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I am grateful to noble Lords, who identified some of the questions that need to be addressed. Let me assure the House that the Government are all too well aware of those questions. That does not mean that there is an immediate and straightforward answer. If there were, the questions would not be apposite, but they are apposite because they relate to a difficult situation. We are concerned to establish consultation on how we amend the process. As the House will recognise, during the Recess both the Governor and the chairman of the Financial Services Authority were present before the important Select Committee in the other place to respond to some of those questions and identify their preliminary answers. Their answers were bound to be preliminary. I want to refute straight away that this tripartite system, which has been in existence for the past 10 years, has never had a test. It has had significant tests produced by financial problems which have had to be resolved. We are all aware of banks which may not have failed in quite the same way as Northern Rock, but we all know of substantial financial institutions which were in great difficulty a decade or so ago and that international terrorism produces real problems for the financial markets. The structure in this country has stood these shocks to the international system and their impact on the British system. It has withstood them in a very able way helping to ensure that over the past decade London has become the financial

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centre of the world, and the basis of the British economy has gone from strength to strength. The Government intend to sustain the tripartite system described in the Statement. We are aware that the individual actors in the system know that they have questions to answer on the process of consultation and how performance can be improved.

Some of the questions can be exaggerated for obvious reasons. I am pleased that the noble Lord, Lord Newby, has not been in close alliance with the noble Baroness, Lady Noakes, and her very heavy emphasis on the financial directive and matters European being automatically within this framework—if one can identify that a great deal of the responsibility and difficulty is because of the way in which Britain has handled its relationship to Europe, that will please her Back-Benchers in this House and in the other place.

Baroness Noakes: My Lords, for clarity, I raised the market abuse directive because there appeared to be a difference of opinion between the Governor of the Bank of England and the Commission. I was not seeking to make any comment about our general relations with Europe on this occasion.

Lord Davies of Oldham: No, my Lords, but the emphasis placed on it is scarcely merited by the role that the directive plays in these terms. We do not consider the directive to have been a crucial factor in the reaction to these issues as far as the authorities in this country were concerned, although we will discuss with our European partners aspects of the directive. We are aware that similar problems occurred in Germany and France as well as in the United Kingdom.

The responses thus far have been effective. Criticism has been made that there is considerable risk to the taxpayer. At this point, the taxpayer has not made any contribution to the Northern Rock issue. The support is guaranteed against its existing assets, which the House will know clearly depends on how the bank survives and its future arrangements. It ill behoves anyone in the House to be wholly pessimistic about that. On the existing management at Northern Rock, are noble Lords opposite suggesting that it should have been fired by a government decree?

Lord Oakeshott of Seagrove Bay: Yes.

Lord Davies of Oldham: My Lords, that is taking interference in the market a little further than the whole House may wish. It is a matter for the shareholders of Northern Rock, to whom the management is responsible, and not for government action. On whether Northern Rock should continue to trade, it is being charged a commercial fee from the public resources it receives, so it has no competitive advantage because of that. However, it is the responsibility of the authorities to seek a solution to the problem of Northern Rock as early as possible.

Our intentions are clear. Of course, there are lessons to be learnt, which the Governor of the Bank of England made clear when he appeared before the Select Committee in another place. The Financial Services Authority also recognised that there were

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lessons to be learnt from this situation. We need to consult on this. The lessons may lead to legislative change. We will consult and ensure that we have a reasonable period of time for that consultation in order to draft appropriate legislation, but it should be recognised that the structure is secure. It has served this country for well over a decade. It is in position to effect the necessary corrective on this occasion. The risk to the taxpayer is severely limited. I refute the suggestion that taxpayers have been involved in any significant cost.

I very much appreciate the contributions. I hope that the noble Baroness and the noble Lord will recognise that the Chancellor in his Statement hoped that, because this is an issue of considerable importance to Britain, our economy and financial stability, and to the role of London as a leading financial location in the world, we need to get the legislation right. We need to learn the correct answers to the problems that have arisen from these developments. I hope that we can look forward therefore to an all-party consensus on doing what is right to remedy the difficulties we have had in the recent past.

