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Investment Exchanges and Clearing Houses Bill

Volume 687: debated on Monday 11 December 2006

My Lords, I beg to move that this Bill be now read a second time.

I start by expressing my gratitude for the close co-operation that we have received in expediting the Bill. Expeditious proceedings demand a good reason and some unusual circumstances. That is the case today. The Bill fulfils a commitment given to the House of Commons by the Economic Secretary to the Treasury on 13 September to enhance the powers of the Financial Services Authority—the FSA—to veto changes to the rules of UK-recognised investment exchanges and clearing houses where they are deemed to be disproportionate. That statement was prompted by concerns over the possible regulatory implications of any possible takeover bid for the London Stock Exchange. At the time, a NASDAQ bid for the LSE was still only a possibility. Since then, the US stock market NASDAQ has announced an offer for the LSE. So, with a bid on the table, it is important that we move quickly. With the co-operation of your Lordships, the Government’s aim is to see the Bill gain Royal Assent as soon as possible, consistent with proper scrutiny of the proposals I am setting out.

The other place considered all stages of the Bill on Tuesday, 28 November. I should like to explain the intended timetable for the Bill in this House. The normal minimum interval between First and Second Readings—two weekends—has been followed. From here on, the usual channels have agreed to shorten the normal minimum intervals. If the Bill receives a Second Reading today, it is proposed to schedule the Committee stage for Monday, 18 December. If the Bill is not amended in Committee, Report stage will be taken formally, immediately after Committee stage. Third Reading would follow on Tuesday, 19 December. If the Bill is not amended, Royal Assent will take place later on that day.

Before turning to the Bill, I should like to set out the wider context. London 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, more than 40 per cent of the derivatives market, more than 30 per cent of world foreign exchange business, more than 40 per cent of cross-border equities trading and 20 per cent of cross-border bank lending. More foreign banks operate in London than any other financial centre. It is the location for the headquarters of six of the world’s 10 largest international law firms, and for 200 foreign law firms which recognise its global importance and the role of English law in so much international trade and financial services.

Based on the City’s global reach and outlook, its reputation for free, fair and open global markets and our proportionate risk-based approach to regulation, London has attracted business and listings from around the world, which is increasingly recognised abroad. An authoritative independent report, which was published in the United States on 30 November, states:

“It is worth noting that London, for many years lacking the dominant position in worldwide capital or investment opportunities (which arguably it once held), has been able to retain its position as a leading financial center by choice, not necessity. It has done so, in the view of many, by providing the protection to investors of well-crafted, effective laws properly enforced without unnecessary cost and undue exposure to liability risk”.

The Government are determined to keep it that way.

This year, concerns were put to the Government about the effects of a possible takeover of the London Stock Exchange by a company based outside the United Kingdom and the threat that this might pose to London’s attractiveness as a place for international listing and wider business. The UK has for some years been home to several foreign-owned exchanges and has always been open to overseas investment in UK exchanges. LIFFE, ICE Futures and Virt-X are all owned by overseas companies, NYMEX Europe was established by an overseas company and EDX London is a joint venture between a UK and overseas exchange. That has in part reflected our principles-based, recognised investment exchange regime, which has been flexible enough to accommodate the significant changes in the exchange’s business models in recent years, but rigorous enough to ensure that UK markets have a high reputation for probity. But NASDAQ’s interest in acquiring the London Stock Exchange has led to discussions about the implications of such a change in ownership.

The Government want to make two points absolutely clear. First, they are neutral with respect to the nationality of the ownership of the London Stock Exchange and reject the argument that they should intervene to protect that exchange, or any other UK exchange, from foreign ownership, which would fly in the face of the traditions that have underpinned the City's success. A policy of protecting national champions would damage and not bolster the interests of London and the UK. So the Government do not have and will not express any views about the merits of this proposed takeover. It is for the current owners of the shares to decide whether to accept or reject the offer. But the Government are no less determined that a change in the ownership of the LSE should not affect the existing regulatory regime under which the exchange and its members and issuers operate. We are determined to protect our domestic regulatory environment, which is founded in both UK law and EC directives, which has made the City a magnet for international business. If you operate in London, you should be regulated in London. I am pleased to say that the Government’s determination in that respect is also recognised abroad. I hope I may be permitted a second quotation from the report I referred to earlier:

“There should be no doubt that obtaining and sustaining competitive advantage in financial services by managing regulatory costs and burdens while maintaining the confidence of investors has become an explicit focus of government policy in competing market centers. In a recent statement, Ed Balls, Economic Secretary to the U.K. Treasury, said: ‘Our system of principles and risk-based regulation provides our financial services with a huge competitive advantage and is regarded as the best in the world’”.

The Bill will help to preserve that system 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. 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 rule would impose a regulatory burden on the 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 to any such benefit, and would not be something already required or contemplated by UK or EC law.

The new powers will not put the existing regulatory provisions of the recognised investment exchanges and clearing houses into question; they will apply only to future changes. They will also apply to all UK-recognised investment exchanges and clearing houses from the outset. They will not just apply after there has been a change of control. This will happen to all recognised exchanges and clearing houses, not just those that are in foreign hands. The Bill also provides for the necessary processes and safeguards.

The exchanges and clearing houses will be required to notify the FSA of 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. 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. It will then have a further 30 days after that consultation period has ended to decide whether to veto the proposed rule change.

An exchange or clearing house will not be able to introduce the proposed change in regulatory provision until either the initial 30-day period has expired without the FSA calling in the proposal, the FSA has confirmed that it will not be calling it in, the FSA has stated that it will not be vetoing it or the further 30-day period has expired without the FSA issuing a veto. In the event of an application for judicial review of an FSA veto decision, the Bill makes provision for the effect of the judicial review on the time limits for imposing a veto and the time when a regulatory provision may be validly made by an investment exchange or clearing house.

