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28 Nov 2006 : Column 1016

Rob Marris: The hon. Gentleman and I have exchanged correspondence on these matters. Does he agree that the FSA, the Serious Fraud Office and other regulatory bodies do almost nothing to enforce their powers in respect of insider trading, which evidence uncovered by research reveals to be substantial? How they exercise their enforcement powers is a real problem.

Mr. Gauke: I take the hon. Gentleman’s point about insider dealing. We have exchanged correspondence about that, but I do not know whether his analogy applies in these circumstances. One problem with insider dealing is that it is visible in statistics on the large scale, but how does one apply the rules to individuals? The Bill gives great power to the FSA, which is an unelected body. Should not the Government say that they will make decisions about what is excessive or disproportionate, after taking advice from the FSA? Ultimately, that is a political decision, and one that deserves a little more democratic accountability.

Mr. Field: I agree with my hon. Friend, but does he agree that the Government may be displaying some consistency? We will discover tomorrow that the SFO is not democratic, and before too long that fraud trials will no longer be heard before juries.

Mr. Gauke: My hon. Friend makes a good and interesting point. I hope that the Financial Secretary will deal with the specific question that I have raised, and say what the rationale was for the decision that neither the House, the Treasury nor any Minister accountable to this House will have a say in the implementation of this Bill.

6.12 pm

Mr. Andrew Love (Edmonton) (Lab/Co-op): I welcome this Bill, which safeguards the regulatory regime through powers to curb disproportionate regulation. I emphasise the word “safeguard”, for the benefit of the hon. Member for Twickenham (Dr. Cable). We need to have this measure on the stocks, so that it can be used when necessary.

There is no doubt that the Bill will help to secure the UK’s continued success as a financial centre, but why is it being brought in now? To understand that, we must look at the backdrop to its introduction. All speakers so far have commented on the increasing internationalisation of the City and its institutions. Since the London stock exchange was converted from being a membership organisation, there has been interest from foreign buyers. First was the Deutsche Börse in 2004, then the McQuarrie bank—whose structure no one really understands—in 2005. This year, of course, NASDAQ has continued to pursue its quarry, and we understand that a formal bid has been made.

However, it is not only the LSE that is subject to internationalisation. The LIFFE is already owned by Euronext, and ICE Futures and other organisations and exchanges are already owned by overseas companies. Indeed, Euronext may well be taken over in the near future by the New York stock exchange. Other hon. Members have observed that there could be new entrants to the market, given the proposal from seven investment banks to create a new European trading platform.

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In addition, there have been significant difficulties in other jurisdictions, especially in the US, with the result that New York has been very much affected. No one so far has commented on the article in yesterday’s Financial Times entitled “Big Apple’s Glory Days Passed”, or on the report entitled “Down on the Street” in last weekend’s edition of the Economist, which focuses on the challenges to Wall street’s assumption of global superiority as a capital market.

There is no doubt that there is an air of doom and gloom about New York’s ability to compete internationally. That was summed up in a recent article by Mayor Bloomberg and Chuck Schumer, the Senator for New York state, entitled “Learn from London”. However, we need to look more carefully at the reasons for that decline in competitiveness, and the American press is full of articles trying to describe what has been happening in recent years.

No mention has been made in the debate about the tougher immigration controls that exist in New York, which are affecting its ability to tap expertise from around the world. They are also limiting that centre’s ability to bring people together on a short-term basis, and the result is a real effect on the operation of the New York market. Some people in the US think that New York has been slow to innovate, and anyone who looks at the front page of the Wall Street Journal will know how slow that innovation can sometimes be.

In addition, a culture of litigation exists in the US that does not exist here. The SEC undertakes very aggressive litigation, and indeed the newly elected Governor of New York state built his reputation on aggressive prosecutions in the market place. However, the major focus of concern in America has been on the cost of regulation. In that regard, London has a major advantage, in that it has a principles and risk-based regulatory structure with a light touch. That has played a significant role in its success.

The success of London is worth examining. Financial services make up 8 per cent. of our economy—12 per cent. if we include business services. As was mentioned earlier, the sector has been growing at 10 per cent. a year, with 300,000 people employed directly and an unknown number indirectly. Moreover, it is not often appreciated that the sector employs 100,000 people in Scotland. Another 100,000 are employed in the Leeds area of Yorkshire, although they work more in business services than in financial services.

London is the only major challenger to New York as a global financial centre. The debate has already touched on London’s capacity in foreign exchange dealing, with more than 40 per cent. of the global trade in foreign-based equities. Interestingly, 75 per cent. of the top 500 US companies have a base in London. That is an important consideration, and mention has been made of the cluster effect, whereby expertise in legal, business and finance services are brought together to achieve the success that I have outlined.

