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28 Nov 2006 : Column 1041

Ed Balls: In any matter where consultation is required it is important to ensure that everybody is properly consulted, and that is what we have done with the Bill. I know from my experience of going through the process involved in the markets in financial instruments directive that it is important to listen to the buy side and the sell side. The fact that the London Investment Banking Association, to give one example of a trade organisation with buy and sell side representatives, has endorsed the Bill suggests that both sides are happy with our general intention. There have tended at times to be differences of view between the exchanges and some of the wider City participants as to whether the role of the FSA should be stronger or weaker in this regard.

It is important to consult widely in a way that makes it clear that all sides are being listened to, and I am sure that that will be the FSA’s intention. It is not for me to set out in detail how it will go about planning those consultations, nor is it necessary for the Bill to specify one particular aspect of the consultation process concerning which persons are affected. That is just one of a wide range of issues that it will need to consider as part of its consultative process. Today’s letter by John Tiner gives full assurance to the exchanges and to the City more widely that the consultation process will be substantial. The Bill would not be enhanced by picking out and adding this aspect, nor would it change things either way. I would suggest that we leave the Bill less cluttered and reject the amendment.

Mr. Hoban: The Minister is right to say that we should have clear, straightforward legislation. However, it was important to use this opportunity to get across on the Floor of the House the importance of full consultation and to try to ensure that when potentially excessive rule changes are made by exchanges there is proper representation of all market users and all those with an interest in the success of exchanges.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Hoban: I beg to move amendment No. 9, in page 4, leave out lines 10 and 11.

Again, the amendment deals with a concern flagged up by people in the City. The Bill carves out from its scope overseas investment exchanges. The following scenario has been suggested to me; I do not know whether it is feasible. A UK exchange could be acquired by a company based outside the EU, and the acquirer could then decide that it wanted to close down the UK exchange and encourage members to transfer their listing to an overseas exchange. As a consequence, the provisions in the Bill would no longer apply and the additional regulatory burdens of, say, Sarbanes-Oxley—it could be any other regulation—would affect companies that hitherto had been listed under the UK investment exchange. I am looking for reassurance that an acquirer of a UK exchange cannot compel companies listed on it to move to a US or other non-EU jurisdiction and thus avoid the provisions of the Bill.

Rob Marris: Will the hon. Gentleman give way?

Mr. Hoban: I was about to sit down, but I will give way in the spirit of consensus that has characterised the debate.

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Rob Marris: I am slightly confused by the hon. Gentleman’s remarks. On Second Reading, he seemed to be against extra-territoriality, but his amendment suggests that he is in favour of it. Could he explain that contradiction, or have I misunderstood him?

Mr. Hoban: The hon. Gentleman is, as ever, sharp in pointing out potential contradictions. I am trying to highlight a concern that has been raised with me, to understand the thinking behind the carve-out, and to ensure that protection remains in place.

Ed Balls: I think that the answer to the hon. Gentleman’s question is no. I hope that that gives him sufficient reassurance. As he knows, there are nine UK recognised bodies and 12 overseas recognised bodies. The latter tend to be involved in business that deals with nothing more than placing a trading scheme. They are regulated in the countries where they are based, but because of the obligation on recognition requirements, they have to provide their users with broadly equivalent protection to that provided by UK recognised bodies. The FSA therefore does not have to judge the regulatory provisions of those overseas recognised bodies. It would not be consistent with our EU obligations to do so.

8 pm

The only way in which the effect of the new provisions could be avoided by using overseas investment exchanges and clearing houses, or other EU-regulated markets, would be by transferring and relocating the business of a UK investment exchange to such a body. That would at best be very difficult to do, and a lot of business would be lost. I hope that that gives the hon. Gentleman some comfort. That was probably the long way of answering his question. The short answer is no.

Mr. Hoban: I am always grateful for a longer answer from the Economic Secretary. Now, when people raise this question with me, I shall be able to give them a more informative answer, rather than simply saying no. With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Rob Marris: I want to make a few brief remarks, first on the deemed refusal periods in proposed new sections 300C and 300D, in lines 8 and 28 on page 3 of the Bill. The hon. Member for Dundee, East (Stewart Hosie) referred earlier to planning law, and I am sure that hon. Members will be familiar with the concept of deemed refusal in planning law. In England and Wales, although I am not sure about Scotland, if the local authority does not make a decision within five weeks—it used to be six weeks—it is deemed to be a refusal. There are similar duties on the FSA in the Bill, and I congratulate the Government on putting them in to try to speed up the process of getting agreement to rule changes so that it is not burdensome for business.

