| Home Page |
Column 523
House of Commons
Friday 6 November 1992
The House met at half-past Nine o'clock
PRAYERS
[Madam Speaker-- in the Chair ]
BCCI (Bingham Report)
Motion made, and Question proposed, That this House do now adjourn.-- [Mr. Patnick.]
[Relevant documents : The Second Report from the Treasury and Civil Service Committee (House of Commons Paper No. 26 of Session 1991-92) and the Fourth Report from the Committee (House of Commons Paper No. 177 of Session 1991-92) on Banking Supervision and BCCI, together with the responses of the Government and the Bank of England thereto (Third Special Report, House of Commons Paper No. 302 of Session 1991-92 ; First Special Report, House of Commons Paper No. 178 of Session 1992-93 ; Second Special Report, House of Commons Paper No. 248 of Session 1992-93) and the Minutes of Evidence taken before the Committee on 4th November (House of Commons Paper No. 250-i.]
9.34 am
The Economic Secretary to the Treasury (Mr. Anthony Nelson) : This debate fulfils the pledge made by my right hon. Friend the Chancellor of the Exchequer that there would be an early opportunity for the Bingham report to be debated in the House and for hon. Members to have the chance to express their views.
In introducing the debate, I intend to summarise the main themes of the report and to set out the proposals of the Government and the Bank of England in response to the main recommendations. I shall put those changes in the context of what is happening in Europe and internationally on banking supervision, and respond to the reports of the Treasury and Civil Service Select Committee. I also intend to highlight the important issue of compensation, which is of concern to many hon. Members and their constituents.
Sir Thomas Bingham's report on the supervision of the Bank of Credit and Commerce International was published on 22 October. It represents the conclusion of an inquiry into the largest and most wide-ranging fraud in the history of banking. Billons of dollars were involved in a series of financial crimes, deceptions and malpractices that extended over many years and touched the lives of tens of thousands of depositors in more than 60 countries. Those frauds, and the calculating and cynical men who devised and directed them, were responsible for bringing hardship into the lives of many innocent and hard-working people who trusted BCCI with their savings. I know that many hon. Members have constituents who have suffered in that way, and I am sure that we all condemn the individuals whose greed and callousness has led to such widespread distress.
The report is the outcome of an inquiry into the supervision of BCCI, not into the bank itself. The inquiry lasted for just over a year and involved taking written and oral evidence from more than 200 witnesses. Among those
Column 524
witnesses were current and former Ministers, hon. Members, officials of Government Departments, including the Treasury, and representatives from the Bank of England and BCCI's auditors, Price Waterhouse. BCCI's majority shareholders from Abu Dhabi also gave evidence, as did former employees and directors of the bank ; banking regulators from the United States, Luxembourg, the United Arab Emirates and elsewhere ; and many others, all of whom had dealings with BCCI in one way or another.The inquiry was thorough and painstaking ; and the report is both comprehensive and clear. It makes some significant criticisms of the Bank of England's supervision of BCCI and draws attention to important lessons that the Bank and the Government are determined to learn.
I am sure that all hon. Members will join me in paying tribute to Sir Thomas Bingham for the thorough way in which he has produced an extremely readable report. We owe him a debt of gratitude for the assiduous and comprehensive inquiry that he conducted.
The narrative of events that makes up a large part of Sir Thomas Bingham's report has two main themes. The first is of a bank that was structured in such a way as to maximise its potential for concealing information from both its auditors and the supervisory boards around the world that sought to regulate its activities. The bank's guiding principle was divide and deceive. It almost seemed to be in search of a home.
Throughout much of the report, which hon. Members will have read, it is clear that the bank had a constant quest for a proper supervisory structure. However, the quest was impeded by a determination to procrastinate and obscure the command structure within the bank. The BCCI group was structured into myriad companies built around two major banking subsidiaries, one of which, BCCI SA, was incorporated in Luxembourg and the other, BCCI Overseas, in the Cayman Islands.
Mr. David Shaw (Dover) : My hon. Friend is aware that I have introduced the Transactions with Tax Havens (Sanctions) Bill. The purpose of the Bill is to concentrate not so much on the tax issues of tax havens, as on the fraud issues of the havens, which might better be called "fraud havens". Will my hon. Friend please touch on the issue of how we might take more and better regulatory action against such fraud havens?
