§ 4.40 p.m.
§ Second Reading debate resumed.
§ Lord Elton
My Lords, it appears to be opportune to return to the Banking Bill. It is a very short speaking list and that reflects the fact that the Bill is not only necessary but broadly welcome, though possibly less welcome on the Benches opposite than on this side of the House. That remains to be seen. I am anxious to preserve amity at this stage at least and it was my intention in any case to make only the briefest of interventions. Since I formed that intention almost everything I intended to say has been said already, concisely and rather better than I could have said it. 547 Most of what I have to say remains merely a matter of endorsing what has been said before.
The first area of interest to which I hope my noble friend the Secretary of State will be able to refer in his concluding remarks today, or perhaps he can expand on it in Committee, is the question of the criteria for resisting the takeover of British banks by foreign banks. The case has been ably put by my noble friend Lord Boardman. I would subscribe to his views and offer to support them at a later stage with enthusiasm, for one reason if for no other. It is because of the inhibitions latent upon him in what he said by way of disclaimer at the beginning of his remarks on the subject. The head of any organisation in the present financial climate who seeks to protect it from a hostile takeover bid is in danger of the criticism that he is denying his shareholders something which he would prefer they did not want. It may be that those in the banking profession such as my noble friend and his colleagues will be less than enthusiastic in pursuing this point. If it is useful, I shall ask my noble friend on the Front Bench to pursue it nonetheless at a later stage.
The other matters I had in mind to bring before your Lordships are relatively minor. The first area deserves attention and concerns the significant shareholders, defined in Clause 37 as those,entitled to exercise, or control the exercise of, 5 per cent. or more but less than 15 per cent. of the voting power",of an institution. The Bill is clear about the need to identify those shareholders, about the consequent need for declarations to be made about them and about the power which the bank should be able to exercise over the admissions of new significant shareholders to the register if they are not already on it. On the control of the quality of new significant shareholders the Bill is explicit, but on the treatment of existing significant shareholders it appears to be silent. If the Bill is silent they may be covered elsewhere in the statute, but if not I should be grateful if either now or at a later stage my noble friend could tell us whether this is by design. If it is, what provisions are already in place to ensure that no unfit significant shareholders already exist; and what other provision is there to deal with the contingency of an existing fit and proper significant shareholder becoming, for instance, by a takeover or some other means, unfit within the intention of the Act after it becomes law?
While looking at that area of concern I hope that my noble friend will look also at another small but significant aspect of Clause 39 and in particular subsections (1) and (3). They appear to enable a bank to require information from the authorised institution only. Clause 39(10), at a first reading at least, does not appear to authorise the requirement of information from the significant shareholder himself. If that is an anomaly, perhaps it should be addressed at Committee stage.
I hope that my noble friend will also take the opportunity to take us through some of the aspects of the provisions of Clause 35, which deals with large exposures. The clause creates a criminal offence of failure to report certain developments. It permits failure to report to be excused on the grounds of 548 ignorance of the events to which the failure relates, which is only to be expected. Clarification would be useful from my noble friend at some stage as to what is the correlation between the duty of a bank—and I refer to "bank" with a small "b" as opposed to the "Bank" which throughout the Bill means the Bank of England—to manage its affairs properly and the availability of this plea of ignorance. Where a bank has three, four or five score subsidiaries or branches in foreign countries and where there may be dozens of agents trading on behalf of scores of principals, a large exposure may be accumulated by an aggregation of small exposures, which may never become apparent until it is too late for the purposes of the Bill. What then would be the liability to prosecution of the individuals responsible under the Bill?
I do not guarantee not to raise other points. I find the characteristic of all legislation is that as soon as one starts reading it one discovers what one believes to be anomalies in the drafting. While I shall deny myself the pleasure of trying to improve drafting for its own sake, where I think the implications of it are unintentional I shall with great courtesy ask my noble friend to put me right, as I am sure I shall be wrong.
§ 4.46 p.m.
§ Viscount Chandos
My Lords, I apologise to your Lordships' House and in particular to the noble Lord, Lord Young, for arriving too late to hear the opening of this Second Reading debate, not, I should add, because of the crush of people outside welcoming the newest Member of the House of Commons but because I was detained unexpectedly on the practice of banking as opposed to the theory. I should like to thank your Lordships for agreeing to my speaking out of scheduled order. It it does nothing else I hope it will encourage the Government Front Bench to press the Prime Minister for fairer nomination of Alliance working peers to allow the non-working peers to pursue their non-work.
