The closure of BCCI in July 1991 caused substantial losses and hardship for depositors, creditors, local authorities and thousands of employees in the United Kingdom.
Although eligible depositors in the UK had access to the statutory deposit protection arrangements, an important question soon arose: should those who suffered losses also receive additional compensation if failures in banking supervision had contributed to what happened?
This issue became increasingly important as inquiries into the supervision of BCCI identified serious shortcomings in the way BCCI had been supervised by the Bank of England.
The Question of Supervisory Responsibility
When BCCI was closed, the UK Government initially resisted suggestions that public funds should be used to compensate those affected beyond the existing deposit protection arrangements.
However, the UK Government's own position left open an important qualification. During parliamentary discussions in 1991, the possibility was acknowledged that the position on compensation might have to be reconsidered if responsibility or blame were subsequently found to rest with the supervisory authorities.
The House of Commons Treasury and Civil Service Committee also addressed this issue in its December 1991 report. It indicated that the normal argument against compensating depositors could be different if it were established that the Bank of England had failed to discharge its supervisory responsibilities.
This made the subsequent findings concerning the Bank of England particularly significant.
The Bingham Report
The Bingham Inquiry was established to examine the supervision of BCCI, rather than to conduct another investigation into the Bank itself.
Published in October 1992, the Bingham Report identified serious shortcomings in the Bank of England's supervision of BCCI. It criticised aspects of the supervisory approach, the handling of information and the failure to respond sufficiently effectively to warning signs over a prolonged period.
Importantly, however, compensation was not part of Lord Justice Bingham's terms of reference. The fact that the report did not recommend compensation could therefore not, by itself, be regarded as a determination that compensation was unwarranted.
This distinction became an important issue when the Government relied, in part, upon the absence of a compensation recommendation in Bingham when rejecting further payments to BCCI victims.
The Barlow Clowes Comparison
The treatment of investors in Barlow Clowes became one of the principal comparisons raised by those campaigning for compensation for BCCI victims.
Barlow Clowes had collapsed in 1988, causing substantial losses to thousands of investors. The Government initially rejected demands for compensation. It maintained that it had no legal liability and that the available evidence did not justify using taxpayers' money to compensate investors.
The position subsequently changed following an investigation by the Parliamentary Commissioner for Administration, which found maladministration. Although the Government did not accept legal liability, substantial ex gratia compensation was eventually provided to Barlow Clowes investors.
The significance of the case for BCCI was therefore not that the circumstances of the two institutions were identical. Rather, Barlow Clowes demonstrated that the Government was prepared to provide discretionary compensation where serious failures in regulatory administration had contributed to losses, even without accepting legal liability.
The Comparison Raised in the UK Parliament
The comparison was made explicitly during the House of Commons debate on the Bingham Report on 6 November 1992.
Keith Vaz MP asked why BCCI depositors, creditors, former employees and local authorities should be treated differently from the victims of Barlow Clowes. He pointed out that compensation in the Barlow Clowes case had initially been refused but was subsequently paid.
The Government rejected the comparison. Economic Secretary Anthony Nelson argued that Barlow Clowes was different because the Parliamentary Commissioner for Administration had recommended compensation in that case.
This response itself raised another difficulty.
No Equivalent Ombudsman Route for BCCI
Those affected by BCCI did not have an equivalent means of obtaining an Ombudsman finding against the Bank of England.
During the same parliamentary debate it was pointed out that, because of the statutory position of the Bank of England, local authorities and other BCCI victims could not simply take the Bank's supervisory conduct to the Parliamentary Commissioner in the manner that had proved decisive in the Barlow Clowes case.
This created an apparent circularity in the Government's argument: Barlow Clowes compensation was distinguished because an Ombudsman had recommended it, while BCCI victims did not have access to an equivalent Ombudsman route through which such a recommendation could be obtained.
The difference in available remedies therefore became part of the wider argument about whether BCCI victims had received equal treatment.
The Treasury and Civil Service Committee
The issue returned to Parliament after publication of Bingham.
In February 1993, the House of Commons Treasury and Civil Service Committee published its Second Report of Session 1992-93, Banking Supervision and BCCI: The Implications of the Bingham Report (HC 250).
Its conclusion was highly significant. The Committee stated that the Bingham Report demonstrated conclusively that the Bank of England had “failed to discharge its supervisory duties” in respect of BCCI.
