Question proposed, That the clause stand part of the Bill.

It is a delight to see you in the Chair, Mr Bone.

We have discussed the role of derivatives in the report. Proposed new section 142J will place an obligation on the Prudential Regulation Authority to make a full report to Parliament and the Treasury every five years on the ring-fencing rules.

Clause 6(2) lists the areas that will be covered. As we discussed on Thursday, they are set at a relatively high level. However, as I told the Committee then, the Government will consider the case for specifically mentioning derivatives when we debate the Bill in later stages.

Having listened to the Parliamentary Commission, we will now require annual reporting on ring-fencing. The report will be about the way in which ring-fenced bodies have complied with the rules and guidance and what steps the PRA has taken to enforce the ring fence. The clause will amend schedule 1ZB to the Financial Services and Markets Act 2000, to include a report on ring-fencing in the PRA’s annual review.

The PRA’s annual report will have to be laid before Parliament, which will give Parliament the chance to track from year to year the strength of the ring fence.

Good morning, Mr Bone. It is always a pleasure to serve under your chairmanship. I have missed it; the last time was probably on another financial services Bill of some sort or another. I am glad to be back.

As the Minister set out, Clause 6 gives the full detail of the reporting requirements that will be placed on the Prudential Regulation Authority. If we are to police the ring-fencing concept properly, it is important that we have a comprehensive and independent process of monitoring the compliance of particularly ring-fenced banks with the rules.

I have a number of questions for the Minister. I am assuming that, as well as the work of the ring-fenced banks, the PRA will be responsible for keeping track of how investment banks or associated investment banking activities in sister or parent companies interrelate with the ring-fenced banks. In other words, we will look not just at what goes on in the retail side of the bank, but at  any attempts by investment banks to muscle into the business lines of the retail banks or to get involved with them. Are we talking about—this analogy is getting a bit ridiculous—policing both sides of the fence, rather than simply one side of it? How would that work?

The tests set out by the Minister are relatively clear. He has kept them fairly broad brush, rather than itemising certain aspects. As he knows, we are keen to include a specific reference to monitoring the derivatives’ activities of retail banks. We will probably return to that issue on Report, hopefully with some, more detailed rules on the arrangements.

The PRA will be both enforcer of the rules and author of some of the criteria. We agree with the provisions in clause 6, which will also cover whether guidance notes and other reports have been taken to heart by retail banks.

When can we expect the first of such PRA publications to be made? I know that the PRA does not, theoretically, exist yet—it is only a matter of days—but will we have to wait a full calendar year? I assume we are waiting until after the Bill gets Royal Assent, because the requirements are not extant at present. However, before Royal Assent I would like to get a notion from the PRA, even in an informal context, that it will be working on those processes as soon as it gets cracking next week. It would be nice to know that in the financial year 2013-14 there will be some PRA commentary about the processes as we move towards the ring-fencing arrangements. I would be grateful if the Minister could clarify that matter.

I am quite sure that the Minister is able to satisfy the Committee that the PRA will have the necessary resources to monitor ring-fencing, but I am not sure whether there will be a particular Division within it tasked with addressing that set of structural questions. We have heard the general description of micro-prudential regulation, which sounds great, if slightly opaque to the outside observer; however, what will that involve? Are we talking about a set of generalists within the PRA who will occasionally be tasked with looking at the structural questions, or will there be a standing unit specifically looking at the issues of safety and division?

Finally, when we get the PRA reports, what will be the process thereafter? Will there be opportunity for parliamentary debate? Will there be a written ministerial statement or other ministerial response reflecting on the PRA’s findings? It would be useful to know what the answer will be to the “So what?” question when the PRA makes its reports. Those are the only issues that I have with clause 6 as it stands. [Interruption.]

Graham Evans? No, he does not wish to speak.

It might be helpful to the Committee to remind officials and the Minister that they should not pass information directly to one another. That is a convention of the House.

I was looking forward to a speech by my hon. Friend the Member for Weaver Vale, but we will hear it on another occasion, I am sure. I am happy to respond to the points made in the debate. I can confirm  to the Committee that the duties of the PRA in respect of reporting on adherence to ring-fencing rules apply, in the terms that the hon. Member for Nottingham East used, to both sides of the ring fence, so they would apply to attempts by investment banks to breach the ring fence from that side. They apply to the totality of the ring fence.

As the hon. Gentleman said, the provisions in Clause 6 are relatively high level, but we will certainly see what can be done to ensure that there are specific requirements on derivatives.

On the PRA’s annual report, which is the subject of the clause, as the hon. Gentleman said, the PRA comes into effect in a few days’ time, on 1 April, and its first report will be a year after that, in 2014. However, the requirement to report on the ring-fencing rules that the clause inserts will apply a year after those rules have been introduced, so the first report concerning the ring fence will be in 2019.

On the resources available to the PRA and its internal structures for monitoring, as the hon. Gentleman knows, the PRA is operationally independent and it is a matter for the PRA to structure itself the better to carry out its duties. All I will say is that, having moved towards the twin peak system of separating conduct and prudential regulation, our intention is that there be a much clearer focus on the prudential regulatory activities.

Obviously it is true that the PRA is independent, in a way, although it is under the careful wing of the Bank of England. However, it is important that we have some form of parliamentary insight into how adequately the regulators are able to do that particular job. It would be useful if, perhaps from 1 April onwards, the Minister could provide greater information about what the PRA structure will be, so that at least we would get a sense of the adequacy of the design of that regulator. Perhaps the Minister could send a note or—to use that horrible phrase—an organogram to Members about how the PRA will work.

I am happy to suggest that to the PRA. I am sure it will not be shy in wanting to assure the public, and indeed Members of this House, that it is organised in a proper and effective way. The annual report, to which the hon. Gentleman referred, will be laid before Parliament. It will be published and deposited in the library with a written ministerial statement attached to it. It is expected that the Select Committee will call the officers of the PRA to give evidence on its annual report. The Committee can scrutinise it in that way.

Whether or not the Committee has concerns about the PRA’s operational effectiveness, it will have the opportunity to satisfy itself that the operation, as well as the rule-setting and policing side, of the PRA is adequately scrutinised. Arrangements are in place for the scrutiny of the PRA, which was much discussed in another Committee, no doubt chaired by Mr Bone, on the Financial Services and Markets Act. We are using those provisions, and the Clause adds a further requirement to the reporting mechanism, which has been well scrutinised and is about to become operational—it will do so next month.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.