I welcome this much needed updating of the laws covering the authorisation and supervision of banks in this country. Following the passing last year of the Financial Services Act and the Building Societies Act, there was an inevitable need for a measure to bring banking and deposit-taking into the same relatively co-ordinated framework of authorisation, even if the unhappy saga of Johnson Matthey had not occurred. As many of your Lordships will know, the financial markets are becoming rapidly internationalised. Even within the previously clear distinctions between one market or financial service and another, between the money markets and the securities markets, between banking and securities, dealing boundaries are rapidly being eroded.
All those noble Lords who devoted so much time last year to the Committee and Report stages of the Financial Services Bill will probably agree with me that the Bill aimed to cover a sufficiently broad definition of financial services so that any enlargement would have been both unwelcome and unworkable. Nonetheless, in view of developments in the financial markets, a theoretical case could certainly have been made for a single Bill covering the operations of banks, building societies and other financial institutions, including, if this is not to reopen old arguments, the 549 Lloyd's insurance markets. But that would have been an indigestible and mammoth Bill to say the least.
I shall not quibble therefore with the way it has ended up, although we must clearly be careful to ensure that there is consistency among the three different key Acts covering the financial markets (or four Acts including the Lloyd's Act) in all cases. As it is, I should like to welcome the slimness of the Bill we are considering today, standing like the winner of a weight-watchers' competition alongside the Sumo wrestler-like bulk of the Financial Services Act.
The power and weight of the Sumo wrestler is perhaps a reasonable symbol of the strength of Japanese financial institutions, to which many Members of the House of Commons have already referred in discussing this Bill. Although there are many important new provisions in the Bill they are largely regarded by the general public as being technical, with public concern being most concentrated, as the noble Lord, Lord Boardman, said, on the level of protection which should be given to British banks and their independence, against the background of foreign banks and financial institutions having developed disparate capital and other resources. Inevitably, I should like to return to this point later in my speech and also during the Committee and Report stages.
First. I hope your Lordships will think it appropriate if I try briefly to identify the unique aspect of the banking industry, on which most of its special treatment by the Government has been based over the years. I should have already declared my interest as a director of a British owned bank which is active, though it is not a clearing bank, to some degree in retail deposit-taking and lending as well as in the wholesale commercial end of the business.
The British clearing banks and building societies have long represented the most important haven for individuals' savings as well as increasingly the most effective means of managing the other financial aspects of day to day life. It should be said that the British public have been slower to embrace personal banking than has been the case in many other developed countries. The record of the clearing banks in particular, and of British financial institutions generally, in widening the use of bank services has perhaps not been distinguished. Much of the pioneering work has often been done by foreign owned banks or consumer credit companies, developing business with customers who have not previously had a bank account of any sort.
The Government's campaign through their privatisation programme, whether or not well conceived, to increase the number of individual shareholders in this country is inevitably at the marginal expense of the banks' and building societies' deposit base. However, even if this campaign is crowned with success, the importance of the banks as a haven for savings will remain vital.
On the other side of the balance sheet the banks are providers of credit both to individuals and to companies and other bodies, as well as a variety of other financial services more or less closely related to lending, such as foreign exchange. The rapid development in the securities and other markets to which I have already referred has inevitably directed 550 many banks into these markets too as securities and securities-related transactiions have taken over many of the functions previously provided by traditional banking. The provision of credit is nonetheless likely at the very least to remain central to the largest UK banks; and for individuals as much as for companies this is an essential service for the achievement and maintenance of any degree of orderly economic growth.
Finally, through the central role played by the major banks in the financial markets and as creators of credit, they are a vital part of the mechanism by which the Government, through the Bank of England, regulate the money supply, control credit and the pace at which it grows and dictate monetary policy. Even those of us who do not believe that it is, or ever can be, the sole method of regulating the economy and controlling prices and inflation, nonetheless believe it is of critical importance.
While the banks, through conscious diversification as well as the unstoppable widening of markets generally, provide a number of other services I suggest that the three functions I have mentioned represent their central role, with an importance to industry and the rest of the community which justifies a degree of support and protection from the Government even in the eyes of those with widely differing political persuasions. Although the Government, often through the Bank of England, have provided support directly to, and co-ordinated financial support for, industrial companies this is clearly of a different nature and to a different degree from the support that has been extended even to small banks in the past and is assumed to be available, at least to the largest banks, in the future.