In drawing up these clauses, we have been anxious to ensure that the procedures are not burdensome and disruptive for the recognised investment exchanges and clearing houses. Any unnecessary regulation would stifle innovation and impose extra costs for both the exchanges themselves and the FSA—costs that would ultimately be paid by the exchanges and clearing houses and their users—and conflict with the ultimate objective, which is to facilitate innovative developments that will help London remain a world-leading and well-regulated financial centre.

Treasury officials consulted the exchanges and clearing houses themselves. In consultation, those bodies made clear their concerns that the procedures in the Bill, if applied in a heavy-handed way, could damage their competitive position by reducing the flexibility they have to make and change their rules. The Government are determined that this will not happen. We are committed to ensuring that the new processes will not impose an unnecessary burden on the exchanges and clearing houses or the FSA. The new power has always been intended as a backstop. It has never been intended as a day-to-day supervisory tool for the FSA.

It is the clear view of the Government and the FSA that the vast majority of changes to regulatory provisions will not raise the kinds of concern which the new power is intended to address. Many rule changes by exchanges and clearing houses are simply routine changes. These should not be subject to the kind of scrutiny and processes which I have just outlined. The Financial Services Authority will not be involved in micromanaging the rulebooks of the exchanges and clearing houses. It will act fully and consistently within the principles-based approach to regulation which characterises the regime established under the Financial Services and Markets Act 2000. The FSA’s chief executive, Mr John Tiner, wrote last month to the Economic Secretary to confirm this point, and a copy of the letter has been placed in the Library. To make this clear, and following detailed consultation with the FSA and the exchanges, the Bill gives a power to the FSA to specify in its rules the types of change to regulatory provision which need to be notified and those which do not. This approach fits well with the general scheme of the Financial Services and Markets Act. The general approach is in the Act, but the more detailed working out is left to secondary legislation—either Treasury regulations or FSA rules.

Of course, it will take time for the FSA to plan, discuss, devise, draft rules, consult on draft rules and make the necessary rules. But in view of the need to act with some urgency, and because it will take longer for the FSA to draw up and consult on these detailed rules than the time available before Royal Assent, the Bill also gives the FSA a power to grant waivers from the notification obligation to exchanges and clearing houses for the first 12 months.

These provisions 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 could not be undermined by precipitate rule changes between Royal Assent and commencement.

I am sure that your Lordships will be pleased to hear that the FSA has already started working with the exchanges and clearing houses on the formulation of the waivers. That work is already well advanced.

The legislation reflects two key principles; first, the principle that we should be blind to ownership of exchanges is protected—entrenching London’s reputation as a global financial centre determined to attract talent and ownership from around the world. Nothing in the Bill has any consequence for the nationality of the ownership of UK exchanges. It will make overseas ownership neither easier nor more difficult. It will not deter any potential foreign investor who wants to come to the UK.

The second principle is that it is right for our Government to act to protect and enhance the UK’s proportionate and risk-based regulatory regime. That approach—founded on principles rather than on centrally formulated detailed rules, proportionate to real problems and based on the actual risks to consumers and investors—has served the UK well. The Government are determined to safeguard it.

I believe that the Bill will deliver that objective and do so without imposing any unnecessary regulatory burden on the exchanges and clearing houses. The Bill is legislation not to impose regulation but to avoid any risk of 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 am sure that the Bill will help ensure that London continues to be a magnet for international business and new listings from around the world. I commend the Bill to your Lordships.

Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)

My Lords, I welcome the Bill but am in some difficulty in speaking immediately after the Minister. I did not know whether I would be able to participate in this debate as I thought I would not be here for the duration; it was only very early this morning that I realised that I could be here and put my name down to speak. I was intending not to deal comprehensively with the points that the Minister had made but only to raise three particular points in the expectation that I would be arriving towards the end of the debate. In fact, I do not need to deal comprehensively with what he said because I pretty well agree with everything.

There is one general point I would like to make before I come to my three particular points. It should be stressed—indeed, it cannot be repeated often enough—that this is not a protectionist measure but is very much in the spirit of open and free trading that the Minister described.

If it were a protectionist measure, we would be taking measures to prevent NASDAQ or others from taking over the London Stock Exchange or other exchanges based here. Indeed, it is almost the opposite of a protectionist measure. What it does do is recognise the asset to our open trading approach and to the City of London that our system of principles and risk-based, light-touch regulation, as conducted by the FSA, offers.

Like others, I have on occasion been critical of some of the ways in which the FSA has over-regulated or been over-intrusive in other financial services, but I do not think that it applies to the issues of the exchanges and clearing houses. How much better is the approach of the FSA than the American approach that we now see of the box-ticking Sarbanes-Oxley induced system of excessive regulation both in terms of regulatory requirements and cost.

I turn now to my three points. First, much was made in the other place of the paradox that an apparent increase in regulatory requirements is designed to prevent excessive regulation; that an extension of regulation is being introduced to protect our light-touch regulation and might lead to less regulation. An intriguing point was made in the debate in the other place by Ed Balls, the Minister, on 28 November. He intervened in the speech by my honourable friend Mark Hoban, who was saying that it was a 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. At that point, Ed Balls said,

“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?”.—[Official Report, Commons, 28/11/06; col. 996.]

That point was not much followed up later in the debate in the other place. I put to the Minister three questions. First, is it his interpretation of the Bill that it will keep the deregulatory pressure on all exchanges? Secondly, will it have the consequence, irrespective of change of control and affecting all London exchanges, of providing what has been described as a kind of deregulatory ratchet? Thirdly, how does he envisage that that will come about?

