On 21 September 2020, the PRA published a report which reviews the extent of proprietary trading engaged in by PRA-authorised deposit takers and investment firms incorporated in the UK.
The legislative background to the report is section 9 of the Financial Services (Banking Reform) Act 2013. This Act introduced a requirement for the largest UK banking groups to separate core banking services from investment banking, in a process known as ‘ring-fencing’. Deposits from UK individuals and small businesses must be placed inside the ring-fenced bank (RFB). This bank is separately capitalised, and has substantial limitations placed both on what non-core banking functions it can perform and on its relationships with entities in the wider group. Ring-fencing thus seeks to protect retail banks from risks arising from investment banking activity, both by limiting them within the RFB and reducing their impact on the RFB if they occur elsewhere in the group. This protection includes guarding the RFB from the negative impact of many forms of proprietary trading. The UK ring-fencing regime commenced on 1 January 2019.
During the debates before this Act, the question arose as to whether the UK should impose some form of ban on proprietary trading by all banks. Parliament took the view that there should be strong restrictions on proprietary risk taking within RFBs, but that a complete ban for all banks was not justified by the evidence available at the time. Instead, the PRA was required to review the case for further restrictions on proprietary trading within a year of the commencement of ring-fencing.
The report concludes that the PRA already has substantial supervisory powers which can be and are used to mitigate the risks created by proprietary trading in its various forms where appropriate, and hence that it does not need new powers to address the risks