.

Why, three hours before the bank was closed, was a transaction that BCCI had agreed to make to one of the clearing banks intercepted by the Bank of England? Because of the Bank of England's action, my authority lost over £2 million. Was that step taken to prevent haemorrhages of funds from other institutions, or was it a direct attempt to ensure that local authorities and other lenders did not have the opportunity to withdraw substantial sums of money which could be used at a later date by the liquidator? The Minister should make a commitment to provide a public answer to that question. In the meeting between the Chancellor of the Exchequer and the Governor of the Bank of England, I raised--as did other hon. Members--the subject of the list that the Bank of England issued to local authorities. I do not have time to discuss whether that list carried a risk. If I accept the argument that it did, why did Treasury and Bank of England officials at the Committee on Local Authority Borrowing, which met on 10 May in the Treasury under the chairmanship of the adviser to the current Chancellor of the Exchequer, go out of their way to make it clear to the local authorities that there were no problems with the secondary banking system?

Indeed, Mr. Beverly, representing the Bank of England, said that local authorities would have to take into account the risk of overreacting and moving funds unnecessary and at some expense. That statement was not made in isolation. It was a direct attempt by the Bank of England

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to put off inquiring local authority treasurers who were voicing concern about the problems of the secondary banking system at that time.

Given the consequences of the two smaller banks, on13 May-- Mr. Tim Smith : Will the hon. Gentleman give way?

Mr. McCartney : No, the hon. Gentleman can make his own contribution. If he cannot do so, it is tough luck--at the top.

Mr. Smith : Why does not the hon. Gentleman read from paragraph 11 of the minutes of the meeting?

Mr. McCartney : I would read the whole minute if I had time. From the discussions in paragraphs 10, 11 and 12, it was clear that local authority representatives had become concerned that there was no guarantee about the list. They therefore said that it would be reasonable for them to withdraw the funding from the secondary banking system. In paragraph 13, the Bank of England representatives went out of their way to show that that was not the best course of action for them to take at that time.

That minute was subsequently followed by a letter on behalf of the local authorities from those represented at the meeting. The letter asked the Bank to confirm that it had been given the assurance that there was no systemic problem with the secondary banking system and to confirm the confidence shown by the Bank of England at the meeting of 10 May. The Bank of England did not respond to that inquiry to deny confirmation that there was no substantial problem lurking round the corner for the local authorities that were investing in the secondary banking system.

However, we know from the information that came to light that that was not so. The Bank of England was well aware that it would take action within days, if not weeks, to close down the bank. We can well understand why local authorities feel aggrieved that they were taken for a ride by the Bank of England and the Treasury, which failed to take them into their confidence when the issue was raised on 10 May by those representing local authorities at the meeting at the Treasury.

Irrespective of what anyone believes about local authorities' role in the affair, one fact is clear--local authorities of all political persuasions have become involved. All took the same view about investing in the bank. They all took the same advice, and came to the conclusion that, having made the best inquiries that they could, their investments were safe.

Local authorities will survive the affair, but that is not true of the tens of thousands of small depositors in this country. Therefore, it is vital that we ensure that, if it is clear that the Treasury failed to recognise the signs as soon as it should have done, and that the Bank of England failed to act to defend depositors, the Government should admit that mistake and allow compensation to be paid.

Mr. D. N. Campbell-Savours (Workington) : I think that I know what the hon. Member for Beaconsfield (Mr. Smith) was trying to say about paragraph 11 when he attempted to intervene in my hon. Friend's speech. However, I do not think that he heard my hon. Friend's comments. At the meeting, assurances were given about the secondary banking sector and, having heard them,

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treasurers believed that they were safe in making investments. Therefore, paragraph 11 does not relate to the issue to which my hon. Friend alluded--

Mr. Deputy Speaker (Mr Harold Walker) : Order. I am not sure whether the hon. Member for Workington (Mr. Campbell-Savours) is intervening in the speech of the hon. Member for Makerfield (Mr McCartney) or in a hypothetical intervention that I did not hear.

Mr. McCartney : Either way, my hon. Friend the Member for Workington (Mr Campbell-Savours) made a telling intervention. My hon. Friend is always able to provide information to the House that is helpful in clarifying the confusion surrounding this issue--which is more than can be said about the various statements that have been made by Ministers to the House.

During the past few weeks, we have seen a pass-the-parcel Government. The parcel has passed between the Department of Trade and Industry, the Department of Employment, the Treasury and the Bank of England--and back again. During the past 18 months or so, millions of pounds have been sifted out of that parcel. A decision was eventually taken on 28 June which changed for the worse the livelihoods of many people in this country and worldwide, probably for the rest of their lives.

The lesson that should be learned from the debacle is that we must ensure that nothing similar happens again. We must ensure that we have international arrangements so that small countries such as Luxembourg cannot hide behind inefficient regulations that allow funds to flow into that country that affect the international banking system. We must also devise a warning system, so that not only local authorities but others can invest with confidence in the secondary banking system--otherwise, it will be deprived of many millions of pounds of resources, which are important to its continuing good health in the British economy.

