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No. 6, in page 4, line 11, at end add—
‘(4) In sections 300A and 300D “change of governance” means, in respect of a recognised body, the obtaining of material influence by a person who did not previously exercise material influence over—
(a) the board of the recognised body, or
(b) the board of any person who (whether directly or by means of holding control over one or more other persons) has control over the recognised body.
(5) For the purposes of subsection (4) the obtaining of material influence by a person who is—
(a) a new holding company where the interests of the members of the new holding company are the same as, and held in the same proportions as, the members of the recognised body (or the holding company of the recognised body, as the case may be) immediately prior to such company becoming the new holding company, or
(b) a wholly owned subsidiary of the recognised body or any such new holding company,
is not a change of governance.
(6) For the purposes of subsections (4) and (5) “material influence”—
(a) means the power (whether directly or indirectly and whether by the ownership of share capital, the possession of voting power, contract or otherwise) to appoint or remove all such members of the board of directors or other governing body of a person as are able to cast 50 per cent. or more of the votes capable off being cast by the members of the board or governing body on all, or substantially all, matters, or otherwise to have (or have the power to have) material influence over the policies and affairs of that person; and
(b) is demonstrated if the person exercising material influence acts in a way otherwise than in accordance with United Kingdom corporate governance standards.’.
Mr. Hoban: Let me be quite clear at the start that this group of amendments, and subsequent amendments, are probing. They arise from conversations that I have had over recent weeks with people in the financial services sector who seek to use the opportunity of the Committee stage to understand some of the thinking behind the Bill and why it has been structured as it has. I think that we would all acknowledge—the tone of the debate on Second Reading indicates this—that the current system of regulation for investment exchanges works well, and that the rules that it has come up with seem to be proportionate and lead to efficient markets. In fact, we can see the attractiveness of those rules being expressed in the amount of new money that has been raised on the London stock exchange.
It is in the context of existing markets that are seen to be well regulated and which work effectively that we are considering the Bill today. The Bill is before us because of the threat in relation to the change of control of one of those investment exchanges. If the independent status of the LSE had not been threatened, I suspect that the Bill would not have come before us, or at least would not have been rushed through all its stages in this House in a day. Clearly, the prospect of such a change of control has triggered a thought process not only in the mind of the Government, but in the minds of Her Majesty’s Opposition and of stakeholders in the financial services sector.
We do not know whether the LSE or any other recognised investment exchange will be acquired by
NASDAQ or any other bidder that might come forward. If the LSE were to retain its independence, there would be no reason to believe that it would wish to bring forward excessive regulation that would put at risk the competitiveness of UK capital markets. As far as I am aware, it has not tried to introduce such rules, so if it remains independent, there is no reason to think that it will do so in the future. However, under the Bill, even if the LSE retains its independence and there is no change of ownership, it and other recognised investment exchanges will be subject to regulation as has not hitherto been the case. On Second Reading my hon. Friend the Member for Wycombe (Mr. Goodman) highlighted the paradox that we are extending to exchanges regulations that do not exist at present.
The purpose behind the amendments is to probe why the Government have chosen to introduce a blanket change in regulation, rather than awaiting a change of control before bringing regulations into effect. As the Economic Secretary said on Second Reading, the provisions will effectively come into force on the day after Royal Assent, so any changes that take place from that day forward will be subject to the process under the Bill. If the impact of the Bill were restricted to circumstances in which a change of control had taken place, it would mean that exchanges that had not been subject to a change of control would continue to benefit from existing regulatory mechanisms and would not have to incur additional costs through the call-in process, nor would the FSA have to go through the process of reviewing the rules. Amendments Nos. 1 to 6 give us the opportunity to ask the Economic Secretary why the Government are saying that all future changes to regulations by recognised investment exchanges and clearing houses should be subject to such a process, and why the process is not restricted to circumstances in which there has been a change of control.
