Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008

My Lords, I support the Prayer from my noble friend Lord Eccles. I declare that I sit on the same Merits of Statutory Instruments Committee with him that has given rise to the questions he raised. In this matter, he is absolutely right in his analysis that circumstances did not justify, under the criteria set by the original order, the draconian action being imposed on Bradford & Bingley in this case. I shall go back a further stage to suggest, as I have believed for a very long time, that the Government have been fundamentally wrong, root and branch, in their perception of how to mount a rescue of these banks that have gone into trouble since the days when the Northern Rock issue first crossed the horizon. Although the Bradford & Bingley is significantly less of a danger than Northern Rock was at the time, I still thought that the better solution for Northern Rock, and the right course of action for the bank, would have been to proceed down the path of regarding it as a conventional business workout and place it in the hands of an expert bank that could undertake this work along the lines of the Lloyds Bank proposal at that time. Today, that looks as though it would have been infinitely the cheapest solution available to the taxpayers in resolving that problem. It would also not have created the atmosphere of banking panic and crisis which eventually swept up Bradford & Bingley in its wake. I feel very strongly that the Government developed an appetite which then grew on that it did feed upon; they decided that they liked getting control of banks and that Bradford & Bingley became another vulnerable one that they could sweep up on the way. I shall not go down the same erudite and precise course of analysis that my noble friend did, because he has said it all and said it very well. However, I shall add two thoughts not so far aired in this House arising from this crisis and bring them to the attention of the Minister responsible for banking activities. First, to go back to the real core origin of the crisis, I suggest that it lies in the Consumer Credit Act 1974, which came in after the second coming of the Wilson Government and was brought about by the fact that, in the first coming of that Government, they relied very heavily on hire-purchase controls as the means of taking the heat out of the economy. In doing so, they inadvertently wrecked the British motor industry, leading to the formation of British Leyland and, eventually, to the bankruptcy of that business. In the course of that, they moved the Japanese market share of British car sales from 3 per cent to 22 per cent in a year, which gave rise to a massive impact on the balance of payments adversely to this country, which has never been corrected or repaired. The Government went to Professor Goode of London University and asked him to come up with a completely new credit package that could be translated into law, which came out eventually as the Consumer Credit Act. The banks did not like it very much because it did not give them any asset-backing security for the loans that they were making, which is what gave rise in turn to the creation of second mortgages, or sticking the additional finance for a car on the back of a house loan. That tended to give a huge emphasis to the importance of accruing values for houses as the only means of financing both the domestic economy and personal needs, and ““taking the waiting out of wanting””, in the dreadful phrase of the time. As time went on, the banks realised that by putting the credit for a motor car at a few thousand pounds into the back of a house loan, they were not doing as well as they had done in the old days of hire-purchase, because they could have charged higher and got a bigger profit out of it. So they decoupled the arrangement and started to work on the basis of a specific second mortgage, to which they could apply a different set of turns and rates. However, they went a stage further—and here is where I would like the Minister to give very careful thought. They separated the methodology by which they analysed the profitability of a loan, separating the interest from the capital repayment portion of each instalment. At that time, the banks relied on a ludicrous method called the rule of 78th, which is what you get if you take the months of the year from one to 12 and add them together. If you then take the months of the year and write them down in reverse against the one to 12, you get 13 against one, and so on. They decided that if, for example, you had £200 a month to pay back to a bank under one of these arrangements and you paid back £600 after three months, you had not paid back a quarter of the interest in that time. They added the 12, 11 and 10 together, which came to 33, and expressed that as a percentage of the total 78, which gave them something like 42 per cent—which meant that 42 per cent of the £600 that they had collected in three months gave them £240 of interest, which they claimed as their profit. That also had the disadvantage for the borrower that he still owed a higher proportion of capital, which was very unfair and has remained unfair ever since. From that position to what we have now, we have reached a situation in which banks that were created as banks after the demutualisation of the building societies went down this path and were able to show a massive advance in profitability, arising in comparison with conventional clearing street banks, because they were using this old hire-purchase-type profit extraction formula. As a result, the stock market loved them, rights issues were snapped up, money flooded in and a disproportionate amount of money came in to the least responsible, newest and most inexperienced arm of the banking community and drove it up to the point where it unbalanced the national economy by creating purchasing power with what was really false money. It did not exist; it was being put up and subscribed on a myth. I suggest to the Minister that one of his first priorities should be to discuss with the Accounting Standards Board the methodology by which a single formula could be established for the extraction of the profit content of all lendings and repayments, whether for clearing banks or building societies. In future, we could take the heat out of the overgrowth of the secondary banking market and never have this awful situation occur again. That would be the first and biggest thing to take us out of the boom and bust cycle that could be done by this Government, which they have not done so far. Secondly, I suggest that one thing could have been done very simply a long time ago, which should now be done. We should ask the auditing profession to do a little more to earn its money. It gets very well paid and it could do one thing for us all that could very well save us from having this panic-stricken crisis situation occur again. That is, we should ask them in all audit certificates in future ever signed on behalf of a lending institution of any sort—and on behalf of anyone in, say, the Times top 1,000 as well—to have a certified working capital certificate for 12 months from the date of the signing of the audit certificate. That certificate should make it clear that it has been reviewed and assessed in the context of the known business plans of that company concerned. It would not have stopped Northern Rock going bust, but it would have given us a year in advance to decide what to do about that while we decided what the industry could do to save it. I make those two recommendations. My noble friend has given a very reasonable argument why this provision was wrong on this occasion, but none of us would be here today if we had had those two changes in the law previously.