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Dr. Cable: What the hon. Gentleman says is absolutely true. It suggests that there is a self-regulating process, which makes it even more difficult to understand why British legislation is necessary.
Let me take the argument a step further. Let us suppose that we are talking about the potential implications of NASDAQ’s taking over the London stock exchange. Why, in any circumstances, would it want to bring American regulation with it? Presumably—the Minister made this point indirectly—it is coming here to pick up listings that it has been unable to attract in the United States, and would strongly resist any attempt to import American regulation through the stock exchange system. From what are we trying to protect ourselves?
Another point made very well by the hon. Member for Fareham (Mr. Hoban) is that although extra-territoriality is clearly a problem, this is not the most appropriate way of dealing with it, or even directly relevant to most aspects of it. An appalling example of extra-territoriality in recent months is that of the NatWest Three. Taking British employees of a British company to an American court for an offence that they committed in the United Kingdom is real extra-territoriality. There is a problem with British companies that happen to be listed in the United States being pursued in Britain for things that they have done in the United States, and the Bill will not protect against that. If extra-territoriality is to be dealt with, it will have to be dealt with through joint negotiation with the United States. Whatever the virtues of the Bill, it does not deal with the extra-territoriality problem.
It is being suggested that there is something lethal about the Sarbanes-Oxley Act. Certainly everyone with whom I have discussed it in the City is worried about what might happen if those five pieces of American legislation entered British law. The hon. Member for Wolverhampton, South-West tried to raise a fundamental question: what is the problem, and why is the legislation so difficult and iniquitous?
Let us return to basics. The Sarbanes-Oxley law was introduced in the wake of Enron and WorldCom. It dealt with a variety of issues, which included investor protection but also accounting procedures. When it was referred to the American Congress, which covers a wide spectrum—no one could accuse American Congressmen of being isolated from business interests and opinions—the Senate backed it by 99 votes to nil, while the House of Representatives backed it by 423 votes to three. The overwhelming consensus, extending from the most libertarian Republicans to the most diehard leftists of the Democratic party, was that the legislation was sensible. Distinguished people such as Alan Greenspan spoke up for it strongly—although they have subsequently acknowledged that aspects of it are a problem, notably section 404. The vast majority of it is uncontentious, and perhaps helpful.
Mr. Mark Field: In describing the historical lesson of what happened in the United States, is the hon. Gentleman not making an extremely good case for the argument that, in the aftermath of high-profile failures such as WorldCom and Enron, legislators should be making sensible regulation rather than hastening to play to the gallery?
Dr. Cable: Certain aspects of the legislation have been found to be excessive, and I understand that at the behest of the United States Treasury Secretary they are now being reviewed—and they might well have been removed by the time that this legislation receives Royal Assent and reaches the statute book. The Americans are well aware of the awkward aspects of that legislation and appear to be taking action on it.
Mr. Redwood: Does the hon. Gentleman accept that listings in America have declined while in London they have risen mightily because of this ham-fisted legislation? We are very lucky that the Americans had it. Can he not understand that the crimes that were alleged against the senior executives at Enron were all crimes under the law as it stood before the Americans decided to legislate again? What happened in respect of Enron was a matter of enforcement not of inadequate law, and they responded to it wrongly.
Dr. Cable: There is an element of truth in what the right hon. Gentleman says. I do not pretend to be an authority on financial markets, but it is my understanding that the decline in listings in the United States was taking place quite some time before the Sarbanes-Oxley provisions were introduced. That decline was prompted by, among other things, class actions and the fact that there are multiple regulators with different agendas. The decline of the IPO—initial public offering—market has been referred to; that was in evidence well before the Sarbanes-Oxley provisions came in.
There is a simple interpretation of recent financial history in which that villainous legislation is responsible for every problem, but there is a lot of good academic research that suggests that companies that have listed in the United States have enjoyed substantial premiums; they have higher regulatory costs, but they also have higher levels of investor protection, which is a positive factor in the market. So there is a trade-off, and the situation is not as clear-cut as some Members seem to be implying.
Stewart Hosie: I seek a little more clarity. Many of the issues we are discussing are about specific commercial companies, which presumably would be dealt with in our country by, for example, the Companies and Insolvency Acts and legislation covering audit, but the Bill is specifically about exchanges and clearing houses. I think that we might be crossing over too much from normal commercial activity. I want us to focus on the Bill’s objectives, which seem to be to avoid burdensome regulation over and above that required for an exchange or a clearing house. Is that not what we should be focusing on?
