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This all means that London is now a truly international financial centre, handling foreign transactions worth £560 billion a day. It is the place where more international mergers and takeovers are arranged than anywhere else, and more cross-border transactions take place than anywhere else. It has the biggest foreign exchange, swaps and international insurance and reinsurance markets in the world. The City has more foreign banks than any other financial centre—264 at the last count. It has almost a third of the daily turnover in the world foreign exchange market. It has over 40 per cent. of the world’s OTC derivatives trade, 70 per cent. of the Eurobond market, 40 per cent. of the world’s turnover in foreign-listed equities trading, and the fastest-growing share,
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currently 20 per cent., of global hedge fund assets. It has taken a long time to establish a regulatory system which can cope with that new order. Most people accept that the fragmented, predominantly self-regulatory regime established at the time of big bang was a messy compromise that ended in failure.

If we look back at the 1980s and the early 1990s, we can all recite a litany of City failures and scandals—Johnson Matthey, British and Commonwealth bank; Bank of Credit and Commerce International, Barlowe Clowes, Lloyds of London, Brent Walker, the Guinness affair, the Blue Arrow affair, Roger Levitt, Asil Nadir and Polly Peck, Maxwell and the Mirror Group pension funds, and, of course, Nick Leeson and the ignominious downfall of Barings bank.

At the time of the Barings collapse, I was employed in Abbey National’s treasury division. At the time, Abbey National had a derivatives trading joint venture with Barings, which, I suspect, it would not care to remind people about these days—I hasten to add that it had nothing to do with Barings futures trading activities in Singapore. I was called into the Barings head office in London on the Sunday when Barings went under to help to sort out the mess with the Bank of England and the chief executives of the top UK banks. I remember that day well, because it was the day of my constituency Labour party’s annual general meeting. I was chair of my constituency at the time and had to give my apologies, which raised more than a few eyebrows among my comrades in Luton, North Labour party, who until then had no idea what I did for a living. I am glad to say that the Labour party has come a long way since then.

Barings management did not know what its traders were up to, the regulators did not know that the management did not know what the traders were up to, and the Government certainly did not know that the regulators did not know that the management did not know what its traders were up to. The old boy network comprehensively failed. It may be tempting fate to say that I do not think that such a scenario could happen now. Of course we should never be complacent, but the Financial Services Authority and the relationship between the Government and the regulators inspire a great deal more confidence now.

Mr. Redwood: Surely the hon. Lady is experienced enough to know that there is no regulatory system in the world that is proof against all fools, knaves and crooks—so it is completely silly to say that there will never be a collapse in Britain again. We must accept that that will happen in the future.

Kerry McCarthy: As I said, we should never be complacent.

It is easy to portray the Barings situation as the consequence of one rogue trader acting in a criminal way. If one examines the matter closely, however, there was a systemic failure throughout the management and the regulatory system, and people simply did not understand the risks that the bank was taking. I am a member of the Treasury Committee, which has discussed with the FSA how it regulates matters such as hedge funds and the current risk-based system of assessment. I am confident that the FSA appreciates what the banks that operate out of the UK are doing,
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what sort of business they are engaged in and what risks are associated with it. [ Interruption. ] Farepak does not come under the FSA, although perhaps that is a subject for future debate.

The UK approach is widely seen as the best in the world, and it underpins London’s success as a modern international financial centre. It is important that we preserve that approach, which is the essence of the Bill. While we are debating how we regulate our financial markets and City institutions, I want to restate why, while we should aim to achieve a degree of harmonisation and a level playing field across the European Union—and, indeed, further afield—it must never be at the expense of our international competitiveness.

London has a comparative advantage in financial services, and if other countries want to compete with us they should do so by raising their game to our level, not by seeking to hold us back with inflexible, over-burdensome, gold-plated regulation. A one-size-fits-all approach in a new enlarged European Union is unlikely to be to London’s advantage, and we should resist attempts to force us down that path. However, we should do so not through withdrawal and seeking to isolate and disassociate ourselves from our European partners, as I have heard the right hon. Member for Wokingham (Mr. Redwood) suggest, but through co-operation, negotiation, being at the table and making our voice heard.

As the Minister has said, we should welcome European co-operation on regulation, but only where it is necessary, where it truly furthers the integration of the internal market and where other non-legislative policy solutions have been thoroughly considered. Any new regulation must be implemented in a sensitive light-touch manner, too.

The City is stronger because of its position within the EU. We act as Europe’s wholesale financial services gateway to the world, and the world’s financial services’ gateway to Europe. It is in Britain’s best interests that we stay fully engaged, but we must do it in the City’s best interests, not at the City’s expense. That is increasingly true on a global scale as developing markets open up, and countries such as China and India develop their financial sectors. Regulatory co-operation is more important than ever before, but we must continue to strike the right balance between protecting investors and entrenching financial stability, and encouraging innovation and foreign investment.

