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I beg to move, That the Bill be now read a Second Time.
I start by expressing my gratitude for the close co-operation that we have enjoyed in preparing today's Bill—from the shadow Minister, Mr. Hoban, from Dr. Cable, from their spokesperson colleagues in the other place, and from other interested stakeholders across the City of London, particularly the recognised exchanges themselves, with whom we have been able to discuss the Bill in recent weeks. I hope that we can demonstrate today to the outside world that—perhaps unusually for this place—we have been able to reach a consensus in the national interest on the way forward on this important issue: both inside this House with Opposition Members, and outside it among practitioners in the City. I am also grateful for Members' co-operation in allowing us to move the Bill quickly through its Commons stages and detailed scrutiny this afternoon, in what are unusual circumstances.
As Opposition and other Members will know, the Bill fulfils the commitment that I gave in a written statement to the House on
Why do we need a guillotine? This is about the first piece of Labour legislation that some of us actually want. It is sensible and there is agreement in all parts of the House—why can we not have an open debate, given that we want to get it through as much as the Minister does?
I am grateful to the right hon. Gentleman for his intervention; hopefully, he will make a more substantive contribution in due course. I expect that there will be plenty of time in this debate for various points to be made by Members in all parts of the House. I very much look forward to the right hon. Gentleman's contribution; I hope that it will be as revealing and interesting as yesterday's was.
My statement of
Before I turn to the Bill's detail, I want to set out the wider context. London today is widely seen as one of only two truly global financial centres in the world. It is the location for 70 per cent. of the global secondary bond market, for more than 40 per cent. of global derivatives, and for more than 40 per cent. of cross-border equities trading. London today has more foreign banks than any other financial centre, and it is the location for the headquarters of six of the world's 10 largest international law firms. Based on its global reach and its reputation for free, fair and open global markets, London has in recent years been attracting business and listings from around the world. We are determined to keep it that way.
I believe that international businesses have located in the City because of four great strengths: our commitment to the rule of law and the highest professional standards; the skills and flexibility of the work force and our ability to attract talent from around the world; our long-standing tradition of openness and internationalism—a global approach to competition and ownership that has allowed the City to innovate and to respond to new challenges; and the FSA's highly respected principles-based and risk-based approach to regulation, which has been put in place over the past decade. I know that the whole House will join me today in paying tribute to the many men and women from across our country and abroad who work hard in the City and in our other UK financial services to build the City's reputation and to contribute to its strengths.
However, we are not complacent. Back in May, when I first became the Minister responsible for such matters, concerns were expressed to me about the effects of a possible takeover of the London stock exchange by a company based outside the UK, and the threat that that might pose to London's attractiveness as a place for international listing and wider business. Some Members will know that the UK has for some years been open to overseas investment in UK exchanges. The London international financial futures and options exchange, ICE Futures and virt-x are all owned by overseas companies. Such overseas interest in UK exchanges in part reflects our principles-based approach to regulation, which has been flexible enough to accommodate the desire of exchanges to innovate in recent years, but rigorous enough to ensure the probity and integrity of our markets.
However, following NASDAQ's interest in acquiring the LSE, I have discussed the implications of such a change in ownership widely in recent months, including with all the interested parties. I have made two points absolutely clear. First, the Government are neutral with respect to the nationality of the ownership of the LSE. It has been put to me that the right approach is Government intervention to protect the LSE from foreign ownership. I reject that argument. Such intervention would fly in the face of the traditions that have underpinned the City's success over the past 20 years. A policy of protecting "national champions" would damage, not bolster, the interests of London and the UK. So the Government do not have and will not express any views about the commercial merits of the proposed NASDAQ takeover. It is for the current owners of the shares to decide whether to accept or reject the offer. But secondly, our interest in the ownership of the LSE is that it should not affect the existing regulatory regime under which the exchange and its members and issuers operate. We are determined to act to protect our domestic regulatory environment, founded in both UK law and EC directives, that has made the City a magnet for international business. If a company operates in London, it should be regulated in London.
Following those discussions, in which a range of possible approaches were put to the Government, we concluded that the only way to provide the assurance to London and the UK was through primary legislation, by making changes to part 18 of the Financial Services and Markets Act 2000, which provides for the recognition of investment exchanges and clearing houses.
Let me turn to the detail of the Bill. The provisions will confer a new and specific power on the Financial Services Authority to veto rule changes proposed by UK- recognised investment exchanges and clearing houses that would have an excessive regulatory impact. By excessive we mean that the proposed rules would impose a regulatory burden on a user of the exchange or clearing house, or the wider community, that could not be justified by any regulatory benefits, or whose effect on those users or the wider community would be disproportionate—and obviously that would not include anything already required by UK or EU law.
The new powers will not put the existing provisions for regulation of the investment exchanges and clearing houses into question. They will apply only to future changes. But they will apply to all UK-recognised investment exchanges and clearing houses from the outset, not just after there has been a change of control. They will apply to all recognised exchanges and clearing houses, not just those that are in foreign hands.
The Bill also provides for necessary processes and safeguards. The exchanges and clearing houses will be required to notify proposed changes to their rules and other regulatory provision—by which I mean any guidance, policy, practice or arrangement made by an exchange or clearing house—to the FSA. The FSA will have up to 30 days to decide whether to call in a proposal for further examination. If it calls in the proposal, the FSA will have to set a period in which it will consult publicly about the proposed rule change. The FSA will then have a further 30 days after that consultation period has ended to decide whether to veto the proposed rule change.
Of course there is. In this area, as in others under the Financial Services and Markets Act 2000, the appropriate course would be to apply for judicial review of the FSA's decision. Given that that would probably be an exceptional event, an application for judicial review would be the best approach.
May I suggest a different set of circumstances. Let us say that the FSA decides to intervene in a change proposed by the LSE, and it decides to apply for judicial review of that decision. The FSA's regulatory objectives include the protection of consumers, but do not include the desirability of maintaining the competitive position of the UK—it merely has to have regard to that. The FSA could be vulnerable to having its decision overturned on those grounds.
I am sure that we will deal with such matters in detail in Committee. Clause 1 writes into the Financial Services and Markets Act 2000 the power to block any regulatory decision by an exchange judged to be excessive and disproportionate and going beyond what is required for the proper functioning of that exchange. The Bill gives the FSA the power to block changes that would damage both its ability to regulate properly and proportionately and the competitiveness of the City of London. We have looked at the matter in detail, and we have judged that there is no need to include that clear intention in the Bill. Any attempt to do so would have given the impression that we were trying to narrow the FSA's powers unnecessarily.
As I have said, we believe that the problem that Mr. Gauke described will not arise, but it is important that any decision by the FSA is open to scrutiny. An exchange or clearing house will not be able to introduce the proposed change in regulatory provision until the initial 30-day period has expired without the FSA calling in the proposal, or until the FSA has confirmed that it will not be calling the proposal in, or until the FSA has stated that it will not be vetoing the proposal, or until the further 30-day period has expired without the FSA issuing a veto. If the FSA does then act, it will be open to the exchange to appeal to judicial review, as I have just made clear.
In drawing up these clauses, we have been anxious to ensure that the procedures are not burdensome and disruptive for the investment exchanges and clearing houses. We have consulted all the main exchanges, and the trade association. We are aware of the concern that any unnecessary regulation could stifle innovation and impose extra costs for both the exchanges and the FSA. The exchanges and clearing houses have put to us their concerns that the procedures, if applied in a heavy-handed way, could damage their competitive position by reducing their flexibility to make and change their rules.
We are determined that the new processes will not impose an unnecessary burden. The new power has always been intended to be a backstop; it was never intended to be a day-to-day supervisory tool for the FSA. We believe that the vast majority of changes to the exchanges' regulatory provisions and rules will not raise the sort of concern that the new power is intended to address. The fact is that many rule changes are routine and do not need to be subject to the type of scrutiny and processes that I have just outlined. The FSA will not be micro-managing the rule books of the exchanges and clearing houses.
To make that clear, and following detailed consultation with the exchanges and the FSA, the Bill gives a power to the FSA to specify in its rules which types of change to regulatory provision need to be notified and which do not. That approach is consistent with the wider approach adopted in the Financial Services and Markets Act 2000, where more detailed working out is left to secondary legislation—that is, Treasury regulations or FSA rules.
The exchanges accept that it will take time for the FSA to plan, discuss, devise and draft rules, to consult on those draft rules as it is required to, and then enact them.
Proposed new subsection 300D(2)(c), at lines 19 and 20 on page 3 of the Bill, makes it clear that the FSA will specify a period in which representations can be made. No amendment is proposed to the provision, but the Bill does not specify a long-stop period in which the FSA must act. It has the initial 30-day period, and the 30 days at the end of the process, but the Bill does not limit the length of time that the FSA can devote to looking into a particular matter. Does my hon. Friend share my concern that matters could go into a sort of limbo as a result, and that the slowness of the FSA might be a burden on business?
My hon. Friend helpfully, as always, raises exactly my point: it is important that the FSA takes the time to plan and discuss the precise details of the rule making, and I am sure that that is the approach it will take. I am keen to discuss my hon. Friend's particular point in detail. However, I am sure that Mr. Deputy Speaker agrees that it will probably be more appropriate to do that in Committee, so I look forward to my hon. Friend making the point again at that stage, if he can fit it into his busy schedule this afternoon, so that we can discuss it further.
