Order for Second Reading read.
I beg to move, That the Bill be now read a Second Time.
I start by expressing my gratitude for the close co-operation that we have enjoyed in preparing today’s Bill—from the shadow Minister, the hon. Member for Fareham (Mr. Hoban), from the hon. Member for Twickenham (Dr. Cable), from their spokesperson colleagues in the other place, and from other interested stakeholders across the City of London, particularly the recognised exchanges themselves, with whom we have been able to discuss the Bill in recent weeks. I hope that we can demonstrate today to the outside world that—perhaps unusually for this place—we have been able to reach a consensus in the national interest on the way forward on this important issue: both inside this House with Opposition Members, and outside it among practitioners in the City. I am also grateful for Members’ co-operation in allowing us to move the Bill quickly through its Commons stages and detailed scrutiny this afternoon, in what are unusual circumstances.
As Opposition and other Members will know, the Bill fulfils the commitment that I gave in a written statement to the House on 13 September to enhance the power of the Financial Services Authority to veto changes to the rules of UK-recognised investment exchanges and clearing houses where they are deemed disproportionate.
Why do we need a guillotine? This is about the first piece of Labour legislation that some of us actually want. It is sensible and there is agreement in all parts of the House—why can we not have an open debate, given that we want to get it through as much as the Minister does?
I am grateful to the right hon. Gentleman for his intervention; hopefully, he will make a more substantive contribution in due course. I expect that there will be plenty of time in this debate for various points to be made by Members in all parts of the House. I very much look forward to the right hon. Gentleman’s contribution; I hope that it will be as revealing and interesting as yesterday’s was.
My statement of 13 September was prompted by concerns about the potential implications of a possible takeover bid for the London stock exchange. At that time, a bid by NASDAQ, the US stock market, for the LSE was still only a possibility. As Members will know, NASDAQ has now announced an offer for the LSE, so with a bid on the table it is important that we move swiftly. Our aim, with the co-operation of both Houses, is for the Bill to gain Royal Assent as soon as possible, consistent with proper parliamentary scrutiny. With support from all parts of the House, it should be possible to achieve that before the NASDAQ bid reaches its important point.
Before I turn to the Bill’s detail, I want to set out the wider context. London today is widely seen as one of only two truly global financial centres in the world. It is the location for 70 per cent. of the global secondary bond market, for more than 40 per cent. of global derivatives, and for more than 40 per cent. of cross-border equities trading. London today has more foreign banks than any other financial centre, and it is the location for the headquarters of six of the world’s 10 largest international law firms. Based on its global reach and its reputation for free, fair and open global markets, London has in recent years been attracting business and listings from around the world. We are determined to keep it that way.
I believe that international businesses have located in the City because of four great strengths: our commitment to the rule of law and the highest professional standards; the skills and flexibility of the work force and our ability to attract talent from around the world; our long-standing tradition of openness and internationalism—a global approach to competition and ownership that has allowed the City to innovate and to respond to new challenges; and the FSA’s highly respected principles-based and risk-based approach to regulation, which has been put in place over the past decade. I know that the whole House will join me today in paying tribute to the many men and women from across our country and abroad who work hard in the City and in our other UK financial services to build the City’s reputation and to contribute to its strengths.
However, we are not complacent. Back in May, when I first became the Minister responsible for such matters, concerns were expressed to me about the effects of a possible takeover of the London stock exchange by a company based outside the UK, and the threat that that might pose to London’s attractiveness as a place for international listing and wider business. Some Members will know that the UK has for some years been open to overseas investment in UK exchanges. The London international financial futures and options exchange, ICE Futures and virt-x are all owned by overseas companies. Such overseas interest in UK exchanges in part reflects our principles-based approach to regulation, which has been flexible enough to accommodate the desire of exchanges to innovate in recent years, but rigorous enough to ensure the probity and integrity of our markets.
However, following NASDAQ’s interest in acquiring the LSE, I have discussed the implications of such a change in ownership widely in recent months, including with all the interested parties. I have made two points absolutely clear. First, the Government are neutral with respect to the nationality of the ownership of the LSE. It has been put to me that the right approach is Government intervention to protect the LSE from foreign ownership. I reject that argument. Such intervention would fly in the face of the traditions that have underpinned the City’s success over the past 20 years. A policy of protecting “national champions” would damage, not bolster, the interests of London and the UK. So the Government do not have and will not express any views about the commercial merits of the proposed NASDAQ takeover. It is for the current owners of the shares to decide whether to accept or reject the offer. But secondly, our interest in the ownership of the LSE is that it should not affect the existing regulatory regime under which the exchange and its members and issuers operate. We are determined to act to protect our domestic regulatory environment, founded in both UK law and EC directives, that has made the City a magnet for international business. If a company operates in London, it should be regulated in London.
Following those discussions, in which a range of possible approaches were put to the Government, we concluded that the only way to provide the assurance to London and the UK was through primary legislation, by making changes to part 18 of the Financial Services and Markets Act 2000, which provides for the recognition of investment exchanges and clearing houses.
Let me turn to the detail of the Bill. The provisions will confer a new and specific power on the Financial Services Authority to veto rule changes proposed by UK- recognised investment exchanges and clearing houses that would have an excessive regulatory impact. By excessive we mean that the proposed rules would impose a regulatory burden on a user of the exchange or clearing house, or the wider community, that could not be justified by any regulatory benefits, or whose effect on those users or the wider community would be disproportionate—and obviously that would not include anything already required by UK or EU law.
The new powers will not put the existing provisions for regulation of the investment exchanges and clearing houses into question. They will apply only to future changes. But they will apply to all UK-recognised investment exchanges and clearing houses from the outset, not just after there has been a change of control. They will apply to all recognised exchanges and clearing houses, not just those that are in foreign hands.
The Bill also provides for necessary processes and safeguards. The exchanges and clearing houses will be required to notify proposed changes to their rules and other regulatory provision—by which I mean any guidance, policy, practice or arrangement made by an exchange or clearing house—to the FSA. The FSA will have up to 30 days to decide whether to call in a proposal for further examination. If it calls in the proposal, the FSA will have to set a period in which it will consult publicly about the proposed rule change. The FSA will then have a further 30 days after that consultation period has ended to decide whether to veto the proposed rule change.
Of course there is. In this area, as in others under the Financial Services and Markets Act 2000, the appropriate course would be to apply for judicial review of the FSA’s decision. Given that that would probably be an exceptional event, an application for judicial review would be the best approach.
May I suggest a different set of circumstances. Let us say that the FSA decides to intervene in a change proposed by the LSE, and it decides to apply for judicial review of that decision. The FSA’s regulatory objectives include the protection of consumers, but do not include the desirability of maintaining the competitive position of the UK—it merely has to have regard to that. The FSA could be vulnerable to having its decision overturned on those grounds.
I am sure that we will deal with such matters in detail in Committee. Clause 1 writes into the Financial Services and Markets Act 2000 the power to block any regulatory decision by an exchange judged to be excessive and disproportionate and going beyond what is required for the proper functioning of that exchange. The Bill gives the FSA the power to block changes that would damage both its ability to regulate properly and proportionately and the competitiveness of the City of London. We have looked at the matter in detail, and we have judged that there is no need to include that clear intention in the Bill. Any attempt to do so would have given the impression that we were trying to narrow the FSA’s powers unnecessarily.
As I have said, we believe that the problem that the hon. Member for South-West Hertfordshire (Mr. Gauke) described will not arise, but it is important that any decision by the FSA is open to scrutiny. An exchange or clearing house will not be able to introduce the proposed change in regulatory provision until the initial 30-day period has expired without the FSA calling in the proposal, or until the FSA has confirmed that it will not be calling the proposal in, or until the FSA has stated that it will not be vetoing the proposal, or until the further 30-day period has expired without the FSA issuing a veto. If the FSA does then act, it will be open to the exchange to appeal to judicial review, as I have just made clear.
In drawing up these clauses, we have been anxious to ensure that the procedures are not burdensome and disruptive for the investment exchanges and clearing houses. We have consulted all the main exchanges, and the trade association. We are aware of the concern that any unnecessary regulation could stifle innovation and impose extra costs for both the exchanges and the FSA. The exchanges and clearing houses have put to us their concerns that the procedures, if applied in a heavy-handed way, could damage their competitive position by reducing their flexibility to make and change their rules.
We are determined that the new processes will not impose an unnecessary burden. The new power has always been intended to be a backstop; it was never intended to be a day-to-day supervisory tool for the FSA. We believe that the vast majority of changes to the exchanges’ regulatory provisions and rules will not raise the sort of concern that the new power is intended to address. The fact is that many rule changes are routine and do not need to be subject to the type of scrutiny and processes that I have just outlined. The FSA will not be micro-managing the rule books of the exchanges and clearing houses.
To make that clear, and following detailed consultation with the exchanges and the FSA, the Bill gives a power to the FSA to specify in its rules which types of change to regulatory provision need to be notified and which do not. That approach is consistent with the wider approach adopted in the Financial Services and Markets Act 2000, where more detailed working out is left to secondary legislation—that is, Treasury regulations or FSA rules.
The exchanges accept that it will take time for the FSA to plan, discuss, devise and draft rules, to consult on those draft rules as it is required to, and then enact them.
Proposed new subsection 300D(2)(c), at lines 19 and 20 on page 3 of the Bill, makes it clear that the FSA will specify a period in which representations can be made. No amendment is proposed to the provision, but the Bill does not specify a long-stop period in which the FSA must act. It has the initial 30-day period, and the 30 days at the end of the process, but the Bill does not limit the length of time that the FSA can devote to looking into a particular matter. Does my hon. Friend share my concern that matters could go into a sort of limbo as a result, and that the slowness of the FSA might be a burden on business?
My hon. Friend helpfully, as always, raises exactly my point: it is important that the FSA takes the time to plan and discuss the precise details of the rule making, and I am sure that that is the approach it will take. I am keen to discuss my hon. Friend’s particular point in detail. However, I am sure that Mr. Deputy Speaker agrees that it will probably be more appropriate to do that in Committee, so I look forward to my hon. Friend making the point again at that stage, if he can fit it into his busy schedule this afternoon, so that we can discuss it further.
It is exactly to make sure that we get such things clarified that the FSA will consult on the rule book. That will take some months, so as we need to act with some urgency, and because it will take considerably more time for the FSA to hold those consultations on the detailed rules than we hope will be available before Royal Assent, the Bill gives the FSA the power in the meantime to grant waivers from the notification obligation to exchanges and clearing houses for the first 12 months after Royal Assent. That will enable the FSA to offer some comfort and flexibility to exchanges while it gets the detail of the rules in place—to respond to the point made by my hon. Friend.
The provisions of the Bill are intended to come into force on the day after Royal Assent, so that once Parliament has decided that the new regime is to have effect, the policy intention of the Bill cannot be undermined by precipitate rule changes between Royal Assent and commencement. I am sure that the House will be pleased to hear that the FSA has already started to work with exchanges and clearing houses on the formulation of the waivers. Indeed, the FSA has written to me today—copies of the letter have been deposited in the Library and passed to Opposition Members—to confirm its intention to use that power only if it is justified as proportionate and if the benefits of doing so exceed the costs, and only after consultation.
I appreciate that the FSA regime is somewhat different from that which applies, for example, in Wall street or Tokyo, but does the Minister have any evidence that in other major international exchanges where similar issues might arise a similar regime has been adopted to try to give protection from disproportionate actions elsewhere?
The hon. Gentleman makes an important observation. The answer is no, not in our experience. I do not think that any other financial centre has such an open and global market for ownership and exchanges, as well as a regulatory regime that its authorities are so keen to protect. There is something particular about not only our open approach, but our regulatory regime, which means that we are keen simultaneously to allow ownership changes if shareholders desire them and to retain that back-stop power.
As I said, in the recent consultations, we considered the type of thing we could do; for example, issues arise in the case of the proposed, or rumoured, New York stock exchange takeover of Euronext, which would have implications for London, owing to Euronext’s ownership of LIFFE—the London International Financial Futures and Options Exchange—although regulatory issues do not arise in quite the same way. We looked at the corporate governance changes that were being proposed and discussed with authorities in other European capitals and concluded that those arrangements would not give us sufficient comfort. As we looked around the world, and at past experience, we concluded that as no model would give us comfort, other than taking power directly in law, that was the appropriate thing to do. However, it is my understanding that there is no precedent for what we are proposing.
After the detailed scrutiny of the Bill on which we are about to embark, I hope that Members will conclude that the guiding principles I set out earlier are being fully respected in the legislation. First, the principle that we should be blind to ownership of exchanges is being protected; we are entrenching London’s reputation as a global financial centre determined to attract talent and ownership from around the world. Nothing in the legislation has any consequence for the nationality of the ownership of UK exchanges. It will make overseas ownership neither easier nor more difficult and I am confident that any potential foreign investor who wants to come to the UK will not be deterred. We are also upholding the principle that it is right for the Government to act to protect and enhance the UK’s proportionate and risk-based regulatory regime.
I believe that the Bill will deliver that objective and can do so without imposing unnecessary regulatory burdens on the exchanges. Yes, we are intervening. However, we are intervening and legislating not to impose regulation, but to avoid excessive regulation being imported into the UK. By outlawing the imposition of any rules that might endanger the proportionate and risk-based regulatory regime that underpins the City’s success, I believe that we will help to ensure that London continues to be a magnet for international business and new listings from around the world. The Bill will therefore continue to bring new investment and new jobs to the UK, so I commend it to the House.
First, let me make it clear that we support the Bill. Indeed, there is widespread support for it across the financial services sector and few measures on financial regulation have gained the support of so many interested parties. We have sought to co-operate with the Government to ensure that the Bill receives a swift passage through the House today. We recognise the importance of the timing and want to place on the record our acknowledgement of the spirit of co-operation between the Government and Opposition Front Benchers in a rare outbreak of consensus and working together. It could be said that a similar spirit of consensus was not the hallmark of yesterday’s debate.
We welcome the powers given to the Financial Services Authority to veto changes to the rule books of exchanges, particularly where they are seen to be excessive. As the Economic Secretary said, the Bill is before us because of widespread concern that acquisition of the London stock exchange could lead to changes in its rule books that could damage the competitiveness of UK capital markets. If a US exchange were to acquire the London stock exchange, US regulations—especially Sarbanes-Oxley—would be imposed on UK-listed companies.
Does the hon. Gentleman accept that there is concern about regulation not only in London but in the US? Although that concern may not have reached up to Congress, it is actively discussed in New York and in markets throughout the US.
The hon. Gentleman is right about concern in the US, which is widespread. Hank Paulson, the US Treasury Secretary, has made a number of speeches on the theme, so although the issue may not yet have reached Congress, it is certainly important in the higher ranks of the US Treasury. In some of my discussions with UK institutions, I have found that the most vociferous opposition to extraterritoriality has come from some of the US banks, which recognise themselves in discussions of the problems caused by disproportionate regulation.
The Bill deals with one aspect of extraterritoriality in the regulation of financial services. In recent years, there have been other instances of regulators seeking to impose their rules on businesses operating outside their jurisdictions, thus eroding the competitive advantage that one market has by doing things differently and countering any such benefit. The consequence has been to impose additional costs on businesses and try to erode the advantages of the light-touch, principles-based, risk-driven approach, which has been the cornerstone of the success of the UK financial services sector.
I understand where the hon. Gentleman is going, but may I suggest the other side of the coin? Shareholders in a recognised body might be concerned if they could not tighten their own rules to protect the solvency of their organisation because such tightening would fall foul of the legislation. The Bill might deem it excessive, because it would not be required under UK or Community law. Thus, if an organisation wanted to take action internally to protect itself and its shareholders, it might not be allowed to do so.
The hon. Gentleman raises a quite complex point. We need to establish what constitutes the right balance of protection and I believe that the Bill makes important moves in seeking to ensure that we protect one of this country’s vital assets: the regulatory environment of the UK financial services sector.
A recent report by the City of London corporation highlighted that the strength of the regulatory environment in the UK was one of the most important success factors in determining the strength of the City. We should also make it clear that such strength comes from getting the level of regulation right too. There is a balance to be struck between over-regulation that imposes additional costs on businesses and under-regulation that damages confidence in the market. Moving one way or the other can harm the financial services sector.
The current strength of the UK capital markets is partly a result of the regulatory arbitrage between the UK and the US, as a consequence of the Sarbanes-Oxley legislation. Reflecting on the point made by the hon. Member for Edmonton (Mr. Love), I suspect that the existence of regulatory arbitrage will come under threat as the US wakes up to the consequences of the Sarbanes-Oxley legislation. We cannot rely for ever on the existence of such regulatory arbitrage to promote and allow UK financial markets to grow. We need to ensure in that aspect, as in every other, that we keep the regulatory structure under review, so that we continue to achieve the right balance.
The historical examples may not bear out the point that the hon. Gentleman is making. I agree that it would be sensible for the US authorities to adopt such an approach, but looking back to the Eurobond fiasco of some time ago, the US took so long to wake up that it lost the business.
Indeed, the hon. Gentleman makes a fair point, but I hope that regulators and legislators learn those lessons. Effective light-touch, risk-based and principles-based regulation is in the interests of the sector globally, and the Government need to send that message more strongly to the US Administration and Congress, so that we ensure that the arguments in favour of the UK regulatory regime are put and understood in Washington.
I shall give some examples of how extraterritoriality imposes additional burdens on businesses. Under the Sarbanes-Oxley legislation, the US Public Company Accounting Oversight Board is required to report on foreign auditors with US-listed clients. It has recently exercised those powers by reviewing audits undertaken by Ernst and Young in the UK. Of course, UK auditors are already subject to audit inspection arrangements, so in a sense the additional review by the board imposes an additional cost on UK auditors. In effect, those costs will be borne by their clients in one form or another.
