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I am grateful for the clarification that the Economic Secretary has provided, but the definition of “excessive” is linked to the global character of financial services and markets, so regulation in another jurisdiction may therefore be relevant in reviewing that character.

Ed Balls: I accept the point that the hon. Gentleman has made, but it is for the FSA to make a judgment as to whether a requirement outside UK or EU regulatory requirements and law is reasonable or excessive. The fact that it has an outside origin does not mean that it is global. The FSA must judge whether a provision would lead to more protected markets and excessive regulation, or to more openness and mobility. Having listened to the arguments and consulted our legal experts, we do not believe that we are running an unreasonable risk of judicial review, and we do not believe that the amendment would strengthen our position. On that basis, I urge the Committee to reject the amendment.

Mr. Hoban: I am grateful to the Economic Secretary for his response, both to the amendment and to the contribution by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke).

Two points need to be made about the wording of the provision. First, the use of the word, “excessive”, and the way in which UK and European legislation are carved out, means that if, for example, someone proposed to impose excessive US-style regulation on the UK, the fact that it originated from outside the UK and the EU should give the FSA an opportunity to rule
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it out or veto it. That is the thrust of the Bill, and it is an important consideration.

Secondly, I was not entirely persuaded by the Economic Secretary’s arguments about the wording of my amendment, but I will not press it to a vote. His explanation, however, should reassure people that the Bill aims to protect the global competitiveness of the UK capital markets. I am not sure that I agree with his remarks about market share, which is a red herring. The wording of the amendment is sufficiently broad to suggest both the attractiveness of the UK as a place in which to do business and its strengths in comparison with other jurisdictions. However, the hon. Gentleman has provided assurances on Second Reading and elsewhere, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Mr. Gauke: I should like to return to an issue that I have raised a couple of times, as I am concerned about vulnerability to judicial review in circumstances with which the Bill is designed to deal. For example, in a takeover of the London stock exchange by a US exchange, a rule could be proposed and the FSA could seek to block it. Under clause 1, the FSA would consider whether

and whether the requirement is “excessive”. Proposed new subsections (3) and (4) provide guidance about what is excessive. If the proposal

the FSA can block it. That wording is on the right lines and I do not wish to query it. If that test is met, proposed new subsection (2) states that

If there is a challenge to that direction, it will be examined on the basis of the Financial Services and Markets Act 2000, regulatory objectives and the second-tier matters to which the FSA must have regard. The judicial review will not necessarily be conducted on the basis of what is contained in the Bill—that is, the definition of “excessive”.

Put simply, the first test, the “excessive” test, is whether the rule is disproportionate. The next test is whether the rule is appropriate to secure the relevant regulatory objective, which is the protection of consumers. I question whether it is possible that a particular rule change might fail the test set out in subsections (2), (3) and (4)—that is, it might be excessive because it is disproportionate, as defined in the Bill—but the direction made by the FSA would nevertheless be correct, given the objective of securing the appropriate degree of protection for consumers.

As the hon. Member for Wolverhampton, South-West (Rob Marris) suggested earlier, many of the provisions are designed to protect consumers. My argument is that a rule may be appropriate for the protection of consumers under the FSA test set out in the Financial Services and Markets Act 2000, because the protection of consumers is a regulatory objective,
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whereas the desirability of maintaining the competitive position of UK markets is not. That was an issue when the Act was passed.

A measure might meet one of the two tests, but not both. In those circumstances, the very outcome that the Bill is designed to prevent—judicial review—may be available to a US exchange or to the London stock exchange. As I mentioned earlier, there are two ways of addressing that. One is to make competitiveness a regulatory objective. The other is to narrow the definition of protection of consumers in this limited context. The hon. Member for Wolverhampton, South-West raised concerns about the protection of consumers. In this narrow circumstance, to be consistent with the rest of the Bill, there may be an argument for considering that point. I would be grateful for the Economic Secretary’s view and his reassurance that the two stages of the test do not raise issues that need to be addressed.

Rob Marris: I am pleased to follow the hon. Member for South-West Hertfordshire (Mr. Gauke), who has taken up some of the issues that I wanted to discuss. The crux of the Bill is in clause 1. The rest is procedural, which we will come to. It is important to get the procedure right, but the principle and foundation of the Bill is in clause 1.

We must be careful about the apparent love-in on “low regulatory regime”. As an individual—I expect most hon. Members would feel the same—I would not invest in the stock exchange in Burma because that is a dodgy regime in a dodgy country. As protection there for me as an investor, whether as an individual or through some mythical company I might own, or as a buyer of the Burmese stock exchange if ever it were for sale, I would not want too little regulation because I could lose my shirt.

Ed Balls: Does my hon. Friend agree that at no point in the debate have we used the phrase “a low level of regulation”? The language that we have used consistently is “proportionate” and “risk based”. That allows a high degree of regulation where risk demands it. He may judge that Burma is or is not a place where a higher degree of risk might arise, but we have not spoken of “low regulation”. The use of words such as “proportionate” and “risk based” allows the FSA to make appropriate judgments at all times.

