I beg to move, That the Bill be now read a Second time.
The proposals in the Bill are by no means new to the majority of hon. Members. They were first published in outline in a White Paper as long ago as August 1976. The Bill was published in draft in July this year, and as now introduced it does not differ in any fundamental respect either from the original White Paper or from the draft Bill of July.
The background to the Bill will be familiar. Unlike most other advanced countries, we have never had a comprehensive system of authorisation for banks. A number of statutory recognitions exist, granted by Government Departments, especially the Department of Trade, in consultation with the Bank of England; and, of course, the Bank has traditionally supervised the primary banking system on an informal non-statutory basis. These arrangements worked well for many years and gave the British banking system a stability envied by many other countries with more formal methods. But, especially in the late 1960s, many institutions grew up outside the primary banking system. The secondary banks crisis of 1973–74 led to a general recognition that it was necessary to take a comprehensive look at the regulation of institutions which took deposits from the public. At the same time, the EEC was devising plans for the first stages of harmonisation of European banking systems. It seemed likely that these would be based on a system of prior authorisation of all banking enterprises. The first EEC directive on credit institutions was adopted in December 1977, with the full support of the United Kingdom.
Thus the Bill has a single objective, and that is the protection of depositors. It will remedy the gaps in supervision of the deposit-taking sector revealed by the 1973 crisis and also fulfil our obligations under the EEC directive. At the same time, it seeks to preserve as much as possible of the flexible approach which has characterised the Bank of England's supervision of the primary banking sector. That supervision will be put on a statutory basis, and the Bank's responsibilities will be extended to cover all deposit-taking institutions, other than those already supervised under other statutes.
The Bill has been the subject of wide consultation since the publication of the White Paper in August 1976. I take this opportunity of thanking all those, both individuals and associations, who have taken a great deal of trouble in scrutinising our proposals and giving us the benefit of their comments. My thanks go particularly to the British Bankers Association, the Committees of London and Scottish Clearing Bankers and the Finance Houses Association. I think I can say that they all accept the fundamental principles of regulation and supervision embodied in the Bill, and many of its details reflect points which they have made. In general the Bill has received warm support, and I am sure that it is the better for this consultation process. I shall deal briefly with some of the changes which have been made as a result of these consultations as I go through the Bill.
The basis of the Bill is that all deposit-taking businesses which are not specifically excluded will require authorisation from the Bank of England and will be subject to its continuing supervision. Authorisation may take the form either of recognition as a bank, which will be accorded to institutions satisfying a wide range of exacting criteria, or of a licence to take deposits. In general, only recognised banks will be allowed to call or describe themselves as banks. To a large extent, this structure formalises the existing situation.
There are at present many deposit-taking institutions which would not claim to be banks or seek to become banks but which are highly respectable and fulfil a very useful function. This will continue to be the case and such institutions will form a natural part of the licensed sector. Other institutions in that sector may well have aspirations to attain recognised status in due course and to that end will be seeking to develop their range of ser- vices and build up their standing in the financial community as potential banks.
It is not intended to erect barriers to movement to the one sector from the other provided that the relevant criteria are fulfilled. Again, this parallels the existing situation where the difference between the primary banking sector and other deposit-taking institutions relates essentially to differences of current function and standing as a bank and does not preclude the possibility of progression.
I might mention here that it was represented to us that the proposal that licensed institutions should pay fees to the Bank of England to cover the costs of their supervision was inconsistent with the position as I have described it, and it would have borne particularly hard on the smallest institutions. The Government acknowledged that these representations had force and that the regulation by the Bank of the licensed sector could be regarded as a natural extension of its traditional central banking responsibility for the supervision of banks proper. As a result, we no longer propose that there should be fees for licences. This will not add to public expenditure because, as explained in the explanatory and financial memorandum, expenditure by the Bank of England is not classified as public expenditure.
It may be of some assistance to the House if I go through the clauses of the Bill. Part I of the Bill sets up the general system of control and supervision. Clauses 1 and 2 contain a general prohibition against deposit-taking in the course of a deposit-taking business by any person other than a recognised bank, a licensed institution, a body exempted by schedule 1 or the Bank of England. The bodies exempted in schedule 1 are in general already supervised under other statutes. They include notably the building societies, the trustee savings banks and National Girobank—or, as it appears in the schedule, the Post Office. Building societies are supervised by the chief registrar. The trustee savings banks are now moving towards the private sector and should by the early 1980s have developed sufficiently to bring them within the supervisory system of the Bill. National Giro-bank is excluded from the Bill because it is responsible to Ministers and is already subject to a system of supervision very like that which will be carried out by the Bank under the Bill.
In clause 1, the definition of "deposit" goes wide and includes current accounts and loans made against the issue of debentures and similar securities. However, it is not our intention to bring within the ambit of control ordinary trading companies raising capital in the normal way for the purpose of the capitalisation of their business. The definition of a deposit-taking business will exclude genuine cases of this kind. The definition of "deposit" excludes loans made by recognised banks and licensed institutions—including inter-bank loans, loans by schedule 1 bodies, loans by moneylenders and intra-group transactions, and as a result of representations it will exclude loans made to institutions by persons who are closely connected with them. Thus, an institution borrowing solely from, say, connected depositors would be excluded from the control which is designed for the protection of the public at large.
Clause 3 and schedule 2 set out the criteria for recognition as a bank and for licensing. The criteria covers a wide range of aspects of the institution's business, including its management and capitalisation. The Bank of England will give further guidance to institutions about the application of these criteria in the annual report which clause 4 requires it to make to the Chancellor of the Exchequer. This report will be laid before Parliament by the Chancellor, and it will, of course, be open to the House to raise questions upon it. No doubt the Select Committee on Nationalised Industries will wish to take an interest in it.
Clause 5 deals with the procedure for applying for recognition or a licence, and clauses 6 to 10 deal with the Bank's powers to revoke a licence or recognition. Revocation is a serious step and will not be undertaken by the Bank lightly. Various procedures are open to the Bank. Where it considers that an institution which is in trouble may within a reasonable period be restored to health, it may issue a conditional licence. The conditions may cover almost any aspect of the institution's business, and where urgent remedial action is necessary in the interests of depositors a conditional licence can be imposed with immediate effect. However, in the most serious cases, revocation of all deposit-taking authority may be necessary. In such cases the Bank may issue directions to the institution. These will have immediate effect and will have the general purpose of safeguarding the assets of the institution in the interest of depositors until all outstanding deposit liabilities have been paid off.
The next section of the Bill deals with appeals from decisions of the Bank of England. These appeals will be directed in the first instance to the Chancellor of the Exchequer. But I should make clear that he will be acting in a quasi-judicial and not in a ministerial or political role. All appeals will be referred to a completely independent tribunal whose hearing will constitute a statutory inquiry within the meaning of the Tribunals and Inquiries Act 1971. Clause 13 allows for a further appeal to the courts.
Clauses 14 and 15 are miscellaneous provisions relating to licensed institutions, requiring them to notify to the Bank changes in their control and management and to keep copies of their accounts available for inspection by the public.
Clauses 16, 17 and 18 confer various powers on the Bank of England to obtain information and investigate the affairs of an institution, and to petition for the winding-up of an institution. These are back-up powers, and I hope that they will not have to be frequently used.
Clauses 19 and 20 deal with the protection of the confidentiality of information relating to institutions authorised under the Bill. It is clearly necessary to protect such commercially sensitive information. The Bank is, however, empowered to pass information to the Treasury, the Secretary of State for Trade, overseas supervisory authorities and the Deposit Protection Board in carefully defined circumstances. Clause 20 allows the Secretary of State to pass to the Bank of England information obtained under the Companies Acts.
Before I pass to part II of the Bill, it may be of help if I take a general look at the effects of part I. The Bank of England now supervises on an informal basis about 200 United Kingdom-incorporated institutions, as well as maintaining contact and holding prudential discussions with 180 branches of overseas institutions whose supervision is essentially the responsibility of their supervisory authorities abroad. We expect the number of institutions initially authorised under the Bill to be around 500. This figure is bound to be a rough estimate, since we cannot be sure how many small deposit-taking institutions may exist of which the Bank is unaware. Perhaps rather more than half of the 500 may qualify for recognition as banks, though it is obviously difficult to be precise.
It is not the intention to put small institutions out of business. Existing institutions will be given every chance to meet the criteria for a licence. The fixed minimum capital requirement will not apply to the existing institutions, although they must have adequate capital to support their activities. If, in spite of this dispensation, they do not immediately meet the criteria for a full licence, the Bank has the power to issue a transitional licence. This can give the institution up to two years to bring itself up to the standard required for a full licence. The Bank must, however, be satisfied before granting a transitional licence that the institution's management is honest and competent. As I have mentioned, licence fees, which would have borne particularly hard on the smallest institutions, are no longer proposed by the Government.
Will the Minister comment on the criteria for the qualification of a bank involving retail banking deposit structures, the issue of cheque books and so on? Much, of this banking has been done not only on the retail side but in merchant banking and some would argue the need for growth in that sector. Therefore, the requirement on the retail banking side may become supernumerary to the activities of industrial banking. Will the Minister give an assurance that the requirement to have a cheque book on the retail banking side would not necessarily be held to?
Perhaps we can discuss this matter further when we examine the Bill in detail. Eventually the Bank of England will have to decide on the criteria set out in the legislation and will examine all factors before deciding whether an institution can call itself a recognised bank. However, I take the hon. Gentleman's point.
The system is not intended to restrict competition; this deals with the hon. Gentleman's point in a general way. The numbers of institutions already involved will ensure a healthy degree of competition, and there will be no deterrent" entry fee" for new institutions. The specific figures for minimum capital will need to be met by new institutions, but these figures are not high. Indeed, they have been set at the minimum level considered acceptable for an institution entering the business of handling other people's savings. Transitional licences will not be available to new institutions, which will have to meet all the criteria for a full licence from the start. While the Government thought it right to allow existing institutions time to adjust to the new system, the same arguments do not apply to deposit-taking institutions setting up in the United Kingdom for the first time after the passage of the Bill.
I should like to deal briefly with the position of existing institutions under the Bill. All existing institutions will be required to apply for recognition or a licence within six months of the appointed day. For the whole of that six-month period, and thereafter until the Bank notifies the institution of its decision on the application, the institution may continue to take deposits. During this period it may continue to use its banking name and any banking descriptions which it has been accustomed to use. If the institution is then granted recognition as a bank, its position will remain unchanged—that is, it may continue to take deposits and will have free use of banking names and descriptions.
If it is granted a full licence, it may continue to take deposits. But it will in due course have to change its name if it at present enjoys a banking name, and it will have to cease using banking descriptions. But we have provided generous grace periods in these circumstances. A body may continue to use its banking name for 12 months from the date of the Bank's decision and to continue to use banking descriptions for a period of six months from that date. Moreover, it may for a further period of 12 months make reference to its old name in a context where it uses its old designation—for example, the ABC Finance Corporation Ltd., formerly ABC Banking Company.
As I have made clear, it is not the Government's intention to put small institutions out of business. To institutions which are not immediately able to meet the criteria for a full licence the Bank may issue a transitional licence, so long as the management meets the criteria of honesty and competence. These licences will usually have conditions attached—for instance, requiring an institution to increase its capitalisation or to improve its liquidity to a specified degree within a specified time. An institution may hold a transitional licence for up to two years, and during that time it will have the ability to accept deposits so long as it complies with any conditions attached to the licence. These institutions will be subject to the same restrictions on banking names and descriptions as holders of a full licence.
We have, of course, to strike a balance between the proper protection of depositors and the need to give a fair chance to institutions which may have been in business for many years. I believe that our proposals do this.
That is not contemplated.
I turn now to part II of the Bill, which sets up the deposit protection scheme. No supervisory system, however effective, could or, for the health of the system, should exclude totally the possibility of an institution finding itself in difficulties. In such circumstances the Government believe that it would be entirely wrong to leave depositors with no protection for their savings. The scheme is deliberately geared to smaller deposits in that only the first £10,000 of funds deposited with a failed institution is eligible for protection, and in order to leave an incentive to prudence on the part of the depositor 75 per cent. of that sum is covered by the compensation provisions. The scheme will be financed by a levy on all recognised banks and licensed institutions according to their size. It will take the form of a small initial cash fund and a system of back-up guarantees.
I should now like to deal with the question of the exclusion of public sector institutions. This is, of course, a scheme for the protection of depositors with the private sector and not with public sector institutions. Thus, the National Savings Bank is exempted because it has a Government guarantee. Trustee savings banks are at present moving from the public towards the private sector. They will be brought within the supervisory provisions of the Bill in the early 1980s, and at that point they will automatically become contributors to the deposit protection scheme.
I turn now to National Girobank. At present this, in effect, enjoys a Treasury guarantee. We have recognised, however, that it is in competition with institutions which will be contributing to the deposit protection scheme, and we have therefore decided that Girobank will pay to the Treasury a contribution in respect of its guarantee equal to what it would have paid under the deposit protection scheme if it had been a member. I think that that is fair because, as I have said, it is competing with institutions which will have to make contributions to the scheme.
Clause 21 and schedule 5 set up the board which will administer the deposit protection scheme. The board will be headed by the Governor of the Bank, and as a result of the representations we have received we have agreed that it is only fair that contributory institutions should be represented on it. The board will employ no staff, and its administrative work will be carried out by the Bank of England on a repayment basis. This should minimise the overheads of the scheme.
Clauses 22 to 27 deal with the constitution of the fund and the mechanism for securing contributions to it. The board will also have a borrowing power. Again as a result of representations from the banks, there will be a limit to the total liability of an institution to the scheme.
