House of Commons Hansard Debates for 6 Nov 1992

Column 559

compensation was paid and, as the Governor of the Bank of England told the Treasury Committee on Wednesday, "every penny recovered". In the Maxwell pension fund case the Government have used a discretionary payment to make grants of over £1million to eight pension schemes and interest-free loans of £100 million. The campaign for more compensation goes on. The hon. Member for Dover (Mr. Shaw) is involved in that case.

When the right hon. Member for Brent, North and I met the Chancellor and the Economic Secretary last week the right hon. Member told them that there was a perception that the Government were being unfair and discriminatory. I hope that in his winding-up speech the Economic Secretary will refute those allegations and show why there is to be a difference between the two cases. I am heartened by the statement by my hon. Friend the Member for Durham, North (Mr. Radice), a senior and respected member of the Select Committee, that he believes that compensation should be paid. Will the Minister answer the question put to him earlier? If the Treasury Select Committee makes a recommendation for compensation will the Government pay it? Compensation should mean full compensation for the depositors, creditors and ex-employees of BCCI. I put to the Economic Secretary a list of proposals that I think could help resolve these matters before the question of compensation is finally resolved by the Government. First, the Chancellor should examine representations for compensation from the affected groups. As I have said, I do not think that it will be as much as £6 billion, because the number of claimants will be considerably less than the current number of customers, which is about 285,000. As he said, there has already been a 50 per cent. under-claim on the deposit protection scheme. Secondly, a committee should be established with representatives from the Department of Trade and Industry, the Treasury and the Foreign and Commonwealth Office to oversee the rapid conclusion of this problem and the co-ordination of Government activities. Thirdly, the Department of Trade and Industry should be asked to act on the representations to it by creditors and staff about the way in which the liquidation is proceeding. I understand that the liquidators are currently claiming fees of between £1 million and £2 million a week. When creditors write to the liquidators asking how much money they are taking they are told virtually to get lost. According to the liquidators' report, at the time of closure the total assets of the bank were $16 billion, including $3 billion in cash and due from other banks. According to Lord Justice Bingham, one of the reasons why the Bank of England did not tell Abu Dhabi about the closure was that it wanted the assets preserved and was concerned that, if given advance notice, Abu Dhabi might withdraw or disperse those assets. Where are those assets? In his evidence to the Select Committee last year when pressed on the position of United Kingdom branches, the Governor of the Bank of England said :

"We do believe that the branches may be asset surplus." I ask again : where is the money, what has happened to it since the bank closed? Nothing has been realised and nothing has been paid out.

As the House knows, the liquidators were appointed by a fax sent by the Secretary of State for Trade and Industry on the undertaking that a meeting of creditors would be

Column 560

held within three months. No such meeting has taken place. It is no good the liquidators chasing the small customers in Britain. They should chase the big borrowers whose loans are parked in the Grand Cayman islands, because they are the people who can give back the kind of money that the depositors need. Why are the liquidators not returning to the staff the $150 million taken by the the bank from the staff benefit fund?

Last week I asked the President of the Board of Trade to produce a list of the liquidators' costs and information about some written-off loans. I asked those questions because I had asked Mr. Desmond Flynn, one of the President's senior officials, to produce this information. In front of five other people Mr. Flynn produced a file and said that because of the powers conferred on him by the Insolvency Act 1986 and because there has not been a creditors meeting, the Secretary of State has to approve all the write- off of these loans. Why is that information not made available to all hon. Members?

The first scandal in BCCI was the fraudsters profiting from the misery of ordinary people because the Bank of England failed in its duty to protect them. The second scandal will be the liquidators becoming rich on the victims' money while the Government stand by and watch. I say to the Minister, as I said to the Chancellor last week, that in a year we shall be here again debating another inquiry into the way in which the liquidation has been conducted. That is why the DTI must hold an inquiry now into the liquidation.

Fourthly, the Prime Minister should approach the Sheikh of Abu Dhabi, because it is clear that the Sheikh owns the whole bank. There is no question of his being the majority shareholder. In the light of the Bingham report, the Government owe the Sheikh an apology. When that apology has been given he should be asked in the gentlest, kindest and politest way through diplomatic channels to see whether his contribution can be increased. As the owner of the bank, he has a moral obligation to increase the amount available for compensation. The Minister said that the Sheikh was giving $1.7 billion, but what does he get back? He gets $4 billion in promissory notes and the right to chase the big borrowers in the Grand Cayman islands. That means that any money realised after the agreement will go to the Sheikh of Abu Dhabi. At the end of next year the depositors will receive only 10 per cent.--not 30 or 40 per cent.--of their money back and they have no timetable for payment of the rest of the money because the liquidators refuse to state the timetable.

