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Employment Protection (Increase of Limits) Order 1995

1.57 p.m.

Lord Chesham rose to move, That the draft order laid before the House on 28th June be approved [25th Report from the Joint Committee].

The noble Lord said: My Lords, the Secretary of State is required to review each year the limits on certain payments under the legislation while other limits can be reviewed as and when he thinks fit. The order increases the maximum amount of most of the awards that industrial tribunals can make to individuals whose statutory employment rights have been infringed. It also affects the amount of redundancy payment payable to employees.

As your Lordships may know, the limits that must be reviewed annually are the limits on the amount and duration of guaranteed payments, the limit on the weekly amount payable from the National Insurance Fund and the insolvency payments in respect of certain debts, the limit on the amount of a week's pay used to calculate redundancy payment, the basic award of

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compensation for unfair dismissal and the additional award for an employer's failure to comply with an order of re-employment.

As has been the usual practice, the Secretary of State for Employment consulted widely with employer and employee bodies and with others who have an interest in this matter. He has also been required to take into account the general level of earnings, the national economic situation as a whole and any other relevant matters. As a result of all these considerations we propose that the limit on the daily amount of guaranteed pay should increase roughly by the RPI index from £14.10 to £14.50 and that the limit on the amount of a week's pay should increase from £205 to £210. There has been no significant pressure for changes to the duration and period of guaranteed pay. The Secretary of State for Employment laid a report on 19th June in which he explained why these limits would remain at their existing level for five days in any period of three months.

The legislation also enables the Secretary of State to review from time to time limits on the compensatory award for unfair dismissal and the special award which may be made in some cases where dismissal is for trade union or health and safety reasons. The opportunity of the consultation was taken to consider these limits at the same time as those for which an annual review is required by statute. The general compensation limit was last raised two years ago. The special award reflects fundamental protection against being dismissed for trade union membership, or non-membership, or because of trade union activities, or since the Trade Union Reform and Employment Rights Act 1993 for certain health and safety matters.

The level of the limits here act only as compensation for the individual, but are a real deterrent against employers acting in such a way. As with the other limits, we consider it right that there should be a modest increase in these awards this year. The proposed new limits will be as set out in the order. I beg to move.

Moved, That the draft Order laid before the House on 28th June be approved [25th Report from the Joint Committee].—(Lord Chesham.)

2 p.m.

Baroness Turner of Camden: My Lords, I welcome the noble Lord, Lord Chesham, to his first stint at the Dispatch Box on an employment question. I am sure that we shall hear a great deal more about employment from him in future. I would also like to thank him for the way in which he has explained this order.

We on this side welcome it, although perhaps in rather a tepid way, on the ground that it represents an improvement and, I suppose, it is better than nothing. However, the order gives me the opportunity to express my concern about the disappearance of the Department of Employment. It seems to me that, at a time when the employment scene is changing so drastically; when people are so insecure, even those who have jobs; and when everyone, including the Government, are talking about flexibility in employment, which is more like casualisation—we had a debate about that in this House quite recently—entirely the wrong signals are being sent

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out. The impression will certainly get around that the Government are not really concerned about employment problems and that these can be subsumed in other departments—in education, the DTI, the environment and so forth. It simply confirms the point of view that some of us have held for some time, that employee rights are rather low on the Government's agenda and now that they are simply not there at all. I believe it to be a very retrogressive step and it is one which I am sure the Government will regret.

Turning to the order itself, the Government could have done a little better. Some of the limits have not really kept up with inflation, as I am sure the Minister must know. Moreover, as regards unfair dismissal, about which we are concerned because of the general employment situation, there has been, as I believe the Trades Union Congress has said, a total failure to uprate in line with the RPI. The limit is now £11,300, but if it had kept pace with inflation, it would have been of the order of £27,000. However, the limits on compensation awards for sex discrimination and race discrimination have had to be removed as a result of European decisions, so why should we not remove the limit as regards this particular area? As far as other limits are concerned, I gather that in some instances there has been no increase since 1992, so the increases now given are hardly munificent.

As I said at the beginning, we welcome the order on the basis that it is an improvement on what was there before, but we believe that it would have been possible for the Government to have done better.

Lord Chesham: My Lords, I thank the noble Baroness for the kind words welcoming me here. I am glad that she has some welcome for the proposed increase, even though it is not as large as she would have liked. Any increase in these limits must be set in the overall context of the country's economic priorities. Our first priorities must remain the strengthening of the economy and avoiding any unreasonable increases on the burdens of business.

As regards her other comments, it is a little difficult for me to respond to the situation of the Department of Employment. We have done what we can to raise the limits. In fact, where the majority of the maximum limits are involved, the actual amounts paid out are averaging around £2,700 as against £27,000, which is the maximum amount allowed. While they could be higher, the average amount being paid out is considerably less than the maximum amount. I commend the order to your Lordships.