2.07 pm

Lord Elystan-Morgan: My Lords, although I accept that seismic incidences in North America have sent shock waves across the Atlantic and that a great deal of the problem emanates from that source, has not Northern Rock been the architect of its own difficulties to a great extent? Am I right in assuming that, before the Treasury took what I regard as a very bold, decisive and proper course in underwriting the deposits of Northern Rock, the Government made a careful analysis of the situation of the company over the previous 12 months? First, had it been indulging itself in allowing mortgages at 125 per cent of the value of the real property used as collateral? Secondly, were mortgagors encouraged to make their own assessment, not only of their current incomes but of future incomes? Thirdly, was there an over-indulgence in so far as borrowing short and lending long was concerned on the part of Northern Rock?

It seems that no Government could possibly have taken the wholly fundamental decision that they took—rightly—without having analysed those situations and come to some meaningful conclusion concerning them. What were those conclusions? What is the factual situation? Far from suggesting that the Government should be responsible immediately for dismissing errant directors, I wonder whether they have obtained some form of undertaking from the company that such disciplines will be looked to?

Lord Davies of Oldham: My Lords, the answer to the noble Lord is straightforward. The Bank of England did not support Northern Rock because of the deserts of that company. Every noble Lord as well as everyone in the market was palpably aware of the exposure of Northern Rock to the collapse of liquidity in the wholesale markets and its vulnerability. It is a private company which takes responsibility for its judgments, and having seen the initial catastrophic collapse of its share price, we are all too well aware of the price that

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is being paid for incompetence. But the Government have two responsibilities. They certainly have a responsibility to the ordinary, relatively low-scale depositor—men and women in the street who trusted Northern Rock as an institution and whose funds were at risk—and it was right for the Chancellor to make clear the underwriting of the position to guarantee those deposits.

The second responsibility is in regard to the international liquidity position. It was the judgment of the Bank of England that excessive turbulence in the market could lead to a serious impact on the economy. We are by no means outside that turbulence at present, and none of us would be sanguine enough to suggest that there will not be some difficult months ahead. But it was the Bank of England’s judgment that increasing liquidity to a limited extent at this point would offer a degree of stability and help to ensure that there are no repercussive effects from Northern Rock on other institutions. That is a judgment made by the Governor and for which the Chancellor is ultimately responsible in terms of support from the elected House. But let us remember that the Governor is charged with the responsibility of sustaining stability in the markets as far as he is able through his actions, and he was fulfilling that remit.

Lord Higgins: My Lords, the Minister said that the system has worked over the past 10 years, but he did not give any example of which particular problems had been solved in that way. The reality is that when it came to the crunch, the system devised by Mr Gordon Brown 10 years ago did not work, with the consequences we are discussing today.

I have three questions for the Minister. The first is on a point which has already been raised—the European directive. It is pretty clear that the reason the Governor of the Bank of England received advice that it could not provide a solution to the problem in the way he wished was that the directive prevented him in that regard. The European Union then said that the directive did not prevent him. The reality seems to be that it was the gold-plating of the directive that caused the problem. The Minister rightly says that we are not out of the woods yet, so do the Government propose that the gold-plating should be removed forthwith?

Secondly, in his Statement the Chancellor said that he is proposing to change the arrangements for compensation to depositors. One can certainly agree that a system to meet an immediate problem as it arises is needed, but I do not understand why there is any need to raise the limit from £35,000. It is only people who decide that they want to deposit a sum over that amount with a particular building society who would have a problem. The Minister will correct me if I am wrong, but if they spread their funds around, there will not be a problem. There is no need to increase the potential burden on taxpayers in order to cover people who allocate their assets in an imprudent way.

Thirdly, on the guarantee, there seems to be something of a mystery, and perhaps the Minister could clarify the position for us immediately. I am not clear by what

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authority, legislative or other, the Government gave this particular guarantee, and the contingent or possibly real charge on the taxpayer. I simply do not understand how, when a Minister decides that he will give a guarantee, that situation could arise. On the position of the directors of Northern Rock, it is quite extraordinary that the Government should give the guarantee without seeking in some way to hold the directors to account. At that point the Government are clearly in a very strong bargaining position indeed. It is extraordinary that after the guarantee had been given, the Government then decided that the company might issue a dividend. That is really quite amazing. Indeed, it continues to lend huge multiples of income. That of course is widespread across the industry, but we are going to run into a negative equity problem on a far greater scale than anything we have ever seen before if this kind of thing goes on.

