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What do we have now? We have a system of universal banks that try to do everything but do not necessarily understand everything they are doing. However, they want to do everything because that is the nature of a universal bank. They are regulated by a tripartite system whose members seem to have difficulty in talking to one another. Under those circumstances, I find it difficult to see how the present Bill will prevent future disasters. As the noble Lord, Lord Stewartby, and the noble Viscount, Lord Eccles, observed, it

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might have been useful last year but perhaps not this year. It may be impossible to put the genie back in the bottle in terms of separating the business of underwriting and dealing in securities from the business of deposit taking and commercial banking without a collapse of 1931 proportions, which obviously we have to guard against. But I hope that someone, somewhere, is thinking about restoring the role of securities versus commercial banking and the financial integrity of mortgage lenders. Obviously I am ludicrously optimistic, but I remain so in the hope that someone will look at these issues seriously.

We are dealing with a Bill that will do little or nothing to address what I regard as the real problem. There is some evidence that the authorities are not entirely clear about the final shape of the legislation. For instance, in this Bill the Government propose to give themselves not just Henry VIII but truly Cromwellian powers to change the rules whenever they see fit. Clause 75 as it stands, even after negotiations, allows in subsection (8) the Treasury to make a series of orders amending the law without prior parliamentary approval. Cromwell would certainly have approved. Clause 155 allows the Treasury to amend primary legislation relating to building societies, but at least any proposal to do so requires prior parliamentary approval. All this reinforces the conclusion that we need a review of this legislation after a period to see how it is working.

I have a few small points to make. There is some doubt about the code of practice. The authorities are to “have regard” to the code. I could have regard to a code of practice but it does not mean very much. When he winds up the debate, I should like my noble friend to explain what “have regard” really means. As with many Bills, miscellaneous bits and pieces have been tacked on, such as the “financial stability objective” in Clause 228, which my noble friend Lord Eatwell talked about. Is it necessary to have this on the statute book? After all, I thought that the idea that the Bank of England,

was guaranteed because it is the job of the Bank of England and the Government. But, as my noble friend pointed out, there is the question of the Financial Stability Committee which is going to be set up under the Bill. Will my noble friend explain the status of this committee? Is it going to be transparent? Will we see how it operates and know what it says?

I have spent too long on my remarks. It is only right and fair to advise my noble friend that, if the parties opposite press to a Division the question of a sunset clause, post-legislative scrutiny or an independent review, either in Committee or on Report, I will be in their Lobby.

7.30 pm

Lord James of Blackheath: My Lords, coming this late into the debate one is always on the edge of one’s seat as to whether there is going to be anything left to say of the text one has brought in. I thought that I had got lucky until the noble Lord, Lord Williams of Elvel, summarised most of my main points. However, I shall try to elaborate on them a little.

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I go back to the opening remarks of my noble friend Lady Noakes when she said that we are not opposed to the idea of the Bill; we want it to happen. Effectively, she was saying, “We are the Opposition and we want to help you”, if you will believe it. I can go along with that entirely but the Bill as it stands is seriously flawed in practicalities. If we are to have a speedy process of resolution following the recess, the Minister could do a great deal to assist by addressing a number of critical points which are wrong in the Bill and by bringing forward amendments or clarification at that time.

I shall use my time to run through the six points that I wish to make. Before I do so, I repeat the warning given by my noble friend Lady Noakes at the outset which did not get the reaction that I expected. Your Lordships will be aware that Section VI of the Bank Charter Act 1844 lays down a strict requirement that the Bank of England shall deliver each week to the Government a precise account of the total value of all notes and coinage of the realm currently in circulation. Remove that control and there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses. If we went down that path we would be following a road which starts in Weimar, goes on through Harare and must not end in Westminster and London. That is the great fear that the abolition of that section will bring about—but the Bill abolishes it. What on earth that provision is doing in the Bill I have no idea; it does not belong there and has nothing to do with the rest of it. If it is left in, it will be the biggest single threat to the Bill and will undo all the good work that it might otherwise do. Let us get rid of it.

My six specific points refer to the practicalities of implementing the Bill. It is, let us say, three o’clock in the morning at Freshfields or Simmons & Simmons and one is trying, with this Bill in hand, to work through the implementation of an acquisition—this might be in three years’ time, three months’ time or whenever. I refer your Lordships to Clause 48(1)(c), which deals with the arrangements for close-out and offset—netting off. It appears to imply that at the time of the execution of a bank rescue under the Bill there should be an entitlement to net off the value of any debtor of the bank against any liability which that same debtor has as a creditor. This might be a highly desirable arrangement but, as it stands, it is wholly in conflict with the Insolvency Act 1986. Effectively, it would create an illegality in the Bill. It would become a fraudulent preference, and that is strictly not allowed. We need clarification of the circumstances under which this could be done.