An approach must be made to Abu Dhabi as quickly as possible, especially now that an appeal has been lodged. I suggested to the Economic Secretary the name of a person who would be a good go-between who has the confidence of both sides.

This morning I received a cheque in the post. Initially I thought that it was a payoff inviting me not to continue my campaign but it was a copy of a cheque for $2.5 million. It was drawn on a private Swiss bank account and signed by the founder of BCCI, Abu Hassan Abedi, and payable to his excellency Mr. Ghanzim Mazrui, chief of staff of the Sheikh of Abu Dhabi. I realise that Mr. Mazrui is an important man and that, with all the current important negotiations, we cannot offend him. However, it is plain that in his evidence to the Select Committee last year the Governor of the Bank of England realised that

Column 561

members of the household who are close to the owner of the bank received some payment. It is important to clear that up and that is why the Sheikh should be approached.

Finally, the Serious Fraud Office should be allowed to interview those responsible. One of them who has been held in detention since last year died this week while in Abu Dhabi. These people are British citizens who could not only help in discovering the truth about what happened but could assist the liquidators by disclosing the location of the assets.

When I returned from Karachi in May I passed information to the Solicitor- General and invited him to ask the Serious Fraud Office to go to Karachi to interview people who wanted to give evidence but who, for a variety of reasons, were unable to come here. I hope that the Economic Secretary will pursue this matter to make sure that this information is made readily available, especially if the liquidators say that they cannot find some of the assets. If that is not done then, as in the case of the gentleman who unfortunately died this week, those people will be unable to help the SFO in its inquiries. The solution to this terrible tragedy lies with the Government. The Prime Minister and the Chancellor were told what was to happen a week before the bank closed. Lord Justice Bingham, our most senior civil law judge, has found the Bank of England to be at fault. On Wednesday, the Governor, during one of his better moments, talked about the need for natural justice. Here is a case for natural justice. Perhaps I am old-fashioned, but I believe that people and organisations should pay for their mistakes. The cost of the Bank of England's tragedy of errors is being paid every day and every hour by the victims of BCCI. When citizens place money in banks, they do so in good faith, believing that they are being properly supervised. BCCI was owned by one of the richest men in the world and supervised by one of its greatest financial institutions. Why on earth should people have doubted its integrity?

At the end of the Committee meeting on Wednesday, this exchange took place between my hon. Friend the Member for Durham, North and the Governor. My hon. Friend asked :

"Do you have any regret for what happened?"

The Governor replied :

"I have great regret that enormous amounts of money like this have been lost, yes.

But do you feel that you have any responsibility?

I cannot accept absolute responsibility. Banking is a risky business."

In a democratic society, with power goes responsibility. There must be responsibility for both action and lack of action. With the failure of responsibility goes the duty to compensate those who have suffered. At paragraph 2.23 Bingham talks about the Bank's "duty to the depositors" overriding all other considerations. I agree. Next week, one of the depositors of BCCI, a middle-aged woman who lives in Herne Hill, London, and who has lost everything she ever possessed in the closure of BCCI, will begin a hunger strike. I beg the Government not to draw out the suffering of these unfortunate victims in the way that they did over Barlow Clowes. I beg them not to push these people to the margins of their sanity. Repenting years later, as Lord Young did, cannot help victims now.

Column 562

The Chancellor should accept his responsibility and stand by his commitments to the House. He must pay for the Bank's mistakes by paying compensation in full to those affected. If he refuses to do so, he will be impeaching the good name of this country, damaging the name of the City as a major financial centre and blighting a whole section of our community.

I can assure him that the campaign will go on and on until every penny is returned and every person, no matter how powerful or important, is brought to account, and justice is done.