The regulatory overlap that arises from extraterritoriality is a problem, but it is not the only one: the situation has arisen with hedge funds when their management is based in the UK. The Securities and Exchange Commission has sought to regulate hedge funds by reference to the location of the hedge fund investor. The SEC has gone to some lengths to try to draw UK-based hedge fund managers into its remit.
The SEC requires firms with more than 13 clients to register with it, but it has looked beyond simply the number of direct investors to the next layer down. For example, a UK-based hedge fund could have, say, 10 investors—below the SEC limit—but if they each had 10 investors, the SEC would say that the hedge fund had 100 investors and it would be drawn into the net. So there is a continuing push from the SEC to draw more activities based outside the US into its remit, with the consequence of imposing additional regulatory burdens on those funds. Although the Bill tackles an aspect of extraterritoriality, we should be under no illusion that it deals with the issue in its entirety.
Does my hon. Friend agree that, if sensibly interpreted, the Bill is a bit of a first? It provides some kind of deregulatory ratchet, instead of a regulatory ratchet, which we have had so often in so many areas. It cannot just target one possible overseas buyer of the stock exchange and one possible overseas source of extra regulation. It has to target all of that. So as exchanges renew their regulations, there will be a gentle deregulatory pressure, which seems admirable.
I am grateful to my right hon. Friend for making that point. There is a great deal in what he says, because there will be an inherent bias in the Bill to look at how exchanges reviewing their rule books might lead to the introduction of more onerous regulations, affecting the competitiveness of those exchanges. There is a benefit there. It is a slightly curious irony that the Bill makes a small extension of regulation in order to protect the light-touch regulation that we see at the moment and to entrench it still further.
On that point, does the hon. Gentleman agree that, in order to make sure that we keep that deregulatory pressure on all exchanges, there is merit in the provision applying to all new rules and all existing exchanges regulated in London, and not simply to exchanges where there has been a change in governance?
Indeed, although the Minister is in danger of trespassing on the detailed scrutiny of the Bill in Committee. I have tabled a probing amendment to that effect, to elicit from him his thought process. He makes an important point. There is an issue in that the current ownership regime of all exchanges has not created a problem to date. Some may believe that these changes should be triggered only on a change of control. It is important that, in Committee, we flesh that out still further.
Let me turn to the background to the Bill and the importance of the measure. The global nature of international capital markets means that businesses looking to raise money can choose where they go to raise it. Historically, international businesses have looked principally to New York to do so, but, following the introduction of the Sarbanes-Oxley legislation in the aftermath of the WorldCom and Enron scandals, international businesses have found the regulatory burden in the US too onerous and sought to raise capital in the UK. As a consequence, we have seen an increase in the number of initial public offerings in London and the amount of capital raised. It was announced earlier this month that £22.3 billion of funds has been raised on the London stock exchange so far this year, which exceeds the amount raised on other exchanges.
We have seen a significant benefit to the UK from Sarbanes-Oxley and the impact of that regulation, and not just in terms of fees for merchant banks and issuers. There are also the accountancy and legal services. A whole range of people have benefited from the fallout from excessive regulation in the US. A recent study indicated why firms were coming to raise money in the UK. It said that the cost of capital at both the initial public offering stage and afterwards is lower in London than in other major European or US financial centres. The report, commissioned by the City of London corporation and the London stock exchange, found that London markets are cheaper than both the New York stock exchange and NASDAQ with respect to both underwriting fees and other direct IPO costs. Other direct IPO costs, including legal and accounting costs, are lower in London than in the US largely due to the fact that in the US one needs to comply with Sarbanes-Oxley.
It is interesting that, despite the additional costs associated with US listing, the report found no evidence that Sarbanes-Oxley has delivered any significant regulatory benefits not already available under the UK corporate governance regime. That indicates an area where regulation has not improved the protection available to consumers. In the US, those involved are bearing the costs without seeing any great regulatory benefit.
The unpopularity of US markets and the increasing popularity of UK and European markets has led to US exchanges looking abroad to strengthen their business. It led to the New York stock exchange seeking to acquire Euronext and to the NASDAQ bid for the stock exchange. The commercial logic of that is that the US exchanges would like to benefit from the success of effectively regulated markets in the UK and Europe. Indeed, we should be clear in acknowledging that it is not in the economic interest of potential acquirers of UK and European exchanges for the Securities and Exchange Commission to be in a position to exert pressure to enable US regulations to be imported into the UK and Europe. If such regulations were brought in, there would be a risk that IPOs would move from Europe to Asia and other markets, with money thus flowing out of the UK and Europe. That explains why acquirers have an interest in the legislation going ahead in the UK.
In meetings that my hon. Friends and I have had with institutions across the City, it has become clear that businesses are worried that the takeover of the London stock exchange could lead to the City losing its competitive advantage over US capital markets. We need to be clear that the Bill has nothing to do with economic nationalism or the protection of national institutions. It would be wrong for any country to use the Bill to defend its protectionist policies. We have thrived as an economy because we have open markets and enable foreign companies to buy UK assets. Indeed, that has been one of the factors behind the strength of the UK financial services market. The Bill is really answering the question of how we can best protect the regulatory advantage that we have at the moment.
In reply to an intervention made by the hon. Member for Edmonton (Mr. Love), I said that US houses had been more vociferous than others about the risk of Sarbanes-Oxley being applied in the UK, but it is not just US houses making such comments. In March, Angela Knight—she was then at the Association of Private Client Investment Managers and Stockbrokers, but is now at the British Bankers Association—said:
“What we need is a copper-bottomed guarantee that whatever framework is put into place we continue to trade and settle here, be governed by British law and be regulated by the FSA … Otherwise, the SEC believes very strongly in extra-territorial activities, and because NASDAQ and the NYSE are American they will find it difficult to resist”.
The Bill will achieve a single goal: to enable the ownership of not just the LSE but other exchanges to change without having a detrimental impact on the competitiveness of UK capital markets.
As the Minister said, the Bill gives the Financial Services Authority the power to veto changes to the rule book not just of the LSE, but of all UK recognised investment exchanges and clearing houses. Those powers are new. At the moment, exchanges in London have the freedom to set their own rules, subject to meeting certain recognition criteria. My hon. Friend the Member for Cities of London and Westminster (Mr. Field) asked the Minister whether there is a parallel with that elsewhere. I understand that many other regulators regulate the detail of rule books to a greater extent than the FSA has hitherto been able to do. Enabling the FSA to consider rule changes and the rule books of new exchanges is a significant change for London. Although the measure represents an extension of the FSA’s regulatory power, it is an attempt to entrench our present advantage and, as my right hon. Friend the Member for Wokingham (Mr. Redwood) said, to introduce a deregulatory ratchet.
One of the concerns about the Bill that has been expressed by several people is the extent to which the FSA will seek to look at individual rules. The FSA will need to minimise the additional compliance burden on exchanges without creating the opportunity for exchanges to impose unchecked rules that make UK markets less competitive. I welcome the letter that the Economic Secretary received from John Tiner today about the FSA’s recognition of that.
The Bill’s regulatory impact assessment reinforces the point about looking at relatively few changes to rules. It gives an upbeat assessment of the impact of the Bill, suggesting that of the estimated 1,000 rule changes a year, there would be only about 25 notifications, of which only one would be called in. On that basis, the RIA suggested that the measure would have a relatively low cost. I suggest that when the FSA considers regulations during the 12-month grace period before it must introduce detailed regulations, it should look at the type of rule changes made in the past, so that it understands what it would call in, because it is important for it to understand what is likely to happen in practice. We should continue to monitor the detailed regulations once they are applied to make sure that we are not calling in too many regulations, and imposing too many costs on exchanges and clearing houses in the UK.
The Bill sets out the framework within which the powers can be exercised. It is carefully worded, and it assumes that any rule required under EU or Community law is not excessive—a point that some in the industry might question, but I leave the matter at that. The Bill does not prevent the exchanges from ignoring excessive regulations that come from Brussels. It sets out the four criteria that should be considered in determining whether requirements are excessive. The first is the effect of existing legal and other requirements. The second is the global character of financial services and markets, and international mobility of activity. The third is the desirability of facilitating innovation, and the fourth is the impact of the proposed provision on market confidence.
The hon. Gentleman raises a point about the context in which the Bill should be considered. Of course, the FSA has other powers relating to consumer protection, which is one of its regulatory objectives. The Bill deals with the regulations that apply to shares traded on exchanges, so I do not think that issues of shareholder protection come within its remit. There are measures in the UK listing rules that cover shareholder protection, too. The Bill is narrowly focused; it is more a rapier-like thrust than a clunking fist when it comes to tackling regulation, and we should keep it like that, rather than use it as a Christmas tree from which to dangle ever more baubles, although I may be in danger of mixing my metaphors.
Perhaps I did not make clear what I sought to tease out from the hon. Gentleman. A body might wish to increase consumer protection or shareholder protection by tightening its rules, but that does not come within the framework of the Bill, so that tightening could well be seen as “excessive” under the definition in the Bill. That is the issue that I wished to raise.
The hon. Gentleman is trying to make an important point. He is trying to find out whether there is any opportunity under the Bill for a Sarbanes-Oxley measure to be introduced, but I hope that it will not enable such a provision to be made. He should remember that although the conditions that I mentioned are in place the FSA seeks to ensure that regulation is proportionate and not excessive in its impact—so there is not leeway, exactly, but a wider context for such considerations.
On whether a requirement is excessive, proposed new section 300A(3) includes a test of whether something is
“required under Community law or…law in the United Kingdom” ,
and a second test, which is whether the requirement
“is not justified as pursuing a reasonable regulatory objective”.
One “reasonable regulatory objective” is the aim of protecting consumers, so I do not take the point made by the hon. Member for Wolverhampton, South-West (Rob Marris), as that aim can be pursued under that heading. As long as the requirement is not
“disproportionate to the end to be achieved”,
it would not be excessive.
Indeed. My hon. Friend has practised in that area of law, and he demonstrates his knowledge and understanding of the subject, and of the way in which the Bill will interact with the Financial Services and Markets Act 2000. The hon. Member for Wolverhampton, South-West (Rob Marris) is in danger of leading us up a blind alley.
The suggestion made by the hon. Member for Wolverhampton, South-West (Rob Marris) is dangerous, because if too many of those provisions were added to the legislation, Sarbanes-Oxley would indeed be legal in Britain and it would be used as a reason for excessive regulation.
My right hon. Friend is quite right. The narrow focus of the Bill and the way in which it has been drafted have received widespread support from the financial services sector and from trade bodies, because they seek to prevent that very thing from happening. If the wording were wider, more permissive and less restrictive, it would not necessarily command consensus, because it would not address the threat that UK financial services institutions attach to the imposition of extra-territorial jurisdiction in that area.
Surely the important factor is that scandals such as those involving Enron and WorldCom have not taken place in the UK, presumably because of the proportionate regulatory environment. When Parliament passes the legislation, it must provide reassurance that sufficient protection is available to prevent similar scandals.
The hon. Gentleman is right that those things did not happen in the UK. We did not suffer from the extensive financial scandals that afflicted US markets, partly because of the strength of UK regulation. A principles-based approach to regulation, with an emphasis on risk, puts in place the right framework to prevent the reoccurrence of those scandals. Too often, financial scandals arise because of a prescriptive, rules-based approach that requires people to tick boxes. We must therefore learn lessons from the American experience, and we must be careful not to repeat the mistakes that were made in the US in the past.
May I turn to the four conditions set out in proposed section 300A? People using the Bill must have a clear understanding of its import, and the purpose of the provision is to maintain the competitive advantage of the UK financial services sector relative to other global markets. We must look carefully in Committee at the language of proposed subsection (4)(b) to make sure that that message is clearly conveyed to people who are interested in regulation in the UK. The hon. Member for Wolverhampton, South-West asked the Minister about the lack of a backstop date in proposed section 300D. I am sure that, after consulting stakeholders, the Financial Services Authority will suggest an appropriate date. However, will the Minister or the Financial Secretary confirm that the FSA believes that the 30-day period in which it may deliberate on the changes is sufficient to consider fully the impact of any rule changes? Returning to the collapse of Enron and WorldCom, how long would it have taken people to discern the long-term damage that Sarbanes-Oxley would have inflicted if it had been introduced in UK capital markets? It is therefore important that we make sure that there is sufficient time for the FSA to consider fully the impact of any rule changes.
In conclusion, Sarbanes-Oxley has provided a great boost for the City, as US markets recognise, which is why, from Hank Paulson downwards, there has been pressure to water down the provision. It should be a warning to the Government and to Governments across Europe that while one piece of legislation can strengthen our competitive position, another can seriously damage it. We must pay great attention to the conditions that make the UK financial services sector a great success. It is not just about regulation—it is about the people and businesses based here, the tax system, infrastructure and many other factors. If the UK is to thrive, we must look at what we can do ourselves to ensure that it remains globally competitive in the financial services sector, rather than relying on others to make mistakes from which we can benefit.
The Bill gives the FSA the power to protect the competitive position of our capital markets, but as the provisions indicate, it cannot protect exchanges and clearing houses from excessive regulations imposed here in Westminster or in Brussels. Although it protects UK capital markets from one aspect of extra-territoriality, it does not protect them from all aspects. We welcome the Bill and hope that it will be effective, but we do not see it as the end of the story when it comes to maintaining the competitiveness of the UK financial services sector.
I am pleased to have the opportunity to speak in the debate. I welcome my hon. Friend the Minister’s opening remarks, which confirm that the Bill is intended not to impose additional regulatory burdens on the City, but to protect the light-touch system of regulation that has served the City so well since we set up the Financial Services Authority.
I also welcome my hon. Friend’s reaffirmation that the Government recognise that the City’s strength lies not just in its sensitive and light-touch approach to regulation, but in its internationalism and receptiveness to outside influences and outside investment. I am pleased to hear confirmation that the Bill is not intended to restrict foreign ownership of our recognised exchanges and clearing houses, that the Government are neutral on the matter and will remain neutral, and that the Bill is intended to safeguard the risk-based, principles-based approach that has made London such an attractive place for international financial institutions to do business, and its exchanges such a magnet for listings from around the world.
Far from imposing a new burden, the Bill will, by giving the FSA what I am sure will be a judiciously exercised power of veto, ensure that excessive, disproportionate or unnecessary regulation is not permitted. I am also pleased to hear the Minister confirm that the Bill is not about micro-managing the exchanges, and that safeguards will be built into it so that the FSA can allow exchanges to make minor changes to their rules without interference.
Many reasons have been advanced for the City’s position as one of the world’s two most successful financial centres—some would say the most successful. Such factors include the English language, our geographical position between the US and Asian time frames, our skilled work force, and the attractions of London as a place in which to live and do business. But the Bill encapsulates the two main reasons for London’s success: its internationalism and its approach to regulation.
Britain has always been ahead of the pack as far as globalisation is concerned. Its financial sector has for 300 years or more been internationally focused and outward looking. Unlike other financial centres that developed primarily to serve their own domestic markets, the City’s phenomenal growth has been due to its role in financing world trade, rather than financing our indigenous industries. Indeed, as Professor Anthony Hopkins said, the industrial revolution happened independently of the City of London.
In the past three decades or more, since the collapse of Bretton Woods, London has prospered as a financial centre not just by capitalising on its traditional strengths, but by embracing liberalisation and exploiting the advantage offered it by protectionist or fiscally restrictive regimes in other financial centres. We have spoken a great deal today about Sarbanes-Oxley, but in the 1970s the London Eurobond market flourished because of decisions taken in the USA.
In 1979, the scrapping of exchange controls by the Thatcher Government freed up the flow of capital in and out of the country, removing a key obstacle to globalisation and cementing the City’s position as an international hub. Big bang, 20 years ago last month, changed the City for ever, by relaxing the rules preventing foreign ownership of British financial institutions and leading to an influx of overseas investment. Of course, there has always been a foreign element in the City. The names of what we would regard as some of the most traditional City institutions, such as Rothschild’s, Warburg’s, and Kleinwort Benson, make it clear that they were established by immigrants, and they have now been taken over by yet more foreigners coming in.
With big bang we saw what is commonly dubbed the “Wimbledonisation” of the City—that is, its domination by foreign players. In particular, US banks, prohibited by Glass-Steagall from owning US securities houses, took the opportunity to move into London in force, and provided the City with capital for almost unlimited expansion.
This all means that London is now a truly international financial centre, handling foreign transactions worth £560 billion a day. It is the place where more international mergers and takeovers are arranged than anywhere else, and more cross-border transactions take place than anywhere else. It has the biggest foreign exchange, swaps and international insurance and reinsurance markets in the world. The City has more foreign banks than any other financial centre—264 at the last count. It has almost a third of the daily turnover in the world foreign exchange market. It has over 40 per cent. of the world’s OTC derivatives trade, 70 per cent. of the Eurobond market, 40 per cent. of the world’s turnover in foreign-listed equities trading, and the fastest-growing share, currently 20 per cent., of global hedge fund assets. It has taken a long time to establish a regulatory system which can cope with that new order. Most people accept that the fragmented, predominantly self-regulatory regime established at the time of big bang was a messy compromise that ended in failure.