I can only conclude that this remarkable document, the Explanatory Notes, must have been written by a student anarchist collective from about 1968. Perhaps they have now become Treasury solicitors or Treasury officials—presumably they have to earn a living somehow when they have qualified and finished being anarchists. They say, “Do not worry about this because we will pass a statutory instrument and that will make it all right”. They give that answer as the standard resolution to every problem that arises. If they are listened to, the air will be thick with a shower of statutory instruments

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flooding through the House; they will be flying around like confetti at a spring wedding on a windy day. We cannot do it.

They are also saying that there is to be no referral to either House; that there will be no debate on any of them. This is not the language of mature, democratic government; it is the language of totalitarianism seeking to obtain control of a process; it is not a democratic procedure. Will the Minister address seriously the question of the fraudulent preference? It is a serious crime; it must not be committed and yet the Bill is saying that we should do it.

My second question is of a similar nature. It relates to Clause 71, which deals with the arrangements governing a pension scheme. When I read it, I thought it was the joke that had been written into the Bill in order to keep us amused while reading through this vast amount of legislation. It is only about two months ago that we debated the Pensions Bill in this House, when the Government were strongly resistant to any suggestion that a solvent company could have a failed pension scheme and could go into the PPF. Amendments were brought forward and defeated, the Government got their way and that is how it stands. The Bill does not say that there is any obligation to fill the deficit in an underfunded, insolvent pension scheme but it does say that where a bank is acquired and there is a pension scheme, the pension scheme should be hived off and should float away to take care of itself. If that were the case, it would have no access to the Pension Protection Fund. Effectively, the Government have opened up the hazard of a totally unfunded pension scheme being adrift in the market because they would not recognise that the scheme could not go into the PPF if its parent was solvent, which of course it would be if the bank is rescued first. It is nonsense; it is the funniest joke in the whole document, and there are not many.

My third concern relates to the recurring use of the phrase “financial assistance”. It swarms through the Bill. Another mildly funny joke is that sometimes it is used correctly in the sense that the law requires, but I do not think the people who drafted it realised that they were using it correctly. To a quoted company, financial assistance means, quite specifically, that if you are going to be acquired by another company you cannot give any assistance to the person who is acquiring you to buy you. As the Bill stands, financial assistance is referred to recurringly as though it is permissible for the bank to assist the Government to purchase it. A situation could easily be created by the Bill in which the Government want the bank to be acquired in order to rescue it and therefore come to an arrangement with the bank under which the assets of the bank are rearranged, packaged or parcelled up to a third party, who then participates in the acquisition to support the Government’s action. That would create a financial assistance which would be illegal under the Companies Act. No recognition of that appears in the notes or in the Bill. That is a serious concern.

Again, the unhelpful descriptive memorandum says, “It is not a problem; we will just issue another statutory instrument and put it right”. Clause 7 and paragraph 32 of the Explanatory Notes acknowledge this point

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but then go on to say that the accepted interpretation can be ignored for the purposes of the Bill, thus overturning a long-established and sensible law.

This cavalier attitude to the established laws of finance carries on into Clauses 17 and 34, which both separately and together appear to suggest that where anything required by the Bill runs counter to an existing law, that can simply be set aside and ignored in the greater quest for the acquisition of more banks on behalf of government. Worse still, Clause 75 provides for the “Power to change law”. This has already been referred to but the noble Lord who mentioned it omitted one hugely important point. There is a power to change the law simply on the issue of another statutory instrument by the Treasury but, unbelievably, the same clause goes on to say that the power to modify the provisions will include the power to modify common law and both primary and secondary legislation simply by the use of statutory instruments which will not be referred for the consent of either House. I should love to know what a Law Lord might think about the intention to alter common law in that way and I am sorry that none of them is here to stand up and talk to us on the subject today.

Throughout the Bill there is an undisciplined and completely erratic use of the word “asset”. You might think that that is a quibble in this context, but I put it to your Lordships that it is fundamental to understanding how the Government are going to interrelate any bank they take control of. They will do so by an acquisition of assets. I suggest that there are three categories of asset that would each react very differently in terms of what the Government could do with them.

The traditional way for a bank to acquire a distressed company is for it to acquire the balance sheet of the company concerned. That is a whole assets and liabilities acquisition. If that is how the Government intend to proceed in this case, that is fine, but we must understand that by acquiring the balance sheet the Government would be acquiring all the undertakings and investments on that balance sheet as well. Let us suppose that the bank being acquired had a significant interbank relationship with another bank and that the Government, as the new owner, then sought to interfere with that arrangement by creating an act of default on the third-party bank, giving them the opportunity to move for the immediate nationalisation and acquisition of each other bank reflected in the original balance sheet of the first bank acquired. I do not really believe that that is the devious process in the Government’s mind but they might want to consider injecting here, and in several other places, a negative pledge not to do what might be raised as a possibility in this case. That might speed up the eventual process of moving the Bill forward.