London accounts for an increasingly large share of world activity in financial and other services. Although it is well behind New York and some other centres in hedge fund trading, London’s share of the market is
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growing all the time. The same is true of syndicated loans and last year Europe overtook the US in the corporate debt market.

The hon. Member for Twickenham spoke about IPOs, but I think that he got it slightly wrong. There has been a seismic shift in that market in a relatively short time. He was right to suggest that the move predates the Sarbanes-Oxley rules, but the IPO volume in New York used to be five times bigger than it was in London. Even so, London overtook New York in that market last year, and many people on the other side of the pond are very worried about that.

The regulatory framework is incredibly important, but other factors are at work in the successes that I have described. We look for people with the highest professional standards, and we work hard to attract the best talent available. Europeans regularly come to London to learn how our financial services operate. We are open and transparent in much of what we do. As has already been said, more international banks are registered in London than anywhere else and a similar internationalism can be seen across the whole market.

We have to recognise the impact of those principles on the success of the City and it would be counter-productive to reverse them. We have to ensure that we do not appear to be trying to frustrate or oppose foreign international ownership of our institutions. That is a cardinal principle and I very much support the Economic Secretary’s clear statement of it today. The Government have to remain neutral on ownership; there is significantly more international ownership in London than in any other marketplace, which has been of great benefit to us.

We also have to recognise that consolidation and integration in financial services may—only may—threaten the light-touch regulation that has been the hallmark of the City and of the FSA since it was set up. As I have said before, evidence suggests that that light touch gives the City a significant advantage over other marketplaces. Indeed, excessive regulation threatens the possibility of a retreat offshore. We have already discussed that point this afternoon, so I shall not go into it. What is most important is that we ensure that the legislation will protect the integrity of London as a global financial centre.

The Bill also responds to the concern, about which we have had quite a debate, that the acquisition of City institutions may bring extra-territorial application of regulations. We have talked in particular about Sarbanes-Oxley. In my view, that would extinguish London’s present regulatory advantage, because it would provide additional onerous regulatory requirements, and we have asked questions about that. The internal control report, which is part of Sarbanes-Oxley, seems to be the focus of greatest concern in terms of the legislative changes introduced under that Act. It is clear that there has been a considerable hike in compliance costs as a result of the measure.

The Government have already considered some aspects of Sarbanes-Oxley in some detail and concluded that they would be disproportionate, although, interestingly, The Economist refers to the cost-benefit of the introduction of greater regulation. Of course, one study will say one thing, while another says something else, but the import of the studies carried out so far appears to be that at the lower end of
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the market—up to $250 million—there is a disbenefit and that the benefit begins to increase the larger the company becomes. The alternative investment market may be the biggest beneficiary of our decision to resist that additional regulation, as appears to be happening.

I welcome the power in the Bill to veto excessive regulation and, indeed, the framework to ensure that the FSA does not get involved in the day-to-day commercial judgments of exchanges. That is extremely important; exchanges have to be left to carry out their business. The Bill also rejects micro-management of the rule books and the vetting of every rule change. There must be a broad-brush approach—a simple veto power when disproportionate regulation is being considered.

We have to enshrine in the legislation the fact that our exchanges remain open to overseas ownership, and we must send that message clearly. It is an important principle that the City has always upheld.

Putting all those measures together, this simple Bill will provide the safeguards that we require and will, when necessary, ensure the continuation of the light-touch regulation that has been such a success in the City. I commend it to the House.

6.25 pm

Mr. Mark Field (Cities of London and Westminster) (Con): Like other speakers, I welcome this minor but important piece of legislation and support the powers that it proposes to give the Financial Services Authority.

Although I am unaccustomed to supporting aspects of Liberal Democrat speeches, it is particularly important to consider Bills that have overwhelming support with a slightly more sceptical eye, so I supported the hon. Member for Twickenham (Dr. Cable) in some of his concerns. He rightly pointed out that Sarbanes-Oxley had got through both Houses of Congress with precisely three opposition votes out of 550—someone will probably note that there are slightly fewer than 550 legislators in the United States, but I am sure that the hon. Gentleman recognises my point. When there is overwhelming agreement, there is often no proper debate, so it is right that we have had some discussion of this relatively small Bill.

The history lesson in the contribution made by the hon. Member for Bristol, East (Kerry McCarthy) was most welcome, as indeed was the contribution of the hon. Member for Edmonton (Mr. Love). The City of London has always been internationally minded; at least, it certainly was until 1914 and then from the early 1970s. The hon. Gentleman referred to what he regarded as the fiasco of the eurobond market, but in reality it was high tax in the USA that opened up the eurobond market to Europe. It was only the foresight of the Thatcher Government, with the big bang in 1986, that ensured the internationalisation in the City of London, from which, as has been pointed out, the whole country has prospered. Without a thriving financial services industry, the UK would be in deep economic difficulties.