It is exactly to make sure that we get such things clarified that the FSA will consult on the rule book. That will take some months, so as we need to act with some urgency, and because it will take considerably more time for the FSA to hold those consultations on the detailed rules than we hope will be available before Royal Assent, the Bill gives the FSA the power in the meantime to grant waivers from the notification obligation to exchanges and clearing houses for the first 12 months after Royal Assent. That will enable the FSA to offer some comfort and flexibility to exchanges while it gets the detail of the rules in place—to respond to the point made by my hon. Friend.
The provisions of the Bill are intended to come into force on the day after Royal Assent, so that once Parliament has decided that the new regime is to have effect, the policy intention of the Bill cannot be undermined by precipitate rule changes between Royal Assent and commencement. I am sure that the House will be pleased to hear that the FSA has already started to work with exchanges and clearing houses on the formulation of the waivers. Indeed, the FSA has written to me today—copies of the letter have been deposited in the Library and passed to Opposition Members—to confirm its intention to use that power only if it is justified as proportionate and if the benefits of doing so exceed the costs, and only after consultation.
I appreciate that the FSA regime is somewhat different from that which applies, for example, in Wall street or Tokyo, but does the Minister have any evidence that in other major international exchanges where similar issues might arise a similar regime has been adopted to try to give protection from disproportionate actions elsewhere?
The hon. Gentleman makes an important observation. The answer is no, not in our experience. I do not think that any other financial centre has such an open and global market for ownership and exchanges, as well as a regulatory regime that its authorities are so keen to protect. There is something particular about not only our open approach, but our regulatory regime, which means that we are keen simultaneously to allow ownership changes if shareholders desire them and to retain that back-stop power.
As I said, in the recent consultations, we considered the type of thing we could do; for example, issues arise in the case of the proposed, or rumoured, New York stock exchange takeover of Euronext, which would have implications for London, owing to Euronext's ownership of LIFFE—the London International Financial Futures and Options Exchange—although regulatory issues do not arise in quite the same way. We looked at the corporate governance changes that were being proposed and discussed with authorities in other European capitals and concluded that those arrangements would not give us sufficient comfort. As we looked around the world, and at past experience, we concluded that as no model would give us comfort, other than taking power directly in law, that was the appropriate thing to do. However, it is my understanding that there is no precedent for what we are proposing.
After the detailed scrutiny of the Bill on which we are about to embark, I hope that Members will conclude that the guiding principles I set out earlier are being fully respected in the legislation. First, the principle that we should be blind to ownership of exchanges is being protected; we are entrenching London's reputation as a global financial centre determined to attract talent and ownership from around the world. Nothing in the legislation has any consequence for the nationality of the ownership of UK exchanges. It will make overseas ownership neither easier nor more difficult and I am confident that any potential foreign investor who wants to come to the UK will not be deterred. We are also upholding the principle that it is right for the Government to act to protect and enhance the UK's proportionate and risk-based regulatory regime.
I believe that the Bill will deliver that objective and can do so without imposing unnecessary regulatory burdens on the exchanges. Yes, we are intervening. However, we are intervening and legislating not to impose regulation, but to avoid excessive regulation being imported into the UK. By outlawing the imposition of any rules that might endanger the proportionate and risk-based regulatory regime that underpins the City's success, I believe that we will help to ensure that London continues to be a magnet for international business and new listings from around the world. The Bill will therefore continue to bring new investment and new jobs to the UK, so I commend it to the House.
First, let me make it clear that we support the Bill. Indeed, there is widespread support for it across the financial services sector and few measures on financial regulation have gained the support of so many interested parties. We have sought to co-operate with the Government to ensure that the Bill receives a swift passage through the House today. We recognise the importance of the timing and want to place on the record our acknowledgement of the spirit of co-operation between the Government and Opposition Front Benchers in a rare outbreak of consensus and working together. It could be said that a similar spirit of consensus was not the hallmark of yesterday's debate.
We welcome the powers given to the Financial Services Authority to veto changes to the rule books of exchanges, particularly where they are seen to be excessive. As the Economic Secretary said, the Bill is before us because of widespread concern that acquisition of the London stock exchange could lead to changes in its rule books that could damage the competitiveness of UK capital markets. If a US exchange were to acquire the London stock exchange, US regulations—especially Sarbanes-Oxley—would be imposed on UK-listed companies.
Does the hon. Gentleman accept that there is concern about regulation not only in London but in the US? Although that concern may not have reached up to Congress, it is actively discussed in New York and in markets throughout the US.
The hon. Gentleman is right about concern in the US, which is widespread. Hank Paulson, the US Treasury Secretary, has made a number of speeches on the theme, so although the issue may not yet have reached Congress, it is certainly important in the higher ranks of the US Treasury. In some of my discussions with UK institutions, I have found that the most vociferous opposition to extraterritoriality has come from some of the US banks, which recognise themselves in discussions of the problems caused by disproportionate regulation.
The Bill deals with one aspect of extraterritoriality in the regulation of financial services. In recent years, there have been other instances of regulators seeking to impose their rules on businesses operating outside their jurisdictions, thus eroding the competitive advantage that one market has by doing things differently and countering any such benefit. The consequence has been to impose additional costs on businesses and try to erode the advantages of the light-touch, principles-based, risk-driven approach, which has been the cornerstone of the success of the UK financial services sector.
I understand where the hon. Gentleman is going, but may I suggest the other side of the coin? Shareholders in a recognised body might be concerned if they could not tighten their own rules to protect the solvency of their organisation because such tightening would fall foul of the legislation. The Bill might deem it excessive, because it would not be required under UK or Community law. Thus, if an organisation wanted to take action internally to protect itself and its shareholders, it might not be allowed to do so.
The hon. Gentleman raises a quite complex point. We need to establish what constitutes the right balance of protection and I believe that the Bill makes important moves in seeking to ensure that we protect one of this country's vital assets: the regulatory environment of the UK financial services sector.
A recent report by the City of London corporation highlighted that the strength of the regulatory environment in the UK was one of the most important success factors in determining the strength of the City. We should also make it clear that such strength comes from getting the level of regulation right too. There is a balance to be struck between over-regulation that imposes additional costs on businesses and under-regulation that damages confidence in the market. Moving one way or the other can harm the financial services sector.
The current strength of the UK capital markets is partly a result of the regulatory arbitrage between the UK and the US, as a consequence of the Sarbanes-Oxley legislation. Reflecting on the point made by Mr. Love, I suspect that the existence of regulatory arbitrage will come under threat as the US wakes up to the consequences of the Sarbanes-Oxley legislation. We cannot rely for ever on the existence of such regulatory arbitrage to promote and allow UK financial markets to grow. We need to ensure in that aspect, as in every other, that we keep the regulatory structure under review, so that we continue to achieve the right balance.
The historical examples may not bear out the point that the hon. Gentleman is making. I agree that it would be sensible for the US authorities to adopt such an approach, but looking back to the Eurobond fiasco of some time ago, the US took so long to wake up that it lost the business.
Indeed, the hon. Gentleman makes a fair point, but I hope that regulators and legislators learn those lessons. Effective light-touch, risk-based and principles-based regulation is in the interests of the sector globally, and the Government need to send that message more strongly to the US Administration and Congress, so that we ensure that the arguments in favour of the UK regulatory regime are put and understood in Washington.
I shall give some examples of how extraterritoriality imposes additional burdens on businesses. Under the Sarbanes-Oxley legislation, the US Public Company Accounting Oversight Board is required to report on foreign auditors with US-listed clients. It has recently exercised those powers by reviewing audits undertaken by Ernst and Young in the UK. Of course, UK auditors are already subject to audit inspection arrangements, so in a sense the additional review by the board imposes an additional cost on UK auditors. In effect, those costs will be borne by their clients in one form or another.
The regulatory overlap that arises from extraterritoriality is a problem, but it is not the only one: the situation has arisen with hedge funds when their management is based in the UK. The Securities and Exchange Commission has sought to regulate hedge funds by reference to the location of the hedge fund investor. The SEC has gone to some lengths to try to draw UK-based hedge fund managers into its remit.
The SEC requires firms with more than 13 clients to register with it, but it has looked beyond simply the number of direct investors to the next layer down. For example, a UK-based hedge fund could have, say, 10 investors—below the SEC limit—but if they each had 10 investors, the SEC would say that the hedge fund had 100 investors and it would be drawn into the net. So there is a continuing push from the SEC to draw more activities based outside the US into its remit, with the consequence of imposing additional regulatory burdens on those funds. Although the Bill tackles an aspect of extraterritoriality, we should be under no illusion that it deals with the issue in its entirety.
Does my hon. Friend agree that, if sensibly interpreted, the Bill is a bit of a first? It provides some kind of deregulatory ratchet, instead of a regulatory ratchet, which we have had so often in so many areas. It cannot just target one possible overseas buyer of the stock exchange and one possible overseas source of extra regulation. It has to target all of that. So as exchanges renew their regulations, there will be a gentle deregulatory pressure, which seems admirable.
I am grateful to my right hon. Friend for making that point. There is a great deal in what he says, because there will be an inherent bias in the Bill to look at how exchanges reviewing their rule books might lead to the introduction of more onerous regulations, affecting the competitiveness of those exchanges. There is a benefit there. It is a slightly curious irony that the Bill makes a small extension of regulation in order to protect the light-touch regulation that we see at the moment and to entrench it still further.