Ed Balls: Let me take the amendments in two groups. Amendments Nos. 1, 3, 5 and 6 would introduce a trigger mechanism so that the powers of the FSA to veto excessive regulatory provisions would arise only when the trigger had been operated—the trigger being a change of governance or control of an investment exchange or clearing house. Amendments Nos. 2 and 4 would insert the word “material” before the phrase “regulatory provision”.
It seems that amendments Nos. 1, 3, 5 and 6 would introduce two different triggers. Amendment No. 6 states that the change would be exercised
“if the person exercising material influence acts in a way otherwise than in accordance with United Kingdom corporate governance standards.”
It is not easy to work out from the amendments whether the trigger would be brought about by a change in control, or a change in control when it was also the case that the person with control over the recognised body acted unacceptably. The rule provision could not be triggered by both a change in governance and someone behaving unacceptably. The latter point is the important one. The trigger is not a change in governance, but whether people behave unacceptably, as defined in the Bill. We are setting up an important test. Rule changes judged by the FSA to be disproportionate and excessive,
not a change of governance, will be the trigger for the FSA to consider its veto power.
The hon. Member for Fareham (Mr. Hoban) is absolutely right to point out that if there were no change of ownership at the LSE or any other exchange, the new powers would still come into operation. However, if any UK or foreign-owned exchange were to act outside “corporate governance standards”, as amendment No. 6 says, or, more generally, disproportionately and excessively, it would be right for the FSA to trigger the power. It would be unacceptable if we could trigger the power if there was a new owner of an exchange, but could not do so if an existing owner of a UK or foreign exchange that had not been subject to a change of governance acted unacceptably. We are trying to apply the trigger power in a way that is consistent across the piece.
We feared that if the mechanism was triggered by a change of governance, the measure would be not only unworkable but discriminatory and unfair. Such a measure would protect existing managements by allowing them to do what they liked, while imposing new requirements only on exchanges with changed ownership. That would create a deterrent to takeovers. It would unnecessarily discriminate against both foreign and domestic future owners, because they would have a greater regulatory burden than existing foreign or domestic owners.
We also feared that discriminating between two types of owners carrying out essentially the same action would be incompatible with our obligations under EC treaties and the World Trade Organisation’s general agreement on trade in services. In addition, the right hon. Member for Wokingham (Mr. Redwood) has pointed out that irrespective of whether owners are new or existing, or foreign or from the UK, if they act in a way that is excessive, disproportionate and outwith the wider objectives set out in the Financial Services and Markets Act 2000 and the FSA’s rules and guidance, it is right that we should take action to veto. The Bill will enable us to do that, but the amendments would undermine the process.
We have discussed amendments Nos. 1 to 6 in detail with the exchanges, and I know that the hon. Member for Fareham will have done the same thing. I understand the intention behind Amendments Nos. 2 and 4 and the desire to strengthen barriers to the FSA acting disproportionately by inserting the word “material” to the Bill. However, we have concluded that the amendments would not give any extra protection to exchanges. They would not make unnecessary notifications less likely. Exchanges and clearing houses want legal certainty, but adding the word “material” would not give them any extra certainty, because there would be exactly the same room for doubt and argument. The only effect of the amendments would be that exchanges and clearing houses would have to take further legal advice on the meaning of “material” in such cases.
The conclusion that we have reached, which is more reflective of the spirit and intention of FSMA, is to put in place a rule-making power for the FSA. We believe that the process of discussion and consultation that will lead to FSA rules about the way in which it will use the powers in the Bill will give more certainty and comfort to exchanges than inserting the word “material” in the Bill. As I explained on Second
Reading, the waiver for the first 12 months will ensure that while such consultation is conducted, the FSA will have discretion to waive its powers for certain types of new rules.
We have examined amendments Nos. 1 to 6 in detail and discussed them with the exchanges in the City. As I have explained, we do not think that they would meet the concerns of the exchanges. However, we made modifications to our proposals in the light of their representations. In particular, the rule-making power and the waiver power offer a better way of assuring the exchanges that we will act proportionately, carefully and not excessively.
