Skip to main content

Investment Exchanges and Clearing Houses Bill

Volume 687: debated on Monday 18 December 2006

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved accordingly, and, on Question, Motion agreed to.

House in Committee accordingly.

[The LORD SPEAKER in the Chair.]

Clause 1 agreed to.

Clause 2 [Procedural and other supplementary provisions]:

Page 4, line 11, at end insert-

“(4) For the avoidance of doubt, should ownership of the London Stock Exchange or other principal financial exchange pass into the hands of a foreign entity, supervision and control of that exchange shall remain in the hands of the supervisory bodies already established for those purposes in the United Kingdom.”

The noble Lord said: I much regret that I was unable to be present when the Bill was given its Second Reading last week. The issues that need attention were addressed by Mr Balls, the Economic Secretary, in another place on 28 November and by the noble Lord, Lord McKenzie of Luton, in this House on 11 December. The Economic Secretary said very clearly that ownership of the Stock Exchange was not a cause for concern, but that a change of ownership should not affect the existing regulatory regime. I heartily agree with that view, but unfortunately it was not included in the text of the Bill as it now stands. Instead, the Bill confers powers on the regulator—the FSA—to disallow excessive regulatory provision. The sole purpose of my amendment is to remedy the omission—namely, the reassurance regarding the change of ownership, which should, I think, be a feature of the Bill. I have no other significant objective in view.

The Bill focuses on the legal basis of the authority’s power to disallow excessive regulation. The neutrality of the Government on the ownership issue is not referred to. That is unfortunate, as it describes the authority’s existing powers to intervene and extends to five pages of complicated provisions on the way in which enforcement could be rendered more effective. How is that to be done if the owner of the exchange objects? Would the authority be obliged to bring proceedings in the English courts or in the European Court? The space devoted to the legal niceties in the Bill seems to be excessive and likely to provoke further anxious inquiries from the new owner. The key issue is the vexed question of international jurisdiction, which is always a difficult matter in our relations with the United States, as several noble Lords pointed out at Second Reading.

I should briefly explain my interest in this subject. For four years, from 1976 to 1979, I was the Minister (Commercial) at the Washington embassy. After retirement from the public service, I was a non-executive director of the then SFA—an association at that time—and a member of its disciplinary committee. The American attitude to jurisdiction is very different from our own. Noble Lords may know that the IRS, the American equivalent of the Inland Revenue, taxes the revenue of its citizens resident abroad as a matter of course. In addition, the US authorities permitted American Airlines to breach our bilateral aviation treaty for several years by allowing it to have direct routes from London Heathrow Airport to European destinations. This was certainly extraterritoriality with a vengeance. We had to give legal notice of the termination of the treaty to obtain a fair and legal deal for our airlines.

I could give other examples, and we could all recall, as some noble Lords did in Committee on another Bill, the recent problems with our bilateral treaty on extradition. My point is simply that the US has regularly extended its international legal reach to promote its perceived national interests. International jurisdiction is thus an active and sensitive subject in the USA; it is a far more important issue there than it is here. We should do nothing to stir this hornets’ nest, which I fear the Bill risks doing in its existing form.

The long passages in the Bill making excessive and heavy-handed references to existing law are rather unfortunate and have no direct effect on international legal enforcement. If no one has questioned the validity of the various laws that are cited in the Bill, why do we need to list them now? If it is thought necessary to list them, they should be in a separate annexe with the Explanatory Notes, which are already to be treated in the same way, instead of in the body of the Bill.

I thank the Minister for his kindness in discussing some of these matters with me on the telephone last week. At one point late last Thursday, he persuaded me to abandon the amendment but, after a sleepless night, I decided that my first instincts were right. He also expressed unease that my amendment, if accepted, might delay the passage of the legislation. But if speed is essential, why has it taken so long to prepare the Bill? Several people, including me, foresaw this difficulty some weeks ago. I cannot believe that it would cause concern if we were to delay this matter for some days or even a few weeks longer, given the very clear policy statements courageously made by Ministers about the acceptance of foreign ownership.

All these difficulties could be overcome by accepting my amendment or another amendment on similar lines. Will the Government please decide to defer progress on the Bill until they have examined afresh the issues that I have mentioned this afternoon? The Bill does not strike the right balance in its present form. I beg to move.