Rob Marris: I am grateful to my hon. Friend. I shall check Hansard, but the term has been used from the Opposition Front Bench and, I think, by my hon. Friend. “Light-touch regulation” is a phrase that has been used, and that rings little alarm bells for me. I wanted some reassurance from the Minister, and I have some.

Until the hon. Member for South-West Hertfordshire spoke in the stand part debate, there has been little discussion of consumer protection and shareholder protection, which I have mentioned in interventions. Can the Economic Secretary clarify whether the phrases in clause 1(3)(b)(i) and (ii)—


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encompass consumer protection and shareholder protection, particularly the latter,

If an investment exchange or a clearing house proposed rule changes that the FSA might deem to be excessive, would consumer and shareholder protection be considered if the investment exchange or clearing house stated that the end to be achieved through the tightening of its rules was greater consumer or shareholder protection?

I am not sure whether “reasonable regulatory objective” would encompass consumer or shareholder protection. That is part of the equation that we must examine. Like other hon. Members, I want London to continue as a thriving premier international market, but I want protection for individual shareholders and consumers and for businesses and organisations, not only because that is right in moral terms, but because London will not continue to thrive as a premier financial location without that platform of regulatory control, so that those who might invest in that market do not fear losing their shirts because of poor regulation. I hope the Economic Secretary can deal with those issues.

Ed Balls: Let me reassure the hon. Member for South-West Hertfordshire (Mr. Gauke) and my hon. Friend the Member for Wolverhampton, South-West (Rob Marris). The tests in clause 1 for “excessive” are whether the regulatory provision goes beyond what is required by UK or EU law and, in addition, either is not directed at securing a proper regulatory objective or the regulatory burden that it would impose is disproportionate to the end that it is intended to secure.

Under the Financial Services and Markets Act 2000, and therefore in UK law, the FSA is required to have regard to four statutory objectives, which are market confidence, public awareness, protection of consumers and reduction of financial crime, so protection of consumers is one of the regulatory objectives to which the FSA must have regard at all times. However, that is one of four objectives, so the FSA must always balance consumer protection against, for example, market confidence. When we speak of a proportionate and risk-based approach to regulation, that allows the FSA to take a lighter touch approach to regulation in those areas where it believes market confidence can be maintained with a greater degree of risk. Hence, the AIM market is a more risk-loving, less regulated market, but the individual retail consumer going in needs to know that there is less market protection.

The FSA must consider the four new tests set out in clause 1(4)(a) to (d) in the context of its four statutory objectives. Those four tests therefore inform the FSA in striking the balance between its statutory duties to protect consumers and to maintain market confidence, although it would not have to strike such a balance with regard to that particular example. In our judgment, so long as it has regard to those four points and is conscious of its need to strike a balance between market confidence and the protection of consumers, we think that it will be proof against judicial review in making such judgments.

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That does not mean that the FSA is bound to reject a regulatory proposal for an exchange that goes beyond the UK or EU requirements of the time. If it took the view that a proper regulatory objective was being pursued—for example, investor protection—and in its judgment that objective was not disproportionate or excessive, the FSA could judge, consistent with the four objectives in the Bill and its statutory duties, that the objective was correct and that it was being done in a proportionate way, and it could allow the rule to go through, which should provide some comfort. The Bill allows the FSA to strike that balance, but at the same time the FSA can take action, if it judges that it is proportionate.

Mr. Gauke: I take the Economic Secretary’s point about the four points in proposed new section 300A, which is helpful. However, they are merely the first part of the test, which triggers the right of the FSA to make a direction. My point concerns a direction made under proposed new subsection (2), which cannot relate to proposed new subsection (4). The question whether such a direction would be subject to judicial review returns us to the regulatory objectives. Whether the direction is reasonable or compliant with regulatory objectives relates to section 2 of the Financial Services and Markets Act 2000 and the four regulatory objectives mentioned by the Economic Secretary. At that stage, proposed new subsection (4) would not be relevant. Stage 1 concerns whether the excessive test has been breached, and stage 2 is when a direction is made. Would such a direction be reasonable?

Ed Balls: The test of the reasonableness of the directive is whether the requirement is excessive under proposed new subsection (2)(b). Proposed new subsection (4) states:

proposed new paragraphs (a) to (d). As on so many occasions in terms of finance, if only Mrs. Gauke were here. Not being a lawyer, I must fall back on the legal advice put before me. It has been put to me that so long as the FSA makes its decision in line with the tests in proposed new section 300A, and that reasonableness is defined as striking a proper balance between market confidence and consumer protection, the FSA will be judged to have fulfilled its obligations under the 2000 Act.

David Taylor (North-West Leicestershire) (Lab/Co-op): The Treasury has promoted the Bill as a means of protecting the London stock exchange from heavy overseas regulation such as the Sarbanes-Oxley Act. However, the intent of the US legislature was to boost investor and public confidence following the high profile corporate collapses of Enron and WorldCom. Is the Economic Secretary saying that we will undercut the Americans on investor protection? And do the four tests strike the right balance?