I should like to make a final point. The Government have said that they are seeking to improve the transparency of off-balance-sheet finance. If that is so, one would hope that the Government will be the first to do that—they certainly are not doing so now.

Lord Davies of Oldham: My Lords, I turn to the first question about the EU directive and gold-plating. All central banks in the modern age find it far more difficult to intervene in the market and provide support against a background in which the markets expect disclosure and transparency a great deal more than was the case a decade or two ago. So there are problems in this area and that is why we intend to discuss both in Europe and elsewhere the role of central banks in dealing with this issue, and the question of the directive obtains in those terms. However, I seek to minimise the salience of the directive because in a sense European central banks have nothing to do with the directive, and they all face the same problems in how they respond to markets.

The guarantee arrangements were made under the Treasury’s common law powers and they were noted to Parliament, as is appropriate, so they followed exactly the position Parliament gives to the Treasury. The noble Lord asked whether the limit needs to be raised above £35,000. The Chancellor made it clear several weeks ago that the guarantee would be set at that figure to stabilise the position in Northern Rock, but whether the figure needs to be set higher is a proposal in a discussion document about the protection of depositors, so no decision has been taken. The Government have indicated that in order to ensure stability in such important institutions, £100,000 may be necessary to recognise the position of house purchase arrangements, but it is not a decision. Rather, it is a proposal to be discussed, and I have not the slightest doubt that the noble Lord will make his views on the issue known as well.

I appreciate the point made by the noble Lord about rewards to Northern Rock. The Government and the Bank are concerned that Northern Rock should not fold under these circumstances. It would have a catastrophic impact not just on those with resources in the company, but possibly on other institutions. We all recognise the problems that would arise from a complete bank failure, so some support

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has been provided. That support is limited and it is not anticipated that Northern Rock is going to remain in its present state for very much longer. If the question is whether the present directors are fit for purpose, the obvious implication may be anticipated that control in Northern Rock will potentially change in the near future. But I stress that those who have taken this role within Northern Rock are looking not towards rewards but to a catastrophic situation in their own terms.

Lord Soley: My Lords, my noble friend is absolutely right, as are other Members of this House, that there are serious lessons to be learnt, both in this country—particularly by Northern Rock and the Bank—and in other countries. The issue, however, is much wider. Will he continue to take a firm line with those who seem to think that this was a badly handled event? In view of the circumstances, it was extremely well handled. To take lessons on negative equity from a party that managed to turn negative equity into a growth industry for homeless families’ accommodation would be extreme, to put it mildly.

This is an international problem; it is a problem for Germany, France and, obviously, the United States. There is a question about transparency and secrecy. I welcome the decision to have a voluntary agreement by hedge funds and others to have a less secretive and more visible financial system. Maybe—and I understand this is one of the things being talked about—we need far greater agreement at the G8, the IMF and the World Bank on creating some structure as we are now dealing with a world financial system that is radically different from what it was before. A run on a bank is a serious matter that affects a number of countries, not just this one.

Lord Davies of Oldham: My Lords, I am grateful to my noble friend for providing some corrective to what on the whole have been negative comments from the Back Benches. He will also appreciate that we are all too well aware of the fact that questions have been raised during the course of these disturbing developments of the past few months. Those questions are acute enough for it to be necessary for us to address ourselves to them. The Governor of the Bank of England has made it clear that he thinks that is necessary, as did the Financial Services Agency when it was giving testimony to the Select Committee. The Chancellor has already indicated that not only does he think it is necessary, but he is concerned to produce a consultation paper in order that we can get the best possible approach across the country and across the parties to a solution to what is, after all, fundamental to our economy and financial system in which every single person in the United Kingdom has a stake.

Lord Oakeshott of Seagrove Bay: My Lords, we know that the Government have given an unlimited blank cheque to Northern Rock, but is it undated as well? How long is this going to last for while the hedge funds circle to see if they can sort it out? What are the limits?