On that point, does the hon. Gentleman agree that, in order to make sure that we keep that deregulatory pressure on all exchanges, there is merit in the provision applying to all new rules and all existing exchanges regulated in London, and not simply to exchanges where there has been a change in governance?
Indeed, although the Minister is in danger of trespassing on the detailed scrutiny of the Bill in Committee. I have tabled a probing amendment to that effect, to elicit from him his thought process. He makes an important point. There is an issue in that the current ownership regime of all exchanges has not created a problem to date. Some may believe that these changes should be triggered only on a change of control. It is important that, in Committee, we flesh that out still further.
Let me turn to the background to the Bill and the importance of the measure. The global nature of international capital markets means that businesses looking to raise money can choose where they go to raise it. Historically, international businesses have looked principally to New York to do so, but, following the introduction of the Sarbanes-Oxley legislation in the aftermath of the WorldCom and Enron scandals, international businesses have found the regulatory burden in the US too onerous and sought to raise capital in the UK. As a consequence, we have seen an increase in the number of initial public offerings in London and the amount of capital raised. It was announced earlier this month that £22.3 billion of funds has been raised on the London stock exchange so far this year, which exceeds the amount raised on other exchanges.
We have seen a significant benefit to the UK from Sarbanes-Oxley and the impact of that regulation, and not just in terms of fees for merchant banks and issuers. There are also the accountancy and legal services. A whole range of people have benefited from the fallout from excessive regulation in the US. A recent study indicated why firms were coming to raise money in the UK. It said that the cost of capital at both the initial public offering stage and afterwards is lower in London than in other major European or US financial centres. The report, commissioned by the City of London corporation and the London stock exchange, found that London markets are cheaper than both the New York stock exchange and NASDAQ with respect to both underwriting fees and other direct IPO costs. Other direct IPO costs, including legal and accounting costs, are lower in London than in the US largely due to the fact that in the US one needs to comply with Sarbanes-Oxley.
It is interesting that, despite the additional costs associated with US listing, the report found no evidence that Sarbanes-Oxley has delivered any significant regulatory benefits not already available under the UK corporate governance regime. That indicates an area where regulation has not improved the protection available to consumers. In the US, those involved are bearing the costs without seeing any great regulatory benefit.
The unpopularity of US markets and the increasing popularity of UK and European markets has led to US exchanges looking abroad to strengthen their business. It led to the New York stock exchange seeking to acquire Euronext and to the NASDAQ bid for the stock exchange. The commercial logic of that is that the US exchanges would like to benefit from the success of effectively regulated markets in the UK and Europe. Indeed, we should be clear in acknowledging that it is not in the economic interest of potential acquirers of UK and European exchanges for the Securities and Exchange Commission to be in a position to exert pressure to enable US regulations to be imported into the UK and Europe. If such regulations were brought in, there would be a risk that IPOs would move from Europe to Asia and other markets, with money thus flowing out of the UK and Europe. That explains why acquirers have an interest in the legislation going ahead in the UK.
In meetings that my hon. Friends and I have had with institutions across the City, it has become clear that businesses are worried that the takeover of the London stock exchange could lead to the City losing its competitive advantage over US capital markets. We need to be clear that the Bill has nothing to do with economic nationalism or the protection of national institutions. It would be wrong for any country to use the Bill to defend its protectionist policies. We have thrived as an economy because we have open markets and enable foreign companies to buy UK assets. Indeed, that has been one of the factors behind the strength of the UK financial services market. The Bill is really answering the question of how we can best protect the regulatory advantage that we have at the moment.
In reply to an intervention made by Mr. Love, I said that US houses had been more vociferous than others about the risk of Sarbanes-Oxley being applied in the UK, but it is not just US houses making such comments. In March, Angela Knight—she was then at the Association of Private Client Investment Managers and Stockbrokers, but is now at the British Bankers Association—said:
"What we need is a copper-bottomed guarantee that whatever framework is put into place we continue to trade and settle here, be governed by British law and be regulated by the FSA ... Otherwise, the SEC believes very strongly in extra-territorial activities, and because NASDAQ and the NYSE are American they will find it difficult to resist".
The Bill will achieve a single goal: to enable the ownership of not just the LSE but other exchanges to change without having a detrimental impact on the competitiveness of UK capital markets.
As the Minister said, the Bill gives the Financial Services Authority the power to veto changes to the rule book not just of the LSE, but of all UK recognised investment exchanges and clearing houses. Those powers are new. At the moment, exchanges in London have the freedom to set their own rules, subject to meeting certain recognition criteria. My hon. Friend Mr. Field asked the Minister whether there is a parallel with that elsewhere. I understand that many other regulators regulate the detail of rule books to a greater extent than the FSA has hitherto been able to do. Enabling the FSA to consider rule changes and the rule books of new exchanges is a significant change for London. Although the measure represents an extension of the FSA's regulatory power, it is an attempt to entrench our present advantage and, as my right hon. Friend Mr. Redwood said, to introduce a deregulatory ratchet.
One of the concerns about the Bill that has been expressed by several people is the extent to which the FSA will seek to look at individual rules. The FSA will need to minimise the additional compliance burden on exchanges without creating the opportunity for exchanges to impose unchecked rules that make UK markets less competitive. I welcome the letter that the Economic Secretary received from John Tiner today about the FSA's recognition of that.
The Bill's regulatory impact assessment reinforces the point about looking at relatively few changes to rules. It gives an upbeat assessment of the impact of the Bill, suggesting that of the estimated 1,000 rule changes a year, there would be only about 25 notifications, of which only one would be called in. On that basis, the RIA suggested that the measure would have a relatively low cost. I suggest that when the FSA considers regulations during the 12-month grace period before it must introduce detailed regulations, it should look at the type of rule changes made in the past, so that it understands what it would call in, because it is important for it to understand what is likely to happen in practice. We should continue to monitor the detailed regulations once they are applied to make sure that we are not calling in too many regulations, and imposing too many costs on exchanges and clearing houses in the UK.
The Bill sets out the framework within which the powers can be exercised. It is carefully worded, and it assumes that any rule required under EU or Community law is not excessive—a point that some in the industry might question, but I leave the matter at that. The Bill does not prevent the exchanges from ignoring excessive regulations that come from Brussels. It sets out the four criteria that should be considered in determining whether requirements are excessive. The first is the effect of existing legal and other requirements. The second is the global character of financial services and markets, and international mobility of activity. The third is the desirability of facilitating innovation, and the fourth is the impact of the proposed provision on market confidence.
The hon. Gentleman raises a point about the context in which the Bill should be considered. Of course, the FSA has other powers relating to consumer protection, which is one of its regulatory objectives. The Bill deals with the regulations that apply to shares traded on exchanges, so I do not think that issues of shareholder protection come within its remit. There are measures in the UK listing rules that cover shareholder protection, too. The Bill is narrowly focused; it is more a rapier-like thrust than a clunking fist when it comes to tackling regulation, and we should keep it like that, rather than use it as a Christmas tree from which to dangle ever more baubles, although I may be in danger of mixing my metaphors.
Perhaps I did not make clear what I sought to tease out from the hon. Gentleman. A body might wish to increase consumer protection or shareholder protection by tightening its rules, but that does not come within the framework of the Bill, so that tightening could well be seen as "excessive" under the definition in the Bill. That is the issue that I wished to raise.
The hon. Gentleman is trying to make an important point. He is trying to find out whether there is any opportunity under the Bill for a Sarbanes-Oxley measure to be introduced, but I hope that it will not enable such a provision to be made. He should remember that although the conditions that I mentioned are in place the FSA seeks to ensure that regulation is proportionate and not excessive in its impact—so there is not leeway, exactly, but a wider context for such considerations.
On whether a requirement is excessive, proposed new section 300A(3) includes a test of whether something is
"required under Community law or...law in the United Kingdom" , and a second test, which is whether the requirement
"is not justified as pursuing a reasonable regulatory objective".
One "reasonable regulatory objective" is the aim of protecting consumers, so I do not take the point made by Rob Marris, as that aim can be pursued under that heading. As long as the requirement is not
"disproportionate to the end to be achieved", it would not be excessive.
My right hon. Friend is quite right. The narrow focus of the Bill and the way in which it has been drafted have received widespread support from the financial services sector and from trade bodies, because they seek to prevent that very thing from happening. If the wording were wider, more permissive and less restrictive, it would not necessarily command consensus, because it would not address the threat that UK financial services institutions attach to the imposition of extra-territorial jurisdiction in that area.
Surely the important factor is that scandals such as those involving Enron and WorldCom have not taken place in the UK, presumably because of the proportionate regulatory environment. When Parliament passes the legislation, it must provide reassurance that sufficient protection is available to prevent similar scandals.
The hon. Gentleman is right that those things did not happen in the UK. We did not suffer from the extensive financial scandals that afflicted US markets, partly because of the strength of UK regulation. A principles-based approach to regulation, with an emphasis on risk, puts in place the right framework to prevent the reoccurrence of those scandals. Too often, financial scandals arise because of a prescriptive, rules-based approach that requires people to tick boxes. We must therefore learn lessons from the American experience, and we must be careful not to repeat the mistakes that were made in the US in the past.