12.2 pm

Mr. John Greenway (Ryedale) : It is a pleasure to follow the hon. Member for Leicester, East (Mr. Vaz), because it gives me the opportunity to be the first to congratulate him on the role that he has played in following up the BCCI scandal. Those of us who have been here today to listen to his speech already knew how much work he had done, but the common touch that he demonstrated this morning as he showed the House how this scandal has affected the lives of many ordinary people speaks for itself. I compliment him on that. I wish that I could support the hon. Gentleman's call for compensation, for which he made a compelling case. However, there is a fundamental difference between the Barlow Clowes and BCCI cases. In the former, the ombudsman found negligence on the part of officials of the Department of Trade and Industry, but there is no finding of negligence in the Bingham report. I accept that it is not an ombudsman's report, but, if anything, it is even more thorough than the report on Barlow Clowes. That is where the line needs to be drawn. However compelling the case made by the hon. Member for Leicester, East, and however much we all, in our hearts, would like to support that claim, if there is no finding of negligence, we are in some difficulty.

Equally, given that any compensation would come from the public purse, it is important to look at what Sir Thomas Bingham says about the role of officials and Ministers in the Treasury. He is specific on that, but he makes no criticism of them. There is some criticism of Price Waterhouse. Again, those criticisms are not sufficient to lead to calls for the resignation of the Governor of the Bank of England. Even if Sir Robin Leigh -Pemberton were to resign, those who might have been responsible for some of the events, perhaps for the lack of supervision to which Sir Thomas Bingham refers, would still be in place.

Mr. Beith : Perhaps they should go.

Mr. Greenway : I understand the right hon. Gentleman's point, but, if I remember correctly what I read in the report, Sir Thomas Bingham does not criticise or highlight individuals in such a way as to make it necessary for anyone to resign. I do not feel that the Governor should resign. The Bank has not been shown to be negligent. What the report demonstrates--this is what we have to conclude today--is that it was not the acts or omissions of the Bank of England that caused the loss : it was the unprecedented scale of the fraud carried out by those responsible for running BCCI. They must be called to account.

Column 563

Mr. Wilson : Behind the guise of doubtless genuine concern, the hon. Gentleman is saying that nobody was responsible and that Sir Thomas Bingham has said that nobody was responsible. However, the report says :

"the Bank's supervisory approach to BCCI was in my opinion deficient."

Does that apply only to vague and intangible institutions and not to the efforts of the people involved, from the Governor of the Bank of England downwards?

Mr. Greenway : The hon. Gentleman should bear in mind the fact that Sir Thomas Bingham also says that these criticisms are being made with the benefit of hindsight, and that nobody could possibly have been expected to anticipate the scale of fraud that was perpetrated by those responsible for running BCCI.

We should accept Bingham's findings. There is no justification for questioning his judgment or his conclusions, or the facts revealed by the inquiry, which, in any event, are similar to the conclusions reached by the Treasury and Civil Service Select Committee. The role for the House is to concentrate on the measures needed to strengthen the arrangements for supervision. I welcome the comments about that by the Minister. He is right to conclude that some of these changes, particularly in relation to the role, duties and responsibilities of auditors, should apply right across the financial services sector, including insurance, the subject on which I wish to concentrate.

In doing so, I declare some interests. I have been involved in the financial services industry for almost 23 years. I am a director of a firm of insurance brokers, and I am an elected member of the Insurance Brokers Registration Council. I advise the Institute of Insurance Brokers. All these bodies will be greatly affected by what the Minister said about putting the role of auditors on a statutory footing. That is the key recommendation of Bingham, and the key point of the Government's plans for change.

The key is to end the uncertainty about how far an auditor can and should go in taking action to the detriment of the client, which undermines the auditor-client relationship. I am not an accountant, but I can understand the difficulty that Price Waterhouse faced in dealing with its responsibilities. To clear the uncertainty once and for all by means of the Minister's proposal is undoubtedly the right way forward. I hope that the House will welcome that course, and will welcome statutory clarification.

I said to my hon. Friend the Minister in an intervention that the practical effect of his legislative proposal is to a large extent the basis on which the Insurance Brokers (Registration) Council regulates insurance brokers. I shall remind the House of the provisions of the Insurance Brokers (Registration) Act 1977. Effectively, all insurance brokers are required to submit their audited accounts for the year end within six months of that year end. Accompanying them must be a declaration from the auditor about the way in which policyholders' moneys have been looked after and the solvency margins of the firm. These requirements have statutory force. I know from my own experience how seriously auditors take their responsibility in ensuring that the registration council receives exactly right detail and advice in relation to the management of the firm.