I want, however, to take up a point made earlier by my hon. Friend the Financial Secretary regarding the explanatory notes to the Bill. He was helpfully trying to
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clarify the intervention that I had made on my hon. Friend the Economic Secretary about the missing link in the middle of the process. This relates to what I call the representation period, in contradistinction to the consultation period. The consultation period is what the regulatory body will have; the representation period will be set by the FSA, and is set out in lines 19 and 20 on page 3 of the Bill.

The reason I am raising this matter is that the explanatory notes do not say—because the Bill does not say—how long the representation period should be. Note 14 on page 4 of the explanatory states:

But it does not specify the number of days. My understanding is that the Bill could be amended in the Lords and I would urge my hon. Friends the Ministers to consider introducing an amendment to line 20 on page 3 of the Bill, so that proposed new section 300D(2)(c), which now reads

would continue with the words “which period shall not exceed 60 days”. Similarly, in line 21, proposed new section 300D(3) reads:

and I believe that it should then say something like “by no more than 28 days”.

I appreciate that different proposals will have different gravity, and that the FSA might need longer for some than others, but proposed new section 300D(3) already contains the provision to extend what I call the representation period. So the Bill contains a representation period, with an unspecified number of days, and the ability to extend that period, again by an unspecified number of days. Yet in line 39 on page 2 of the Bill, proposed new section 300C(2)(a) defines the initial period as one of 30 days. So the Government are clearly not averse to putting a numerical or diurnal value on that period, but that is not the case for this middle bit, the representation period.

I would like reassurance from the Minister either that a specified period will be put into the Bill or that clear guidance will be given to the FSA on this matter. Otherwise, the FSA could decide to take six months, and a change in rules that a regulatory body deemed necessary—it would not go through all this rigmarole if it did not deem it necessary—could get held up for rather a long time. The FSA might say, “We do not have the resources to deal with this”, or “We do not think it is that important, so we will set a long representation period.” Conversely, if the regulatory body wished to make an extremely important change as a matter of urgency, the FSA might say, “This is a very important change, so we must have a long representation period in the middle, because we need to consult so many people and do so much work on it.” I urge the Minister to have another look at that missing link in the middle, the representation period, and I hope that amendments can be tabled in another place to specify the number of days. Alternatively, I would like reassurance that strong guidance will be issued to the FSA on that point.

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Ed Balls: My hon. Friend has made a most interesting point and admission. During the passage of the Finance Bill, many people believed that its explanatory notes had been written by him, so for him to point out a drafting error made by others is novel.

We have specified a 30-day period, which will apply from the notification by an authority that it is making a rule change, which will allow the FSA to consider that rule change. If the FSA made no judgment during the 30 days, the rule change would go through by default. However, proposed new section 300D(2)(c) deals with what we believe will be the unusual circumstances in which the FSA calls in a regulation and considers disallowing it. We expect such cases to be the exception rather than the norm. We mentioned earlier, in reference to the Sarbanes Oxley case, the importance of not repeating the same mistakes by rushing in too fast. My guess is that the markets and the exchanges might consider it an advantage that the FSA has the discretion to choose the period over which it consults, so that it does not make a wrong decision.

If we feared that the FSA was likely to take a disproportionate, heavy-handed or costly approach to the implementation of this power, we might have reasons to be concerned. But, as John Tiner’s letter makes clear, the FSA will use the power only if it is justified as being proportionate, if the benefits exceed the costs, and only after consultation. The letter also says:

in the Bill. I do not believe that there is a need for the House to fetter the discretion of the FSA in this matter by arbitrarily curtailing the length of consultation that it might want to take, given that there might be circumstances in which it would want to take more time. We know that it would be motivated by a desire to be proportionate and to ensure that no unnecessary costs would be incurred.

Rob Marris: My hon. Friend talks about fettering the FSA’s discretion, and I understand that point. However, its discretion is fettered in the initial period, because the Bill specifies a period of 30 days on two, if not three, occasions.

Ed Balls: My hon. Friend is absolutely right. This will all become much clearer when the FSA consults on the rules that will apply in this area, the provision for which is made in the Bill. We want to make it clear to the exchanges that, in the majority of cases relating to rule changes, even if a rule requires consultation under the FSA’s rules that consultation will normally happen in a speedy manner. There might, however, be exceptional circumstances in which the FSA calls in a rule and wants to ensure that its judgment is right. In those circumstances, it is not necessary to fetter its discretion. There is a principled reason for specifying 30 days in one part of the Bill but not to fetter its discretion on such a rare occasion.