Mr. Nelson : I will try to do so during my remarks. I take very seriously any recommendations and legislative proposals that my hon. Friend introduces. Much of the theme of European and international debate in Basle and in some of the Community directives have very much in mind the transparency and corridors of communication that underlie my hon. Friend's proposals.
Mr. Keith Vaz (Leicester, East) : Does the Minister recall his remarks to the House when the inquiry was announced by the Chancellor of the Exchequer. The right hon. Gentleman said :
"Many of us are confident that it will show beyond any question of doubt that the Government and the Bank of England acted only in a timely and proper fashion."--[ Official Report, 19 July 1991 ; Vol. 195, c. 724.]
I accept that the Minister was a Back Bencher at that stage. Will he now accept that his statement was wrong?
Column 525
Mr. Nelson : I will not. The one thing that is evident is that Treasury Ministers and other Ministers get a clean bill of health--a glorious phrase--in that regard. I do not retract my remarks. It is true that the report makes some serious criticisms of the Bank of England in terms of time limits ; I acknowledge that. However, the report stops well short of suggesting that things would necessarily have been different if the Bank of England had acted differently, and it does not make any accusations of negligence, for example. Nevertheless, there are serious criticisms, as my right hon. Friend the Chancellor and I have acknowledged on separate occasions. In practice, BCCI did little business either in Luxembourg or in the Cayman Islands. It spread forth its tentacles into more than 60 countries. BCCI SA operated 47 branches in 13 countries, including the United Kingdom. BCCI Overseas had 63 branches in 28 countries, and subsidiaries and affiliates of the holding company operated 255 banking offices in 28 countries. The deliberate confusion that flowed from the structural complexity enabled BCCI to grow rapidly in the 1970s and the 1980s, when modern techniques and systems of banking supervision were only beginning to come into force, and in parts of the world where, to quote the report, "impenetrable secrecy" was a prominent feature of banking regulation.
It was only in the final years of BCCI's existence, when Price Waterhouse took over responsibility for auditing the bank worldwide and when regulators began to come together in a college of supervisors, that the full enormity of the fraud being practised started to come to light.
The other striking theme of the report is the sheer scale of the fraud. Many hon. Members may have felt, as I did on reading the report, that the deeply offensive point about it was that the scale and quantity of fraud dwarfed the earnings and savings of ordinary people. The fraud was wholly out of proportion to the lives, efforts and prudence of ordinary people. To that extent, the report, and the crimes and frauds revealed by it and by the collapse of the bank are shocking and arresting. The sums being siphoned off and misappropriated were enormous.
When my right hon. Friend the Chancellor made his statement to the House, he thanked Sir Thomas Bingham for producing a masterly account of such a complex subject and for being so constructive in his recommendations for the future. I repeat today that the Government accept all the recommendations and have already begun to implement them.
Mr. A. J. Beith (Berwick-upon-Tweed) : A few moments ago, the Minister implied that if the Bank had not made mistakes, it is unlikely that the outcome would have been different. I ask the Minister to note paragraph 2.484 in the report, in which Sir Thomas says :
"How different the course of events would have been had these deficiences not existed, one can only speculate."
The Minister must recognise that, if action had been taken earlier, the many individuals involved at least would not have lost money.
Mr. Nelson : Yes. I have tried to make it clear, and I will do so again, that I have understood Sir Thomas Bingham to say that he could not speculate on what the outcome would have been if the Bank had acted differently.
The right hon. Member for Berwick-upon-Tweed (Mr. Beith) spoke of action being taken sooner. There has been
Column 526
a great deal of discussion about the exact timing, about when the whistle should have been blown and about when the bank should have been closed down. There has been discussion about when that point should have been--whether a month sooner, six months sooner or a few months later, which some people suggested at the time to protect depositors. It was suggested that the bank was closed down too soon and that another solution, such as the injection of further capital, could have been found. Whenever closure takes place, people lose. When the bank was closed, the books amounted to $16 billion. Previously, the gross assets had been up to $23.5 billion. I know that that cannot be construed as an argument for not acting sooner. If something is a rotten apple to the core, one must take action whenever it is justified and when the evidence is clear. However, to suggest that fewer people would have lost raises a difficult question. It is arguable that many more people might have lost, because the deposit base would have been even larger.Mr. Terence L. Higgins (Worthing) : I understand what my hon. Friend is saying. It is a question of how far back one takes the matter. Everyone now accepts that there should have been a single lead regulator. Instead, a special arrangement was set up for BCCI. Had such an arrangement been refused at that point, the scale of losses would be far smaller.