May I turn to the four conditions set out in proposed section 300A? People using the Bill must have a clear understanding of its import, and the purpose of the provision is to maintain the competitive advantage of the UK financial services sector relative to other global markets. We must look carefully in Committee at the language of proposed subsection (4)(b) to make sure that that message is clearly conveyed to people who are interested in regulation in the UK. The hon. Member for Wolverhampton, South-West asked the Minister about the lack of a backstop date in proposed section 300D. I am sure that, after consulting stakeholders, the Financial Services Authority will suggest an appropriate date. However, will the Minister or the Financial Secretary confirm that the FSA believes that the 30-day period in which it may deliberate on the changes is sufficient to consider fully the impact of any rule changes? Returning to the collapse of Enron and WorldCom, how long would it have taken people to discern the long-term damage that Sarbanes-Oxley would have inflicted if it had been introduced in UK capital markets? It is therefore important that we make sure that there is sufficient time for the FSA to consider fully the impact of any rule changes.
In conclusion, Sarbanes-Oxley has provided a great boost for the City, as US markets recognise, which is why, from Hank Paulson downwards, there has been pressure to water down the provision. It should be a warning to the Government and to Governments across Europe that while one piece of legislation can strengthen our competitive position, another can seriously damage it. We must pay great attention to the conditions that make the UK financial services sector a great success. It is not just about regulation—it is about the people and businesses based here, the tax system, infrastructure and many other factors. If the UK is to thrive, we must look at what we can do ourselves to ensure that it remains globally competitive in the financial services sector, rather than relying on others to make mistakes from which we can benefit.
The Bill gives the FSA the power to protect the competitive position of our capital markets, but as the provisions indicate, it cannot protect exchanges and clearing houses from excessive regulations imposed here in Westminster or in Brussels. Although it protects UK capital markets from one aspect of extra-territoriality, it does not protect them from all aspects. We welcome the Bill and hope that it will be effective, but we do not see it as the end of the story when it comes to maintaining the competitiveness of the UK financial services sector.
I am pleased to have the opportunity to speak in the debate. I welcome my hon. Friend the Minister's opening remarks, which confirm that the Bill is intended not to impose additional regulatory burdens on the City, but to protect the light-touch system of regulation that has served the City so well since we set up the Financial Services Authority.
I also welcome my hon. Friend's reaffirmation that the Government recognise that the City's strength lies not just in its sensitive and light-touch approach to regulation, but in its internationalism and receptiveness to outside influences and outside investment. I am pleased to hear confirmation that the Bill is not intended to restrict foreign ownership of our recognised exchanges and clearing houses, that the Government are neutral on the matter and will remain neutral, and that the Bill is intended to safeguard the risk-based, principles-based approach that has made London such an attractive place for international financial institutions to do business, and its exchanges such a magnet for listings from around the world.
Far from imposing a new burden, the Bill will, by giving the FSA what I am sure will be a judiciously exercised power of veto, ensure that excessive, disproportionate or unnecessary regulation is not permitted. I am also pleased to hear the Minister confirm that the Bill is not about micro-managing the exchanges, and that safeguards will be built into it so that the FSA can allow exchanges to make minor changes to their rules without interference.
Many reasons have been advanced for the City's position as one of the world's two most successful financial centres—some would say the most successful. Such factors include the English language, our geographical position between the US and Asian time frames, our skilled work force, and the attractions of London as a place in which to live and do business. But the Bill encapsulates the two main reasons for London's success: its internationalism and its approach to regulation.
Britain has always been ahead of the pack as far as globalisation is concerned. Its financial sector has for 300 years or more been internationally focused and outward looking. Unlike other financial centres that developed primarily to serve their own domestic markets, the City's phenomenal growth has been due to its role in financing world trade, rather than financing our indigenous industries. Indeed, as Professor Anthony Hopkins said, the industrial revolution happened independently of the City of London.
In the past three decades or more, since the collapse of Bretton Woods, London has prospered as a financial centre not just by capitalising on its traditional strengths, but by embracing liberalisation and exploiting the advantage offered it by protectionist or fiscally restrictive regimes in other financial centres. We have spoken a great deal today about Sarbanes-Oxley, but in the 1970s the London Eurobond market flourished because of decisions taken in the USA.
In 1979, the scrapping of exchange controls by the Thatcher Government freed up the flow of capital in and out of the country, removing a key obstacle to globalisation and cementing the City's position as an international hub. Big bang, 20 years ago last month, changed the City for ever, by relaxing the rules preventing foreign ownership of British financial institutions and leading to an influx of overseas investment. Of course, there has always been a foreign element in the City. The names of what we would regard as some of the most traditional City institutions, such as Rothschild's, Warburg's, and Kleinwort Benson, make it clear that they were established by immigrants, and they have now been taken over by yet more foreigners coming in.
With big bang we saw what is commonly dubbed the "Wimbledonisation" of the City—that is, its domination by foreign players. In particular, US banks, prohibited by Glass-Steagall from owning US securities houses, took the opportunity to move into London in force, and provided the City with capital for almost unlimited expansion.
This all means that London is now a truly international financial centre, handling foreign transactions worth £560 billion a day. It is the place where more international mergers and takeovers are arranged than anywhere else, and more cross-border transactions take place than anywhere else. It has the biggest foreign exchange, swaps and international insurance and reinsurance markets in the world. The City has more foreign banks than any other financial centre—264 at the last count. It has almost a third of the daily turnover in the world foreign exchange market. It has over 40 per cent. of the world's OTC derivatives trade, 70 per cent. of the Eurobond market, 40 per cent. of the world's turnover in foreign-listed equities trading, and the fastest-growing share, currently 20 per cent., of global hedge fund assets. It has taken a long time to establish a regulatory system which can cope with that new order. Most people accept that the fragmented, predominantly self-regulatory regime established at the time of big bang was a messy compromise that ended in failure.
If we look back at the 1980s and the early 1990s, we can all recite a litany of City failures and scandals—Johnson Matthey, British and Commonwealth bank; Bank of Credit and Commerce International, Barlowe Clowes, Lloyds of London, Brent Walker, the Guinness affair, the Blue Arrow affair, Roger Levitt, Asil Nadir and Polly Peck, Maxwell and the Mirror Group pension funds, and, of course, Nick Leeson and the ignominious downfall of Barings bank.
At the time of the Barings collapse, I was employed in Abbey National's treasury division. At the time, Abbey National had a derivatives trading joint venture with Barings, which, I suspect, it would not care to remind people about these days—I hasten to add that it had nothing to do with Barings futures trading activities in Singapore. I was called into the Barings head office in London on the Sunday when Barings went under to help to sort out the mess with the Bank of England and the chief executives of the top UK banks. I remember that day well, because it was the day of my constituency Labour party's annual general meeting. I was chair of my constituency at the time and had to give my apologies, which raised more than a few eyebrows among my comrades in Luton, North Labour party, who until then had no idea what I did for a living. I am glad to say that the Labour party has come a long way since then.
Barings management did not know what its traders were up to, the regulators did not know that the management did not know what the traders were up to, and the Government certainly did not know that the regulators did not know that the management did not know what its traders were up to. The old boy network comprehensively failed. It may be tempting fate to say that I do not think that such a scenario could happen now. Of course we should never be complacent, but the Financial Services Authority and the relationship between the Government and the regulators inspire a great deal more confidence now.
Surely the hon. Lady is experienced enough to know that there is no regulatory system in the world that is proof against all fools, knaves and crooks—so it is completely silly to say that there will never be a collapse in Britain again. We must accept that that will happen in the future.
As I said, we should never be complacent.
It is easy to portray the Barings situation as the consequence of one rogue trader acting in a criminal way. If one examines the matter closely, however, there was a systemic failure throughout the management and the regulatory system, and people simply did not understand the risks that the bank was taking. I am a member of the Treasury Committee, which has discussed with the FSA how it regulates matters such as hedge funds and the current risk-based system of assessment. I am confident that the FSA appreciates what the banks that operate out of the UK are doing, what sort of business they are engaged in and what risks are associated with it. [ Interruption. ] Farepak does not come under the FSA, although perhaps that is a subject for future debate.
The UK approach is widely seen as the best in the world, and it underpins London's success as a modern international financial centre. It is important that we preserve that approach, which is the essence of the Bill. While we are debating how we regulate our financial markets and City institutions, I want to restate why, while we should aim to achieve a degree of harmonisation and a level playing field across the European Union—and, indeed, further afield—it must never be at the expense of our international competitiveness.
London has a comparative advantage in financial services, and if other countries want to compete with us they should do so by raising their game to our level, not by seeking to hold us back with inflexible, over-burdensome, gold-plated regulation. A one-size-fits-all approach in a new enlarged European Union is unlikely to be to London's advantage, and we should resist attempts to force us down that path. However, we should do so not through withdrawal and seeking to isolate and disassociate ourselves from our European partners, as I have heard Mr. Redwood suggest, but through co-operation, negotiation, being at the table and making our voice heard.
As the Minister has said, we should welcome European co-operation on regulation, but only where it is necessary, where it truly furthers the integration of the internal market and where other non-legislative policy solutions have been thoroughly considered. Any new regulation must be implemented in a sensitive light-touch manner, too.