On Question, Motion agreed to.

Banking Supervision

2.4 p.m.

Lord Eatwell rose to call attention to the need for improved banking supervision, in the light of the collapse of Barings; and to move for Papers.

The noble Lord said: My Lords, it is traditional for Motions to resolve in your Lordships' House to end with the words, "and to move for Papers". In the circumstances

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of our debate today, that Motion is even more than usually appropriate: Papers are certainly needed. We have all now had the opportunity to study the report of the inquiry into the collapse of Barings. It makes it abundantly clear that the collapse was brought about by the three factors listed in paragraph 13.4: first, unauthorised and concealed trading by Mr. Leeson; secondly, a total management failure at Barings; and, thirdly, a serious regulatory failure by the Bank of England. The collapse would not have occurred without each of those three ingredients to the fatal brew. The report demonstrates that this unbelievable mess was brought about not just, as the Chancellor of the Exchequer originally asserted, by a rogue trader, but also by a rogue management and a rogue regulatory system. All three were necessary for the collapse; only one of them is still in place.

That is why a responsible government, mindful of the importance of the integrity and long-term profitability of the City of London for our national economy, would now set up a proper independent review to consider what should be the structure of a modern supervisory system for British banking. That review should consider both what are the tasks of financial regulation in a fast-changing world and whether the Bank of England should continue to perform those tasks or whether they should pass to a new banking commission. In other words, its terms of reference should be drawn far more broadly than the Board of Banking Supervision's terms of reference in the investigation into Barings.

The Barings report, like the report on the Johnson Matthey affair and the Bingham report, provides a number of detailed recommendations for changes in the Bank of England's regulatory system. Famously, these include the recommendations in paragraphs 14.35 and 14.37 that the Bank should understand the business it is supposed to be regulating—an argument the implications of which are not particularly reassuring. Indeed, as with the Johnson Matthey and the BCCI reports, this report leaves us with the distinct impression of a regulatory system which is always catching up with yesterday's problems, and in the case of Barings a problem which the Governor of the Bank of England believes is an aberration. Therefore, the recommendations, sensible though they undoubtedly are, are also reactions to yesterday's problems.

In the succession of regulatory failures suffered over the past 10 years, we always seem to be playing catch-up. It is time that we designed a regulatory system which could provide Britain with a competitive lead. The need to take a lead has been created by the speed of global financial deregulation and innovation which is sweeping away the old boundaries between deposit-taking banks, on the one hand, and investment and securities houses, on the other hand. Competition in global markets is forcing the development of larger, more diverse financial conglomerates in place of the segmented, fragmented markets of old. New markets in derivatives and other financial products have blurred the lines between prudent hedging and reckless gambling. It was precisely those changes which resulted in the Bank

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of England's regulators confessing in 1993 that they did not understand the business that they were supposed to be regulating.

Of course, the development of global markets also poses new problems of international regulatory co-operation and co-ordination, but the traditional tasks of an effective supervisory system remain essentially the same. First, the banking system must be protected from systemic risk—that is, the possibility of a catastrophic financial failure which spreads from one financial institution to another. The funds of depositors, small and large, in banks and near-banks must be protected. Secondly, while in securities markets investors do not receive the same protection as depositors—investments are necessarily risky—regulators must nonetheless ensure that investors are fairly and honestly treated. As the Barings case shows, the difficulty is that in a world in which banks and securities traders are one and the same, the risks of a securities business can overwhelm prudential banking.

That problem has been considered recently by the so-called "tripartite group" of international banking, securities and insurance regulators, which produced a report entitled The Supervision of Financial Conglomerates. The tripartite group attempts to gain a picture of the entire regulatory framework of the global financial markets. It would be helpful if the Minister could tell us what contribution the Bank of England made to the tripartite group's work on the supervision of conglomerates. After all, the Bank certainly has a lot of experience of what can go wrong.

In its report, the tripartite group identifies a number of possible approaches to the problem of conglomerate regulation. It contrasts, on the one hand, consolidated supervision by a lead regulator who has responsibility for an entire conglomerate with, on the other hand, solo supervision in which different parts of the conglomerate are the responsibility of different regulators. The report also assesses the advantages of the isolation of banking activities from investment activities. Noble Lords will remember that that was an important issue at Barings where banking and securities operations were combined. That form of isolation has been enforced in the United States since the 1930s under the Glass-Steagll Act. Finally, the report assesses the benefits of New Zealand's approach to regulation, which involves far greater transparency, with the enforced publication of exhaustive information.

Whichever of those approaches is adopted, it is clear that banking supervisors have great difficulty handling the new world of conglomerates. Co-operation between different supervisors is difficult enough in one country, let alone between countries. Moreover, it is clear that there will always be a tendency to exploit the soft restrictions which may be found in the cracks between different regulators. All in all, what is most important in any complex financial group is the development of powerful internal controls and methods which are internationally agreed.

