My Lords, before I turn to the substance of these amendments, I would like briefly to pause and reflect on the process that has brought us to this point. Throughout the course of this Bill the Government have consistently tried to adopt the most constructive approach possible, welcoming contributions from all sides to help us get this right. I am particularly grateful for the constructive comments to that effect from my noble friend Lord Lawson and the most reverend Primate. I thank them for those.
Our ambition has just been to get this right. Even before the Bill was introduced to Parliament, we asked the PCBS to conduct pre-legislative scrutiny. We considered seriously its recommendations both on the draft Bill and on banking conduct and standards more generally. Almost a third of the Bill before us today was either added or heavily amended in response to its recommendations. We have also showed ourselves to be open to considering ideas proposed by the Opposition, both in the Commons and in this House. Where we have been convinced by the points made, we have been willing to amend the Bill to reflect that. I think that the sentiment of the House has demonstrated that. That includes changes to the process of scrutiny of the ring-fencing proposals, introducing the single bank separation power, putting the so-called Haldane principles in the Bill and clarifying the regulator’s objectives.
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On the specific subject of the independent review of the ring-fence, the Government have never opposed the principle of a future review. How could we when the ring-fence itself was the product of an independent review, the ICB? Indeed, my right honourable friend the Chancellor told the PCBS in February this year that,
“we should have a review about whether the John Vickers reforms are working”.
Therefore we have been more sceptical of the need to legislate for this review. After all, the ICB itself needed no legislation to conduct its painstaking research and rigorous, independent analysis. However, having listened to the arguments made, in particular in this House by members of the PCBS, we have accepted the case for a statutory review of the ring-fence in the interests of certainty, to determine, as my noble friend just pointed out, whether it is as robust as I have implied we would like it to be.
Government Amendments 11 and 16 therefore provide for a review of the operation of the ring-fence, to be conducted by a panel of independent experts once the ring-fence has come into force. In drawing up these amendments, the Government have consulted closely with members of the PCBS. My right honourable friend the Chancellor and I met PCBS representatives to discuss their concerns. We have made our officials available to them to clarify any points of technical detail and have shared drafts of our amendments in advance—which, incidentally, explains why the drafting of the PCBS’s amendments so closely matches our own.
Following those discussions, the Government believe that our amendments address the substance of the PCBS’s concerns. To reflect that ring-fencing is a bold new step, the review’s central task will be to assess how well the ring-fence is working. Its conclusions are not constrained; it can make any recommendations it sees as appropriate. If it believes that the ring-fence is in need of improvement or repair, it will be able to make recommendations as to what changes in the legislation or rules are required to fix it. Therefore I can give my noble friend Lord Lawson the unequivocal commitment which I think he asked for—I will test whether I have got this right—that if the review concludes that the
ring-fence is irreparably broken, it will also have the scope to recommend an alternative approach altogether. That will, of course, include full separation.
The review will be conducted by a panel of experts who are independent of the Government, the Bank of England and regulators, as well as financially independent of the industry. Amendment 16 gives it a statutory power to obtain whatever information it believes is necessary to complete its work. Despite our approach in developing these amendments, it appears that some areas of difference remain, which are reflected in the various alternative amendments that have been tabled for debate today. I will address those issues now. I think it will go some way to helping us see how all this will be turned into something that makes coherent sense.
First, I will address the issue of the review panel membership. The Government do not believe that requiring pre-approval, as in Amendments 4, 5 and 13, is proportionate or appropriate. At present there is only one government appointment for which pre-approval is required: the appointment of the head of the Office for Budget Responsibility. That arrangement is supported by a strong body of academic literature that emphasises the essential need for credible and independent fiscal forecasts and statistics. No comparable evidence base exists in the case of an independent review of ring-fencing.
I also note that pre-approval of this sort is not required for the Governor of the Bank of England or the heads of the regulators, so is membership of a review really a more weighty responsibility than any of those posts? Finally, Sir John Vickers and the ICB were not subjected to any pre-approval requirement, yet their independence could hardly be questioned. As noble Lords will see from government Amendment 11, we have already accommodated the PCBS’s desire for a parliamentary role by requiring consultation with the chair of the Treasury Committee before review panel members are appointed. I hope that that is sufficient to satisfy any concerns. I therefore call on the noble Lords not to press those amendments.