Dr. Cable: I thought that we were. I keep coming back to what I thought was the purpose of the proposed legislation: to stop a particular body of legislation—the American Sarbanes-Oxley provisions—being imported by some mechanism, which has not been entirely explained, into the workings of the British exchanges. The argument in respect of that might be right; I am not suggesting that it is completely wrong. I am just sceptical about whether new British legislation is necessary to achieve that objective.
In recent months and years there have been some extremely controversial takeovers in the United Kingdom. There have been takeovers in the water industry, in my part of Britain by an Australian company with very strange corporate governance. Abbey and the airports have been taken over by Spanish companies, also with strange corporate governance. Our electricity is delivered by a French company that is an offshoot of the French state. At no point has it been suggested that we need to introduce defensive legislation to protect us from those imports. The view has been that contested takeovers are desirable and might well be in the British national interest, and I share that view. So my final point is: what is so different and special about the London exchange that it requires specific preventive legislation?
Mr. Hoban: There is an important distinction between the examples that the hon. Gentleman cited—such as the takeover of BAA plc—and the takeover of the stock exchange: BAA plc exists in a regulatory environment that it does not control, whereas the stock exchange determines its own rules. The Bill is about the rules that the stock exchange and other exchanges use to regulate business conducted on those exchanges. To refer to another of the hon. Gentleman’s examples, water companies operate within the framework of Ofwat, but the stock exchange makes its own rules. What we are trying to do in this Bill is protect the rules of the stock exchange; it is not about the ownership of the stock exchange, but about ensuring that its rules work efficiently and effectively and achieve their regulatory objectives. There is a difference between the takeovers that the hon. Gentleman mentioned and the potential takeover of the stock exchange or any other exchange in the UK.
Dr. Cable: I understand the point that the hon. Gentleman makes, and I realise that there is a clear distinction between taking over a network with a set of rules and taking over individual operations. However, I come back to the central point, which I have repeated on several occasions. I completely understand a lot of the reasoning behind the Bill. I realise that there is a wish not to make British regulatory practice more onerous than it already is, and that there is a fear—it has not yet been properly explained, however—that the American rules will be imported into the British system as a result of the takeover. If the Minister can explain how this importation could take place—how the damage could be done—I will be very happy to support the Bill.
Ed Balls: Let me give the hon. Gentleman an example that might help him. There was a concern in some parts of the world outside the UK that the alternative investment market—a lighter-touch market with lighter-touch rules set by the London stock exchange—is too “light-touch”. One can imagine a regulator in another part of the world saying to a company regulated in that part of the world, “If you are going to own a foreign exchange like the LSE, which is listing through the AIM, you must make sure that the AIM listings are equivalent to our rules in our territoriality, in order to pass our domestic regulatory regime test.” That example shows exactly how an external regulator could attempt to undermine our competitive strength by exporting rules on to the AIM. Does the hon. Gentleman accept that such concerns are very real in the City of London, and that this Bill addresses them?
Dr. Cable: I do understand such concerns, but is not the following point equally valid? Let us say that Deutsche Börse took over the LSE or another exchange. It would find the AIM incompatible with its interests and would seek to reduce its importance and not invest in it, but because it was subject to European, rather than American, rules, it would not be protected in any way as a result of this legislation. Perhaps I have misunderstood the distinction between British and Community rules and American rules, but it seems to me that the example that the Minister has described would apply just as seriously if a takeover took place within the European Union, rather than by an exchange outside it.
I have repeated the point on several occasions and I need not go over it again. I see the Bill’s underlying purpose and I am inclined to support it. I am sceptical about whether it is necessary, and I hope that that will become a little clearer in future exchanges on the Bill.
5.52 pm
Helen Goodman (Bishop Auckland) (Lab): I begin by declaring an interest—my husband recently advised Deutsche Börse on its bid for Euronext. It is a pleasure to follow the hon. Member for Twickenham (Dr. Cable), who treated us to some meaningless statistics yesterday. I would not say that his arguments this afternoon were meaningless, but we have become used to the Liberal Democrats proposing totally irresponsible and completely inconsistent public finance legislation. This afternoon, they have adopted a similar posture toward what is in fact one of our strongest economic sectors. If we went down the path described by the hon. Gentleman, we would lose a valuable exporter and employer to this country.
The City of London is one of the most successful sectors of the economy, and we employ more than 1 million people in financial services in this country. As has clearly been demonstrated, the days when Labour Governments had an ambivalent attitude toward the City have long since gone. So I welcome the Bill introduced by my hon. Friend the Minister.