Clauses 28, 29 and 30 deal with payments out of the fund to depositors in the event of the insolvency of a contributory institution. It will be the object of the board to make payments to depositors as soon as possible after that event. Clause 30 deals with trustee deposits and joint deposits. This clause, which differs somewhat from that in the draft Bill, again reflects discussion with the banks.
Is the Minister aware that among the clauses dealing with the contribution there is a clause for special contributions, which leads to a total call on the banks of approximately £140 million? Why is it necessary to have a provision on a scale of that sort? What kind of collapse of banking institutions does the right hon. Gentleman evisage if £140 million is involved, particularly when, as is almost without doubt certain, the clearers will never be in that position themselves?
Of course, the initial scheme is between £5 million and £6 million, as the hon. Gentleman will appreciate. There are provisions in the Bill for affirmative resolution procedures to increase the amount. The figure of £140 million sounds a large one, but it represents only about 20,000 depositors with about £10,000 each. Obviously, one cannot envisage all depositors having £10,000 each in a failed institution. Looked at in that light, however, I suggest that it is perhaps not such a very large scheme. However, the present fund will be between £5 million and £6 million and at the moment there is no proposal to increase it.
Clauses 31 and 32 deal with the board's ability to recover from the dividends distributed by the liquidator of a failed institution the payments it has made to depositors, and require that these payments shall be repaid to contributory institutions rather than swelling the size of the fund.
As my hon. Friend will appreciate—indeed, the Bill sets it out—there is at present a limit of £300,000 on initial contribution and on further contributions. Therefore, the maximum amount by way of initial contribution to the fund which a bank can be called upon to contribute is £300,000. As to a further contribution, again the limit is £300,000. There are these definite limits which have been put in as a result of consultations, especially with the clearing banks.
Perhaps I can deal with that point when winding up, but I under- stand that the moneys will be mainly invested in Treasury bills.
Part III deals with advertisements and banking names. The provisions in the Protection of Depositors Act for the regulation of advertisements are carried over in clause 33, and there is a specific power in clause 34 for the Bank to issue directions to a licensed institution concerning misleading advertisements.
Clause 35 embodies the policy that in general only recognised banks should be able to use banking names and descriptions. Special provisions are made for overseas institutions with branches or representative offices here, and for savings banks and municipal banks. Clause 36 provides for grace periods for institutions which are required to change their name because of the provisions of clause 35.
Part IV deals with miscellaneous and general matters. Clause 37 re-enacts the offence of fraudulent inducement to make a deposit contained in the Protection of Depositors Act. Clause 38 deals with representative offices of overseas deposit-taking institutions. These offices do not take deposits but generally promote and assist the banking services of the institutions and may often be transformed into deposit-taking branches at a later stage. The institution is required to inform the Bank of the establishment of such an office.
Clause 41 allows the Bank of England and recognised banks and licensed institutions, as well as institutions seeking recognition or a licence, to ask questions of their directors, controllers and managers about spent criminal convictions, and provides that such convictions may constitute grounds for dismissal, notwithstanding the provisions of the Rehabilitation of Offenders Act.
Clauses 42 and 43 are procedural provisions. Clause 44 repeals some obsolete enactments relating to banking.
Clause 45 deals with municipal banks. Seven of these are in Scotland and one in Stockton-on-Tees. They are owned by their local authorities. They will be exempted from the provisions of the Bill as long as their local authority unconditionally guarantees all their deposits. Clauses 46 and 47 contain definitions and clauses 48 and 49 deal with procedural matters.
Looking at the Bill as a whole, I should like to emphasise three main points. First, the Bank of England's supervision of the primary banking sector will be placed within a statutory framework and extended to cover those deposit-taking institutions now outside an effective supervisory system.
Secondly, the deposit protection scheme set up by the Bill will provide additional security, particularly for the smaller depositor.
Lastly, the provisions on banking names and descriptions are designed to sort out the present confusion and to prevent the recurrence of abuses of the kind which have frequently occurred in the past. All these measures taken together represent, in the Government's view, a highly desirable advance in consumer protection in the important area of people's savings.
Therefore, I believe, this is an important Bill. Unusually perhaps for an important Bill, it is one which has received a general welcome from those directly affected by it, as well as from wider interests. It makes a significant contribution towards ensuring the continued health of the financial system and the protection of the small depositor.
I agree with the Minister of State that this is an important Bill. But it is by no means as innocuous or non-controversial as he has suggested.
The Bill has three godfathers. The first is the EEC first Council directive of 12th December 1977, the second is the fashionable preoccupation with consumer protection, and the third is the secondary banking crisis of 1973–74.
The Bill itself is divided into three parts reflecting those three political progenitors. Part I purports to reflect the EEC banking directive by setting up a machinery for licensing all deposit-taking institutions. However, the Bill as a whole goes a great deal further in its interventionist detail than the directive requires. In certain important respects it is contrary to the spirit of the directive.
Part II proposes the establishment of a scheme to protect the consumer—in this case in his role as a depositor. It does so by setting up an expensive deposit protection scheme to be financed mainly by the nine clearing banks. It is not a modest little scheme as the Minister has suggested; it is potentially expensive.
Part III, which controls bank names and advertisements, seeks to solve the problem of the supervision of the secondary banking sector by, in effect, announcing that it no longer exists. In future, six months after vesting day, most secondary banks are to be known as licensees—institutions licensed to accept deposits, but forbidden to describe themselves as banks or as conducting the business of banking. The Minister said it was not the intention of the Bill to put any of these small businesses out of action, but I assure him that a number of them are extremely concerned that that might be the precise effect.
The fundamental question that the Bill raises is whether the Government, in this legislation, are over-reacting to the three political influences to which I have referred. The licensing of all deposit-taking institutions is generally welcomed by those engaged in the business. Moreover, it is enjoined upon us by the EEC banking directive.
Article 3(1) of that directive is the key provision from our point of view. It reads in part:
Member States shall require credit institutions, subject to this Directive, to obtain authorisation before commencing their activities.
In article 3(2) the directive says:
the competent authorities shall grant authorisation only when the following conditions are complied with…
These conditions which are then listed are duly included in this Bill. So far, so good. But the Government might have been wise to confine their Bill to the terms of the directive. Instead, they have chosen to take this opportunity to grasp the nettle of banking status and categorisation. The Minister glossed over this and seemed to imply that everyone agreed that it was necessary to go very much further and introduce this elaborate new licensing system. Here again, the Government have moved into an extremely controversial position.
It is an apparent oddity that Britain is the only country in the advanced world which has never given an exact legal definition of the meaning of the words "bank" and "banker". Many people would say that this is one reason why our banking system has always been so successful, and why the City of London has retained its international pre-eminence when so much around it is in decline and decay.
The Bills of Exchange Act 1882 described "banker" as
a body of persons whether incorporated or not who carry on the business of banking".
That is the splendidly circular and uninformative definition which is characteristically liberal in tone.
Section 4 of the Bank of England Act 1946 defines "banker" as
any such person carrying on a banking undertaking as may be declared by order of the Treasury to be a banker for the purposes of this section.
Certainly that has the modern authoritative ring of Socialist bureaucracy. Fortunately, it has proved meaningless because no such declaration has ever been made by the Treasury and no directions have been issued.
In this Bill, after centuries of successful banking, a British Government are seeking for the first time precisely to define what constitutes a banker and a bank. Clearly the parliamentary draftsmen have not found it altogether easy. The licensing procedures in the Bill propose three categories—the recognised bank, the licensed deposit taker, and the excluded categories.
Even now, the suggested definitions are extremely subjective. Clause 3 of the Bill must be read in conjunction with the second schedule which lays down as two of the key criteria for obtaining a licence of a recognised bank that
the institution enjoys, and has for a reasonable period of time enjoyed, a high reputation and standing in the financial community";
and that the business
will be carried on with integrity and prudence and with those professional skills which are consistent with the range and scale of the institution's activities.
It would be difficult to devise words more relevant and yet more imprecise and subjective than those. "Reasonable", "reputation", "standing", "integrity", "prudence" and so on, are essential requirements of a good banker, but judgment as to what constitutes each of those qualities would vary very much according to the judge.
These are, therefore, very much subjective matters of judgment, and the judgment will be the judgment of the Bank of England, with a right of appeal to the Treasury, whose political masters may not always be particularly well qualified to appreciate such qualities. I was, therefore, relieved to hear that they would be acting in a quasi-judicial capacity when examining such appeals.
The criteria of what constitutes a good banker are not being changed, and the Bank of England will remain the arbiter, continuing to fulfil its long-established role of prudential supervision of the banking scene. To that extent, the clauses dealing with the licensing of recognised banks are merely legalistic window-dressing, necessitated primarily by the Continental mania for codifying practices which it is our tradition to handle by custom and tradition and mutual cooperation on a more informal basis. The Minister recognised that that approach had been extremely successful in the past.
Harmonisation is the enemy of informality. The ultimate significance of codification for the future role of the Bank of England may, I suspect, eventually prove to be the most significant effect of the Bill. There is, however, nothing in the EEC directive requiring the establishment of different categories of deposit taking institutions, and nothing requiring the establishment of a deposit protection fund. On the contrary, the preamble to the directive specifically states that the eventual aim is to introduce uniform authorisation requirements throughout the Community for comparable types of credit institutions, and that this aim can be achieved only if the particularly wide discretionary powers which certain supervisory authorities have for authorising credit establishments are progressively reduced
. There is precious little in the Bill to suggest that the Government have taken that message on board. Indeed, in the greater part of the Bill they are deliberately moving in the opposite direction to the declared intention of the preamble to the directive. They are intent, apparently on subjecting 500 British credit-taking institutions to a greater and stricter degree of regulation than hitherto, and greater than that imposed on their counterparts and competitors in many Community countries. I have serious doubts about whether that is calculated to help the competitiveness of our financial institutions, particularly in their international business.
This brings me to a consideration of part III of the Bill, since it seems more logical to take it in this order and to leave part II to the end. Part III will forbid a considerable number of credit-taking institutions from calling themselves banks. The Minister did not say how many, and no one can be sure as yet. The best estimate that I can obtain is that it forbids as many as 50 credit-taking institutions which have hitherto called themselves banks—in one case. I understand, since as long ago as l825—from doing so in future. They would have to apply for the status of licensed deposit takers.
As the Minister pointed out, the majority of deposit-taking institutions are not banks and have no wish to become banks. The hire-purchase finance companies are an obvious and important example. But the minority which are in the business of banking are very concerned that they will not be able to describe themselves as being so in future. Some of them are well-established institutions of the highest repute others obviously have a lower standing and rating. Some secondary banks in the 1973–74 crisis were found to have acted imprudently—the most extreme example being an institution in the public sector, the Crown Agents. Others suffered no such accusation then or since.
The proposal to relegate all of them to the status of licensee has been described as rough justice. The minority of existing banks whose existence as banks is threatened see the roughness but ask where the justice is. Some of them have for many years taken deposits, made loans, run current accounts, issued cheque books, carried on foreign exchange business, provided personal financial services and advice for customers, and submitted all required information regularly to the Bank of England. In short, they are in the business of banking. Any other description would be inadequate and misleading.
If, as a result of the implementation of part III in its present form, they are to be forbidden, within a year of the implementation of the Bill, to call themselves banks, they will regard it as a considerable humiliation, and for practical reasons that I shall describe later it would also be a serious commercial blow to them to be demoted to the new category of licensee. It is, of course, true that they will probably all change their name when the Bill comes into force from "bank" to "trust" to soften the impact of the blow, although that would partially nullify the presumed purpose of the Bill.
It is also true that of the 17 members of the Acceptance Houses Committee, only one, Hambros, has the name of bank in its official title. The great houses like Rothschild and Baring are above such considerations and will, of course, certainly be licensed as recognised banks. It is precisely the small private bank, usually in a provincial city, hoping to become the Rothschild of the future, which wants to be able to call itself a bank while climbing the ladder. Such institutions fear that if they are no longer permitted to do so the following consequences may result, and here I come to the practical anxieties of these banks.
I turn to the question of deposits first, because they are the basis of all banking. Deposits, including those from overseas, may be withdrawn from them, or, if they are to be retained, they fear that a higher rate of interest may have to be paid for them. Although a licensee must be sound if the Bank of England does its job, potential depositors may believe that a licensee must be unsound if, although apparently carrying on a banking business, it is forbidden by law from saying so.
The institutions in this category, currently enjoying banking status, may be unable to obtain deposits, whether in the primary or secondary market, on the same basis as before—and again, the essence of all banking is competitive rates at which one can obtain one's deposits. Solicitors will be prevented from depositing funds with them. Trustees may feel themselves inhibited from doing so. They may also lose the ability to deal in the inter-bank market if their banking status is removed from them.
There are many other technical considerations more suitable for discussion in Committee but which nevertheless are of great importance to the institutions in this category. So I say in all earnestness to the Minister—and I am sure that he was addressing the House with complete sincerity—that he was incorrectly advised in telling us that the Bill will not and is not intended to put small businesses out of action. For the reasons I have described, there is a danger that that will be its effect.
It must be borne in mind that there has always been a longish and multi-runged banking ladder up which small banks have climbed, and are still climbing, rung by rung. Movement up that ladder as a bank grows in size of its deposits, the breadth of its services, the growing skills of its management and its general reputation throughout the financial community, has traditionally been governed by successive recognitions, as they are called by the Bank of England, exercising what it calls prudential supervision, primarily through its discount department. All that is clearly set out in the Bank's evidence to the Wilson committee in June this year, which will be familiar to the House.