The City is stronger because of its position within the EU. We act as Europe's wholesale financial services gateway to the world, and the world's financial services' gateway to Europe. It is in Britain's best interests that we stay fully engaged, but we must do it in the City's best interests, not at the City's expense. That is increasingly true on a global scale as developing markets open up, and countries such as China and India develop their financial sectors. Regulatory co-operation is more important than ever before, but we must continue to strike the right balance between protecting investors and entrenching financial stability, and encouraging innovation and foreign investment.
We should not be scared of foreign investment or foreign ownership in the City. In the late 1990s, more than 40 per cent. of City employees had an overseas employer, and I am sure that that percentage has, if anything, grown since then. Some of the recognised exchanges are subsidiaries of foreign companies. However, we need to be watchful to ensure that foreign takeovers do not lead to the imposition of burdensome foreign regulatory standards on UK exchanges and issuers, and that, as Mr. Hoban said, the US's extra-territorial ambitions are curbed. I say that as someone who has worked for an American investment bank and has been on the receiving end of the not-so-light regulatory touch of the Securities and Exchange Commission.
As a member of the Treasury Committee, I visited the US earlier this year with my hon. Friend Mr. Love, and we heard first-hand about the impact of Sarbanes-Oxley. The London stock exchange has benefited as a result of Sarbanes-Oxley. It attracted a record 129 international companies to its main market and the alternative investment market last year, up 82 per cent. on 2004. Twenty-five per cent. of companies surveyed identified the UK's standards of regulation and corporate governance as the most important factor in their decision to float in London, and of those that had considered listing on a US exchange, 90 per cent. felt that the demands of Sarbanes-Oxley made listing in London more attractive. We were therefore right to choose not to go down that path. However, we need to be ever vigilant to ensure that we do not import overseas regulatory burdens, and that we have the best possible environment in which our financial services industry can continue to prosper and to create jobs.
I very much welcome the Government's initiative in introducing the Bill. I am sure that it will be welcomed in the City, as it has been on both sides of the House.
It is a pleasure to follow Kerry McCarthy, whose presentation was all the more authoritative for being based on her own experience.
The Economic Secretary said at the outset that there is all-party consensus on the Bill, and I certainly do not intend to oppose it. I am not yet entirely persuaded that it is necessary, but that need will no doubt emerge in the course of the debate. When I see Conservative and Labour Front Benchers, together with most luminaries in the City and even Mr. Ken Livingstone, romping in the same bed, I tend to suspect that something not entirely wholesome is taking place.
I think that the characterisation of American financial regulation—I am not an expert, unlike the hon. Member for Bristol, East—has been a little overdone and rather unhelpful, given that the Americans are aware of the problems and are dealing with them. It was presented as the financial equivalent of avian flu against which we must put up defences.
Let me go over a few areas of undoubted common ground. First, it is true, as the Economic Secretary said, that the City is a crucial part of the British economy. Ten per cent. of gross domestic product is generated from financial services, although not all of those are based in the City—some are provided by retail banking throughout the country. It is particularly important for employment.
Secondly, we all agree that financial services must be regulated flexibly—but, as the hon. Members for Edmonton (Mr. Love) and for Wolverhampton, South-West (Rob Marris) said, flexibility must be balanced against investor protection and protection against systemic failure. There is more than one dimension to consider.
Thirdly, we all accept that we are dealing with global markets that move very fast and that this is not an area where nationalism or national ownership are appropriate concepts. Competition takes place not between countries but between sets of rules. People in the City often employ the imagery of Wimbledon to describe what they are trying to achieve, saying that they are hosting an event and that it does not matter whether British people win it. That is quite a comforting image in some respects. However, there are problems with the Wimbledon comparison. Will Hutton has observed that it is probably because we have Wimbledon that we produce such dreadful tennis players, unlike smaller European countries. He also argues that having an international financial centre may be to the detriment of domestic companies' growth and innovation. I do not entirely buy that, but we have to look at both sides of the argument.
I part company with the proposals over two issues. First, we should be more honest about what this legislation is for. It is presented as being completely innocuous, but its proper title should be something like the "Investment Exchanges and Clearing Houses (Americans Keep Out) Bill". That is essentially what we are talking about. The Minister and the Conservative spokesman have said that there is no objection to takeovers or to foreigners per se, but it is clear that a barrier is being raised and that powers are being created to deal with takeovers from two particular sources, which just happen to be the two biggest exchanges in the world: the New York stock exchange and NASDAQ. Because they are so big, they have the potential to launch a successful takeover in London.
Does the hon. Gentleman agree that Morgan Stanley, Merrill Lynch and Goldman Sachs are all important American investment houses that play a vital role in creating jobs and employing people in the City of London? We welcome those American investment houses into the UK, and the idea that we are trying to prevent American ownership in London is disproved by the reality of today's City of London.
The Minister is being a little too defensive. I was not suggesting for a moment that there was a problem with American companies investing in London. The problem is with the American exchanges that might take over London or the Euronext market. That is the issue here.
There are certain forms of regulation that are not covered by the Bill. Mr. Redwood might be able to make this point more comfortably that I can. The Bill does not cover European regulation, which may or may not be onerous. Let us envisage a hypothetical situation—after all, the Bill is all about hypothetical possibilities—in which, as a result of injecting this poison pill into the regulatory system, the New York stock exchange backs off from its interest in the Euronext company, and the Deutsche Börse, a German company that is interested in acquiring a Franco-Dutch operation, succeeds as a consequence of that. As a pan-European exchange, it could then choose to apply European regulation in a way that is unhelpful to London's interests. That is purely hypothetical, but it could certainly happen.
There is nothing in the Bill to prevent that from happening, because European legislation has primacy here. One of the unintended consequences of blocking American takeovers could therefore be disadvantageous practices against which the Bill provides no protection.
The hon. Gentleman has completely misunderstood the proposals. The Bill is not trying to block American takeovers. It might better be entitled the "Protection of Your Interests (Having Taken It Over) Bill". It is saying to the American exchanges that we will not let the American Government mess up the asset if they acquire it.
I shall come to the Sarbanes-Oxley legislation, and what it might entail, later. The issue here is whether two particular American companies, the two biggest exchanges in the world, will be able to launch an unresisted takeover of the UK exchanges. The American Government are one or two steps removed from this process.
I just want to make it absolutely clear—I have made exactly the same point to the chief executives of the New York stock exchange and NASDAQ—that we have no problem at all with the NYSE or NASDAQ owning a UK exchange. We do not encourage or discourage it, but we have no problem with it at all. The issue is whether they would own an exchange where listings are regulated in London by the Financial Services Authority. I made it clear in my speech that we are neither overtly nor covertly trying to prevent there being an American owner of any exchange in London.
The two exchanges in the United States have a different interpretation. They have given public assurances that there is no way in which the SEC and other regulations in the United States could be imported through their ownership. We will deal later with how that might happen and whether it is a plausible hypothesis. The Economic Secretary's remarks are reassuring, but they reinforce my scepticism as to why the Bill is necessary in the first place.
To develop the point further, not only have I discussed the purpose of the Bill with those two American companies, as well as with the London stock exchange and others, but I have seen no public statement of opposition from either of those companies. As I understand it, the opposite is the case: they are comfortable about us taking the power, so that we can be reassured, as can they, that the regulatory regime will not change as a result of a change in ownership. I have no reason to believe that NASDAQ has concerns: to my understanding, the opposite is the case.
I am more mystified than ever. If the Economic Secretary has absolutely no problem with the two American exchanges taking over London exchanges, and they have no problem either, why is the Bill necessary in the first place?
No doubt the Economic Secretary will get an opportunity to reply later. Let me develop my scepticism further.
One has to question the motives for establishing such a defensive mechanism. Usually, hostile takeover bids are resisted by a company's management. Clara Furse, the manager of the London stock exchange, has said clearly that her exchange is not for sale. That is her strategy. She does not want to sell. The price of shares in the London stock exchange has been ramped up considerably, creating barriers, and its management undoubtedly wants to resist a takeover. Why would the British Government want to create a mechanism to make it easier to protect the insider interest in this case?
Let me move on to the argument about which the Economic Secretary is exercised, which goes back to the principle and basic economics of exchanges. My starting point would be that an exchange is a network or utility that works best because everybody is a participant in it, as in the case of the electricity grid or bank clearing system. The productivity of exchanges, however, has risen rapidly—in London, by 6 per cent. in the past 20 years—and their monopolistic structure tends to lead to much higher profits and fees, which are resisted by the users.
Two sets of countervailing pressures are emerging, one of which is competition. In the United States in particular, small exchanges are being launched with low costs. In principle, the new European regulation encourages competition, which, in the course of time, should bid down costs. The Turquoise consortium of investment banks appears to have that objective. The problem of obtaining gains through competition, however, is that it breaks up the network, losing efficiency and potentially raising costs.
That raises the question of the other route to contestability in the market, which is through takeovers. That is the reason for growing pressure from the New York stock exchange, NASDAQ, Deutsche Börse, Macquarie bank and others to enter the market. The question is whether that is a problem. The problem posed is that one or other such acquisition—if we accept that the worry is not just about the Americans—might succeed in importing into the UK unhelpful forms of regulation, particularly those prevailing in the United States.
The Conservative spokesman made a genuine attempt to explain the transmission mechanism for that and quoted one example, the registration of hedge funds. As I understand it, however, that case was introduced at the behest of the SEC and has subsequently been dropped, although I am sure that he knows a lot more about that than I do. I think that that is the only concrete case that we have of that type of extra-territoriality being introduced through the exchange mechanism, but there may be many others. The right hon. Member for Wokingham is shaking his head. It is important to understand how this could happen, why it is such a threat in practice, and why the Bill is necessary to prevent it.