Mr. Nelson : My right hon. Friend makes an important point, which is covered in a complete analysis by Sir Thomas Bingham. Hindsight is a great thing, whereas foresight is far more difficult. There were cases in 1979, in 1985 and in the latter part of the 1980s, which are considered carefully by the Bingham report, when a different decision and a different approach could have been taken by the Bank of England, not only on the question of the revocation of authorisation, but on the question of the appropriate form of supervisory structure. We must make it clear that we were dealing with, if not a unique, a complex and devious bank structure. The bank's deliberate intention was to play one regulatory system off against another to try to fall between all posts and to set itself up in the least regulated condition. It was difficult for any one authority to take on complete and consolidated supervision, which is why the college of regulators was established. However, my right hon. Friend the Member for Worthing (Mr. Higgins) makes a good point.
Mr. Calum Macdonald (Western Isles) : The Minister's answer explains exactly why the Bank of England should have stepped in earlier to regulate more effectively. The structure of BCCI hid the fraud from the outset. In paragraph 2.484, Sir Thomas Bingham says that the problem of fraud did not occur only in the last 15 months, but had its roots deep in the past. He says that the fraud hidden by the structure
"might have been in part prevented, or brought to a head much earlier, had strong and resolute action been taken to insist on structural change as a condition of continued authorisation and to impose on the group the supervisory regime it was known to require." It was known not with hindsight, but at the time. Sir Thomas concludes :
"The Bank did not pursue the truth of BCCI with the rigour that BCCI's market reputation justified"--
at the time.
Column 527
Mr. Nelson : To be fair to the Bank, it insisted on a number of changes, not only in the structure, but in the management of BCCI. The hon. Gentleman referred to the various points at which BCCI'S reputation might have been brought into question. It is important for all of us to recognise that the prime responsibility of the Bank of England under successive legislation has been to protect depositors. Bearing that responsibility uppermost in mind leads not necessarily to pre-emptive foreclosure but to an attempt to find ways to protect deposits. In 1979 the bank was profitable, the Luxembourg Banking Commission was not complaining and the auditors were not qualifying the reports.
In 1985 an alternative structure of incorporation in the United Kingdom under SA was decided upon. It was also decided that treasury operations would be moved to Abu Dhabi--a structural change insisted upon by the Bank of England. Efforts in the later part of the 1980s were to protect depositors. The improved standing of the principal shareholder, the injection of further resources and management changes were carried out deliberately to try to safeguard the interests of depositors. With the benefit of hindsight, it is easy to make a different judgment about what should have happened, and with the benefit of hindsight that may well be right. But at the time, the main interest was the protection of depositors, and on the information available to the Bank of England at the time, its decisions can be defended.
Mr. Macdonald : The Minister mentioned 1979. Bingham says that, in 1979, the bank was structured in such a way that effective regulation was impossible. Paragraph 2.30 of the report says :
"if a group was so structured that the Bank was unable to ascertain how the business was done, and so to satisfy itself that the business was conducted prudently, then the Bank was not only entitled but obliged to refuse a licence",
to take deposits. The Minister says that it is a matter of judgment as to whether the bank should have acted differently but Bingham's judgment is that the bank should have acted differently by refusing to issue a licence.
Mr. Nelson : Bingham speaks for himself on the matter but also says in paragraph 2.21 that no concrete evidence of malpractice had been established in 1979. The Banking Act 1979, which was Labour legislation, introduced two tiers of full banking authorisation and deposit-licensed status. The key part of that legislation was section 3(5) which effectively allowed foreign authorisation of a bank as a satisfactory means of "grandfathering" into the new regime an authorised bank.