It is all those issues and problems—the problems of the modern world—which a thorough review of Britain's supervisory structures should address. In principle, the content and flexibility of the supervisory

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system is far more important than who actually runs it, whether it be the Bank of England or an independent banking commission. The structure of a modern supervisory system should be the major part of the terms of reference of a thorough review.

Although the content of a modern supervisory system is the main question to be tackled, the issue of the role of the Bank of England cannot be left out of the equation. Is the Bank part of the solution or part of the problem? What is most disturbing in the light of the events of the past decade is the increasing evidence that, despite numerous attempts which have led to some significant changes, the Bank cannot adequately reform itself from within. Why not? First, there is the culture which seems to suggest that the Bank knows best. That breeds complacency. The words "informal" and "lack of rigour" echo down through the Johnson Matthey report, the Bingham report and now the report on Barings. The same words appear again and again.

It was that culture of complacency which decreed that there should be no site visit to Barings in three years. It was that culture of complacency which resulted in warnings from Singapore and from the Bank for International Settlement in Basel being ignored. It was that culture of complacency which led the Governor to argue just a year ago:

    "We now have an expert team monitoring derivatives who are getting even better every time that they go to see a firm. These people know what they are doing whether it is at director level or the chaps on the desk".

it is that same culture—the belief that the Bank knows best—which results in the Governor of the Bank, a public official, describing parliamentary investigations of a clearly flawed regulatory system as a witch-hunt. Does the Minister consider that rigorous parliamentary oversight of such important matters amounts to a witch-hunt?

The second reason why we must doubt the Bank's ability to reform itself from within is that it appears to have a disturbingly casual attitude to those people at Barings who have managed other people's money so incompetently. On Wednesday, the Governor was notably reticent in his answers to the Treasury and Civil Service Select Committee of another place as to whether those people will be allowed to run a bank again. If they were doctors, they would have been struck off; if they were clergymen, they would have been hauled before a consistory court. What will happen to the people who ran Barings, who clearly could not be entrusted with a whelk stall? Does the Minister think that those people should ever be allowed to run a bank again?

Thirdly, there is a persistent tendency in the Bank's approach to its supervisory role to regard regulation as an unfortunate cost rather than as a competitive benefit. Whenever the Governor is asked to compare the British arm's length approach to regulation with the American aggressive and intrusive tradition of on-site visits, he refers to the extra costs of the American-style regulation and the necessity of not stifling enterprise, if that is what American regulators are trying to do.

The bank seems to believe that regulation should be minimal and best undertaken by those who can be relied upon to put the interests of the City practitioners whom

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the bank represents before those of clients and depositors. But our informally regulated market has not proved a source of competitive advantage for Britain in the long run. Instead, it has been an important factor in the decline of the British merchant banking community. The regulatory failure that hastened the collapse of Barings led to a sharp increase in the cost to all British merchant banks of borrowing money. That money is their essential raw material, and its cost is a major determinant of their competitiveness.

So it is no accident that famous names in British merchant banking—Warburgs and Kleinwort Benson—have surrendered their independence to foreign buyers: the Swiss Bank Corporation and Dresdner Bank respectively. Barings is now owned by the Dutch Company ING and of course Morgan Grenfell is owned by the Deutsche Bank.

In each and every case the stronger purchasing bank has come from financial markets that are considerably more tightly regulated than London. The weaker banks are in London. That has been the particular form of systemic risk which the Bank has itself created: the risk to the entire system of British merchant banking. It is clear that the Conservative Party does not care who owns Britain's banks, but the Labour Party wants there to be a decent number of world-class British companies competing in London and sustaining London as the centre of the world's financial system. The strength of London will not be sustained by informal regulation lacking in rigour. It will be enhanced by a modern supervisory system with transparent, firm controls which encourage creative enterprise. Creating such a system should be the key elements in the terms of reference of a proper review.

It will not happen—not under this Government. What the events of the past few days have illustrated beyond all reasonable doubt is that the true source of the rogue complacency in the British financial system is not to be found in Threadneedle Street but in 11 Downing Street. It has been the Chancellor of the Exchequer who has sought to impede change by deploying the bogus argument that because no regulatory system is absolutely perfect nothing fundamental can be done. It has been the Chancellor of the Exchequer who, by continuously repeating that there can be no guarantee of regulatory perfection, has ensured that the necessary changes can be headed off. It has been the Chancellor of the Exchequer who has declared, in the face of all the evidence in the report to the contrary, that the events leading up to the collapse do not point to the need for any fundamental change to the framework of regulation in the UK.