If we look back at the 1980s and the early 1990s, we can all recite a litany of City failures and scandals—Johnson Matthey, British and Commonwealth bank; Bank of Credit and Commerce International, Barlowe Clowes, Lloyds of London, Brent Walker, the Guinness affair, the Blue Arrow affair, Roger Levitt, Asil Nadir and Polly Peck, Maxwell and the Mirror Group pension funds, and, of course, Nick Leeson and the ignominious downfall of Barings bank.
At the time of the Barings collapse, I was employed in Abbey National’s treasury division. At the time, Abbey National had a derivatives trading joint venture with Barings, which, I suspect, it would not care to remind people about these days—I hasten to add that it had nothing to do with Barings futures trading activities in Singapore. I was called into the Barings head office in London on the Sunday when Barings went under to help to sort out the mess with the Bank of England and the chief executives of the top UK banks. I remember that day well, because it was the day of my constituency Labour party’s annual general meeting. I was chair of my constituency at the time and had to give my apologies, which raised more than a few eyebrows among my comrades in Luton, North Labour party, who until then had no idea what I did for a living. I am glad to say that the Labour party has come a long way since then.
Barings management did not know what its traders were up to, the regulators did not know that the management did not know what the traders were up to, and the Government certainly did not know that the regulators did not know that the management did not know what its traders were up to. The old boy network comprehensively failed. It may be tempting fate to say that I do not think that such a scenario could happen now. Of course we should never be complacent, but the Financial Services Authority and the relationship between the Government and the regulators inspire a great deal more confidence now.
Surely the hon. Lady is experienced enough to know that there is no regulatory system in the world that is proof against all fools, knaves and crooks—so it is completely silly to say that there will never be a collapse in Britain again. We must accept that that will happen in the future.
As I said, we should never be complacent.
It is easy to portray the Barings situation as the consequence of one rogue trader acting in a criminal way. If one examines the matter closely, however, there was a systemic failure throughout the management and the regulatory system, and people simply did not understand the risks that the bank was taking. I am a member of the Treasury Committee, which has discussed with the FSA how it regulates matters such as hedge funds and the current risk-based system of assessment. I am confident that the FSA appreciates what the banks that operate out of the UK are doing, what sort of business they are engaged in and what risks are associated with it. [Interruption.] Farepak does not come under the FSA, although perhaps that is a subject for future debate.
The UK approach is widely seen as the best in the world, and it underpins London’s success as a modern international financial centre. It is important that we preserve that approach, which is the essence of the Bill. While we are debating how we regulate our financial markets and City institutions, I want to restate why, while we should aim to achieve a degree of harmonisation and a level playing field across the European Union—and, indeed, further afield—it must never be at the expense of our international competitiveness.
London has a comparative advantage in financial services, and if other countries want to compete with us they should do so by raising their game to our level, not by seeking to hold us back with inflexible, over-burdensome, gold-plated regulation. A one-size-fits-all approach in a new enlarged European Union is unlikely to be to London’s advantage, and we should resist attempts to force us down that path. However, we should do so not through withdrawal and seeking to isolate and disassociate ourselves from our European partners, as I have heard the right hon. Member for Wokingham (Mr. Redwood) suggest, but through co-operation, negotiation, being at the table and making our voice heard.
As the Minister has said, we should welcome European co-operation on regulation, but only where it is necessary, where it truly furthers the integration of the internal market and where other non-legislative policy solutions have been thoroughly considered. Any new regulation must be implemented in a sensitive light-touch manner, too.
The City is stronger because of its position within the EU. We act as Europe’s wholesale financial services gateway to the world, and the world’s financial services’ gateway to Europe. It is in Britain’s best interests that we stay fully engaged, but we must do it in the City’s best interests, not at the City’s expense. That is increasingly true on a global scale as developing markets open up, and countries such as China and India develop their financial sectors. Regulatory co-operation is more important than ever before, but we must continue to strike the right balance between protecting investors and entrenching financial stability, and encouraging innovation and foreign investment.
We should not be scared of foreign investment or foreign ownership in the City. In the late 1990s, more than 40 per cent. of City employees had an overseas employer, and I am sure that that percentage has, if anything, grown since then. Some of the recognised exchanges are subsidiaries of foreign companies. However, we need to be watchful to ensure that foreign takeovers do not lead to the imposition of burdensome foreign regulatory standards on UK exchanges and issuers, and that, as the hon. Member for Fareham (Mr. Hoban) said, the US’s extra-territorial ambitions are curbed. I say that as someone who has worked for an American investment bank and has been on the receiving end of the not-so-light regulatory touch of the Securities and Exchange Commission.
As a member of the Treasury Committee, I visited the US earlier this year with my hon. Friend the Member for Edmonton (Mr. Love), and we heard first-hand about the impact of Sarbanes-Oxley. The London stock exchange has benefited as a result of Sarbanes-Oxley. It attracted a record 129 international companies to its main market and the alternative investment market last year, up 82 per cent. on 2004. Twenty-five per cent. of companies surveyed identified the UK’s standards of regulation and corporate governance as the most important factor in their decision to float in London, and of those that had considered listing on a US exchange, 90 per cent. felt that the demands of Sarbanes-Oxley made listing in London more attractive. We were therefore right to choose not to go down that path. However, we need to be ever vigilant to ensure that we do not import overseas regulatory burdens, and that we have the best possible environment in which our financial services industry can continue to prosper and to create jobs.
I very much welcome the Government’s initiative in introducing the Bill. I am sure that it will be welcomed in the City, as it has been on both sides of the House.
It is a pleasure to follow the hon. Member for Bristol, East (Kerry McCarthy), whose presentation was all the more authoritative for being based on her own experience.
The Economic Secretary said at the outset that there is all-party consensus on the Bill, and I certainly do not intend to oppose it. I am not yet entirely persuaded that it is necessary, but that need will no doubt emerge in the course of the debate. When I see Conservative and Labour Front Benchers, together with most luminaries in the City and even Mr. Ken Livingstone, romping in the same bed, I tend to suspect that something not entirely wholesome is taking place.
I think that the characterisation of American financial regulation—I am not an expert, unlike the hon. Member for Bristol, East—has been a little overdone and rather unhelpful, given that the Americans are aware of the problems and are dealing with them. It was presented as the financial equivalent of avian flu against which we must put up defences.
Let me go over a few areas of undoubted common ground. First, it is true, as the Economic Secretary said, that the City is a crucial part of the British economy. Ten per cent. of gross domestic product is generated from financial services, although not all of those are based in the City—some are provided by retail banking throughout the country. It is particularly important for employment.
Secondly, we all agree that financial services must be regulated flexibly—but, as the hon. Members for Edmonton (Mr. Love) and for Wolverhampton, South-West (Rob Marris) said, flexibility must be balanced against investor protection and protection against systemic failure. There is more than one dimension to consider.
Thirdly, we all accept that we are dealing with global markets that move very fast and that this is not an area where nationalism or national ownership are appropriate concepts. Competition takes place not between countries but between sets of rules. People in the City often employ the imagery of Wimbledon to describe what they are trying to achieve, saying that they are hosting an event and that it does not matter whether British people win it. That is quite a comforting image in some respects. However, there are problems with the Wimbledon comparison. Will Hutton has observed that it is probably because we have Wimbledon that we produce such dreadful tennis players, unlike smaller European countries. He also argues that having an international financial centre may be to the detriment of domestic companies’ growth and innovation. I do not entirely buy that, but we have to look at both sides of the argument.
I part company with the proposals over two issues. First, we should be more honest about what this legislation is for. It is presented as being completely innocuous, but its proper title should be something like the “Investment Exchanges and Clearing Houses (Americans Keep Out) Bill”. That is essentially what we are talking about. The Minister and the Conservative spokesman have said that there is no objection to takeovers or to foreigners per se, but it is clear that a barrier is being raised and that powers are being created to deal with takeovers from two particular sources, which just happen to be the two biggest exchanges in the world: the New York stock exchange and NASDAQ. Because they are so big, they have the potential to launch a successful takeover in London.
Does the hon. Gentleman agree that Morgan Stanley, Merrill Lynch and Goldman Sachs are all important American investment houses that play a vital role in creating jobs and employing people in the City of London? We welcome those American investment houses into the UK, and the idea that we are trying to prevent American ownership in London is disproved by the reality of today’s City of London.
The Minister is being a little too defensive. I was not suggesting for a moment that there was a problem with American companies investing in London. The problem is with the American exchanges that might take over London or the Euronext market. That is the issue here.
There are certain forms of regulation that are not covered by the Bill. The right hon. Member for Wokingham (Mr. Redwood) might be able to make this point more comfortably that I can. The Bill does not cover European regulation, which may or may not be onerous. Let us envisage a hypothetical situation—after all, the Bill is all about hypothetical possibilities—in which, as a result of injecting this poison pill into the regulatory system, the New York stock exchange backs off from its interest in the Euronext company, and the Deutsche Börse, a German company that is interested in acquiring a Franco-Dutch operation, succeeds as a consequence of that. As a pan-European exchange, it could then choose to apply European regulation in a way that is unhelpful to London’s interests. That is purely hypothetical, but it could certainly happen.
There is nothing in the Bill to prevent that from happening, because European legislation has primacy here. One of the unintended consequences of blocking American takeovers could therefore be disadvantageous practices against which the Bill provides no protection.
The hon. Gentleman has completely misunderstood the proposals. The Bill is not trying to block American takeovers. It might better be entitled the “Protection of Your Interests (Having Taken It Over) Bill”. It is saying to the American exchanges that we will not let the American Government mess up the asset if they acquire it.
I shall come to the Sarbanes-Oxley legislation, and what it might entail, later. The issue here is whether two particular American companies, the two biggest exchanges in the world, will be able to launch an unresisted takeover of the UK exchanges. The American Government are one or two steps removed from this process.
I just want to make it absolutely clear—I have made exactly the same point to the chief executives of the New York stock exchange and NASDAQ—that we have no problem at all with the NYSE or NASDAQ owning a UK exchange. We do not encourage or discourage it, but we have no problem with it at all. The issue is whether they would own an exchange where listings are regulated in London by the Financial Services Authority. I made it clear in my speech that we are neither overtly nor covertly trying to prevent there being an American owner of any exchange in London.
The two exchanges in the United States have a different interpretation. They have given public assurances that there is no way in which the SEC and other regulations in the United States could be imported through their ownership. We will deal later with how that might happen and whether it is a plausible hypothesis. The Economic Secretary’s remarks are reassuring, but they reinforce my scepticism as to why the Bill is necessary in the first place.
To develop the point further, not only have I discussed the purpose of the Bill with those two American companies, as well as with the London stock exchange and others, but I have seen no public statement of opposition from either of those companies. As I understand it, the opposite is the case: they are comfortable about us taking the power, so that we can be reassured, as can they, that the regulatory regime will not change as a result of a change in ownership. I have no reason to believe that NASDAQ has concerns: to my understanding, the opposite is the case.
No doubt the Economic Secretary will get an opportunity to reply later. Let me develop my scepticism further.
One has to question the motives for establishing such a defensive mechanism. Usually, hostile takeover bids are resisted by a company’s management. Clara Furse, the manager of the London stock exchange, has said clearly that her exchange is not for sale. That is her strategy. She does not want to sell. The price of shares in the London stock exchange has been ramped up considerably, creating barriers, and its management undoubtedly wants to resist a takeover. Why would the British Government want to create a mechanism to make it easier to protect the insider interest in this case?
Let me move on to the argument about which the Economic Secretary is exercised, which goes back to the principle and basic economics of exchanges. My starting point would be that an exchange is a network or utility that works best because everybody is a participant in it, as in the case of the electricity grid or bank clearing system. The productivity of exchanges, however, has risen rapidly—in London, by 6 per cent. in the past 20 years—and their monopolistic structure tends to lead to much higher profits and fees, which are resisted by the users.
Two sets of countervailing pressures are emerging, one of which is competition. In the United States in particular, small exchanges are being launched with low costs. In principle, the new European regulation encourages competition, which, in the course of time, should bid down costs. The Turquoise consortium of investment banks appears to have that objective. The problem of obtaining gains through competition, however, is that it breaks up the network, losing efficiency and potentially raising costs.
That raises the question of the other route to contestability in the market, which is through takeovers. That is the reason for growing pressure from the New York stock exchange, NASDAQ, Deutsche Börse, Macquarie bank and others to enter the market. The question is whether that is a problem. The problem posed is that one or other such acquisition—if we accept that the worry is not just about the Americans—might succeed in importing into the UK unhelpful forms of regulation, particularly those prevailing in the United States.
The Conservative spokesman made a genuine attempt to explain the transmission mechanism for that and quoted one example, the registration of hedge funds. As I understand it, however, that case was introduced at the behest of the SEC and has subsequently been dropped, although I am sure that he knows a lot more about that than I do. I think that that is the only concrete case that we have of that type of extra-territoriality being introduced through the exchange mechanism, but there may be many others. The right hon. Member for Wokingham is shaking his head. It is important to understand how this could happen, why it is such a threat in practice, and why the Bill is necessary to prevent it.
I am following the hon. Gentleman’s argument as closely as I can. He seems to be suggesting that when an exchange is taken over alien extra-territorial regulation is a significant issue, but would it not almost inevitably lead to the creation of alternative structures? AIM—alternative investment market—and subsequently Ofex were created because of the cost of a full London stock exchange listing. Would this not offer an opportunity for the creation of another exchange somewhere down the line that avoided extra-territorial regulation?
What the hon. Gentleman says is absolutely true. It suggests that there is a self-regulating process, which makes it even more difficult to understand why British legislation is necessary.
Let me take the argument a step further. Let us suppose that we are talking about the potential implications of NASDAQ’s taking over the London stock exchange. Why, in any circumstances, would it want to bring American regulation with it? Presumably—the Minister made this point indirectly—it is coming here to pick up listings that it has been unable to attract in the United States, and would strongly resist any attempt to import American regulation through the stock exchange system. From what are we trying to protect ourselves?
Another point made very well by the hon. Member for Fareham (Mr. Hoban) is that although extra-territoriality is clearly a problem, this is not the most appropriate way of dealing with it, or even directly relevant to most aspects of it. An appalling example of extra-territoriality in recent months is that of the NatWest Three. Taking British employees of a British company to an American court for an offence that they committed in the United Kingdom is real extra-territoriality. There is a problem with British companies that happen to be listed in the United States being pursued in Britain for things that they have done in the United States, and the Bill will not protect against that. If extra-territoriality is to be dealt with, it will have to be dealt with through joint negotiation with the United States. Whatever the virtues of the Bill, it does not deal with the extra-territoriality problem.
It is being suggested that there is something lethal about the Sarbanes-Oxley Act. Certainly everyone with whom I have discussed it in the City is worried about what might happen if those five pieces of American legislation entered British law. The hon. Member for Wolverhampton, South-West tried to raise a fundamental question: what is the problem, and why is the legislation so difficult and iniquitous?
Let us return to basics. The Sarbanes-Oxley law was introduced in the wake of Enron and WorldCom. It dealt with a variety of issues, which included investor protection but also accounting procedures. When it was referred to the American Congress, which covers a wide spectrum—no one could accuse American Congressmen of being isolated from business interests and opinions—the Senate backed it by 99 votes to nil, while the House of Representatives backed it by 423 votes to three. The overwhelming consensus, extending from the most libertarian Republicans to the most diehard leftists of the Democratic party, was that the legislation was sensible. Distinguished people such as Alan Greenspan spoke up for it strongly—although they have subsequently acknowledged that aspects of it are a problem, notably section 404. The vast majority of it is uncontentious, and perhaps helpful.
In describing the historical lesson of what happened in the United States, is the hon. Gentleman not making an extremely good case for the argument that, in the aftermath of high-profile failures such as WorldCom and Enron, legislators should be making sensible regulation rather than hastening to play to the gallery?
Certain aspects of the legislation have been found to be excessive, and I understand that at the behest of the United States Treasury Secretary they are now being reviewed—and they might well have been removed by the time that this legislation receives Royal Assent and reaches the statute book. The Americans are well aware of the awkward aspects of that legislation and appear to be taking action on it.
Does the hon. Gentleman accept that listings in America have declined while in London they have risen mightily because of this ham-fisted legislation? We are very lucky that the Americans had it. Can he not understand that the crimes that were alleged against the senior executives at Enron were all crimes under the law as it stood before the Americans decided to legislate again? What happened in respect of Enron was a matter of enforcement not of inadequate law, and they responded to it wrongly.
There is an element of truth in what the right hon. Gentleman says. I do not pretend to be an authority on financial markets, but it is my understanding that the decline in listings in the United States was taking place quite some time before the Sarbanes-Oxley provisions were introduced. That decline was prompted by, among other things, class actions and the fact that there are multiple regulators with different agendas. The decline of the IPO—initial public offering—market has been referred to; that was in evidence well before the Sarbanes-Oxley provisions came in.
There is a simple interpretation of recent financial history in which that villainous legislation is responsible for every problem, but there is a lot of good academic research that suggests that companies that have listed in the United States have enjoyed substantial premiums; they have higher regulatory costs, but they also have higher levels of investor protection, which is a positive factor in the market. So there is a trade-off, and the situation is not as clear-cut as some Members seem to be implying.
I seek a little more clarity. Many of the issues we are discussing are about specific commercial companies, which presumably would be dealt with in our country by, for example, the Companies and Insolvency Acts and legislation covering audit, but the Bill is specifically about exchanges and clearing houses. I think that we might be crossing over too much from normal commercial activity. I want us to focus on the Bill’s objectives, which seem to be to avoid burdensome regulation over and above that required for an exchange or a clearing house. Is that not what we should be focusing on?