I remind the Minister that if an insurance broker fails

Column 564

to discharge his responsibilities within the mechanism I have described, the registration council is required to take disciplinary action against the firm. That would almost certainly lead to the firm's being struck off the register of insurance brokers. For many years, I have wanted these statutory requirements to be extended to cover the entire insurance and financial services sector. Intermediaries are affected, whether they are independent or dependent on or tied to one insurer. The far-reaching proposal that has been made as a result of the Bingham report should be set in the context of developments within the financial services sector to which the hon. Member for Edinburgh, Central (Mr. Darling) referred. My right hon. Friend the Chancellor of the Exchequer asked the Securities and Investments Board in July to undertake a review of the Financial Services Act 1986. An agenda has been set out, and one which is apposite to this debate. One of the regulatory responsibilities of SIB--Andrew Large, its chairman, has put it on the agenda--is whether the balance or interaction between investor protection and caveat emptor is understood or appropriate. That question goes to the heart of the BCCI difficulty and the difficulty of compensation.

When we were faced with the Barlow Clowes scandal, the feeling emerged that if the Government put in place a regulatory framework for financial services and that framework is deficient in some way and found wanting, that is the Government's fault, and compensation should be paid.

The other side of the argument--the Minister outlined it at the end of his speech--is that every individual must take proper advice and, more than that, ensure that the company, bank or institution in which he is investing his money is sound and properly managed. In the SIB review we need to examine the boundaries of the two conflicting arguments to ascertain whether the balance is right, and on that basis to see what needs to be done in terms of investor compensation.

The SIB regulatory responsibility review will be concluded in March or April 1993. There will have been responses from the entire financial services industry. I warn the Minister that he is likely to find some pretty negative answers to some of the questions. For example, are the objectives that lie behind the Financial Services Act 1986 understood and appropriate? I am sure that they are not understood by the majority of the British people. They may be understood by those who work in the financial services industry, but ordinary investors do not have an understanding of them.

Let us consider the likely changes in the regulatory structure. The hon. Member for Edinburgh, Central talked about the prospect of a new self- regulatory organisation, the Personal Investment Authority. That interacts with a further development, which is the European Community's recommendation that there should be regulation of insurance intermediaries.

If we are to have a statutory duty imposed on auditors and that is to apply to intermediaries, it must apply to those in the financial services sector as well as to those in the insurance sector. I have already said that those who are registered brokers already effectively have to comply with the statutory requirement to make available their accounts and show their solvency. Under the Financial Services Act, all intermediaries must be regulated.

Column 565

However, intermediaries who do not transact investment business are not properly regulated at present. The EC recommendation that genuine insurance intermediaries should be regulated provides us with an opportunity.

I accept that responsibility lies with the Department of Trade and Industry and not with the Minister. Nevertheless, I hope that he will recognise the logic of ensuring that insurance intermediaries are regulated. I can say from my experience as a member of the registration council that it fulfils its task with great professionalism and great thoroughness.

If that regulation were to apply to all intermediaries, I do not believe that there would be anything like as much concern that there are regulatory gaps that need to be closed. There are gaps, but scandals would not emerge, with policyholders and investors losing their funds, if there were the regulation that I am advocating. I ask for my hon. Friend's support. A consultation paper will be issued shortly that will seek responses to the general proposition that I have outlined.

These matters have a strong bearing on what should happen in financial service regulation as well. Under the Insurance Brokers (Registration) Act 1977, the council has responsibility for regulating insurance brokers when they mediate in insurance. If that function is extended to all intermediaries who mediate in insurance, those who mediate in investments, which include life assurance, must come within the scope of the registration council's responsibilities.

To put the matter simply, many independent financial advisers who transact insurance business as part of their day-to-day work would come within the scope of any compulsory registration of intermediaries on the registration council. That must follow. Equally, it must follow that, as the registration council is carrying out supervision under the Financial Services Act entirely to the satisfaction of the SIB--it is currently authorised as a recognised professional body--we must question whether we need to adhere to the 49 per cent. threshold, or whether that can be removed on the basis that the registration council regulates all intermediaries--subject to one caveat to which I shall come. That would apply to all intermediaries, be they insurance brokers or whatever else they call themselves. They would be regulated to the same high standard that applies to insurance brokers. The regulation would cover all insurance services, and would be carried out under the terms of the Financial Services Act.

That must make sense, but I will enter one caveat. Many intermediaries advise clients to make investments that are not insurance investments--unit trusts, PEPs, and so on--and such firms would have to be regulated by the new Personal Investment Authority. The Minister will find that the insurance broking profession will give general support to that overall concept, subject to some conditions.