I sympathise with at least part of the intention behind the amendment, which I think is to put on record our determination to resist extraterritorial encroachments on our ability to regulate UK markets in accordance with UK and EC law. In doing so, I acknowledge the expertise of the noble Lord, Lord Bridges, on the international scene, and I am sorry if I gave him a sleepless night on Thursday. Let me stress that the Government have no difficulty resisting extraterritorial encroachments. Indeed, I hope that that was made clear in my Second Reading opening speech and by my honourable friend the Economic Secretary to the Treasury in his Second Reading opening speech in the other place, in which he said that,

“our interest in the ownership of the London Stock Exchange 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”.—[Official Report, Commons, 28/11/06; col. 990.]

However, we would not wish to accept this amendment today for both handling and substantive reasons. On the substance, the amendment would detract from the clarity of the Bill and would introduce an element of protectionism. While it leaves the existing processes in the Bill untouched, it adds a requirement that, if it were to have any effect, would make it impossible for the operation of the markets operated in the UK by recognised investment exchanges to be moved to another country. That could be the state in which the new owner is established or indeed any other state.

A UK-recognised body does not cease to be a UK-recognised body if control of it passes to a foreign person. Provided that it continues to carry on activities regulated under the Financial Services and Markets Act by way of business in the United Kingdom after the change of ownership, the exchange or clearing house concerned will still need to be either an authorised person under the Act or exempt from the need for that authorisation by being a recognised body. In both cases, it remains subject to the Act’s requirements and to the relevant provisions in EC law. It will still be supervised by the Financial Services Authority. There is no question of supervisory responsibility passing to a foreign regulator and there never has been. LIFFE, which is owned by the Dutch company Euronext NV, NYMEX Europe and ICE Futures, which are owned by US parents, and Virt-X, which is owned by a Swiss parent, are still supervised by the FSA and have to comply with the same FSMA requirements as the London Stock Exchange and the London Metal Exchange.

If a UK-recognised body carries on activities in another country that are regulated in that country, it will have to comply with that country’s law. That would include, of course, complying with the conditions for a “passport” under the relevant EC directives if it wished to carry on such activities in another EU member state.

There will be no more opportunity for the SEC or any other foreign regulator or authority to commence proceedings against a UK-recognised body after a change of ownership than there is now—or against a member firm of the recognised body, against an issuer whose securities are quoted on that body or against any other person, such as the directors or employees of recognised bodies, member firms or issuers. We cannot stop the authorities in any foreign country taking action against its own citizens or residents in its own courts; we have never been able to do that and will never be able to do so. But the Bill will give them the defence of being prevented by local, UK law, from carrying out the foreign regulator’s wishes.

There is no need to legislate against any attempt by a US or other foreign regulatory authority to impose its provisions directly on a UK recognised body. The Protection of Trading Interests Act 1980 and the corresponding EC Council regulation are designed to protect Community interests by making it illegal for individuals and companies to comply with extraterritorial demands by US or other overseas authorities. Under that legislation, UK companies are obliged to inform the Government and the European Commission of any extraterritorial action taken against them in order that appropriate protective measures can be taken. Those measures make it unlawful for persons in the UK and the EU to comply with the requirements of the foreign legislation, regulator or court. None of this will happen on account of the Bill; it is simply a consequence of how the existing law works. The amendment is not therefore needed to make that point clear or to put it beyond doubt.

The Bill is directed at a different problem. Its purpose is to prevent foreign-owned bodies from applying regulatory schemes from other states that would be excessive when considered against the existing UK and EC regulatory framework. It is possible that the foreign owners of a UK-recognised body might wish to do this for commercial reasons. It is more likely, however, that the regulatory authorities or Government in their home country would attempt to force the hand of the foreign owners by passing legislation or taking enforcement action under existing legislation in that home country. The Bill’s provisions will prevent such actions from resulting in unwelcome changes to the operation of UK-recognised bodies and the markets and systems that they run by giving the FSA a right to veto excessive regulatory provision proposed by UK-recognised bodies irrespective of their ownership or whether there has been a change of ownership.

We also have concerns about how the amendment would work. The issue raised here is similar to issues that were raised in the other place when probing amendments were tabled. The Government believe that limiting the Bill’s provisions so that they took effect only after a change of control of a UK-recognised body or after a foreign takeover would be undesirable. Equally, the Government recognise that, if an owner of a recognised body wants to operate in a completely different way and seeks to move the domicile of the body to enable him to do so, then that is his right in a world of free markets. Attempting to prevent such steps would be unworkable, discriminatory and unfair. It is unlikely that any regime along these lines would be compatible with the UK’s obligations under the EC treaty or under the World Trade Organisation’s general agreement on trading services.