I thought that we were. I keep coming back to what I thought was the purpose of the proposed legislation: to stop a particular body of legislation—the American Sarbanes-Oxley provisions—being imported by some mechanism, which has not been entirely explained, into the workings of the British exchanges. The argument in respect of that might be right; I am not suggesting that it is completely wrong. I am just sceptical about whether new British legislation is necessary to achieve that objective.
In recent months and years there have been some extremely controversial takeovers in the United Kingdom. There have been takeovers in the water industry, in my part of Britain by an Australian company with very strange corporate governance. Abbey and the airports have been taken over by Spanish companies, also with strange corporate governance. Our electricity is delivered by a French company that is an offshoot of the French state. At no point has it been suggested that we need to introduce defensive legislation to protect us from those imports. The view has been that contested takeovers are desirable and might well be in the British national interest, and I share that view. So my final point is: what is so different and special about the London exchange that it requires specific preventive legislation?
There is an important distinction between the examples that the hon. Gentleman cited—such as the takeover of BAA plc—and the takeover of the stock exchange: BAA plc exists in a regulatory environment that it does not control, whereas the stock exchange determines its own rules. The Bill is about the rules that the stock exchange and other exchanges use to regulate business conducted on those exchanges. To refer to another of the hon. Gentleman’s examples, water companies operate within the framework of Ofwat, but the stock exchange makes its own rules. What we are trying to do in this Bill is protect the rules of the stock exchange; it is not about the ownership of the stock exchange, but about ensuring that its rules work efficiently and effectively and achieve their regulatory objectives. There is a difference between the takeovers that the hon. Gentleman mentioned and the potential takeover of the stock exchange or any other exchange in the UK.
I understand the point that the hon. Gentleman makes, and I realise that there is a clear distinction between taking over a network with a set of rules and taking over individual operations. However, I come back to the central point, which I have repeated on several occasions. I completely understand a lot of the reasoning behind the Bill. I realise that there is a wish not to make British regulatory practice more onerous than it already is, and that there is a fear—it has not yet been properly explained, however—that the American rules will be imported into the British system as a result of the takeover. If the Minister can explain how this importation could take place—how the damage could be done—I will be very happy to support the Bill.
Let me give the hon. Gentleman an example that might help him. There was a concern in some parts of the world outside the UK that the alternative investment market—a lighter-touch market with lighter-touch rules set by the London stock exchange—is too “light-touch”. One can imagine a regulator in another part of the world saying to a company regulated in that part of the world, “If you are going to own a foreign exchange like the LSE, which is listing through the AIM, you must make sure that the AIM listings are equivalent to our rules in our territoriality, in order to pass our domestic regulatory regime test.” That example shows exactly how an external regulator could attempt to undermine our competitive strength by exporting rules on to the AIM. Does the hon. Gentleman accept that such concerns are very real in the City of London, and that this Bill addresses them?
I do understand such concerns, but is not the following point equally valid? Let us say that Deutsche Börse took over the LSE or another exchange. It would find the AIM incompatible with its interests and would seek to reduce its importance and not invest in it, but because it was subject to European, rather than American, rules, it would not be protected in any way as a result of this legislation. Perhaps I have misunderstood the distinction between British and Community rules and American rules, but it seems to me that the example that the Minister has described would apply just as seriously if a takeover took place within the European Union, rather than by an exchange outside it.
I have repeated the point on several occasions and I need not go over it again. I see the Bill’s underlying purpose and I am inclined to support it. I am sceptical about whether it is necessary, and I hope that that will become a little clearer in future exchanges on the Bill.
I begin by declaring an interest—my husband recently advised Deutsche Börse on its bid for Euronext. It is a pleasure to follow the hon. Member for Twickenham (Dr. Cable), who treated us to some meaningless statistics yesterday. I would not say that his arguments this afternoon were meaningless, but we have become used to the Liberal Democrats proposing totally irresponsible and completely inconsistent public finance legislation. This afternoon, they have adopted a similar posture toward what is in fact one of our strongest economic sectors. If we went down the path described by the hon. Gentleman, we would lose a valuable exporter and employer to this country.
The City of London is one of the most successful sectors of the economy, and we employ more than 1 million people in financial services in this country. As has clearly been demonstrated, the days when Labour Governments had an ambivalent attitude toward the City have long since gone. So I welcome the Bill introduced by my hon. Friend the Minister.
Under this Government, financial services growth has reached 10 per cent. a year. Last year, the financial services trade surplus was some £19 billion. During the past 10 years, foreign equity turnover has increased by 260 per cent., and foreign exchange turnover by 60 per cent. While my hon. Friend the Member for Bristol, East (Kerry McCarthy) was worrying about the Bank of Credit and Commerce International in those far-off days, which were not so halcyon, I was the Treasury official on the foreign exchange desk. The contrast between the situation then and now can be illustrated by the fact that I was authorised to agree to the Bank of England’s intervening up to the figure of £50 million a day on the foreign exchange markets in order to stabilise sterling. Nowadays, we do not pursue such economic policies; moreover, £50 million is now such a paltry sum that it would have no impact, anyway.
Given the hon. Lady’s lack of ambivalence about the great success of the City of London, how does she regard the comments of the right hon. Member for Neath (Mr. Hain) and the right hon. and learned Member for Camberwell and Peckham (Ms Harman) about City bonuses?
I am very happy to say that we are discussing the Bill before us, not City bonuses; however, perhaps we will return to that issue on another occasion.
It is clear that a key factor in the success of the British financial services sector has been the light-touch, risk-based regulatory regime. The Financial Services and Markets Act 2000 replaced the old self-regulatory regime with an approach based on principles, statutory independence, transparency and a rigorous assessment of costs and benefits for each individual regulation. My hon. Friend the Minister has struck the right balance in the Bill between Government intervention and a laissez-faire approach. He made it clear earlier that the Government have no interest in, or concern about, the nationality of the London stock exchange’s ownership. Indeed, the UK markets are already open to overseas investment; for example, the London international financial futures and options exchange is already owned by Euronext. I hope that that satisfies some of the concerns raised earlier by the hon. Member for Twickenham.
There is a clear trend toward globalisation in the exchanges, as well as in equity trading, which spells the end of natural monopolies in this piece of financial infrastructure and increased competitiveness in the arena of exchanges. It is interesting to note that, despite the huge increase in turnover volume, fee rates have been maintained and bid-offer spreads have not changed, which means that exchange profitability has risen greatly. That is why the banks are looking again at the ownership of the exchanges. While NASDAQ has been looking at the London stock exchange, the LSE is looking over its shoulder at Project Turquoise—a conglomeration of banks that is looking at the LSE.
So in this very fluid situation, it is right that the Government take action to safeguard our regulatory regime. It would be unacceptable if a takeover of the London stock exchange by a US exchange such as NASDAQ led to US regulatory requirements being imposed on UK issuers of securities traded here. The Bill gives the Financial Services Authority the power to prevent regulatory changes that would undermine our approach, and it gives the power of veto not on day-to-day regulation, but on significant changes that would bring about a disproportionate burden of regulation.
There are some fundamental principles at issue here. Even those with the most minimalist picture of the role and function of the state acknowledge that it is the state’s function to uphold the rule of law and to maintain the value of the currency. We need to resist the tendency toward extra-territoriality of some other states, particularly in a case where our own regime has been successful in attracting new businesses because it keeps down costs. With this legislation in place, I am sure that we will continue to see the successful and dynamic development of the UK financial services sector.
I add my words of support for the Bill, which is a sensible proposal, although I have a couple of queries. I support the Bill because on the issue of globalisation, of which we have heard much today, it answers two questions correctly. The first is on ownership and national champions. Despite the comments by the hon. Member for Twickenham (Dr. Cable), I agree with the points made by the Economic Secretary and my hon. Friend the Member for Fareham (Mr. Hoban) that this is not an issue of economic nationalism. The ownership of institutions in the City is not important. Indeed, there are far more important issues at stake. At a time of growing economic nationalism—the chairman of the CBI, Sir John Sunderland, in remarks reported this morning, was critical of France, Spain, Italy and the US for their economic nationalism—it is pleasing that we have a consensus between the major parties that focusing on ownership is a mistake. Indeed, the City has done well out of Wimbledonisation, whereby we provide the venue and the rest of the world provides the players, and that is to be welcomed.
The second question that arises from globalisation concerns the difficulty that countries have in achieving the appropriate level of regulation. There is often a race to the bottom, as the jurisdiction with the lowest level of regulation is seen as the most attractive to businesses. That argument is grossly overstated. Globalisation punishes inappropriate, disproportionate and bad regulation, and Sarbanes-Oxley is an example. As several hon. Members have pointed out, Sarbanes-Oxley has resulted in some companies listing in the UK rather than in the US. However, good regulation is necessary. If a country gets the balance right—and we can argue that this country has done so, especially compared with the US in this area—it does well. The race to the bottom argument is therefore weak.
Countries should retain their own regulatory control, as the Bill suggests, because otherwise the pressure is towards regulation. If globalisation is about economic integration, it also pushes countries towards regulatory integration. Co-operation between regulators is at times appropriate, but too much regulatory integration would be dangerous. One example is the extra-territorial approach adopted by the US on occasion, which is a concern. To return to the points made by the hon. Member for Twickenham, the concern is not that a US exchange will wish to impose additional regulatory burdens on those companies listed on a UK exchange that becomes a subsidiary of the US exchange. The concern is that US legislators will attempt to impose additional regulatory burdens on those companies listed on the LSE or AIM. Extra-territorial legislation regulation is one way in which Governments have attempted to deal with the supposed race to the bottom.
Another way—and this was touched on by the hon. Member for Bristol, East (Kerry McCarthy)—is supranational regulation, and we see that with the European Union. Some of the arguments that can be used for the approach set out in the Bill—that UK regulation should continue to apply and that we should not be influenced by overseas factors—also apply to European legislation, as the hon. Lady acknowledged. The issue is about getting the balance right.
I have two specific concerns about the wording of the Bill. The first is the point that I made to the Economic Secretary during his speech earlier. For argument’s sake, let us suppose that NASDAQ buys the LSE. Then, prompted by NASDAQ, presumably for reasons of US law, the LSE proposes a rule change to implement Sarbanes-Oxley. The FSA considers that change—whether it is excessive or disproportionate—and blocks it. The next step would be a challenge and judicial review. At that point, the regulatory objectives that apply to the FSA come into play.
The FSA has the regulatory objective of protecting consumers, and rightly so. However, it does not have the regulatory objective of protecting or maintaining the competitiveness of UK financial services. Does that make the FSA vulnerable to judicial review in such circumstances? I assume that the Treasury has sought advice on that point, but perhaps the Financial Secretary could address the issue when he winds up.
The issue could have been addressed in a couple of ways. First, section 5 of the Financial Services and Markets Act 2000, which relates to the protection of consumers, could be amended to add a carve-out that makes it clear that any requirement that the FSA deems to be excessive under section 300A is not an appropriate measure for the protection of consumers. The other—and perhaps preferable—way to deal with the issue would be to treat the desirability of maintaining the competitive position of the UK as a regulatory objective, instead of an also-ran, second-tier point. I assume that the Treasury has considered that option and rejected it for various reasons, but I raise the point none the less.
My point is that it could be a two-stage process. Where the FSA concludes that the rule change is excessive and disproportionate—and bearing in mind its regulatory objectives at that point—it could be because the proposed rule is not appropriate for the protection of consumers. However, the test of whether a proposed rule is excessive under section 300A might be an easier test to apply. Given that the rule change has overcome that hurdle, the FSA would then need to consider its regulatory objectives and other factors. To do so, it has almost to ignore the first step and ask whether the rule change is appropriate and whether it would protect consumers. If the rule change would protect consumers, does the FSA have the flexibility to reject it as inappropriate? The second stage may be harder for the FSA and, under judicial review, it may run into difficulties. It is a technical point and might be better addressed at a later stage, but it is an issue. The FSA is left to make a difficult decision—technical in nature but political in implication—as to whether a regulation is appropriate and proportionate. That will have consequences for our relationship with the US.
The Protection of Trading Interests Act 1980 deals with some of the same matters as this Bill, and it gives the Secretary of State for Trade and Industry the power to make judgments. Is it right to give the unelected FSA the power to make difficult political decisions? The provision could cut two ways. First, one could claim that the existence of a second tier is more likely to lead to the Treasury being put under political pressure and that it is therefore better to keep matters at arm’s length and subject to purely technical decisions. On the other hand, concern could be expressed about whether a mere regulator like the FSA could be brave enough to take on the might of, say, the US.
The hon. Gentleman and I have exchanged correspondence on these matters. Does he agree that the FSA, the Serious Fraud Office and other regulatory bodies do almost nothing to enforce their powers in respect of insider trading, which evidence uncovered by research reveals to be substantial? How they exercise their enforcement powers is a real problem.
I take the hon. Gentleman’s point about insider dealing. We have exchanged correspondence about that, but I do not know whether his analogy applies in these circumstances. One problem with insider dealing is that it is visible in statistics on the large scale, but how does one apply the rules to individuals? The Bill gives great power to the FSA, which is an unelected body. Should not the Government say that they will make decisions about what is excessive or disproportionate, after taking advice from the FSA? Ultimately, that is a political decision, and one that deserves a little more democratic accountability.
My hon. Friend makes a good and interesting point. I hope that the Financial Secretary will deal with the specific question that I have raised, and say what the rationale was for the decision that neither the House, the Treasury nor any Minister accountable to this House will have a say in the implementation of this Bill.
I welcome this Bill, which safeguards the regulatory regime through powers to curb disproportionate regulation. I emphasise the word “safeguard”, for the benefit of the hon. Member for Twickenham (Dr. Cable). We need to have this measure on the stocks, so that it can be used when necessary.
There is no doubt that the Bill will help to secure the UK’s continued success as a financial centre, but why is it being brought in now? To understand that, we must look at the backdrop to its introduction. All speakers so far have commented on the increasing internationalisation of the City and its institutions. Since the London stock exchange was converted from being a membership organisation, there has been interest from foreign buyers. First was the Deutsche Börse in 2004, then the McQuarrie bank—whose structure no one really understands—in 2005. This year, of course, NASDAQ has continued to pursue its quarry, and we understand that a formal bid has been made.
However, it is not only the LSE that is subject to internationalisation. The LIFFE is already owned by Euronext, and ICE Futures and other organisations and exchanges are already owned by overseas companies. Indeed, Euronext may well be taken over in the near future by the New York stock exchange. Other hon. Members have observed that there could be new entrants to the market, given the proposal from seven investment banks to create a new European trading platform.
In addition, there have been significant difficulties in other jurisdictions, especially in the US, with the result that New York has been very much affected. No one so far has commented on the article in yesterday’s Financial Times entitled “Big Apple’s Glory Days Passed”, or on the report entitled “Down on the Street” in last weekend’s edition of the Economist, which focuses on the challenges to Wall street’s assumption of global superiority as a capital market.
There is no doubt that there is an air of doom and gloom about New York’s ability to compete internationally. That was summed up in a recent article by Mayor Bloomberg and Chuck Schumer, the Senator for New York state, entitled “Learn from London”. However, we need to look more carefully at the reasons for that decline in competitiveness, and the American press is full of articles trying to describe what has been happening in recent years.
No mention has been made in the debate about the tougher immigration controls that exist in New York, which are affecting its ability to tap expertise from around the world. They are also limiting that centre’s ability to bring people together on a short-term basis, and the result is a real effect on the operation of the New York market. Some people in the US think that New York has been slow to innovate, and anyone who looks at the front page of the Wall Street Journal will know how slow that innovation can sometimes be.
In addition, a culture of litigation exists in the US that does not exist here. The SEC undertakes very aggressive litigation, and indeed the newly elected Governor of New York state built his reputation on aggressive prosecutions in the market place. However, the major focus of concern in America has been on the cost of regulation. In that regard, London has a major advantage, in that it has a principles and risk-based regulatory structure with a light touch. That has played a significant role in its success.
The success of London is worth examining. Financial services make up 8 per cent. of our economy—12 per cent. if we include business services. As was mentioned earlier, the sector has been growing at 10 per cent. a year, with 300,000 people employed directly and an unknown number indirectly. Moreover, it is not often appreciated that the sector employs 100,000 people in Scotland. Another 100,000 are employed in the Leeds area of Yorkshire, although they work more in business services than in financial services.
London is the only major challenger to New York as a global financial centre. The debate has already touched on London’s capacity in foreign exchange dealing, with more than 40 per cent. of the global trade in foreign-based equities. Interestingly, 75 per cent. of the top 500 US companies have a base in London. That is an important consideration, and mention has been made of the cluster effect, whereby expertise in legal, business and finance services are brought together to achieve the success that I have outlined.
London accounts for an increasingly large share of world activity in financial and other services. Although it is well behind New York and some other centres in hedge fund trading, London’s share of the market is growing all the time. The same is true of syndicated loans and last year Europe overtook the US in the corporate debt market.
The hon. Member for Twickenham spoke about IPOs, but I think that he got it slightly wrong. There has been a seismic shift in that market in a relatively short time. He was right to suggest that the move predates the Sarbanes-Oxley rules, but the IPO volume in New York used to be five times bigger than it was in London. Even so, London overtook New York in that market last year, and many people on the other side of the pond are very worried about that.
The regulatory framework is incredibly important, but other factors are at work in the successes that I have described. We look for people with the highest professional standards, and we work hard to attract the best talent available. Europeans regularly come to London to learn how our financial services operate. We are open and transparent in much of what we do. As has already been said, more international banks are registered in London than anywhere else and a similar internationalism can be seen across the whole market.
