Written evidence submitted by the London
Stock Exchange
INTRODUCTION
We welcome the opportunity to respond to the
Treasury Select Committee's inquiry into financial regulation.
The regulatory framework is vitally important to our ability to
finance the real economy in the UK, in maintaining investor confidence
and attracting international business to the UK.
The London Stock Exchange is home to over 2,000
UK companies that have a combined value of over £1,750 billion.
The Exchange is an essential provider of non-bank finance to UK
companies and the access to equity finance provided by its markets
has been a major economic stabiliser for UK companies during the
crisis. £161 billion has been raised by UK businesses, both
large and small, through the Exchange since the run on Northern
Rock which compares to the £200 billion pumped into the economy
through the Bank of England's Quantitative Easing scheme.
The London Stock Exchange also plays a key role
in attracting international companies to the UK. Currently over
600 international companies from 70 countries with a combined
market capitalisation of £1,825 billion[23]
are listed on our markets underlining the international scale
and global importance of London's financial markets.
EXECUTIVE SUMMARY
In response to the inquiry our key points are:
— We support a true "twin peaks"
regulatory model. The London Stock Exchange Group (LSEG) supports
the creation of a twin peaks regulatory structure in which the
regulation of conduct of business and macro-prudential activity
are separated into two separate bodies. However, it is essential
for continued financial stability that a strong markets division
is created within the CPMA in order to ensure the proper and orderly
regulation of the UK's capital markets.
— The CPMA retail and wholesale responsibilities
must be operationally distinct and run by separate CEO's who report
into an overarching Chairman. This will ensure appropriate regulation
for each division of the CPMA and that each is run by a specialist
champion. A strong and cohesive markets division within the CPMA
will need to maintain a strong link between the primary market
(where companies raise capital) and subsequently where shares
in companies are traded (in the secondary market). This is necessary
to maintain investor protection, ensure effective real time market
supervision, tackle market abuse and execute enforcement activities.
— To ensure effective regulation, the UKLA
must be part of the CPMA markets division. Our strong view is
that CPMA markets division, as the main UK securities regulator,
would be the appropriate place for the UK Listing Authority (UKLA).
The proposed merger of the UKLA and Financial Reporting Council
(FRC) offers little by way of synergies and would serve to fragment
the regulation and supervision of primary and secondary markets,
to the detriment of investors and issuers. The regulation of the
UK's capital markets requires experience on a global scale and
sophisticated real-time monitoring and response capabilities to
ensure preservation of the market quality for issuers and investors.
Only the CPMA markets division can provide this.
— Aligning the UK regulatory structure
with the EU regulatory supervisors is vital to the UK maintaining
a strong and credible voice in Europe. We welcome the consultation
document statement that the CPMA markets division will have the
UK seat at the new European Securities and Markets Authority (ESMA).
This body will have rule making powers and be able to direct national
regulators. It is therefore vital that the UK vote at ESMA speaks
with authority and fights the UK's corner effectively. The removal
of the UKLA from the CPMA markets division means that the UK will
only be directly represented at European level on secondary markets
issues. Primary market regulation has historically been a source
of competitive advantage to the UK and we would not want to see
this eroded in the name of European harmonisation. The UK market
accounts for 60 to 80% of EU securities trading, yet we only have
8% of the vote at ESMA. Therefore it is vital that we are represented
by technical experts with a detailed understanding of the UK's
capital markets.
— It is important that UK financial regulators
have regard to the international competitiveness of UK financial
services. It is clear that the UK's capital markets were not a
cause of the financial crisis, but were a key economic stabiliser.
London's ability to attract international companies is also a
key factor in its status as a global financial centre. In the
wider context, the importance of the financial services sector
to the Exchequer cannot be underestimated, this is a broader sector
than only banking related activities. PwC have estimated that
in financial year 2009, financial services companies contributed
in excess of 10% of Treasury tax revenues.[24]
It is therefore critical that the ability of financial services
to fund the real economy and attract international business to
the UK is a consideration of the UK regulators.