Of course, a thriving financial services industry brings problems. London Members see many of the problems that have resulted from the great strength of the City of London. However, that strength is to be
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welcomed, as is the fact that so many Labour Members, who, 15 or 20 years ago, were somewhat less than ambivalent about the power of the City, now embrace what it brings.

Helen Goodman: I wonder whether one of the problems with the City of London is the exceptionally high level of bonuses this autumn. What is the hon. Gentleman’s attitude to that?

Mr. Field rose—

Mr. Deputy Speaker (Sir Alan Haselhurst): Order. I think that the hon. Member for Bishop Auckland (Helen Goodman) might take her earlier advice as to what is relevant to the debate.

Mr. Field: Saved not by the bell but by you, Mr. Deputy Speaker. Thank you very much indeed. Given my earlier intervention, I guess I was asking for that comment from the hon. Lady.

In a nutshell, the Bill ensures that the FSA will be able to prevent recognised investment exchanges and clearing houses from adopting regulatory changes that it regards as disproportionate to the regulatory objectives proposed. The underlying concern is that otherwise the internationally competitive position of the UK-based financial services industry in globally competitive markets may be damaged. The protection of the competitive position of London investment exchanges that may in future be acquired by overseas shareholders is the main purpose of the Bill.

Naturally, that brings into the equation two other issues to which several Members have referred. The first is the principle of overseas control. In fact, the City of London is already internationally owned, staffed and managed—a process that accelerated rapidly after the 1986 big bang. Legitimate concerns have been expressed on both sides of the House about how sustainable that would be in a massive economic downturn.

Clearly, there was a recession in the early 1990s, which hit the City of London as it hit many other parts of the British service industry. There was also grave concern that by not joining the euro at the beginning of this century, Britain could find its competitive advantage in London undermined. That has not come to pass. Equally, however, we should not be complacent about the longer term, while we should rejoice about the fact that the City remains very strong in spite of the fact—perhaps even because of it—that overseas ownership allows flair and innovation from all corners of the globe to play an important part in the London market.

Secondly, the issue of the limits of protection in the Bill has also been drawn to my attention. My reading—perhaps it also takes us back to the thoughts of the hon. Member for Twickenham—is that in the event of NASDAQ’s bid for the stock exchange proving successful, we cannot provide protection against actions potentially in the US or in British courts by aggrieved US investors in LSE-quoted securities or, indeed, by high-profile district attorneys wishing to make a name for themselves. We have had a broad-ranging debate about the effect of Sarbanes-Oxley and it is now clear that, given the concerns evident in the US market, there has been a rowing back from it.

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I hope that we can take the opportunity provided by the Bill to make the case once again for the pursuance of a minimum regulatory regime, especially in view of foreign membership as a fact of City life. We need to remember that innovation, flair and light-touch regulation have been the watchwords for many of the great successes in the overseas and outward-looking global financial markets in which London has played an important part over recent centuries. We should ensure that the UK authorities are able to regulate to the lightest possible degree and avoid the micro-management of the financial markets, to which other hon. Members have referred, irrespective of their ownership of the exchange in question.

I believe that that is the intention of this small but important piece of legislation. I welcome it as a positive step forward, which has certainly been welcomed by the City of London corporation in my constituency. It is wise to look carefully into all aspects of regulation and the way in which the FSA operates. We cannot be complacent. I detected from the Minister’s earlier comments that with the additional powers given to the FSA in 1997, we had somehow been able to ward off all the problems that had arisen from Enron, WorldCom or the litany of previous scandals in this country that were outlined earlier by the hon. Member for Bristol, East. We should always remember that there will be crooks in any market and we should not be overly complacent that, in putting a new regulatory framework into place, we have somehow made ourselves immune from any such nefarious behaviour.

I welcome the Bill and hope that after rapid progress on Report and Third Reading it will be on the statute book before too long.

6.33 pm

Mr. Paul Goodman (Wycombe) (Con): I am grateful for the opportunity during this short Third Reading debate—[Hon. Members: “Second!”] I am sorry, I mean Second Reading debate; time has flown so fast that it has evidently left part of my mind behind. On behalf of the official Opposition, I wish the Bill all good speed and I will reiterate briefly why it merits all-party support. I believe that it does, in the end, have all-party support. The hon. Member for Twickenham (Dr. Cable) provided the necessary grit, but said at the end of his speech that he was inclined to support the Bill. I have to say, though, that having listened to his entire contribution, I was not always sure that he was going to reach that conclusion.

We thank the Economic Secretary for sharing a draft of the Bill with us and for briefing us personally. After all the turmoil, drama and excitement of yesterday’s Queen’s Speech debate, we are glad to see that the clunking fist has been replaced by the outstretched hand of co-operation, but we know, of course, that we will be back to normal business soon—

Ed Balls: Tomorrow.

Mr. Goodman: No doubt tomorrow, and we all look forward to it.

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