On my second point, in the other place there was some concern about the lack of parliamentary accountability and scrutiny. The Government’s regulatory impact assessment suggested that of the estimated 1,000 rule changes a year in our stock exchanges, clearing houses and so on, there would be only about 25 notifications, of which only one would be called in. So the RIA suggests that the measure will have a relatively low cost. We will not know for some time—beyond the 12-month grace period—whether that is so: whether it will be low cost, achieves its objective of avoiding excessive US-type regulation and leans towards being a deregulatory ratchet.

On the question of parliamentary accountability, most of the scrutiny will come from Select Committees. I am a member of the new Select Committee on Regulators that our House has just set up. We are all familiar with the point that Select Committees in the other place cannot cover comprehensively the range of activities that they are dealing with, so the amount of time that each Select Committee—in this case, the Treasury Select Committee—could give to following up in a detailed way how deregulation works and how the regulator works is itself limited. Therefore, it is a role of this House and our new Select Committee, after a 12-month period, to take up the point that has been made in the other place as to how this Bill is working. Our Select Committee has been set up for only 12 months, but I hope that it illustrates why it would be wise for the Select Committee in this House to have a more permanent position and to be able to undertake that role.

Dr Vincent Cable, speaking on behalf of the Liberal Democrats in the other place, questioned whether the Bill was really necessary. He did so on the basis that NASDAQ had already indicated that it would abide by the FSA rules and that there would be no change. He therefore asked why we had to legislate for it. However, there is such a thing as the law of unintended consequences, as we have clearly seen with the 2003 extradition legislation and treaty, or, perhaps more appropriate in this case, the law of possible foreseeable consequences if we do not pass the legislation. The extradition treaty, as we all know, was supported by so many of us because we believed that it was linked solely with terrorism, but it has been extended in other directions by the Americans to affect the NatWest Three and various business people. Just as we were told that the extradition treaty was being introduced to deal with terrorism offences and it was extended, so, in this case, NASDAQ may well state that it would operate under current FSA rules, but can we be sure that that would last?

There is no doubt that the consequences of Sarbanes-Oxley have been greatly to the benefit of the City of London. Bob Greifeld, the chief executive officer of NASDAQ, has referred to the City and the London Stock Exchange as being the premier financial centre of Europe. He is only partly right because, as the Minister indicated in some of the statistics which he gave, it is now the premier centre of the world. There is a significant difference between the two.

I give another example. So far in this financial year, there have been 155 initial public offerings in London, of which 40 were international. In the first half of this year, there were 40 IPOs for international companies on the London Stock Exchange. There were only six on the New York stock exchange. The LSE lists 614 international companies from 66 countries; the New York stock exchange lists 460 from 46. That demonstrates very clearly how the London Stock Exchange has overtaken the New York stock exchange and how London is truly the leading international financial centre. I suspect that NASDAQ wants to acquire the LSE to get a slice of that action and to counterbalance the decline of the New York stock exchange and of NASDAQ.

We have seen the outreach beyond the United States of the instincts of US legislators, regulators and lawyers. It is not beyond the powers of imagination to envisage a situation where, with the LSE under US ownership and an American-dominated management team, US regulation would be extended to London to level the playing field with New York and to attract international business, which is currently attracted to London because of the benefits which we offer, back to New York. We do not want an extension of American litigious practices and class acts to London.

I seriously hope that that will not happen, but we cannot be sure. Winding up the debate in another place, the Minister, John Healey, reminded us that,

“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”.—[Official Report, Commons, 28/11/06; col. 1027.]

I support the Bill to avoid that danger ever coming about and to protect our approach to regulation.

There is of course a risk in producing legislation in haste, which is that it may be flawed in some detail and does not work well in practice. I have had neither the time nor the resources which Ministers have, but I trust that that will not happen in this case. On the assumption that the Bill is so framed as to achieve the objectives intended, I hope that it will pass quickly into law.

My Lords, I start by thanking the Minister for not using the phrase “light touch” in relation to the Bill. I have spent some time in the venture capital area. In the context of light touch, it is worth reminding the House that the Financial Services Authority’s handbook has some 23 volumes with approximately 10,000 pages, which would probably reach from the Table to the ceiling of this House. You can purchase a copy for £2,258. It may be a slight exaggeration to call that light touch but, as the noble Lord, Lord MacGregor, said, it is somewhat preferable to many other regimes elsewhere in the globe.

In general I very much support the Bill although questions were asked on it in the other place. Questions need to be asked about it. For instance, the FSA already has complete control over the listing rules and produces the disclosure and prospectus rules. There is a source book on recognised investment exchanges and recognised clearing houses, in which the FSA can lay down regulations. It is already very powerful in that area.

In what circumstances is the Bill needed? I hope that the Minister will forgive me if I have completely misunderstood the position with regard to the alternative investment market. Having looked at the Bill, and the Financial Services and Markets Act to which it refers, I note that Section 300 refers solely to recognised investment exchanges and recognised clearing houses. That is fine for the main London Stock Exchange market and many of its recognised bodies, which it lists, but although the alternative investment market is a subsidiary owned by the London Stock Exchange, it is very specifically not a registered investment exchange; it is an exchange regulated market. It is very differentiated to avoid some heavy touch European regulation, particularly the prospective directive. The alternative investment market is not an RIE. I do not understand how it is protected by this legislation.

Over the past 10 years AIM has been one of the great successes of the London market. It has raised some £34 billion worth of capital and has 1,500 listed companies. It is particularly successful in attracting overseas listings from 26 countries. I believe that some 250 overseas companies are listed on it. It has a great reputation for growth and light regulation. Unlike the LSE’s internal rule book of some 250 pages, the AIM rule book has only some 35 pages and exists wholly to promote light-touch regulation. Yet, if the LSE were taken over as a corporation by NASDAQ or any other external body, clearly it would have ownership of AIM. I do not understand how this legislation covers AIM because it is not a recognised investment exchange.

