Financial Services Bill

Baroness Penn Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Lord Eatwell (Lab)]

My Lords, this request for a review of short selling is essentially a request to focus on just one of the aspects of the financial markets today that may contribute to enhanced instability in times of stress. It is not just short selling that involves the sale of borrowed assets—this is what the repo market, for example, is all about. The repo market was central to the dangerously short-term funding of the banking sector in the run-up to the financial crisis of 2007-9.

Of course, short selling is prominent because it is a factor in falling markets, when money is being lost, as opposed to similar practices in rising market bubbles, when money is being made. Of course, the short sellers sometimes get their comeuppance, as has been mentioned by several noble Lords in reference to the case of GameStop. The fundamental question is not whether short selling is a process that can be abused—of course it can. What is important is whether the very existence of the practice contributes to market instability and risk or, as has also been argued, to price discovery and greater liquidity.

Those questions may be asked of many practices in our financial markets today, and, at a time when the UK is rethinking its economic and financial future after leaving the European Union, perhaps the time is right for such a wider review of permitted practices. This could begin with consideration of the impact of trading in borrowed assets—as well as, of course, naked transactions—in forward markets.

Since the liberalising years of the 1970s and 1980s, a wide range of these market practices have developed, with potentially serious destabilising consequences—indeed, we have seen these. As such, does the Minister agree with the many noble Lords who have argued that it is time to stand back and think through whether matters have gone too far, are just right or have not gone far enough? Perhaps such a review is too specific for the regulatory framework review that is going on at the moment because, after all, that is about the framework. However, it is necessary to consider, from time to time, practices that will inevitably have downsides but may also have upsides. That sort of consideration should not be delayed at a time when market regulation is changing significantly, with the exit from the European Union.

[Baroness Penn (Con)]

My Lords, it is important to stress, as a number of noble Lords have done, that short selling is a legitimate investment technique that can contribute to orderly and open markets supporting many consumers. Taking short and long positions can ensure that investors are able to manage risk and volatility in their portfolio, particularly during uncertain times; for example, if a firm has purchased a large number of shares, that firm might want to short some of those shares if they have a volatile price.

As my noble friend Lady McIntosh of Pickering ably set out, the UK’s regulatory regime for short selling is predominantly set out in the short selling regulations, which were introduced in 2012 to regulate short selling practices while safeguarding companies and the financial system. Among other things, it requires persons to notify the FCA of the size of their short positions in shares traded on a UK trading venue. It also gives the FCA various powers to intervene in response to exceptional circumstances that pose a serious threat to financial stability or market confidence in the UK. These include requiring the notification or disclosure of short positions, as well as restricting short selling to periods of up to three months. Furthermore, the FCA can temporarily prohibit or restrict short selling when the price has fallen significantly during a single trading day relative to the closing price of that instrument on the previous trading day. This regime is working as intended, providing the necessary safeguards to allow the operation of a fair and effective market. The Government continue to work closely with the regulators and market participants to monitor the effectiveness of the entire regulatory regime to ensure that legislation continues to be fit for purpose and delivers on its objectives, in particular to support economic growth and maintain financial stability.

As my noble friend Lady McIntosh of Pickering noted on the example of GameStop, the UK short selling regime was not breached because it does not apply to shares admitted to trading on US trading venues. Furthermore, the regime that I have just set out that applies to short selling would mean that in such a scenario in the UK the FCA would have been able to identify short positions building up and would have been able effectively to engage with the firms holding the short positions in that case.

I am not sure that I recognise the characterisation of the Bank for International Settlements’ report set out by my noble friend Lady McIntosh of Pickering, but I will happily write to her on that matter.

A number of noble Lords have spoken, from different perspectives, in favour of a review of short selling. In response to a number of direct questions about what jurisdictions such a review would look at or whether it would look at relaxing or shoring up such regulations, at this point the Government do not see this issue as the most pressing area of financial services regulation to look at. We see no need to conduct a review of this legislation at this time, so I ask my noble friend Lady McIntosh to withdraw her amendment.

[Baroness McIntosh of Pickering (Con) [V]]

I am grateful to the Minister and to all those who have contributed. I recognise the role that the noble Baroness, Lady Bowles, played in the adoption of the current EU regulation. I am grateful to my noble friend and others who set out the arguments on one side or the other. I have a great deal of sympathy with my noble friend Lord Holmes of Richmond and his earlier amendment calling for a review of all financial regulations and regulators’ rules, and I note that my noble friend Lady Penn does not see the need for this at present.

This is something that I will personally continue to monitor. I have no doubt that my noble friend Lady Noakes, who speaks with great authority and expertise on these issues, and my noble friends Lord Sharpe and Lord Trenchard would prefer that many of the regulations would just go away, but I am rather pleased that they are not going away for the moment. My concerns have been addressed to a great extent. I will continue to support my noble friend Lord Holmes’s call for a further review of all these practices. I am grateful to have had the opportunity to debate these issues and I beg leave to withdraw the amendment at this stage.

--- Later in debate ---

Amendments 91 to 98 not moved.

[Baroness Penn (Con)]

My Lords, this may be a convenient moment for the Committee to adjourn.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

That concludes the work of the Committee this afternoon. As always, I remind Members to sanitise desks and chairs.