Fifth Standing Committee on Delegated Legislation
Wednesday 7 June 2000
[Mr. Andrew Welsh in the Chair]
Draft Local Authority (Stocks and Bonds) (Amendment) Regulations 2000
4.30 pm
The Economic Secretary to the Treasury (Miss Melanie Johnson): I beg to move,
That the Committee has considered the draft Local Authority (Stocks and Bonds) (Amendment) Regulations 2000.
The Chairman: With this it will be convenient to consider the draft Uncertificated Securities (Amendment) Regulations 2000.
Miss Johnson: It may be helpful if those on the Opposition Front Bench say whether they want to debate the regulations at length. I have quite a long speaking note on which I could embark.
Mr. Howard Flight (Arundel and South Downs): I thank the Minister. It might be sensible for the record if she gave a summary of the regulations.
Miss Johnson: I shall endeavour to give some fairly instantaneous summaries.
We are debating the changes to the legislative structure for CREST, the computerised system which transfers shares and corporate bonds electronically without using share certificates. CREST is a key component of the London financial market, which, as my right hon. Friend the Chancellor has said, is
a vital asset to the British and European economies, attracting investment and boosting competitiveness.
The two instruments are part of a series of four that are necessary to enable the full merger between CREST and the Central Gilts Office. The merger was one of the key recommendations of the Bank of England's securities settlement priorities review and was widely endorsed by participants in both the retail and wholesale sectors of the financial market. In view of this widespread support, I do not propose to detain the Committee with a lengthy apologia for the merger, but it is worth reminding ourselves briefly of the benefits that will flow from it and the context in which it takes place.
The main advantage which the merger will bring is an increase in the efficiency of the UK securities settlement infrastructure. Having one settlement system for government and public sector securities and another for equities and corporate bonds means that businesses have to spend more on running and developing their back office computer systems and that legal, regulatory and administrative costs are higher than they would otherwise be. That is inefficient and, whatever the historical reasons for the current situation, I hope that we can all agree that it is not sensible now.
The other main benefit to flow from the merger is a reduction in systemic risk. No one would maintain that settlement is the sole—or even the major—source of risk in securities trading, but undoubtedly a single settlement system will help businesses set up simpler collateral and liquidity management systems, and thus enable them to have greater control over their credit exposures. Again, I hope that we can all agree that that is a desirable objective.
However advantageous these benefits might be in themselves, they are also important factors in maintaining the UK's competitive position. As the review noted, settlement is an important source of revenue and one determined at the location of financial activity. As issuers and investors nowadays have an ever-increasing choice about where they do their business, it is essential that the UK remains attractive to them.
It is against that background that we seek approval for the relevant statutory instruments. On the two not requiring affirmative procedure, the Government Stock (Amendment) Regulations were laid before the House on 2 May and the Exchange of Securities (General) (Amendment) Rules are not subject to parliamentary procedure.
The Uncertificated Securities (Amendment) Regulations amend the Uncertificated Securities Regulations 1995 which contain the statutory provisions governing transfers through the CREST system. Most of the amendments are technical in nature and are designed to facilitate, and give legal backing to, the physical process of migrating securities from one system to another. Because of that, I do not intend to deal with every last jot and tittle of the regulations.
The Local Authority (Stocks and Bonds) (Amendment) Regulations amend the Local Authority (Stocks and Bonds) Regulations 1974, which contain provisions governing the issue and transfer of a limited number of local authority securities. Some £40 million-worth of these stocks is outstanding, just over half of which is held in the Central Gilts Office. The majority of transfers involve low-value retail transactions, but there are a small number of institutional investors. The regulations import into the 1974 regulations a number of definitions contained in the Uncertificated Securities Regulations 1995. That is necessary so that securities issued under the 1974 regulations can be transferred through the CREST system after the merger. They import into the 1974 regulations a number of the detailed provisions of the Uncertificated Securities Regulations 1995. These cover matters such as the registration of transfers of stocks in the name of a deceased person and prohibition on the registration of a trust. The regulations provide that securities issued under the 1974 regulations can be transferred under the current legislative framework or under the Uncertificated Securities Regulations 1995, but not under both.