One is that PIA membership should not automatically be granted to firms currently regulated by FIMBRA and LAUTRO, but that a fresh application should be made with a view to re-examining advisers. The Minister will not be surprised to learn that insurance intermediaries will also want polarisation maintained, and a single public register

Column 566

established and maintained by any new regulator such as the PIA, with sections for product providers and intermediaries.

A clear distinction should be drawn between intermediaries who are dependent and those who are independent. If the statutory basis of the declaration by auditors is to be made compulsory across the board, it is no use applying that practice only to independent advisers. Bad advice and the risk of investors losing life savings is more of a problem in the tied than in the independent sector. Authorised representatives often run firms independent of the product provider--but, because they have only one agency, they are tied agents and are regulated not by FIMBRA but by LAUTRO. They would have to be regulated by the PIA.

Any declaration by auditors relating to solvency and accounts must apply to such firms as well. It follows that the solvency margins imposed now on insurance brokers--and soon, we hope, on the entire independent sector-- must apply to independent firms that are effectively dependent on one product provider. I am sure that the Minister acknowledges that important point. Unless that is done, there will be no proper polarisation or level playing field, as between the two sides of the industry.

It is crucial also that all advisers have professional indemnity insurance, because that is the best way initially of providing adequate protection for investors. That must be a requirement of the new PIA.

The Minister knows that there is much discussion in the financial services industry about those key points. He was absolutely right to outline the basic principles of best advice. I look forward to reading his five golden rules in Hansard, to see whether he missed anything out. If investors are not to put all their eggs in one basket but are to approach a number of different outlets and sources of advice, it is crucial that all are soundly based, secure, and fit and proper.

It was the fitness and properness of BCCI as a bank that gave rise to the problem--the Bank of England was examining BCCI's solvency, whereas we require fitness and properness. If the House genuinely wants to protect investors, nothing less will do.

12.24 pm

Mr. Calum Macdonald (Western Isles) : I wonder whether the Minister has the courage to visit the widow in Hong Kong described by my hon. Friend the Member for Leicester, East (Mr. Vaz) and tell her his five golden rules --particularly that about always being sure to hire an adviser. That kind of response is hardly adequate in dealing with the scale of disaster and failure represented by BCCI's collapse. I add my congratulations to Lord Justice Bingham on producing an excellent, comprehensive, and clearly written report. It allows one to follow in detail the long, damning history of the Bank of England's errors and failures in supervising BCCI. The Bank repeatedly failed to understand the Banking Acts of 1987 and 1989 and the powers that were available to it. Time and again, the Bank ignored warning signals and failed to act in the way that a supervisory body should have done.

As to the Bank of England's Governor, BCCI was surely a bungle too far. He has participated in the most humiliating devaluation since the war, presided over the biggest banking scandal in financial history, and

Column 567

authorised the worst financial forecasts of any City institution. What more can he get wrong and still hang on to his position ? For a year, the ordinary people of the Western Isles and those throughout the country, who themselves carry no blame or responsibility for the BCCI, have had to bear the costs in cuts in services and extra local taxes--in effect, a Bank of England tax. The costs of the Bank's negligence should be carried by the Governor, who should resign, and by the Government, who should devise a scheme to provide fair and equal compensation for all who lost money or jobs. The Government stick to the line that no negligence was shown in the Bingham report. When I wrote to the Chancellor of the Exchequer, he replied :

"my statements in July last year were about my willingness to reconsider the issue of compensation if evidence of negligence on the part of the supervisory authorities were to emerge. Lord Justice Bingham has found no such evidence."

That same argument has been used today by Conservative Members. In fact, the report plainly shows evidence of negligence. I wondered whether Lord Justice Bingham would agree with the Chancellor's interpretation, and that of the Minister. I therefore wrote to him, enclosing the Chancellor's letter. I wrote :

"Mr. Lamont makes the bald statement that you found no evidence of negligence on the part of the Bank of England in respect of its supervision of the Bank of Credit and Commerce International I would be very grateful if you could tell me whether you agree with the Chancellor's assertion."

Lord Bingham replied :

"Thank you very much for your letter of 29 October 1992. Having been appointed to inquire and report by the Chancellor of the Exchequer and the Governor of the Bank of England, and having delivered my report, I do not feel that it would be right for me to comment on the interpretation which either of them put on it. I appreciate that the report, even without the appendices, is quite lengthy, but I did my best to make it clear and intelligible. It is not for me to say whether or not I succeeded. But I am afraid that the answer to your question must be found in the report." The sphinx has spoken.

