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Session 1999-2000
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Delegated Legislation Committee Debates

Draft Official Listing of Securities (Charge of Competent Authority) Regulations 2000

Seventh Standing Committee on Delegated Legislation

Thursday 16 March 2000

[Mr. Barry Jones in the Chair]

Draft Official Listing of Securities (Change of Competent Authority) 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 Official Listing of Securities (Change of Competent Authority) Regulations 2000.

The purpose of the regulations is to transfer the function of the United Kingdom competent authority for listing from the London stock exchange to the Financial Services Authority. The intention is that the transfer should take effect on 1 May 2000. The competent authority for listing performs a number of functions. It is responsible for making the listing rules that govern the admission of securities to the official list and the on-going responsibilities of issuers of such securities. It admits securities to the official list and monitors the on-going compliance by issuers of officially listed securities with the requirements laid down in the listing rules. Finally, it has a role in approving prospectuses and similar shareholder documents in certain circumstances.

The requirement to have a competent authority is, like a number of the requirements that issuers of officially listed securities must meet, laid down in the various European Community directives dealing with official listing. There is no legal obligation on issuers of securities to apply for listing, but it acts as a kind of kite-mark. Investors know that securities admitted to official listing are obliged to meet and continue to fulfil the conditions set out in the listing rules.

The London stock exchange has been the UK's competent authority since the concept was first introduced into UK law in 1984. It has performed the role of competent authority well and, as my right hon. Friend the Chancellor said when announcing our decision to make the transfer, we pay tribute to the exchange and to the staff of its listing department for the way in which they have carried out their responsibilities in that area. The decision to make the transfer in no way reflects dissatisfaction with the past performance of the exchange. However, as hon. Members will know, the exchange announced last year its proposal to demutualise—indeed, our debate today is topical because as Members of the Committee may know from media reports, the, exchange held its extraordinary general meeting yesterday and voted in favour of demutualisation.

In the light of those developments, it is no longer appropriate for the exchange to continue to exercise the competent authority function—indeed the exchange itself suggested that would be inappropriate. A demutualised stock exchange will be a for-profit organisation and we consider that a conflict of interest may be created if the statutory functions of the competent authority were exercised by a commercial for-profit company, especially against the background of increasing competition between stock exchanges, including new entrants to the UK market.

We therefore announced in October that we intended to transfer the competent authority function to the Financial Services Authority. Having the financial services regulator perform that role is in line with the practice in a number of other countries, including France, Spain, the United States and Japan. There are useful synergies in doing so: the FSA has a strong, wide-ranging interest in many different aspects of the markets in officially listed investments and is very concerned to ensure that such markets are not abused and that investors are protected.

We have tabled amendments to the Financial Services and Markets Bill in another place to adapt the proposed new framework for listing under that Bill in the light of the intended transfer of responsibilities. However, we have decided to effect the transfer initially by means of regulations made under the European Communities Act 1972. There are two main reasons for that.

First, it is clearly in the interests of all concerned that the transfer of responsibilities be as smooth and seamless as possible. The transfer involves not just legislative powers, but staff, IT systems, financial issues, and so on. In that context, it is necessary to have a precise target date for making the transfer so that the planning and implementation can be carried out efficiently and effectively. As always with primary legislation, we cannot say precisely when the Financial Services and Markets Bill will be enacted and the necessary provisions brought into force; using regulations therefore enables us to specify in advance a particular date.

Secondly, against the backdrop of the demutualisation process of the London stock exchange, it is desirable to make the transfer as soon as possible. It would be unsatisfactory for the exchange, as well as for others, to leave it with the competent authority function for a significant period after it has demutualised. There are also good practical reasons why it is better not to have too long a gap between announcing the decision to make the transfer and bringing it into effect.

Hence, we consider that it would be best to make the transfer using the powers under the European Communities Act 1972, and 1 May is the earliest feasible date. The proposed new framework for the competent authority in the Financial Services and Markets Bill would then be brought into effect as soon as possible after its enactment. The regulations provide for the transfer of the powers and responsibilities that are exercised by current competent authority. The exchange will, of course, retain its rights and duties as a recognised investment exchange.

The effect of the regulations will be that the FSA will inherit the functions, rights and obligations of the exchange in its capacity as the competent authority. The regulations also make transitional provisions for listings and listing rules and anything done or in train at, the time of the transfer. Provision is included for the transfer of staff in the exchange's listing department to the FSA.