My second question is about sub-prime lending. In the Statement the Government said,



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What is the definition of “sub-prime lending” in the UK? If the Minister does not know, will he write to me with the official definition? I should volunteer that I am the colleague of the noble Lord, Lord Newby, who rang up Northern Rock this week and got what I can only describe as a sub-prime quote for a 127 per cent loan, which it is still offering. I shall run through it quickly: one is offered a £127,000 loan on a £100,000 house, so if you have a gross income of £500 a week, the interest payable alone would be £160 a week on that loan. That is before any deductions or any capital repayment, so what we are talking about is probably more like half someone’s income. Does the Minister agree, when he thinks about it, that at a time when house prices are falling fast in many parts of Britain, that is a toxic mortgage with “repossession risk” written all over it? If taxpayers are not underwriting sub-prime loans today, I do not know what they are doing. How can this possibly be right?

Lord Davies of Oldham: My Lords, the noble Lord is asking me an impossible question when he asks for a definition of “sub-prime”. As I understand it, it started off as an American term for a broad category of certain kinds of loan, and it has a different connotation in other countries. But we all understand that by “sub-prime” we mean “additional risk involved”. I cannot give a definition much beyond that. If the noble Lord is dissatisfied with that—and I clearly see he is—I will certainly write to him and give the best definition we can.

On the more tangible issue that he raised with me, the company asked for support until February 2008 while it considered all its options, and we have agreed to provide support to that date.

Baroness O'Cathain: My Lords, I shall ask the Minister just one question, because he has the beguiling habit of roaming widely over the whole subject and getting away with not answering all the questions asked by the noble Lord, Lord Elystan-Morgan, or anyone else.

The FSA has the responsibility to monitor financial institutions. It has obviously been found wanting in these circumstances because it had not monitored for nearly 18 months or thereabouts. We have all been aware of this situation for at least two months, and still the noble Lord, Lord Oakeshott, is able to ring up, ask for a mortgage and get one on the terms he has so ably described to us now. Why is that still happening, what is the FSA doing about it and what are the Government going to do to the FSA about this case?

Lord Davies of Oldham: My Lords, the answer to the noble Baroness’s question is straightforward. With this additional public support under Northern Rock, to put it at its mildest, the FSA is taking the keenest and closest perspective on the developments in Northern Rock with the objective of establishing as far as possible the best possible and most secure position for those who have an interest in Northern Rock. This is not a question of control or the position of the directors—it is for the private market to decide

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when change occurs—but does anyone in this House seriously think, if there is a change of ownership at any time, that the existing directors will sustain?

What is the FSA doing about this? It is monitoring the position, because that is its obligation, and guaranteeing that the support that is given is within the framework of public policy in this area in order to achieve the best possible solution to what we all recognise is a fraught position for that institution.

Gambling: Sport

2.27 pm

Lord Faulkner of Worcester asked Her Majesty’s Government what guidance they are giving to the Gambling Commission to ensure that the integrity of sport is not compromised by the growth of the betting industry.

The noble Lord said: My Lords, I express my appreciation to noble Lords who have put down their names to speak in this short debate, particularly the noble Viscount, Lord Falkland, and my noble friend Lady Golding, both of whom were valued members of the Betting and Gaming All-Party Group inquiry into the effects of betting on sport, which I chaired nearly three years ago. I have two interests to declare, one as an adviser to the football pools business, which goes back more than 30 years, and the other as an adviser to the Alderney Gambling Control Commission.

I do not have time today to describe all the alleged incidents of improper or corrupt betting practices about which our inquiry team heard evidence. Generally they involved an expected sporting outcome not happening, such as a favourite in a horserace losing as a result of unexplained behaviour by the jockey. I do not intend to say more about that because a criminal trial is currently under way in which exactly that allegation is at the heart of the prosecution’s case.

We heard a lot about the improper use of inside information that is not available to the normal punter, such as in cricket matches where large sums were won by punters who correctly forecast bizarre events like the number of fielders who wore sunglasses or the number of times the bails were removed in the course of a morning’s play. The noble Lord, Lord Condon, was a particularly valuable witness in this area. He has sent me his apologies for not being here today but welcomes this debate. We also took evidence about a Rugby League match where the winning margin was predicted with great accuracy by two players from one of the teams, who knew that their team was fielding a weakened side.


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