Although our objective is simple, the complexity is unavoidable, given the nature of the CREST and Central Gilts Office systems, the instruments transferred across them, the sums of money at stake and the vital importance of getting things right. The Government believe that they have got the details right. Indeed, the proposals received wide support from all sorts of quarters. The regulations are essential to make the merger the success that it deserves to be. I therefore commend them to the Committee.
4.37 pm
Mr. Flight: I apologise for the fact that a lift made me 15 seconds late.
The amendment regulations are broadly changes required to allow the migration of gilt settlement to CREST. They deal partly with information technology changes to the system, software and processes used by the market and market participants and partly with changes to ensure that gilt contracts will continue to be effective after the change in the way in which they are processed. There are also statutory changes to ensure that references in the legislation to settlement bodies are updated to refer to the new authority, CREST.
This marks a success of CREST and of Sets, the stock exchange system which goes with CREST. I hope that a future Committee, and the House, will not be bothered with a further set of changes to Xetra if the proposals for the merger of the London and Frankfurt stock exchanges proceed. A less satisfactory settlement system would result. We therefore have no objections to the regulations.
4.38 pm
Miss Johnson: I thank the hon. Gentleman for his supportive remarks. I, too, hope that we do not have to detain a Committee on a future occasion with this matter.
Mr. John Redwood (Wokingham): I am grateful to the Minister for giving way. I have declared my business interests in the Register of Members' Interests.
What impact does the Minister think this amalgamation will have on the cost of trading the securities that come under this settlement system? Would she like to compare and contrast what I presume she will say will be modest savings of cost through this amalgamation, with the enormous cost imposed by the Government on securities attracting stamp duty. As I believe that this amalgamation is driven by the wish to reduce the cost of dealing in London, what is her proposal to deal with that great problem?
Miss Johnson: I am grateful to the right hon. Gentleman for his questions. I shall take the second first.
The last Government promised to end the stamp duty on shares if the Taurus platform went ahead. There were problems with that and, in the event, that Government decided to continue with stamp duty on shares, no doubt for similar reasons to those of the present Government, who have continued with those arrangements. We look at all these matters from time to time. We reviewed them before the last Budget and clearly made our decision. I am sure that the right hon. Gentleman is aware of the current state of play on our position on stamp duty on shares.
Savings will arise primarily through development cost savings—through making one set of changes. The merger will therefore simplify important future developments, such as the enhancement of delivery versus payment. It is also cheaper to operate and access one system, so users should gain operating cost savings as well. We believe that there will be at least modest gains in efficiency—the right hon. Gentleman used the word ``modest''; I think that the gains will be slightly more than modest—as a result of the changes under the regulations.
Mr. Redwood: I would be grateful if the Minister would be a little more precise. Presumably, she or her advisers have made a calculation, as this is the burden of the proposal. How much cheaper will it be to deal in securities covered by the regulations after they have gone through than it was before?
Miss Johnson: I shall see whether any divine inspiration comes to me on the precise figures. I may not be able to satisfy the right hon. Gentleman on this point, but I should like to say something on costs generally.
One of the advantages of the arrangements that we envisage is that, as a result of acquiring the Central Gilts Office settlements, CREST will substantially increase the value of the settlements in which it is engaged and will add to its existing strength on the equity side much greater strength on the bond side. The organisation as a whole will be in a much stronger position.
CREST has just cut transaction charges by 5 per cent., in advance of the move to implement these changes, which we envisage coming into force on 1 July and becoming operational on the following Monday, 3 July.
The Chairman: It is always interesting to see any example of divine intervention.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Local Authority (Stocks and Bonds) (Amendment) Regulations 2000.
DRAFT UNCERTIFICATED SECURITIES (AMENDMENT) REGULATIONS 2000
Resolved,
That the Committee has considered the draft Uncertificated Securities (Amendment) Regulations 2000.—[Miss Melanie Johnson.]
Committee rose at seventeen minutes to Five o'clock.
The following Members attended the Committee:
Welsh, Mr. Andrew (Chairman)
Allen, Mr.
Barron, Mr.
Cohen, Mr.
Davey, Mr. Edward
Fisher, Mr.
Flight, Mr.
Hopkins, Mr.
Howarth, Mr. Gerald
Johnson, Miss Melanie
Pond, Mr.
Russell, Ms
Shaw, Mr.
Simpson, Mr. Keith
Smith, Mr. Llew
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