I beg to move Amendment 25, in Clause 6, page 14, line 7, at end insert—

‘() the nature and extent of the dealings by ring-fenced bodies in derivative products (including options, futures, contracts for differences and similar products);’.

With this it will be convenient to discuss Amendment 27, in Clause 6, page 14, line 7, at end insert ‘and

() developments affecting the appropriateness of the amount for the time being specified for the purposes of any exemption under section 142A(2)(b) for UK institutions holding deposits below that specified amount.’.

Clause 6 deals with the requirement on the PRA, which comes into existence in only a few days’ time, to produce an annual report on how ring-fenced banks comply with the ring-fencing provisions. Although the Opposition agree that the clause is important and necessary, we do not think it is sufficient for keeping track of whether ring-fencing is working. We made suggestions about independent reviews in a parliamentary context when debating amendments to clause 4.

Clause 6 sets out what the PRA’s annual reports should contain, including

“the extent to which, in its opinion, ring-fenced bodies have complied with the ring-fencing provisions,” whether ring-fenced bodies have taken steps to comply, whether there has been any enforcement activity, and the extent to which it has been necessary to give guidance to ring-fenced banks. Those are all self-evident.

The amendments are inspired by the PCBS. Amendment 25 would ensure that the PRA reports describe the “nature and extent” of the activities undertaken by retail banks in the field of derivatives. That is an important safeguard, following the careful thought that the PCBS has given to the extent to which derivatives activities should be allowed within the ring fence. The hon. Member for North East Somerset made a helpful contribution to the Committee about anecdotal circumstances on the margins, where what might appear to be the normal banking activities of ordinary retail customers might impinge on insurance or hedging requirements that may, in a limited way, be justifiable within a ring fence. We think, and the PCBS did as well, that the PRA must keep an eye on what is happening here. This recommendation is an adjunct to the PCBS’s wider set of recommendations on derivatives.

Amendment 27 would ensure that the PRA reports on issues that might arise periodically and that might affect the view of whether exemptions from ring-fencing are still appropriate. We discussed earlier in our proceedings whether the de minimis exemptions, as they are known, were adequate. The Government have somewhat skirted around the issues that we have raised in the amendments, but it is important for Parliament’s views to be taken into account and for regulators to be able to delve into the details and consistently probe the issues involved. Derivatives and future trading have evolved quite rapidly, as have volumes, worldwide, so it would be useful for the PRA to keep check on the banks’ activities in those fields in its annual report. Some of the statistics in this area are quite scary, when we think of the scale involved: there are $300 trillion-worth of contracts for which LIBOR acts as a benchmark in terms of derivative activities, ranging from products related to mortgages and student loans to interest rate swaps. Indeed, the amount of money set aside by some of the universal banks for compensation for the mis-selling of interest rate swap products to small and medium-sized enterprises is already over £1 billion, and some derivatives experts believe that that figure may itself underestimate the eventual costs. Those factors are significant and can impact on the activities of retail banking.

A consistent requirement to monitor and comment on the latest developments would therefore be necessary and welcome. Given that there is still so much uncertainty about whether ring-fencing will provide adequate  protections, a commentary from the regulators about the validity of the exemptions process would also be very useful.

The Government seemed to say in their early reports that they accepted the principle that reviewing the de minimis exemption arrangements should be part and parcel of the PRA reporting process, and I would be grateful if the Minister could confirm whether my understanding is correct. However, there seems to be a little uncertainty about what exactly the Government expect to be in the PRA’s reports. I hope that the Minister agrees that it would be better to be specific at this stage about the dimensions of what the PRA should be reporting on.

Again, there is no great distance between the Government and the Opposition on this issue. We want the PRA to report annually, and we want that report to be broad in its scope. Two particular questions arise; they are questions about handling those issues, on which we can come to a view. Our approach is that the responsibility of the PRA in making its annual report should be broadly defined. It should be done not through a detailed checklist of required components, but through the broad categories that pertain to its work. That is what is in the Bill—the extent to which ring-fenced bodies have complied with provisions, the steps taken in order to comply with the provisions, questions of enforcement and so on.

Although there is nothing inherently objectionable in the inclusion of derivatives, for example, it raises the question whether other specific things should be included. That would take us in the direction of a different approach, which would be to specify in greater detail the exhaustive list of matters, or at least a minimum list of matters, that the PRA should review. That is not something that we favour. We have taken a broad approach, which gives the PRA the ability to report on a wide range of matters, but to prioritise in its report those matters that it considers to be the most important.