I am following the hon. Gentleman's argument as closely as I can. He seems to be suggesting that when an exchange is taken over alien extra-territorial regulation is a significant issue, but would it not almost inevitably lead to the creation of alternative structures? AIM—alternative investment market—and subsequently Ofex were created because of the cost of a full London stock exchange listing. Would this not offer an opportunity for the creation of another exchange somewhere down the line that avoided extra-territorial regulation?
What the hon. Gentleman says is absolutely true. It suggests that there is a self-regulating process, which makes it even more difficult to understand why British legislation is necessary.
Let me take the argument a step further. Let us suppose that we are talking about the potential implications of NASDAQ's taking over the London stock exchange. Why, in any circumstances, would it want to bring American regulation with it? Presumably—the Minister made this point indirectly—it is coming here to pick up listings that it has been unable to attract in the United States, and would strongly resist any attempt to import American regulation through the stock exchange system. From what are we trying to protect ourselves?
Another point made very well by Mr. Hoban is that although extra-territoriality is clearly a problem, this is not the most appropriate way of dealing with it, or even directly relevant to most aspects of it. An appalling example of extra-territoriality in recent months is that of the NatWest Three. Taking British employees of a British company to an American court for an offence that they committed in the United Kingdom is real extra-territoriality. There is a problem with British companies that happen to be listed in the United States being pursued in Britain for things that they have done in the United States, and the Bill will not protect against that. If extra-territoriality is to be dealt with, it will have to be dealt with through joint negotiation with the United States. Whatever the virtues of the Bill, it does not deal with the extra-territoriality problem.
It is being suggested that there is something lethal about the Sarbanes-Oxley Act. Certainly everyone with whom I have discussed it in the City is worried about what might happen if those five pieces of American legislation entered British law. The hon. Member for Wolverhampton, South-West tried to raise a fundamental question: what is the problem, and why is the legislation so difficult and iniquitous?
Let us return to basics. The Sarbanes-Oxley law was introduced in the wake of Enron and WorldCom. It dealt with a variety of issues, which included investor protection but also accounting procedures. When it was referred to the American Congress, which covers a wide spectrum—no one could accuse American Congressmen of being isolated from business interests and opinions—the Senate backed it by 99 votes to nil, while the House of Representatives backed it by 423 votes to three. The overwhelming consensus, extending from the most libertarian Republicans to the most diehard leftists of the Democratic party, was that the legislation was sensible. Distinguished people such as Alan Greenspan spoke up for it strongly—although they have subsequently acknowledged that aspects of it are a problem, notably section 404. The vast majority of it is uncontentious, and perhaps helpful.
In describing the historical lesson of what happened in the United States, is the hon. Gentleman not making an extremely good case for the argument that, in the aftermath of high-profile failures such as WorldCom and Enron, legislators should be making sensible regulation rather than hastening to play to the gallery?
Certain aspects of the legislation have been found to be excessive, and I understand that at the behest of the United States Treasury Secretary they are now being reviewed—and they might well have been removed by the time that this legislation receives Royal Assent and reaches the statute book. The Americans are well aware of the awkward aspects of that legislation and appear to be taking action on it.
Does the hon. Gentleman accept that listings in America have declined while in London they have risen mightily because of this ham-fisted legislation? We are very lucky that the Americans had it. Can he not understand that the crimes that were alleged against the senior executives at Enron were all crimes under the law as it stood before the Americans decided to legislate again? What happened in respect of Enron was a matter of enforcement not of inadequate law, and they responded to it wrongly.
There is an element of truth in what the right hon. Gentleman says. I do not pretend to be an authority on financial markets, but it is my understanding that the decline in listings in the United States was taking place quite some time before the Sarbanes-Oxley provisions were introduced. That decline was prompted by, among other things, class actions and the fact that there are multiple regulators with different agendas. The decline of the IPO—initial public offering—market has been referred to; that was in evidence well before the Sarbanes-Oxley provisions came in.
There is a simple interpretation of recent financial history in which that villainous legislation is responsible for every problem, but there is a lot of good academic research that suggests that companies that have listed in the United States have enjoyed substantial premiums; they have higher regulatory costs, but they also have higher levels of investor protection, which is a positive factor in the market. So there is a trade-off, and the situation is not as clear-cut as some Members seem to be implying.
I seek a little more clarity. Many of the issues we are discussing are about specific commercial companies, which presumably would be dealt with in our country by, for example, the Companies and Insolvency Acts and legislation covering audit, but the Bill is specifically about exchanges and clearing houses. I think that we might be crossing over too much from normal commercial activity. I want us to focus on the Bill's objectives, which seem to be to avoid burdensome regulation over and above that required for an exchange or a clearing house. Is that not what we should be focusing on?
I thought that we were. I keep coming back to what I thought was the purpose of the proposed legislation: to stop a particular body of legislation—the American Sarbanes-Oxley provisions—being imported by some mechanism, which has not been entirely explained, into the workings of the British exchanges. The argument in respect of that might be right; I am not suggesting that it is completely wrong. I am just sceptical about whether new British legislation is necessary to achieve that objective.
In recent months and years there have been some extremely controversial takeovers in the United Kingdom. There have been takeovers in the water industry, in my part of Britain by an Australian company with very strange corporate governance. Abbey and the airports have been taken over by Spanish companies, also with strange corporate governance. Our electricity is delivered by a French company that is an offshoot of the French state. At no point has it been suggested that we need to introduce defensive legislation to protect us from those imports. The view has been that contested takeovers are desirable and might well be in the British national interest, and I share that view. So my final point is: what is so different and special about the London exchange that it requires specific preventive legislation?
There is an important distinction between the examples that the hon. Gentleman cited—such as the takeover of BAA plc—and the takeover of the stock exchange: BAA plc exists in a regulatory environment that it does not control, whereas the stock exchange determines its own rules. The Bill is about the rules that the stock exchange and other exchanges use to regulate business conducted on those exchanges. To refer to another of the hon. Gentleman's examples, water companies operate within the framework of Ofwat, but the stock exchange makes its own rules. What we are trying to do in this Bill is protect the rules of the stock exchange; it is not about the ownership of the stock exchange, but about ensuring that its rules work efficiently and effectively and achieve their regulatory objectives. There is a difference between the takeovers that the hon. Gentleman mentioned and the potential takeover of the stock exchange or any other exchange in the UK.
I understand the point that the hon. Gentleman makes, and I realise that there is a clear distinction between taking over a network with a set of rules and taking over individual operations. However, I come back to the central point, which I have repeated on several occasions. I completely understand a lot of the reasoning behind the Bill. I realise that there is a wish not to make British regulatory practice more onerous than it already is, and that there is a fear—it has not yet been properly explained, however—that the American rules will be imported into the British system as a result of the takeover. If the Minister can explain how this importation could take place—how the damage could be done—I will be very happy to support the Bill.
Let me give the hon. Gentleman an example that might help him. There was a concern in some parts of the world outside the UK that the alternative investment market—a lighter-touch market with lighter-touch rules set by the London stock exchange—is too "light-touch". One can imagine a regulator in another part of the world saying to a company regulated in that part of the world, "If you are going to own a foreign exchange like the LSE, which is listing through the AIM, you must make sure that the AIM listings are equivalent to our rules in our territoriality, in order to pass our domestic regulatory regime test." That example shows exactly how an external regulator could attempt to undermine our competitive strength by exporting rules on to the AIM. Does the hon. Gentleman accept that such concerns are very real in the City of London, and that this Bill addresses them?
I do understand such concerns, but is not the following point equally valid? Let us say that Deutsche Börse took over the LSE or another exchange. It would find the AIM incompatible with its interests and would seek to reduce its importance and not invest in it, but because it was subject to European, rather than American, rules, it would not be protected in any way as a result of this legislation. Perhaps I have misunderstood the distinction between British and Community rules and American rules, but it seems to me that the example that the Minister has described would apply just as seriously if a takeover took place within the European Union, rather than by an exchange outside it.
I have repeated the point on several occasions and I need not go over it again. I see the Bill's underlying purpose and I am inclined to support it. I am sceptical about whether it is necessary, and I hope that that will become a little clearer in future exchanges on the Bill.
I begin by declaring an interest—my husband recently advised Deutsche Börse on its bid for Euronext. It is a pleasure to follow Dr. Cable, who treated us to some meaningless statistics yesterday. I would not say that his arguments this afternoon were meaningless, but we have become used to the Liberal Democrats proposing totally irresponsible and completely inconsistent public finance legislation. This afternoon, they have adopted a similar posture toward what is in fact one of our strongest economic sectors. If we went down the path described by the hon. Gentleman, we would lose a valuable exporter and employer to this country.
The City of London is one of the most successful sectors of the economy, and we employ more than 1 million people in financial services in this country. As has clearly been demonstrated, the days when Labour Governments had an ambivalent attitude toward the City have long since gone. So I welcome the Bill introduced by my hon. Friend the Minister.