The Bill's effect will be to saw the ladder off about three or four rungs from the top. In future, potential recognised banks will have to climb up the licensee ladder and then make a sudden, dramatic and exciting jump from one ladder to another. Such banks ask how they are properly to acquire the skills necessary to conduct the business of banking unless they are allowed to advertise the fact that they are practising them.
The Catch 22 nature of the situation which the Government are seeking to bring into being and which faces those institutions, and the still-Gladstonian circumlocution of the Treasury terminology, reminiscent of the extract from the 1882 Act that I read out, is well reflected in the following extract from a letter from the Minister of State's own office to one of the institutions. Dated as recently as 18th September, it reads in part:
The Government policy on banking names and descriptions reflects the two-tier system, so that the use of such names and descriptions should in general be confined to the recognised sector. This should not prevent licensed institutions from describing the nature of the services they offer; it will, however, be necessary to refrain from describing them as banking services.
That is Catch 22 indeed for a business which is in fact providing banking services.
The response of such institutions to this threat can perhaps be summed up in one sentence. The Bank of England should not grant a licence of any kind to any credit-taking institution which is not sound, but if it is sound and carrying on a banking business under the normal supervision of the Bank of England the institution should be allowed to indicate that fact.
There is also an important international aspect. Part III will place the smaller United Kingdom banking organisations at a substantial disadvantage compared with their counterparts within the EEC, which will be free to compete for deposits without the serious inhibition of being unable to represent themselves as banks, and entitled to trade and to be taxed in this country as such.
Secondly, there is apparently no intention in the Bill to apply the same rigorous rules about banking names and advertising to the 180 foreign banks which have branches in this country. Clause 3(5) says that the criteria will be satisfied if
the relevant supervisory authorities"—
that is, the foreign countries' authorities—
inform the Bank that they are satisfied with respect to the management of the institution and its overall financial soundness".
Therefore, in the case of those 180 foreign banks, it will be the central banks of a great number of overseas countries which will make the decision, not the Bank of England.
There is no point in the hon. Gentleman's saying that he knows. It is very important. The subsection continues:
and (b) the Bank"—
the Bank of England—
is satisfied as to the nature and scope of the supervision exercised by those authorities.
Therefore, the final judgment rests with the Bank of England, not with the overseas authority.
I am well aware of what follows, but the right hon. Gentleman cannot be as naive as all that. Are we to suppose that the Bank of England and the Treasury, still less the Foreign and Commonwealth Office, faced with a bank whose head office is, for example, in a major OPEC country, will tell the central bank of that country, possibly a large holder of sterling deposits, that it does not know its job? I am trying to avoid mentioning any names. Would that central bank be told that, and told that it should not allow the bank, whose chairman will also certainly be a close relative of the Head of State, to be called a bank at all?
I have some knowledge of these markets, and I speak from experience. If the right hon. Gentleman tells me that the Bank of England will be able to tell such countries that their prize commercial bank, when operating in England, is to be publicly stripped of its right to call itself a bank, he is living in cloud-cuckoo-land and had better consult his colleagues in the Foreign and Commonwealth Office.
What, then, is the hon. Gentleman suggesting? Is he suggesting that we should not have the legislation, that we should not try to tighten up, but that we should simply allow the position that he is describing to continue?
Naturally, I shall come to that. I am building up the case for the prosecution, and then I shall give my constructive proposals for consideration.
To conclude that part of my speech, I want to make the point that, of course, the Bank of England would in practice be very chary of exercising the safeguard which the Minister has just quoted to me, and which was very much in my mind when I thought on these matters.
In practice, the Bill as drafted will have the effect of requiring the smaller United Kingdom banks to compete on most disadvantageous terms with foreign banks, both in our own domestic market and in their domestic markets. That is hardly the way to strengthen the international competitiveness of our putative banking institutions, some of which have had remarkable successes in overseas operations.
It will no doubt be argued that we are talking about only a relatively small number of United Kingdom institutions, whose total deposits amount to only a tiny fraction of those of one of the big clearing banks. But that is to miss the point. The Bill constitutes a further restraint on com- petition. The Minister went out of his way to say that that would not be its effect, but it must be. It is a further blight visited upon the seed corn.
All the great banks in this country today started as small banks, offering a much more limited range of services and skills than they offer to their customers today, just as Morris Motors started in a bicycle shop and Marks and Spencer on an open air stall. Some of the great banking names—I think, for instance, of Lazard and Warburg—have become major institutions in the City in a span no longer than my own lifetime, and not much longer than my working life in the City. Why should we now erect what are almost certainly largely unnecessary obstacles in the way of the Lazards and Warburgs of the future?
In the belief of those concerned, part III may so reduce the deposit-taking capacity of the new-style licensee as to kill its capacity to develop a banking business to the point where it is ready to satisfy the exacting criteria for the status of recognised bank. That will cause loss of employment in the United Kingdom and an increased placing of deposits with overseas institutions. The provisions of part III are inequitable as between foreign banks and small United Kingdom banks. It will reduce competition.
Part III is a charter for the existing banking establishment, which is why the clearing banks acquiesce to it and direct their fire only at part II. Part III will tend to ossify the whole banking system of this country, as so much has been ossified in other spheres by the creeping paralysis of Socialism.
The longer-term implications of this are even more serious. Anyone acquainted with the banking system in the United States knows of the serious distortions, bordering on malpractices, which can flow from the introduction of rigidities into banking legislation. The nature of money is that it is not merely liquid but protean. The very strict banking laws in the United States, for instance, have led to many banking operations being conducted outside the American banking system—and one of the objects of this Bill, according to the Minister, is to stop that. A great deal of traditional banking business has been taken outside the banking system. American Express and Sears Roebuck are highly respectable examples of this phenomenon, but there are others which are less respectable.
Another effect in America has been that much business is conducted by subterfuge or is conducted overseas. There are, for instance, all the curious consequences which flow from telling a great bank such as the Bank of America that it can formally raise deposits in the United States only in the State of California.
Above all, the rigidities of the United States banking laws have created the unhealthy position in which 70 per cent. of all American bank profits are earned outside the United States. General de Gaulle, of course, had his views about that. The overblown Eurodollar markets are another by-product. So, to some extent, is the weak state of the domestic United States dollar in recent years.
The City of London has held its own in a competitive world. We have tended to avoid banking rigidities in Britain and have laid much emphasis on flexibility. Although I admit fully that it will not involve all the consequences which I have been describing in America, part III of the Bill is undoubtedly a step in the wrong direction.
There is no need for us to assume that all our small private deposit-taking institutions which call themselves banks are lame ducks, crooked ducks or the types of ugly ducklings which will never transform themselves into beautiful swans. The Bank of England has learned much from the secondary banking crisis of 1973–74. Although no system of supervision can be wholly foolproof or wholly crook-proof, it has adequate powers and great experience to do its job without part III of the Bill. Therefore, I hope that before the Committee stage, the Government will give further serious thought to whether part III needs to be kept in the Bill.
I come to the specific question put to me by the hon. Member for Thornaby (Mr. Wrigglesworth) about my proposal. My proposal is that if the Government, despite all my arguments, are determined to categorise banking status in this somewhat arbitrary way—and any categorisation must be arbitrary because there will always be some institutions which fall just on one side or the other of a given category, however sympathetically and intelligently the Bank of England operates its criteria—the Government should consider the introduction of an additional category between the recognised bank and the licensed deposit taker. Such a third category could carry with it a licence permitting the institution to describe itself as licensed to carry on a banking business, or some such formula.
I know that there are problems about this. It would have the effect of downgrading still further the categories below it. But on balance it is an improvement on the two-category system and one likely to overcome many of the problems of the institutions at present carrying on banking business which otherwise would not be allowed to describe themselves as so doing.
I fail to see how the proposal which the hon. Member has just suggested would deal with the problem with which he was trying to scare us just now—that of the Middle Eastern bank which would not be supervised effectively under the Government's proposals. How would his proposal take care of that?
It would not solve that problem, but it would at least put the United Kingdom institution back on all fours with the foreign bank in that it would be able to describe itself on its writing paper, if not as a bank, at least as an institution licensed to carry on a banking business. I agree that it is not a very satisfactory solution, because part III creates an inherently unsatisfactory position. I am seeking to argue that if the Government are irreversibly wedded to the concept of part III, an amendment of this kind which would put the United Kingdom institutions on all fours with their foreign competitors would at least ease the position.
I come finally to part II of the Bill, which contains the proposal to establish a deposit protection scheme. The Minister described it as though it were a very minor and modest proposal, and certainly in its initial cash form of £5 million to £6 million it is fair to describe it as such. However, the Government are taking powers to be able to transform that into a vastly more expensive operation.
If part I of the Bill is the belt and part II the braces, I suppose that part III can be described as the suspenders. But certainly this is a belt and braces operation. If the licensing system works, a deposit protection scheme is not necessary. It is not enjoined upon us by the EEC directive. No outside depositor lost a penny of his deposit as a result of the 1973–74 banking crisis. In the almost inconceivable and super-crisis event of a clearing bank failing, the scheme proposed in the Bill, even in its most extensive form, would be inadequate to deal with it.
The Minister rightly said that the deposit protection scheme dealt with small depositors. But he failed to point out that about 90 per cent. of the relevant protected deposits—a depositor is protected only up to £7,500 of his first £10,000 deposit—are with the clearing banks which do not need or want the scheme, although they will have to pay for it. It is a form of subsidy or encouragement to the smaller deposit-taking institutions which for the most part are interested only in the bigger deposits at the wholesale end of the business.
The strange feature of it is that this proposal for a protection fund is inconsistent in its spirit with the rest of the Bill which is so hostile to these smaller deposit-taking institutions. The scheme constitutes, as such arrangements always do, an underwriting of less sound businesses by the sounder businesses. This is an inherently bad principle. If it has any effect at all, it can lead only to the lowering of standards and the raising of interest rates.
The man with up to £10,000 to place on deposit will know that his money will be almost as secure wherever he places it. So why put it on deposit at a lower rate of interest with a recognised bank when he can get a higher rate of interest from one of the licensees which part III of the Bill regards as unfit to call themselves banks but which are to be covered by this deposit protection scheme that will be paid for largely by the clearing banks if anything goes wrong? It is a classic and typical example of this Socialist Government aiming for one result and encouraging the opposite result. This scheme is an open invitation to the less prudent financial institutions to bid up their rates of interest.
Another effect will be that the 20 million customers who use the clearing banks will be called upon to provide support for those people who gain a larger return than they are getting by placing their money with more risky institutions. This will enable the riskier banks to attract customers away from the safer ones. Inevitably, there will be competitive pressure on all banks to act less prudently. It will promote the very type of financial instability against which the Bill is supposed to be safeguarding us.
I have the permission of the Committee of Scottish Clearing Banks to quote it as saying:
The Scottish Banks strongly endorse the view that there should be no need for a Deposit Protection Scheme if the supervisory and control functions of the Bank of England operate as intended; to introduce a scheme on the proposed scale can only imply doubts about the exercise of the bank's statutory powers.
I would add that is also the view of the London clearing banks. Even it one disregards all those arguments and accepts the need for a deposit protection scheme the particular methods of financing it which are envisaged by the Bill are open to serious criticism.
In the preamble to the EEC banking directive from which I have already quoted it is stated:
Measures to co-ordinate the credit institutions must, in order to protect savings and create equal conditions of competition between these institutions, apply to all of them".
I have already shown how far short of this the Government have fallen in the Bill in their treatment of our smaller banks by comparison with foreign banks operating in the United Kingdom. But there they have gone even further down the road of unequal treatment by excluding the public sector of banking from the burden of helping to finance the deposit protection scheme.
In his speech the Minister no doubt foresaw that criticism and he put up certain defences for his position. Though there is some force in each of the points he made—for instance, the fact that the trustee savings banks are to join the full banking system this year under the Trustee Savings Bank Act which we debated a few months ago in the House—I do not see why they should not be expected to contribute to the potential costs of the fund until the early 1980s, particularly since the trustee savings banks are anxious to become fully involved on an equal footing with the commercial banks as soon as possible.
When we come to the National Giro the situation is even more serious, because, as the Minister knows, the commercial banks do not accept the argument that, because it will be making a contribution to the Treasury comparable with that which would be required if it were part of the deposit protection scheme, fairness has been achieved. If there were difficulties and if there were a failure, it would be the commercial banks which would have to put up the money, stage by stage, with the Government in a position to make calls. They feel—I share their feeling, and the Minister will know that very senior bankers have written to the Treasury on this point—that if there is to be a public sector in banking it must be treated absolutely on all fours with the private sector, with which it is competing. I hope that the Minister will take that message on board and accept that the National Girobank will make exactly the same contribution in precisely the same way through the fund.
I think I made that quite clear. The National Giro will make an equal contribution through the Government, the same contribution it would have made had it been part of the deposit protection scheme.
I have listened carefully to what the Minister said, but the National Giro bank will be making that contribution to the Government, not to the protection scheme, and the Government are not contributing to that scheme.
One of the criticisms by the commercial banks is that neither the Treasury nor the Bank of England will be contributing to the scheme. The fact that the National Giro bank is having, as it were, money switched from one pocket to the other is irrelevant. The commercial banks want to see the National Giro making exactly the same contribution as they make to the protection scheme. If the logic of setting up such a scheme is that it is considered that ordinary people can no longer be expected to judge the strength of the institution to which they entrust their savings, the main responsibility for preserving the health of our financial system must fall upon the Government-appointed guardians, the Treasury and the Bank of England, to whom are being given these new "nanny" powers of licensing and supervision.
