Financial Services (Banking Reform) Bill

Debate between Lord Higgins and Lord Turnbull

Wednesday 23rd October 2013 Lords Chamber

[Lord Higgins (Con)]

My Lords, I also support my noble friend’s amendment, but with some qualifications and a request for some clarification. The amendment simply refers to “proprietary trading by banks”; that does not distinguish between one part of a ring-fenced bank and another. The arguments on this issue are so clear that we should take a perfectly clear view that there ought to be no proprietary trading whatever by any ring-fenced bank.

There is also no real need to wait three years for such an inquiry. My noble friend referred to the Volcker rule in America; not all of us in this Chamber have Paul Volcker as a personal friend, but I have great respect for him. He is absolutely right that this should not be carrying on in the United States. Although it may be that there has been a decrease for the moment, over a period of three years the situation might change somewhat. Therefore, we could take a clearer view on this between now and Report than is set out in the amendment. As my noble friend has pointed out, this is effectively the banks’ carrying out risky trading on their own behalf—in the past, not infrequently, it was risky trading on their own behalf with clients’ money—and this, again, is a crucial point. Perhaps we should clarify that aspect of the matter, but I have not the slightest doubt that this is a move in the right direction and I hope that we can make rapid progress on it.

[Lord Turnbull]

I reassure the noble Lord, Lord Higgins, that it is certainly not intended, while this activity might remain within a banking group, that it should be done, under the plan, by a ring-fenced bank. One of the reasons why we took the view that we should wait and see is that the dividing line between a proprietary trade and a trade on behalf of a customer is not straightforward, which is why it is very difficult in the US. For example, if I lend the noble Lord money he may seek some kind of hedge which I would provide. That might mean that my position as the bank is no longer what I really want it to be. As a bank, I would look around to see what my colleagues have done during the course of the day, and we would then add up all the positions that we have taken. We may well find that that position is not where we really want to be, so on the following day the bank goes out and undertakes a trade which gets it back to the degree of hedged position that it wants. Was that a proprietary trade or was it a trade that was a consequence of serving a customer? That is why this is actually very difficult and why we are wise to wait and see whether workable definitions could be found of what constitutes real proprietary trading and of what constitutes trading in response to a customer. This measured amendment enables us to do precisely that.

[Lord Deighton]

My Lords, the ICB considered in detail the case for a ban on proprietary trading in the UK, but decided in favour of ring-fencing. The PCBS heard evidence from a wide range of sources that prop trading does not appear to play a large role in the UK at the moment—as my noble friend Lord Lawson pointed out—nor did it play a significant role in the financial crisis. The noble Lord, Lord Turnbull, has already addressed the question of my noble friend Lord Higgins, but it should of course be noted that the ring-fenced banks will be banned from proprietary trading as well as from market-making and other forms of trading activity that would expose them to risks from global financial markets. Therefore, from a prudential perspective, much of the risk posed by prop trading can be addressed by a suitably robust ring-fence which is, of course, the thrust of our legislation. This was the point made by the PRA in response to questions from the PCBS.

It is also worth noting that the evidence heard by the PCBS also suggests that prop trading is not necessarily the sole avenue for the cultural contamination of banks. For example, the PCBS highlighted in its excellent report the serious failings in culture and standards at HBOS, a bank which did not engage in any prop trading at all. Indeed, it is perfectly possible to run an integrated securities business with full integrity in a way that manages any potential conflicts of interest quite satisfactorily, so they do not necessarily follow. It is far from clear, therefore, that prop trading is the real problem facing the UK financial system, or that structural solutions address cultural problems. In light of that, and of observations about the practical difficulties of a ban on prop trading, as it is being attempted in the US through the Volcker rule, the PCBS did not recommend a ban on prop trading.

It is not wholly clear what further evidence would support a different conclusion to that reached by the PCBS in its own assessment, so it is unclear what a further review into proprietary trading within such a short period of the PCBS’s own report would add. Still less is there a need for such a review to be followed immediately by an independent review of the same question. Of course, we have no issue with reviews as a matter of principle: we are just not sure that, in this case, legislating for one in advance really does much for us.

As the findings of the PCBS do not suggest that prop trading presents a serious prudential risk at this time, I do not think we need to legislate for the regulator to carry out a further review. The absolutely valid point made by my noble friend Lord Lawson was that this could change in the future. That is what we are trying to address. Should that happen, the PRA has made it clear that it already has the powers it needs to bear down on prop trading where it endangers the safety and soundness of a firm or where the risk incurred is not consistent with the publicly stated risk appetite of a bank.

Moreover, monitoring and reviewing all risks to a bank constitutes an essential part of the PRA’s work. The PRA’s approach is to insist that firms adopt and follow a risk appetite that is consistent with the PRA’s statutory objective to promote the safety and soundness of firms that it regulates. This will include regular monitoring and review of all risks, not limited just to those associated with prop trading. Therefore, to require the PRA by legislation to undertake such a review seems unnecessary. Should we legislate for a review of how reference rates are set, for example? Should we legislate for a review of mis-selling practices? Why, therefore, should we do it for prop trading? It is not apparent to me what problem a review would solve. While I think that reviews can play a useful role, in this case we are not sure that it is justified in advance.

