Draft Financial Services and Markets act 2000 (Ring-fenced Bodies, core activities, excluded activities and prohibitions) (Amendment) Order 2016

George Kerevan Excerpts

Monday 24th October 2016 General Committees

[George Kerevan (East Lothian) (SNP)]

It is a great pleasure to serve under your chairmanship, Sir Roger. I shall not detain the Committee terribly long, or challenge the order, but I do wish to place on the record some concerns I have, which I hope will be taken away by the Minister and, in due course, noted by the regulatory authorities.

We do not yet have the ring fence. In fact, it will take a whole six years from the initial legislation in 2013 to the ring fence coming into operation in 2019, which is rather a long time, and we will not know whether it is working until some considerable time after that. It is a major experiment, given that we are trying to solve a problem that occurred way back in 2007-08.

My concern, which is shared by a number of colleagues on the Treasury Committee—that is why I feel emboldened to raise it today—is that the length of time it is taking to get the ring fence in place is leading to a bit of regulatory arbitrage on the part of the banks. I understand that—I am not being particularly censorious—but the banks are clearly trying to ensure that the details of the ring fence are placed best for their business, to give them the widest flexibility in business. I understand that, but six years is rather a long time for them to nibble away at the principle of the original legislation.

Two issues in the proposals give me a bit of concern. Let us just remind ourselves that the ring fence is meant to stop the retail side of banks dealing in investments in a way that leads to institutional exposure that it ultimately falls back on the taxpayer to cover. The proposal to loosen the regulation on banks acting as trustees and investing on behalf of clients’ trusts seems, at first, to be innocuous. The draft notes from the Treasury mentioned widows and orphans, and it sounded very much like old-fashioned banking, but anyone who knows anything about contemporary retail banking knows that retail banks are keen to expand their activities on behalf of high-net-worth clients all over Europe.

The changes in the order in fact open the door to retail banks investing heavily, in a very expanded way, on behalf of private clients, here and across the EU and the European economic area. That might be a sensible reform, but it is a door that could be opened ever wider by commercial banks, particularly when we have a runaway boom. Will the Treasury look at that carefully? If all that is intended is to ensure normal investment activity on behalf of small trusts and private clients—the average widow—then fine. But if it is going to allow more than that, the Treasury needs to look at these rules in greater detail.

The other issue of modest concern is allowing the retail side of the ring fence to invest directly in special vehicles for infrastructure investment. The order specifically states that that covers infrastructure investment across the whole European economic area, not just the UK. The draft rules specify the specific areas covered by investment infrastructure and clearly rule out investment in commercial property. That is a very good thing because, looking back to the run-up to 2007, commercial banks on the retail side got themselves into serious trouble—particularly Halifax and the Royal Bank of Scotland—by investing in a proprietary way in commercial property. That seems to be ruled out and I just want the Minister to reassure me of that.

The other areas where retail banks could find themselves being exposed to institutional risk by investing directly in infrastructure include housing and energy, which I presume would include something such as Hinkley Point. Large amounts of money could be involved, and although in principle that is not something one would be opposed to, in periods when the market runs away with itself it opens up the prospect of banks taking undue risk.

I will finish on this point. We have slightly opened the door to retail banks engaging in investment in their own name and therefore exposing themselves to institutional risk in a way that was not there before the rules came up for amendment. I want to be sure that the Treasury has looked at that and will keep a watching brief on it, because a potential danger lurks there.