On the scope of the review, Amendments 4 and 14 similarly specify recommendations that the review must consider. As the review will be able to make recommendations on whatever it sees as appropriate—including recommended alternatives such as full separation, or indeed other ideas if they are appropriate—I do not believe that this is necessary. Indeed, it could even cast doubt on whether the review had the right to consider matters not specified in the legislation, which would constrain it, contrary to the PCBS’s intentions. However, I believe that the Government’s amendment and the PCBS’s amendment are sufficiently close in substance that, on the basis of my clear commitment, this amendment should not be pressed.
Amendments 5 and 15 would expressly require the review to consider the case for full separation as an alternative to ring-fencing. While I believe the review should be free to recommend what it wishes, the Government do not, however, believe that it is appropriate to require it to consider a specific alternative, to privilege in legislation consideration of one possible conclusion of a review. Let me be very clear: if the review concludes that the ring-fence has failed beyond repair, it will be
able to propose an alternative policy. That could be full separation, if the review believed that to be the best alternative course. It could, however, be other things too.
On both of these points, the Government’s amendments deliver the substantive objectives of those tabled by the PCBS. Indeed, as the review will also be able to consider the case for a ban on proprietary trading—on the model of the US Volcker rule—they also meet the objectives of Amendment 181, which we will debate later. Therefore, we can use this device to ensure that, if there are emerging issues with respect to proprietary trading, the review has the flexibility to make recommendations in that area too. I therefore hope that the noble Lords will not press their amendments.
I turn next to Amendment 12, which would shorten the period between ring-fencing coming into force and the review being conducted. On this point, the Government see the force of the arguments made by the Opposition, and agree that an earlier review than that proposed by the PCBS could be helpful. Provided that the regulators agree that a review after just two years is feasible, we would certainly be willing to consider this change. We are quite open-minded on the timing and I hope that the various parties will find a way of reaching an agreement on that.
Finally, I will address the question of whether the legislation should establish an independent review as a trigger for a move to full separation, as provided for by Amendments 5, 6, 15, 195 and 196. The Government continue to believe that a reserve provision for full separation is at best otiose, and at worst bad law. As I have already said, a review that concluded that the ring-fence was irreparably broken could recommend a shift to full separation instead. It could, however, recommend a shift to some other option too. If it did, and if the Government of the day accepted that recommendation, then a reserve provision for a full separation would not be appropriate in any case.
Imagine, however, that a review did propose full separation, and the Government of the day accepted that recommendation. Simply enacting a reserve provision would be a very poor way to implement such a significant change. It would allow for no detailed scrutiny, no debate, and no thorough testing of the arguments by Parliament. Yes, there would have to be a review, but the ICB proposals went through Second and Third Reading debates and extensive Committee scrutiny. None of that would be available to the outcome of this review. The Government, therefore, remain of the view that inserting a reserve provision now would be bad legislation, so I call on the noble Lords not to press their amendments.
Some have argued that a reserve provision of this sort could act as a deterrent, reinforcing the ring-fence by threatening dire consequences in the event that banks “game” the rules. Personally, I do not find this convincing. For a deterrent to work, consequences must follow from the bad behaviour that it is intended to deter. But the amendments before us today make no mention of gaming. Under these amendments, a review could conclude in favour of a switch to full separation without even having considered whether any gaming had taken place. How, then, is that a deterrent?
I should also remind the House that we have already provided for a powerful deterrent against gaming, by giving the regulator the power to force a single group that has gamed the rules to separate. In my own experience as a banker, I can absolutely make clear that I was much more concerned about a regulator dealing with my own institution and threatening to make changes there if I did not behave than considering what my competitors were doing. The powerful tool is the direct, specific action against an individual institution. That is what the existing electrification we have included provides for. For me, that is the appropriate additional tool for the regulator. By contrast, even if the review did recommend full separation on the grounds that some firms had gamed the ring-fence, forcing separation on the entire sector—the innocent as well as the guilty—would be unjust and disproportionate. Indeed, if firms are at risk of being split up whether they game the ring-fence or not, they could conclude that they might as well game the rules, and cash in while they can. So, far from deterring gaming, a reserve provision might actually encourage it.
The Government have approached this issue in an open and constructive spirit. We have listened to the concerns that have been expressed in this House and elsewhere. The Government’s amendments meet the substance of those concerns and deliver an independent, expert review of the ring-fence, once it is in force. This will ensure that it remains fit for purpose.