The fact that BCCI was not given full banking status at that time reflected the Bank of England's concern about it. The bank became a licensed deposit taker. The report's criticisms of the Bank's actions at that time acknowledge that there were arguments on both sides, and paragraph 2.21 sets out grounds for the Bank of England believing that its action at that time was proper. [Interruption.] I should like to make some progress, because there are important issues to be addressed and many hon. Members want to take part in the debate. The Bank has responded to one of the important recommendations by establishing a special investigations unit under Mr. Ian Watt. It will have specific responsibility for pursuing evidence of malpractice or illegality which the Bank receives, and for seeing that the issues which may be raised are followed up. As part of this process, the Bank is
Column 528
also strengthening its existing capacity for on-site examination of banks. Before taking up this appointment, Mr. Watt was a partner at KPMG Peat Marwick. He has considerable experience of liquidation and has acted as a DTI inspector on a number of occasions, most notably into the Guinness inquiry. He acted as the accountancy assessor to the Bingham inquiry. In his new role, he will have direct access to the governors and will attend meetings of the Board of Banking Supervision.Similar access and status will be accorded to Mr. Peter Peddie, a former partner in Freshfields, who has been appointed to head a new, specialised legal unit within the Bank. His role will be to ensure that, in carrying out its supervisory tasks, the Bank takes full account of the powers available to it under the law--an area where Sir Thomas Bingham felt that the Bank may have been too cautious in the past. The Bank will itself be taking steps to implement his recommendation that more use should be made of the Board of Banking Supervision--a body created by the 1987 Act largely to provide a vehicle for outside experts to advise the Bank on how it carries out its supervisory duties. The Bank is reviewing its guidance on involving the Board and in future its views will be sought at an earlier stage in problem cases. Outside members will be encouraged to have more contact with Bank officials at working level to discuss issues that cause them concern. They will continue to have free access to staff and papers.
On the Bank's approach to supervision, Sir Thomas concluded that, while its traditional techniques, had, on the whole, served the community well, a different approach was needed in cases such as BCCI where trust and frankness were lacking. With such institutions, the Bank's staff need to develop a higher degree of alertness to signs of fraud and they need to be more inquisitive. The Bank has begun to extend and improve the training that it provides to supervisors in order to achieve these objectives.
Sir Thomas regards
"the most important single lesson"
of the BCCI affair as being that
"banking group structures which deny supervisors a clear view of how business is conducted should be outlawed."
While not persuaded that the Bank currently lacks the powers needed to deal with such cases, if there is felt to be any doubt on the point, he would support explicit provisions being introduced. The Government accept this conclusion and will introduce legislation, as soon as the parliamentary timetable allows, to put the Bank's powers beyond doubt. In particular, the legislation will need to deal with banking groups whose structure has changed significantly after authorisation or who have developed an active presence in secretive or poorly supervised jurisdictions.
On the European level, Sir Thomas finds nothing in the history of BCCI that requires substantial revision to the emerging Community regime for supervision. But he proposes that two recitals to EC directives--one discouraging supervisory "forum shopping" and the other requiring banks' place of incorporation and head office to be in the same member state-- should become express requirements of Community law. He also proposes that all member states should confer powers on their regulators to refuse or withdraw authorisation where a bank cannot be effectively supervised, and he supports the proposed Community deposit guarantee directive being adopted as soon as possible.
Column 529
As my right hon. Friend made clear at the time of publication, we shall be pursuing all of these points with the Commission and our European partners. Sir Leon Brittan has already issued a statement responding to the Bingham report and acknowledging the force of these recommendations. His officials have been asked to report quickly on all the Bingham points that bear on Community legislation so that Sir Leon can make a more detailed statement at the ECOFIN Council on 23 November. My right hon. Friend the Chancellor will be in the chair on that occasion and will use the opportunity to seek to take matters forward.The Government have already made clear the importance that we attach to making progress with the deposit guarantee directive. Our officials are seeking to finalise the draft currently before the Council working group and we continue to hope for political agreement to a final text before the end of this year.
On the wider international front, the Government agree with all that Sir Thomas says about the need to press for further improvements in banking supervision and to facilitate better communications between supervisors. The new standards promulgated by the Basle committee--the key requirement of which is that all banks that branch abroad must have a home supervisor ready and able to conduct effective consolidated supervision--represent an important advance in international action to deal with countries offering impenetrable secrecy. The Government and the bank also support his call for independent monitoring of supervisory standards and will be proposing the establishment of peer group reviews, to both the G10 supervisors' committee and the EC banking advisory committee, as the best way of taking this forward.
The Government accept that the effective supervision of international groups requires clear and legally robust channels of communication between supervisors and other authorities and agencies engaged in combating financial crime and fraud. We shall be focusing our further action on four main areas.
First, we shall urge within the European Community that the provisions on information flow in the second banking co-ordination directive, and in other financial services directives, should be looked at again to ensure that the necessary channels of communication are being kept open. Next we shall raise the issue of exchanging information with non-EC countries, so that the practical difficulties in maintaining supervisory confidentiality are not allowed to constrain necessary communications with third countries. An international consensus is needed on the common interest in effective supervision of banking groups world wide, and on the level of confidentiality required to underpin it.
