My Lords, I beg to move that this Bill be now read a second time.
This is a small, simple Bill. On the one hand, it is designed to promote choice for the consumer. On the other, it is a modest attempt to start winding in a banking system that is becoming increasingly unsustainable. It is in response to the recent Northern Rock crisis, which represents the first run on a UK high street bank in the post-war era, and the systemic failure manifest in the worldwide banking system. Of course, Northern Rock is not the first bank since the war to go wrong because of incompetent management; there were the National Mortgage Bank, Barings and Johnson Matthey, to name but three. But no reassessment was made of the fundamentals after those crises.
I want to take a moment to set out the background. The present banking crisis was inevitable. The only question was when it would happen. Since 1971, there has been a massive change in the way in which the banking and monetary system operates, but there has been no discussion in Parliament, or a vote, as to whether the system is right and whom it is benefiting. The current system was designed by bankers for the use of bankers and for the benefit of bankers. One should not complain that they have done well out of it, but what about the depositor and the taxpayer? From their point of view, all Governments are at fault because they have not looked at this whole matter with the critical eye that it deserves. As the rest of us became more regulated, the banks were given a light touch—so light as to be almost insignificant.
In 1979, the total UK money supply was just under £31 billion. When this Government took power, it was £665 billion. Today, it is well over double that, and on the Bank of England's calculation it is £1,700 billion. These figures show about a 5,400 per cent increase over 30 years and the graph is getting steeper. It seems to be on an exponential curve which promises a lot more problems ahead.
It is most appropriate that the debate following this Bill in the name of the most reverend Primate the Archbishop of Canterbury is calling attention to indebtedness and credit. A consequence of the banking and monetary policy is that we live in a debt-based society which most people are beginning to see is dangerous and wrong. Yet the answer to the present crisis is to reduce interest rates and try to reduce the cost of mortgages. But what does that do? It merely encourages us to keep our existing borrowing and extend it. We shall not solve that problem unless we tackle its roots.
Since 1971, the proportion of notes and coins, which is the Government's responsibility, has fallen from 14 per cent to 2.5 per cent, so the Government are increasingly irrelevant and marginalised. It is the banks, building societies and commercial lenders which have been responsible for this situation and now greed, incompetence in many cases, and lack of accountability have all become apparent. Even the Institute of International Finance has admitted that banks have been guilty of major points of weakness in business practice. No wonder there is a lack of confidence in the credit markets.
Although it was good to hear the Minister say on Monday, when he repeated the Statement on financial stability—although "financial instability" might have been a more appropriate description—that the Financial Stability Forum in Washington had agreed a range of actions, the genie is out of bottle and it is too little too late. Sadly, that body does not seem to have addressed itself to the position of the individual, and all of us, whether we like it or not, have to work with and through banks. In that, we have no choice, which takes me on to the Bill.
Most people do not know that, as the law stands, as soon as they put their money into their current or cheque accounts it is no longer their own. It becomes the property of the bank and they become unsecured creditors, ranking behind secured creditors in the event of failure. Far from putting their money into safe storage, they are actually lending it to the bank, and the bank is free to use it and invest it as it pleases within the rules of the FSA. The Minister, with his well known scepticism of the estate agency market, will surely agree with me that it makes a mockery of the need for solicitors and estate agents to have to account for clients' funds in the way that they do, only for the bank to muddle up all that money, together with others, and put it at possibly greater risk.
As we have seen with Northern Rock and with the entire world banking system, bank managers are not necessarily prudent or wise in their investment strategies. Nor has the FSA proven capable of proper supervision of banking business plans, investment strategies or risk management. When Northern Rock refused to allow its depositors to withdraw their money, the bank acted correctly and responsibly. The law states that its first duty is to secured creditors and not to depositors.
At present, if we wish to pay our bills easily and conveniently, we need a current or cheque account at a bank or building society. There is no other choice. Yet in order to use a bank or building society current or cheque account, we must put our money at risk by becoming an unsecured creditor of an institution too many of which have proven to lack wisdom, prudence or safe investment practices. That is why there is such a hue and cry for Governments to make the banking industry safer. A new approach is needed, which is why I am putting forward this legislation. It offers depositors the service and protection that they believe they have, but do not, and to which they should be entitled.
The Bill offers depositors the choice between a present at-risk current account and a safety deposit current account in which the funds deposited remain the property of the depositor and which guarantees to depositors both secure storage and secure distribution. With safety deposit accounts, banks will be required to maintain for each account the precise amount on deposit in the form of cash in their vaults. That cash must be segregated from the banks' other cash and be available to depositors on demand. Banks will not be allowed to use funds in safety deposit accounts for any purpose whatever, other than according to the instructions of the depositors. Therefore, a bank will not be able to put depositors' money at risk in order to earn money for itself. That is the essence of Clause 1.
Without the ability to try to earn money with these deposits, banks will have to make a reasonable charge for both storage and distribution. This is covered by Clause 2. These accounts will be more expensive than existing current accounts, but depositors will in future be given a choice: safety at higher cost or risk at lower cost. These accounts will need proper monitoring. Although the FSA has not covered itself in glory to date, Clause 3 requires it to audit banks continually to ensure that the cash held physically by each bank in its vaults is both equal to the amount on deposit and segregated from the bank's other funds.
From the taxpayer's point of view, these safety deposit accounts offer a considerable saving. Northern Rock alone has already cost the taxpayer some £1,800 each. My noble friend Lady Noakes reminded us on Monday that it could be considerably more. That was before an additional £50 billion was made available to banks by the Bank of England on Monday in its dramatic U-turn. The previous position argued by the governor was that banks should pay for their mistakes. Now the commercial banks' prayer, "Forgive us our sins", has been answered. The clear perception now is that the Government will ride to the rescue of those who have managed a bank badly or incompetently. Let us not forget that it is the taxpayer who has to guarantee these funds and thus remains even more at risk to the entire banking system.
With a more sensible banking option having been established by this Bill, it is only right that the taxpayer is better protected than at the moment. Thus, under Clause 4, safety deposit accounts will be the only accounts that public funds will be allowed to insure or guarantee. Surely it is right that taxpayers will no longer be required to bail out the irresponsible and greedy behaviour of some bankers, whom the Government treat differently from normal companies. The FSA will be limited to guarantee precisely what it audits regularly and ensures is physically present in the vaults of each bank. For this guarantee, there should be little if any risk at all. The consumer will be offered a choice of current accounts and the right to continue to own their own money when stored for them. I commend the Bill to the House.
Moved, That the Bill be now read a second time.—(The Earl of Caithness.)