If in future a licensed bank is unable to repay its depositors, that will primarily represent the failure of that supervision and not the failure of the commercial banking community. It is appropriate, therefore, as I have said, that in addition to the National Giro the authorities should be required to shoulder at least some of the burden of compensation, because a burden it is. The Bill provides for the Treasury to be given power by order—we can discuss in Committee whether it should be by negative or affirmative resolution procedure—to increase the banks' ultimate contributions liability to 0.6 per cent. of their deposit rate, which is specially defined to exclude inter-bank deposits and certificates of deposit. It therefore increases greatly the proportionate contribution which the clearing banks have to make. This 0·6 per cent. figure, which would be necessary only in a crisis considerably more grave than that of 1973–74, in which no outside depositor lost a penny because of the skill of the "lifeboat" recycling operation, would constitute at least £260 million, of which the clearing banks would have to find about £160 million.
The hon. Member for Thornaby asked the Minister whether he could break down the figures for particular banks. He was not able to do so. I checked this before the debate and I understand that even if the 0·3 per cent. of the deposit-based figure is called for it would work out at about £18 million for Barclays as a large bank, about £4 million for Williams and Glyns, a medium-size bank, and £100,000 for a relatively small merchant bank such as Arbuthnot Latham. There would be £130 million altogether from the private sector, of which the clearing banks would have to find some £80 million. That is on the 0·3 per cent. call. These figures would have to be doubled for the 0·6 per cent. call, so that we are dealing with very sizeable sums. Even the original small fund to which the Minister directed his remarks, which is to be set up immediately and which will amount to £5 million to £6 million, makes considerable demands on very small businesses because, as I understand it, the smallest licensee will have to make a £5,000 minimum contribution. Five thousand pounds is a substantial sum for a small business to have to pay out.
The Scottish clearing banks are particularly concerned that the maximum contribution of £300,000 at each call will have a much greater impact on them than on the larger institutions, bearing in mind that the deposit base of the London clearing banks is almost 10 times that of the Scottish clearing banks. In equity, the contributions from the banks should really be on a pro rata basis. It is clear, therefore, that there will be much to discuss in Committee before we decide to give the Bill an unopposed Third Reading.
The fact which, above all, must be remembered is that the City of London is the one feature of our British national commercial activity which is still internationally pre-eminent. Never in our long history, although many of our wars were fought on its gold and its loans, have the people of this country been so dependent in their everyday peacetime lives on the overseas earnings of the British financial institutions as in recent years.
Jealous eyes are cast on that preeminence by New York, Paris, Frankfurt and Brussels and increasingly by the rapidly developing money markets of the Far East. We have frittered away so many of our advantages and opportunities in other commercial spheres where we were also once leaders. Let us, therefore, be resolute in our determination not to damage the international competitiveness of the British banking system by self-inflicted governmental follies.
I wholly support the Minister in all that he has said in introducing the Bill. I am pleased that it has been introduced. If I were to make any criticism it would be that I wish the Bill had been introduced earlier. Much of the debate will no doubt take place in Committee. I have been tempted by the speech of the hon. Member for Horncastle (Mr. Tapsell) to make a longer speech than I had originally intended. Listening to him I began to wonder whether the Opposition intended to vote against the Bill. The hon. Gentleman laid such a damning indictment against it that I cannot under- stand why the Opposition do not intend to oppose it.
The House should be grateful that the banks have been rather more measured in their criticism of the Bill than the hon. Member for Horncastle. Let me take his criticism of the deposit protection fund and the figures which he has quoted. How do they compare with the contribution which those whom he is seeking to protect, the London clearing banks, had to make to bail out small banks during the lifeboat exercise? It cost the shareholders—and I would have thought that the hon. Gentleman might have been interested in them—a total of £1·2 billion. That is a rather large contribution when compared with the contribution which the banks are now being asked to make to this modest scheme designed to protect consumers of banking services.
What we are talking about are the depositors, not the shareholders. The deposit protection scheme will not protect shareholders in any way. It is aimed only at protecting depositors. It was to that point that I was directing my remarks.
I recognise that. The point I am making is that the contribution which is being asked of the banks is very small in comparison with the £1,200 million which they had to contribute to the lifeboat fund to bail out the substantial number of fringe banking institutions and other bodies which collapsed a few years ago.
I draw the attention of the House to the remarks made by the banking correspondent of the Financial Times when the Government's proposals were produced. He is a respected banking correspondent who has been on the Financial Times for some time and who knows the City and the banking institutions very well. He said:
Rather than complaining about the deposit protection proposals in the banking supervision White Paper, the clearing banks should be grateful that the Government's ideas have turned out so much in the interests of the established banks.…It might have been tempting, for example, to have set up more rigid and restrictive regulations governing bank activities than are envisaged in the Government's proposals, which would undoubtedly have been unpalatable to the banks. There could have been moves towards greater formality in the system and particularly to ensure the detailed involvement of Parliament
—possibly through other departments than the familiar channels of the Bank and the Treasury.
There are other examples of independent comment about the Government proposals which reinforce what is said there. This is not a draconian measure.
We have heard all this nonsense about this being another Socialist proposal. The hon. Member for Horncastle knows very well the genesis of this proposal. The Minister rehearsed it clearly in his speech. Anyone who compares the history of banking in post-war years in this country with that of other countries will find it remarkable that we have maintained such loose control over the banking industry. We have had unclear definitions of banking institutions. It is surprising that we have been able to escape for so long without a major collapse of the sort we had earlier in the decade. This is surprising when we consider the lack of supervision and the freedom with which people have been able to establish banking institutions in this country. Despite the hon. Gentleman's criticisms of the Government proposals, it will be seen that they have not stopped Chase Manhattan, City Corp, the Bank of America and a whole host of substantial banks—indeed, the biggest banks in the world—from expanding rapidly and being successful.
They expanded internally first. It is dangerous to draw too close a comparison. The banking legislation in the United States restricts banks to activities in their own states. Nevertheless, it has not stopped substantial growth by many large banks which have grown and become international over the years. These banks have outclassed our banks in many parts of the world and are bigger than our banks, despite the freedom which there has been here and despite the critcisms of the control which there has been in the United States.
Let me not give the impression that I believe that the Government's proposals, or the type of legislation operating in the States, is the be-all and end-all of everything and will bring to an end all difficulties in banking or will stop banking collapses. If we could guarantee that there would not be any more banking collapses, there would not be a case for a deposit protection fund. Despite the controls operating in the States, there was the collapse of the Franklin National Bank and there were the problems with the First National Bank of San Diego. There have been problems in Germany with the Herstatt collapse. We know that there have been these difficulties and we know that simply by introducing this legislation we shall not overcome them.
The system which we have had has been dreadfully confusing for the banks and for anyone wishing to establish a bank. There has been confusion of supervision between the Bank of England, the Department of Trade, the Treasury, and so on. To tidy all of this up, to get a proper definition of banking, to put the responsibility on the Bank of England for supervising the banks, is a step in the right direction which should be welcomed. In many respects—the deposit protection fund aside—this Bill is welcomed by many bankers in this country.
Over the years the deposit protection fund will be able to provide the resources to deal with a collapse and to protect small depositors. There is a limit to the fund. That is what it is aimed at. The fund is predominantly aimed at those small institutions where collapse is more likely. There is no question about that. There cannot be a deposit protection system without involving all the banks. Anyone who has looked at the deposit protection system in the United States will recognise that that is the case. It has not stopped collapses from happening there, but it has given support to depositors when banks have collapsed. They have the same sort of limit, perhaps slightly higher than here. It is a useful piece of consumer protection which, I believe, should be welcomed here, and which has been effective and helpful in the United States.
Before the hon. Gentleman leaves the international arena and in the light of what my hon. Friend the Member for Horncastle (Mr. Tapsell) has said, may I ask the hon. Gentleman whether he would say that the Edge Act had been more helpful to American banks in their domestic market or to the City of London?
I do not want to go down a long line of debates about what might or might not have happened as a result of different pieces of legislation in the United States, or for that matter, in Hong Kong, where they have a much tighter system of banking control than we have—in what is said to be that great bastion of free enterprise in south-eastern Asia.
I accept that this measure is not the answer to all of our problems. All that it does is to lessen the chance that there will be a collapse. It tidies up the whole of our banking legislation and supervision. People will know much more clearly where they stand as a result of this Bill, both overseas and at home. It is an improvement which should be welcomed. I do not suggest that it is a panacea which will deal with all problems, as the Edge Act and other measures in other countries have not been panaceas.
The justification for this measure is, first, that there has been a need to end the confusion and tidy up the banking supervision laws in this country. The second justification is that it will safeguard the public and lead to greater public confidence in the banking institutions.
When one travels round the streets of London one sees the various operations that have been established in the last couple of years which take upon themselves the name "bank". It is worrying that no action has been taken and that no action can be taken under present legislation to control their activities.
We have heard comments about the foreign exchange and almost "bucket-shop" operations that are dotted around London. In various parts of the City there are a number of such organisations, companies or bodies. I do not know who owns them. I do not know what safeguards there are against the public being rooked by such bodies because they are not controlled at all.
This legislation will put fairly on the shoulders of the Bank of England the responsibility for supervising such institutions. A company will not be able to use the name "bank" or a name which implies that it is a banking organisation unless it can satisfy the Bank of England that it meets the criteria.
There was a collapse in the secondary banking sector earlier in the decade. I was working in the City in the early part of the 1970s. If anybody had told me that companies such as UDT, Mercantile Credit and Brandts—and that is only sample—would be in difficulties, I should have been very surprised.
The collapse which aroused the most attention was that of London and County Securities. The inspectors' report on that collapse led to the first interest being taken in such institutions and eventually to this Bill. I remind the House of what the inspectors' report on London and County Securities said:
Up to the time of the collapse of L & C the Bank of England did not much concern itself with secondary banks. But since the collapse the Bank of England has taken action, in particular by calling for detailed returns.
It is staggering that until only a few years ago the Bank of England was not that. The report continues:
The Department of Trade is responsible for monitoring the accounts of those which are deposit-taking institutions under the Protection of Depositors Act, 1963…It appears that this lesson still needs to be learned and that greater control over the names and descriptions of secondary banks is necessary… Other descriptions, not including the word 'bank', but using such words as 'financial trust' or 'industrial trust', may also be used to inspire undue confidence and should be controlled…Supervision of secondary banks is necessary. The Bank of England would probably be the most suitable body to undertake this task.
That statement came after an exhaustive study.
If one examines all the other things that happened at that time and the establishment of the lifeboat to bail out those institutions at a phenomenal cost to the Bank of England and considerable cost to the clearing banks one can make out a powerful case for the Bill being given a speedy passage.
Can my hon. Friend tell me something about the Stockton-on-Tees Municipal Bank? I come from Stockton-on-Tees and represent a constituency which is just across the river from it. I have not heard of that bank. Perhaps I should sample some of its services. I am sure that the people of Stockton will be honoured to know that their bank has been mentioned in the debate.
May we have more information about the other banking legislation, some of which is mentioned in the Bill? There is a plethora of Acts which have an influence on the banking scene. It would be helpful if we had some consolidation soon. I wonder whether the Government have that in mind. I am sure that in overcoming the confusion to which I have referred it would be helpful if we had a measure to bring together all those Acts, some of which were passed in the last century, which are still in operation but which are diverse and confusing.
I wish the Bill well. I hope that it is passed speedily. The hon. Member for Horncastle mentioned several matters which need examining in Committee. I hope that the House does not delay the Bill unnecessarily.
The hon. Member for Thornaby (Mr. Wrigglesworth) personifies the Socialist approach to life. Over the centuries Britain's banking system has operated efficiently and properly. Because there is no definition the typical Socialist decides that we must interfere with it, put a definition on paper and regulate it. That is the typical Socialist approach to life.
The hon. Member pleaded with the Government to do something about the present Acts. He would have been better to plead for a simplified income tax system. That is of far more importance than trying to harmonise the banking system.
My hon. Friend the Member for Horn-castle (Mr. Tapsell) made an excellent speech and damned the Bill absolutely. I cannot understand why, with that indictment, we are not to vote against the Bill. The Bill has some good points but many more bad points. Already the Minister has changed the Bill. The Post Office Giro will now give to the Government the contribution that it would have given to the protection fund. That is a nonsense.
The Giro is in the same business as other banking institutions. Why should Barclays Bank or one of the secondary banks have to pay into a fund while the Giro gives its contribution to the Trea- sury? That is illogical. What will the Treasury do with the money? Will it pass it onto the fund? The Minister must explain.
I cannot understand why the trustee savings bank is not included in the Bill. If we are to set up deposit protection, all bodies in that business should contribute to it. I presume that municipal banks will not contribute. It is a racket that they should not contribute because they guarantee deposits. The ratepayer, not the municipality, guarantees the deposits. Such banks should contribute to the fund. All banks, whether or not they are publicly owned, should be subject to the same regulations.
I agree with my hon. Friend the Member for Horncastle's criticism of the part of the Bill dealing with advertising. The restricted use of the word "bank" will have a detrimental effect on the City and its institutions, particularly as there are so many foreign banks in the country.
The Bank of England will control everything. The right of appeal in the Bill as it stands is only to the Chancellor of the Exchequer. I am delighted that there is now to be a neutral quasi-judicial body. That is a step in the right direction. If there had been merely an appeal to the Chancellor of the Exchequer, who, after all, controls the Bank of England, there would have been no effective appeal.