In return for these privileges and support it is clearly equitable that the banks provide the essential services I have listed, and to do so with the same degree of commitment to the national interest as the banks expect and receive support from the national interest. The noble Lord, Lord Boardman, in his speech maintained vehemently that the major British banks massively support the British public and that it was questionable whether an overseas controlled bank would maintain such a commitment to the national interest. I must add a word of partial dissent from that claim. If the support has been massive there are legitimate concerns outside the financial community—and to some extent within it—that it has not been massive enough.
There is a conflict between the priorities and objectives implicit in the maintenance of London as an international financial centre and those appropriate for a banking industry whose foremost aim is to serve national industry, the community and the national interest. That is absolutely not to say that it is wrong for British financial institutions to seek to strengthen their international business and operations; but if they expect abnormal support in the last resort from the Government, abnormal commitment to the national interest must be returned. Too often, compared to the nature and scale of support given, for example by French, German or Japanese banks to their industrial customers and even allowing for the different financial systems prevailing in the respective countries, British banks have not been sufficiently committed.
551 I believe that is central to the question of whether there should be any extension of protection afforded to major banks from unwanted changes of control beyond those already included in the Bill. Although I am instinctively uncomfortable with the banking industry being afforded greater protection than their industrial customers (particularly in view of the role the banks have played in arranging and financing contested industrial takeovers) there is nonetheless an undeniable national interest in maintaining a British owned, British controlled major component of the banking and financial industry. However, the quid pro quo for that must be a commitment by the major banks to industry and the rest of the community which is absolutely beyond question.
Therefore I look forward to the opportunity during the Committee stage of bringing forward or supporting amendments which will give the necessary reserve powers to the Bank of England and/or the Government directly to ensure that, when it is deserved, the independence of the major British banks can be protected from unwarranted or unhelpful changes in control brought about by the unchecked workings of the markets. Although the Monopolies and Mergers Commission has in the past considered wider aspects than simple competition in its reviews of proposed banking mergers, such as national or regional considerations, in a changing and uncertain world I believe there would be no harm—and some reassurance—in providing additional and specific protection under the terms of this Bill.
The question of reciprocity is of course related, for it would be unfortunate if such reserve powers inhibited the modest expansion of British banks in other countries and their markets. I do not believe that they need it but, even if they did, the certain protection of our own banking system would be preferable—more than just the lesser of two evils—to the greater freedom to expand internationally. However, as the noble Lord, Lord Boardman, said, the overseas acquisitions and expansion of the UK banks are never likely to represent a dominant market share in another country's market; or if they did, we should respect the legitimate desires of that country's authorities to examine and potentially prevent it.
As the noble Lord, Lord Boardman, said, this is the area of greatest public concern. I believe, therefore, that it was right to highlight it in this Second Reading debate. The other, perhaps more technical, measures which we will be discussing in detail in Committee are designed—in most cases they seem to succeed—to strengthen and toughen the regulatory regime, which with the events since your Lordships' House finished considering the Financial Services Act must be seen to be just, as well as being effective and practicable.
For that reason, the role of the non-executive directors and the precise definition of their responsibilities, both generally and within an audit committee, are of paramount importance. The Board of Banking Supervision and the independent representation on it is likewise a critical component in the Bill as there is unease (not just because of Johnson Matthey) both within the financial community and outside that the resources, the power and the authority 552 of the Bank of England need to be enhanced as its task becomes ever greater.
An independent banking commission has been proposed. Your Lordships can imagine the concern that that proposal gives to the Bank of England, but a fiercely effective and independent board of banking supervision would be the best defence against that. The statutory requirement to report large exposures, about which the noble Lord, Lord Elton, has spoken, is perhaps another of the most significant new features of the Bill and stems directly from the extraordinary breaches of prudent practice perpetrated by Johnson Matthey which was unchecked by the Bank of England. These measures are therefore to be supported and applied with vigour, while acknowledging the difficulty in always being able to quantify all forms of exposure that a bank may have on a particular Name in areas beyond simple lending. I commend the Bill to this House.
§ 5 p.m.
§ Lord Williams of Elvel
My Lords, first I have to declare an interest. I am a member of the national committee of the board of a Spanish bank. I hope that that admission does not disqualify me from talking about this Bill. I am very grateful to the noble Lord, Lord Young, for granting me permission to continue.