The main point in that letter is that, at the very least, it is not possible for the Minister and other Conservative Members to state categorically that Lord Bingham found no evidence of negligence. At the very least, they must admit that we are forced to draw that conclusion, having read the evidence presented in the report. I do not believe that any reasonable person could read the report without concluding that the Bank of England was negligent in the execution of its duties. According to Bingham, right from the beginning--in 1979, when the Bank of England authorised BCCI to accept deposits--the Bank

"was not only entitled but obliged to refuse a licence". That is in paragraph 2.30. The Bank was obliged to refuse a licence, but it went ahead and granted one. Surely that represents a gross failure to understand the powers available to it--and, indeed, required of it--under the Banking Act 1979. It also represents negligence.

Paragraph 2.46 of the report, and the paragraphs leading up to it, reveal what is perhaps one of the strangest episodes to feature in the whole affair. In 1982-83, the supervision department of the Bank of England concluded that BCCI must be incorporated in London if the Bank was to be able to regulate it effectively. A memorandum to that effect was sent to the Governor ; he signed it, authorising the Bank's conclusion. The Bank then called in Mr. Abedi, who was interviewed by the director of

Column 568

banking supervision and told that the Bank wished him to incorporate in London so that BCCI could be regulated more effectively. Apparently, Mr. Abedi threw a tantrum and walked out of the office. That was the end of the affair.

With, as usual, mild understatement, Lord Bingham says in paragraph 2.46 that the Bank was "rather easily deterred". It is astonishing that the Bank of England, with its worldwide reputation for being able to bring other institutions into line simply by raising an eyebrow, could drop a course of action authorised by the Governor himself, merely because the person required to take that course had thrown a tantrum and declined at the very first interview. Has the Chancellor, the Economic Secretary or anyone else asked the Governor why he did not pursue more effectively the policy that he himself had authorised and approved?

That bizarre episode was followed by something equally strange : a complete change of policy. From 1985 onwards, the Bank of England shied away from any suggestion that BCCI should be incorporated in London. It declined all such offers, performing a complete flip-flop. The report does not explain why that happened. There is no explanation for the change of view by the Bank of England. One wonders whether that has anything to do with the information contained in appendix 8 relating to the intelligence services, and whether some of the blank pages--the black holes of logic or causality in this whole affair--could be explained if we had access to appendix 8.

A number of points have been made by the Minister and Conservative Members to explain why the Bank of England failed to carry out its regulatory role. Reference has been made to the last 15 months of BCCI's life. Whether the bank was closed down earlier or later is not the point : the structural problem was there from the very beginning, and the Bank of England had reason to act about that problem from the very beginning. It was too late by the last 15 months of BCCI's life.

Reference has been made to the unpredictable scale of the fraud. Again, that is not the point. Nobody could have predicted the exact scale of the fraud. Lord Bingham's point is that that fraud was made possible by the opacity, the vagueness of the structure of BCCI, which made it impossible to regulate the bank effectively. The Bank of England's failure was to allow such a structure to exist. By allowing it to exist, the Bank enabled fraud to be committed. Revocation is another red herring that has been drawn across the path of this whole affair. It has been said that the Bank of England could not possibly pull the plug on BCCI because of the catastrophic consequences that would flow from its closure. But revocation is not the point, either. Lord Bingham pointed out time and again that the Bank of England has enormous powers to step in and exercise its influence, and that it clearly failed to do so in the case of the 1984 episode. One is therefore entitled to ask why the Bank of England did not exercise its influence.

Hon. Members have said that we see all this with the benefit of hindsight, but that is not what Lord Bingham says. Section 7 of his report covers the years from 1984 to 1986, well before BCCI's final collapse. In paragraph 2.57 of chapter 2, Lord Bingham describes the Bank's supervisory situation as highly unsatisfactory, adding : "as should have been obvious at the time."

That is not with the benefit of hindsight. According to Lord Bingham, it should have been obvious at the time that this was highly unsatisfactory.

Column 569

Lord Bingham went on to describe some of the Bank of England's responses. In paragraph 2.62, he says :

"making, as I hope, appropriate allowance for the benefit of hindsight, I cannot regard this as an adequate supervisory response."

It was an inadequate response, not with the benefit of hindsight but because of what was known at the time.