There is confusion regarding my next question. Who are we concerned about regarding over-regulation? Is it the recognised investment exchanges themselves or the corporations that list on them? The Minister mentioned the exchanges themselves. I should have thought that the FSA’s current source books and powers enable it to control that totally. I refer to registration and deregistration. The rules regarding recognised bodies are laid out and come within FSA powers. However, the indirect regulation and rules concerning the companies that are listed on those exchanges are more difficult. If those companies also have listings on the New York stock exchange or elsewhere, or if the LSE is a subsidiary of a foreign listed corporation based in America, they will be subject to Sarbanes-Oxley whether we like it or not. It seems to me that we have a clash of legislation, rather than necessarily annulling the effects of Acts such as the Sarbanes-Oxley Act.

This Bill gives the FSA powers generally to interfere in the way in which registered investment exchanges and clearing houses make rules, which may in no way be related to a takeover by a foreign, or any other, business. I would like to have the Minister’s assurance that the legislation does not give an open book for the FSA to over-interfere in such exchanges and clearing houses.

I very much welcome the legislation as an insurance policy, but I would like to be far clearer about the dangers, particularly whether the alternative investment market—which is one of London’s jewels in the crown—is actually protected by the legislation, because I do not understand how it is.

My Lords, at Second Reading I always ask myself three questions about a Bill: first, are the aims of the Bill desirable; secondly, do you need a Bill to achieve those aims; and, thirdly, if so, does the Bill set about it in the appropriate way?

In this Bill, the answer to the first question seems to me, unambiguously, yes. Its purpose is to prevent excessive regulation being imposed by a London Stock Exchange owned by NASDAQ via the introduction of Sarbanes-Oxley type rules. There are two reasons for wanting to prevent that, one practical and one principled. The practical reason is that, as noble Lords have said, London has made an outstanding success of operating with what I was going to describe as a light-touch regime—given the comments of my noble friend Lord Teverson, I had perhaps better say that it operates with a relatively light-touch regime. However, that relatively light-touch regime has been one of a number of contributory factors towards its success in recent years. Although there is a huge rule book, it is noticeable that when the FSA asks for suggestions on how the rule book might be significantly reduced, it finds very few practical suggestions forthcoming.

Over a period when London has been growing, however, New York has been contracting in certain respects. It is absolutely clear that the excessive regulation, as we see it, of Sarbanes-Oxley—which is a classic case of the unintended consequences of a Bill that was designed to do what at the time were non-contentious things—has had a significant, negative effect on New York. That has been to our advantage. Therefore, it would be pretty foolish to encourage or allow anything that undermines the advantage that London has had in recent times.

The principled objection to the imposition of Sarbanes-Oxley rules relates to the issue of extraterritoriality. It is for this country, within, when appropriate, the overall context of EU legislation, to decide what level of regulation it believes appropriate. It is always difficult to get the balance right, but it is for us in the UK to decide how we set about doing that. As we have seen in the recent NatWest case on extradition, the USA is very quick to seek to apply its rules extraterritorially whenever it can. It is a logical extension of the military and economic power that the US has. It is a cast of mind that people get into, but it is pretty arrogant to believe that you can always call the shots even outside your own jurisdiction. It is therefore unacceptable and should be resisted. That is one of the consequences of this Bill.

Is the Bill necessary? How likely is it that a NASDAQ-owned LSE would in practice introduce Sarbanes-Oxley type legislation? If it sought to do so, why wouldn’t the existing legislative framework be adequate to deal with it? On the likelihood of the Bill being necessary, the arguments are less clear-cut than seeing the aim established. One of the principal reasons for NASDAQ seeking to buy the LSE is to gain the benefits that, by driving business away from the US, Sarbanes-Oxley has brought to London. It would be perverse to introduce the very rules that would undermine the ongoing success of NASDAQ’s new purchase. Indeed, it has said that it welcomes the Bill.

That attitude is underpinned by the growing and, by now, widespread acceptance in the US in financial and political circles that Sarbanes-Oxley, in the way it has been interpreted and implemented, has gone too far. There is a strong likelihood that some of the rules will be repealed or relaxed in the foreseeable future. In those circumstances, it is unlikely that there would be pressure on NASDAQ and the SEC to try to introduce Sarbanes-Oxley to the UK.

An argument was also made in the other place that if the LSE adopted new and onerous rules, market competition should and could deal with that—that new exchanges that did not make such onerous requirements would and should be established. As we have seen recently with the Turquoise consortium of international banks that proposes to establish a new, low-cost share trading platform, such developments are possible, although they are not guaranteed—certainly, not in the short term.

If there is a belief that one may need to apply regulatory pressure against the imposition of Sarbanes-Oxley type rules, why is existing legislation not adequate? As my noble friend Lord Teverson said, the FSA has plenty of powers to regulate exchanges. The Economic Secretary stated in another place, as the noble Lord, Lord MacGregor, mentioned, that the Protection of Trading Interests Act 1980 and EU regulations could be effective if an overseas authority sought to impose its national requirements directly on a UK exchange or clearing house in respect of its UK activities. However, if a US owner were pressurised into operating in accordance with domestic US law, existing EU and UK legislation could not prevent lawful instructions being given by that US owner.

The Bill would prevent such an outcome by allowing the FSA to act against excessive legislation from whatever source. The nub of the Bill is that it protects NASDAQ against SEC influence to impose rules that it would like imposed here, when NASDAQ, having just bought an asset to avoid those rules, would be very unlikely to impose them. In a sense, one can see why NASDAQ may support the Bill as a way of protecting itself against SEC pressure on it back in the US.