We should not be scared of foreign investment or foreign ownership in the City. In the late 1990s, more than 40 per cent. of City employees had an overseas employer, and I am sure that that percentage has, if anything, grown since then. Some of the recognised exchanges are subsidiaries of foreign companies. However, we need to be watchful to ensure that foreign takeovers do not lead to the imposition of burdensome foreign regulatory standards on UK exchanges and issuers, and that, as the hon. Member for Fareham (Mr. Hoban) said, the US’s extra-territorial ambitions are curbed. I say that as someone who has worked for an American investment bank and has been on the receiving end of the not-so-light regulatory touch of the Securities and Exchange Commission.

As a member of the Treasury Committee, I visited the US earlier this year with my hon. Friend the Member for Edmonton (Mr. Love), and we heard first-hand about the impact of Sarbanes-Oxley. The
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London stock exchange has benefited as a result of Sarbanes-Oxley. It attracted a record 129 international companies to its main market and the alternative investment market last year, up 82 per cent. on 2004. Twenty-five per cent. of companies surveyed identified the UK’s standards of regulation and corporate governance as the most important factor in their decision to float in London, and of those that had considered listing on a US exchange, 90 per cent. felt that the demands of Sarbanes-Oxley made listing in London more attractive. We were therefore right to choose not to go down that path. However, we need to be ever vigilant to ensure that we do not import overseas regulatory burdens, and that we have the best possible environment in which our financial services industry can continue to prosper and to create jobs.

I very much welcome the Government’s initiative in introducing the Bill. I am sure that it will be welcomed in the City, as it has been on both sides of the House.

5.26 pm

Dr. Vincent Cable (Twickenham) (LD): It is a pleasure to follow the hon. Member for Bristol, East (Kerry McCarthy), whose presentation was all the more authoritative for being based on her own experience.

The Economic Secretary said at the outset that there is all-party consensus on the Bill, and I certainly do not intend to oppose it. I am not yet entirely persuaded that it is necessary, but that need will no doubt emerge in the course of the debate. When I see Conservative and Labour Front Benchers, together with most luminaries in the City and even Mr. Ken Livingstone, romping in the same bed, I tend to suspect that something not entirely wholesome is taking place.

I think that the characterisation of American financial regulation—I am not an expert, unlike the hon. Member for Bristol, East—has been a little overdone and rather unhelpful, given that the Americans are aware of the problems and are dealing with them. It was presented as the financial equivalent of avian flu against which we must put up defences.

Let me go over a few areas of undoubted common ground. First, it is true, as the Economic Secretary said, that the City is a crucial part of the British economy. Ten per cent. of gross domestic product is generated from financial services, although not all of those are based in the City—some are provided by retail banking throughout the country. It is particularly important for employment.

Secondly, we all agree that financial services must be regulated flexibly—but, as the hon. Members for Edmonton (Mr. Love) and for Wolverhampton, South-West (Rob Marris) said, flexibility must be balanced against investor protection and protection against systemic failure. There is more than one dimension to consider.

Thirdly, we all accept that we are dealing with global markets that move very fast and that this is not an area where nationalism or national ownership are appropriate concepts. Competition takes place not between countries but between sets of rules. People in the City often employ the imagery of Wimbledon to describe what they are trying to achieve, saying that they are hosting an event and that it does not matter whether British
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people win it. That is quite a comforting image in some respects. However, there are problems with the Wimbledon comparison. Will Hutton has observed that it is probably because we have Wimbledon that we produce such dreadful tennis players, unlike smaller European countries. He also argues that having an international financial centre may be to the detriment of domestic companies’ growth and innovation. I do not entirely buy that, but we have to look at both sides of the argument.

I part company with the proposals over two issues. First, we should be more honest about what this legislation is for. It is presented as being completely innocuous, but its proper title should be something like the “Investment Exchanges and Clearing Houses (Americans Keep Out) Bill”. That is essentially what we are talking about. The Minister and the Conservative spokesman have said that there is no objection to takeovers or to foreigners per se, but it is clear that a barrier is being raised and that powers are being created to deal with takeovers from two particular sources, which just happen to be the two biggest exchanges in the world: the New York stock exchange and NASDAQ. Because they are so big, they have the potential to launch a successful takeover in London.

Ed Balls: Does the hon. Gentleman agree that Morgan Stanley, Merrill Lynch and Goldman Sachs are all important American investment houses that play a vital role in creating jobs and employing people in the City of London? We welcome those American investment houses into the UK, and the idea that we are trying to prevent American ownership in London is disproved by the reality of today’s City of London.

Dr. Cable: The Minister is being a little too defensive. I was not suggesting for a moment that there was a problem with American companies investing in London. The problem is with the American exchanges that might take over London or the Euronext market. That is the issue here.

There are certain forms of regulation that are not covered by the Bill. The right hon. Member for Wokingham (Mr. Redwood) might be able to make this point more comfortably that I can. The Bill does not cover European regulation, which may or may not be onerous. Let us envisage a hypothetical situation—after all, the Bill is all about hypothetical possibilities—in which, as a result of injecting this poison pill into the regulatory system, the New York stock exchange backs off from its interest in the Euronext company, and the Deutsche Börse, a German company that is interested in acquiring a Franco-Dutch operation, succeeds as a consequence of that. As a pan-European exchange, it could then choose to apply European regulation in a way that is unhelpful to London’s interests. That is purely hypothetical, but it could certainly happen.