We need to give the regulator the space to allocate its resources in a way that is appropriate and proportionate when considering all the different risks to the UK financial system, not only focusing on one particular risk. Our more widely framed reporting requirements allow for this. For all of these reasons, I do not think that a review on the particular issue of prop trading is necessary. The regulators are already subject to extensive reporting requirements. I expect the PRA to make the Treasury, and Parliament, aware of any emerging risks it identifies, whether through prop trading or anything else. The deputy governor for financial stability has already written to the chair of the Treasury Committee, offering to discuss arrangements for reporting. I therefore ask the noble Lord to withdraw his amendment.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Higgins and Lord Turnbull

Monday 29th November 2010 Grand Committee

[Lord Higgins]

I shall try to speed up the proceedings in the light of what the noble Lord, Lord Barnett, has said. We have a specific amendment to the Bill and the Minister can say one of three things. He can say: “I accept it and will table an amendment at a later stage”; “I do not accept it for the following reasons and we will return to the matter if we wish at the next stage”; or, “I am not sure, so I’ll think about it and return to it at the next stage”. I am not in the least clear whether he proposes to accept, reject or think about the amendment.

[Lord Turnbull]

May I respond to the noble Lord, Lord Myners? He talked about not restricting the OBR’s ability to comment on general economic matters. We are trying to create an instrument of fiscal policy, not a council of economic advisers that can comment on issues, such as whether the economy is competitive, whether we have the right set of industry instruments or whether the policies are correct for the flexibility of the labour market. The OBR can forecast the effects of the policies as they stand. There are references to the Government providing the OBR with as much information as possible to enable it to make those forecasts, but it is not the OBR’s role to become a general commentator, as happens in some other countries, on all aspects of economic policy generally. Some of the amendments seem to be taking us towards that goal.

--- Later in debate ---

[Lord Higgins]

In moving the amendment, I think that it would be helpful to discuss Amendments 21, 33 and 38. I shall dispose of Amendment 38 immediately as it is rather oddly grouped with the other amendments. It refers to leaving out “paragraph (c)”. That part of the Bill says that the OBR must,

“publish the report … lay it before Parliament, and … send a copy of it to the Treasury”.

I tabled the amendment as it seems rather absurd if the office has to publish and lay the report before Parliament that it should need to send a copy to the Treasury. We could make a substantial saving in public expenditure on postage by eliminating that and I hope that my noble friend will accept that amendment.

Amendments 7 and 21 take a diametrically opposed view to that expressed by the noble Lords opposite in Amendment 33. Amendment 7 states:

“The Treasury shall not make economic forecasts covering the same areas as those of the Office for Budget Responsibility”.

There is a case for including that in the Bill because, otherwise, after going through all the expense of the OBR, we will find the Treasury still duplicating it unnecessarily. I hope that my noble friend can accept that amendment.

Amendment 21 is an important amendment dealing with the forecasts and suggests that we should insert,

“which are agreed with the Bank of England; the agreed forecasts will then be used both by the Treasury and the Bank of England”.

If our economy is not to be managed in a totally schizophrenic manner between the fiscal and monetary side of things, it would be quite absurd if the two bodies will not use the same forecasts. Otherwise we are bound to end up with a situation where monetary policy goes one way and the forecast on which the decisions are based may be quite different from that of the Office for Budget Responsibility. That seems an eminently sensible suggestion. It is categorically contradicted by the amendment in the name of the noble Lords, Lord Peston and Lord Barnett, which says that the,

“Office must always act independently of the Monetary Policy Committee of the Bank of England, especially in regard to its forecasts”.

I do not think that the Bank of England can have one set of forecasts and the Treasury another without there being some risk that economic policy is in conflict between monetary and fiscal policy. I beg to move.

[Lord Turnbull]

My Lords, I speak almost in direct contradiction to the noble Lord, Lord Higgins. The current draft of the fiscal framework says:

“The Government intends to adopt the OBR’s fiscal and economic forecasts as the official forecast of the Budget Report. The Government retains the right to disagree with the OBR’s forecasts and, if this is the case, will explain why to Parliament. The Treasury will continue to maintain the necessary analytical and macroeconomic expertise to provide on-going advice to the Government”.

I would say that that is absolutely spot on and what the relationship should be. Treasury Ministers have the ultimate accountability and should, if they feel it essential, be able to state their view and then justify it in a very important area, which is different from monetary policy. They take fiscal policy decisions; they do not take monetary policy decisions. This is the correct formulation and I hope that it will be supported. The Treasury will, of course, need to maintain a separate apparatus. If the entire forecasting apparatus were transferred to the OBR it would be necessary for the Treasury, for all sorts of other purposes—if only to answer questions from Parliament—to retain some apparatus. Then you would get unnecessary duplication.

On the question of whether the Bank and the OBR should agree a common forecast, it is surprising that someone from the Conservative Party is suggesting a monopoly. I think that the element of competition is important and, if the two forecasts differ, we ought to know why. Parliament, the EAC and its equivalent committee, the Treasury Select Committee, should examine why the two bodies have different views, rather than try to suppress them and coerce them into some kind of lowest common denominator. Therefore, I am not attracted at all to this group of amendments and I think that paragraph 3.7 of the draft charter is exactly where we should be.