In summary, there is a “better safe than sorry” argument in favour of having a Bill at all. The Bill may well be unnecessary, but it would be pretty foolish if we had not legislated for circumstances in which it might be necessary and, for some perverse reason, a NASDAQ-owned LSE introduced over-prescriptive rules. There are some vague echoes here of last week’s debate about Trident—we do not think that we will need to use it but we feel safer with it. At least this Bill is a cheaper option than Trident—and might be a safer one. My second argument is that it is important to lay down a matter of principle to the US that we will not simply accept extraterritoriality. This Bill sends such a signal, and that is useful in itself.

If we accept, as I do, that a Bill is desirable, does this one do the trick? I think that probably, on balance, it does. It is very skilfully drafted by not mentioning a specific exchange or a specific potential owner. I agree with the Minister and the other noble Lords who spoke that this certainly is not a protectionist Bill, and we on these Benches share the view that we should be nationality-blind to who owns institutions in the City.

However, the question about the wide application of this Bill across all exchanges brings me to the first of two questions for the Minister. As the noble Lord, Lord MacGregor, said, the Economic Secretary in another place said that one advantage of the Bill was that it would keep deregulatory pressure on all existing exchanges operating in London. Do the Minister and the Government envisage that the FSA will use the new powers in the Bill against existing exchanges, or do they envisage that it really is clever drafting which actually has a narrower target? The second question— there was some discussion in another place about EU legislation—is whether, in their wide consultation, the Government have consulted the European Commission and other member states. If so, as this is financial services legislation that is outwith the EU framework of capital markets regulation, have any concerns been expressed about any aspects of the Bill?

With those questions, I reiterate that I believe this is an expedient Bill. As the Minister said at the beginning of the debate, the usual channels have agreed a timetable, which obviously I support. We look forward to having the Bill enacted by Christmas.

My Lords, this is getting rather boring. For these Benches, I add our support for the Bill, and I thank the Minister and his honourable friend the Economic Secretary for the courtesy of letting me see a draft of the Bill a few weeks ago.

As the Minister is aware, in view of the importance of the subject matter of the Bill to the City of London—using that term as a proxy for our vibrant financial services industry, wherever it is located and certainly beyond the confines of the square mile—we have unusually agreed to the shortened time frame for getting this Bill through, both in your Lordships' House and in another place. The advantage is that we clearly lay down the basis for future regulatory changes as early as possible, so there can be no misunderstanding for anybody who might seek to acquire a controlling interest in any of our investment exchanges or clearing houses.

These procedures have a down side, however, in that issues may not have been examined in the depth necessary; my noble friend Lord MacGregor referred to that. There is some danger of a technical deficiency going unnoticed, or the appearance of our old friend the unintended consequence.

The mere fact that this Bill is not opposed by the Official Opposition Benches or the Liberal Democrat Benches—or, indeed, by any significant body of opinion outside Parliament—is not necessarily a guarantee that we will make good law. We have only to look at the proximate cause for this Bill—the Sarbanes-Oxley legislation—for an example of what went wrong. In the wake of the Enron and WorldCom scandals, that Bill went through the US legislature with no opposition from within the legislature or outside. But it is manifestly flawed legislation which has imposed massive costs on US-listed companies, and of course those UK companies that also have a US listing, in return for benefits which, I believe, are now widely acknowledged to be not commensurate with the costs imposed. As a result, as other noble Lords have said, there has been a commercial disadvantage for the US capital markets, of which London has taken advantage.

I do not want to labour this point because we have agreed with the Government that this Bill can proceed quickly. However, we need to recognise that there is a risk, and I hope that the Minister will say something this evening about the nature and the robustness of the Government's engagement with those potentially affected by the Bill.

This may be a case where it would have been appropriate for the Bill to contain a sunset clause or possibly—I shall no doubt get into trouble for suggesting this—a power for the Government to amend further the Financial Services and Markets Act if it is discovered that the amendments covered by the Bill either do not do the job that they are intended to do or end up doing the wrong job. The Minister might like to say what consideration the Government gave to those mechanisms when drafting the Bill.

I make it plain that my party is entirely open to ownership issues relating to exchanges or clearing houses: we entirely agree with the Government on that. The history of our financial services market, especially since the brave reforms undertaken by my party in the 1980s, has shown that ownership is irrelevant. We owe the vibrancy of our financial markets to the fact that the City is a good place for financial services businesses to be, as the studies undertaken by the Corporation of London, referred to this evening, clearly show. We outshine Tokyo and everywhere in Europe, and we do better than New York on many counts. This country has always welcomed financial services businesses from abroad, whether they are setting up from scratch or buying into existing UK businesses. My party has no truck with economic nationalism, and there is a good degree of consensus on that this evening.

One hallmark of my party is our dislike of regulation and our commitment to deregulation. Before we sign up to additional regulation, we need to be satisfied that it is absolutely necessary. It is undeniable that the Bill creates new regulatory burdens which will apply to investment exchanges and clearing houses, in that it creates for the first time the power for the FSA to interfere in the nature of regulatory processes applied by the exchanges. There is a nice argument that says that the Bill is about stopping more regulation coming in by the back door and so it is really a deregulatory Bill, but I do not quite buy that. The FSA is a regulator. The noble Lord, Lord Teverson, referred to the zeal with which it approaches its regulatory tasks, and the Bill is giving it more powers to regulate.