— Exchanges must maintain their current
regulatory regime as market infrastructure providers: The consultation
asks whether exchanges should be regulated like Authorised firms
eg investment banks. There are significant differences between
exchanges and authorised firms which must be appreciated and justify
a different regulatory treatment under the Recognised Body (RBs)
regime. The reputational impact of removing this status will seriously
undermine the RB's ability to market London as a key destination
for global capital.
1. ENSURING A
"TRUE" TWIN
PEAKS MODEL
WHICH INCLUDES
THE UKLA
1.1 We agree with HMT that the tripartite
system contained a number of inherent weaknesses and contradictions
that led to no one body possessing the responsibility, authority
or powers to monitor the system as a whole.[25]
We therefore support the move to a "twin-peaks" model
of regulation, whereby macro-prudential regulation is carried
out by the Bank of England and conduct of business regulation
by the CPMA. It is critical however that this is a true twin peaks
model whereby the CPMA and the PRA possess full powers and authority
to conduct regulatory activities for the areas under their remit.
Therefore we do not support a model which would split the UKLA
from the CPMA because it would separate the regulation of primary
and secondary markets in the UK and:
— It is inconsistent with current Government
aims. Placing the UKLA, the UK's primary market regulator, outside
the CPMA markets division (which will be the UK's main securities
regulator) would be inconsistent with the Government's drive for
a true "twin peaks" model to avoid the problems that
arose within the current tripartite system.
— Need for focus on enforcement and implementation.
The majority of the UKLA's functions involve real-time monitoring
and response, and implementation and enforcement which are critical
to market quality but are not the primary functions of the policy
development focused Financial Reporting Council (FRC). Of the
20,000 securities admitted to the Official List, only 6% represent
equity securities issued by UK companies, 74% are UK and international
corporate bonds and sovereign debt (gilts). The remainder includes
structured products, debentures (which can also be counted as
debt), warrants and preference shares.
The FRC is not a real time regulator: it reviews
accounts of issuers once listed, so after the event. Furthermore,
its focus is on the companies themselves as corporate bodies,
rather than the broader range of securities that can be issued.
Overlap with CPMA market supervision functions.
There is significant overlap with CPMA wholesale market supervision
functions which will deliver real synergies and more effective
application of regulation and enforcement in the interests of
market participants.
— The need for a commercially-orientated
UKLA. To ensure we preserve the attractiveness of London as a
capital raising centre and to facilitate capital raising by companies,
it is critical to have a quick and efficient listing and capital
raising process in the UK. £161 billion was raised by UK
companies, large and small, through our markets during the crisis
as investors supported businesses during the downturn. This requires
a commercially-oriented UKLA, which is up to speed on the latest
market practices, developments and integrated into the wider regulation
of markets.
— The need for a strong voice in Brussels.
The UK will only have one voting member at ESMA, which will be
the CPMA markets division. Given the extensive impact the EU regulatory
agenda is having on the UK's financial services sector, the need
for a strong voice in Brussels has become imperative. It is vital
that the CPMA markets division has the authority and weight to
represent the interests of London's capital markets in total including
primary and secondary markets policy. It is our view that removing
responsibility for primary market policy (with the UK listing
function being the regulatory function that implements primary
markets policy) from CPMA will fundamentally undermine the strength
of our voice in this area. Some 60-80% of Europe's trading occurs
in the UK, yet we only have 8% of the vote at ESMA; the CPMA must
speak with authority and technical expertise. Historically this
has been the key to the FSA's ability to fight the UK's corner
in Europe—our representatives have understood the full technical
detail from both the secondary and primary markets perspective
of the policies under discussion.
— Maintaining London's ability to compete
internationally. Our ability to strengthen and improve the standards
for listing in London, as set by the European Directives for Prospectus,
Transparency and Market Abuse, is key to London's ability to compete
internationally. For example, London's premium listing standard
is vital to attracting international issuers such as the recent
ESSAR Energy listing from India. It is important that this standard
is preserved and that London's ability to preserve its unique
listing rules is maintained at ESMA, and not eroded in the name
of European harmonisation.
2. WORKING TOGETHER—THE
PRA AND CPMA
2.1 The PRA and the CPMA must be two distinct
bodies; the PRA should not be the lead authority over the CPMA.