I turn to the setting up of the deposit protection board. The Minister has told us that three members from the banking fraternity—for example, the clearing banks and the secondary banks, the contributors—will be on the board. In addition, there will be three ex officio members—the Governor, the Deputy Governor and the Cashier of the Bank of England.
The board will look after the deposits that have been paid in by all the various contributors. There will be three members from the banking fraternity proper and three ex officio members from the Bank of England, but it seems that there will be other Bank of England officials. How many? Is the board to be weighted?
The private banks will be subscribing £5 million or £6 million and the management of that sum will be under the direction of the board. Private enterprise will have three members on the board and it seems that there will be a greater number of Bank of England officials who will be ordinary members. The board will be heavily weighted.
The system of contributions is a thoroughly bad principle to adopt. There will be a £5,000 minimum contribution and a maximum of £300,000. A contribution may be up to 0·3 per cent. of the deposit base. That will bring in £140 million. That will all come from the banks. In fact, that can be doubled to £280 million. That is a great deal of money. It is interfering with banking to make the banks produce that sort of money when we have not as yet had any collapse in which a depositor has lost his money. In the long run it will be detrimental.
The main contribution will come from the nine clearing banks. The secondary banks and the other institutions that are smaller will produce very little of the £5 million or £6 million. What are we doing? We are saying to the most profitable section of banking that it is to produce a certain amount of money to protect the section of banking that might not be profitable. We are telling the profitable section to look after the unprofitable section. That is a thoroughly bad principle.
If people deposit in a secondary bank, they will obviously receive a much higher rate of interest than if they deposit in a clearing bank. I suppose that a person could get 10½ per cent. by putting his money into Barclays Bank or the National Westminster. If he invests in a secondary bank, he will probably receive 13½ per cent. or 14 per cent.
The person who invests in a secondary bank and receives another 3 per cent. is entering into a more speculative venture than the person who puts his money into one of the clearing banks. If secondary banks are to have a fund from which they will be able to draw if they go bust, that will give an air of respectability to many fringe banks that they should not enjoy. It is to be done at the expense of the most stable section of banking. The Government have made a fatal mistake in setting up the deposit scheme.
The banking section fits itself into two parts. First, there is the clearing bank section. Surely nobody will ever think that one of the clearing banks will go down. The second section is the specula- tive part of banking—namely, secondary banking. Surely we can decide which of the two sections is the most speculative and which is the most stable. If it is necessary to set up a fund, there should be two funds established. Let the clearing banks subscribe to their own stable banking and let the other banks subscribe to their fund. Such a system would be much fairer.
Why should a person who invests in one of the clearing banks be put at risk if one of the secondary banks goes bust? Why should Barclays or National Westminster have to bail out a secondary bank? It is a thoroughly bad principle.
We have over-reacted to the 1972–73 secondary banking crisis. Nobody lost his money. What were the main reasons for that collapse? Probably one of the main reasons was the announcement that there would be a development land tax. Following that announcement, property values immediately decreased. It is all very well the hon. Member for Thornaby laughing, but that was one of the main reasons. It was nothing to do with deposits.
It seems that the EEC directive has been used as an excuse by the Government to introduce a more rigid and wider Bill than necessary. The directive would have been perfectly all right.
If the Bank of England is to look after the secondary banks and insist on the presentation of certain accounts—incidentally, I wish that it had done that with the Crown Agents—and it fails in that job, it should be up to the Bank of England to take the penalty. We should not set up a fund with the support of the other banks in case the Bank of England is incompetent and cannot control some of the fringe banks.
I am glad that my hon. Friend the Member for Horncastle has said that we must examine how we can change the Bill in Committee and that we shall reserve our position for Report and Third Reading. The Bill contains a little that is good and a great deal that is bad. I regret that we have not decided to throw it out and to start all over again.
If the Bank of England needed to have proof that it has a clean bill of health, today's debate is that absolute proof. We have heard criticisms from the Socialist Benches of the Bank of England on so many occasions, yet today the Socialist Benches are absolutely empty. Not one word has been raised against the Bank of England, and rightly the Bill is brought forward to enhance the authority and power of the Bank of England. Strangely enough, that is being done by a Socialist Government.
I congratulate the Treasury Bench on having the strength and the wisdom to realise that when powers of control of the banking system have to be introduced into our legislation as a requirement of our entry into the EEC, they should be placed at the centre of the banking system—namely, with the Old Lady of Threadneedle Street.
The hon. Member for Honiton (Mr. Emery) will recollect that the hon. Member for Horncastle (Mr. Tapsell) described the Bill as "creeping Socialism". I do not know how the hon. Member for Honiton can reconcile that statement with his remarks about the Government using the traditional methods of the Bank of England to carry out these provisions.
I am doing nothing other than praising the speech of my hon. Friend the Member for Horncastle (Mr. Tapsell). It was elegant and accurate. Where Socialism creeps into the Bill, my hon. Friend had no worry in underlining that fact.
The Opposition are not opposing the Second Reading because anyone who knows anything about banking agrees that the aspects of control in the banking system ought to be centralised. These banks were under the Department of Trade, and as a Minister there I had problems both from the consumer aspects and in the application of section 123 banks. The Treasury had problems. Indeed, the tacit control within the banking system and the reporting required by the Bank of England of all banking institutions are frequently unknown outside a small circle of people. I give credit and praise to the Bank for the way in which it carried out this very difficult task between 1973 and 1976. The Bank did it with great tact and in a manner which few other bodies could have matched, particularly any ministerial body which would have involved a degree of bureaucracy, which has been non-existent in the Bank's approach.
My main reason for speaking is to underline that our Socialist Government have rightly decided to ensure that where control in the banking sector has to be strengthened, it should be done by the Bank of England.
My hon. Friend the Member for Horn-castle referred to foreign banks. I believe that the British banking institutions, particularly the smaller ones, will object strongly if the rules by which they have to abide are entirely different from those for foreign banking institutions. Foreign banks can set up a branch in the City of London and compete for deposits without any of the controls and regulations established by the Bill. It would be nonsense to think that the Bill is setting up new regulations; it really only codifies them. Although I have not discussed the matter with my hon. Friend the Member for Horncastle, I believe that all banking institutions, whether foreign or not, should have to meet the same criteria, if they are taking deposits. If they are not deposit-taking, it is an entirely different matter.
Why have the American banks been particularly successful in this country? Much of the banking business of American companies will flow partly, though not entirely—the big American corporations have two or three bankers—through American bank branches in this country. How has the Bank of Cyprus done so well? It has attracted deposits from Cypriots living in this country. I mention that bank because it had a difficult period which its management has rectified and it is now stabilised. It would be quite wrong that that bank should meet our criteria and regulations and that another foreign bank should be allowed to compete for depositors, having met none of the regulations or management requirements which are so necessary in running an acceptable financial institution.
Therefore, I ask the Minister whether it has been considered that all foreign banks willing to take deposits in this country should be required to meet the regulations. The Minister may tell me that that has been considered. If that is so, perhaps he will tell me why it was decided that they need not comply with the same regulations as a British bank.
Regarding competition and the "climbing up the ladder" syndrome to which my hon. Friend the Member for Horncastle devoted part of his speech, he was absolutely right when he underlined how all big institutions were once small. In the City of London there are major institutional bodies which have grown up within two generations, and sometimes even sooner. In those circumstances, we must ensure a progression which will not be too difficult.
I am particularly concerned that the phrase:
a wide range of banking services
which appears several times in the Bill has five criteria in schedule 2. I do not intend to go into those criteria, but one is that current and deposit account facilities shall be made available. I describe them as retail banking facilities. The schedule goes to say that the Bank of England, in considering the wide range of banking services, can exclude three of those five criteria. However, it is not allowed to exclude the retail banking services.
Many merchant banks, which rightly describe themselves as banks because they carry out many banking operations with industry and commerce and provide money for joint ventures and the whole area of corporate finance, do not need or want to carry out a retail banking operation. Some do, but purely for prestige purposes. Some are moving away from this operation, because unless they have an increasing number of accounts it becomes a very expensive shop window.
In certain instances I would hone that the exception of the retail banking factor would still allow a body climbing up to consider providing a wide range of banking services. The type of banking services that such a merchant bank would provide would be directed not towards the retail banking side but more to the corporate or industrial finance side. I hope that that matter can be fully considered in Committee.
Similarly, I am not quite certain how the application of the foreign currency till will be started. At present, that is controlled through the Bank of England. I presume that the licensed institution wishing to climb up the ladder will, in time, be allowed to have a foreign currency till. If it cannot get a foreign currency till until it becomes a recognised bank, I am not certain how it can become a recognised bank. This is another problem which we must have defined.
I agree with the hon. Member for Thornaby (Mr. Wrigglesworth) that the number of shop windows" appearing round London providing a necessary service—foreign currency exchange—are there only to make money. They are not there for the benefit of anyone but the proprietor. It is nonsense that these foreign currency shop windows should be allowed to call themselves banks. I think that the registrar of companies could control that practice under existing regulations. Can the Minister undertake to look at the matter while the Bill is going through, because that practice ought to be stopped?
I also urge that in dealing with variations between the recognised bank and the licensed institution, one of the requirements for licensed institutions should be carried through into recognised banks. What matters most for any good organisation is the management of the business. Schedule 2 to the Bill states:
Every person who is a director, controller or manager of the institution is a fit and proper person to hold that position.
It is terribly important that we do not have people running deposit-taking institutions who are not of the highest calibre. Where problems have arisen in the past, it has normally been because bodies have not had a high standard of management capability and have got themselves into trouble. We should not presume that just because an organisation has moved from the second division into the first division it will automatically keep the same requirements on management. That provision should be stipulated in the Bill and not just presumed as it seems to be at present.
I do not take quite as strong a view as do my hon. Friends about the depositors' protection scheme. I believe that it has been included because it plays up to the modern trend of consumer protection. It panders to that. Is it so terrible to suggest that that pandering should be taken out of the Bill?
I understand the criticism of Giro. The Minister has partially answered it and I know the further answer that Giro is not being included in the protection scheme because the guarantor of Giro is the taxpayer, so Giro would never have to draw on the scheme. However, I immediately have to ask whether the Government expect that the joint stock banks or the clearing banks will ever have to draw on the scheme. Of course they do not.
The Government are saying, in effect, that the strong will provide an insurance for the most questionable. In basic economics, that is nonsense. It will encourage the less responsible to put up their rates to attract deposits and perhaps be even less responsible.
Anyone who knows the City is aware that no depositor in any banking institution has ever lost a penny: shareholders yes, but not depositors. That is why the Bank of England had the lifeboat, but we do not need a depositors' protection scheme for people to know that no depositor in a British bank has ever lost any money.
The Treasury has been sensible in its approach to the Bill, especially in giving responsibility to the Bank of England. That is a great credit to the Bank and is exactly what I would have expected. Because of that, it is right to welcome the Bill. There will be major points to be dealt with in Committee, but I hope that that work will make the Bill better and that we shall be able to combine in seeing it onto the statute book.
I declare my interest as a director of one of the accepting houses, but I am speaking entirely in a personal capacity. I have another reason for intervening. Because, alas, I shall be serving on the Committee of another Bill going through at the same time, I shall be unable to take part in the Committee stage of this Bill.
There are a number of observations that I wish to nut on the record and draw to the attention of the Minister. Some have been made by other hon. Members, but the more they are reinforced, the more seriously the Minister will take them. I have to raise these matters now, even though one or two are really Committee points, because I shall not be able to serve on the Committee.
I accept what the hon. Member for Thornaby (Mr. Wrigglesworth) said about the need to tighten the licensing and supervision of the banking system. I was not in the House, but I was in the City, during what has become known as the secondary banking crisis. My bank was not involved, but I naturally observed at close hand what was going on.
I accept that the Bill is necessary for a number of reasons, including the effects on the financial system of what happened at that time. All hon. Members know that many depositors do not have the same sophistication as those who are familiar with the financial scene and that many of them put lifetime savings into insurance funds or banks and expect protection. If they do not get it, they come to hon. Members—we all remember what happened with Nation Life—and complain. I accept that the Government's proposals are necessary because there were obvious weaknesses at that time.
However, I noticed that when my hon. Friend the Member for Croydon, South (Mr. Clark) was discussing some of the reasons for the secondary banking collapse and referred to the introduction of the precursor of the development land tax, the hon. Member for Thornaby shook his head and smiled. I have to tell him that, although there were a number of reasons, the introduction of that tax was one. It undoubtedly had a major effect on the property market and, although it could be argued that too many banks were too heavily involved in the property market, for reasons that we can go into at some other time, the proposed tax had a serious ripple effect. The hon. Gentleman must not discount its impact on the collapse.
If the hon. Gentleman would be prepared to extend his listing of causes to the general area of Government policy at that time, I would heartily agree with him. The announcement of the tax was important, but there were many other reasons besides that.
That is a subject which we shall have to debate at another time. The cause of the collapse certainly extended into other areas, but the announcement of the tax had a crucial effect on confidence and set up a ripple effect. I agree with what my hon. Friend the Member for Croydon, South said and it seems that the hon. Member for Thornaby is coming a little closer to our view. I hope that he will learn the lessons of the effects on the wider scene of the introduction of such a tax.
We are indeed. I said that it was not the development land tax, but its precursor, which was the development gains tax. We are talking about the same tax and we seem to be getting nearer to agreement.
There are much wider issues at stake in the question of what happens in the banking system than just the supervision. I agree that at the time of the secondary banks crisis there were weaknesses in the supervision. I thought that the most glaring was that the section 123 banks reported to the Department of Trade. Clearly it was right for them to be brought within the scope of Bank of England supervision.