We have to recognise the impact of those principles on the success of the City and it would be counter-productive to reverse them. We have to ensure that we do not appear to be trying to frustrate or oppose foreign international ownership of our institutions. That is a cardinal principle and I very much support the Economic Secretary’s clear statement of it today. The Government have to remain neutral on ownership; there is significantly more international ownership in London than in any other marketplace, which has been of great benefit to us.
We also have to recognise that consolidation and integration in financial services may—only may—threaten the light-touch regulation that has been the hallmark of the City and of the FSA since it was set up. As I have said before, evidence suggests that that light touch gives the City a significant advantage over other marketplaces. Indeed, excessive regulation threatens the possibility of a retreat offshore. We have already discussed that point this afternoon, so I shall not go into it. What is most important is that we ensure that the legislation will protect the integrity of London as a global financial centre.
The Bill also responds to the concern, about which we have had quite a debate, that the acquisition of City institutions may bring extra-territorial application of regulations. We have talked in particular about Sarbanes-Oxley. In my view, that would extinguish London’s present regulatory advantage, because it would provide additional onerous regulatory requirements, and we have asked questions about that. The internal control report, which is part of Sarbanes-Oxley, seems to be the focus of greatest concern in terms of the legislative changes introduced under that Act. It is clear that there has been a considerable hike in compliance costs as a result of the measure.
The Government have already considered some aspects of Sarbanes-Oxley in some detail and concluded that they would be disproportionate, although, interestingly, The Economist refers to the cost-benefit of the introduction of greater regulation. Of course, one study will say one thing, while another says something else, but the import of the studies carried out so far appears to be that at the lower end of the market—up to $250 million—there is a disbenefit and that the benefit begins to increase the larger the company becomes. The alternative investment market may be the biggest beneficiary of our decision to resist that additional regulation, as appears to be happening.
I welcome the power in the Bill to veto excessive regulation and, indeed, the framework to ensure that the FSA does not get involved in the day-to-day commercial judgments of exchanges. That is extremely important; exchanges have to be left to carry out their business. The Bill also rejects micro-management of the rule books and the vetting of every rule change. There must be a broad-brush approach—a simple veto power when disproportionate regulation is being considered.
We have to enshrine in the legislation the fact that our exchanges remain open to overseas ownership, and we must send that message clearly. It is an important principle that the City has always upheld.
Putting all those measures together, this simple Bill will provide the safeguards that we require and will, when necessary, ensure the continuation of the light-touch regulation that has been such a success in the City. I commend it to the House.
Like other speakers, I welcome this minor but important piece of legislation and support the powers that it proposes to give the Financial Services Authority.
Although I am unaccustomed to supporting aspects of Liberal Democrat speeches, it is particularly important to consider Bills that have overwhelming support with a slightly more sceptical eye, so I supported the hon. Member for Twickenham (Dr. Cable) in some of his concerns. He rightly pointed out that Sarbanes-Oxley had got through both Houses of Congress with precisely three opposition votes out of 550—someone will probably note that there are slightly fewer than 550 legislators in the United States, but I am sure that the hon. Gentleman recognises my point. When there is overwhelming agreement, there is often no proper debate, so it is right that we have had some discussion of this relatively small Bill.
The history lesson in the contribution made by the hon. Member for Bristol, East (Kerry McCarthy) was most welcome, as indeed was the contribution of the hon. Member for Edmonton (Mr. Love). The City of London has always been internationally minded; at least, it certainly was until 1914 and then from the early 1970s. The hon. Gentleman referred to what he regarded as the fiasco of the eurobond market, but in reality it was high tax in the USA that opened up the eurobond market to Europe. It was only the foresight of the Thatcher Government, with the big bang in 1986, that ensured the internationalisation in the City of London, from which, as has been pointed out, the whole country has prospered. Without a thriving financial services industry, the UK would be in deep economic difficulties.
Of course, a thriving financial services industry brings problems. London Members see many of the problems that have resulted from the great strength of the City of London. However, that strength is to be welcomed, as is the fact that so many Labour Members, who, 15 or 20 years ago, were somewhat less than ambivalent about the power of the City, now embrace what it brings.
Saved not by the bell but by you, Mr. Deputy Speaker. Thank you very much indeed. Given my earlier intervention, I guess I was asking for that comment from the hon. Lady.
In a nutshell, the Bill ensures that the FSA will be able to prevent recognised investment exchanges and clearing houses from adopting regulatory changes that it regards as disproportionate to the regulatory objectives proposed. The underlying concern is that otherwise the internationally competitive position of the UK-based financial services industry in globally competitive markets may be damaged. The protection of the competitive position of London investment exchanges that may in future be acquired by overseas shareholders is the main purpose of the Bill.
Naturally, that brings into the equation two other issues to which several Members have referred. The first is the principle of overseas control. In fact, the City of London is already internationally owned, staffed and managed—a process that accelerated rapidly after the 1986 big bang. Legitimate concerns have been expressed on both sides of the House about how sustainable that would be in a massive economic downturn.
Clearly, there was a recession in the early 1990s, which hit the City of London as it hit many other parts of the British service industry. There was also grave concern that by not joining the euro at the beginning of this century, Britain could find its competitive advantage in London undermined. That has not come to pass. Equally, however, we should not be complacent about the longer term, while we should rejoice about the fact that the City remains very strong in spite of the fact—perhaps even because of it—that overseas ownership allows flair and innovation from all corners of the globe to play an important part in the London market.
Secondly, the issue of the limits of protection in the Bill has also been drawn to my attention. My reading—perhaps it also takes us back to the thoughts of the hon. Member for Twickenham—is that in the event of NASDAQ’s bid for the stock exchange proving successful, we cannot provide protection against actions potentially in the US or in British courts by aggrieved US investors in LSE-quoted securities or, indeed, by high-profile district attorneys wishing to make a name for themselves. We have had a broad-ranging debate about the effect of Sarbanes-Oxley and it is now clear that, given the concerns evident in the US market, there has been a rowing back from it.
I hope that we can take the opportunity provided by the Bill to make the case once again for the pursuance of a minimum regulatory regime, especially in view of foreign membership as a fact of City life. We need to remember that innovation, flair and light-touch regulation have been the watchwords for many of the great successes in the overseas and outward-looking global financial markets in which London has played an important part over recent centuries. We should ensure that the UK authorities are able to regulate to the lightest possible degree and avoid the micro-management of the financial markets, to which other hon. Members have referred, irrespective of their ownership of the exchange in question.
I believe that that is the intention of this small but important piece of legislation. I welcome it as a positive step forward, which has certainly been welcomed by the City of London corporation in my constituency. It is wise to look carefully into all aspects of regulation and the way in which the FSA operates. We cannot be complacent. I detected from the Minister’s earlier comments that with the additional powers given to the FSA in 1997, we had somehow been able to ward off all the problems that had arisen from Enron, WorldCom or the litany of previous scandals in this country that were outlined earlier by the hon. Member for Bristol, East. We should always remember that there will be crooks in any market and we should not be overly complacent that, in putting a new regulatory framework into place, we have somehow made ourselves immune from any such nefarious behaviour.
I welcome the Bill and hope that after rapid progress on Report and Third Reading it will be on the statute book before too long.
I am grateful for the opportunity during this short Third Reading debate—[Hon. Members: “Second!”] I am sorry, I mean Second Reading debate; time has flown so fast that it has evidently left part of my mind behind. On behalf of the official Opposition, I wish the Bill all good speed and I will reiterate briefly why it merits all-party support. I believe that it does, in the end, have all-party support. The hon. Member for Twickenham (Dr. Cable) provided the necessary grit, but said at the end of his speech that he was inclined to support the Bill. I have to say, though, that having listened to his entire contribution, I was not always sure that he was going to reach that conclusion.
We thank the Economic Secretary for sharing a draft of the Bill with us and for briefing us personally. After all the turmoil, drama and excitement of yesterday’s Queen’s Speech debate, we are glad to see that the clunking fist has been replaced by the outstretched hand of co-operation, but we know, of course, that we will be back to normal business soon—
No doubt tomorrow, and we all look forward to it.
I would like to respond to some of the good and expert speeches, beginning with those of Labour Members. We heard what can fairly be described as two hymns to the City as a powerhouse of capitalism from the hon. Members for Bishop Auckland (Helen Goodman) and for Bristol, East (Kerry McCarthy). Conservative Members enjoyed listening to both. This week, we have heard some Conservative spokesmen defending the work of Polly Toynbee and now two Labour Members defending the power of capitalism. It would understandable if onlookers were somewhat confused, but I shall explain in a few moments why such views might be held and why the Bill is necessary. We also heard an expert speech from the hon. Member for Edmonton (Mr. Love), who made some interesting points about the present climate in the US, particularly with regard to litigation culture, and the effect of immigration restrictions on financial markets.
My hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) took us, as those who served in Committee on the Finance Bill might have expected, into legal territory, weighing up the balance between necessary regulation and consumer protection on the one hand and a light touch on the other. I do not know whether he has had the opportunity to talk to someone whose name, for some reason, escapes me, but who figured a great deal in proceedings on the Finance Bill.
My hon. Friend the Member for Cities of London and Westminster (Mr. Field), who knows a great deal about these matters—they are, so to speak, on his doorstep—made an expert speech. He rightly said that we must preserve the innovation, flair and light-touch regulation that is the hallmark of the City.
The House may be concerned that proposals that command cross-Bench support do not always necessarily stand the test of time. I received a note saying just that before the hon. Member for Twickenham raised the interesting point that Sarbanes-Oxley went through the US legislature almost unopposed. Given the criticisms of aspects of Sarbanes-Oxley that we have heard in the debate, it is right for us to pause for a moment and consider whether, because the Bill commands all-party support, it should necessarily glide through. I thus want to reiterate by coming straight to the main point why we believe that the Bill is workable and durable.
The Bill is effectively built on the paradox that the preservation of the present light-touch regulation of financial services can be guaranteed only by extending the powers of the regulator. That paradox is, like most paradoxes, quite hard to accept at first, so it is necessary to show why it holds good. The London stock exchange may be acquired by a US exchange, as others may in due course. Once again, like the Government, we have no objection to that whatever. The Bill has nothing to do with keeping the stock exchange in British hands, in the sense of flying the Union flag above the LSE, just as it has nothing to do with any particular takeover possibility and it does not seek to prevent the LSE from being bought by any foreign company or group.
We all want to ensure—Government Members as much as Opposition Members—that UK capital markets remain competitive. It has nothing to do with economic nationalism and everything to do with the national interest—two words, not to mention prosperity and employment, used by the Economic Secretary in his opening remarks. There is widespread concern that the acquisition of the LSE could lead to changes in its rule book that would damage the competitiveness of UK capital markets.
The source of such concern is the Sarbanes-Oxley legislation, which was introduced in the aftermath of Enron and WorldCom, and the general tendency of the regulation of financial services to creep across national boundaries, which my hon. Friend the Member for Fareham (Mr. Hoban) described in some detail. He referred specifically to the present double regulatory requirements not only on hedge funds, but on UK auditors.
In short, given the global nature of modern capital markets, businesses that want to raise money can effectively choose where to do so, and the effect of the Sarbanes-Oxley legislation has been to make US markets less attractive and UK markets more attractive. Consequently, US exchanges are looking abroad to strengthen their businesses. The risk is that the takeover of the LSE by a US exchange would enable the SEC to act extra-territorially and allow creeping regulation. The Bill thus necessarily alters the present arrangement whereby the LSE and all UK recognised investment exchanges and clearing houses have the freedom to set their own rules, subject to meeting certain criteria.
The FSA will therefore have a vital responsibility in drawing up the rules that flow from the Bill, and an interesting aspect of the debate was the degree to which it has concentrated attention on the FSA’s responsibility to get them right, to ensure that the additional compliance burdens on exchanges are minimised to preserve precisely the competitive position of the UK markets to which I referred a moment ago.
In closing, I want to stand back from the Bill for a moment to consider a general law of life and politics to which it points: our old friend the law of unintended consequences. I doubt whether the movers of the Sarbanes-Oxley legislation intended to improve the relative position of UK and European capital markets. That seems to be a classic illustration of the law of unintended consequences, and it helps to explain why my hon. Friend the Member for Fareham warned the House that, while one piece of legislation can strengthen our competitive position, another can weaken it.
Of course the Bill will not protect the competitive position of our capital markets from all aspects of creeping extra-territoriality. It will not protect those markets from new laws proposed in Brussels—that, of course, is not its function and those are matters for another day—but it will protect our capital markets from a danger, and that is why we believe that it deserves all-party support.
I am grateful to hon. Members on both sides of the House for the attention that they have given to the Bill on Second Reading. I welcome the fact that the hon. Members for Fareham (Mr. Hoban) and for Wycombe (Mr. Goodman) have welcomed the Bill. I particularly welcome the fact that, in a debate on the City of London, there have been more speeches from Government Back Benchers than from the Opposition—probably something of a milestone in the House.
A number of important points have been made in the debate, some of which are probably best dealt with in Committee, which, I hope, we shall come to shortly. Before dealing with the principal concerns and arguments that have been raised in the debate, let me underline the purpose of the Bill. As my hon. Friend the Economic Secretary stressed in his opening remarks, we are legislating not to impose regulation, but to avoid it. I appreciate that that might sound contradictory, but it goes to the heart of what we want to achieve.
We want to safeguard our successful, risk-based and highly competitive regime of market regulation, which has helped to make London the world’s leading international financial centre. The Bill will do that. It will create a system in which the FSA, which is widely respected here and abroad as one of the world’s leading financial regulators, can veto disproportionate regulatory changes proposed by exchanges or clearing houses for the markets that they provide and support, while putting in place mechanisms to enable the FSA to ensure that that will not impose any unnecessary or excessive burden on exchanges or clearing houses.
My hon. Friend the Member for Bristol, East (Kerry McCarthy) brought to the debate her experience as a member of the Treasury Committee and at Abbey National. She noted not just the successes of the City of London, but some of the underlining reasons for its expansion. She talked very sharply about the challenges of regulating effectively, both domestically and in Europe. She also talked about the evolution from the systemic regulatory failures in the City of London and in financial services to the approach now taken by the FSA.
My hon. Friend the Member for Edmonton (Mr. Love), who is a former member of the Treasury Committee—
I beg my hon. Friend’s pardon. He is a long-standing and serving member of the Treasury Committee, and he demonstrated not only the expertise that that Committee has built up, but his personal expertise about the financial services and markets in both the UK and the US.
I hope that my hon. Friend remains a Member for a very long time, but if he looks for a change of career, I am sure that opportunities will open up to him, given his expertise.
My hon. Friend reminded us, as no other contributor to the debate did, that UK financial services are an important feature of the economy not only in Scotland but in Leeds. As a Yorkshire MP, I slightly hesitate to say this, but the financial services centres in other parts of the UK are heavily dependent on the outstanding performance and position of the City of London. My hon. Friend rightly said that the test of the Bill should be whether it will protect the integrity of the regulatory system in London.
My hon. Friend the Member for Bishop Auckland (Helen Goodman) brought to the debate experience not of serving on the Treasury Committee, but of working in the Treasury as an official on the foreign exchange desk through some interesting times in the past and as a member of the Public Accounts Committee. She vividly described the nature of the global financial markets, and she clearly understands the case for the safeguards in the Bill.
The hon. Member for Twickenham (Dr. Cable) said that he will not oppose the Bill, but he remains to be convinced about it, and I hope that my hon. Friend the Economic Secretary and I can do just that this evening. However, the Bill is emphatically not a legislative “Americans keep out” sign. I thought that my hon. Friend was very clear in his remarks and interventions. The Government are studiedly and publicly neutral on the merit of any takeover bid for the London stock exchange, including any from the US. The issue is not the nationality of ownership, but the nationality and nature of the regulation. We want to ensure that the investment exchanges and clearing houses that operate in London are regulated in London by the FSA.
I wonder whether the Financial Secretary can confirm a comment that, I think, the Economic Secretary made in a telling intervention on my speech. I think that he said that the American exchanges—NASDAQ and the New York stock exchange—welcome the Bill and would not see it in any way as an obstacle to their proceeding with a takeover. Is that correct?
My hon. Friend the Economic Secretary has indeed, as he explained to the House, had conversations with the leading figures responsible for the two US exchanges. They have confirmed to him that they see no obstacle to their interest in the London stock exchange in the content of the Bill. I want to make it clear to the hon. Gentleman that the issue is not one of protecting business, but one of safeguarding the regulatory approach that we have in London, which is defined and controlled by the FSA.
The hon. Member for South-West Hertfordshire (Mr. Gauke) alighted on a couple of legal points, particularly in relation to clause 1 and the factors that the FSA may take into account under proposed new subsection (4). If he will forgive me, those points may be better dealt with in the next stage of the proceedings, particularly in relation to amendment No. 8 in the name of the hon. Member for Fareham.
We all have an interest in the Bill, but the hon. Member for Cities of London and Westminster (Mr. Field) is really the only Member of the House with an authentic constituency interest in its content. He clearly has an interest in the future competitiveness of the City of London, as he explained. He rightly argued the importance of a light-touch, principles-based approach to the regulatory regime. The Bill reflects that.
There were two questions—first, from the hon. Member for Fareham, and secondly, from my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) in an intervention—on the timings in the process that the FSA will be responsible for. The hon. Member for Fareham asked whether the 30-day period would be sufficient for the FSA to consider the impact of any proposed rule changes and then make a decision about whether to call in such proposals. In drafting the Bill, we consulted the FSA. It makes its supervisory decisions independently, within the framework of the Financial Services and Markets Act 2000. In drafting the Bill as we have, we believe that it strikes the right balance between giving the FSA sufficient time to consider the potential impact of proposed rule changes and ensuring that there is not unnecessary delay or uncertainty in the system.
