My Lords, once again I would like to thank the Government and, in particular, my noble friend Lord Deighton, for moving this amendment. It is in response to a strong recommendation that was encapsulated in a specific report on this subject among the five reports from the Parliamentary Commission on Banking Standards.
Just as in the previous amendment, which concerned the review of the ring-fence, initially the Government were prepared to look at it only from the point of view of whether an individual banking institution had been gaming the ring-fence. They have now agreed to look at the system as a whole, and I am grateful for that. Again, initially the Government said, “No way should there by a review of proprietary trading”, but they have now come round to saying, “Yes, the parliamentary commission was right and there should be a review”. I am extremely grateful to my noble friend for that. He said that there is no risk at the moment. That is because proprietary trading has, for the time being, stopped to all intents and purposes. Yet at its peak it was for many banks up to 30% of their total business. One must imagine that that is quite likely to occur again in future. I do not know whether it will but it is clearly possible. But if I might say so to my noble friend, it is not simply a question of risk—although risk is obviously an important factor.
There was an important debate on Thursday last week on the five reports of the Parliamentary Commission on Banking Standards. Unfortunately, I was unable to attend but I read the Hansard report. It was introduced by a magisterial speech by the most reverend Primate the Archbishop of Canterbury and there were a number of good speeches—it read very well. In particular, I was impressed by the speech by my noble friend Lord Deighton, in which he gave us a little autobiographical counter. He spoke a little bit about his own experience as a banker. One thing I noted in particular. He said he was always conscious of the importance in banking of,
“putting the customer first”. That is a very important aspect of banking culture. Indeed, banking culture was one of the most important things that the parliamentary commission was set up to look into.
However, in proprietary trading there is of course no question of putting the customer first—because there is no customer. It is the bank trading on its own behalf. That involves a totally different culture and mindset. If you want to preserve in banking—as I think we should—the culture that my noble friend believes in, as he said on Thursday, then you should ban proprietary trading by banks altogether. It is fine for hedge funds. It is an excellent activity for them and they can do it very well. I am not suggesting that it should be made an illegal activity, but banks should not do it. Most of us on the commission—though clearly not all—came to that conclusion. We called for a review because we were unsure about the practicalities. There is some difficulty in defining the sort of proprietary trading that should be banned for banks because there is a need for market-making. The line between market-making and proprietary trading is very clear in the minds of those doing it, but whether it is clear in law is another matter. We thought it useful to look at the American experience.
Finally on this, I say to my noble friend that we should look at the American experience but not too much at the American legislation. The complexity and detail of the American legislation was simply appalling. It is a problem across the legislative system that they have in the United States. My noble friend quite rightly referred to the Volcker rule because Paul Volcker insists that there should be a ban—for cultural reasons, above all. He also told us, when he gave evidence to the commission, that the legislation introduced in Congress was certainly not the sort he had in mind.
Having said that, I wish the Government well in this. It will be an important review, for the reasons that I have outlined. I commend the Government for repenting, if slightly belatedly—but as the right reverend Prelates on the Bishops’ Benches will know, better “the sinner that repenteth”, et cetera. Thank you very much.
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