It could also be argued that the Bank of England supervision at that time was somewhat lax, and perhaps not quite as formal and as closely controlled as it will be now. Nevertheless, having made that point, I would not wish in any sense to vote against the Bill on Second Reading.
I think that the Bill has gone for overkill, and I want to concentrate on one particular aspect—part II, which deals with the deposit protection scheme. I do not believe that the case has yet been made for the introduction of the scheme. Unless in Committee—as I said, I regret not being on the Committee—a much clearer case can be made for it than has been made by the Minister today, I would be disposed to argue that this part of the Bill should be voted against on Report.
I wish to put forward three main reasons, some of which have been touched upon already in different ways by my hon. Friends. The first concerns the whole principle of the scheme, which is really asking the entirely prudent banks and those who deposit with them to bail out those who are not prudent—and, inci- dentally, their depositors who were taking risks, and who should have known that they were taking risks, by seeking higher interest rates. Is this the right way to go about consumer protection?
My hon. Friend the Member for Honiton (Mr. Emery) referred to the need to pander to consumer protection. He said that there may be something to be said for it. But we ought to be realistic about what kind of consumer protection we are seeking. There are two sorts of consumers involved. One is the depositor with the prudent bank and the other is the depositor with the imprudent bank. We appear to be saying that consumer protection should be for the imprudent and not for the prudent. I question whether that principle is right. The point made by my hon. Friend the Member for Croydon, South about the two types of deposit protection schemes seem to be worth looking at in Committee.
I cannot resist making a further point on this principle, having referred to prudent banks. I wish that in the debate we had focused rather more—or that the Minister had done so—on the tremendous record of the prudent banks, because in seeking to introduce these new provisions we are talking of a very narrow area of banks. What strikes me so often, when I pay this tribute to the prudence of our banking system, is the completely split mind of so many Labour Members, and particularly those in the Tribune group. I am struck by the paradox in the way in which they approach the question. If they were here today, they would be strongly supporting the Bill and making all sorts of speeches about the imprudent lending of many banks, yet they are the first to urge upon many of our private institutions, whether banks or insurance companies, that they should lend in areas which the banks and insurance companies would themselves regard as imprudent, simply because it suits the predilections of the Tribune group.
On the one hand, we so often hear the Tribune group criticising the fuddy-duddiness of our clearing bank system and the fact that the banks will not lend to the kind of proposition that the Tribune group would favour. On the other hand, we hear the Tribune group criticising other banks when there is any possibility of depositors losing their money. These Labour Members are ready to criticise, at the drop of a hat, any imprudent lending by the private sector, but they do not give a fig when they urge Governments to use taxpayers' money in the same direction. We have seen a good deal of spending by Government in assistance to industry which has gone completely wrong and the taxpayer has lost his money. In one and the same argument we are talking about the same type of people, except that in one case they are depositors and in the other they are taxpayers.
When we hear Labour Members talking about the City—whatever that might mean—or banks not lending in the national interest, when those Members mean their own personal predilection, they might bear in mind that it is the prudent lending in which the banks have been engaged which has so often protected the depositor. That being said, I still think that the principle of the deposit protection scheme is wrong.
My second reason is that if the supervision system is now correct, the deposit protection scheme is unnecessary. That is the belt-and-braces point made by my hon. Friend the Member for Horncastle (Mr. Tapsell). If the new system is sound, as we hope it will be, and bearing in mind that all the banks which will be licensed and supervised will have prudent bankers operating in them, is there any need to set up this kind of spurious scheme in order to give some spurious feeling of consumer protection? If there is a need, it is quite simply a reflection on the way in which the Bank of England has exercised its powers in this case. If there is a really serious situation in any one bank, I question whether we need the scheme in any case.
The hon. Member for Thornaby referred to the funds that went out during the lifeboat operation. I think that there is a quite large distinction between a deposit protection scheme and a lifeboat operation. This point was made very effectively in The Banker in October 1978, from which I quote this brief paragraph in order to get it on the record. It says:
The irony…is that, had the Deposit Insurance Scheme proposed in Part II of the Bill been set up in 1973, it is not at all certain that many calls would have been made upon it. All
the arguments for creating the ' lifeboat' in order to halt the weakening of depositors' confidence would have remained just as valid as they were without the Deposit Insurance Scheme, since the purpose of the 'lifeboat' was to prevent institutions experiencing withdrawals of deposits from going under. But if institutions were not forced into liquidation, then the Deposit Protection Scheme would never have been triggered; and even if it had been triggered only a relatively small proportion of the total amounts deposited with the failed institutions would, in fact, have been covered.
Various consequences flow from that. If there is a major difficulty, such as the secondary banking collapse which occurred in the 1973 period, we shall have to look to something further than the deposit protection scheme—or the banks will wish to do so—in order to prevent a collapse of confidence in the system. If, on the other hand, there is a collapse of only one small bank, where the deposit insurance scheme would be relevant, it is very likely indeed that all that would be happening would be that the clearing banks and their prudent managers and prudent depositors would be bailing out those who were imprudent. I come back, therefore, to my first objection in principle—
I am grateful to my hon. Friend for giving way. Would he not agree that, if there is a depositor protection scheme, the likelihood of being able to bring in another lifeboat would be made more difficult? There would already be a protection scheme, and that would be the confidence factor. It is not a matter of the small depositor; it is the withdrawal of the large deposits which cause banks to collapse. That is where confidence is lost, not in the work that the protection scheme will do for the small depositor.
My hon. Friend could well be right. In certain circumstances that could certainly flow. I take his point. We have to make the distinction between a major situation and a very minor one. If it is a minor one, we come back once again to the question whether the principle of the scheme is right.
My third criticism relates to the unfair method of setting up the fund. My hon. Friends have already referred to this and therefore I need touch on it only briefly, but I have some points to add to what they said. The point has already been made about the lending banks having to provide the bulk of the funds, and I do not need to repeat it, but there are other banks concerned—for example the accepting houses.
I have a point to put to the Minister on this. One of the arguments of certain of the accepting houses against this method is that their sterling deposit base is used as the base from which their contribution to the fund comes, but, of that sterling deposit base, only a tiny proportion, in the case of a number of accepting houses, will be small deposits. Effectively at any point, even if anything happened to one of them, they would get very little out, but they are making a big contribution.
There is a point here on which there seems to be some uncertainty. Perhaps the Minister will deal with it in his reply. In a situation such as that of the accepting houses, to what deposit base does the fund apply? I know that, in the Bill as a whole, inter-bank and other deposits of that sort as defined in clause 1 are excluded, but in clause 23(6) it is not absolutely clear whether inter-bank deposits are excluded as well as the three listed or whether inter-bank deposits come in. I suspect that inter-bank deposits are excluded. Therefore, the British Bankers Association is correct in its representations. But I have had representations from other people within the Accepting Houses Committee which leads me to suspect that all deposits are brought within that definition. I should be grateful for clarification on that point.
I come back to the unfair method. I feel strongly that the way in which the Minister is proposing to bring in the National Giro—it is a big improvement—and the delay in bringing in the trustee savings banks is unfair to the private sector. I think that we see this happen all too often and that we let it slip by all too easily.
I am still greatly disturbed about the extent to which Government national savings in all forms can obtain favourable tax treatment. It is easy for a Government, whenever they wish, to twist the way in which tax-free interest on deposits is allowed. It is easy for them to introduce an unfair bias against the private sector. Therefore, if we are looking for fair competition in banking, we should be on our guard against anything which smacks of unfair competition.
The Minister has gone some way towards meeting the point about the National Giro. I should like to feel that he would also bring in the trustee savings banks much earlier than he said.
I should like to make two points on the National Giro. First, I take it that the contributions under the special contributions clause will apply equally to the National Giro if special contributions are called for from the banks. Secondly, will the Minister reconsider where the funds from the National Giro go? I agree with my hon. Friend the Member for Honiton about this matter. It is easy to say that the National Giro will never fail. That, in a sense, is unfair competition, because if it makes substantial losses we know that the Treasury will bail it out. But it should at least be put on the same basis as everyone else by contributing to the fund. Such a contribution would increase the fund. That would not only be helpful to the banks but would put them on a fair basis.
I should like to make a point about the building societies. I recognise that they are regulated under a different system. However, we should bear in mind that increasingly large numbers of people—I think now the majority of depositors—use building societies as banks. We need only look at the growth in the current balances and deposit balances of all the banks and compare them with the growth in the building societies' funds since 1968 to see how enormously the buildings societies' funds have grown. The banks' funds have not grown proportionately. There is only one reason: that with easy withdrawals higher rates of interest and tax advantages, people regard them as banks.
It may be argued that the building societies have their own system of regulation, but they are not being asked to set up a fund such as the one proposed in the Bill. When trouble arose with the Grays Building Society, the Building Societies Association moved in, just as the banks would if there were a collapse of a small bank, to protect the depositors. One can say that it is satisfactory. But suppose—let us hope that it never happens—a larger building society ran into difficulties. Would the building societies be able to give the same help?
Leaving aside the point that there is doubt whether the system for the building societies is fully satisfactory, we are here saying that there should be one system for the banks with a deposit protection scheme and that the building societies, which affect the banks in many ways, should go without one. Is that right? My conclusion is that we should drop the deposit protection scheme for the banks rather than set up some cumbersome method for the building societies. The point is that again we are not introducing like with like.
Is not the fund an unnecessary extension of bureaucracy and Government intervention? If we brought in the section 123 banks under the Bank of England and strengthened its supervision, would that not be sufficient? I do not think that the Minister has yet given proper justification for the introduction of the fund.
I want to make three other points. The first is probably a Committee point, but I want to make it now as I shall not be serving on the Committee. It relates to relief from taxation for the contributions which the banks will have to make to the fund. The British Bankers Association has already made representations to the Minister on this matter. I agree with those representations. I understand that under current case law this should not happen. Where, however, the Government are to force the banks to make contributions out of which they can make no profit and which, if only to a small extent, reduce the capital base on which their business depends, I think that they should be allowed relief from tax for those contributions. I hope that this point will be taken up in Committee.
The next point relates to the special provisions. It is beginning to be seen from the debate today that what the Government are asking for with all the special provisions—particularly if they can be doubled to the extent of a £280 million fund—is a very large fund. If it is necessary to have such a fund, will this system work? Shall we not have to resort to the kind of things that we saw with the lifeboat? Is it necessary to have hanging over the banks this threat of special provisions being called upon at any point because something happens to another bank?
I am suspicious of clause 33 on advertising. I confess that at various times in my banking career I have been responsible for the drawing up of advertisements for deposits. I have always been extremely prudent in the way I have done it. If we are to have this new banking supervision system, is it necessary to introduce a new burden of controls? When the legislation goes through, clause 33 will give certain people powers to make new regulations regarding advertising, and again we shall have every "t" crossed and every "i" dotted. Is that really necessary? If the Minister insists on it, I hope he will give an assurance that the clause will be flexibly applied.
The deposit protection scheme is the most important aspect of the Bill which worries me. I recognise that the British Bankers Association has gone along with the scheme. In a sense it had to do so, because it was seeking agreement with the Government. But we are in a different position. I believe that before the Government are allowed to introduce the deposit protection scheme they should be asked to justify their position. They have not yet done so.
Like my hon. Friend the Member for Norfolk, South (Mr. MacGregor), I begin by declaring an interest. I am a director of Brown, Shipley & Company Limited and a member of the Accepting Houses Committee, which I joined in 1960.
This has been a short but useful debate and I should like to make a few comments on some of the points which have been made. I think it will be apparent to anyone who has been in the Chamber this evening that, even though Second Reading of the Bill may not have attracted a great deal of attention on the Floor of the House, the Bill has attracted a lot of interest outside. That is due not only to the subject matter but to the effective way in which the preliminary stages were gone through.
I commend the Minister of State for the substantial time that was allowed between publication, first, of a White Paper and then of a draft Bill, because it enabled representations on many points of detail to be made about the content of the Bill. Indeed—due, I am sure, to the Minister's own interest—many improvements and adjustments were made in the light of those representations.
Another way in which the significance of the Bill is wider than our consideration of it tonight lies in the fact that what is implicit in the Bill is in many ways as important, if not more so, as the content of the Bill. Although the Bill lays down some fairly clear-cut rules and a framework within which the British banking system will be called upon to operate in the years ahead, it is not at this stage easy to tell in every way how it will be interpreted in practice.
It would be fair to say that the success of the Bill and the system that it establishes will owe a great deal to the way the parties to it carry out their various responsibilities, duties and functions, not the least of them the Bank of England. It will also involve the attitude of the Treasury and the co-operation of the banks and the licensed deposit-takers to make the system work. I profoundly hope that it will work. If we are making a major change in the arrangements for banking—it is the first time a structured arrangement has been introduced in this country for the whole business of banking—it will naturally have a profound effect if it does not work as well as we may be entitled to hope.
Many Committee points have been raised during the debate. As my hon. Friend the Member for Norfolk, South said, some of these will have to be pursued in Committee, but there are a number of points of principle, many of which have come up more than once in the debate.
I must agree with my hon. Friend the Member for Horncastle (Mr. Tapsell), who in an excellent introductory speech said that the Bill was not as innocuous or uncomplicated as it might appear at first sight. That point was taken up by my hon. Friends the Members for Croydon, South (Mr. Clark) and for Honiton (Mr. Emery). I entirely agree with them. I do not want to repeat all that they said, and I shall endeavour not to do so, but some of the ground they have touched upon contains the essence of some of the difficulties that may lie ahead. We should take this opportunity to be sure where we stand on some of those points.
