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I would like to respond to some of the good and expert speeches, beginning with those of Labour
Members. We heard what can fairly be described as two hymns to the City as a powerhouse of capitalism from the hon. Members for Bishop Auckland (Helen Goodman) and for Bristol, East (Kerry McCarthy). Conservative Members enjoyed listening to both. This week, we have heard some Conservative spokesmen defending the work of Polly Toynbee and now two Labour Members defending the power of capitalism. It would understandable if onlookers were somewhat confused, but I shall explain in a few moments why such views might be held and why the Bill is necessary. We also heard an expert speech from the hon. Member for Edmonton (Mr. Love), who made some interesting points about the present climate in the US, particularly with regard to litigation culture, and the effect of immigration restrictions on financial markets.
My hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) took us, as those who served in Committee on the Finance Bill might have expected, into legal territory, weighing up the balance between necessary regulation and consumer protection on the one hand and a light touch on the other. I do not know whether he has had the opportunity to talk to someone whose name, for some reason, escapes me, but who figured a great deal in proceedings on the Finance Bill.
My hon. Friend the Member for Cities of London and Westminster (Mr. Field), who knows a great deal about these mattersthey are, so to speak, on his doorstepmade an expert speech. He rightly said that we must preserve the innovation, flair and light-touch regulation that is the hallmark of the City.
The House may be concerned that proposals that command cross-Bench support do not always necessarily stand the test of time. I received a note saying just that before the hon. Member for Twickenham raised the interesting point that Sarbanes-Oxley went through the US legislature almost unopposed. Given the criticisms of aspects of Sarbanes-Oxley that we have heard in the debate, it is right for us to pause for a moment and consider whether, because the Bill commands all-party support, it should necessarily glide through. I thus want to reiterate by coming straight to the main point why we believe that the Bill is workable and durable.
The Bill is effectively built on the paradox that the preservation of the present light-touch regulation of financial services can be guaranteed only by extending the powers of the regulator. That paradox is, like most paradoxes, quite hard to accept at first, so it is necessary to show why it holds good. The London stock exchange may be acquired by a US exchange, as others may in due course. Once again, like the Government, we have no objection to that whatever. The Bill has nothing to do with keeping the stock exchange in British hands, in the sense of flying the Union flag above the LSE, just as it has nothing to do with any particular takeover possibility and it does not seek to prevent the LSE from being bought by any foreign company or group.
We all want to ensureGovernment Members as much as Opposition Membersthat UK capital markets remain competitive. It has nothing to do with economic nationalism and everything to do with the national interesttwo words, not to mention prosperity and employment, used by the Economic Secretary in his
opening remarks. There is widespread concern that the acquisition of the LSE could lead to changes in its rule book that would damage the competitiveness of UK capital markets.
The source of such concern is the Sarbanes-Oxley legislation, which was introduced in the aftermath of Enron and WorldCom, and the general tendency of the regulation of financial services to creep across national boundaries, which my hon. Friend the Member for Fareham (Mr. Hoban) described in some detail. He referred specifically to the present double regulatory requirements not only on hedge funds, but on UK auditors.
In short, given the global nature of modern capital markets, businesses that want to raise money can effectively choose where to do so, and the effect of the Sarbanes-Oxley legislation has been to make US markets less attractive and UK markets more attractive. Consequently, US exchanges are looking abroad to strengthen their businesses. The risk is that the takeover of the LSE by a US exchange would enable the SEC to act extra-territorially and allow creeping regulation. The Bill thus necessarily alters the present arrangement whereby the LSE and all UK recognised investment exchanges and clearing houses have the freedom to set their own rules, subject to meeting certain criteria.
The FSA will therefore have a vital responsibility in drawing up the rules that flow from the Bill, and an interesting aspect of the debate was the degree to which it has concentrated attention on the FSAs responsibility to get them right, to ensure that the additional compliance burdens on exchanges are minimised to preserve precisely the competitive position of the UK markets to which I referred a moment ago.
In closing, I want to stand back from the Bill for a moment to consider a general law of life and politics to which it points: our old friend the law of unintended consequences. I doubt whether the movers of the Sarbanes-Oxley legislation intended to improve the relative position of UK and European capital markets. That seems to be a classic illustration of the law of unintended consequences, and it helps to explain why my hon. Friend the Member for Fareham warned the House that, while one piece of legislation can strengthen our competitive position, another can weaken it.
