My Lords, these amendments require the PRA to review proprietary trading by UK banks and PRA-regulated investment companies and prepare a report to the Treasury. That will be followed by an independent review of the issue. The PRA must consider in its report the extent to which regulated firms engage in proprietary trading. It will then have to assess whether that risks their safety and soundness.
As the Parliamentary Commission on Banking Standards showed, proprietary trading can take many forms. That is why we are requiring the PRA to look into what particular risks different forms of proprietary trading can pose to the safety of the firm.
To help to give a full picture to the Treasury and to Parliament, the PRA must also report on steps it has taken to deal with risks from proprietary trading and whether it encountered any difficulties when it tried to tackle those risks. Building on that, the PRA must then give an assessment of whether it believes the tools it has to tackle proprietary trading are appropriate, given the risks that may exist at that time and in future. It must also consider whether restrictions imposed on proprietary trading in other countries have been effective. The experience of the United States in relation to the Volcker rule, which banned proprietary trading by banks, will be particularly relevant.
That review will take place within a year of the ring-fence coming into force. The Government have committed to ring-fencing being implemented in 2019, so this will take place in 2020. In Committee, there was some discussion about the appropriate timing of the review. The Government returned to the original PCBS recommendation, which said that the review must include,
“an assessment of the impact of the ring-fencing rules on proprietary trading by banks”.
To do that, the ring-fence must be in place for at least some time to consider such issues. While the ring-fence and proprietary trading are in many ways distinct issues, they will of course interact. Therefore we think it is right to allow the PRA to consider the impact of risks from proprietary trading on ring-fenced banks and whether the safeguards in place are sufficient for the particular requirements for the safety of ring-fenced banks. I know that members of the PCBS have been very concerned about that in the past, and I want to make sure that this review looks at this important area.
Following the PRA’s report to the Treasury and to Parliament, the Treasury will set up an independent review panel. The first task for that panel will be to consider the evidence that the PRA gathered and come to a view on its findings. It will then have to make recommendations about whether future measures to deal with risks from proprietary trading are necessary.
The independent review will be able to make any recommendations in relation to proprietary trading that it considers appropriate. It will not be constrained, and like the PRA review, will be able to consider the experience other countries have had with restrictions on proprietary trading, such as in the US with the Volcker rule. By the time of the review, I imagine that a wealth of information and views will be available to help the independent panel come to its conclusions. The independent review panel must make its recommendations in a report to the Treasury and to Parliament.
As I have said previously, the PCBS heard in evidence that proprietary trading does not currently pose a large risk for the UK financial system, but it can do little harm to keep this area under review, should risks emerge in the future.
As noble Lords have seen when we debated other parts of the Bill, and, indeed, through this Government’s willingness to set up and listen to the ICB in the first place, we are in favour of independent reviews. Therefore we are persuaded that proprietary trading is an area where an independent review in future can add value. These reports will give a future Parliament all the information it needs to assess whether future safeguards are necessary. I beg to move.