Thirdly, all those concerned in regulating international banks should be clear about what information should be shared and how it is to be channelled between those who need it.
Fourthly, as my right hon. Friend announced last month, new machinery is being established between the supervisory, investigation and prosecuting authorities within the United Kingdom, to strengthen their exchange of information, so as to enable us better to detect and deal with financial and company faud.
Column 530
Finally, on auditors, Sir Thomas Bingham's main proposal is that they should be put under a statutory duty to report relevant information to the Bank. This reflects a similar recommendation in the fourth report of the Treasury and Civil Service Select Committee.The Government strongly support this approach, which, I am pleased to say, has also been welcomed by the professional bodies. My right hon. Friend the Chancellor has already made it clear that a similar duty should be introduced for the auditors of building societies and financial services companies. My right hon. Friend the President of the Board of Trade has said that he would want this approach also to be extended to the auditors in insurance companies.
A process of consultation is now getting under way, involving both the professional bodies and representatives of the sectors concerned. This will cover the formulation of such a duty, and its enforcement. Discussions will proceed as a matter of urgency with the aim of introducing measures in this House at the earliest opportunity.
Mr. David Shaw : My right hon. Friend will know of my interest in small businesses. Has he taken into account the fact that, if every single financial services company is to be regulated, that will be getting down to some very small companies and businesses that will have to fill out even more forms than they are already filling out? Will there be a levelling-off process, so that the very small are exempted?
Mr. Nelson : I understand full well the important point that my hon. Friend raises, and I have considered a de minimis rule. So far, I am not inclined to introduce one. These matters will be the subject of consultation, but there is an existing professional responsibility that extends to auditors to flag up concerns when they arise, Secondly, it is intended that this will apply to all authorised firms in the financial services sector. To include some and exclude others would require a line that it would be extremely difficult to draw. Thirdly, while I understand the concerns of some small firms, it is sometimes in those small firms that problems arise, and depositors and investors need to be protected. Finally, I want to ensure that the way that the legislation is introduced and then conducted in practice will not involve the flagging up of too much information, because that can impose an impossible burden on regulators and supervisors, and extra costs on small businesses. Overall, the objective is to bolster the ability of auditors to say to a firm or its directors, "Look, unless you bring this to the attention of the authorities, I am required to do so by law." For those reasons, the change is justified.
Mr. John Greenway (Ryedale) : Does my hon. Friend agree that the picture that he is painting of what is required in terms of auditors' disclosure is mirrored largely in what already exists in the regulation of insurance brokers, through the Insurance Brokers (Registration) Act 1977, on which I shall talk later if I manage to catch your eye, Mr. Deputy Speaker?
Mr. Nelson : I am grateful to my hon. Friend. That is indeed the case, and that is one reason why it has been welcomed by the profession.
I hope that it will be clear to the House from what I have said that the Government attach the highest importance to implementing in full all the recommendations that Sir Thomas Bingham has made. Perhaps I
Column 531
should now say something about the work that the Treasury and Civil Service Select Committee has undertaken since the collapse of BCCI. It has produced two thoughtful reports, one on the role of local authorities and money brokers, and another looking into international and national regulation. The Government and the Bank of England have already responded to both reports. On behalf of the Government, I should like to say how much we appreciate the careful consideration and the compelling analysis and recommendations of these reports. I am sure that hon. Members will wish to pay tribute to the work of the Committee.Both the Government and the Bank accept, and are grateful for, a sizeable number of the Committee's recommendations and conclusions, and we have already announced our intention to implement them. These include the need to deal effectively with banking groups that have an inadequate structure, the need to impose a statutory duty on auditors to report their suspicions to the Bank and the desirability of establishing an international mechanism for monitoring supervisory standards.
Despite all that we sometimes hear about the superiority of Senate committees over our Select Committees that operate here, the work that the Treasury and Civil Service Select Committee has done on BCCI compares favourably with the much less-considered report of Senator Kerry.
Another subject discussed in the Bingham report is the extent and nature of the Bank's powers to deal with recalcitrant institutions.