Under this Government, financial services growth has reached 10 per cent. a year. Last year, the financial services trade surplus was some £19 billion. During the past 10 years, foreign equity turnover has increased by 260 per cent., and foreign exchange turnover by 60 per cent. While my hon. Friend the Member for Bristol, East (Kerry McCarthy) was worrying about the Bank of Credit and Commerce International in those far-off days, which were not so halcyon, I was the Treasury official on the foreign exchange desk. The contrast between the situation then and now can be illustrated by the fact that I was authorised to agree to the Bank of England’s intervening up to the figure of £50 million a day on the foreign exchange markets in order to stabilise sterling. Nowadays, we do not pursue such economic policies; moreover, £50 million is now such a paltry sum that it would have no impact, anyway.
Mr. Mark Field: Given the hon. Lady’s lack of ambivalence about the great success of the City of London, how does she regard the comments of the right hon. Member for Neath (Mr. Hain) and the right hon. and learned Member for Camberwell and Peckham (Ms Harman) about City bonuses?
Helen Goodman: I am very happy to say that we are discussing the Bill before us, not City bonuses; however, perhaps we will return to that issue on another occasion.
It is clear that a key factor in the success of the British financial services sector has been the light-touch, risk-based regulatory regime. The Financial Services and Markets Act 2000 replaced the old self-regulatory regime with an approach based on principles, statutory independence, transparency and a rigorous assessment of costs and benefits for each individual regulation. My hon. Friend the Minister has struck the right balance in the Bill between Government intervention and a laissez-faire approach. He made it clear earlier that the Government have no interest in, or concern about, the nationality of the London stock exchange’s ownership. Indeed, the UK markets are already open to overseas investment; for example, the London international financial futures and options exchange is already owned by Euronext. I hope that that satisfies some of the concerns raised earlier by the hon. Member for Twickenham.
There is a clear trend toward globalisation in the exchanges, as well as in equity trading, which spells the end of natural monopolies in this piece of financial infrastructure and increased competitiveness in the arena of exchanges. It is interesting to note that, despite the huge increase in turnover volume, fee rates have been maintained and bid-offer spreads have not changed, which means that exchange profitability has risen greatly. That is why the banks are looking again at the ownership of the exchanges. While NASDAQ has been looking at the London stock exchange, the LSE is looking over its shoulder at Project Turquoise—a conglomeration of banks that is looking at the LSE.
So in this very fluid situation, it is right that the Government take action to safeguard our regulatory regime. It would be unacceptable if a takeover of the London stock exchange by a US exchange such as NASDAQ led to US regulatory requirements being imposed on UK issuers of securities traded here. The Bill gives the Financial Services Authority the power to prevent regulatory changes that would undermine our approach, and it gives the power of veto not on day-to-day regulation, but on significant changes that would bring about a disproportionate burden of regulation.
There are some fundamental principles at issue here. Even those with the most minimalist picture of the role and function of the state acknowledge that it is the state’s function to uphold the rule of law and to maintain the value of the currency. We need to resist the tendency toward extra-territoriality of some other states, particularly in a case where our own regime has been successful in attracting new businesses because it keeps down costs. With this legislation in place, I am sure that we will continue to see the successful and dynamic development of the UK financial services sector.
5.59 pm
Mr. David Gauke (South-West Hertfordshire) (Con):
I add my words of support for the Bill, which is a sensible proposal, although I have a couple of queries. I support the Bill because on the issue of globalisation, of which we have heard much today, it answers two questions correctly. The first is on ownership and national champions. Despite the comments by the hon.
Member for Twickenham (Dr. Cable), I agree with the points made by the Economic Secretary and my hon. Friend the Member for Fareham (Mr. Hoban) that this is not an issue of economic nationalism. The ownership of institutions in the City is not important. Indeed, there are far more important issues at stake. At a time of growing economic nationalism—the chairman of the CBI, Sir John Sunderland, in remarks reported this morning, was critical of France, Spain, Italy and the US for their economic nationalism—it is pleasing that we have a consensus between the major parties that focusing on ownership is a mistake. Indeed, the City has done well out of Wimbledonisation, whereby we provide the venue and the rest of the world provides the players, and that is to be welcomed.