As the noble Lord, Lord Beaverbrook, pointed out, this Bill is the third in a series of Bills, of which two have become Acts, updating regulations and introducing new ones in the financial markets. When considering this Bill we have to reflect, as some of us certainly have done (in fact, some noble Lords have referred to the other two Acts), on the difference between banking as expressed in the Banking Bill and building societies and financial services as expressed in the Building Societies Act and the Financial Services Act.
I was slightly taken aback by the belligerent attitude, if I may put it that way, of the noble Lord, Lord Elton, in thinking that these Benches would oppose this piece of legislation. We fully supported both the Building Societies Bill and the Financial Services Bill in their passage through Parliament, and indeed the 1979 Banking Act was partially on the stocks when we were in government. Therefore I do not think it can properly be said that we would oppose regulation of this sort. Certainly we do not, and we wish this Bill well.
§ Lord Elton
My Lords, the noble Lord reads a little too much into my cautious acceptance of his welcome of the Bill. I intended nothing more than to say that I did not wish to be disappointed.
§ Lord Williams of Elvel
It gives me an opportunity, my Lords, to correct a statement that I made during the debate on polarisation that we had in your Lordships' House the other day. In response to an intervention I was unwise enough to say that the latest information that I possessed was that a minority of the adult population had current accounts in banks. The noble Lord, Lord Boardman, picked up this point and was kind enough to write to me. I am therefore very happy to correct the statement that I made and to 553 repeat the figures that he gave me; namely, that about 68 per cent. of the adult population now have a bank current account and, if deposit accounts are added in, the figure is nearly 80 per cent. I am quoting from the letter that he sent to me.
In that letter he goes on to say:We believe that somewhere between 55 and 60 per cent. have a building society account and, perhaps more relevant to the point we were debating"—and this is the point that, I should like to bring out—well over 90 per cent. of the population have an account of some kind with either a bank or a building society".The first major point that I wish to make is that I do not believe we can separate the legislation on banking that is before us from the legislation on building societies that we passed. The two have to be looked at together.
There was a full discussion of this Bill in another place, and the Government conceded a number of amendments which were welcome to us. We were sorry that in one case the Government felt unable to go as far as we should have liked, and in another case, to which I shall come later and which concerns the foreign control of banks, the Government felt unable to go as far as a number of their friends would have liked them to go. As the noble Lord, Lord Boardman, pointed out, like the building societies system (if I may refer to it as such) the banking system depends on trust. It depends on confidence. The greater the speed of money transmission and information technology the greater the trust has to be. The Continental Illinois could practically go bankrupt in about 20 seconds. That is a measure of the problem involved in regulating banks.
At the same time, the banking business, like the building society business as it has now become after the Building Societies Act, is very diverse. There are large banks, small banks, merchant banks and specialised banks. It is. extremely difficult to devise a Bill that regulates all these institutions in one fell swoop. I believe that the Government have succeeded well in their task, building on the experience of the 1979 Act. I believe that the Government are right to abolish the distinction between licensed deposit-taking institutions and recognised banks and to have only one category.
However, I should like to raise four fundamental questions, three of which are of a rather technical nature. The first question concerns the Bank of England. I do not want to go over what my noble friend Lord Bruce of Donington said in his opening speech, but it is clear from the Bill that is before us that the Bank of England has a very great responsibility not only for the regulation of banks but for being seen to be the regulator of banks. In other words, the Bank of England is obliged under Sections 16 and 17 to publish in its report a list of those banks that it has authorised so that the whole world will know which banks are authorised by the Bank of England and which banks are regulated and supervised by the Bank of England.
The question that arises—it is a question which bothered me when I was a practising banker, and perhaps it bothers the noble Lord, Lord Boardman, but I do not know—is this. If a bank is authorised by the Bank of England and is under the supervisory 554 authority of the Bank of England, does the Bank of England thereby stand behind the Bank of England as a lender of last resort? No doubt the noble Lord, Lord Young, will correct me if I am wrong, but I seem to remember that if one went and asked the bank whether a clearing bank was undoubted, the Bank of England would say, yes. If one asked the bank whether an accepting house was undoubted, the Bank of England would say, yes. If one asked the bank about a bank that was neither a clearing bank nor an accepting house, the Bank of England would say yes and no and perhaps, and there were certain qualifications. I have never seen a clear statement that the Bank of England, both as the supervisory authority and as central bank, stood behind as lender of last resort. I should like to have this matter cleared up. Presumably it can be cleared up very simply by the Minister when he comes to wind up the debate.