Stewart Hosie: I agree with the Economic Secretary, particularly in his scepticism about amendment No. 1, which, as I understand it, simply seeks to bring the clause into effect when there is a change of governance. He is right that there should be consistent application of the rules in all circumstances. The hon. Member for Wycombe (Mr. Goodman), speaking for the Conservatives, got it right when he said that the issue was not economic nationalism, but the national interest, which includes jobs.
Brief reference was made to Scotland, where 127,000 people are employed in banking, finance and insurance. Five of Scotland’s top 10 businesses are in that sector. Back home, it is one of the industries in which one can reach the very top of one’s career, working in a global company with a genuine international reach. As has been said, it is not only the City of London, but the Financial Services Authority’s light-touch regulatory approach to the sector, that has been the success. We support the clause, and we support taking a consistent approach, whether or not there is a change of governance. I shall keep my contribution short, but I should just say that I agree with the description given earlier: the paradox is that by giving more power to the FSA, we ensure that a light touch remains. The global reach of world-class companies, and 127,000 jobs in Scotland, can be protected and enhanced by the measure.
Mr. Hoban: As I said earlier, this is a series of probing amendments and we have had a useful exchange. First, on amendments Nos. 2 and 4, the Minister is absolutely right, and the letter from John Tiner, to which we referred earlier, should reassure investment exchanges and clearing houses about the way in which the FSA will seek to use the powers. Of course, the consultation process that will take place over the next few months to determine the detail of the rules for call-in will reinforce the message set out in that letter. That should give exchanges and clearing houses further reassurance about the way in which the new powers will be used.
I now turn to the amendments about change of control. Perhaps there is a second paradox on display: it took a potential change of control in an investment exchange to flag up the issue of the freedom that exchanges and clearing houses enjoy in determining their own rule books. Although historically that has been seen as a strength, clearly, in future, challenges could emerge that would change that strength into a problem. By taking the necessary powers now, having been prompted by the potential change of control, we are ensuring more certainty over the regulatory
environment in the UK. In a sense, even if the acquisition of the London stock exchange by NASDAQ does not go ahead, perhaps the prospect of it has done us a favour by highlighting the issue. It led us to introduce this legislation quickly, so perhaps in the long term it has done UK financial services a great favour by making us look at the rules once more, and making us think about how the rule book will develop. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Hoban: I beg to move amendment No. 8, in clause 1, page 2, leave out line 5 and insert
‘need to maintain the competitiveness of United Kingdom markets,’.
On Second Readings I sought to highlight the opacity of the wording of proposed new section 300A(4)(b). The purpose of the Bill is to protect the global competitiveness of UK capital markets, but it is not entirely clear how that fits in with the four factors in subsection (4). I am sure that the Minister will come up with good reasons for the opaque wording of the provision, but the wording should make the thrust and purpose of the Bill clear. My amendment would give the Bill a degree of clarity, so that no one could be in any doubt about its purpose and what it seeks to achieve.
7.15 pm
As for the precise wording of proposed new subsection (4)(b), financial markets are global and activity is mobile, but that does not necessarily lead to the conclusion that regulators should veto rules that would have an impact on the competitiveness of UK capital markets. Indeed, some might say that because of the mobility of activity there should be a single set of global rules, not different sets of rules for different jurisdictions. That is not my view, but the wording of subsection (4)(b) is not sufficiently clear to inform readers about the precise purpose of the Bill and what it seeks to protect. The wording is rather bland and neutral, and my amendment would make it slightly crisper and more focused, to get the point across.
That echoes comments made by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke)—he may well speak on this point, too—about how the wording fits in within the regulatory objectives of the Financial Services and Markets Act 2000, in which competitiveness is not one of the regulatory objectives. It is relegated to as a factor to which the FSA should “have regard”. By anchoring the Bill in the context of much clearer and sharper wording, we will lose any ambiguity about what the Bill seeks to achieve, and we will perhaps give practitioners and regulators a much clearer sense of direction.