Any new owner would also be taking an enormous business risk in seeking to move the centre of operations and the legal domicile of the exchange to another state, which is the only way in which overseas regulatory authorities would be able to take on any regulatory function in respect of any of the existing UK markets or the exchanges that operate them. In other words, the exchange would have to cease to be a UK exchange. Exchanges cannot force issuers or member firms to follow them if they migrate. Issuers and member firms are ultimately just users of the facilities that the exchange provides on a commercial basis. They are customers who can go elsewhere.

The Government do not want to send out the message that the UK does not welcome foreign owners or foreign investment in the financial services sector. I am sure that few Members of the House would wish to send that message out either. My honourable friend the Economic Secretary said in another place:

“Such intervention”—

he meant protecting the London Stock Exchange from foreign ownership—

“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”.—[Official Report, Commons, 28/11/06; col. 989.]

As to the handling reasons to which I referred earlier, if we amend the Bill now it will have to go back to the other place and its passage would be delayed. NASDAQ’s bid for the London Stock Exchange is on the table. It is important, therefore, as I said in my Second Reading speech, that we move quickly. I do not accept the contention of the noble Lord that the Bill has been a long time in coming. Once it was identified as an issue to take forward, the Government moved swiftly. I am grateful for the support that we have had from the Opposition Benches. Correspondingly, I must oppose the amendment.

Perhaps I may ask the Minister a question. I do not pretend to be an expert in this highly complicated field but I am aware of what I have heard from experts outside the discussions of the House and of what I took from the noble Lord, Lord Bridges, in moving the amendment. He asked the Minister whether it would be possible for Members of the House, with their advisers, to consider the highly important and, if I may say so with great credit to him, extraordinarily complex statement that he has made—which, after all, envisages questions of extraterritoriality, foreign legal systems and European Union law, which I have also heard experts discuss—and the Minister’s very important reply to the amendment again after Christmas, when, no doubt, they and their advisers will be in a mellow mood from a happy period of recess.

We are concerned about delaying the passage of the Bill. There has been the opportunity of a limited debate at Second Reading to discuss some of the broader principles and there has been a full debate in the other place. As I said, the NASDAQ bid is on the table. The Government are neutral as to the outcome of that—we do not know where it is going to go—but we want to make sure that any challenge to the regulatory environment that we have on the exchanges at the moment cannot succeed. I believe that there has been a fair opportunity in the passage of this legislation thus far, through the other place and here, for due consideration to be given to it; the Bill has taken the normal course.

I am very grateful to the Minister for his reply. I have to say that I am not convinced on one important matter which I thought I had mentioned, so perhaps I should explain it again. This is the question of extraterritorial jurisdiction. Let us suppose that the SEC, which follows these matters with close attention, decides that the way in which the regulator is managing affairs in this country is not quite to its satisfaction. The SEC contains expert people who have their own ideas about what should be done. They might therefore use their influence to ensure that the owner introduced certain changes that we had difficulty with. There would then be a conflict of jurisdiction. Where would this be settled? Would there be proceedings in the High Court? Would it be at a European court? Do we honestly believe that, in response to a summons from this country, a representative of the Securities and Exchange Commission would come to London? I can see that we have built in, no doubt with the very best of intentions, a situation that I fear could possibly come about, and I think that it ought to be dealt with at this stage. I would be very grateful if the Minister could kindly answer those questions.

I will seek to do that. If we had a situation where, by one means or another, the SEC sought to impose on the London Stock Exchange a regulatory provision, the provisions of the Bill would kick in. The Bill would require the recognised exchange to notify the FSA, assuming that it fell within its rules of notification, as, if the issue were important, it doubtless would. The FSA would then have to consult on that with key stakeholders and make a judgment on whether it thought that excessive regulation was involved. If so, it would veto that provision. That issue would be conducted in the UK courts. I think that that is right and as it should be. If the exchange wishes to challenge the FSA, it could seek to do so through judicial review—again, a process in the UK courts. If it was successful, the issue would either go back to the FSA or the FSA’s judgment would be abrogated. If the courts supported the FSA, the veto would remain. That is how the provisions of the Bill are meant to operate.

I am very grateful to the Minister for his explanation. It does not seem to me, however, to dispose of the problem. I fear that there is, at the end of these arguments, inevitably a conflict of jurisdictions and I fear that this may be one of the consequences of the Bill. But I have listened carefully to what he has said and I will have the opportunity of reading it afterwards. As no other Lords have spoken, I do not propose to press this matter at this stage. But I think that we may have to come back to these issues, because they will not go away. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 agreed to.

Remaining clauses agreed to.

House resumed: Bill reported without amendment; Report received.