The second fundamental question that I ask regarding this Bill has to do with the Board of Banking Supervision. If one turns to the Building Societies Act one sees that the Building Societies Commission is a wholly separate body, which is not required to advise its members on their actions. On the other hand, the Board of Banking Supervision has independent members who are required to advise the ex officio members on how to run their business, if I may use that rather brief expression. The question is whether that will really help and enable the Bank of England to draw on advice from the independent members and adhere to it, or whether it is something which will just be some kind of camouflage and not have any residual effect.
The problem is aggravated by the provision in the Bill which allows independent members of the board to make representations or report to the Chancellor if the ex officio members ignore their advice. The circumstances under which such a report may be made are unclear and need some kind of clarification, specifying exactly what they can do and how they can do it. Even when their advice is partially accepted, partially ignored or perhaps twisted in one way or another, are they still allowed access to the Chancellor, and if not should that not be the case?
The third fundamental question which has been asked by many noble Lords relates to the foreign control of British banks. I am sorry that the Government did not feel able to accept amendments that were put forward by both sides in another place and which will be echoed by the amendments that the noble Lord, Lord Elton, and perhaps the noble Lord, Lord Boardman, if he allows himself that freedom, will put down in Committee.
I do not believe that the Monopolies and Mergers Commission criteria under the Fair Trading Act are the proper criteria on which to decide the ownership of banks. I believe that the Hong Kong and Shanghai Bank-Royal Bank of Scotland affair demonstrated—it was all a bit of a fudge—that the only way that operation could be prevented was by referring it to the MMC, which has to operate under the Fair Trading Act criteria. They are wide in their application and were devised for industrial companies.
I am afraid that I cannot follow the noble Viscount, Lord Chandos, in saying that those banks which 555 deserve to remain British should be allowed to remain British and those which do not deserve to remain British should be taken over by foreigners. I find that a rather abstruse formulation, and, if I were the government, I should have great difficulty in putting that into any kind of language in law. I do not see how it could be defended; nevertheless, I look forward to seeing the noble Viscount's efforts in Committee.
The Opposition would agree with the noble Lords, Lord Elton and Lord Boardman, that the Government must move just a little bit further than they moved in another place. When the Government see the strength of feeling in your Lordships' House, I believe they may take that last step. I believe that there must be a national interest criterion in the ownership of banks as there must be with building societies. I would go as far as that.
The fourth problem relates to large exposures. That has been referred to by a number of noble Lords. My worry is whether Clause 38 is sufficient to enable the Bank of England to cope with the international debt problem. There has been some comment that sovereign risk will be excluded from Clause 38. I shall be grateful if the noble Lord, Lord Young, when he winds up will assure us that lending on sovereign risk will be included in large exposures. It seems to be an area where there is risk of heavy exposure by the major banks and some of the minor banks in this country. After the Brazil experience, the Mexican experience of a few months ago and the continuing problems in the underdeveloped world, it seems to me that we must look carefully to see how the major banks can be helped with their problems and yet can be supervised in their problems.
Added to that, we must look at the problem from the borrowers' point of view to see whether the supervisory arrangements which the Bill proposes will help those countries which are poor and becoming poorer and which have to transfer massive sums of money each year to the banks in the Western world, which depletes their exchange reserves.
I do not want to detain your Lordships too long, but the technical questions fall into three categories. The first is the role of auditors. Auditors were given a strengthened role in the Financial Services Act and the Building Societies Act. The noble Lord, Lord Beaverbrook, referred to that in his introduction to the Bill. I hope that the noble Lord, Lord Young, will confirm the assurance that was given on Report in another place that the Treasury rules, to which the noble Lord, Lord Beaverbrook, referred as a last resort, will be introduced under the affirmative procedure and not under the negative procedure. That was an amendment which failed for technical reasons to get through on Report in another place.
There is the problem of control systems. Under the Building Societies Act, auditors have a role to ensure that the control systems of building societies are adequate. I remember moving an amendment to require auditors to ensure that the control systems of building societies were adequate, not just for their existing business but for any future business they may get into as a result of developments which would take place under that Act. There is an area there where 556 there is a dissimilarity between this Bill and the Building Societies Act.