My advice to my hon. Friend and the House of Lords is to think carefully about whether we need to impose extra regulatory burdens on the FSA in such a
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way. We should trust the good intentions of the FSA as set out in John Tiner’s letter, and allow it, in exceptional circumstances, to take the time that it needs to make the right judgment. On that basis, I commend the clause to the House.

Question put and agreed to.

Clause 2 ordered to stand part of the Bill.

Clauses 3 and 4 ordered to stand part of the Bill.

Clause 5

Short title and commencement

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

Rob Marris: This matter has been adverted to earlier, and I wonder whether my hon. Friend the Economic Secretary can provide further clarification on clause 5(2), which relates to the coming into force of the Act. Rules are to be made under the Act, and I am not quite sure of the timetable. Will he comment a little on that provision, which is slightly unusual although not unknown in parliamentary drafting?

Ed Balls: I am grateful to my hon. Friend for the opportunity to make the provision clear. The clause provides for the legislation to come into force on the day after Royal Assent. As I said on Second Reading, that means that the new obligations will apply to regulatory provision proposed but not made before commencement, as well as to new regulatory provisions proposed after commencement. By providing for commencement and the powers coming into force in that way, we prevent any problems about a rule change proposed in the gap between Royal Assent and commencement. More generally, a waiver power is provided for 12 months. Through a discretionary act, the FSA can waive, where it judges appropriate, the right to call in certain kinds of rule changes while it goes through the more onerous statutory consultation processes necessary to draw up its rule-making power under the Financial Services and Markets Act 2000. That allows us to move speedily and to have a proper consultative process for the rule book. I hope that I have made the position clear.

Question put and agreed to.

Clause 5 ordered to stand part of the Bill.

Bill reported, without amendment.

Order for Third Reading read.

8.14 pm

Ed Balls: I beg to move, That the Bill be now read the Third time.

Let me start by thanking you, Madam Deputy Speaker, and hon. Members on both sides of the House for the detailed and substantive debate that we have had on all stages of the Bill this afternoon. We have addressed many of the concerns understandably expressed by some parts of the City on the detail, and have shown that we have thought through the clauses. Our wide-ranging debate has established—I said at the
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beginning that I hoped it would—that there is a consensus about how the national interest should apply in this case.

First, the national interest is to preserve the global and open approach to ownership in the City of London, which has been the hallmark of the City not just for the past 10 years but since the big bang and before. We have all agreed that the right position for Britain, from the point of view of investment, jobs and the long-term future of the City, is to welcome foreign ownership and investment from around the world, including into our exchanges, and not to try to establish protectionist barriers.

Secondly, the principle has been established that it is right and legitimate for Government to intervene to protect our principles-based and proportionate regulatory regime. We are intervening not to regulate, but to ensure that we prevent excessive regulation being imported into the UK, and not to make sure that we have a protectionist or narrow view of the City’s future but to make sure that the global, outward-looking City can continue to prosper in future.

Mr. Gauke: On Second Reading, I raised the issue of democratic accountability, which, as far as I have heard, has not been picked up. An important and sensitive decision would be made by the FSA without any accountability to the House or, indirectly, to a Minister, who would be accountable to the House. Will the Economic Secretary give his views on that point?

Ed Balls: I am grateful to the hon. Gentleman for that intervention. This Bill amends the Financial Services and Markets Act 2000. It enshrines a principle-based and risk-based approach to regulation. It gives the FSA considerable discretion and independence, within an overall framework set in legislation and agreed by the House, for which Ministers of the Treasury are responsible to the House. All the protections and safeguards put into the Financial Services and Markets Bill, when it was debated extensively in Committee and in the House some years ago, apply equally to this set of what are essentially additions to the Financial Services and Markets Act 2000. To the extent that there was a concern, that would be about the wider financial services and markets approach. The principles-based approach pursued by the FSA has been not only successful but judged to be open and transparent. In terms of proper scrutiny of its decisions, we got the balance right in the original Financial Services and Markets Bill.

One view of the City of London’s success is, I believe, rather pessimistic. According to that pessimistic view, London is succeeding because of others’ failures, and because some of our European partners have taken too restrictive an approach to financial services in their markets. Similarly, it is argued that London’s recent success is not because of our strengths but because of errors made in the US in particular in relation to corporate governance standards and Sarbanes-Oxley. That pessimistic view moves on to the conclusion that, if the European single market gets completed because we win the argument for reform in Europe, London’s standing will somehow be undermined, or that if the US acts to reform the Sarbanes-Oxley or wider regime, that will take away our competitive edge.

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