My Lords, it is always a great pleasure to follow the noble Lord, Lord Selsdon, who introduces a personal note into our debates which is genuine and pleasant.
The noble Lord, Lord Stewartby, asked why we are here. This Bill has been pored over, as the Minister said, in consultation, in papers, in studies and in extensive debates in another place. That does not mean that the Bill is perfect. When dealing with the Financial Services Bill, which my noble friend Lord Peston will remember very well, I sat where the noble Baroness, Lady Noakes, sits now; it too had been studied endlessly, but it got a lot of things wrong, as I shall explain.
A further complication is the timetable. I understand that the Bill has to become an Act before the original Act lapses. That means that a 255-clause Bill will be debated in your Lordships' House at a machine-gun pace in the first week after the recess. I will argue, and I hope that the Minister will accept, that in the light of that and all my other arguments, a review of the legislation after a period would be right, as the noble Baroness and the noble Lord, Lord Newby, have claimed. We cannot just let it go by without reviewing the legislation.
The noble Lord, Lord Stewartby, asked why we were here in the first place. It is commonly said that today's bankers have forgotten how to be bankers. We have had a series of catastrophic misjudgments. One was revealed yesterday: the Royal Bank of Scotland and HSBC were involved in a fraudulent arrangement in New York. The Government have had to intervene on a massive scale. Bankers are very unpopular, as mentioned by my noble friends Lord Peston, Lord Lipsey and Lord Barnett. I have a slight caveat to that. Auditors, as my noble friend Lord Barnett said, seem to have escaped criticism. It is important to look at history to explain, in the words of the noble Lord, Lord Stewartby, what has happened and why we are here.
In 1890, Barings Bank, for which I had the privilege to work for a number of years, had to be bailed out by the Bank of England and a consortium of friendly banks because it was left holding a baggage of Argentine defaulted securities and had no liquidity. No lessons were learnt as in 1995 Barings collapsed completely, beyond salvation, because one of its traders in securities was arbitraging between the Singapore and Tokyo stock markets with such enthusiasm that he engaged the whole net worth of the parent bank. Directors in London were prepared to transfer the whole of the net worth of the parent bank to Singapore to support his position. The result was that Barings went bust. The Barings directors did not have a true understanding of the business being conducted in Singapore, because if they had they would not have allowed the entire net worth of an old merchant bank to be squandered away on some trader's say-so. I remind noble Lords that the same thing happened in 1931 at the Creditanstalt bank in Vienna. It went bankrupt because it was left holding a lot of securities and had no idea that they were worthless. The failure of the Vienna bank led to the collapse of the entire financial system in 1931, which in turn resulted in legislation that I will come to in a moment.
All these banks—Lehman Brothers is another case—had securitised instruments which they did not understand. The collapse in 1931 led to what in my view was a very sensible development. It ended with the Glass-Steagall Act in the United States and a distinction being made between commercial banks and banks that traded in securities. All that broke down here in the 1980s and in the US, with the final repeal of the Glass-Steagall Act in 1999. In our case, the breakdown led to the infamous Big Bang in the City, when banks paid stockbrokers and jobbers ludicrous sums of money on the grounds that that was the way forward. They had no idea what they buying, but they rushed into buying things because that was the fashion of the period. As a result, serious bankers forgot to be bankers and became, as they saw it, dealers. However, the business cultures of dealers and bankers are quite different. I am sure that I do not need to overemphasise the fact that a banker is someone who looks at a balance sheet and says, "I am a taker of deposits, I will lend them out on overdraft over a relatively short term, and I will not get involved in buying securities, let alone when I have no idea of their value".
That was not the case with Northern Rock and Bradford & Bingley, which involved a different clash of business cultures. I am afraid I was also Jeremiah on the opposition Front Bench during the passage of the 1986 Building Societies Bill. I said that it would be a disaster. It seems to me now, just as it did then, that a building society, whose business is lending on mortgage at long term on the back of a relatively stable retail deposit base, is asking for trouble if it develops ambitions as a bank to finance those long-term assets in the wholesale money market, particularly the interbank market. The danger is compounded if the building society in question loses its sense of social lending and goes recklessly in pursuit of profit maximisation. That is precisely what happened in the cases of both Northern Rock and Bradford & Bingley. The cultures of building societies and banks do not mix.
Although the Big Bang and the building societies legislation were under a Conservative Government and in my view underlie our present problems, I have to agree with noble Lords opposite in their criticism of the move some years ago by this Government to remove the regulation of banks from the Bank of England and place it under something called a tripartite framework of the Treasury, the Bank and the Financial Services Authority, a development also referred to by my noble friend Lord Eatwell. I could not understand then and I cannot understand now how the Bank can satisfactorily play the role of lender of last resort unless it also has a regulatory function—not, I hasten to add, that when I was a banker myself I was particularly happy with the banking supervision department of the Bank of England as it was then constituted. The department head had spent most of his career in public relations, which would mean beefing it up.
What do we have now? We have a system of universal banks that try to do everything but do not necessarily understand everything they are doing. However, they want to do everything because that is the nature of a universal bank. They are regulated by a tripartite system whose members seem to have difficulty in talking to one another. Under those circumstances, I find it difficult to see how the present Bill will prevent future disasters. As the noble Lord, Lord Stewartby, and the noble Viscount, Lord Eccles, observed, it might have been useful last year but perhaps not this year. It may be impossible to put the genie back in the bottle in terms of separating the business of underwriting and dealing in securities from the business of deposit taking and commercial banking without a collapse of 1931 proportions, which obviously we have to guard against. But I hope that someone, somewhere, is thinking about restoring the role of securities versus commercial banking and the financial integrity of mortgage lenders. Obviously I am ludicrously optimistic, but I remain so in the hope that someone will look at these issues seriously.
We are dealing with a Bill that will do little or nothing to address what I regard as the real problem. There is some evidence that the authorities are not entirely clear about the final shape of the legislation. For instance, in this Bill the Government propose to give themselves not just Henry VIII but truly Cromwellian powers to change the rules whenever they see fit. Clause 75 as it stands, even after negotiations, allows in subsection (8) the Treasury to make a series of orders amending the law without prior parliamentary approval. Cromwell would certainly have approved. Clause 155 allows the Treasury to amend primary legislation relating to building societies, but at least any proposal to do so requires prior parliamentary approval. All this reinforces the conclusion that we need a review of this legislation after a period to see how it is working.
I have a few small points to make. There is some doubt about the code of practice. The authorities are to "have regard" to the code. I could have regard to a code of practice but it does not mean very much. When he winds up the debate, I should like my noble friend to explain what "have regard" really means. As with many Bills, miscellaneous bits and pieces have been tacked on, such as the "financial stability objective" in Clause 228, which my noble friend Lord Eatwell talked about. Is it necessary to have this on the statute book? After all, I thought that the idea that the Bank of England,
"shall ... contribute to protecting and enhancing the stability of the financial systems of the United Kingdom", was guaranteed because it is the job of the Bank of England and the Government. But, as my noble friend pointed out, there is the question of the Financial Stability Committee which is going to be set up under the Bill. Will my noble friend explain the status of this committee? Is it going to be transparent? Will we see how it operates and know what it says?
I have spent too long on my remarks. It is only right and fair to advise my noble friend that, if the parties opposite press to a Division the question of a sunset clause, post-legislative scrutiny or an independent review, either in Committee or on Report, I will be in their Lobby.