Lastly, we should like to see—this applies not only to auditors but generally—the same immunity extended to agents of the Bank of England engaged in investigation as is accorded to the Bank of England. It seems hard that the Bank of England has total immunity in its investigations under the Bill and yet when it employs an accountant to do investigations for it that accountant does not have immunity and is liable to civil action. An agent of the Bank of England in a Bank of England investigation should have some kind of immunity.
The second technical problem relates to overseas institutions and jurisdiction. We have had a number of problems in the operation of the 1979 Act. Foreign banks with branches in London are uncertain, and the Bank of England appears to be somewhat uncertain, as to who finally is responsible for their supervision. In a number of cases, it has been the central bank of the country concerned—that is, where the parent bank is established—and the Bank of England has tried on occasions to assert its rights to control British banking institutions. There must be some clear definition of where the jurisdiction lies for branches of foreign banks in London.
The disclosure of banking information has always been a vexed question because bankers have always taken the view, in my view rightly, that unless there is a court order, banking information is secret between bank and client. We have recently elicited the Government's view on the Consumer Protection Bill that misleading price indication includes banks. It somewhat surprised me when it came out that a bank, when it quotes to a consumer an interest rate, an arrangement fee or whatever it may be, will be subject to the Consumer Protection Bill, when it is enacted. If it is misleading in any sense, that is a criminal offence. Again, there is a question of disclosure of information. What can properly be disclosed by banks?
Finally, I shall refer to Schedule 3, which relates to the minimum criteria for authorisation. I note that some detailed criteria for authorisation are set out, and I welcome them. But the question I ask is: what will happen if the institutions which are at present banks or deposit-taking institutions and which receive automatic authorisation under the Bill do not conform to the criteria for authorisation?
Those are the points that I wish to raise on Second Reading, merely to alert the Government that we shall be concentrating on those matters and also looking rather closely at the amendments that the Government move in response to debates in Committee in another place, and hence perhaps have not had the full and detailed attention that they would have in another place. Having said that, and having taken'up too much of your Lordships' time, I give the Bill a hearty welcome. The Opposition will try to expedite the Bill. We wish it to be enacted. Subject to the usual scrutiny that the Opposition are required to give any Bill that comes before your Lordships, we shall ensure that it goes through as quickly as possible.
§ 5.19 p.m.
Lord Young of Graf ham
My Lords, I am greatly heartened by the support which has been given to the 557 Bill on all sides of the House. Both I and my noble friend Lord Beaverbrook hope for a somewhat easier time with it in Committee than is sometimes the case when lengthy and complex legislation is subjected to your Lordships' well-informed scrutiny. May I declare an interest of a sort? Until recently, my passport described me as "banker", though my practical experience ended just before the 1979 Act came into being.
The few speeches that we have had have not prevented us from having an interesting debate. Issues have been raised which not only merit further debate in Committee but will receive further debate in Committee. I do not think I should be serving the purpose of all the Members of your Lordships' House if I were to seek to address them all. Indeed, I look forward to debating many of these matters in Committee. After all, your Lordships' House is particularly well qualified to consider this Bill. We number among our ranks no fewer than four former Governors of the Bank of England and that alone will add a certain quality to our deliberations.
The main provisions of the Bill were first published as proposals in the Government's White Paper in December 1985. Considerable thought and consultation have been involved both before and since its publication. As has been remarked, the Bill should not be regarded as standing on its own. It completes a trilogy of Government legislation on financial supervision: the Building Societies Act, the Financial Services Act of last year and now the Banking Bill. This has not happened overnight. It has been the result of several years' work. It is appropriate that these new measures should be on the statute book at a time when the changing financial markets bring not only new opportunities but new risks as well.
I do not think that I have to remind anyone in your Lordships' House this afternoon of the significance of the City as an employer and of the contribution it makes to our foreign earnings and our economy generally. My noble friend Lord Beaverbrook referred to the City's record in this area. The number of banks operating in the United Kingdom has increased rapidly over the past decade. There are now some 600 institutions authorised under the 1979 Act. At the same time the output of the banking and finance sector has increased by over two thirds since 1979. With United Kingdom-based bank lending to British companies now over £100 billion, compared with some £39 billion in 1979, I suspect that we shall find that British banks are playing their role in the economy. Indeed, there has been an increase of one third in the sector's contribution to our gross domestic product.