2.2 Within the CPMA equal emphasis must
be placed on Markets and Consumer Protection; recognising the
importance of regulation of wholesale capital markets to the UK
economy and the key input of EU regulation in both conduct and
market regulation.
2.3 The boards of both the PRA and the CPMA
should have a strong and independent voice, composed of Non-Executive
Directors who have a clear understanding and extensive experience
of wholesale markets, conduct of business and macro-prudential
factors.
2.4 It is essential that the PRA and CPMA
are sufficiently cohesive and flexible and therefore capable of
reacting rapidly and decisively to developments in the markets
and the wider economy. This will be important for continued financial
stability and ensuring that equity markets remain open as sources
of capital in times of extreme market stress.
2.5 There should be clear accountability
for the FPC, PRA and the CPMA.
(a) There needs to be clear Parliamentary oversight.
(b) LSEG welcomes the notion of regular TSC hearings
on FPC meetings.[26]
(c) The PRA and the CPMA should be subject to
similar levels of oversight, as suggested in paragraphs 3.40 and
4.39.
3. ALIGNING THE
UK REGULATORY STRUCTURE
WITH EUROPEAN
REGULATORY SUPERVISORS
3.1 Both the PRA and the CPMA will represent
the UK's interests in Europe. Particularly, the CPMA will represent
the UK at ESMA, which will be based in Paris and the PRA on the
EBA.
3.2 The UK represents 60-80% of EU securities
trading, but only has 8% of the vote at ESMA. It is therefore
essential that the CPMA speaks with authority and technical expertise.
Our representative must understand the full detail and impact
of policy proposals to find London's corner effectively—the
devil is always in the detail. To achieve this, a strong and cohesive
Market Division within the CPMA will be essential.
(i) This is because the laws under which companies
raise money and operate on UK markets are set by the EU. It is
only by influencing the process of the rules being made now, at
ESMA, that you can achieve the right outcome for UK companies
and investors
(ii) For example, UK market rules are set by
EU Directives and regulation such as the Markets in Financial
Instruments Directive (MiFID), European Markets Infrastructure
Rules, Prospectus, Transparency and Markets Abuse Directives
(iii) Therefore, all future developments will
be set at EU level and the UK has to have a strong and fully informed
markets voice in Brussels to influence these rules
(iv) This necessitates a clear joined up approach
to primary and secondary market regulation, with the UKLA remaining
within the CPMA. This will ensure that the CPMA retains the experience,
technical knowledge and proximity to markets that are essential
to wield influence in Paris and Brussels. It is these factors
which, in our opinion, have acted as an enabler for the FSA to
be a knowledge leader in Europe.
4. MAINTAINING
THE COMPETITIVENESS
OF THE
FINANCIAL SERVICES
SECTOR FOR
ISSUERS AND
INVESTORS
4.1 The committee and HMT consultation questions
whether the PRA and CPMA should have regard to the international
competitiveness of UK financial services. It is clear that the
UK's capital markets were not a cause of the financial crisis,
but were a key economic stabiliser. London's ability to attract
international companies is also a key factor in our status as
a global financial centre. It is therefore critical that the ability
of financial services to fund the real economy and attract international
business to the UK is a consideration of the UK regulators, to
ensure that we do not have a UK example of the American Sarbanes
Oxley law that drove business away from the US.
4.2 The London Stock Exchange is home to
over 2,000 UK companies that have a combined value of over £1.75
trillion. The Exchange is an essential provider of non-bank finance
to UK companies.
— During the crisis, the London Stock Exchange
remained a robust and stable source of finance for UK companies,
both large and small as bank lending channels all but dried up,
and the off-exchange derivatives markets proved hugely illiquid,
devastating companies' balance sheets.
— £161 billion has been raised by
UK companies since the run on Northern Rock, which compares to
the £200 billion pumped into the economy through the Bank
of England's Quantitative Easing scheme.
4.3 We are very proud of our role in financing
UK SMEs, and believe that innovative, high technology smaller
companies will deliver the long term economic growth required
for a sustainable recovery.
