Covid-19: Financial Markets

Lord Callanan Excerpts

Wednesday 25th March 2020 Lords Chamber

[Lord Bates]

To ask Her Majesty’s Government what steps they are taking to address short-selling on financial markets of shares in companies based in the United Kingdom impacted by the COVID-19 pandemic.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, short selling is a legitimate investment technique that contributes to orderly and open markets, supporting many consumers. As the recent Financial Conduct Authority statement makes clear, short selling is not responsible for recent market falls, and there has been a decrease in its activity in recent days. We continue to monitor activity in UK markets. It is our view that there should be a high bar for the FCA to impose a short-selling ban.

[Lord Bates (Con)]

I thank my noble friend for that Answer and personally thank him for all that he and his department are doing at this time to support British business. However, can he understand the anger and concern felt by many? At a time when the British Government and British taxpayer are mounting an unprecedented collective national effort to stand together with businesses and save jobs, a small number of hedge funds are cashing in on the crisis by short selling stock in struggling businesses, pulling the financial rug from under their feet and those of their employees, and betting on the British Government and taxpayer to pick up the pieces. Can my noble friend confirm that short selling positions have tripled in London over the past week? Will he make it clear to those hedge funds that their actions may at present be legal but are far from moral at this time? Will he echo calls from the Governor of the Bank of England, Andrew Bailey, for those responsible to stop, and if they do not, will he urge the regulator to use the existing powers to ban the practice for the duration of the crisis, as other jurisdictions have done?

[Lord Callanan]

I thank my noble friend for his comments but taking short and long positions allows for the hedging of risks, and short selling can therefore benefit a wide range of investors, not just hedge funds, by helping them to manage the risk in their portfolios, particularly when the market is volatile. Many of these investors are ordinary investors, including pension funds for employees of companies and local government. However, I understand my noble friend’s point, and the regulators are closely monitoring activity. I cannot comment on the figures that he quoted about the extent of short selling in recent days but overall, the FCA’s reporting data shows that aggregate net short selling activity reported to the FCA is low as a percentage of total market activity and has in fact decreased over successive recent days.

[Lord Harris of Haringey (Lab)]

My Lords, I refer to my interests in the register as chair of National Trading Standards and of the Fundraising Regulator for charities. The Minister just responded in quite strange ways to the profiteering by some hedge funds. Would he also like to comment on the profiteering that has taken place, with many retailers jacking up the prices of commodities that currently appear to be in short supply? I am sure he is also aware that many outrageous and unscrupulous scammers are going round, preying on all sorts of people, including some who are very elderly, by purporting to be offering Covid-19 cures or testing, and there are even people going around claiming to collect money for Covid-19-related charities which do not exist. What powers and extra support will the Government give to stamp down on all those practices?

[Lord Callanan]

I thank the noble Lord for his question. He is right to draw attention to the profiteering from a small number of retailers. We are aware of that and are looking urgently at what legal powers and frameworks are in place in order for us to do something about it. We will not hesitate to take any action that is required. With regard to his second point, I am afraid that, sad to say, a small number of unscrupulous and callous individuals will always seek to take advantage of any crisis.

[Lord Purvis of Tweed (LD)]

My Lords, I think we are all very grateful to the noble Lord, Lord Bates, for tabling this question. The Prime Minister’s comments at Prime Minister’s Questions were welcome; he said that the Government are considering further legislative proposals to address the very point about profiteering. The gaming of the financial services sector is often hidden from the public eye but is just as insidious as those people who seek to make profit out of a national emergency. Perhaps the figures that the Minister referred to reflect the fact that a number of weeks ago the European Securities and Markets Authority limited the capacity for short selling, which included the UK, and the UK Financial Conduct Authority quite rightly banned the short selling of 140 Italian and Spanish stocks, aware that this is a considerable issue. The noble Lord, Lord Bates, referenced other countries: South Korea has banned short selling for six months and limited buy-backs, and Spain has banned them for a month. If they are able to take preparatory action, it is quite right that the UK does so as well. The Minister referred to what a high bar might be; this emergency is a high bar to take precautionary action to ensure that the very many families and households who will suffer this emergency for months and potentially years to come will not see those within the financial services sector profiteering from their pain.

[Lord Callanan]

A ban has already been imposed on the short selling of stocks because regulators in their own individual countries have imposed bans. A small number of European countries like the ones he mentioned have imposed bans on short selling, and of course the London authorities have then reflected that in our own regulation. Most of the major trading houses have not yet instituted bans, but this is something that we are looking at closely. The FCA has the powers to restrict and prohibit short selling if that is required. We are keeping this under constant review and there is no evidence that it has contributed to the fall in the market. Moreover, as I have said, the level of short selling over recent days has in fact been declining.

[Lord Adonis (Lab)]

My Lords, referring to the question put by my noble friend Lord Harris, do the Government still have the statutory power to regulate prices?