The second question that arises from globalisation concerns the difficulty that countries have in achieving the appropriate level of regulation. There is often a race to the bottom, as the jurisdiction with the lowest level of regulation is seen as the most attractive to businesses. That argument is grossly overstated. Globalisation punishes inappropriate, disproportionate and bad regulation, and Sarbanes-Oxley is an example. As several hon. Members have pointed out, Sarbanes-Oxley has resulted in some companies listing in the UK rather than in the US. However, good regulation is necessary. If a country gets the balance right—and we can argue that this country has done so, especially compared with the US in this area—it does well. The race to the bottom argument is therefore weak.
Countries should retain their own regulatory control, as the Bill suggests, because otherwise the pressure is towards regulation. If globalisation is about economic integration, it also pushes countries towards regulatory integration. Co-operation between regulators is at times appropriate, but too much regulatory integration would be dangerous. One example is the extra-territorial approach adopted by the US on occasion, which is a concern. To return to the points made by the hon. Member for Twickenham, the concern is not that a US exchange will wish to impose additional regulatory burdens on those companies listed on a UK exchange that becomes a subsidiary of the US exchange. The concern is that US legislators will attempt to impose additional regulatory burdens on those companies listed on the LSE or AIM. Extra-territorial legislation regulation is one way in which Governments have attempted to deal with the supposed race to the bottom.
Another way—and this was touched on by the hon. Member for Bristol, East (Kerry McCarthy)—is supranational regulation, and we see that with the European Union. Some of the arguments that can be used for the approach set out in the Bill—that UK regulation should continue to apply and that we should not be influenced by overseas factors—also apply to European legislation, as the hon. Lady acknowledged. The issue is about getting the balance right.
I have two specific concerns about the wording of the Bill. The first is the point that I made to the Economic Secretary during his speech earlier. For argument’s sake, let us suppose that NASDAQ buys the LSE. Then, prompted by NASDAQ, presumably for reasons of US law, the LSE proposes a rule change to implement Sarbanes-Oxley. The FSA considers that change—whether it is excessive or disproportionate—and blocks it. The next step would be a challenge and
judicial review. At that point, the regulatory objectives that apply to the FSA come into play.
The FSA has the regulatory objective of protecting consumers, and rightly so. However, it does not have the regulatory objective of protecting or maintaining the competitiveness of UK financial services. Does that make the FSA vulnerable to judicial review in such circumstances? I assume that the Treasury has sought advice on that point, but perhaps the Financial Secretary could address the issue when he winds up.
The issue could have been addressed in a couple of ways. First, section 5 of the Financial Services and Markets Act 2000, which relates to the protection of consumers, could be amended to add a carve-out that makes it clear that any requirement that the FSA deems to be excessive under section 300A is not an appropriate measure for the protection of consumers. The other—and perhaps preferable—way to deal with the issue would be to treat the desirability of maintaining the competitive position of the UK as a regulatory objective, instead of an also-ran, second-tier point. I assume that the Treasury has considered that option and rejected it for various reasons, but I raise the point none the less.
Rob Marris: On the first of the hon. Gentleman’s two suggested approaches, is he seriously suggesting lessening or undermining consumer protection? That is what it sounded like.
Mr. Gauke: My point is that it could be a two-stage process. Where the FSA concludes that the rule change is excessive and disproportionate—and bearing in mind its regulatory objectives at that point—it could be because the proposed rule is not appropriate for the protection of consumers. However, the test of whether a proposed rule is excessive under section 300A might be an easier test to apply. Given that the rule change has overcome that hurdle, the FSA would then need to consider its regulatory objectives and other factors. To do so, it has almost to ignore the first step and ask whether the rule change is appropriate and whether it would protect consumers. If the rule change would protect consumers, does the FSA have the flexibility to reject it as inappropriate? The second stage may be harder for the FSA and, under judicial review, it may run into difficulties. It is a technical point and might be better addressed at a later stage, but it is an issue. The FSA is left to make a difficult decision—technical in nature but political in implication—as to whether a regulation is appropriate and proportionate. That will have consequences for our relationship with the US.
The Protection of Trading Interests Act 1980 deals with some of the same matters as this Bill, and it gives the Secretary of State for Trade and Industry the power to make judgments. Is it right to give the unelected FSA the power to make difficult political decisions? The provision could cut two ways. First, one could claim that the existence of a second tier is more likely to lead to the Treasury being put under political pressure and that it is therefore better to keep matters at arm’s length and subject to purely technical decisions. On the other hand, concern could be expressed about whether a mere regulator like the FSA could be brave enough to take on the might of, say, the US.
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