Of course the Bill will not protect the competitive position of our capital markets from all aspects of creeping extra-territoriality. It will not protect those markets from new laws proposed in Brusselsthat, of course, is not its function and those are matters for another daybut it will protect our capital markets from a danger, and that is why we believe that it deserves all-party support.
The Financial Secretary to the Treasury (John Healey): I am grateful to hon. Members on both sides of the House for the attention that they have given to the Bill on Second Reading. I welcome the fact that the hon. Members for Fareham (Mr. Hoban) and for Wycombe (Mr. Goodman) have welcomed the Bill. I particularly welcome the fact that, in a debate on the City of London, there have been more speeches from Government Back Benchers than from the Oppositionprobably something of a milestone in the House.
A number of important points have been made in the debate, some of which are probably best dealt with in Committee, which, I hope, we shall come to shortly. Before dealing with the principal concerns and arguments that have been raised in the debate, let me underline the purpose of the Bill. As my hon. Friend the Economic Secretary stressed in his opening remarks, we are legislating not to impose regulation, but to avoid it. I appreciate that that might sound contradictory, but it goes to the heart of what we want to achieve.
We want to safeguard our successful, risk-based and highly competitive regime of market regulation, which has helped to make London the worlds leading international financial centre. The Bill will do that. It will create a system in which the FSA, which is widely respected here and abroad as one of the worlds leading financial regulators, can veto disproportionate regulatory changes proposed by exchanges or clearing houses for the markets that they provide and support, while putting in place mechanisms to enable the FSA to ensure that that will not impose any unnecessary or excessive burden on exchanges or clearing houses.
My hon. Friend the Member for Bristol, East (Kerry McCarthy) brought to the debate her experience as a member of the Treasury Committee and at Abbey National. She noted not just the successes of the City of London, but some of the underlining reasons for its expansion. She talked very sharply about the challenges of regulating effectively, both domestically and in Europe. She also talked about the evolution from the systemic regulatory failures in the City of London and in financial services to the approach now taken by the FSA.
John Healey: I beg my hon. Friends pardon. He is a long-standing and serving member of the Treasury Committee, and he demonstrated not only the expertise that that Committee has built up, but his personal expertise about the financial services and markets in both the UK and the US.
Mr. Love: I plead guilty to membership of the Treasury Committee, but unlike my two colleaguesmy hon. Friends the Members for Bristol, East (Kerry McCarthy) and for Bishop Auckland (Helen Goodman)I would not plead guilty to having previously worked in the City.
My hon. Friend reminded us, as no other contributor to the debate did, that UK financial services are an important feature of the economy not only in Scotland but in Leeds. As a Yorkshire MP, I slightly hesitate to say this, but the financial services centres in other parts of the UK are heavily dependent on the outstanding performance and position of the City of London. My hon. Friend rightly said that the
test of the Bill should be whether it will protect the integrity of the regulatory system in London.
My hon. Friend the Member for Bishop Auckland (Helen Goodman) brought to the debate experience not of serving on the Treasury Committee, but of working in the Treasury as an official on the foreign exchange desk through some interesting times in the past and as a member of the Public Accounts Committee. She vividly described the nature of the global financial markets, and she clearly understands the case for the safeguards in the Bill.
The hon. Member for Twickenham (Dr. Cable) said that he will not oppose the Bill, but he remains to be convinced about it, and I hope that my hon. Friend the Economic Secretary and I can do just that this evening. However, the Bill is emphatically not a legislative Americans keep out sign. I thought that my hon. Friend was very clear in his remarks and interventions. The Government are studiedly and publicly neutral on the merit of any takeover bid for the London stock exchange, including any from the US. The issue is not the nationality of ownership, but the nationality and nature of the regulation. We want to ensure that the investment exchanges and clearing houses that operate in London are regulated in London by the FSA.
Dr. Cable: I wonder whether the Financial Secretary can confirm a comment that, I think, the Economic Secretary made in a telling intervention on my speech. I think that he said that the American exchangesNASDAQ and the New York stock exchangewelcome the Bill and would not see it in any way as an obstacle to their proceeding with a takeover. Is that correct?
John Healey: My hon. Friend the Economic Secretary has indeed, as he explained to the House, had conversations with the leading figures responsible for the two US exchanges. They have confirmed to him that they see no obstacle to their interest in the London stock exchange in the content of the Bill. I want to make it clear to the hon. Gentleman that the issue is not one of protecting business, but one of safeguarding the regulatory approach that we have in London, which is defined and controlled by the FSA.