I believe that the Minister has played an important personal part in ensuring that many of the technicalities were smoothed out before the Bill reached its published form and before this debate. We accept the general principle of licensing. We believe that it is necessary. My personal view, like that of the hon. Member for Thornaby (Mr. Wriggles-worth), is that, even if there were not a directive from the EEC requiring us to introduce a system of prior licensing, we should probably have to consider something of the kind in order to regulate the business of banking.
In recent years banking has grown so much in scale, the sums of money involved are now so huge and the movement of funds between countries and the effect of the banking system within any economy are now so important and fundamental that it would not be possible to carry on indefinitely with an informal and, indeed, imperfect system. I was very pleased to hear my hon. Friend the Member for Honiton pay tribute to the Bank of England and point out that the absence of criticism from Labour Members—their absence contributed to the silence—allows us to consider the role of the Bank of England in a more rational and perhaps more dispassionate way than we might otherwise have found ourselves doing.
I associate myself with what my hon. Friend said. I believe that the Bank of England is uniquely equipped to perform the functions that the Bill calls upon it to carry out. Although, on the basis of hindsight, it is fair to say that there were glaring deficiencies in the way banking regulation was carried out until the beginning of the 1970s, the early experience which the Bank of England obtained and the way it responded to the situation showed it in the most favourable light. The reputation of Mr. George Blunden and his colleagues and successors in the banking communities in Europe shows that the work that he did has had a beneficial effect on the whole subject of banking regulation far beyond the British Isles. The role of the Bank of England is therefore essential to the requirements of the Bill.
I am one of the few hon. Members—perhaps the only one—who has taken part directly in some of the prudential discussions between a bank and the regulatory authority. I know that the mutual exchange of ideas in these discussions has been helpful to me. I believe that the Bank of England has also learnt a great deal more about the thinking behind the banking community and the money markets in London by its regular discussions with most, or all, of the principal operators involved. To build on that is a sensible, reasonable, desirable and necessary development.
There were weaknesses in the previous system. My hon. Friend the Member for Norfolk, South described them. Like the hon. Member for Thornaby, I would welcome some consolidation not only of the responsibilities, which is taking place within the Bill, but also of some of the other legislation which affects banking and related activities. There is the Exchange Control Act 1947, under which banks can be authorised for exchange control purposes. There is the Companies Act 1948, under which, in schedule 8, provisions are made for some banks to keep some of their reserves undisclosed. There is the Companies Act 1967, which, with hindsight, can be shown to have caused some of the main problems. In section 127 exemption was given from the Protection of Depositors Act in relation to advertising and the submission of accounts.
The more dangerous section 123, which granted exemption from the Moneylenders Act 1900, perhaps led more than anything to misunderstanding in the public mind about the degree of qualification of banks which describe themselves as "123" banks by virtue of that section. Of course, there is section 54 of the Income and Corporation Taxes Act 1970 which allows certain institutions to pay and receive interest gross instead of net of tax.
These various and overlapping recognitions of one kind or another undoubtedly led to the muddle in thinking among the public and within the money markets and the banking community itself. The idea that we should have a banking Bill which dispels those weaknesses in the system and produces a more formal and visible framework is, in principle, to be welcomed.
It is, therefore, extremely important, in view of the way that the Bank of England has fulfilled its role and has been developing it in recent years, that the Bank should be as free as possible from interference and intervention from Whitehall. I wish that I could have as much confidence as my hon. Friend the Member for St. Ives (Mr. Nott), who on Monday, on Second Reading of the Companies Bill, said that he hoped company law would be able to remain a relatively un-political area of our debates. I wish that that was also true of banking. Unfortunately, any discussion of this subject lies under the long shadow of the Labour Party's ambition to control the financial system for political purposes.
I shall not rehearse the threats of nationalisation which have been made on many occasions, but I shall quote one remark that is shattering to those who
look to the future position of the Bank of England. The report of the national executive committee of the Labour Party to the 1978 party conference said of the Bank of England:
Its enormous resources must be brought to bear in support of the Government's industrial strategy.
I suppose that that is another way of saying that if the Department of Industry and the NEB are not going to bail out the Kirkby co-operative, perhaps the Bank of England could be brought in to do it instead.
It is not surprising if, in the light of statements like that, doubts occur in the minds of many as to whether the Bill is not a small first step in the campaign of the Labour Party to tighten the Government's grip on the Bank of England. I sincerely hope that it is not. If it is, it will frustrate the whole tone of this legislation. Unfortunately, the attitude which has been displayed over the position of the Giro is a symptom of the same disease. Why should it not be supervised, and why should it not contribute to the fund? Although the Minister has taken the point that there should be no unfair competition and that it should therefore make a contribution to the Treasury, I hope he will also accept that if institutions like the Giro stay out of the fund, those who are members of it will have to make a greater contribution.
If the Giro, whatever its future form, is to be expanded, and if a greater part of the public's free deposits are to be placed with it, this imbalance will be exaggerated. That cannot be justified on the basis of risk. Deposits with the Giro must be risk-free, as, too, must be deposits with the clearing banks. But they have to bear the lion's share of the contributions to the fund.
I accept that there are different interests among the contributing institutions which are potential contributors to the fund. The clearing banks could reasonably say that because of the safety of their institutions their contribution is too great. That has to some extent been recognised by the placing of an upper limit. Other banks—perhaps the merchant banks and others—could say that many of their deposits are taken in wholesale sizes for insurance companies, corporations and so on and that, therefore, the number of small depositors on their books is small.
A balance must be struck somewhere. I do not disagree too strongly with the pragmatic balance which has been struck in this respect. Much more significant is the question of whether there should be one fund to cover the two different categories of bank, and that is a point to which we should return.
A major theme of the debate has been the size of the fund and, beyond that, the size of the guarantees which lie behind it. At £5 million to £6 million, the fund is not very large in relation to the banking community as a whole where deposits run into billions of pounds. But the guarantee figure—it may be £130 million at the 0·3 per cent. level—is 25 times as large as that. It will be double that proportion if the figure is 0·6 per cent.
In drawing up the Bill, the Government and their advisers may have been confused in their purpose between insurance and rescue. The total of the lifeboat, which amounted to just over £1 billion, was largely devoted to recycling funds and not to bailing out depositors. I view with alarm the sort of failures that might involve anything remotely like 0·3 per cent., let alone 0·6 per cent. of the defined deposit base of the banking system.
In this day and age we may well have to live with some form of protection or insurance. Depositors will not recover all their money. They will lose a quarter of it even if they are covered by the fund. It might have been better if the figure had been slightly higher than 25 per cent. If, however, we accept, in the spirit of consumerism of the age, that some form of deposit protection is acceptable, why do we have to have a tangible fund as well as this colossal guarantee? The only answer I can imagine is that if the fund is visible the public will be more comforted and more certain that they may be recompensed in case of failure.
The Minister, however, must consider what sort of people the public are. If these people are told that one of the High Street banks will pay them back in case of loss of money, do they mind or are they concerned to know whether there is a small pool of funds out of which the money would be drawn or whether the banks would pay up the moment they were asked to do so in the way that they each month make transfers to and from accounts at the Bank of England at a moment's notice?
If the system of supervision and licensing is successful, it ought greatly to reduce the need for any rescue of this kind. We shall be faced with three stages. My hon. Friend the Member for Horncastle mentioned the belt-and-braces approach. There is, first, the supervision and licensing system. I think and hope that it will work pretty well. In principle, it will largely succeed in most circumstances in avoiding the sort of problems that have arisen in the banking system in recent years.
But, in addition to that, there is a small fund and a colossal guarantee. This three-pronged attack does not seem necessary. It is not only a question of belt and braces. It is rather like wearing a spare pair of trousers underneath instead. Even if we are moving into less permissive times, that seems to me too prudish an attitude to the indecencies of financial exposure. I think, therefore, that the case for the fund has now been made. It is bureaucratic and unnecessary and, in the words of my hon. Friend the Member for Norfolk, South, it amounts to overkill.
The other main theme of the debate has been about the structure and division into two watertight categories—the recognised banks and the licensees. The Minister of State pointed to some of the facts which render the dividing line less rigid. He said that there would be adjustments on the fixed minimum capital requirements so that they did not apply to existing institutions. He mentioned, too, that there could be transitional provisions for two years for licensed institutions which were on the borderline and which might soon hope to qualify as banks. But that does not dispose of the problem.
My hon. Friend the Member for Horncastle pointed out that within the 200 or 250 licensed deposit-takers that will emerge under this legislation a number—perhaps a few dozen or 50—are currently genuine banks. Will the Minister of State reconsider the position of companies such as that?
One might ask "When is a bank not a bank?" The answer is "When the Bank of England says that it is not." A great deal will depend upon the definition of "reputation" and standing". I have the greatest confidence in the Bank of England's judgment in this matter, and I do not question it, but the requirements of reputation and standing in the Bill to enable a small or recently formed bank to qualify as a recognised bank are such that many companies will be conducting what in ordinary English is a bank business which they cannot describe as such.
Let us imagine what happens when the managing director of Little Bank Limited goes to his solicitor after the Bill is enacted, if it is. His solicitor tells him that he has only a few months left before his bank must change its name. He will be told that in future it cannot be known as Little Bank Limited but that in future it must be called Little Licensed Deposit-Taking Institution Limited.
The solicitor will then say that simply to cheer up the managing director he has another client in the next room who is an overseas trader who is looking for some financial services. The solicitor will offer to introduce them so that they may do some business together. They meet, and the managing director of the Little Licensed Deposit-Taking Institution Limited tells the overseas trader that he would very much like to do business with him. He will then say "Let me first describe what they do."
Being a well-informed banker he will know the requirements of schedule 2 on page 53 of the Bill off by heart. He will quickly run through the activities carried out by his company. He will say "We conduct current and deposit account facilities, we make overdrafts and have loan facilities. We can provide foreign exchange services for domestic and foreign customers. We open letters of credit, we discount bills of exchange and provide financial advice and investment management services, we deal in securities and so on." "Ah," will say the potential customer, "so you are bankers—just the people we need." The unfortunate managing director of the Little Licensed Deposit-Taking Institution Limited says "What on earth gave you that impression? It would be against the law for me to agree to that."
Clause 35(1) reads:
no person carrying on a business of any description in the United Kingdom"—
other than the Bank of England and other categories, including "a recognized bank"—
may use any name or in any other way so describe himself or hold himself out as to indicate, or reasonably be understood to indicate, that he is a bank or banker or is carrying on a banking business.
It may be possible in Committee to adjust that provision and to add the words "for the purpose of obtaining deposits", because these regulations are to protect depositors. Surely they are not intended to stop people who engage in banking saying that they are bankers and describing accurately what they are doing?
As I understood the hon. Gentleman, he went through schedule 2 and in his example Little Bank Limited was carrying out all the services listed in paragraph 2. I do not know whether that bank enjoys a high reputation and standing in the financial community, but I assume that it did. Therefore, it could probably satisfy the Bank of England that it was a recognised bank. In that case, the prohibition in clause 35 does not apply.
The Minister has made an important comment. He said that if the bank was carrying out all these functions and was of high reputation and standing, it would be a recognised bank in the terms of the Bill. I am anxious about the fact that there are a number of companies—I shall not, for obvious reasons, name names tonight—which are greatly concerned that they have been advised informally in discussions with the Bank of England that they will not qualify as recognised banks, either because they are still small or because they are recently founded and have not yet acquired sufficient reputation and standing for the high accolade of being accorded the appellation of "recognised bank".
I said that that may be the case, but that was not the example given by the hon. Gentleman. He made great play of the fact that Little Bank Limited would be put out of business. Despite that, it seemed to fall within most of his criteria. Size in itself has nothing to do with these considerations. If Little Bank Limited met the criteria in the Bill, if it had a high reputation and standing in the financial community, it could qualify as a recognised bank.
Again the Minister is answering in theory, but in practice there are a number of cases in which the smaller bank, because it has not satisfied the Bank of England that it qualifies as a recognised bank, would be prevented by law from accurately describing its business.
I do not believe that the Government can alter the established meaning of a common word by Act of Parliament, much less make it a criminal offence to use it in the sense which it has enjoyed for centuries. Even if it could alter that practice, I do not think that it should do so for some banks rather than for others. It applies only in some cases, because clause 35(3) mentions
an enactment or any instrument
Such a company if described as "a bank" may be included. That provision is bordering on never-never-land.
I believe that there is a fundamental defect in the drafting of the Bill. I hope that we shall be able to resolve it. I hope that before the Committee proceedings the Minister will be able to address himself carefully not only to what I have said tonight but to various representations which have been made to him by some of the institutions which may be affected.
The hon. Gentleman seems to be putting in doubt the judgment of the Bank of England, an institution which only a few moments ago he was praising. Is he encouraging Labour Members to suggest that there should be more detailed criteria in the legislation than already exists, or does he want the discretion of the Bank of England to be left as it is?
The discretion of the Bank of England is very reliable, but under this legislation it will be necessary for the Bank to give almost statutory meaning to words such as "reputation" and "standing". For the purpose of making any licensed deposit-taker into a recognised bank, it will have to think carefully about the standards in a technical sense that it operates. I believe that there are some small and perhaps recently formed institutions which are banks and which call themselves banks but which, for one reason or another, will not within the two-year transitional period be able to convince the Bank of England that they will become recognised banks.