This finding was important because it addressed the very condition that had previously been identified in discussions about whether exceptional compensation might be justified.
The issue therefore moved beyond the general question of whether mistakes had been made. A parliamentary committee had now formally concluded, after considering Bingham, that the supervisory authority had failed in the discharge of its duties.
The Proposed Compensation Recommendation
During preparation of the Committee's 1993 report, the question arose whether that finding should lead to a formal recommendation for additional Government compensation for BCCI victims.
Contemporary reporting indicates that the draft report included a proposed recommendation for compensation. That recommendation was removed following a division within the Committee, when Conservative members voted against its inclusion and thereby defeated the opposition members supporting compensation.
The published report therefore contained the important finding that the Bank of England had failed to discharge its supervisory duties, but did not contain a formal recommendation that the Government compensate BCCI victims.
This distinction is important when considering later statements that the UK Treasury Committee itself had not recommended compensation. The absence of such a recommendation in the published report did not mean that the issue had not been considered. A compensation recommendation had been proposed, but failed to secure sufficient support within the Committee.
Continuing Parliamentary Support
The question did not disappear with the Committee vote.
On 25 February 1993, Keith Vaz MP tabled an Early Day Motion in the UK Parliament specifically entitled “Compensation for Victims of BCCI.” It ultimately attracted 171 signatures, demonstrating that there remained substantial parliamentary support for reconsidering the treatment of those who had suffered losses following BCCI's closure.
A separate Early Day Motion welcomed the UK Treasury and Civil Service Committee's finding that the Bank of England had failed to discharge its supervisory duties.
The compensation issue therefore remained a significant parliamentary and public policy question even though it did not become a formal recommendation of the UK Treasury Committee.
The UK Government's Position
The UK Government nevertheless maintained its refusal to provide additional general compensation beyond the statutory deposit protection arrangements.
Its position was that BCCI differed from Barlow Clowes and that shortcomings identified in supervision did not automatically establish that the losses suffered by depositors would have been avoided had the Bank of England acted differently.
Those arguing for compensation challenged this reasoning. They pointed out that Bingham had not been asked to determine compensation, that the UK Treasury Committee had subsequently made an explicit finding of supervisory failure, and that Barlow Clowes demonstrated that discretionary payments could be made even where Government legal liability was denied.
The disagreement was therefore not simply about whether supervisory mistakes had occurred. It concerned the more fundamental question of what remedy should follow when the authorities responsible for financial supervision were themselves found to have failed in carrying out that responsibility.
Why Barlow Clowes Matters
Barlow Clowes should not be presented as an identical case to BCCI. The businesses, regulatory arrangements, nature of the losses and available statutory remedies were different.
Its importance lies in the principle demonstrated by the UK Government's response.
In Barlow Clowes, compensation had initially been refused. After findings of maladministration, however, the Government reconsidered its position and made substantial discretionary payments despite continuing to deny legal liability.
In BCCI, serious supervisory failures were subsequently identified and the Treasury and Civil Service Committee expressly concluded that the Bank of England had failed to discharge its supervisory duties. Yet no comparable additional compensation scheme followed.
The comparison therefore raises a legitimate question about the consistency of the approach adopted towards victims of failures involving financial regulation and supervision.
A Question of Equal Treatment
The argument for compensation was never simply that Government should guarantee every depositor against the consequences of a bank failure.
The more specific argument advanced by BCCI victims and their parliamentary supporters in the UK was that the circumstances were exceptional. BCCI was an authorised international bank operating under official banking supervision. The Bingham Report subsequently exposed serious deficiencies in that supervision, and the Treasury and Civil Service Committee went further by concluding that the Bank of England had failed to discharge its supervisory duties.
At the same time, another group of financial victims - those affected by Barlow Clowes - had received substantial discretionary compensation following findings of maladministration.
BCCI victims were therefore entitled to ask why a comparable principle was not applied to them.
What is clear from the UK parliamentary record is that the issue of compensation was seriously considered, that direct comparisons with Barlow Clowes were repeatedly made, and that a proposed Treasury Committee recommendation for compensation, supported by Labour Party members, was defeated after Conservative Party members voted against its inclusion. This inevitably raised questions as to whether political considerations influenced the outcome, particularly as the Conservative Party formed the UK Government at the time.
For that reason, the treatment of BCCI victims forms an important part of the wider debate about double standards, regulatory accountability and equal treatment following major failures in the financial system.