Under this Government, financial services growth has reached 10 per cent. a year. Last year, the financial services trade surplus was some £19 billion. During the past 10 years, foreign equity turnover has increased by 260 per cent., and foreign exchange turnover by 60 per cent. While my hon. Friend Kerry McCarthy was worrying about the Bank of Credit and Commerce International in those far-off days, which were not so halcyon, I was the Treasury official on the foreign exchange desk. The contrast between the situation then and now can be illustrated by the fact that I was authorised to agree to the Bank of England's intervening up to the figure of £50 million a day on the foreign exchange markets in order to stabilise sterling. Nowadays, we do not pursue such economic policies; moreover, £50 million is now such a paltry sum that it would have no impact, anyway.
I am very happy to say that we are discussing the Bill before us, not City bonuses; however, perhaps we will return to that issue on another occasion.
It is clear that a key factor in the success of the British financial services sector has been the light-touch, risk-based regulatory regime. The Financial Services and Markets Act 2000 replaced the old self-regulatory regime with an approach based on principles, statutory independence, transparency and a rigorous assessment of costs and benefits for each individual regulation. My hon. Friend the Minister has struck the right balance in the Bill between Government intervention and a laissez-faire approach. He made it clear earlier that the Government have no interest in, or concern about, the nationality of the London stock exchange's ownership. Indeed, the UK markets are already open to overseas investment; for example, the London international financial futures and options exchange is already owned by Euronext. I hope that that satisfies some of the concerns raised earlier by the hon. Member for Twickenham.
There is a clear trend toward globalisation in the exchanges, as well as in equity trading, which spells the end of natural monopolies in this piece of financial infrastructure and increased competitiveness in the arena of exchanges. It is interesting to note that, despite the huge increase in turnover volume, fee rates have been maintained and bid-offer spreads have not changed, which means that exchange profitability has risen greatly. That is why the banks are looking again at the ownership of the exchanges. While NASDAQ has been looking at the London stock exchange, the LSE is looking over its shoulder at Project Turquoise—a conglomeration of banks that is looking at the LSE.
So in this very fluid situation, it is right that the Government take action to safeguard our regulatory regime. It would be unacceptable if a takeover of the London stock exchange by a US exchange such as NASDAQ led to US regulatory requirements being imposed on UK issuers of securities traded here. The Bill gives the Financial Services Authority the power to prevent regulatory changes that would undermine our approach, and it gives the power of veto not on day-to-day regulation, but on significant changes that would bring about a disproportionate burden of regulation.
There are some fundamental principles at issue here. Even those with the most minimalist picture of the role and function of the state acknowledge that it is the state's function to uphold the rule of law and to maintain the value of the currency. We need to resist the tendency toward extra-territoriality of some other states, particularly in a case where our own regime has been successful in attracting new businesses because it keeps down costs. With this legislation in place, I am sure that we will continue to see the successful and dynamic development of the UK financial services sector.
I add my words of support for the Bill, which is a sensible proposal, although I have a couple of queries. I support the Bill because on the issue of globalisation, of which we have heard much today, it answers two questions correctly. The first is on ownership and national champions. Despite the comments by Dr. Cable, I agree with the points made by the Economic Secretary and my hon. Friend Mr. Hoban that this is not an issue of economic nationalism. The ownership of institutions in the City is not important. Indeed, there are far more important issues at stake. At a time of growing economic nationalism—the chairman of the CBI, Sir John Sunderland, in remarks reported this morning, was critical of France, Spain, Italy and the US for their economic nationalism—it is pleasing that we have a consensus between the major parties that focusing on ownership is a mistake. Indeed, the City has done well out of Wimbledonisation, whereby we provide the venue and the rest of the world provides the players, and that is to be welcomed.
The second question that arises from globalisation concerns the difficulty that countries have in achieving the appropriate level of regulation. There is often a race to the bottom, as the jurisdiction with the lowest level of regulation is seen as the most attractive to businesses. That argument is grossly overstated. Globalisation punishes inappropriate, disproportionate and bad regulation, and Sarbanes-Oxley is an example. As several hon. Members have pointed out, Sarbanes-Oxley has resulted in some companies listing in the UK rather than in the US. However, good regulation is necessary. If a country gets the balance right—and we can argue that this country has done so, especially compared with the US in this area—it does well. The race to the bottom argument is therefore weak.
Countries should retain their own regulatory control, as the Bill suggests, because otherwise the pressure is towards regulation. If globalisation is about economic integration, it also pushes countries towards regulatory integration. Co-operation between regulators is at times appropriate, but too much regulatory integration would be dangerous. One example is the extra-territorial approach adopted by the US on occasion, which is a concern. To return to the points made by the hon. Member for Twickenham, the concern is not that a US exchange will wish to impose additional regulatory burdens on those companies listed on a UK exchange that becomes a subsidiary of the US exchange. The concern is that US legislators will attempt to impose additional regulatory burdens on those companies listed on the LSE or AIM. Extra-territorial legislation regulation is one way in which Governments have attempted to deal with the supposed race to the bottom.
Another way—and this was touched on by Kerry McCarthy—is supranational regulation, and we see that with the European Union. Some of the arguments that can be used for the approach set out in the Bill—that UK regulation should continue to apply and that we should not be influenced by overseas factors—also apply to European legislation, as the hon. Lady acknowledged. The issue is about getting the balance right.
I have two specific concerns about the wording of the Bill. The first is the point that I made to the Economic Secretary during his speech earlier. For argument's sake, let us suppose that NASDAQ buys the LSE. Then, prompted by NASDAQ, presumably for reasons of US law, the LSE proposes a rule change to implement Sarbanes-Oxley. The FSA considers that change—whether it is excessive or disproportionate—and blocks it. The next step would be a challenge and judicial review. At that point, the regulatory objectives that apply to the FSA come into play.
The FSA has the regulatory objective of protecting consumers, and rightly so. However, it does not have the regulatory objective of protecting or maintaining the competitiveness of UK financial services. Does that make the FSA vulnerable to judicial review in such circumstances? I assume that the Treasury has sought advice on that point, but perhaps the Financial Secretary could address the issue when he winds up.
The issue could have been addressed in a couple of ways. First, section 5 of the Financial Services and Markets Act 2000, which relates to the protection of consumers, could be amended to add a carve-out that makes it clear that any requirement that the FSA deems to be excessive under section 300A is not an appropriate measure for the protection of consumers. The other—and perhaps preferable—way to deal with the issue would be to treat the desirability of maintaining the competitive position of the UK as a regulatory objective, instead of an also-ran, second-tier point. I assume that the Treasury has considered that option and rejected it for various reasons, but I raise the point none the less.
On the first of the hon. Gentleman's two suggested approaches, is he seriously suggesting lessening or undermining consumer protection? That is what it sounded like.
My point is that it could be a two-stage process. Where the FSA concludes that the rule change is excessive and disproportionate—and bearing in mind its regulatory objectives at that point—it could be because the proposed rule is not appropriate for the protection of consumers. However, the test of whether a proposed rule is excessive under section 300A might be an easier test to apply. Given that the rule change has overcome that hurdle, the FSA would then need to consider its regulatory objectives and other factors. To do so, it has almost to ignore the first step and ask whether the rule change is appropriate and whether it would protect consumers. If the rule change would protect consumers, does the FSA have the flexibility to reject it as inappropriate? The second stage may be harder for the FSA and, under judicial review, it may run into difficulties. It is a technical point and might be better addressed at a later stage, but it is an issue. The FSA is left to make a difficult decision—technical in nature but political in implication—as to whether a regulation is appropriate and proportionate. That will have consequences for our relationship with the US.
The Protection of Trading Interests Act 1980 deals with some of the same matters as this Bill, and it gives the Secretary of State for Trade and Industry the power to make judgments. Is it right to give the unelected FSA the power to make difficult political decisions? The provision could cut two ways. First, one could claim that the existence of a second tier is more likely to lead to the Treasury being put under political pressure and that it is therefore better to keep matters at arm's length and subject to purely technical decisions. On the other hand, concern could be expressed about whether a mere regulator like the FSA could be brave enough to take on the might of, say, the US.
The hon. Gentleman and I have exchanged correspondence on these matters. Does he agree that the FSA, the Serious Fraud Office and other regulatory bodies do almost nothing to enforce their powers in respect of insider trading, which evidence uncovered by research reveals to be substantial? How they exercise their enforcement powers is a real problem.
I take the hon. Gentleman's point about insider dealing. We have exchanged correspondence about that, but I do not know whether his analogy applies in these circumstances. One problem with insider dealing is that it is visible in statistics on the large scale, but how does one apply the rules to individuals? The Bill gives great power to the FSA, which is an unelected body. Should not the Government say that they will make decisions about what is excessive or disproportionate, after taking advice from the FSA? Ultimately, that is a political decision, and one that deserves a little more democratic accountability.
I agree with my hon. Friend, but does he agree that the Government may be displaying some consistency? We will discover tomorrow that the SFO is not democratic, and before too long that fraud trials will no longer be heard before juries.
My hon. Friend makes a good and interesting point. I hope that the Financial Secretary will deal with the specific question that I have raised, and say what the rationale was for the decision that neither the House, the Treasury nor any Minister accountable to this House will have a say in the implementation of this Bill.
I welcome this Bill, which safeguards the regulatory regime through powers to curb disproportionate regulation. I emphasise the word "safeguard", for the benefit of Dr. Cable. We need to have this measure on the stocks, so that it can be used when necessary.