I do not think of this issue as a strict article of faith, and I am happy to consider the views of the House and of the other place, as the Bill progresses, as to whether ours is the right approach. We think it is right to empower the PRA in this way and to avoid missing things out.

There is a particular issue with regard to the de minimis exemption. We need to keep the de minimis threshold under review. That threshold must be appropriate, so that it fulfils its purpose. The regulator, of course, can have a role in reporting on circumstances that may be relevant to revision of that. But it is important that it is for the Government and for Parliament to decide how that de minimis threshold should be set.

It is the PRA’s job to ensure that the banks comply with the rules of the ring fence. The PRA’s job, in this case, is to ensure that the de minimis threshold is applied properly. But decisions about which banks or activities are inside or outside the ring fence, including the de minimis threshold, are for the Government and Parliament to decide, not the regulator.

Amendment 27 would require the PRA to be drawn into judgments on the appropriate location of the ring fence and on which smaller banks would be exempt. That is not consistent with the approach that we have taken—that such matters should, now and in future, be a matter for Parliament rather than the regulator, so it is not consistent with the clear Division of responsibilities that we are aiming for throughout this Bill.

I note the hon. Gentleman’s approach, particularly in amendment 27, on including derivative products. It might be worth considering, between now and later stages of the Bill, whether a more exhaustive list could be considered, but at the moment we are not persuaded that this would add anything to the general powers that the PRA has to consider matters in its review, as expressed in the Bill.

On Amendment 27, I can see the point that the Minister makes about whether the PRA reporting requirement on de minimis exemptions might stray into policy questions about where the ring fence should be located. I am not sure that that is a particularly strong reason not to have it as a specified requirement in the PRA report, but I accept that there are some issues to be worked through in that regard. It is worth thinking about those some more.

The Minister’s arguments against amendment 25 were not particularly substantial. He knows well that the parliamentary commission feels strongly about further safeguards on derivatives. I do not regard it as an onerous safeguard simply to require specific extra reporting on the nature of extensive dealings in derivative products. It is a reasonable amendment that comes from the parliamentary commission.

Far be it from me to act as an agent for the parliamentary commission—perhaps one day I could aspire to be a co-optee to it—but I feel a sort of duty to stand up a little bit for the hard work that it has done over many months, advancing specific recommendations. It is a delight and a privilege that the only amendment accepted so far was one of our own home-grown versions, but the hon. Member for Chichester and other members of the PCBS might be slightly nonplussed if we went through the whole process without the Government’s accepting, even on fairly small, reasonable issues, some amendments that it had taken time and trouble to draft.

I do not think it is enough of an excuse to say, “Oh well, we haven’t taken a prescriptive list approach.” Having been a Minister, I know that that is from the bran tub of reasons to reject amendments, with the big, black word “Resist” emboldened at the top of the Minister’s pages—“I think that we can discard that one. It could have been done better.” I am happy to give way to the Minister if, on reflection, he wants to accept the amendment.

The reason given is not good enough to stop amendment 25. Therefore I feel duty bound to test the Committee’s view on the amendment, unless the Minister has changed his mind in response to my thoughts. He can see the point I am making about the PCBS wanting to try and make a little bit of progress, during the Committee stage. It is important to show willing, even on small issues such as this.

Perhaps I may intervene. The provision concerns derivatives, and I said on Tuesday that we would expect the PRA to report factually on the experience of derivatives within the ring fence, so there is nothing substantial between us on that. We will expect that to be part of the annual report. However, it will be the only activity specified in the report.

Derivatives have clearly caused a problem in the past, and I dare say that other financial instruments and products may cause problems in future, so I would not want the PRA which, like the FCA, has been set up to look forward rather than backwards, to be anchored into looking at the causes of problems in the past. They need to be looked at, but that should not have primacy over its responsibility to scan the world of banking for problems with breaches of the ring fence or conduct. Having said that, derivatives are a live matter, and the Parliamentary Commission is making further recommendations. This will not be the last word on the matter. We will study what the Commission has to say, and if it makes a case for a particular exemption from the more general approach for derivatives, we will consider it very seriously.

That is useful, and I do not want to labour the Amendment or to serve a contrary purpose so that the Minister sticks his heels further into the mud and resists it, but I do not think that he has given a good enough reason to resist it. I think the matter is important  enough to specify it, and I feel honour-bound on behalf of the Parliamentary Commission to nudge him to consider a little more seriously in Committee some of the amendments that it has suggested. I am not persuaded to withdraw the amendment.

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 8.

Question accordingly negatived.

Ordered, That further consideration be now adjourned.— (Greg Hands.)

Adjourned till Tuesday 26 March at ten minutes past Nine o’clock.