I hope that the Minister will take on board not only the points made in the debate but over the past few days and weeks. Unless he does, we will be back debating the collapse of another bank, and the problems that that creates not only for local authorities but for tens of thousands of our constituents.

Several Hon. Members rose--

Mr. Deputy Speaker : Order. May I ask for very brief speeches? Mr. Burt.

2.25 am

Mr. Alistair Burt (Bury, North) : I will be as brief as I can, Mr. Deputy Speaker. It is clear that the BCCI affair has many levels. I am grateful to the hon. Member for Leicester, East (Mr. Vaz) for reminding the House that the real villains are those who are allegedly guilty of fraud. We are running around chasing everyone else, but we should be chasing those primarily involved in the fraud--and they should be brought to justice as soon as possible. There are many questions to be asked at the highest level of both the Bank of England and the Treasury concerning the time scale of knowledge held by each. As a Member of Parliament whose constituents have lost £6.5 million via the local authority's investment in BCCI, quite apart from the losses of individual investors, I recognise the need for, and welcome unreservedly, the inquiry--and

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the remarkably free range of it indicated by my right hon. Friend the Prime Minister in his statement. He clearly contemplates that no holds will be barred, and putting himself forward if required to do so. Only the most churlish person can fail to recognise the integrity of such an offer.

As to the casualties of the affair, I will concentrate--as did the hon. Member for Makerfield (Mr. McCartney)--on one group of investors, in the form of local authorities. The BCCI scandal has made more open than ever before the complex nature of local authority financial transactions. After the public difficulties concerning recent interest rate swaps that led to court cases, several councils lost significant sums of money through that particular choice of investment.

The inquiry will, rightly, examine the role of the Bank of England and the Treasury in the BCCI affair, but I hope, for the sake of millions of taxpayers throughout the country, that local authority finance systems will also come under scrutiny. I stress that I am in no way prejudging the issue, or impugning the integrity of any local authority officers. I merely want to make it clear that many people whose local authorities have lost money are asking pertinent questions. The most pertinent among them is, "Why us? Why did other authorities choose not to invest as ours did?"

It is incumbent on all public officials to seek answers to such questions. What standing orders govern the making of local authority financial transactions and their reporting to meetings of their full councils or council committees--and are they adequate? In the case of Bury borough council, an officer is empowered to deal, under delegated authority, with day-to-day investment decisions--and that is quite right. I cannot see that arrangement changing, and nor should it. However, the council's standing orders do not subsequently require a full report detailing, among other things, the name of the bank with which a deposit has been placed.

Mr. Campbell-Savours : The same is true of all local authorities.

Mr. Burt : I accept the hon. Gentleman's assertion--he makes my point for me.

In Bury's case, an investment of £6.5 million was made for five years, from April 1988, renewable on six-monthly instalments--the last being in April 1991. Although the terms were reported in confidence to the council's finance sub-committee, the name of the bank in which that money was invested was not revealed--nor was it required to be. I cannot help but feel that such deposits should be reported in full. If that were done, at least all councillors would know of the details of an investment, and any who came to believe that there might be something untoward about the bank concerned could make further inquiries. That could not be done in the case of Bury--and I suspect that the same is true of many other councils.

The hon. Member for Makerfield asked what rules govern the relationships between local authorities investing public money and the investment brokers. Is it wise to take advice "for free"? It is emerging that certain investment brokers who advised councils were allegedly on commission from BCCI of up to four times the norm. Was that known to local authorities? Did they ask? Should they

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not be compelled to seek independent untied financial advice, or at least know in detail and make public the commission arrangements of those who advise them?

Exactly what information was available and circulated among local authorities from 1988 onwards? Why did some authorities resist the pressures to invest with BCCI? Why did some--notably and incredibly, Lambeth--withdraw investments already made while others did not? If all local authorities looked to the famous Bank of England and Department of the Environment lists as gospel, many other authorities would have been caught out. They were not, and we should all know why.

I submit that the questions that I have asked are appropriate for all local authorities, because I suspect that Bury's action was pretty standard. It is proper to pursue such inquiries, bearing in mind the fact that the public in the authorities concerned cannot easily be expected to put the loss of millions of pounds down to experience. Whatever comes out of the inquiries that involves the Bank of England, some authorities--I accept, not all--would still have been caught out, having invested some time ago. Had the Bank of England been in a position to close down BCCI earlier, such authorities would have lost their moneys a few years before they did. For them, therefore, my set of questions about their predicament is easily as relevant as any other set of questions that has been directed to the Government and the Treasury inquiry.

Whatever may have been the cause of the losses to local taxpayers, I hope that they will not have to pay too high a price for the actions of others. My hon. Friend the Member for Bury, South (Mr. Sumberg) and I support the efforts that are being made by authorities to persuade the Government to spread the repayment of the debts over as long a period as possible, to reduce the impact year by year on local taxpayers.

None of us wants to see BCCI-type collapses affect public authorities in future. Only by asking the right questions and seeking the right answers will some good come from the collapse. Only in that way will a similar situation be avoided for local taxpayers of the future--who deserve no less.

2.32 am

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