Mr. Gauke: I have read the wording and I have a concern about its context. It says:
“In considering whether a requirement is excessive the Authority must have regard to all the relevant circumstances, including...the global character of financial services and markets and the international mobility of activity”.
That could be read as meaning that we should take into account regulations that apply in other jurisdictions. Given that we must take account of the global character of financial services, and global regulations such as those in the US, it could be argued that
subsection (4)(b) is in favour of Sarbanes-Oxley, because it tells us to consider “global character”, and what the US is doing. In those circumstances, the provision might be said not to argue in favour of a difference, but to encourage us to conform to the regulations in other jurisdictions. The wording proposed by my hon. Friend the Member for Fareham (Mr. Hoban) would therefore provide greater clarity.
Stewart Hosie: Subsection (4) says:
“In considering whether a requirement is excessive the Authority must have regard to”
the circumstances set out, and the end of subsection (4)(b) refers to
“the international mobility of activity”.
It is crucial that we keep competitiveness and profitability in mind and consider the international mobility of activity, because neither competitiveness nor profitability would be encouraged by the flight of capital. The best way to achieve the ratcheting effect referred to earlier, in respect of light-touch regulation throughout the global markets, is to take account of international mobility, as well as the international nature of activity, and of the money itself. That probably fits in with what the Economic Secretary said in his speech to the Institute of Chartered Accountants in England and Wales in the chartered accountants hall on 20 November:
“We want to see convergence—but convergence around a principles-based, rather than rules-based, approach.”
In that regard, taking account of the international mobility of activity—and, indeed, money—might be the best way to encourage not only the ratcheting-up of a light-touch approach everywhere, but convergence, which might lead to greater access to capital and more growth in the world’s markets.
Ed Balls: I welcome you as Chair of the Committee, Mrs. Heal.
The drafting of the provision is subtle, and there is no disagreement between Government and Opposition about what we are trying to achieve. We have talked about the paradox of regulating to make sure that we have less regulation. Another paradox is that we wish to protect our regime—the measure is an act of protection—so that we can achieve a non-protectionist approach to ownership. We wish to be open and global rather than protectionist. The amendment is carefully worded, as it refers to
“the competitiveness of United Kingdom markets.”
It does not refer to institutions, firms or individuals. I accept that we judge the success of a global approach to financial markets by the breadth and the depth of the market, rather than the market share of a particular UK-domiciled firm. A less global, more protectionist view could be characterised as one in which we judge the successful competitiveness of the markets according to whether a domestic firm has a growing market share, even if that leads to a decrease in the depth and richness of global markets.
We are concerned that if we accept the amendment, its language for competitiveness could be misinterpreted, and it could take us down the protectionist route. I
accept the intention behind the amendment tabled by the hon. Member for Fareham (Mr. Hoban), but I fear that reference to the competitiveness of UK markets could be mistaken for a reference to protecting the market share of UK firms, individuals and institutions, which is contrary to what we are trying to achieve. The reference in proposed new subsection (4)(b) to
“the global character of financial services and markets”
captures our more open, global approach. The amendment would not add anything to what we are trying to achieve, and we fear that it could be misinterpreted in some circles.
The hon. Member for South-West Hertfordshire (Mr. Gauke) was concerned about extra-territoriality, and he asked whether the reference to the global character of financial services meant that the FSA would be forced to accept excessive regulatory provision outside the UK by a UK-recognised body. The test in the Bill for excessive regulatory provision is whether such provision extends beyond UK or European Community law, and whether it fails to pursue a reasonable regulatory objective or is disproportionate to such an objective. That test cannot be levelled up just because a foreign jurisdiction applies an excessive standard that it characterises as global. It is not for the foreign regulator to make the judgment, and we will not level the test up. It is for the FSA to make the judgment under the Bill and the rules that it sets. We do not believe, therefore, that there is such a risk.
Mr. Gauke: The provision states:
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