The hon. Member for South-West Hertfordshire (Mr. Gauke) alighted on a couple of legal points, particularly in relation to clause 1 and the factors that the FSA may take into account under proposed new subsection (4). If he will forgive me, those points may be better dealt with in the next stage of the proceedings, particularly in relation to amendment No. 8 in the name of the hon. Member for Fareham.
We all have an interest in the Bill, but the hon. Member for Cities of London and Westminster (Mr. Field) is really the only Member of the House with an authentic constituency interest in its content. He clearly has an interest in the future competitiveness of the City of London, as he explained. He rightly argued the importance of a light-touch, principles-based approach to the regulatory regime. The Bill reflects that.
There were two questionsfirst, from the hon. Member for Fareham, and secondly, from my hon.
Friend the Member for Wolverhampton, South-West (Rob Marris) in an interventionon the timings in the process that the FSA will be responsible for. The hon. Member for Fareham asked whether the 30-day period would be sufficient for the FSA to consider the impact of any proposed rule changes and then make a decision about whether to call in such proposals. In drafting the Bill, we consulted the FSA. It makes its supervisory decisions independently, within the framework of the Financial Services and Markets Act 2000. In drafting the Bill as we have, we believe that it strikes the right balance between giving the FSA sufficient time to consider the potential impact of proposed rule changes and ensuring that there is not unnecessary delay or uncertainty in the system.
My hon. Friend the Member for Wolverhampton, South-West is quite right to make an observation about the lack of specified time limits for the representations in the Bill. He probably would have found that in the explanatory notes, as well . [ Interruption. ] My hon. Friend the Member for Edmonton says that that is if my hon. Friend the Member for Wolverhampton, South-West got to the explanatory notes. In my experience, my hon. Friend goes first to the explanatory notes. I have never been involved in a debate on a piece of legislation in which he has not scrutinised the explanatory notes in extreme detail. He is correct to say that the FSA will be able to set the period for representations. The reason why is that it is important that there is sufficient time for careful scrutiny in what we regard as the likely rare event that the FSA decides to call in a regulatory provision. However, as was set out in the letter from the chief executive of the FSA, the FSA will use that power in a way that is consistent with its principles-based approach to regulation. I should also explain to the House that that is consistent with other consultation powers under the Financial Services and Markets Act.
I turn to the concerns that the hon. Member for Twickenham worried away at in his contribution. He questioned, first and foremost, whether the Bill is necessary. Although all the recognised investment exchanges and clearing houses have reservations about the detail of the Bill and will welcome the scrutiny that the House is providing, the Joint Exchanges Committee thinks that the Bill is necessary. It states:
We all appreciate and support any initiatives that protect UK regulatory standards from extraterritorial interference.
we are very supportive of the plans to give the FSA additional powers to veto any attempts to introduce excessive or disproportionate regulations that would impair the Citys ability to compete for global equity markets business.
Seems clear that all this is highly advantageous.
We believe it is very positive that the government has demonstrated clear political will to combat creeping extra-territorialism.
It is reasonable to pose the questionas the hon. Gentleman didof why any commercially run exchange would want to damage its own business by excessive regulation. However, the owners of an exchange or clearing house can come under a variety of pressures to change their regulatory provision and rules
and those pressures may not always have a commercial motivation or a commercial source. Competition may not always be effective in challenging or controlling those pressures.
The hon. Gentlemans second question was: why is existing legislation not sufficient? I assume that he had in mind EC regulations and the Protection of Trading Interests Act 1980. The existing legislation could be used only if an overseas authority sought to impose its national requirements directly on a UK exchange or clearing house in respect of its UK activities. In contrast, if an overseas owner were subjected to pressure under its home state law or regulations to secure that a UK investment exchange or clearing house was operated in practice in accordance with that states law, the existing European regulation and the Protection of Trading Interests Act could not prevent lawful instructions being given by the foreign owners. The Bill, however, will allow for all regulatory provision to be assessed so as to prevent regulation that is excessive in the UK context from being made, whatever its source.
We need to ensure that the regulatory provision of key providers of investment exchanges and clearing houses remains appropriate in all circumstances and that it reflects the proportionate, risk-based approach set out in UK and EU law. That is why we are introducing the Bill. I hope that my hon. Friend the Economic Secretary and I can reassure the House that the Bill will achieve those important objectives and will do so without imposing an unnecessary burden on exchanges and clearing houses. I look forward to further debate and to supportI hopefrom both sides of the House on Second Reading and in subsequent stages.
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