The former Liberal Party leader has told an inquiry he “assumed” historic allegations about Cyril Smith were true but they were “nothing to do with me”.
Police investigated allegations about the abuse of teenage boys at the Cambridge House hostel, Rochdale, in 1969 but no prosecution was brought.
David Steel said he discussed the allegations with Smith in 1979, after an article in Private Eye.
The peer said he “disapproved” of Smith’s actions.
A Rochdale Alternative Press piece featured accounts from three men saying they had been told to take their trousers and underwear down as a punishment at the hostel, and had then been smacked or touched by Smith, who served as a Liberal and Liberal Democrat MP for Rochdale from 1972 to 192.
The inquiry heard Smith told Lord Steel “it was correct, the matter had been investigated by police, no further action was taken and that was the end of the story”.
Asked why he did not take it further, Lord Steel, who was elected Liberal Party leader in 1976, said he “saw no reason to go back to something that happened during his time in Rochdale” and the events happened “before he was even a member of the Liberal Party or an MP”.
“I don’t think we went into detail on individual bits of the story,” Lord Steel told the inquiry.
“He just accepted that the story was correct, and obviously I disapproved, but it was, as far as I was concerned, past history. That was the end of it.”
Inquiry counsel Brian Altman QC later asked: “So you came away from that meeting, Lord Steel, not really knowing if he’d committed these offences at all?”
The peer replied: “Well, I assumed he had because he said that the account was correct. Why would he have been investigated if he hadn’t done something that was possibly wrong?”
Mr Altman continued: “So you understood that he’d actually committed these offences from what he said to you?”
Lord Steel responded: “I assumed that.”
The QC then asked: “Wasn’t that all the more reason to take matters further and hold some form of inquiry?”
The peer answered: “No, because it was, as I say, before he was an MP, before he was even a member of my party.
“It had nothing to do with me.”
When questioned on the idea that children could still have been at risk, Lord Steel said: “I have to admit that didn’t occur to me and I’m not sure it would occur to me today.”
Asked whether or not the party’s inaction was to avoid further embarrassment in the wake of the Jeremy Thorpe affair, Lord Steel replied: “Absolutely not.”
Lord Steel also described recommending Smith for a knighthood in 1988 and said he did not pass on any allegations about the sexual abuse of children because “I was not aware of any such allegations other than the matter referred to…which appeared to have been fully investigated.”
Richard Scorer, specialist abuse lawyer at Slater and Gordon, acting on behalf of seven victims in the inquiry, expressed upset at Lord Steel’s admission that he assumed Cyril Smith had committed offences.
He added: “The fact that he took no action against Smith despite this – will cause victims great anger.
“Steel’s inaction was an appalling dereliction of duty and I hope the inquiry will condemn it in the strongest possible terms.”
Two years ago the inquiry heard a former pupil at Cambridge House say that Smith touched his genitals during what he thought was “a medical”.
The hearing continues.