For the past decade it has been Conservative Chancellors of the Exchequer who have moved their brass plates around from one financial crisis to another. So a complacent Chancellor will not institute the wide-ranging review that the Barings Report so clearly reveals to be necessary. He will not respond to the call made just this week by Mr. Andrew Large, chairman of the SIB for:

    "A new business plan for financial regulation".

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Mr. Large argued:

    "It would be ironic if the end of deregulation was that we had to re-regulate financial markets because the regulators cannot cope with the effects of deregulation".

Mr. Large is absolutely right. It is clear that, despite a series of sticking-plaster reforms, Britain's regulatory system cannot cope. A fundamental review is necessary. That review will be undertaken shortly by a Labour Government.

2.20 p.m.

The Viscount of Falkland: My Lords, I thank the noble Lord, Lord Eatwell, for his persistence in requesting and securing a debate on this important subject. I speak from these Benches as a substitute for my noble friend Lord Ezra. He would have spoken not quite in the swingeing and eloquent terms of the noble Lord, Lord Eatwell, but, nevertheless, would have supported fundamentally the points that the noble Lord made following his remarks after the Minister repeated the Statement that was made in another place a few days ago.

In discharging my duty to my noble friend, I begin by broadly agreeing with the main points, as I understood them, made by the noble Lord, Lord Eatwell. It is no good having an anodyne summary to an interesting and detailed report on which the Government Statement was based. We need a full inquiry and I am confident that, when the true facts emerge, a full inquiry will be before us.

The noble Lord, Lord Eatwell, pointed out various interesting aspects of the situation. For instance, should those within the Bank of England remain responsible for the increasingly complex and international world of securities dealing? In the light of the report, the Government's attitude to the situation appears to be extremely relaxed. I am sure that it is not in reality. The report was published surprisingly quickly and it is surprisingly detailed. However, some of its recommendations are, to say the least, facile. I refer to the first three recommendations, for instance, and I believe that my noble friend Lord Ezra made the point when speaking on the Statement. Some of the recommendations are so basic and obvious that they are rather like reading the instruction manual for a new Japanese car; that in order to start the car one must get the key and put it in the ignition. I believe that in respect of such a serious matter the recommendations should have been more serious and have dealt with the problems to which the noble Lord, Lord Eatwell, referred.

It is some years since I was in the City; indeed, since 1986 when what is popularly known as "Big Bang" took place. At that time I listened to the debates in your Lordships' House and was sceptical about the arrangements that were passed by both Houses. I believe that basic flaws have resulted from what happened in 1986.

The City of London has changed enormously. It is an unhappy mixture of the remnants of the old-boy network, which worked quite well. In fact, the self-regulation of the City in the old days, albeit in a smaller world of operation and with its crooks, I agree—

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crooks always exist where there are large amounts of money—and with its ability to use rough justice and to deal with miscreants was quite impressive. If the situation with Barings had arisen 15 years ago, I do not believe that the old-boy network, for better or for worse, would have allowed such a bank to have disappeared off the scene quite so readily. I do not believe that the Bank of England would have considered it.

We should be in no doubt that the disappearance of Barings is as astonishing and surprising to people with any knowledge of the City as it would be to educationalists if Eton had to be closed because there was revealed an enormous teenage drug-trading ring; or if the Grenadier Guards were found to be trading in surplus military equipment. It is an astonishing business. To City people it would be as amazing as discovering that Cazenove's, the leading stockbrokers, had been cheating their private clients and was facing a similar scandal. In fact, just before the news of the scandal broke it was rumoured in some newspapers that a merger between Cazenove's and Barings was being discussed. That would have been an astonishingly powerful financial institution in this country.

However, we have seen revealed in not much detail a scandalous operation. We can only judge it from what we hear through gossip and from what we read in the newspapers. But the damage to the reputation of the City of London as the leading financial centre of Europe, which is often claimed in your Lordships' House and elsewhere, has been immeasurable. There has been the immediate fall-out from this scandal where deposits have been removed from Barings and other banks to foreign centres. Moreover, as the noble Lord, Lord Eatwell, rightly pointed out, the cost of money has become appreciably greater, thereby making the operation of banks in the competitive world increasingly difficult.

The City of London today is a mixture of the old-boy network, with some of the good things and some of the bad things, and the new state of affairs where there are compliance officers, who are sometimes good and sometimes bad. But, generally, they concentrate on the lesser and minor matters of every-day dealing and miss the bigger fish. The bigger crooks will always find a way round that.

Not that I think that Mr. Leeson was a bigger crook. Not many people have bothered to explain, either in the press or elsewhere, exactly what he was doing. My reading of the situation is that he was doing something which is broadly covered under the name of derivative trading. That is an American term which covers all kinds of sophisticated dealings in options right down to what Mr. Leeson was doing. He was punting on behalf of clients and persons unknown on the rise and fall of the Nikkei index.

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