Clause 1 introduces new Section 300A into the Financial Services and Markets Act, allowing the FSA to disallow regulatory provisions where it believes that the provisions would be excessive. The danger appears to me to lie not in the explicit words of the Bill, which seem to confine the FSA’s overt powers in an appropriate way, but in the fact that the exchanges and clearing houses will potentially have to negotiate with the FSA whenever they seek to make any change to their regulatory rule books. That gives the FSA an unparalleled opportunity to influence the rule books in the way that its current powers simply do not allow.

To put that another way, the issue may not be the FSA saying “yes” or “no” to a regulatory change but, rather, that it has a position of power that it could use, perhaps not even consciously, to achieve objectives not directly related to the proposed regulatory change. For example, it could become known that the FSA favoured certain changes to consumer protection measures. Would an exchange or clearing house feel pressured to fall into line in order to get some other, unrelated regulatory change past the FSA and past the powers that we are introducing in this Bill?

Perhaps the Minster will say something about the constraints, if any, on the way that the FSA will, in practice, use its new regulatory powers. The Minister said that the FSA would not use the powers for routine regulatory changes, but Mr Tiner’s letter, to which the Minister referred, does not quite say that. I have concerns about that. Will the Minister say what will happen if the FSA starts to use these new powers more widely? Let us suppose that it is rather taken with its new regulatory power and seeks to use it not once but many times a year, and that it starts to impose significant costs on the exchanges and clearing houses within the Bill. What could the Government do about that?

One possible constraint could be judicial review. As judicial review is process-focused rather than substance-focused, we cannot regard it as a first line of defence against the FSA’s incorrect use of its powers. I hope that some other constraints can be shown to exist. While I do not rate judicial review as a great protection against the powers of the state or its organs, I have one question for the Minister which arises from how judicial review would proceed. This point was made by my honourable friend David Gauke in another place. I have given the Minister notice that I intend to raise this issue.

The meat of this Bill is in Clause 1, which adds new Section 300A to the Financial Services and Markets Act. The new power in Section 300A(2), to direct that a proposed provision must not be made, will have to be construed for judicial review purposes in the context of the four regulatory objectives set out in Section 2 of the Financial Services and Markets Act. Those are market confidence, public awareness, the protection of consumers and the reduction of financial crime.

Noble Lords who took part in the deliberations on the Financial Services and Markets Bill—that does not include the noble Lord or myself, as we were not then in your Lordships’ House—will know that there was extensive debate on whether those four regulatory objectives should be extended to include a fifth, the competitiveness of the UK’s financial services industry. Due to the way in which the Financial Services and Markets Act is drafted, if there is any conflict or prioritisation between consumer protection and competitiveness, the FSA would have to award victory to consumer protection. Competitiveness is not a regulatory objective for the FSA and hence can come into play only if all other things are equal.

If we assume that the London Stock Exchange is taken over by NASDAQ and further assume—although it may appear unlikely at the moment—that NASDAQ decides to add rules along the lines of Section 404 of the Sarbanes-Oxley Act, it is fairly sure to argue that that was necessary on consumer protection grounds. That is what Senator Sarbanes and Senator Oxley did when they proposed their own legislation. Let us further assume that the FSA wants to use its power in Section 300A(2) to direct that this should not be added. NASDAQ would then seek a judicial review, which would look, first, at whether the FSA was acting within its own regulatory objectives. As the competitiveness of the UK's financial services is not a statutory objective, but consumer protection is, would the FSA not in practice be vulnerable in a judicial review?

The Minister should note that I am not framing my question by reference to the terms of new Section 300A and the elaboration of “excessive” found in subsections (3) and (4). Those come into play only if the FSA can indeed make a direction within subsection (2). Meeting the tests laid down in subsection (3) and taking into account the matters in subsection (4) are not a substitute for the direction being within the FSA's statutory objectives. Put another way, Section 300A does not exist in isolation. It has to be seen in the context of the FSA's objectives as already laid down in Section 2, and those objectives contain nothing about the competitiveness of the UK’s financial services.

This is a complex area. It was debated in another place, but it did not achieve the desired level of clarity, which I hope the Minister can achieve this evening. We might have preferred to see some aspects of the Bill expressed differently. The real rationale for the Bill is the potential for regulatory burdens to be imposed following a change of ownership of the London Stock Exchange, but the Bill is not drafted in those terms. It gives a much broader power to the FSA. It may be that the FSA will use the powers with moderation and will not impose excessive burdens. It might even act as a deregulatory ratchet, although I am not holding my breath for that. We should be wary of conferring broader powers than necessary, in case future generations of FSA leadership are less scrupulous than the incumbents.

Another aspect of the definition of “excessive” in subsection (3) of new Section 300A is that it is calibrated by reference to Community law, so if Community law is excessive we are stuck with it. That is doubtless a by-product of our treaty obligations. We know that most of the regulation we must apply in the UK, including for financial services, emanates from Europe. Now, for example, the financial services sector has to cope with MiFID—the markets in financial instruments directive—which will cost up to £1.1 billion to implement and over £100 million a year to operate. We really need a power in the Bill to strike down excessive regulatory burdens, full stop—including those coming from Europe. I accept that, for this Bill at least, that is a pipedream. I hope that the Minister can answer my questions today, so that we can clear the way for an easy and rapid passage through the remaining stages.

My Lords, I am grateful for the attention your Lordships have given the Bill today. I thank noble Lords for broad—and, in some instances, enthusiastic—support for this measure. Before responding to some of the detailed points about the Bill, I shall stress some of the most important, emphasising what has already been debated.

First, we are legislating not to impose regulation but to avoid it. Of course, this sounds like a paradox—a point debated in the other place—but it goes to the heart of what we want to achieve. We want to safeguard our pragmatic and successful regime for market regulation. From today’s debate, that is something we all share. This country’s proportionate risk-based regulatory regime has made London a magnet for international business and an economic asset for the UK, for Europe and for countries throughout the world. As I said before, that is widely recognised in many other countries.