The second category of definition for an asset is that it is solely related to the acquisition of the shareholders’ funds, which implies participation in the equity by some form of instrument that is issued. My noble friend Lord Eccles has been raising this matter since we had the Bradford & Bingley debate about the lack of concern for and identification with the interest of shareholders and other investors. This is a huge omission from the Bill. Shareholders and investors are

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pretty well ignored as second-class citizens and are not dealt with adequately. They need to be better addressed in the Bill if it is to satisfy all parties.

The third category of asset that might be here is the simple acquisition of the backing assets that back every loan in the name of the bank; you just transfer the ownership of the title deeds into the Government’s control. That is workable at one level, but I tried to think of an example of how it might go wrong. This is deliberately intended to be a ridiculous example, but let us suppose that the Government decided that they wanted to nationalise the major football clubs in the country. They could do so by easily tapping into the assets that would be secured to the banks in the name of the loans that had been given to those clubs. Football clubs are only an example; it could be any form of commercial activity going. By just getting the asset level, the Government would have the means of moving their policy of nationalisation forward into any industry they chose, where loans had been made to the companies in that industry. Again, some form of negative pledge that that is not the Government’s intention would solve that problem, but it is a risk. This all comes from the lack of an adequate identification of what is meant by “assets” in the Bill.

The Minister will know—we have had some private conversations about this—that I have been critical of the instrument by which the money is being injected into the banks being rescued. I continue to have that concern because the instrument he is using at the moment is oversimplistic and does not give him a reasonable opportunity to realise the value by using the shareholdings concerned in the form of some bond that either might be used for a back-to-back loan or might itself be floated separately, in order to recover the taxpayers’ money and so deduct something from the £118 billion of national debt that we have at this time. Some £37 billion is outstanding in this category at the moment, and I shall continue in the view that much of it could be recovered quickly as a deduction against the £118 billion if the Minister had selected a more flexible instrument. The Bill does not have enough to say about the process of acquisition and investment. I have said previously to the Minister that he should be looking more closely at the traditional bank method of a convertible, redeemable, cumulative loan stock, which would give him all the advantages and a marketable commodity in the international finance sector, and would probably get him his money back very quickly. This needs a lot more thought, which is absent from any comment in the report as it stands.

The Explanatory Memorandum is a complete disaster and should be rewritten from beginning to end, preferably without its emphasis on the idea of, “Don’t worry about breaking the law; we’ll pass a statutory instrument”, which I think is a disgrace. There is also an unfortunate and, I am sure, unintended element of sneaky secrecy in it. There are two elements to which that applies. First, the memorandum says that the Government do not want the 1844 section to continue because they do not want the Bank of England to publish the borrowing figures as that might frighten people. Secondly, they use a similar phrase in the Explanatory Memorandum when they say that there is to be no registration by the

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Government of any assets that they take to secure a loan in rescue to a bank, because they do not want the world outside to know that they are rescuing that bank. However, I should have thought that this was essential information, with regard to both taxpayers’ money and to the sanctity of the arrangements regarding taxpayers’ money and how it is being accounted for.

Those are my main concerns. I wish the Minister a thoughtful and happy Christmas and I hope that he comes back with some amendments that address these various points.

7.47 pm

Lord Whitty: My Lords, to follow the intervention of the noble Lord, Lord Selsdon, we have had the economists, the accountants, the lawyers and the bankers, and now I am intervening on behalf of the customers and consumers. I declare my interest as chair of the new organisation Consumer Focus.

I support the Bill, but we all have to recognise that although it looks quite chunky—as the noble Lord, Lord James, has just said, it has some pretty far-reaching powers in it, which no doubt we will look at in Committee—it is a limited Bill, which relates to the problems that face us right now. I welcome the references to consumer protection in the Bill, although the aspects of the compensation scheme that were mentioned by my noble friend Lord Lipsey could do with some improvement. These references deal with protection for depositors in the event of a bank failure or when a bank looks to be in danger of failing. Indeed, the bulk of the Bill is about bank failures or, to a lesser extent, reducing the likelihood of a bank failure.

It is right and of immediate importance that the Bill should address those issues, but the fact is that, as the average consumer looks at it, we did not have a high street bank failure for 100 years. The noble Lord, Lord Eatwell, reminded us about BCCI, but that was not a high street bank. In the past 18 months, though, the average user of bank services has been completely appalled, as has every citizen, at what has happened here and in the United States. Much of the financial turmoil, as we euphemistically term it, has been on the basis of recklessness and misjudgments in the banking sector here and across the Atlantic. That has caused serious anger and confusion among consumers, whether businesses or individuals.