[Lord Callanan]

There are competition issues involved in doing that, as the noble Lord will be well aware of, given his experience. We have some powers in certain sectors and at the moment we are looking at this within the existing framework of legislation.

[Baroness Altmann (Con)]

My Lords, I understand my noble friend’s words about wishing to maintain orderly markets. While we are traditionally a country that supports free markets, I too echo the concerns expressed by my noble friend Lord Bates and others around the House today that in the current circumstances, which are exceptional, there are serious concerns about the orderliness of the markets. Those concerns are not only about short selling but also program trading and algorithm trading. There has been evidence over the past few months that some operators in the market have been behaving unscrupulously because they have advance information that is just a few nanoseconds ahead of others, which has led to enormous profits. Will the department consider looking at the implications of this for UK pension funds, which are currently struggling in the market environment that we are facing during this emergency, and will it consider whether some other measures might be necessary?

[Lord Callanan]

I know of the close interest that my noble friend takes in pension funds, so she will be aware that many of them also take advantage of taking both short and long positions to allow for the hedging of risk. However, I can certainly assure her that we continue to closely monitor market activity, including short selling activity, and we are constantly evaluating our approach to ensure that it is the right one for consumers. Further, if it is required, we will not hesitate to take action.

[Lord Collins of Highbury (Lab)]

My Lords, as the Minister and other noble Lords have said, these are exceptional circumstances and matters are moving very fast. However, the noble Lord seems to be unaware of the figures indicated by the noble Lord, Lord Bates. I know that it is the responsibility of the FCA to consider any measures that are necessary on short selling, but it is also a matter for the Treasury to consult. Can he advise us on just how frequently, in this fast-changing situation, we are liaising with the FCA so that we actually do take action when it is needed—and fast?

[Lord Callanan]

Perhaps it would be helpful to the House if I set out what powers the FCA has in this area. Under the short selling regulation, the Financial Conduct Authority has a range of powers which require the holders of net short positions in the issued share capital of a company to make notifications once the thresholds have been breached. It also provides the FCA with the power to suspend short selling or limit transactions where there are significant falls in prices. As I have said, this is being monitored constantly and as yet there is no evidence that it has contributed to the fall in market prices. It forms a relatively small proportion of trading activity at the moment and when studies were made after the financial crisis, again there was no evidence that short selling had contributed to the overall fall in the markets. Nevertheless, it is a situation that we are keeping under constant review and I know that the FCA is watching market activity very closely.

[Lord Faulkner of Worcester (Lab)]

The Government obviously have no responsibility for what is happening in the American markets, but are they watching closely the reports of the short-selling activities in the financial sector, which are having an even more devastating effect than in this country? Are there any lessons that we should learn from the experience in America?

[Lord Callanan]

The noble Lord makes a good point. I am sure that the FCA and the regulators are closely watching what is happening in all markets. As I mentioned, when short selling, certainly in European markets, is banned in certain exchanges, we also limit trading in those countries. So, yes, it is something that we monitor closely.

[Lord Harris of Haringey (Lab)]

The noble Lord will be aware that his right honourable friend the Prime Minister constantly evokes comparisons with the leadership shown during the Second World War. During that war, profiteering was considered a very serious matter, yet we have just heard that nothing is going to happen very quickly on short selling. Given that the Minister dismissed the activities of scammers preying on vulnerable people simply as something that happens all the time, and given that the aim is to try to get everyone in this country to work together and to support each other, does he not think that the Government should take firmer action?

[Lord Callanan]

I certainly did not dismiss that activity; I said that it was appalling and callous, and obviously I wish that people would not indulge in it. However, criminal law and sanctions exist for activities of this sort. We have some powers in this area, and the department’s officials are looking at this matter at the moment. If wrongdoing and illegal activity are proven, we will not hesitate to take the strongest possible action. I view this activity as appalling and I apologise to the noble Lord if I did not give that impression in my earlier answer.

[Lord Oates (LD)]

My Lords, on the subject of irresponsible behaviour, perhaps I may refer to an issue that has been raised with me by medical personnel working long shifts. When they get home and try to sleep, they find that other people—perhaps because they are at home—are playing loud music, and this causes them real difficulty. Will the Minister join me in asking everybody to act responsibly and to understand that a lot of people are working shifts at the moment and need their sleep?

[Lord Callanan]

We are getting off the subject a little—I never cease to be surprised by noble Lords’ ingenuity in moving the subject on to their favourite topic of the day—but I certainly agree with the noble Lord. This is an important issue. With many people, particularly in big cities, living in flats that are currently all occupied, often with young families, it is incumbent on all of us to be good neighbours. We need to bear in mind the limitations and difficulties posed for shift workers and those with young children and so on, who in many cases are finding it difficult to cope at home at the moment.