The Bill will deliver that objective. It enables the Financial Services Authority—widely respected as one of the world’s leading financial regulators—to veto disproportionate regulatory changes proposed by exchanges and clearing houses for the markets which they provide and support. It also puts mechanisms in place which will enable the FSA to ensure that this will not impose any unnecessary or excessive burden on exchanges and clearing houses themselves.

I also emphasise that the Government have not changed their attitude towards foreign investment in our financial services industry. It should therefore be clear that the Government do not have, and will not express, any views about the merits of the takeover bid for the London Stock Exchange made by the US NASDAQ stock market, as I indicated earlier. We will not intervene in the judgments of owners of those shares or in the judgments which the Financial Services Authority and competition authorities must make in their respective fields.

The noble Baroness, Lady Noakes, mentioned the tension between the FSA’s different regulatory objectives and their interaction with the requirements of the Bill. I shall spend a little time on this. Some of it perhaps almost strays into Committee territory, but it would be good to get something on the record. I am grateful to the noble Baroness for giving me advance notice of her intention to raise this matter.

The question may be summarised as querying whether the FSA regulatory objective for the protection of consumers must always trump other considerations, such as the need to maintain UK competitiveness, when the FSA is considering exercising its veto over potentially excessive regulatory provision. Put this way, the answer is no, and I shall say why shortly. It is first worth exploring what would happen in practice and how the different legal provisions, which the noble Baroness rehearsed, might be engaged.

The scenario will always have three elements: first, a UK recognised body wishes to bring in some new regulatory provision and notifies the FSA; secondly, the FSA calls in the proposal and, after fulfilling the other procedural requirements in the Bill, decides that the proposal would be excessive and directs the recognised body not to make it under the new Section 300A(2); and, thirdly, the recognised body challenges the FSA’s decision to make the direction by judicial review.

For such an action to succeed, the recognised body will have to demonstrate that the FSA’s decision was ultra vires, or that there were serious procedural inadequacies, or that the decision was unreasonable in the sense that it was a decision that an authority, when acting in accordance with its powers and having considered all relevant factors and discarded those which were irrelevant, could not rationally have reached. It is worth recalling that it will be for the FSA to review the proposed regulatory provision and judge whether it is excessive. Assuming that there is no question about the FSA’s powers or processes, it will be for the court to review the FSA’s decision and conclude whether that decision was unlawful or unreasonable in the sense described. To succeed, the recognised body would need to demonstrate to the court that no reasonable person in the FSA’s position could properly have taken the decision that it took. The court will not find for the applicant just because, if it had been taking the decision on the basis of all the factors that the FSA considered, it might have reached a different decision.

We now have to consider the impact of the protection of consumers objective in such a case. In particular, a challenge might, as was suggested, argue that if the FSA had given proper weight to that objective, it could never have concluded that the proposed regulatory provision was excessive. For instance, the argument might be that the FSA should have borne in mind that provisions of the same sort deliver consumer protection in another state.

There are three points to note. First, the protection of consumers is only one of the four regulatory objectives that the FSA has under Section 2(2) of the Financial Services and Markets Act. The others are market confidence, public awareness and the reduction of financial crime. I must stress that those objectives are not objectives of the FSA’s business in the sense of business objectives, and still less are they meant to be objectives that the financial services industry or any individual exchange, clearing house or firm is meant to deliver. Rather, they operate more as constraints on how the FSA exercises its general functions. The extent of the obligation in Section 2(1) of the Financial Services and Markets Act is that the FSA is required to,

“so far as is reasonably possible act in a way … which is compatible with the regulatory objectives; and … which the Authority considers most appropriate for the purpose of meeting those objectives”.

So while the authority is to meet those objectives, it is for it to decide how to go about doing so. It would be quite impossible for the FSA lawfully to concentrate on only one of its regulatory objectives to the exclusion of the others. It has to give due weight to all of them and if it did not—for example by giving too much weight to the protection of consumers—it might be vulnerable to a challenge.

Secondly, in Clause 1 the Bill refers to “a reasonable regulatory objective”. It does not refer to the FSA’s regulatory objectives that I have just discussed. In deciding whether a particular proposal pursues a reasonable regulatory objective, that question will have to be considered by reference to the particular proposal, the circumstances of the particular exchange or clearing house proposing the provision—not those of the FSA—and all other relevant circumstances. I am not saying that the protection of consumers could not be a reasonable regulatory objective—of course it could—but whether in the case of a particular proposal the objective being pursued was a reasonable regulatory objective would depend on all the circumstances.

It seems to be being suggested that in these circumstances the only relevant objective would be the protection of consumers. That would not appear to be the case. These circumstances are necessarily dealing with financial markets and exchanges. I refer the noble Baroness to Section 3 of the FSMA which expands on the market confidence objective. Further, in exercising its functions, including that of taking decisions under the provisions of the Act, the FSA must have regard to the matters listed in Section 2(3). It is not the case, as has sometimes been implied, that the matters in Section 2(3), which include,

“the desirability of maintaining the competitive position of the United Kingdom”,

are in some way subordinate to the regulatory objectives. These matters are really engaged in a slightly different way when the FSA makes its decisions and they must also be given the appropriate weight in the circumstances.

Thirdly, even if the FSA protection of consumers’ objective was engaged, that objective is to secure the appropriate protection for consumers. It is for the FSA to decide what the appropriate protection of consumers is. Regulatory provision which went beyond that clearly could “be disproportionate to the end to be achieved” or, equally, it might be considered as not pursuing a reasonable regulatory objective. It would be for the FSA to decide whether that was the case, having regard to all the relevant circumstances in accordance with new Section 300A(4). Just because something is or purports to be for the protection of consumers, it does not follow that it either cannot be excessive or is the appropriate degree of protection.