When consumers look at what has happened in the banking sector and its effects, they are not only appalled and dismayed but uncomprehending and baffled, as well as to a large extent unprotected from the knock-on effects of the disaster. As a business, you now find it difficult to get credit. As a mortgage holder, you see the value of your property plummeting. As a home seeker, you are pretty hard put to get a mortgage at all on the terms that you wanted. As a shareholder in a bank, or in almost anything, the value of your shareholding has gone down. As a saver, the return on your life savings is going south towards zero as we speak. As an actual or future pensioner, the value of your pension scheme has plummeted. So there is real cause for concern and anger out there.

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In the whole of this area, it is really only the depositor who is protected. It is right that a banking Bill should protect the depositor, but you also have to recognise that there is a much wider range of anxiety and loss of confidence in the system. As the noble Lord, Lord Bilimoria, said, that lack of confidence is the main thing that the Government nationally, and Governments internationally, have to address right now.

The banks are not victims of this crisis; they are, in large part, the cause. Only this morning, we had the news that some of our most respected banks had invested huge sums of money—$700 million, in one case—with a particular operator in New York, which turns out to be pretty much a one-man operator who does his own financial controls and has an accountant; he appears to be basically a country accountant who does the auditing off his kitchen table in upstate New York. You would have thought that with due diligence the banks could have worked that out.

Banks are always urging on us, if we go for a loan or want to change our investment or transfer our savings, that we should observe due diligence. In all the fine print that regulators require and all the banking documents that we receive as consumers and customers of banks, there is a caveat emptor clause. But if banks are urging due diligence on us, where was the due diligence on the part of many aspects of the banks? Most of us do not get a personal touch with a bank any more. If we go for a loan, it is a computer that gives us the answer, and the computer usually says no. But if it says no to us, how come it has not said no to all these traders with the banks’ assets—that is, our assets—in the past 18 months? We are not talking about fly-by-night operators; respected, long-established household names and globally successful companies have brought down the system. They are not spivs or speculators; they are not the gnomes of Zurich; they are not even the private equity companies or the hedge funds. They are organisations that we and most citizens of this country regard—in the United States it is the same—as our friendly local bank.

In the real economy, we were probably facing a recession, although a relatively minor one. However, the fact that that recession was preceded and hugely aggravated by this crisis of confidence, and is likely to be prolonged by the collapse of confidence, means that we are probably in the most difficult economic situation that many of us can remember.

There is another victim here which is not the banks or even the average customer. Because of where this started and because of how we are viewing sub-prime borrowers, there is a real danger that the net result in distribution terms will be that people will stop lending money to relatively poor people and that the sub-prime borrowers will be seen as the cause, rather than those who failed to exercise due diligence in extending sub-prime loans. The public and small businesses that are suffering at this time also see that hardly anybody in the banking sector or among the regulators has suffered as a result of this. I have to say that, on this rare occasion, I agree with the remarks made by the Leader of the Opposition the other day on this subject.

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The regulators have failed to prevent this happening. They were probably never in a position to second-guess the range of decisions that the banks were making, but they could have seen the tendency and could have intervened earlier. Therefore, there are questions to be raised about the long-term role of the regulators in this respect.

I have a small personal story to tell about this. I was the chair of the previous consumer organisation when the Northern Rock crisis first came on our television screens and the queues were outside the banking branches. We mildly suggested that the underwriting compensation should extend from 90 per cent to 100 per cent of the first £34,000 in depositors’ accounts. It was, I thought, a rather tentative exercise in that area, but a senior official in the Financial Services Authority rang us and told us that this would prejudice the whole aspect of moral hazard that had to operate within this market. He became very insistent. I happened to be at the Liberal Democrats’ party conference, for my sins, at that point. After the third phone call, in which he tried to persuade us not to send out that press release, which in my view would have taken the majority of the people in the queues back home and off our television screens, thereby reducing the degree to which panic was induced by the Northern Rock crisis, I had to say to that senior gentleman that he was getting so boring with his requests that I was actually going to go in and listen to Ming Campbell.

The regulators must seriously face up to some questions. But what do we do now? The reason why this Bill is limited is that it deals with this immediate crisis. It is not exactly emergency legislation, but it deals with an emergency. Most of the provisions in the Bill are important levers and instruments for a Government to have in that kind of emergency situation. I have no doubt that in Committee noble Lords will raise a number of problems about how they are operated and their knock-on effects, but it is vital that in this immediate period we have such provisions.

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