— Our stock market for smaller companies
(AIM) has raised £70 billion for high growth companies since
its 1995 launch. UK based companies on the market employ in excess
of 250,000 people. A further 320,000 jobs are supported indirectly
by these entities. Around £12 billion is contributed to GDP,
with a further £9.4 billion supplied through Gross Value
Added (GVA). The importance of AIM to the exchequer can not be
underestimated; in 2009 AIM companies contributed £1.8 billion
in tax revenues.[27]
— AIM is a regionally diverse, UK wide
market, with 57% of UK AIM companies based outside of London.
4.4 The world's capital market.
— In 2009, London accounted for 16% of
global further issues by money raised and around a fifth of global
foreign equity trading.[28]
There are currently 600 international companies from 70 countries
with a combined market capitalisation of £1,825 billion[29]
underlining the international scale and importance of London's
financial markets.
— A successful primary market is critical
to ensuring London remains a central destination to international.
— Over $1.6 trillion of equities are managed
out of London, with $888 billion invested in international equity
assets, more than any other major financial centre (including
New York at $804 billion and Paris at $202 billion).[30]
4.5 The regulatory framework is vitally
important to our ability to carry out successfully the above functions,
generating finance to support the real economy. It is therefore
essential that our regulators have regard to the impact of their
actions on this role and on maintaining investor confidence and
attracting international business to the UK.
5. RECOGNISING
THE SPECIAL
FUNCTIONS OF
REGULATED BODIES
IE EXCHANGES
5.1 The HMT consultation asks whether the
different regulatory regimes under which banks and recognised
bodies such as stock exchanges operate should be combined into
a single regime. We believe this is not appropriate for the following
reasons:
— Exchange's fulfil important regulatory
responsibilities as neutral market operators delivering major
benefits to the real economy—stock exchanges provide critical
access to capital for issuers from the UK and abroad. In doing
so they play a key role in attracting international issuers and
investors to the UK. There are currently 600 international companies
on our markets from 70 countries with a total value of £1,861
billion;
— Creating a single regime will reduce
regulatory standards to the lowest common denominator—London's
reputation for high standards of regulation has been critical
in attracting issuers and investors. The threat to these standards
posed by a single regime will severely undermine London's competitive
advantage;
— The reputational impact of removing exchange
status will severely damage the Exchange's ability to market London
and the UK as a major destination for global capital—this
will have severe consequences for London as a financial centre:
we estimate that every £1 of IPO fees collected by the Exchange
is worth close to £1,000 in revenue to the wider financial
sector. The financial sector supports over 300,000 jobs in the
City alone and is estimated to contribute in excess of 10% of
total tax revenues to the Exchequer;
— The separate regimes for RB's and banks
are specifically designed to reflect the different risk profiles
and functions of these bodie—the majority of authorised
firms ie banks take balance sheet risk through dealing either
for themselves or on behalf of customers. In contrast, the primary
risk associated with infrastructure providers such as exchanges
is IT failure;
— Combining the two regimes would not remove
the need for a special regime—it would not achieve any meaningful
"reduction" in regulations since any regulations would
still need to deal with the particular functions carried out only
by RB's (including SME funding, default management, market surveillance
and intervention and disciplinary action).
22 September 2010
(http://217.154.230.218/NR/rdonlyres/F825E02D-B7CD-4AA8-8467-3B8A7999F9DF/0/TTCreport.pdf,
para 3.2).
(http://www.thecityuk.com/media/154873/ifm%20in%20the%20uk%2005%202010.pdf).
23 London Stock Exchange Group data, August 2010. These
are companies that either listed on the LSEG's International Main
Market or admitted to AIM. Back
24
"Total Tax Contribution"-PricewaterhouseCoopers LLP
second study of the UK Financial Services Sector for the City
of London Corporation-December 2009. Back
25
Para 1.5 of the HMT consultation "A new approach to financial
regulation". Back
26
Para 2.60. Back
27
"Economic Impact of AIM and the Role of Fiscal Incentives"
(Grant Thornton and London Stock Exchange). Back
28
International Financial Markets in the UK-May 2010 Back
29
London Stock Exchange Group data, August 2010. These are companies
that either listed on the LSEG's International Main Market or
admitted to AIM. Back
30
Ipreo, June 2010. Back
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