My hon. Friend the Member for Wolverhampton, South-West is quite right to make an observation about the lack of specified time limits for the representations in the Bill. He probably would have found that in the explanatory notes, as well. [Interruption.] My hon. Friend the Member for Edmonton says that that is if my hon. Friend the Member for Wolverhampton, South-West got to the explanatory notes. In my experience, my hon. Friend goes first to the explanatory notes. I have never been involved in a debate on a piece of legislation in which he has not scrutinised the explanatory notes in extreme detail. He is correct to say that the FSA will be able to set the period for representations. The reason why is that it is important that there is sufficient time for careful scrutiny in what we regard as the likely rare event that the FSA decides to call in a regulatory provision. However, as was set out in the letter from the chief executive of the FSA, the FSA will use that power in a way that is consistent with its principles-based approach to regulation. I should also explain to the House that that is consistent with other consultation powers under the Financial Services and Markets Act.
I turn to the concerns that the hon. Member for Twickenham worried away at in his contribution. He questioned, first and foremost, whether the Bill is necessary. Although all the recognised investment exchanges and clearing houses have reservations about the detail of the Bill and will welcome the scrutiny that the House is providing, the Joint Exchanges Committee thinks that the Bill is necessary. It states:
“We all appreciate and support any initiatives that protect UK regulatory standards from extraterritorial interference.”
The London stock exchange thinks that it is necessary. It states:
“we are very supportive of the plans to give the FSA additional powers to veto any attempts to introduce excessive or disproportionate regulations that would impair the City’s ability to compete for global equity markets business.”
The CBI thinks so. It says that it
“Seems clear that all this is highly advantageous”.
The Association of British Insurers also thinks so. It tells us:
“We believe it is very positive that the government has demonstrated clear political will to combat creeping extra-territorialism”.
It is reasonable to pose the question—as the hon. Gentleman did—of why any commercially run exchange would want to damage its own business by excessive regulation. However, the owners of an exchange or clearing house can come under a variety of pressures to change their regulatory provision and rules and those pressures may not always have a commercial motivation or a commercial source. Competition may not always be effective in challenging or controlling those pressures.
The hon. Gentleman’s second question was: why is existing legislation not sufficient? I assume that he had in mind EC regulations and the Protection of Trading Interests Act 1980. The existing legislation could be used only if an overseas authority sought to impose its national requirements directly on a UK exchange or clearing house in respect of its UK activities. In contrast, if an overseas owner were subjected to pressure under its home state law or regulations to secure that a UK investment exchange or clearing house was operated in practice in accordance with that state’s law, the existing European regulation and the Protection of Trading Interests Act could not prevent lawful instructions being given by the foreign owners. The Bill, however, will allow for all regulatory provision to be assessed so as to prevent regulation that is excessive in the UK context from being made, whatever its source.
We need to ensure that the regulatory provision of key providers of investment exchanges and clearing houses remains appropriate in all circumstances and that it reflects the proportionate, risk-based approach set out in UK and EU law. That is why we are introducing the Bill. I hope that my hon. Friend the Economic Secretary and I can reassure the House that the Bill will achieve those important objectives and will do so without imposing an unnecessary burden on exchanges and clearing houses. I look forward to further debate and to support—I hope—from both sides of the House on Second Reading and in subsequent stages.
Question put and agreed to.
Bill read a Second time, and committed to a Committee of the whole House, pursuant to Order [this day].
Bill immediately considered in Committee.
[Sylvia Heal in the Chair]
Power of FSA to disallow excessive regulatory provision
With this it will be convenient to discuss the following amendments: No. 2, in page 1, line 6, after any’, insert ‘material’.
No. 3, in clause 2, page 2, line 16, after ‘that’, insert ‘, following a change of governance’.
No. 4, in page 2, line 16, after ‘any’, insert ‘material’.
No. 5, in page 3, line 13, after ‘where’, insert
‘, following a change of governance in respect of a recognised body,’.
No. 6, in page 4, line 11, at end add—
‘(4) In sections 300A and 300D “change of governance” means, in respect of a recognised body, the obtaining of material influence by a person who did not previously exercise material influence over—
(a) the board of the recognised body, or
(b) the board of any person who (whether directly or by means of holding control over one or more other persons) has control over the recognised body.
(5) For the purposes of subsection (4) the obtaining of material influence by a person who is—
(a) a new holding company where the interests of the members of the new holding company are the same as, and held in the same proportions as, the members of the recognised body (or the holding company of the recognised body, as the case may be) immediately prior to such company becoming the new holding company, or
(b) a wholly owned subsidiary of the recognised body or any such new holding company,
is not a change of governance.
(6) For the purposes of subsections (4) and (5) “material influence”—
(a) means the power (whether directly or indirectly and whether by the ownership of share capital, the possession of voting power, contract or otherwise) to appoint or remove all such members of the board of directors or other governing body of a person as are able to cast 50 per cent. or more of the votes capable off being cast by the members of the board or governing body on all, or substantially all, matters, or otherwise to have (or have the power to have) material influence over the policies and affairs of that person; and
(b) is demonstrated if the person exercising material influence acts in a way otherwise than in accordance with United Kingdom corporate governance standards.’.
Let me be quite clear at the start that this group of amendments, and subsequent amendments, are probing. They arise from conversations that I have had over recent weeks with people in the financial services sector who seek to use the opportunity of the Committee stage to understand some of the thinking behind the Bill and why it has been structured as it has. I think that we would all acknowledge—the tone of the debate on Second Reading indicates this—that the current system of regulation for investment exchanges works well, and that the rules that it has come up with seem to be proportionate and lead to efficient markets. In fact, we can see the attractiveness of those rules being expressed in the amount of new money that has been raised on the London stock exchange.
It is in the context of existing markets that are seen to be well regulated and which work effectively that we are considering the Bill today. The Bill is before us because of the threat in relation to the change of control of one of those investment exchanges. If the independent status of the LSE had not been threatened, I suspect that the Bill would not have come before us, or at least would not have been rushed through all its stages in this House in a day. Clearly, the prospect of such a change of control has triggered a thought process not only in the mind of the Government, but in the minds of Her Majesty’s Opposition and of stakeholders in the financial services sector.
We do not know whether the LSE or any other recognised investment exchange will be acquired by NASDAQ or any other bidder that might come forward. If the LSE were to retain its independence, there would be no reason to believe that it would wish to bring forward excessive regulation that would put at risk the competitiveness of UK capital markets. As far as I am aware, it has not tried to introduce such rules, so if it remains independent, there is no reason to think that it will do so in the future. However, under the Bill, even if the LSE retains its independence and there is no change of ownership, it and other recognised investment exchanges will be subject to regulation as has not hitherto been the case. On Second Reading my hon. Friend the Member for Wycombe (Mr. Goodman) highlighted the paradox that we are extending to exchanges regulations that do not exist at present.
The purpose behind the amendments is to probe why the Government have chosen to introduce a blanket change in regulation, rather than awaiting a change of control before bringing regulations into effect. As the Economic Secretary said on Second Reading, the provisions will effectively come into force on the day after Royal Assent, so any changes that take place from that day forward will be subject to the process under the Bill. If the impact of the Bill were restricted to circumstances in which a change of control had taken place, it would mean that exchanges that had not been subject to a change of control would continue to benefit from existing regulatory mechanisms and would not have to incur additional costs through the call-in process, nor would the FSA have to go through the process of reviewing the rules. Amendments Nos. 1 to 6 give us the opportunity to ask the Economic Secretary why the Government are saying that all future changes to regulations by recognised investment exchanges and clearing houses should be subject to such a process, and why the process is not restricted to circumstances in which there has been a change of control.
Let me take the amendments in two groups. Amendments Nos. 1, 3, 5 and 6 would introduce a trigger mechanism so that the powers of the FSA to veto excessive regulatory provisions would arise only when the trigger had been operated—the trigger being a change of governance or control of an investment exchange or clearing house. Amendments Nos. 2 and 4 would insert the word “material” before the phrase “regulatory provision”.
It seems that amendments Nos. 1, 3, 5 and 6 would introduce two different triggers. Amendment No. 6 states that the change would be exercised
“if the person exercising material influence acts in a way otherwise than in accordance with United Kingdom corporate governance standards.”
It is not easy to work out from the amendments whether the trigger would be brought about by a change in control, or a change in control when it was also the case that the person with control over the recognised body acted unacceptably. The rule provision could not be triggered by both a change in governance and someone behaving unacceptably. The latter point is the important one. The trigger is not a change in governance, but whether people behave unacceptably, as defined in the Bill. We are setting up an important test. Rule changes judged by the FSA to be disproportionate and excessive, not a change of governance, will be the trigger for the FSA to consider its veto power.
The hon. Member for Fareham (Mr. Hoban) is absolutely right to point out that if there were no change of ownership at the LSE or any other exchange, the new powers would still come into operation. However, if any UK or foreign-owned exchange were to act outside “corporate governance standards”, as amendment No. 6 says, or, more generally, disproportionately and excessively, it would be right for the FSA to trigger the power. It would be unacceptable if we could trigger the power if there was a new owner of an exchange, but could not do so if an existing owner of a UK or foreign exchange that had not been subject to a change of governance acted unacceptably. We are trying to apply the trigger power in a way that is consistent across the piece.
We feared that if the mechanism was triggered by a change of governance, the measure would be not only unworkable but discriminatory and unfair. Such a measure would protect existing managements by allowing them to do what they liked, while imposing new requirements only on exchanges with changed ownership. That would create a deterrent to takeovers. It would unnecessarily discriminate against both foreign and domestic future owners, because they would have a greater regulatory burden than existing foreign or domestic owners.
We also feared that discriminating between two types of owners carrying out essentially the same action would be incompatible with our obligations under EC treaties and the World Trade Organisation’s general agreement on trade in services. In addition, the right hon. Member for Wokingham (Mr. Redwood) has pointed out that irrespective of whether owners are new or existing, or foreign or from the UK, if they act in a way that is excessive, disproportionate and outwith the wider objectives set out in the Financial Services and Markets Act 2000 and the FSA’s rules and guidance, it is right that we should take action to veto. The Bill will enable us to do that, but the amendments would undermine the process.
We have discussed amendments Nos. 1 to 6 in detail with the exchanges, and I know that the hon. Member for Fareham will have done the same thing. I understand the intention behind Amendments Nos. 2 and 4 and the desire to strengthen barriers to the FSA acting disproportionately by inserting the word “material” to the Bill. However, we have concluded that the amendments would not give any extra protection to exchanges. They would not make unnecessary notifications less likely. Exchanges and clearing houses want legal certainty, but adding the word “material” would not give them any extra certainty, because there would be exactly the same room for doubt and argument. The only effect of the amendments would be that exchanges and clearing houses would have to take further legal advice on the meaning of “material” in such cases.
The conclusion that we have reached, which is more reflective of the spirit and intention of FSMA, is to put in place a rule-making power for the FSA. We believe that the process of discussion and consultation that will lead to FSA rules about the way in which it will use the powers in the Bill will give more certainty and comfort to exchanges than inserting the word “material” in the Bill. As I explained on Second Reading, the waiver for the first 12 months will ensure that while such consultation is conducted, the FSA will have discretion to waive its powers for certain types of new rules.
We have examined amendments Nos. 1 to 6 in detail and discussed them with the exchanges in the City. As I have explained, we do not think that they would meet the concerns of the exchanges. However, we made modifications to our proposals in the light of their representations. In particular, the rule-making power and the waiver power offer a better way of assuring the exchanges that we will act proportionately, carefully and not excessively.
I agree with the Economic Secretary, particularly in his scepticism about amendment No. 1, which, as I understand it, simply seeks to bring the clause into effect when there is a change of governance. He is right that there should be consistent application of the rules in all circumstances. The hon. Member for Wycombe (Mr. Goodman), speaking for the Conservatives, got it right when he said that the issue was not economic nationalism, but the national interest, which includes jobs.
Brief reference was made to Scotland, where 127,000 people are employed in banking, finance and insurance. Five of Scotland’s top 10 businesses are in that sector. Back home, it is one of the industries in which one can reach the very top of one’s career, working in a global company with a genuine international reach. As has been said, it is not only the City of London, but the Financial Services Authority’s light-touch regulatory approach to the sector, that has been the success. We support the clause, and we support taking a consistent approach, whether or not there is a change of governance. I shall keep my contribution short, but I should just say that I agree with the description given earlier: the paradox is that by giving more power to the FSA, we ensure that a light touch remains. The global reach of world-class companies, and 127,000 jobs in Scotland, can be protected and enhanced by the measure.
As I said earlier, this is a series of probing amendments and we have had a useful exchange. First, on amendments Nos. 2 and 4, the Minister is absolutely right, and the letter from John Tiner, to which we referred earlier, should reassure investment exchanges and clearing houses about the way in which the FSA will seek to use the powers. Of course, the consultation process that will take place over the next few months to determine the detail of the rules for call-in will reinforce the message set out in that letter. That should give exchanges and clearing houses further reassurance about the way in which the new powers will be used.
I now turn to the amendments about change of control. Perhaps there is a second paradox on display: it took a potential change of control in an investment exchange to flag up the issue of the freedom that exchanges and clearing houses enjoy in determining their own rule books. Although historically that has been seen as a strength, clearly, in future, challenges could emerge that would change that strength into a problem. By taking the necessary powers now, having been prompted by the potential change of control, we are ensuring more certainty over the regulatory environment in the UK. In a sense, even if the acquisition of the London stock exchange by NASDAQ does not go ahead, perhaps the prospect of it has done us a favour by highlighting the issue. It led us to introduce this legislation quickly, so perhaps in the long term it has done UK financial services a great favour by making us look at the rules once more, and making us think about how the rule book will develop. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment No. 8, in clause 1, page 2, leave out line 5 and insert
‘need to maintain the competitiveness of United Kingdom markets,’.
On Second Readings I sought to highlight the opacity of the wording of proposed new section 300A(4)(b). The purpose of the Bill is to protect the global competitiveness of UK capital markets, but it is not entirely clear how that fits in with the four factors in subsection (4). I am sure that the Minister will come up with good reasons for the opaque wording of the provision, but the wording should make the thrust and purpose of the Bill clear. My amendment would give the Bill a degree of clarity, so that no one could be in any doubt about its purpose and what it seeks to achieve.
As for the precise wording of proposed new subsection (4)(b), financial markets are global and activity is mobile, but that does not necessarily lead to the conclusion that regulators should veto rules that would have an impact on the competitiveness of UK capital markets. Indeed, some might say that because of the mobility of activity there should be a single set of global rules, not different sets of rules for different jurisdictions. That is not my view, but the wording of subsection (4)(b) is not sufficiently clear to inform readers about the precise purpose of the Bill and what it seeks to protect. The wording is rather bland and neutral, and my amendment would make it slightly crisper and more focused, to get the point across.
That echoes comments made by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke)—he may well speak on this point, too—about how the wording fits in within the regulatory objectives of the Financial Services and Markets Act 2000, in which competitiveness is not one of the regulatory objectives. It is relegated to as a factor to which the FSA should “have regard”. By anchoring the Bill in the context of much clearer and sharper wording, we will lose any ambiguity about what the Bill seeks to achieve, and we will perhaps give practitioners and regulators a much clearer sense of direction.
I have read the wording and I have a concern about its context. It says:
“In considering whether a requirement is excessive the Authority must have regard to all the relevant circumstances, including…the global character of financial services and markets and the international mobility of activity”.
That could be read as meaning that we should take into account regulations that apply in other jurisdictions. Given that we must take account of the global character of financial services, and global regulations such as those in the US, it could be argued that subsection (4)(b) is in favour of Sarbanes-Oxley, because it tells us to consider “global character”, and what the US is doing. In those circumstances, the provision might be said not to argue in favour of a difference, but to encourage us to conform to the regulations in other jurisdictions. The wording proposed by my hon. Friend the Member for Fareham (Mr. Hoban) would therefore provide greater clarity.
Subsection (4) says:
“In considering whether a requirement is excessive the Authority must have regard to”
the circumstances set out, and the end of subsection (4)(b) refers to
“the international mobility of activity”.
It is crucial that we keep competitiveness and profitability in mind and consider the international mobility of activity, because neither competitiveness nor profitability would be encouraged by the flight of capital. The best way to achieve the ratcheting effect referred to earlier, in respect of light-touch regulation throughout the global markets, is to take account of international mobility, as well as the international nature of activity, and of the money itself. That probably fits in with what the Economic Secretary said in his speech to the Institute of Chartered Accountants in England and Wales in the chartered accountants hall on 20 November:
“We want to see convergence—but convergence around a principles-based, rather than rules-based, approach.”
In that regard, taking account of the international mobility of activity—and, indeed, money—might be the best way to encourage not only the ratcheting-up of a light-touch approach everywhere, but convergence, which might lead to greater access to capital and more growth in the world’s markets.
I welcome you as Chair of the Committee, Mrs. Heal.
The drafting of the provision is subtle, and there is no disagreement between Government and Opposition about what we are trying to achieve. We have talked about the paradox of regulating to make sure that we have less regulation. Another paradox is that we wish to protect our regime—the measure is an act of protection—so that we can achieve a non-protectionist approach to ownership. We wish to be open and global rather than protectionist. The amendment is carefully worded, as it refers to
“the competitiveness of United Kingdom markets.”