There is nothing in the Bill to prevent that from happening, because European legislation has primacy here. One of the unintended consequences of blocking American takeovers could therefore be disadvantageous practices against which the Bill provides no protection.

Mr. Redwood rose—

Mr. Hoban rose—

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Dr. Cable: I am sure that one or other of those Members is going to try to reassure me.

Mr. Redwood: The hon. Gentleman has completely misunderstood the proposals. The Bill is not trying to block American takeovers. It might better be entitled the “Protection of Your Interests (Having Taken It Over) Bill”. It is saying to the American exchanges that we will not let the American Government mess up the asset if they acquire it.

Dr. Cable: I shall come to the Sarbanes-Oxley legislation, and what it might entail, later. The issue here is whether two particular American companies, the two biggest exchanges in the world, will be able to launch an unresisted takeover of the UK exchanges. The American Government are one or two steps removed from this process.

Ed Balls: I just want to make it absolutely clear—I have made exactly the same point to the chief executives of the New York stock exchange and NASDAQ—that we have no problem at all with the NYSE or NASDAQ owning a UK exchange. We do not encourage or discourage it, but we have no problem with it at all. The issue is whether they would own an exchange where listings are regulated in London by the Financial Services Authority. I made it clear in my speech that we are neither overtly nor covertly trying to prevent there being an American owner of any exchange in London.

Dr. Cable: The two exchanges in the United States have a different interpretation. They have given public assurances that there is no way in which the SEC and other regulations in the United States could be imported through their ownership. We will deal later with how that might happen and whether it is a plausible hypothesis. The Economic Secretary’s remarks are reassuring, but they reinforce my scepticism as to why the Bill is necessary in the first place.

Ed Balls: To develop the point further, not only have I discussed the purpose of the Bill with those two American companies, as well as with the London stock exchange and others, but I have seen no public statement of opposition from either of those companies. As I understand it, the opposite is the case: they are comfortable about us taking the power, so that we can be reassured, as can they, that the regulatory regime will not change as a result of a change in ownership. I have no reason to believe that NASDAQ has concerns: to my understanding, the opposite is the case.

Dr. Cable: I am more mystified than ever. If the Economic Secretary has absolutely no problem with the two American exchanges taking over London exchanges, and they have no problem either, why is the Bill necessary in the first place?

Ed Balls rose—

Dr. Cable: No doubt the Economic Secretary will get an opportunity to reply later. Let me develop my scepticism further.

One has to question the motives for establishing such a defensive mechanism. Usually, hostile takeover bids
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are resisted by a company’s management. Clara Furse, the manager of the London stock exchange, has said clearly that her exchange is not for sale. That is her strategy. She does not want to sell. The price of shares in the London stock exchange has been ramped up considerably, creating barriers, and its management undoubtedly wants to resist a takeover. Why would the British Government want to create a mechanism to make it easier to protect the insider interest in this case?

Let me move on to the argument about which the Economic Secretary is exercised, which goes back to the principle and basic economics of exchanges. My starting point would be that an exchange is a network or utility that works best because everybody is a participant in it, as in the case of the electricity grid or bank clearing system. The productivity of exchanges, however, has risen rapidly—in London, by 6 per cent. in the past 20 years—and their monopolistic structure tends to lead to much higher profits and fees, which are resisted by the users.

Two sets of countervailing pressures are emerging, one of which is competition. In the United States in particular, small exchanges are being launched with low costs. In principle, the new European regulation encourages competition, which, in the course of time, should bid down costs. The Turquoise consortium of investment banks appears to have that objective. The problem of obtaining gains through competition, however, is that it breaks up the network, losing efficiency and potentially raising costs.

That raises the question of the other route to contestability in the market, which is through takeovers. That is the reason for growing pressure from the New York stock exchange, NASDAQ, Deutsche Börse, Macquarie bank and others to enter the market. The question is whether that is a problem. The problem posed is that one or other such acquisition—if we accept that the worry is not just about the Americans—might succeed in importing into the UK unhelpful forms of regulation, particularly those prevailing in the United States.

The Conservative spokesman made a genuine attempt to explain the transmission mechanism for that and quoted one example, the registration of hedge funds. As I understand it, however, that case was introduced at the behest of the SEC and has subsequently been dropped, although I am sure that he knows a lot more about that than I do. I think that that is the only concrete case that we have of that type of extra-territoriality being introduced through the exchange mechanism, but there may be many others. The right hon. Member for Wokingham is shaking his head. It is important to understand how this could happen, why it is such a threat in practice, and why the Bill is necessary to prevent it.

Stewart Hosie (Dundee, East) (SNP): I am following the hon. Gentleman’s argument as closely as I can. He seems to be suggesting that when an exchange is taken over alien extra-territorial regulation is a significant issue, but would it not almost inevitably lead to the creation of alternative structures? AIM—alternative investment market—and subsequently Ofex were created because of the cost of a full London stock exchange listing. Would this not offer an opportunity for the creation of another exchange somewhere down the line that avoided extra-territorial regulation?

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