The provisions of clause 35(1) on such companies could be onerous and, indeed, unrealistic. There are a number of other technical questions, but they do not go so much to the heart of the provisions of the Bill. We shall require to make a number of these points in Committee.
I should like to make one or two of these points by way of example. Are stockbrokers to be excluded as paragraph 13 of the White Paper suggested? If so, what is the definition of "day-to-day deposits"? What kind of transactions will be exempted by statutory instruments under clause 2? When shall we see the draft of the Treasury regulations on advertisements mentioned in clause 33? Will the initial contributions to the deposit protection fund be deductible for tax purposes?
A number of points, some of them highly critical of the Bill, have been put in this debate. I share some of the anxieties about the structure of these proposals. We shall not at this stage oppose the introduction of the Bill because we believe that the system of licensing and recognition is necessary. However, we are questioning the Bill's form and we shall have to take that matter a little further.
There are many technicalities as well as problems of definitions to be discussed. For example, "a deposit" is defined in no fewer than two clauses of the Bill, and perhaps in other provisions too. At first glance, it is not always easy to see exactly what is provided. I hope that we shall be able to make progress in Committee, which will give us an opportunity to see whether we are able to give the Bill a fair passage in its later stages.
With the leave of the House, perhaps I may try to deal with some of the points which have been raised in this debate.
The hon. Member for Hitchin (Mr. Stewart) raised one fundamental point, to which he referred to as a drafting point. It is not a drafting point, because we are drawing a fundamental distinction between recognised banks and others. I accept that many institutions may feel that they will not be able to satisfy the exacting basic criteria involved in the Bank of England's judgment. I accept that they will feel uneasy and worried about their business. But I must stress that this is a fundamental part of the legislation. We have decided that "bank" is an important word. It is important that the public should realise that "a bank" means something. For that reason, we have produced the Bill.
Of course, as the hon. Member for Honiton (Mr. Emery) said, this is nothing new. It is at the basis of the present system of a primary banking sector and a Department of Trade sector, if I can call it that. But there is a fundamental point here. We feel that it is only right that the word "bank" should be used only by institutions which fulfil these exacting criteria. The criteria will be administered by the Bank of England, and I would have thought that in most cases the Bank of England will know how to determine whether an institution enjoys a high reputation and standing in the financial community. I should make that quite clear, because this is not just a matter of drafting as between one section and another. It is fundamental to the Bill.
The hon. Member for Horncastle (Mr. Tapsell) made a rather strange speech. At one point he seemed not to have much faith in the Bank of England. He was very sceptical of the Bank's powers in relation to foreign banks or the central banks of some countries. He complained that the Bill was "creeping Socialism", although all that we are doing is building upon the existing system, making it more rational, doing away with the present split between the Department of Trade and the Bank and putting it all under the Bank. We are not setting up a new Socialist institution. Ultimately, the Governor of the Bank of England will be the man who will control the system. I can think of nothing which could be described as less creeping Socialism" as that.
Having said that the Bill was "creeping Socialism", the hon. Gentleman then wanted a third category. He said that if we are to have recognised banks we should also have licensed banks and licensed deposit-taking institutions. That would make the whole system more bureaucratic and more difficult to administer. In addition, I do not think that it would be in accord with what the hon. Gentleman seemed to be saying in other parts of his speech. I am sorry to say it to him, but he did not make the kind of constructive contribution that we have had from some of his hon. Friends, who have had reservations about the Bill but who feel that there is a problem which needs to be resolved by legislation.
Several hon. Members, including the hon. Members for Honiton and for Horn-castle, raised the problem of foreign banks. Of course, if the foreign bank is a subsidiary in this country with limited liability—if it is a British company, albeit a subsidiary of a foreign bank—as hon. Members recognise, there is no problem. The problem arises with a branch; but the problem exists already. There is nothing new in this. The Bank of England now has to try to supervise, and it does, large numbers of branches of foreign banks from different countries. It already faces the difficulty of having to consult with the central banks of countries with different standards of banking. I suggest that it does the job very well. I was surprised that the hon. Member for Horn-castle should have what I regard as profound misgivings. At one stage he seemed to suggest that the Bank of England would be influenced if a country in the Middle East deposited money with the Bank in London, and that the Bank's high standards of banking supervision would be relaxed in case such a foreign institution took its money out of this country.
I was making no criticism of the Bank of England. I do not think that the right hon. Gentleman has yet grasped the point that I am making. That is that these foreign bank branches will be operating in the United Kingdom and calling themselves banks. But if this legislation goes through, similar United Kingdom private banks, which are at present also calling themselves banks, will no longer be able to do so and will, therefore, be competing on unequal terms.
I accept part of what the hon. Gentleman says. Yes, such bodies will be able to call themselves banks, partly because of the EEC directive, because that directive says that this must be the case. But we are providing that they will have to describe that they are a bank incorporated in a certain country. That may give the public some indication of where they are from and what kind of institution they are.
However, I believe the hon. Gentleman exaggerates the point about competition. I believe that people in this country will, in the main, be much happier and much more likely to go to their own national institutions. I reject entirely the suggestion that in some way the Bank of England will be unable to supervise these branches, because it is doing so at present.
I apologise to the right hon. Gentleman for interrupting again, but he really is misrepresenting me. I did not say that the Bank of England would not be able to supervise these branches, because it is doing so at present. What I said was that it would not be able to prevent them from using the word "bank".
The hon. Gentleman said more than that. If that was all he said, there was no need to bring in the example of the money being deposited by a Middle East bank, because that has nothing to do with it. Of course, we accept entirely that the Bank of England cannot stop such institutions from calling themselves banks. That is inherent in the legislation and has nothing to do with Middle East money. But the point the hon. Gentle- man made was that somehow they could bring pressure to bear on the Bank of England. I am glad that he is at least now seeking to resile a little from that point.
The hon. Member for Norfolk, South (Mr. MacGregor) raised a number of points and I shall deal with one of them. He asked whether clause 33 would be applied flexibly. I think that he would expect a Treasury Minister to reply "Of course". We shall do our utmost to apply the regulations in a flexible manner.
The hon. Member for Honiton raised the question of wholesale banks and retail banks. I am advised that there is no question of saying that it must be a retail bank, otherwise it cannot call itself a recognised bank. The hon. Gentleman also asked about the company registrar's powers, and whether they could be used to stop bureaux de change from calling themselves banks. I understand that the registrar's powers cover only names and do not cover descriptions. That is where the difficulty lies. This is what we are trying to get at in the legislation, but it is not easy. It is a difficult matter and I shall return to it in a moment.
I shall come to that in a moment. I have a large number of notes which I shall try to deal with. The hon. Member for Norfolk, South and others asked about Giro. The Giro will make a contribution to the Treasury in the same way that it would make that contribution if it were in the private sector. As the hon. Member for Honiton said, the Treasury is providing a guarantee, and that is part of the answer to some of the criticisms which have been made.
I return to the question of clause 35(3) and banking services. Clause 35(3) in itself enables institutions to call themselves banks, as it were, for the purpose of other legislation—for Cheques Act legislation, and for the Income and Corporation Taxes Act. They will still be banks for those purposes, although they may not be recognised banks for the purpose of this legislation.
We have had representations on this, and I take the point, but the difficulty arises that in some cases institutions which will not be able to call themselves banks now describe themselves as carrying on banking services. That description has various consequences for their business, for example, in relation to bills of exchange, financial trade, letters of credit, and so on. We have received many representations and I am looking at them seriously. I recognise that there is a problem here. It is a problem which is difficult to deal with within the framework of the legislation, because if one extends too far the ability to describe services as "banking" services, the whole division between recognised banks and others, and the intention of the legislation to keep this distinction, tends to break down. However, I recognise the point and I hope that we shall be able to deal with it. But the drafting will have to be fairly tight, otherwise we shall open up a quite large loophole.
I turn to the deposit protection scheme. We are aware that many institutions, especially the clearing banks, are not enthusiastic about the scheme. They do not want to pay out any money, and one can understand that. However, I think the banks recognise that we have gone some way towards meeting many of the points they have made. Perhaps I can mention some of these, because they relate to what was said in the debate. The banks, especially the clearing banks, argued for a small cash fund and a system of guarantees as opposed to large fund. Several hon. Members asked what the point was of having a small fund and back-up guarantees. But if one is talking in terms of a fund, the alternative is to have a large fund and a large initial contribution. The clearing banks argued against that, and we met them by saying that we would start with a small fund of £5 million to £6 million with back-up guarantees. We also said that there would be a limit of £300,000 on the initial contribution and on each further contribution.
The clearing banks also argued for 75 per cent. protection of eligible deposits. Legitimate points have been raised in the debate to the effect that, if one insures deposits, the risky operator—the person who offers a high rate of interest—is at an advantage over someone who runs a prudent business and offers a lower rate of interest. That is one of the basic difficulties in having a bank insurance scheme. That was why we went for a 75 per cent. figure instead of a 90 per cent. figure or, indeed, a 100 per cent. figure about which some countries are at present talking. A figure of 75 per cent. was fixed because we feel that depositors should not get a high rate of interest without any risk. The hon. Member for Hitchin said that 75 per cent. was too high. I do not agree, I think it is fair. With the limit of eligible deposits being £10,000, 75 per cent. of that figure is fair.
The banks argued for the protection of current as well as deposit accounts, and we have agreed to that. They also argued for the protection of sterling deposits only and we agreed to that. They argued for a maximum liability on contributions. On all these matters we have tried to go some way towards meeting their legitimate representations.
On the liability to contribute, we estimate that 0·3 per cent. of the deposit base would produce a total of £140 million, although the proposed fund will be £5 million. That £140 million is a large sum, but it represents the maximum payout on less than 20,000 protected deposits. I accept entirely that the situation in which that would happen would be very unlikely in our system. But that is why we placed the figure at 0·3 per cent.
The Bill provides for an increase to 0·6 per cent., but that increase can come about only by affirmative resolution. Whatever Government are in power at the time, if they feel it is necessary to increase that ceiling they must obtain an affirmative resolution of both Houses before the increase can take effect. Therefore, there is no question of trying to increase the ceiling without full discussion and full representations being made by the banks to Ministers.
The clearing banks have also criticised the amount that they will have to contribute compared with what others have to contribute. But a scheme that is based entirely on deposits by individuals—and the scheme includes all legal persons, if I can so describe them—on which the clearers hold about 90 per cent. would have borne much more heavily on the clearers. In that case their contribution would have been much higher. The cutoff of £300,000 for contributions to set up and replenish the fund will reduce their contribution. Indeed, the London clearing banks with just over half the deposit base will contribute just over one-quarter of the cash fund. Of the initial cash fund of £5 million to £6 million the London clearing banks will be contributing one-quarter, but on the other hand will have half the deposit base. I do not think that is unfair, but I can see why the banks want to reduce their contribution. At least I hope that I have shown the House that we have tried, in discussions with the banks, to meet many of their points.
My hon. Friend the Member for Thornaby (Mr. Wrigglesworth) asked about consolidation. I am sorry to disappoint him, but we do not propose to embark on consolidation. To some extent this legislation will make it slightly easier for people who want to find out how banks are regulated and controlled. To that extent this could be said to be a minor consolidation measure. We are still looking for the municipal bank at Stockton-on-Tees. I hope that we will be able to find it before too long.
The hon. Member for Croydon, South (Mr. Clarke) raised a point about Giro and about the trustee savings banks. I made it quite clear that when the trustee savings banks have become private sector institutions so that they are on all fours with the private sector banks they will contribute to the scheme. This will take time, and perhaps the trustee savings banks want to move faster than the Government feel is right in the circumstances. At the moment they are not on all fours with the other banks, but they are in a special position because they are in a transitional period of moving from public to private.
The hon. Member for Norfolk, South raised the point about inter-bank deposits being excluded from clause 23(6). I can give him an assurance that they are excluded. He also raised the question of why we should have a deposit protection scheme at all when we have this wonderful scheme of supervision administered by the Bank of England, which is clearly very good at the job. The reason is that we are talking about 500 institutions—about 250 recognised banks and 250 licensed institutions. It is expecting a lot, even of the Bank of England, with all its expertise and connections with the financial community, to require it to administer them all and be certain that at every point nothing will happen. Hon. Members should be more realistic.
Of course we do not expect great failures, and of course our system will be a good one. but with 500 institutions in a rapidly changing world, with all the problems relating to the transfer of money, there should be some back up for the public. That is what the deposit protection scheme is all about.
Conservative Members spoke a lot about the banks, the City and the financial community, but they did not say much about the public and its need for protection. The reason we are setting up the fund is so that the public knows that it is being protected.
The hon. Member for Honiton said that this was a sop to consumerism—
Certainly no depositor has lost any money, but that does not mean that that system will continue. The world is changing. I did not think that consumerism was a Socialist prerogative. If it is, we shall happily explain that to the public. Apparently it is the Labour Party which is concerned with protecting the consumer, and not the Conservative Party.
No I am not saying that. But we are concerned with 500 institutions. We have seen from the secondary banking crisis that the system did not work very well because there was not a sufficiently close connection with the Bank as the supervisory authority for the four clearing banks and all the other institutions. Now we are bringing it all together under the aegis of the Bank of England. I think it would be a very brave man who would say that never in future will there be a banking crisis, and that among those 500 institutions there would never be an individual who was at risk of losing his money. We are protecting the individual and saying that if there were a crisis, he would get 75 per cent. of his money back.
I am surprised that Conservatives have not said much about the consumer, but perhaps when we get into Committee they will look at this Bill more rationally and more logically. I hope that the House will give the Bill a Second Reading.