The final point raised in this context is whether the fact that the same regulatory provision is already in place in another country means that it must be appropriate or can never be excessive. The answer must clearly be no. I have dwelt at some length on that point to get it on the record. If, on reading Hansard, the noble Baroness or any other noble Lord wishes to raise further points on that before Committee, I would be very happy to set up appropriate meetings.

I will deal with some of the other points raised. The noble Lord, Lord MacGregor of Pulham Market, made the point that this is not a protectionist measure. That is absolutely right; and it would be completely the wrong way to go. I was asked whether these rules would in practice keep deregulatory pressure on the exchanges. I believe that they will because of the processes that have been put in place. The need to notify the appropriate rules is a good mechanism to keep pressure on the exchanges.

The issue was raised about parliamentary scrutiny. The impact assessment talks about post-implementation review. The effectiveness of the proposal will be demonstrated by the continued attractiveness of London as an international financial centre and the competitiveness of the UK financial services sector. In practice, these will be difficult to observe and measure, but the Treasury will be able to keep the effectiveness of the policy under review through its ongoing dialogue with stakeholders in the City and other parts of the UK financial services sector. Obviously, that is part of the review and scrutiny. There is another role for Parliament, as the noble Lord has indicated.

The noble Lord also made the point about whether we might have assurances from NASDAQ that it will always abide by the current regulatory regime—I resist the terminology of the noble Lord, Lord Teverson—but that will not always necessarily be the case, which is why we need this legislation. The noble Lord recited what happened to IPOs. The report I referred to showed over a relatively short period how the US market lost out big time.

The noble Lord, Lord Teverson, raised the point about John Healey’s comments. As I understand the point about extraterritorial jurisdiction, the European Commission has competence for dealing with extraterritorial measures taken by third countries against EU member states. The EU regulation was ratified in the UK as an amendment to the UK Protection of Trading Interests Act. A direct attempt to impose obligations on a territory is a different issue; we are dealing with an attempt coming through an ownership and control structure. That is why we must have particular regard to that.

The noble Lord, Lord Teverson, talked about how extensive the FSA’s handbook was. He may have studied it more assiduously than I have. We are dealing here with recognised markets. These are largely outside the detailed rule-making of the FSA, which is partly how the light-touch approach comes about. Much of the FSA’s rulebook is applied to others where it is the FSA’s job to make the detailed rules.

The noble Lord asked about how AIM is protected. My advice is that AIM is a market of the London Stock Exchange, and part of the London Stock Exchange, not a subsidiary company. So both the LSE main market, which is a recognised market for the purposes of the prospective directive, and AIM, which is not, are regulated in the same way as parts of the recognised investment exchange. Therefore both are covered by the new legislation.

The noble Lord also asked whether this is an open book for the FSA to over-regulate—a point also made by the noble Baroness, Lady Noakes. It should not be. The provisions are targeted and specific. At the end of the day, there is the process of judicial review if the FSA were to act in an overbearing way. The noble Baroness also asked whether undue pressure can be brought to bear. The legislation is about specific rights to veto proposed rule changes. Again, if the FSA sought to stray outside that authority to use it to apply pressure, it could be subject to review.

The noble Lord, Lord Newby, asked whether the Bill is necessary. In reality, we will know in due course. It is a precautionary measure that will be useful to have because, if there were a takeover and if that brought a change to the regulatory environment, that would be a great pity. The noble Lord suggested that market competition would deal with overregulation. The problem with that mechanism is that it would take some time to accrue and costs would be involved in people moving off the exchanges. Why is not existing regulation effective? The FSA has powers not to recognise an exchange, but that would happen after the event and would be a fairly draconian application of the rules. That is why the Bill is necessary.

The noble Lord asked about discussion and consultation in Europe. I will have to write to him on that because I do not have anything specific in my briefing. However— again making reference to the regulatory impact assessment—the Treasury has consulted the FSA. This is a narrowly focused measured concerning a matter that is unlikely to be of wide general interest which the Government want to take forward with all reasonable speed. The Treasury therefore decided that it would not be appropriate to undertake a formal, public consultation on its proposal. The Treasury has shown the proposal informally to UKRIEs and RCHs, relevant trade associations and other key stakeholders, so there has been a degree of consultation, but I shall write specifically to the noble Lord on the issue of engagement with the Commission.

The noble Baroness, Lady Noakes, reminded us that things done in haste with a good deal of support do not always produce the right answer. Sarbanes- Oxley is a classic case of that. It was suggested that there be a sunset clause and asked whether we are happy about the robustness of the legislation. One provision is limited to 12 months: the waiver provisions while the FSA gets its rule book up and running—work is being undertaken on that the moment—but it would not be appropriate to go beyond that. I repeat that this is fairly targeted legislation with a good deal of protection surrounding it. It was touched on whether the FSA would be able to use its power to force other changes. I do not believe that it would, as this is a narrow power to veto specific planned changes to the rule book.

I hope that I have dealt with each of the points raised by noble Lords. If not, I am happy to read the record and follow up later.

The Bill builds on the system that we already have and provides effective and flexible machinery to deliver an important policy objective: to ensure that market regulation here fits with the overall approach to financial regulation in the UK and in Europe. It fulfils the Government's commitment to safeguard the United Kingdom’s proportionate, risk-based approach to market regulation. It will ensure that London remains a magnet for international business and foreign investment and it will do so without imposing an unnecessary or excessive burden on the exchanges and clearing houses. I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.