We are dealing with an important and growing sector of the economy. In formulating its policy on banking supervision the Government have therefore consulted with and paid close attention to the views of all interested parties and have listened carefully to constructive suggestions from all sides. Improvements to the Bill have been introduced by amendments in another place. I believe that it is now in good shape. The Government are grateful to all who have contributed. However, that does not mean that we are not sensible to the contributions and the suggestions made this afternoon.
558 The noble Lord, Lord Bruce of Donington, raised the matter of the reporting procedure of the Bank to Parliament. Clause 2 of the Bill, which refers to the Board of Banking Supervision and makes provision for appointments by the Chancellor and the Governor, is perfectly proper. It is the same formula as used in the Financial Services Act for appointments to the Securities and Investment Board. I believe that it is important in this matter to have a certain amount of consistency among similar types of institutions.
The noble Lord, Lord Bruce, and other noble Lords also raised the question of the Bank's supervisory responsibility for overseas banks. It is established international practice that the supervision of international banks has to be a shared responsibility—shared between the supervisors in the countries in which the bank operates.
Perhaps I may say that my time as a banker was with an American bank. I am well aware of that joint and shared role between the Bank of England and the New York Federal Reserve. however, the prime responsibility falls on the supervisor where the bank has its head office. The 1979 Act was drafted to reflect this. Subsection (3) re-enacts the provision unchanged. This enables the Bank to allow, in the judgment of an overseas supervisory authority, with regard to the major prudential criteria set out in Schedule 3 in respect of an overseas bank, the establishing of a branch in the United Kingdom. The Bank can rely on that judgment only if it is satisfied about the nature and scope of the supervision exercised by the overseas supervisory authority. The Bank may require additional insurances if it so wishes, and has invariably done so, in particular in relation to the policies, operations and staff of the United Kingdom operation. In this respect the Bank's supervision of an overseas bank is similar to that of a United Kingdom incorporation institution. I hope that that brings some comfort to the noble Lord, Lord Williams.
Other matters were raised by the noble Lord, Lord Bruce, which perhaps can be dealt with more closely and more carefully at the Committee stage. However, he asked whether there will be adequate enforcement procedures. He will find that the Bank will have the satisfactory ability to enforce whatever is required under the Act. I hope that I can give him more assurance on that at a later stage if he still has doubts.
I was grateful to my noble friend Lord Boardman. I listened carefully to what he had to say. He raised three matters to which I hope to return in due course. I hope that we can discuss them at Committee stage if he feels at that time that they should be raised. He asked how non-authorised subsidiaries were to be treated and how directors of those subsidiaries were to be treated. He queried the level of a capital value of £5 million. There are always demarcation disputes whatever level one sets. I have no doubt that to him £5 million appears to be a very small capital. There are other institutions to which I suspect that a capital of £5 million may not appear quite so small. It is a matter that he is perfectly at liberty to raise later. But there has to be a level of some kind, and we can all see some dispute whatever level is set.
I listened carefully to what my noble friend had to say on change of control. It was a matter mentioned by 559 many this afternoon. The whole question of reciprocity was raised. He asked whether, if an American bank were to take over a UK financial institution—not, I hasten to add, the institution with which he is concerned—the United States' financial institution would have a much larger share of the United Kingdom market than we should have if his bank were to take over, say, an equivalent American bank. The answer is, of course not. There are relative differences in scale between the two countries.
My noble friend drew attention to the way in which the French Government, he claimed, had a peculiarly French solution to the matter. We shall have to see. I hope that noble Lords will accept the assurance that the procedures are in place today just as they were at the time when the Bank of Scotland matter arose. They will find in future that a similar outcome will prevail. But it is perfectly open to anyone in your Lordships' House to raise these matters should they so wish at a later stage in the Bill.
There was a matter which concerned my noble friend Lord Elton, who now enjoys considerable liberty—I shall not say licence—in looking at legislation with a totally free and untrammelled mind. He can remember only too clearly, I suspect, being in my role. He knows full well that we are subject to some constraints; I put it no higher than that. I listened carefully to what he had to say, in particular about significant shareholders and the anomalies in Clause 39(1) and (3). These are matters to which we can return at the Committee stage.
