My Lords, the PCBS did express concern, very understandably, despite the fact that proprietary trading is not as big a part of the current challenge as it perhaps was and perhaps will be. The concern is—just to show that I have grasped the point—that it will come back and become a major risk
in the future. Therefore, the PCBS tabled an amendment that proposed two reviews. The first is a requirement on the regulator to review the steps it has taken to bear down on proprietary trading, and the difficulties it has encountered. The second, following such a review, would be a review commissioned by the Government into the issue, and into the case for changing the law.
I reassure noble Lords that at present we have a robust set of safeguards to deal with risks from proprietary trading. Indeed, as Andrew Bailey made clear in his response to the PCBS, the PRA thinks that it currently has the appropriate powers and tools to address risks from proprietary trading where it endangers the safety and soundness of a firm. The PRA continually monitors and reviews all risks that banks take, including those from proprietary trading, and it uses the capital regime to make these risks safe.
The new conduct regulator, the FCA, has a similarly wide range of tools, including sanctions, to ensure that banks adhere to a high standard of conduct in their business. Finally, ring-fenced banks, which are at the heart of this new legislation, will already be banned from any proprietary trading, further shielding them from any risks to which it might give rise. Therefore, the Government do not believe that there is a case for reviewing a ban on proprietary trading so shortly after these reviews and before ring-fencing has been put in place.
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However, while the regulators are currently equipped to deal with risks if and when they arise, it seems only reasonable that these arrangements should be reviewed over time and that we should take a strategic look at what any future risks from proprietary trading might mean for the UK banking sector as a whole, including whether the regulators’ powers are appropriate.
I believe that the approach recommended by the PCBS on this is the right one. First, it should be for the PRA and FCA to review the situation, assess their powers and recommend further action to the Government. However, it also seems right that we review this matter once ring-fencing is in place and its effects have been analysed. It would therefore make sense for any such review to incorporate the thinking from the wider review into the ring-fence.
Therefore, I propose to noble Lords that the Government commit to a review of proprietary trading if the PRA deems it necessary, having evaluated its powers and practices in this area. The Treasury will therefore ask the PRA whether it feels equipped to deal with any risks from proprietary trading that may have arisen by that time. If the PRA does not think that it has the right tools, the Treasury will conduct a review of proprietary trading and its impacts, including on ring-fenced banks. That review of course will consider further safeguards against potential future risks from proprietary trading, including a ban, should it conclude that such safeguards are necessary.
Any review that does its job will also consider the experience that other countries have had with structural reforms. The Volcker rule in the US would of course be an obvious candidate, as my noble friend Lord Lawson said. By the time of the review, implementation
of the Volcker rule—“encrusted with barnacles” was, I think, the phrase used; my notes refer simply to “practical difficulties”—may be further advanced. It is more likely that we can learn lessons then, rather than in three years’ time.
It is reasonable to suggest that ring-fencing should be in place before such a review takes place. I suggest that it should take place only after ring-fencing has been in place for at least a year, and possibly should coincide with the wider review into the operation of the ring-fence. The evidence base will then be much richer.
Therefore, I confirm to my noble friend Lord Lawson that I think we are in vigorous agreement and that we will come back at Third Reading with some agreed wording—in particular, to deal with the timing. On that basis, I ask my noble friend to withdraw his amendment.