It does not refer to institutions, firms or individuals. I accept that we judge the success of a global approach to financial markets by the breadth and the depth of the market, rather than the market share of a particular UK-domiciled firm. A less global, more protectionist view could be characterised as one in which we judge the successful competitiveness of the markets according to whether a domestic firm has a growing market share, even if that leads to a decrease in the depth and richness of global markets.
We are concerned that if we accept the amendment, its language for competitiveness could be misinterpreted, and it could take us down the protectionist route. I accept the intention behind the amendment tabled by the hon. Member for Fareham (Mr. Hoban), but I fear that reference to the competitiveness of UK markets could be mistaken for a reference to protecting the market share of UK firms, individuals and institutions, which is contrary to what we are trying to achieve. The reference in proposed new subsection (4)(b) to
“the global character of financial services and markets”
captures our more open, global approach. The amendment would not add anything to what we are trying to achieve, and we fear that it could be misinterpreted in some circles.
The hon. Member for South-West Hertfordshire (Mr. Gauke) was concerned about extra-territoriality, and he asked whether the reference to the global character of financial services meant that the FSA would be forced to accept excessive regulatory provision outside the UK by a UK-recognised body. The test in the Bill for excessive regulatory provision is whether such provision extends beyond UK or European Community law, and whether it fails to pursue a reasonable regulatory objective or is disproportionate to such an objective. That test cannot be levelled up just because a foreign jurisdiction applies an excessive standard that it characterises as global. It is not for the foreign regulator to make the judgment, and we will not level the test up. It is for the FSA to make the judgment under the Bill and the rules that it sets. We do not believe, therefore, that there is such a risk.
The provision states:
“In considering whether a requirement is excessive the Authority must have regard to…the global character of financial services and markets”.
I am grateful for the clarification that the Economic Secretary has provided, but the definition of “excessive” is linked to the global character of financial services and markets, so regulation in another jurisdiction may therefore be relevant in reviewing that character.
I accept the point that the hon. Gentleman has made, but it is for the FSA to make a judgment as to whether a requirement outside UK or EU regulatory requirements and law is reasonable or excessive. The fact that it has an outside origin does not mean that it is global. The FSA must judge whether a provision would lead to more protected markets and excessive regulation, or to more openness and mobility. Having listened to the arguments and consulted our legal experts, we do not believe that we are running an unreasonable risk of judicial review, and we do not believe that the amendment would strengthen our position. On that basis, I urge the Committee to reject the amendment.
I am grateful to the Economic Secretary for his response, both to the amendment and to the contribution by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke).
Two points need to be made about the wording of the provision. First, the use of the word, “excessive”, and the way in which UK and European legislation are carved out, means that if, for example, someone proposed to impose excessive US-style regulation on the UK, the fact that it originated from outside the UK and the EU should give the FSA an opportunity to rule it out or veto it. That is the thrust of the Bill, and it is an important consideration.
Secondly, I was not entirely persuaded by the Economic Secretary’s arguments about the wording of my amendment, but I will not press it to a vote. His explanation, however, should reassure people that the Bill aims to protect the global competitiveness of the UK capital markets. I am not sure that I agree with his remarks about market share, which is a red herring. The wording of the amendment is sufficiently broad to suggest both the attractiveness of the UK as a place in which to do business and its strengths in comparison with other jurisdictions. However, the hon. Gentleman has provided assurances on Second Reading and elsewhere, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
I should like to return to an issue that I have raised a couple of times, as I am concerned about vulnerability to judicial review in circumstances with which the Bill is designed to deal. For example, in a takeover of the London stock exchange by a US exchange, a rule could be proposed and the FSA could seek to block it. Under clause 1, the FSA would consider whether
“the proposed provision will impose a requirement on persons affected”
and whether the requirement is “excessive”. Proposed new subsections (3) and (4) provide guidance about what is excessive. If the proposal
“is disproportionate to the end to be achieved”
the FSA can block it. That wording is on the right lines and I do not wish to query it. If that test is met, proposed new subsection (2) states that
“the Authority may direct that the proposed provision must not be made.”
If there is a challenge to that direction, it will be examined on the basis of the Financial Services and Markets Act 2000, regulatory objectives and the second-tier matters to which the FSA must have regard. The judicial review will not necessarily be conducted on the basis of what is contained in the Bill—that is, the definition of “excessive”.
Put simply, the first test, the “excessive” test, is whether the rule is disproportionate. The next test is whether the rule is appropriate to secure the relevant regulatory objective, which is the protection of consumers. I question whether it is possible that a particular rule change might fail the test set out in subsections (2), (3) and (4)—that is, it might be excessive because it is disproportionate, as defined in the Bill—but the direction made by the FSA would nevertheless be correct, given the objective of securing the appropriate degree of protection for consumers.
As the hon. Member for Wolverhampton, South-West (Rob Marris) suggested earlier, many of the provisions are designed to protect consumers. My argument is that a rule may be appropriate for the protection of consumers under the FSA test set out in the Financial Services and Markets Act 2000, because the protection of consumers is a regulatory objective, whereas the desirability of maintaining the competitive position of UK markets is not. That was an issue when the Act was passed.
A measure might meet one of the two tests, but not both. In those circumstances, the very outcome that the Bill is designed to prevent—judicial review—may be available to a US exchange or to the London stock exchange. As I mentioned earlier, there are two ways of addressing that. One is to make competitiveness a regulatory objective. The other is to narrow the definition of protection of consumers in this limited context. The hon. Member for Wolverhampton, South-West raised concerns about the protection of consumers. In this narrow circumstance, to be consistent with the rest of the Bill, there may be an argument for considering that point. I would be grateful for the Economic Secretary’s view and his reassurance that the two stages of the test do not raise issues that need to be addressed.
I am pleased to follow the hon. Member for South-West Hertfordshire (Mr. Gauke), who has taken up some of the issues that I wanted to discuss. The crux of the Bill is in clause 1. The rest is procedural, which we will come to. It is important to get the procedure right, but the principle and foundation of the Bill is in clause 1.
We must be careful about the apparent love-in on “low regulatory regime”. As an individual—I expect most hon. Members would feel the same—I would not invest in the stock exchange in Burma because that is a dodgy regime in a dodgy country. As protection there for me as an investor, whether as an individual or through some mythical company I might own, or as a buyer of the Burmese stock exchange if ever it were for sale, I would not want too little regulation because I could lose my shirt.
Does my hon. Friend agree that at no point in the debate have we used the phrase “a low level of regulation”? The language that we have used consistently is “proportionate” and “risk based”. That allows a high degree of regulation where risk demands it. He may judge that Burma is or is not a place where a higher degree of risk might arise, but we have not spoken of “low regulation”. The use of words such as “proportionate” and “risk based” allows the FSA to make appropriate judgments at all times.
I am grateful to my hon. Friend. I shall check Hansard, but the term has been used from the Opposition Front Bench and, I think, by my hon. Friend. “Light-touch regulation” is a phrase that has been used, and that rings little alarm bells for me. I wanted some reassurance from the Minister, and I have some.
Until the hon. Member for South-West Hertfordshire spoke in the stand part debate, there has been little discussion of consumer protection and shareholder protection, which I have mentioned in interventions. Can the Economic Secretary clarify whether the phrases in clause 1(3)(b)(i) and (ii)—
“it is not justified as pursuing a reasonable regulatory objective”
“it is disproportionate to the end to be achieved”—
encompass consumer protection and shareholder protection, particularly the latter,
“disproportionate to the end to be achieved”?
If an investment exchange or a clearing house proposed rule changes that the FSA might deem to be excessive, would consumer and shareholder protection be considered if the investment exchange or clearing house stated that the end to be achieved through the tightening of its rules was greater consumer or shareholder protection?
I am not sure whether “reasonable regulatory objective” would encompass consumer or shareholder protection. That is part of the equation that we must examine. Like other hon. Members, I want London to continue as a thriving premier international market, but I want protection for individual shareholders and consumers and for businesses and organisations, not only because that is right in moral terms, but because London will not continue to thrive as a premier financial location without that platform of regulatory control, so that those who might invest in that market do not fear losing their shirts because of poor regulation. I hope the Economic Secretary can deal with those issues.
Let me reassure the hon. Member for South-West Hertfordshire (Mr. Gauke) and my hon. Friend the Member for Wolverhampton, South-West (Rob Marris). The tests in clause 1 for “excessive” are whether the regulatory provision goes beyond what is required by UK or EU law and, in addition, either is not directed at securing a proper regulatory objective or the regulatory burden that it would impose is disproportionate to the end that it is intended to secure.
Under the Financial Services and Markets Act 2000, and therefore in UK law, the FSA is required to have regard to four statutory objectives, which are market confidence, public awareness, protection of consumers and reduction of financial crime, so protection of consumers is one of the regulatory objectives to which the FSA must have regard at all times. However, that is one of four objectives, so the FSA must always balance consumer protection against, for example, market confidence. When we speak of a proportionate and risk-based approach to regulation, that allows the FSA to take a lighter touch approach to regulation in those areas where it believes market confidence can be maintained with a greater degree of risk. Hence, the AIM market is a more risk-loving, less regulated market, but the individual retail consumer going in needs to know that there is less market protection.
The FSA must consider the four new tests set out in clause 1(4)(a) to (d) in the context of its four statutory objectives. Those four tests therefore inform the FSA in striking the balance between its statutory duties to protect consumers and to maintain market confidence, although it would not have to strike such a balance with regard to that particular example. In our judgment, so long as it has regard to those four points and is conscious of its need to strike a balance between market confidence and the protection of consumers, we think that it will be proof against judicial review in making such judgments.
That does not mean that the FSA is bound to reject a regulatory proposal for an exchange that goes beyond the UK or EU requirements of the time. If it took the view that a proper regulatory objective was being pursued—for example, investor protection—and in its judgment that objective was not disproportionate or excessive, the FSA could judge, consistent with the four objectives in the Bill and its statutory duties, that the objective was correct and that it was being done in a proportionate way, and it could allow the rule to go through, which should provide some comfort. The Bill allows the FSA to strike that balance, but at the same time the FSA can take action, if it judges that it is proportionate.
I take the Economic Secretary’s point about the four points in proposed new section 300A, which is helpful. However, they are merely the first part of the test, which triggers the right of the FSA to make a direction. My point concerns a direction made under proposed new subsection (2), which cannot relate to proposed new subsection (4). The question whether such a direction would be subject to judicial review returns us to the regulatory objectives. Whether the direction is reasonable or compliant with regulatory objectives relates to section 2 of the Financial Services and Markets Act 2000 and the four regulatory objectives mentioned by the Economic Secretary. At that stage, proposed new subsection (4) would not be relevant. Stage 1 concerns whether the excessive test has been breached, and stage 2 is when a direction is made. Would such a direction be reasonable?
The test of the reasonableness of the directive is whether the requirement is excessive under proposed new subsection (2)(b). Proposed new subsection (4) states:
“In considering whether a requirement is excessive the Authority must have regard to all the relevant circumstances, including”
proposed new paragraphs (a) to (d). As on so many occasions in terms of finance, if only Mrs. Gauke were here. Not being a lawyer, I must fall back on the legal advice put before me. It has been put to me that so long as the FSA makes its decision in line with the tests in proposed new section 300A, and that reasonableness is defined as striking a proper balance between market confidence and consumer protection, the FSA will be judged to have fulfilled its obligations under the 2000 Act.
The Treasury has promoted the Bill as a means of protecting the London stock exchange from heavy overseas regulation such as the Sarbanes-Oxley Act. However, the intent of the US legislature was to boost investor and public confidence following the high profile corporate collapses of Enron and WorldCom. Is the Economic Secretary saying that we will undercut the Americans on investor protection? And do the four tests strike the right balance?
I understand my hon. Friend’s point, which we considered in some detail on Second Reading. The US consensually decided that the Sarbanes-Oxley Act would provide proper consumer protection and be consistent with the continued success of its financial markets. We considered that exact issue at the time in the UK, and we were criticised by some commentators for refusing to go down the road of the Sarbanes-Oxley Act. We feared that that approach would damage the competitiveness of our financial markets and that a move towards a more heavy handed, dirigiste, box-ticking approach to regulation would be likely to undermine, rather than to enhance, consumer protection. As I have said to my hon. Friend the Member for Wolverhampton, South-West, a light touch, proportionate, risk-based system requires one to act more decisively when one sees risk than is possible under a more legalistic, box-ticking approach to regulation, which allows one to comfort people that the boxes have been ticked but does not involve the identification of risk.
Today, I had lunch with the US Treasury Secretary, Mr. Hank Paulson, who shared a platform two weeks ago with the chairman of the Securities and Exchange Commission, Mr. Christopher Cox. I think that they both share my analysis of the current dangers of the Sarbanes-Oxley regime, which is that the way in which it has been implemented is both burdensome and insufficiently risk-based and that therefore it does not achieve the initial intention. That is why the SEC, with US Treasury support, is currently consulting on how the implementation of the Sarbanes-Oxley Act and the wider corporate governance regime could be enhanced, reformed and in some way lightened in order that it can become more risk-based in the future. I am happy to rely on the expertise of the US authorities rather than commenting on the sensibleness or otherwise of the regulatory regime.
Finally, the hon. Member for Fareham (Mr. Hoban) has asked whether we have inadvertently come across a flaw in the current regime, or at least that we have had the benefit of realising the need to act, because a change of ownership might allow us to take a power to block excessive or disproportionate rule changes without any change of ownership. However, at no point has the FSA put it to me that it has concerns about the current rule books of the current exchanges or changes to those rule books. In the initial discussions in May and June, no one suggested jumping in to impose a new burden on existing exchanges. As I understand it, that fear did not exist within the FSA. We have looked in detail at how to address that concern, and the only fair way to do so that is legitimate and that applies across the piece would be to cover all exchanges, which is the approach that we are taking.
I am also not aware of any concern about the existing rule books, and the strength of the UK capital markets has demonstrated their effectiveness. Looking at the topic in the context of the potential change of ownership of the London stock exchange has done us a service in pointing out an opportunity to fine tune the regulatory environment for exchanges and clearing houses, and perhaps we should be grateful for that.
I was not trying to suggest that the hon. Gentleman had made the opposite point to me. He has wondered whether the matter has done us a favour. The truth is that no one considered that that favour was necessary until now. The issue might arise in future, and if it does, the fair way to resolve it would be for the veto power to apply to all excessive or disproportionate rule changes by any UK exchange, regardless of change of ownership. Clause 1 achieves that objective in a watertight and well-understood way, and I therefore commend it to the House.
Question put and agreed to.
Clause 1 ordered to stand part of the Bill.
Procedural and other supplementary provisions
I beg to move amendment No. 7, in clause 2, page 3, line 20, at end insert ‘, and
(d) specifying those persons which the Authority believes may be affected by the proposal.’.
The amendment concerns consultation, how the FSA will seek to use its new powers, and whom it will look to when thinking about the consequences of any rule change. People in City institutions have told me that the Bill should ensure that the FSA takes account of the concerns of all market users. There is a sense that historically when changes have been proposed to the rules of exchanges, consultation was predominantly with the sell side—that is, market participants such as major investment banks, who raise capital on behalf of their clients, acting as sponsors of new issues of shares. It is clearly in their interests for the market to be efficient.
However, no market is one-sided. Investment banks need fund managers and other investors to buy shares; they too have an interest in the operation of markets and their views should be considered as well. For example, an exchange might propose a rule change that would make the raising of capital easier but lessen the protection afforded to investors. Unless the consultation process included the buy side as well as the sell side, there would be a risk that the voice of the buy side would go unheeded, leading to loss of confidence in the market and an absence of buyers. That goes back to the point raised by the hon. Member for Wolverhampton, South-West (Rob Marris) in the previous debate. This is not about low regulation but about getting the regulatory balance right between the buy side and the sell side and ensuring that the regulation not only makes it easy to raise capital but gives investors confidence in the market. One way to do that would be to ensure that when rule changes are consulted upon, all participants in the market are consulted, not only the sell side.
I agree with the hon. Gentleman’s intentions. However, let me give an analogy with the planning system, where there is no third-party right to appeal and it is limited to those directly involved. Is not there a danger that his amendment could be interpreted as seeking to limit those who may make representations instead of widening the process as much as possible?
In any matter where consultation is required it is important to ensure that everybody is properly consulted, and that is what we have done with the Bill. I know from my experience of going through the process involved in the markets in financial instruments directive that it is important to listen to the buy side and the sell side. The fact that the London Investment Banking Association, to give one example of a trade organisation with buy and sell side representatives, has endorsed the Bill suggests that both sides are happy with our general intention. There have tended at times to be differences of view between the exchanges and some of the wider City participants as to whether the role of the FSA should be stronger or weaker in this regard.
It is important to consult widely in a way that makes it clear that all sides are being listened to, and I am sure that that will be the FSA’s intention. It is not for me to set out in detail how it will go about planning those consultations, nor is it necessary for the Bill to specify one particular aspect of the consultation process concerning which persons are affected. That is just one of a wide range of issues that it will need to consider as part of its consultative process. Today’s letter by John Tiner gives full assurance to the exchanges and to the City more widely that the consultation process will be substantial. The Bill would not be enhanced by picking out and adding this aspect, nor would it change things either way. I would suggest that we leave the Bill less cluttered and reject the amendment.
The Minister is right to say that we should have clear, straightforward legislation. However, it was important to use this opportunity to get across on the Floor of the House the importance of full consultation and to try to ensure that when potentially excessive rule changes are made by exchanges there is proper representation of all market users and all those with an interest in the success of exchanges.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment No. 9, in page 4, leave out lines 10 and 11.
