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Safety Deposit Current Accounts Bill [HL]

My Lords, I welcome the opportunity to debate the issues the Bill raises. Lest noble Lords thought that as a Private Member's Bill it represented not much more than the extrication of a small pin from the ground, let me say that the pin contained in the Bill is more akin to the one in a hand grenade, as a rather loud explosion will go off if in fact the Bill ever becomes law. I must say that I have a great deal of sympathy with the speech of the noble Lord, Lord Razzall, who indicated the implications of the Bill. I am not sure that I can follow the line that this is a fundamental onslaught on the concept of banking since the 14th or 15th century, but there are aspects of it that are not far off. That is why the Government look at the Bill not only with interest but with a certain anxiety about its implications, particularly as, as the noble Baroness has taken the appropriate opportunity to say, we are concerned about how we best support confidence in our banking system. In a few moments I will relate the Government's proposals in respect of this. Inevitably, I suppose, we were bound to go over a certain amount of old ground, and I did not think that I could face this debate without some reference to Northern Rock and perhaps even to the Statement made earlier this week. Let me reiterate again—and I cannot say this much more strongly than I have sought to do in the past—Northern Rock was not bailed out. Northern Rock is in public ownership with the shareholders having lost very substantially. The shareholders are possibly bringing a case about the level of the shares and the compensation to which they are entitled. But, let us make no bones about it, there are losers in Northern Rock as far as concerns the shareholders. In addition, as was predicted—and this point does not get quite the same level of currency in the House in contributions from the other side—announcements are being made that Northern Rock will lose substantial numbers of staff as its business contracts. So several hundreds of people are going to pay the price of the failure of Northern Rock in circumstances where they may have the most marginal, if any, responsibility for the debacle which occurred. Likewise I reiterate, as I sought to emphasise on Monday, the Bank of England is not bailing out banks; it is increasing the degree of liquidity in circumstances where we all recognise that limited liquidity is producing great strains on the financial system and would feed through to the real economy. But the whole concept underpinning Monday’s Statement is that the banks locate with the Bank of England securities that not only are appropriate and level to the resources made available to them but are of greater value than the money that becomes available to them. The idea that it is some kind of bail-out is a complete misconception. The noble Lord, Lord Razzall, was concerned to emphasise that banks play a critical role in the economy and that we should take care about any possible onslaught on the principles on which they work. The noble Earl, Lord Caithness, sought to bring to the House’s attention the fact that I had taken an interest in the past in the other place with legislation I introduced concerned with client money and estate agents holding money for third parties. It is a very important consideration. I was very glad that although I could not, as a Back-Bencher, get that legislation through, it eventually became government legislation a few years afterwards. This concept is different. It is not about a third party’s money but the individual going to the bank and the bank having a special arrangement for the deposit which the individual makes. Banks use resources made available to them through accounts for investment. They distribute capital across the economy and allow financial needs to be managed over time. Banks play a critical role. That is why we are all concerned. I am not talking just about legislators; every one of our fellow citizens is inevitably concerned when the banking system gets into the level of difficulty that has obtained over the past few months. The Bill seeks to strengthen protection for the bank’s customers in one particular area, namely deposits. The proposal is that the bank should be required to provide a safe custody service for the money. That is entirely different from how banks operate when we deposit money or open current accounts with them. The new account would mean that the banks are not borrowing from the customers at all. They would hold the customer’s money on his or her behalf, and could not lend it to other customers. That is a massive inhibition on the centuries-old role of banks and the long period of time in which building societies have operated. If there were a high take-up of the proposed safety deposit current accounts by consumers, there would certainly be a significant impact on the cost of borrowing and therefore on the real economy. Secondly, the new account which the noble Earl presents has the great virtue of absolute protection, but it is not a savings vehicle. Money has to be held in cash and will remain the property of the customer. Everyone will be able to follow the illustration of the noble Earl, Lord Ferrers, of the individual who goes along and demands there and then to see their money, and everyone of course can take out their money there and then, even though it is a deposit account. That would of course affect the flexibility with which banks operate with regard to resources, and the money would not grow. It would freeze at its current position. Although the House will recognise the Government's significant success over the past decade in managing and restraining inflation, inflation still erodes savings over time and this deposit account would be worthless the longer it was held in the bank. The other aspect is that there is no reason why a bank should not offer this facility here and now. We do not need legislation to allow banks to provide a deposit facility. In fact banks offer safety deposit boxes. It is true that they charge for them, but that is the agreement between the customer and the bank. That guarantees what is in the box. The concept of the safety deposit box is that the bank does not know what is in it. It is merely a secure place in which things are lodged. I do not think that we need to prescribe anything in legislation in relation to that. As the noble Baroness, Lady Noakes, emphasised, we need to take urgent steps to strengthen the banking system and to restore confidence in the light of developments over recent months. I am not sure that this Bill will make any contribution to that. However, as the noble Baroness indicated, it is important that the Government think very seriously indeed about, and produce proposals to deal with, the situation with which we are confronted. In October last year, the Chancellor announced a review of the existing supervisory regime, including complex areas such as the legal framework for dealing with banks facing difficulties. As a result, a consultation document was published in January 2008, Financial Stability and Depositor Protection: Strengthening the Framework. We allowed time for consultation on this framework document, which ended on Wednesday. That does not mean to say that the noble Earl, Lord Caithness, has not contributed something to that. I am not suggesting for one moment that he is out of time. The Government are ever open to representations from all quarters but particularly from parliamentarians and the noble Earl, Lord Caithness, is timely in his representation. But we need something more significant than this Bill. We intend to bring forward legislation later this year once we have evaluated the consultation and reached our conclusions. The document envisages action by the Financial Services Authority to make rule changes and by the Bank of England to address the key objectives of strengthening the financial system, reducing the likelihood of banks failing, reducing the impact of failing banks, designing effective compensation arrangements in which customers have confidence, strengthening the role of the Bank of England and improving co-ordination between the authorities charged with the supervision of the financial system. This work will bear fruit in a government Bill, which will come before this House not long from now, and in a range of other measures to restore confidence in the banking system and improve protection for customers. We have all learnt very sharp and important lessons from developments over the past few months. I emphasise that the Government are responsible for the British banking system but the House will recognise that the difficulties we face are reflected internationally across all the advanced economies and even beyond. As I said at the beginning, this Bill looks modest in intent, but, if implemented, its impact would be explosive. I welcome the opportunity to debate it and I very much enjoyed the noble Earl’s opening speech but I am not sure that the Government will feel the greatest joy if this measure finally arrives on the statute book.