7.45 pm

Ed Balls: I understand my hon. Friend’s point, which we considered in some detail on Second Reading. The US consensually decided that the Sarbanes-Oxley Act
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would provide proper consumer protection and be consistent with the continued success of its financial markets. We considered that exact issue at the time in the UK, and we were criticised by some commentators for refusing to go down the road of the Sarbanes-Oxley Act. We feared that that approach would damage the competitiveness of our financial markets and that a move towards a more heavy handed, dirigiste, box-ticking approach to regulation would be likely to undermine, rather than to enhance, consumer protection. As I have said to my hon. Friend the Member for Wolverhampton, South-West, a light touch, proportionate, risk-based system requires one to act more decisively when one sees risk than is possible under a more legalistic, box-ticking approach to regulation, which allows one to comfort people that the boxes have been ticked but does not involve the identification of risk.

David Taylor: Is the Economic Secretary saying that the Sarbanes-Oxley Act is a disproportionate overreaction by the American regulatory authorities?

Ed Balls: Today, I had lunch with the US Treasury Secretary, Mr. Hank Paulson, who shared a platform two weeks ago with the chairman of the Securities and Exchange Commission, Mr. Christopher Cox. I think that they both share my analysis of the current dangers of the Sarbanes-Oxley regime, which is that the way in which it has been implemented is both burdensome and insufficiently risk-based and that therefore it does not achieve the initial intention. That is why the SEC, with US Treasury support, is currently consulting on how the implementation of the Sarbanes-Oxley Act and the wider corporate governance regime could be enhanced, reformed and in some way lightened in order that it can become more risk-based in the future. I am happy to rely on the expertise of the US authorities rather than commenting on the sensibleness or otherwise of the regulatory regime.

Finally, the hon. Member for Fareham (Mr. Hoban) has asked whether we have inadvertently come across a flaw in the current regime, or at least that we have had the benefit of realising the need to act, because a change of ownership might allow us to take a power to block excessive or disproportionate rule changes without any change of ownership. However, at no point has the FSA put it to me that it has concerns about the current rule books of the current exchanges or changes to those rule books. In the initial discussions in May and June, no one suggested jumping in to impose a new burden on existing exchanges. As I understand it, that fear did not exist within the FSA. We have looked in detail at how to address that concern, and the only fair way to do so that is legitimate and that applies across the piece would be to cover all exchanges, which is the approach that we are taking.

Mr. Hoban: I am also not aware of any concern about the existing rule books, and the strength of the UK capital markets has demonstrated their effectiveness. Looking at the topic in the context of the potential change of ownership of the London stock exchange has done us a service in pointing out an opportunity to fine tune the regulatory environment for exchanges and clearing houses, and perhaps we should be grateful for that.

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Ed Balls: I was not trying to suggest that the hon. Gentleman had made the opposite point to me. He has wondered whether the matter has done us a favour. The truth is that no one considered that that favour was necessary until now. The issue might arise in future, and if it does, the fair way to resolve it would be for the veto power to apply to all excessive or disproportionate rule changes by any UK exchange, regardless of change of ownership. Clause 1 achieves that objective in a watertight and well-understood way, and I therefore commend it to the House.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2

Procedural and other supplementary provisions

Mr. Hoban: I beg to move amendment No. 7, in clause 2, page 3, line 20, at end insert ‘, and

(d) specifying those persons which the Authority believes may be affected by the proposal.’.

The amendment concerns consultation, how the FSA will seek to use its new powers, and whom it will look to when thinking about the consequences of any rule change. People in City institutions have told me that the Bill should ensure that the FSA takes account of the concerns of all market users. There is a sense that historically when changes have been proposed to the rules of exchanges, consultation was predominantly with the sell side—that is, market participants such as major investment banks, who raise capital on behalf of their clients, acting as sponsors of new issues of shares. It is clearly in their interests for the market to be efficient.

However, no market is one-sided. Investment banks need fund managers and other investors to buy shares; they too have an interest in the operation of markets and their views should be considered as well. For example, an exchange might propose a rule change that would make the raising of capital easier but lessen the protection afforded to investors. Unless the consultation process included the buy side as well as the sell side, there would be a risk that the voice of the buy side would go unheeded, leading to loss of confidence in the market and an absence of buyers. That goes back to the point raised by the hon. Member for Wolverhampton, South-West (Rob Marris) in the previous debate. This is not about low regulation but about getting the regulatory balance right between the buy side and the sell side and ensuring that the regulation not only makes it easy to raise capital but gives investors confidence in the market. One way to do that would be to ensure that when rule changes are consulted upon, all participants in the market are consulted, not only the sell side.

Stewart Hosie: I agree with the hon. Gentleman’s intentions. However, let me give an analogy with the planning system, where there is no third-party right to appeal and it is limited to those directly involved. Is not there a danger that his amendment could be interpreted as seeking to limit those who may make representations instead of widening the process as much as possible?

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