Lord Bingham refers in paragraph 2.66 to the Bank of England's failure to exercise its powers in an appropriate way and to exercise some formal control over the way the business was run :

"it is hard to think that SA in the summer of 1986 was not such a case"

as to deserve some formal control over the way the business was run. Inadequacy of supervision should have been obvious at the time to the Bank of England.

Lord Bingham concludes paragraph 2.67 with what I believe to be one of the most damning sentences in the whole report :

"I think the supervisors tended to lose sight of their primary duty to protect the bank's UK depositors. I do not think that in this instance the Bank measured up to its task."

When the Bank of England loses sight of its primary duty to protect BCCI's United Kingdom depositors, the Bank of England is thereby negligent of its duties.

The case for compensation for local authorities is especially strong. The authorised list has been mentioned, but in order fully to understand its import, one must understand its origins. The Local Government and Housing Act 1989 specifically restricted local authority investments to "authorised" investments. Investments would have to be made with authorised institutions, which included banks authorised by the Bank of England.

Why was that done? For no good reason? No, it was done for a specific purpose : the Government's express intention to end imprudent investments and so safeguard local authority funds. That was made clear in the consultative paper on capital expenditure and finance published by the Department of the Environment in July 1988, before the Act went through Parliament.

In paragraphs 37 and 38 of that paper, the Department of the Environment said :

"it is a matter for concern that some authorities appear to have used their funds to undertake speculative investments the new system will, therefore, specify a list of approved investments." In other words, the new system-- the list--was intended to distinguish between speculative investments and non-speculative, presumably safer, investments.

Acting in that context, and according to those guidelines, local authorities throughout the country placed money with BCCI, which featured on the list of authorised institutions. To me that context is inescapable, and it makes the local authorities' case for compensation especially compelling.

Local authority compensation need not mean extra overall taxation in the country as a whole. Local authorities are already having to pass on the cost of the losses to local taxpayers, by means of higher local taxes. Compensation from central Government would mean that, instead of the burden being loaded entirely onto the shoulders of local taxpayers--many of whom, in areas such as mine, are suffering high unemployment and severe economic distress--the load could be carried more broadly across the nation as a whole.

Column 570

Finally, on the subject of redress and compensation, it has already been said that BCCI depositors have no means of redress other than through the Government. The Bank of England has legal immunity and cannot be sued, except in instances of bad faith. I do not say that there was bad faith ; there was simply incompetence and negligence. The ombudsman is not empowered to investigate the matter either, because it affects the Bank of England, so depositors can look only to the Government for some kind of compensation.

It is clear from the Bingham report that what has happened has been primarily a failure of national regulation.

If the Select Committee returns to this problem in a future report, and if it recommends the payment of compensation, will the Government accept that recommendation? The Select Committee is the only independent body able to make such a recommendation. The ombudsman and the courts could not ; nor could Lord Justice Bingham, because it was not in his remit. The only independent voice to decide the verdict in this matter is the Treasury Select Committee. If it recommends compensation, will the Government accept that? BCCI represented a huge failure of regulation by the Bank of England, charged by the Government with the task of supervising the banking system and ensuring the basic security for people's deposits. I believe that it is now the responsibility and duty of the Government to come forward with a fair and reasonable scheme of compensation to lift the burden from tens of thousands of innocent depositors and local taxpayers who are now carrying all the costs through lost savings, lost jobs and lost services.

I echo the question by other hon. Members--what is the price of failure on the part of the Bank of England? So far, we have had no apologies, no resignations, no compensation--just excuses. If there is no price, what incentive is there to do the job effectively and properly in the future?

More than 123 hon. Members have already signed early-day motion 727, calling upon the Governor to accept his responsibility for this failure and to resign. The longer he declines to do so, the longer he remains a Governor not just without credibility, but I am afraid--I am reluctant to say it--without honour.

12.46 pm

Mr David Wilshire (Spelthorne) : I apologise to the House because the issue I want to raise may result in my failure to be present for the conclusion of the debate. I should declare an interest because I was one of the people who actually owed money to BCCI when it closed down. I used its credit card, which gave a percentage of turnover to green issues, and when the bank closed down I owed it £5.50. I hasten to add that I paid that rather promptly.

Mr. David Shaw : With interest?

Mr. Wilshire : I do not believe that I had the debt long enough for interest to be added.

I must also explain to the House that I cannot possibly bring certain expertise to bear in this debate because I am neither a banker nor an accountant. I am also ready to admit to not having been closely involved as this awful

Next Section

Home Page