There is one regulation to which I draw specific attention. Although the transfer is intended to take place on 1 May, regulation 8 provides that the FSA should be able to make listing rules as soon as the regulations, when agreed by both Houses, are made. The purpose of that provision is to enable the FSA to bring the new listing rules and the revocations of the old listing rules into force immediately on 1 May when the transfer of functions takes effect. Certain limited changes to the listing rules are necessary to reflect the separation of admission to the official list and to trading on the London stock exchange after the FSA becomes the competent authority. In the absence of regulation 8, there might be doubt about the FSA's powers to prepare new rules in advance and an undesirable hiatus between the transfer of functions and the new listing rules taking effect.

The exchange, the FSA and my Department are all working to ensure that the transfer occurs as smoothly as possible, with no loss of effectiveness for the competent authority. The draft regulations are a necessary part of the process and I commend them to the Committee.

4.39 pm

Mr. Howard Flight (Arundel and South Downs): The statutory instrument changes the competent authority for the listing of securities from the London stock exchange to the FSA. I understand that the target date is 1 May. The role of listing securities includes the competence to admit securities to the official list to trade and list on the stock exchange under the terms and rules of the listing. The FSA will also be permitted to make its own rules in advance of the transfer. We understand that the staff in the exchange listing department will transfer to the FSA to provide such arrangements.

The reason for the transfer is the demutualisation of the London stock exchange. We could debate whether that rendered it inappropriate to continue such a role, but Conservative Members broadly accept that there is no alternative other than the FSA to take it on. The Government have advised that they will be tabling amendments to part IV of the Financial Services and Markets Bill in the other place in order to adopt a new legislative framework for listing in the light of the transfer.

When the issue was discussed in Committee, several important and potentially controversial issues were raised, in particular by my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton). We seek specific responses from the Economic Secretary on the transfer, which is a proper function of our agreeing to it.

What, if any, material changes to the stock exchange listing rules are proposed? The Financial Services and Markets Bill introduces a new power to accompany the transfer that will allow the FSA to impose a penalty on issuers who breach the listing rules. What is the intended magnitude of such penalties, and what appeal procedure will operate when the FSA takes over the listing authority?

The Financial Services and Markets Bill also empowers the Treasury to change the FSA as the competent authority. In what circumstances would it effect that power? What would constitute the FSA not carrying out its duty as the listing authority satisfactorily?

We are all aware that the generation of income is the major difference between the FSA's roles as regulator and listing authority. The listing role is about ensuring that companies provide the necessary information to the market. It is not about the conduct of business of issuers, which falls under the regulatory role of the FSA. Does the Minister feel it appropriate for the FSA's annual report and its annual general meeting, for example, to cover the listing function, as is proposed? Would it not be more appropriate for it to be dealt with separately, as it is a separate function? Indeed, it is likely to be lost when wrapped up in the FSA's main activities.

We note that the proposed complaints investigator will be able to consider complaints against the competent authority—the FSA in its listing activities. We would like to be clear as to whether the complaints investigator's functions will include the power to make ex gratia payments when he feels that the listings authority has damaged the interests of certain companies. That touches the crucial issue of whether it is appropriate for the FSA to enjoy legal immunity in discharging its essentially commercial role as a listing authority. I shall return to that anon.

What arrangements are proposed for the FSA to consult on rules and conduct cost-benefit analysis during its listing authority tasks? Is it proposed that cost-benefit analysis will apply only to changes that the FSA makes, or will such analysis be applied thoroughly to the whole system? The Committee will be aware that it is proposed that the regulatory tasks be grandfathered.

The function of listing on the stock exchange has made a profit of about £4 million or £5 million a year, which is around a fifth of the turnover. The Government have advised that the transfer of functions should not result in a significant increase in costs to issuers, and the FSA has said that it believes that listing fees will not be materially different this year. Surely costs should go not up, as is implied, but down. If not, what is the FSA intending to do with the profit that it is likely to make from its listing activity?

What will happen to penalties levied by the FSA? Will they be put towards reducing future listing charges, or will they be rebated in some way? There are arrangements for penalties in the FSA's other activities, but it is not clear what will happen to the penalties under its role as a listing authority.

How will the FSA's role as the listing authority compare with other international listing authorities? As my hon. Friend the Member for East Worthing and Shoreham has said previously, the Securities and Exchange Commission has five separate divisions. It is self-evident that the listing role will be a separate division, but precisely how, in terms of Chinese walls and accountability, is it proposed that the FSA will structure that differently from its wider roles? The stock exchange also had the Securities and Investments Board as its regulator in a commercial role.