There is one matter that I should raise because it is important to put it on the record this afternoon. My noble friend Lord Elton and other noble Lords raised the question of large exposures. Clause 38(1) and (9) provides a defence where the institution did not know of the facts by which the exposure became reportable. Provided that a report is made within seven days of discovering the facts, that will give the necessary defence. It is impossible to report the knowledge of a large exposure until the knowledge of it becomes available.
§ Lord Elton
My Lords, perhaps my noble friend will forgive me since he wishes to put this on the record now. The issue to which I was addressing myself was this. Can it be a matter of dispute whether the bank should have known of the matter and did not? Is that covered by this clause? I have not given notice to my noble friend and no doubt he will wish to write or deal with the matter at Committee stage.
§ Lord Young of Graffham
My Lords, I am grateful to my noble friend. The Bank also has a discretion regarding whether or not to prosecute in particular circumstances, depending on the defence. I think that in those circumstances it is something which the bank would take into account. I believe that these are matters which we can discuss in further detail when we look at the minutiae of the Bill. It is an important matter; but, for reasons which noble Lords will understand, not one on which I should like to go into detail this afternoon.
In response to the question asked by the noble Lord, Lord Williams of Elvel, I should say that Clause 39 of 560 the Bill will allow for the reporting of sovereign debt amounting to large exposures. The details of that are to be worked out and published by the Bank under the Bill in due course, but the clause will allow for those particular matters.
I am grateful to the noble Viscount, Lord Chandos, for his general welcome to the Bill. I am a little concerned that he considers that British banks are not sufficiently committed to United Kingdom interests. I disagree with the noble Viscount on that matter. I believe that it is dangerous to appear to be a "little Englander"—if I may put it that way—about the banking industry when London has become established as a financial centre of the world and when that establishment is growing. I believe that it is possible to have a regime in which the health of London as a financial centre and the demands of commerce and industry can be adequately met, not only by our banking industry but by foreign banks which come to this country.
There can be little doubt that competition is good. In all these matters we must ensure that the competition is fair and reasonable, and where necessary we must also look at the national interest. However, it is dangerous for a nation such as ours, which today has the second largest net overseas investments of any country, to become too cautious about overseas investments in the United Kingdom. On the last occasion that I saw the figure quoted we had some £80 billion of overseas investments. We should look carefully at the response given by other countries when our companies and banks invest on their soil.
I was glad of the welcome given to the Bill by the noble Lord, Lord Williams of Elvel. The noble Lord drew attention to the real danger in the world today; namely, the effect of technology. I was involved in the banking world in the early 1970s when the effect of technology on foreign exchange dealing first came to the fore. I saw the great sense of shock displayed by banks when they suddenly realised how quickly they could become committed on various matters. I believe that technology has been harnessed to considerable value by overseas banks. Banking will always be based upon trust, and trust will be the foundation of any good banking system. I hope that the Bill will reinforce that sense of trust because without it I do not believe that any system will work.
I found the four fundamental questions put to me by the noble Lord, Lord Williams of Elvel, deceptively simple. The more that I thought about them, the more concerned I became. I should like to answer the first question which was: is the Bank of England a bank of last resort? No, my Lords, it is not. The Bank of England will deal with matters on a case by case basis. I do not believe that any national bank can ever say, in all circumstances, that it can be a bank of last resort.
Secondly, the noble Lord asked how the Board of Banking Supervision will work and in particular how the access to the Chancellor will work. The access to the Chancellor will occur if the advice is not followed. In the course of a debate, of this nature it is difficult to assess all the various permutations as regards when it will or will not work. I believe that it is a system which must be made to work. I have no doubt that if any 561 individual member wishes to have access to the Chancellor, he has only to ask and I have no doubt that he will do so. However, we must yet work out the details of that matter.
The noble Lord also raised the question of foreign control and he says that there must be a national interest criteria in that regard. I have no doubt that noble Lords will return to that matter when we deal with that part of the Bill. I was able to answer in some measure the noble Lord's fourth question concerning lending on sovereign risks.
I am able to satisfy noble Lords of one other matter. When it comes to auditors, yes, there will be an affirmative resolution. I am happy to give that undertaking. Many other matters have arisen, and I have been able to deal with some of them in this debate—if only superficially. I have no doubt there are further matters which we shall deal with in great detail at a later stage. I hope that the Bill will pass speedily through this House. I believe that we shall see your Lordships' House working at its best, and, as a reforming Chamber, looking at a piece of serious legislation on which Members have considerable expertise.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.