Mr. Brian Wilson (Cunninghame, North) : Why did Senator Kerry have to conclude that a number of significant documents were withheld, presumably on the instructions of the British Government? These related to information, of which the Bank of England must have been aware, from the security services on the doubts that existed in those quarters about BCCI many years ago. Readers of Private Eye have had a glimpse of these documents, but apparently Senator Kerry, and perhaps even Bingham, did not. In an age of supposedly open government, how can those documents be kept private and not be put in the public domain?
Mr. Nelson : The Governor and my right hon. Friend the Chancellor of the Exchequer established the Bingham inquiry for exactly that purpose. Nothing was withheld from Lord Justice Bingham while he was making his inquiries, and the Government regarded this report, as they do now, as the authoritative report on the supervision of BCCI. Senator Kerry may complain that he did not get some information, but we may complain, with justification, that he did not seek evidence, and did not enable people to question some of his conclusions and findings. I am sure that the hon. Gentleman will accept, as many of his hon. Friends do, that this is the authoritative version, this is the one that was justified by the calling for any papers and this is the one that we should consider today.
Sir Thomas Bingham has, quite rightly, drawn attention at a number of points in his report to the nature and extent of the powers conferred on the Bank by the 1979 and 1987 Acts. He has also pointed, on a number of occasions, to situations where they could have been exercised. But, in all those cases, the Bank has always a second test that it must apply. It must ask itself not only
Column 532
whether its powers are exercisable but, if it decides that they are, whether would it be in the interest of depositors to exercise them. Deciding to revoke a bank's licence and to bring its operations to an end may sometimes be the right or only course to follow.Often, the interest of depositors are better served by taking less drastic, remedial action so that an institution in difficulties can be restructured or, perhaps, wound down over a period, so minimising the risks for depositors or even, with good management, eliminating them altogether.
Over the past six years or so, there have been 35 occasions on which banks have been persuaded to undertake remedial action without fuss and with no loss to depositors ; 17 occasions on which authorisations have been revoked ; 28 examples of authorisations being restricted under the Act ; and 18 more in which an institution has been persuaded to surrender its authorisation under pressure from the Bank. On all these occasions, the Bank has acted in good faith with the need to protect depositors very much at the forefront of its concerns.
Mr. Macdonald : Will the Minister give way?
Mr. Nelson : If the hon. Gentleman will forgive me, I will not, as I wish to make progress. I shall deal now with compensation, and if need be, I shall give way on that issue.
At the time of closure, BCCI had 25 branches in the United Kingdom with deposits totalling £1.85 billion, of which one third were sterling retail deposits. Deposits by United Kingdom residents totalled £240 million, of which three quarters were in sterling. I understand that BCCI had more than 53,000 sterling accounts. The Deposit Protection Board has sent out claims forms to some 42,000 depositors. So far, more than 16,500 claims have been lodged with the board, and more than 9,000 of them have already been paid. A total of more than £54 million has been paid out so far, and we expect the final figure to be a good deal higher--perhaps as much as £85 million.
I can understand, of course, why a number of hon.
Members--especially those who have had experience of hardship among their own constituents--should want to suggest that additional compensation should be paid to help those who have lost some or all of their savings as a result of the fraud.
The Government have made it clear that responsibility for the collapse of BCCI rests with those who devised, directed and implemented the frauds and that there is no justification for public money being used to provide recompense to those who have lost as a result. There are also other compelling reasons for this, which I invite the House to consider.
First, no system of banking supervision is fail-safe. When a fraud like this is led and organised by those at the very heart of an institution's management, and where so much time and effort was devoted to concealing its existence both from supervisors and from their auditors, it is particularly difficult to detect in its early stages.
It was because Parliament acknowledged that no system of banking supervision could ever guarantee banks against failure that the Banking Act 1987 established the Deposit Protection Board to provide a degree of compensation for depositors.
What these arrangements were designed to achieve--and what in my view they do achieve--is a proper balance
Column 533
between the need to offer some protection, particularly to smaller depositors, on the one hand ; and the equally important need, on the other, to maintain the principle that depositors themselves have to be aware of the risks associated with different institutions and to bear them in mind when deciding where to put their money. If that were not so, and depositors were compensated for any failure of a financial institution, those banks that acted irresponsibly--by, for example, offering unrealistically high levels of interest--would prosper at the expense of the more prudent. That would lead to increasingly risky approaches being adopted towards the running of deposit-taking businesses, which, over the long term, would have damaging implications for the entire banking system. Recent experience of the United States thrift banks makes it clear that this is a real practical concern, and not simply the construct of theoretical economists.Supervisors' behaviour would change too. They would become much more cautious in the way in which they carried out their task, tending towards the setting of higher capital and liquidity requirements and moving to close down banks at the earliest sign of difficulty. Their primary motivation would soon become to protect themselves from the risk of litigation, at the expense of almost everything else. That would not be in the long-term interests of depositors or of the economy more generally.