The FSA will have no regulator in acting as the listing authority. How will the discharge of its duty in accordance with requirements be monitored, if not regulated? That will make legal immunity ever more relevant, in that if the FSA were immune from acting with gross negligence in such activity, and it has no regulator monitoring it, clearly there will be some risk of it not discharging its role satisfactorily. I cannot resist making the point that, in the private sector, those who mis-sold pensions have suffered greatly, while, in the public sector, that has not been so. No one seems even to known who in the Department of Social Security was responsible for mis-advice on the state earnings-related pension scheme widows' pensions. When matters are locked in and unaccountable, there is clearly scope for things to go seriously wrong.

Who will have responsibility for maintaining market liquidity? The listing authority has played that crucial role. It would be inappropriate for the FSA to provide such a service, but how is it envisaged that it will continue under the new listing arrangements? More important are the potential conflicts of interest. The FSA will be regulating corporate financiers, producing documents on the basis of which companies are listed, but then, wearing its listing authority hat, it might decline approval for such a listing. Having already approved such individuals as fit and proper, it might say that what they are doing is not so. How will conflicts of interest be resolved when carrying out both roles?

Nothing has been said about AIM—the alternative investments market—which is an important, but vulnerable market in the present climate. That will be left with the stock exchange, so the exchange will carry on a listing authority duty after all, with a main market. On one hand, that implies that the stock exchange could continue as the listing authority; on the other, if that is considered inappropriate, why should the stock exchange continue to handle the listing authority role for AIM? Next year, we will face considerable dangers of crashes in prices in AIM, in which values will be driven up to excessive levels.

Who will handle closing prices? Many unit trusts rely for their valuation purposes on the closing prices that the stock exchange has previously produced as the listing authority. As far as I am aware, the FSA will not be handling closing prices. Will the stock exchange continue that as a separate role, although it will no longer be the listing authority? During proceedings in Committee on the Financial Services and Markets Bill, I said that we shared the view of the Confederation of British Industry that, in its commercial role as the listing authority, it was particularly inappropriate for the FSA to be immune from being sued for gross negligence. It will be carrying out a different role from that of its regulatory role. It will have the responsibility for checking prospectuses—or will it have to delegate that to someone else? What are the Government's specific proposals? Do they intend the same immunity that is enjoyed generally under the Financial Services and Markets Bill by the complaints investigator, or do they propose that, in the listing authority role, the FSA should have less immunity?

Many people are worried that the FSA will have too much of a monopoly on determining, under the Treasury's direction, whether companies that want to list can do so. What arrangements have been considered for a degree of independent adjudication and appeal? The Treasury is to decide what category of assets is competent for listing.

In this territory, I am certainly not a member of the stock exchange, but as the chairman of a management business, I should perhaps declare an interest. The listing of funds on the stock exchange has international importance governing the marketability of British funds elsewhere in the world. For example, the structure of the umbrella fund was developed by the legal innovation of the stock exchange and firms of City lawyers, which worked out that if a fund added new share classes, they could be deemed to be already listed. I am somewhat concerned that is an area of commercial innovation and that the Treasury may not appreciate the importance of subtlety and flexibility in determining which categories of assets should be listed.

Are the Government proposing parallel-warning notice mechanisms in relation to penalties for breaches of listing requirements, as provided for other offences under the Financial Services and Markets Bill, or will there be different arrangements? Will the FSA take six months, as prescribed, to make up its mind whether to grant a listing, or up to a year if it gives notice that it is to require further consideration? Do the Government believe that six to 12 months provide a speedy enough process? Would it not be better for the FSA to accomplish decisions more speedily?

How will the FSA act regarding the suspension of listings? Usually, they are suspended by the stock exchange in the event of volatile share movements or financial irregularities. I am worried that in the present climate, with the FSA taking on this role anew, and even though the listing department staff will transfer, there are distinct risks that the FSA could damage its reputation in the event of a United States-led crash in share prices. Many people would argue that is a distinct probability—or, at least, a possibility—at some time over the next year. If the FSA acted incompetently in such territory, it could damage its entire reputation as a regulator.

When the Conservative party asked Howard Davies about a year ago whether the FSA had any intention or desire to become the listing authority, he categorically denied it. He asserted that the FSA ``had no desire'' to do so. I am worried that the role is being forced on the FSA, potentially against its better judgment. Today could see a change in the arrangements for takeovers, if the Government agree to the proposed EU directive. That, together with less flexible listing arrangements, could be bad news for London and bad news for the financial services industry. Success has depended on flexibility, open markets and rules that were not cast in stone. This very day could be a bad day for the future of the financial services industry.

The act of transfer raises a host of questions. The Government have said that they will deal with it through amendments in the Lords. I should be grateful if the Minister made some effort to respond to the issues that I have raised. I should like an assurance that the matter will be addressed in the manner that we suggest.

4.55 pm


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