Again, the amendment deals with a concern flagged up by people in the City. The Bill carves out from its scope overseas investment exchanges. The following scenario has been suggested to me; I do not know whether it is feasible. A UK exchange could be acquired by a company based outside the EU, and the acquirer could then decide that it wanted to close down the UK exchange and encourage members to transfer their listing to an overseas exchange. As a consequence, the provisions in the Bill would no longer apply and the additional regulatory burdens of, say, Sarbanes-Oxley—it could be any other regulation—would affect companies that hitherto had been listed under the UK investment exchange. I am looking for reassurance that an acquirer of a UK exchange cannot compel companies listed on it to move to a US or other non-EU jurisdiction and thus avoid the provisions of the Bill.
I think that the answer to the hon. Gentleman’s question is no. I hope that that gives him sufficient reassurance. As he knows, there are nine UK recognised bodies and 12 overseas recognised bodies. The latter tend to be involved in business that deals with nothing more than placing a trading scheme. They are regulated in the countries where they are based, but because of the obligation on recognition requirements, they have to provide their users with broadly equivalent protection to that provided by UK recognised bodies. The FSA therefore does not have to judge the regulatory provisions of those overseas recognised bodies. It would not be consistent with our EU obligations to do so.
The only way in which the effect of the new provisions could be avoided by using overseas investment exchanges and clearing houses, or other EU-regulated markets, would be by transferring and relocating the business of a UK investment exchange to such a body. That would at best be very difficult to do, and a lot of business would be lost. I hope that that gives the hon. Gentleman some comfort. That was probably the long way of answering his question. The short answer is no.
I am always grateful for a longer answer from the Economic Secretary. Now, when people raise this question with me, I shall be able to give them a more informative answer, rather than simply saying no. With that, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
I want to make a few brief remarks, first on the deemed refusal periods in proposed new sections 300C and 300D, in lines 8 and 28 on page 3 of the Bill. The hon. Member for Dundee, East (Stewart Hosie) referred earlier to planning law, and I am sure that hon. Members will be familiar with the concept of deemed refusal in planning law. In England and Wales, although I am not sure about Scotland, if the local authority does not make a decision within five weeks—it used to be six weeks—it is deemed to be a refusal. There are similar duties on the FSA in the Bill, and I congratulate the Government on putting them in to try to speed up the process of getting agreement to rule changes so that it is not burdensome for business.
I want, however, to take up a point made earlier by my hon. Friend the Financial Secretary regarding the explanatory notes to the Bill. He was helpfully trying to clarify the intervention that I had made on my hon. Friend the Economic Secretary about the missing link in the middle of the process. This relates to what I call the representation period, in contradistinction to the consultation period. The consultation period is what the regulatory body will have; the representation period will be set by the FSA, and is set out in lines 19 and 20 on page 3 of the Bill.
The reason I am raising this matter is that the explanatory notes do not say—because the Bill does not say—how long the representation period should be. Note 14 on page 4 of the explanatory states:
“Section 300D…sets a period within which the FSA must take a decision about a proposal”.
But it does not specify the number of days. My understanding is that the Bill could be amended in the Lords and I would urge my hon. Friends the Ministers to consider introducing an amendment to line 20 on page 3 of the Bill, so that proposed new section 300D(2)(c), which now reads
“specifying a period during which representations with respect to that question may be made to it”,
would continue with the words “which period shall not exceed 60 days”. Similarly, in line 21, proposed new section 300D(3) reads:
“The Authority may extend the period for making representations”,
and I believe that it should then say something like “by no more than 28 days”.
I appreciate that different proposals will have different gravity, and that the FSA might need longer for some than others, but proposed new section 300D(3) already contains the provision to extend what I call the representation period. So the Bill contains a representation period, with an unspecified number of days, and the ability to extend that period, again by an unspecified number of days. Yet in line 39 on page 2 of the Bill, proposed new section 300C(2)(a) defines the initial period as one of 30 days. So the Government are clearly not averse to putting a numerical or diurnal value on that period, but that is not the case for this middle bit, the representation period.
I would like reassurance from the Minister either that a specified period will be put into the Bill or that clear guidance will be given to the FSA on this matter. Otherwise, the FSA could decide to take six months, and a change in rules that a regulatory body deemed necessary—it would not go through all this rigmarole if it did not deem it necessary—could get held up for rather a long time. The FSA might say, “We do not have the resources to deal with this”, or “We do not think it is that important, so we will set a long representation period.” Conversely, if the regulatory body wished to make an extremely important change as a matter of urgency, the FSA might say, “This is a very important change, so we must have a long representation period in the middle, because we need to consult so many people and do so much work on it.” I urge the Minister to have another look at that missing link in the middle, the representation period, and I hope that amendments can be tabled in another place to specify the number of days. Alternatively, I would like reassurance that strong guidance will be issued to the FSA on that point.
My hon. Friend has made a most interesting point and admission. During the passage of the Finance Bill, many people believed that its explanatory notes had been written by him, so for him to point out a drafting error made by others is novel.
We have specified a 30-day period, which will apply from the notification by an authority that it is making a rule change, which will allow the FSA to consider that rule change. If the FSA made no judgment during the 30 days, the rule change would go through by default. However, proposed new section 300D(2)(c) deals with what we believe will be the unusual circumstances in which the FSA calls in a regulation and considers disallowing it. We expect such cases to be the exception rather than the norm. We mentioned earlier, in reference to the Sarbanes Oxley case, the importance of not repeating the same mistakes by rushing in too fast. My guess is that the markets and the exchanges might consider it an advantage that the FSA has the discretion to choose the period over which it consults, so that it does not make a wrong decision.
If we feared that the FSA was likely to take a disproportionate, heavy-handed or costly approach to the implementation of this power, we might have reasons to be concerned. But, as John Tiner’s letter makes clear, the FSA will use the power only if it is justified as being proportionate, if the benefits exceed the costs, and only after consultation. The letter also says:
“As you know, we exercise our supervisory decisions independently within the framework of the principles of good regulation set down”
in the Bill. I do not believe that there is a need for the House to fetter the discretion of the FSA in this matter by arbitrarily curtailing the length of consultation that it might want to take, given that there might be circumstances in which it would want to take more time. We know that it would be motivated by a desire to be proportionate and to ensure that no unnecessary costs would be incurred.
My hon. Friend is absolutely right. This will all become much clearer when the FSA consults on the rules that will apply in this area, the provision for which is made in the Bill. We want to make it clear to the exchanges that, in the majority of cases relating to rule changes, even if a rule requires consultation under the FSA’s rules that consultation will normally happen in a speedy manner. There might, however, be exceptional circumstances in which the FSA calls in a rule and wants to ensure that its judgment is right. In those circumstances, it is not necessary to fetter its discretion. There is a principled reason for specifying 30 days in one part of the Bill but not to fetter its discretion on such a rare occasion.
My advice to my hon. Friend and the House of Lords is to think carefully about whether we need to impose extra regulatory burdens on the FSA in such a way. We should trust the good intentions of the FSA as set out in John Tiner’s letter, and allow it, in exceptional circumstances, to take the time that it needs to make the right judgment. On that basis, I commend the clause to the House.
Question put and agreed to.
Clause 2 ordered to stand part of the Bill.
Clauses 3 and 4 ordered to stand part of the Bill.
Short title and commencement
Question proposed, That the clause stand part of the Bill.
This matter has been adverted to earlier, and I wonder whether my hon. Friend the Economic Secretary can provide further clarification on clause 5(2), which relates to the coming into force of the Act. Rules are to be made under the Act, and I am not quite sure of the timetable. Will he comment a little on that provision, which is slightly unusual although not unknown in parliamentary drafting?
I am grateful to my hon. Friend for the opportunity to make the provision clear. The clause provides for the legislation to come into force on the day after Royal Assent. As I said on Second Reading, that means that the new obligations will apply to regulatory provision proposed but not made before commencement, as well as to new regulatory provisions proposed after commencement. By providing for commencement and the powers coming into force in that way, we prevent any problems about a rule change proposed in the gap between Royal Assent and commencement. More generally, a waiver power is provided for 12 months. Through a discretionary act, the FSA can waive, where it judges appropriate, the right to call in certain kinds of rule changes while it goes through the more onerous statutory consultation processes necessary to draw up its rule-making power under the Financial Services and Markets Act 2000. That allows us to move speedily and to have a proper consultative process for the rule book. I hope that I have made the position clear.
Question put and agreed to.
Clause 5 ordered to stand part of the Bill.
Bill reported, without amendment.
Order for Third Reading read.
I beg to move, That the Bill be now read the Third time.
Let me start by thanking you, Madam Deputy Speaker, and hon. Members on both sides of the House for the detailed and substantive debate that we have had on all stages of the Bill this afternoon. We have addressed many of the concerns understandably expressed by some parts of the City on the detail, and have shown that we have thought through the clauses. Our wide-ranging debate has established—I said at the beginning that I hoped it would—that there is a consensus about how the national interest should apply in this case.
First, the national interest is to preserve the global and open approach to ownership in the City of London, which has been the hallmark of the City not just for the past 10 years but since the big bang and before. We have all agreed that the right position for Britain, from the point of view of investment, jobs and the long-term future of the City, is to welcome foreign ownership and investment from around the world, including into our exchanges, and not to try to establish protectionist barriers.
Secondly, the principle has been established that it is right and legitimate for Government to intervene to protect our principles-based and proportionate regulatory regime. We are intervening not to regulate, but to ensure that we prevent excessive regulation being imported into the UK, and not to make sure that we have a protectionist or narrow view of the City’s future but to make sure that the global, outward-looking City can continue to prosper in future.
On Second Reading, I raised the issue of democratic accountability, which, as far as I have heard, has not been picked up. An important and sensitive decision would be made by the FSA without any accountability to the House or, indirectly, to a Minister, who would be accountable to the House. Will the Economic Secretary give his views on that point?
I am grateful to the hon. Gentleman for that intervention. This Bill amends the Financial Services and Markets Act 2000. It enshrines a principle-based and risk-based approach to regulation. It gives the FSA considerable discretion and independence, within an overall framework set in legislation and agreed by the House, for which Ministers of the Treasury are responsible to the House. All the protections and safeguards put into the Financial Services and Markets Bill, when it was debated extensively in Committee and in the House some years ago, apply equally to this set of what are essentially additions to the Financial Services and Markets Act 2000. To the extent that there was a concern, that would be about the wider financial services and markets approach. The principles-based approach pursued by the FSA has been not only successful but judged to be open and transparent. In terms of proper scrutiny of its decisions, we got the balance right in the original Financial Services and Markets Bill.
One view of the City of London’s success is, I believe, rather pessimistic. According to that pessimistic view, London is succeeding because of others’ failures, and because some of our European partners have taken too restrictive an approach to financial services in their markets. Similarly, it is argued that London’s recent success is not because of our strengths but because of errors made in the US in particular in relation to corporate governance standards and Sarbanes-Oxley. That pessimistic view moves on to the conclusion that, if the European single market gets completed because we win the argument for reform in Europe, London’s standing will somehow be undermined, or that if the US acts to reform the Sarbanes-Oxley or wider regime, that will take away our competitive edge.
That view is far too pessimistic. The City of London’s reputation has been built not over two decades but over 300 years. The tradition and integrity of our markets, and of our accountancy and legal professions, underpin the City of London. We have established a reputation for talent and expertise as well as a depth to our markets that is respected all around the world—again, a reputation that has been built over decades. The reforms of the big bang, which led to the explosion of foreign firms and new talent coming to London, were introduced well before any changes in the US corporate governance regime. In my judgment, we should be confident about London’s success—our skills, the cluster of London markets, our integrity and our reputation. We should see reform in Europe as an opportunity for us to expand into new markets in France, Germany and other European countries. Similarly, if the United States does decide to reform the Sarbanes-Oxley regime—in terms of its implementation or more generally—we should see that as an opportunity. As we know, a number of United Kingdom firms and auditors are currently burdened by the regime to some extent, and it would be in the interests of not just the United States but the global economy for some of the reforms to be enacted.
We should welcome the speeches being made by Hank Paulson and by Securities and Exchange Commission chairman Christopher Cox. We should be confident that a successful global New York market and a successful global London market can succeed and prosper in the future, side by side. The rise of new financial centres in Shanghai, Hong Kong and Dubai, and also in the rest of Europe, gives London an opportunity to build new partnerships and win new business.
I am not pessimistic about the City of London. I think it is right for us to act to protect our regulatory regime, but we must do so with the right kind of risk-based, proportionate regulation and a continued focus on investing in skills. We must bring the best talent from around the world to London and to our other financial services in the United Kingdom, and encourage others in Europe and the world to move in our direction—the direction of a more risk-based, proportionate approach to regulation.
I do not believe that London will be set back; I believe that it will continue to prosper. We can win more jobs and more investment, and make London the global financial centre of a globally integrating world. It is with that intention and that commitment that I hope the House will support the Bill tonight.
I echo the thanks expressed by the Economic Secretary in his opening remarks.
The Bill is important to the future of the City. As the Economic Secretary pointed out, it is not about tackling foreign ownership. Since the big bang the City has thrived as a result of openness and our ability to allow what were venerable British names to be bought by overseas companies. That has enriched and strengthened the City. I am sure that when the Economic Secretary meets those in City institutions he recognises, as I do, the international diversity of both ownership and personnel. That is one of the great assets of the financial services sector, and it is what I think has made the sector so successful in a global economy. It has also led to opportunities for the City in that global economy: existing relationships with countries overseas can be exploited and developed still further.
There is, however, a legitimate reason for the Bill. There has been widespread concern about the impact of United States regulation if a United States exchange acquired the London stock exchange, and in recent months there has been considerable debate on the subject in the City. That concern is not based on prejudice or on some narrow interest; it reflects the experience of people who work in the City every day, and who have a creeping sense of extra-territoriality entering the regulatory regime. It is a genuine concern that should be addressed.
When people first began to ask how we could protect the regulatory environment from which the United Kingdom financial services sector benefits, a host of mechanisms were proposed to ring-fence the regime, including adjustments to the ownership structure post-acquisition in the stock exchange. However, it was clear to most participants in the market that none of those mechanisms would be particularly effective in recognising and retaining the strength of the regulatory regime that we have today. It was, I think, a recognition of the failings of those alternative mechanisms that led to the Bill, which provides a vital opportunity to safeguard the regime. It sends the clear message that we are keen on foreign ownership of UK-based businesses, but also keen to maintain the strength of the regulatory sector.
The hon. Member for Wolverhampton, South-West (Rob Marris) asked whether we were talking about low regulation. I do not think that we are, on either side of the House. We are talking about the right level of regulation—proportionate regulation that responds to the level of risk and is based on principles, not on detailed rules. That type of regulatory regime has stood the UK in good stead in recent years, benefiting both consumers and those who supply financial services products.
I agreed with the Economic Secretary’s closing remarks. We should be optimistic about the future of the financial services sector. I am always impressed by the people whom I meet in that sector, who are full of ideas about how to exploit markets, come up with new products and take advantage of the changing world in which we live. However, in recognising their skills, talents and innovations, we cannot afford—and the Economic Secretary cannot afford—to neglect the sector. We cannot say “The job is done tonight”, because the job has not been done tonight. More work must be done to maintain the competitiveness of the UK financial services sector.
We must think about skills, tax, infrastructure and regulation. We cannot assume that one summit every 10 years is enough to tackle those issues. We must continue to safeguard the future competitiveness of the sector, and think hard about what it needs and how Government and politicians can strengthen it. We must not neglect it, because unless we look after it and are concerned about how it develops, it will not continue to thrive on the basis of its talents alone. We must make a collective effort to safeguard its future.
I believe that the Bill will play an important role in safeguarding the sector’s future, and in taking the regulation of exchanges into a new dimension in a new way. I hope that, as a result, more businesses will continue to come to London to raise capital and use our capital markets here in the United Kingdom.
I welcome the positive conclusion that we have reached. In my contributions, I had initially intended—as the Financial Secretary rather kindly put it—to add a bit of grit to the debate while also educating myself in some of the issues, but what others have said has taught me things about matters that were not entirely clear to me at first. For example, the hon. Member for South-West Hertfordshire (Mr. Gauke) explained how the Sarbanes-Oxley legislation might be inadvertently introduced into United Kingdom rules as a result of private litigation, and that helped me to understand the process.
I think that one useful contribution I made was to prompt, or provoke, the Economic Secretary into a helpful intervention that cast new light on the whole subject. Press comment on takeovers has been very controversial and the language has often been protectionist, but the Economic Secretary told us on the basis of his own conversations that the American exchanges were relaxed about—indeed, supportive of—the Bill, which would not inhibit a takeover bid from them on normal commercial principles. That was a considerable clarification.
The Economic Secretary could, however, increase my satisfaction quotient from 95 to 100 by dealing with one of my questions which has not yet been answered. Although we debated at length the possibility that American legislation would have a detrimental effect, intentionally or otherwise, and how the Bill might deal with it, there remains the problem of what might happen if a European, perhaps a German, exchange acquired a British exchange and took action in relation to, for instance, the LIFFE or the alternative investment market that proved detrimental. Might not the companies involved argue that they were protected by single-market legislation, and might the Bill therefore not be effective in that context?
The hon. Member for Fareham (Mr. Hoban) made a helpful point. The Bill deals with one aspect of the much bigger issue of extra-territoriality; we dealt with the human dimension involving the NatWest Three. We were not given a great deal of help on that from the Government, but it remains a live issue, and some of the legislative aspects have yet to be addressed. Having heard the debate and received reassurances, however, I welcome this step forward.
Question put and agreed to.
Bill accordingly read the Third time, and passed.