Mr. Vaz : I would have been astonished if the Minister had arrived in the Chamber this morning with a cheque for £6 billion to pay out compensation. If he accepts from the local authorities' point of view the argument of the Select Committee on the Treasury and Civil Service, which is set out in paragraph 76--the Minister has lavished praise on the Select Committee--there was a breach of supervisory duty on the part of the Bank of England. He must accept also, as I think he has done--he has accepted all the recommendations--the savage criticism of the Bank of England that appears in the report. Surely there is no difference between the case of the BCCI victims, be they creditors, depositors, ex-members of staff or local authorities, and the people who lost money in Barlow Clowes. In that case, as the Minister knows, Lord Young refused compensation, but eventually compensation was paid. Surely the Minister must consider the issue of compensation. He must listen to the representations of those affected before he makes a decision.
Mr. Nelson : It would be wrong for me to lead the hon. Gentleman on. The Government have carefully considered the representations. We have considered the report fully, in accordance with our undertaking. My right hon. Friend made it clear that it was our intention not to grant additional compensation over and above that provided by the deposit protection scheme. The BCCI case is different from that of Barlow Clowes. The Parliamentary Commissioner for Administration recommended that compensation should be paid to those involved in the Barlow Clowes case. For the reasons that my right hon. Friend has already--
Mr. Macdonald : Will the Minister give way?
Mr. Nelson : I have given way on several occasions. There will be opportunities for the hon. Gentleman--
Column 534
Mr. Macdonald rose--Mr. Deputy Speaker (Mr. Michael Morris) : Order. The Minister is not giving way. I should be grateful if the hon. Member for Western Isles (Mr. Macdonald) would resume his seat.
Mr. Nelson : I hope that hon. Members will understand that I shall not give way. I wish to deal--
Mr. Macdonald : Will the Minister give way?
Mr. Deputy Speaker : Order. The hon. Gentleman must resume his seat. He must not keep getting up and challenging the Minister.
Mr. Nelson : I am obliged, Mr. Deputy Speaker.
I move on to the Abu Dhabi scheme, which is of great importance in this matter. As many hon. Members will be aware, there is a further source of funds that will be potentially available to depositors. This is the separate package that is being negotiated by the liquidators of BCCI SA, BCCI Overseas, and the majority shareholders in Abu Dhabi. It has now been approved by the courts in Luxembourg, following earlier approval by courts both here and in the Cayman Islands. The package contains two main elements. The first is a pooling arrangement, by which the proceeds realised from assets by liquidators all around the world--whether from BCCI SA or the Caymans-registered BCCI Overseas--will be put into a central pool, from which all creditors, not just those in the United Kingdom, will receive a payment in proportion to their admitted claims. I understand that the intention behind that arrangement is to ensure a co-ordinated approach to all BCCI creditors wherever they may be, and to prevent competition between different liquidators for the same assets. That is clearly a sensible objective, although it does have the consequence--about which several hon. Members have expressed understandable concern--that no payments have yet been made by liquidators, either in the United Kingdom or anywhere else. It is far from clear, given the complexity of BCCI's affairs, that any payments would yet have been made even if the package had never been proposed.
The second element, which I know has also aroused a good deal of interest, involves the setting up of a contribution fund by the majority shareholders, which--together with the estimated proceeds from the liquidation--should lead to creditors recovering some 30 to 40 per cent. of their money. I understand that, under the terms of that arrangement, majority shareholders would, over the next 20 months or so, put up between $1.2 billion and $1.7 billion to be paid to creditors. In return for payment from the fund, creditors would be required to waive any legal claims against the majority shareholders.
In order to be put into effect, the arrangement requires that creditors to the value of $7 billion grant waivers of legal claims--although that target figure may be reduced at the discretion of the majority shareholders. Once that level has been reached, the scheme can go ahead, and a first "distribution", which I believe will equate to about 10 per cent. of creditors' claims, will be paid, some time during 1993, with further payments following later.
Mr. Vaz : Will the Minister give way?
| Next Section
| Home Page |