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Financial Services: Regulation

Volume 685: debated on Monday 9 October 2006

My honourable friend the Economic Secretary (Mr Ed Balls) has made the following Written Ministerial Statement.

Concerns have been expressed to the Government about the effects of a possible takeover of the LSE by a company based outside the UK on the LSE’s rules, in particular the rules applying to those companies whose securities are traded on the LSE’s markets. This is a concern that the Government share. In this statement I set out our approach.

The Government are neutral as to the nationality of the owners of recognised bodies (RBs)1. Of the current RBs, five are subsidiaries of overseas-based companies. Openness to overseas investment has been an important part of the success of the City in recent years and will continue to be in the future.

The Government would also not seek to intervene in the independent judgments of the Financial Services Authority (FSA) and the competition authorities in respect of any changes of ownership of RBs. The FSA and the competition authorities have specific tasks to perform on an independent basis within clear legislative frameworks set out by Parliament. Independence and indifference to nationality are key elements of the UK’s regulatory regime.

Investors, issuers of securities, and members of RBs all have an interest in RBs having rules which strike a balance appropriate to that body between the benefits of the restrictions, particularly in terms of investor protection and the impacts on issuers, members and other stakeholders. Such a balance is vital to ensuring exchanges play their role in creating deep and liquid capital markets which promote economic growth. In this respect, the Government believe it is essential that changes of ownership of RBs should not put at risk the achievement of such a balance by RBs.

Our current regulatory regime for RBs is based on high-level legislative principles supplemented by FSA guidance. Within this framework, RBs have the freedom to develop their own rule books in consultation with their members.

I have discussed these issues widely in recent months and made clear that I would expect any potential new owners of the LSE to want to provide certainty and reassurance to the exchange’s stakeholders. I welcome the statement which the US Securities and Exchange Commission issued on 16 June. This provided a helpful clarification of how the SEC sees the current position in respect of the scope of US securities laws.

However, as the FSA pointed out in its statement of 12 June, there is a degree of uncertainty about how overseas ownership of the LSE would affect its regulatory regime. It depends on exactly how any owner would attempt to integrate the LSE with its existing business and the legal framework in other countries, both of which can be subject to change.

It is important that there is certainty that the rules of RBs in the UK will continue to be proportionate, balancing the benefits of restrictions with the impacts on stakeholders.

The Government will now legislate to enhance the FSA’s powers in this area. This will confer power on the FSA to veto changes to the rules of an RB in defined circumstances. The aim would be to enable the FSA to stop RBs making rule changes whose effects on issuers and others were likely to be disproportionate to the public benefits. The Government will provide further details in due course.

The purpose of such a change to legislation is not to involve the FSA in the day-to-day commercial judgments of the RBs. The power will be a right of veto and not a right of approval of rule changes. It will provide a back stop to ensure that the RB’s stakeholders can be certain about the proportionality of the rules of the RB going forward.

This new provision will ensure that UK RBs remain open to overseas ownership. It makes the permissible outer limits of the RB’s rules blind to the nationality of their ownership by entrenching better regulation principles in respect of those rules.

It should also be clear that we will not allow this legislation to be evaded through abuse of our Recognised Overseas Investment Exchange and Clearing House regimes.

1 Under Section 18 of the Financial Services and Markets Act 2000 there are seven recognized investment exchanges (the London Stock Exchange, London International Financial Futures Exchange, EDX London, Virt-X, ICE Futures, the London Metal Exchange and NYMEX Europe) and two recognised clearing houses (CREST and LCH.Clearnet Ltd).