There is no doubt that the Bill will help to secure the UK's continued success as a financial centre, but why is it being brought in now? To understand that, we must look at the backdrop to its introduction. All speakers so far have commented on the increasing internationalisation of the City and its institutions. Since the London stock exchange was converted from being a membership organisation, there has been interest from foreign buyers. First was the Deutsche Börse in 2004, then the McQuarrie bank—whose structure no one really understands—in 2005. This year, of course, NASDAQ has continued to pursue its quarry, and we understand that a formal bid has been made.
However, it is not only the LSE that is subject to internationalisation. The LIFFE is already owned by Euronext, and ICE Futures and other organisations and exchanges are already owned by overseas companies. Indeed, Euronext may well be taken over in the near future by the New York stock exchange. Other hon. Members have observed that there could be new entrants to the market, given the proposal from seven investment banks to create a new European trading platform.
In addition, there have been significant difficulties in other jurisdictions, especially in the US, with the result that New York has been very much affected. No one so far has commented on the article in yesterday's Financial Times entitled "Big Apple's Glory Days Passed", or on the report entitled "Down on the Street" in last weekend's edition of the Economist, which focuses on the challenges to Wall street's assumption of global superiority as a capital market.
There is no doubt that there is an air of doom and gloom about New York's ability to compete internationally. That was summed up in a recent article by Mayor Bloomberg and Chuck Schumer, the Senator for New York state, entitled "Learn from London". However, we need to look more carefully at the reasons for that decline in competitiveness, and the American press is full of articles trying to describe what has been happening in recent years.
No mention has been made in the debate about the tougher immigration controls that exist in New York, which are affecting its ability to tap expertise from around the world. They are also limiting that centre's ability to bring people together on a short-term basis, and the result is a real effect on the operation of the New York market. Some people in the US think that New York has been slow to innovate, and anyone who looks at the front page of the Wall Street Journal will know how slow that innovation can sometimes be.
In addition, a culture of litigation exists in the US that does not exist here. The SEC undertakes very aggressive litigation, and indeed the newly elected Governor of New York state built his reputation on aggressive prosecutions in the market place. However, the major focus of concern in America has been on the cost of regulation. In that regard, London has a major advantage, in that it has a principles and risk-based regulatory structure with a light touch. That has played a significant role in its success.
The success of London is worth examining. Financial services make up 8 per cent. of our economy—12 per cent. if we include business services. As was mentioned earlier, the sector has been growing at 10 per cent. a year, with 300,000 people employed directly and an unknown number indirectly. Moreover, it is not often appreciated that the sector employs 100,000 people in Scotland. Another 100,000 are employed in the Leeds area of Yorkshire, although they work more in business services than in financial services.
London is the only major challenger to New York as a global financial centre. The debate has already touched on London's capacity in foreign exchange dealing, with more than 40 per cent. of the global trade in foreign-based equities. Interestingly, 75 per cent. of the top 500 US companies have a base in London. That is an important consideration, and mention has been made of the cluster effect, whereby expertise in legal, business and finance services are brought together to achieve the success that I have outlined.
London accounts for an increasingly large share of world activity in financial and other services. Although it is well behind New York and some other centres in hedge fund trading, London's share of the market is growing all the time. The same is true of syndicated loans and last year Europe overtook the US in the corporate debt market.
The hon. Member for Twickenham spoke about IPOs, but I think that he got it slightly wrong. There has been a seismic shift in that market in a relatively short time. He was right to suggest that the move predates the Sarbanes-Oxley rules, but the IPO volume in New York used to be five times bigger than it was in London. Even so, London overtook New York in that market last year, and many people on the other side of the pond are very worried about that.
The regulatory framework is incredibly important, but other factors are at work in the successes that I have described. We look for people with the highest professional standards, and we work hard to attract the best talent available. Europeans regularly come to London to learn how our financial services operate. We are open and transparent in much of what we do. As has already been said, more international banks are registered in London than anywhere else and a similar internationalism can be seen across the whole market.
We have to recognise the impact of those principles on the success of the City and it would be counter-productive to reverse them. We have to ensure that we do not appear to be trying to frustrate or oppose foreign international ownership of our institutions. That is a cardinal principle and I very much support the Economic Secretary's clear statement of it today. The Government have to remain neutral on ownership; there is significantly more international ownership in London than in any other marketplace, which has been of great benefit to us.
We also have to recognise that consolidation and integration in financial services may—only may—threaten the light-touch regulation that has been the hallmark of the City and of the FSA since it was set up. As I have said before, evidence suggests that that light touch gives the City a significant advantage over other marketplaces. Indeed, excessive regulation threatens the possibility of a retreat offshore. We have already discussed that point this afternoon, so I shall not go into it. What is most important is that we ensure that the legislation will protect the integrity of London as a global financial centre.
The Bill also responds to the concern, about which we have had quite a debate, that the acquisition of City institutions may bring extra-territorial application of regulations. We have talked in particular about Sarbanes-Oxley. In my view, that would extinguish London's present regulatory advantage, because it would provide additional onerous regulatory requirements, and we have asked questions about that. The internal control report, which is part of Sarbanes-Oxley, seems to be the focus of greatest concern in terms of the legislative changes introduced under that Act. It is clear that there has been a considerable hike in compliance costs as a result of the measure.
The Government have already considered some aspects of Sarbanes-Oxley in some detail and concluded that they would be disproportionate, although, interestingly, The Economist refers to the cost-benefit of the introduction of greater regulation. Of course, one study will say one thing, while another says something else, but the import of the studies carried out so far appears to be that at the lower end of the market—up to $250 million—there is a disbenefit and that the benefit begins to increase the larger the company becomes. The alternative investment market may be the biggest beneficiary of our decision to resist that additional regulation, as appears to be happening.
I welcome the power in the Bill to veto excessive regulation and, indeed, the framework to ensure that the FSA does not get involved in the day-to-day commercial judgments of exchanges. That is extremely important; exchanges have to be left to carry out their business. The Bill also rejects micro-management of the rule books and the vetting of every rule change. There must be a broad-brush approach—a simple veto power when disproportionate regulation is being considered.
We have to enshrine in the legislation the fact that our exchanges remain open to overseas ownership, and we must send that message clearly. It is an important principle that the City has always upheld.
Putting all those measures together, this simple Bill will provide the safeguards that we require and will, when necessary, ensure the continuation of the light-touch regulation that has been such a success in the City. I commend it to the House.
Like other speakers, I welcome this minor but important piece of legislation and support the powers that it proposes to give the Financial Services Authority.
Although I am unaccustomed to supporting aspects of Liberal Democrat speeches, it is particularly important to consider Bills that have overwhelming support with a slightly more sceptical eye, so I supported Dr. Cable in some of his concerns. He rightly pointed out that Sarbanes-Oxley had got through both Houses of Congress with precisely three opposition votes out of 550—someone will probably note that there are slightly fewer than 550 legislators in the United States, but I am sure that the hon. Gentleman recognises my point. When there is overwhelming agreement, there is often no proper debate, so it is right that we have had some discussion of this relatively small Bill.
The history lesson in the contribution made by Kerry McCarthy was most welcome, as indeed was the contribution of Mr. Love. The City of London has always been internationally minded; at least, it certainly was until 1914 and then from the early 1970s. The hon. Gentleman referred to what he regarded as the fiasco of the eurobond market, but in reality it was high tax in the USA that opened up the eurobond market to Europe. It was only the foresight of the Thatcher Government, with the big bang in 1986, that ensured the internationalisation in the City of London, from which, as has been pointed out, the whole country has prospered. Without a thriving financial services industry, the UK would be in deep economic difficulties.
Of course, a thriving financial services industry brings problems. London Members see many of the problems that have resulted from the great strength of the City of London. However, that strength is to be welcomed, as is the fact that so many Labour Members, who, 15 or 20 years ago, were somewhat less than ambivalent about the power of the City, now embrace what it brings.
I wonder whether one of the problems with the City of London is the exceptionally high level of bonuses this autumn. What is the hon. Gentleman's attitude to that?
In a nutshell, the Bill ensures that the FSA will be able to prevent recognised investment exchanges and clearing houses from adopting regulatory changes that it regards as disproportionate to the regulatory objectives proposed. The underlying concern is that otherwise the internationally competitive position of the UK-based financial services industry in globally competitive markets may be damaged. The protection of the competitive position of London investment exchanges that may in future be acquired by overseas shareholders is the main purpose of the Bill.
Naturally, that brings into the equation two other issues to which several Members have referred. The first is the principle of overseas control. In fact, the City of London is already internationally owned, staffed and managed—a process that accelerated rapidly after the 1986 big bang. Legitimate concerns have been expressed on both sides of the House about how sustainable that would be in a massive economic downturn.
Clearly, there was a recession in the early 1990s, which hit the City of London as it hit many other parts of the British service industry. There was also grave concern that by not joining the euro at the beginning of this century, Britain could find its competitive advantage in London undermined. That has not come to pass. Equally, however, we should not be complacent about the longer term, while we should rejoice about the fact that the City remains very strong in spite of the fact—perhaps even because of it—that overseas ownership allows flair and innovation from all corners of the globe to play an important part in the London market.
Secondly, the issue of the limits of protection in the Bill has also been drawn to my attention. My reading—perhaps it also takes us back to the thoughts of the hon. Member for Twickenham—is that in the event of NASDAQ's bid for the stock exchange proving successful, we cannot provide protection against actions potentially in the US or in British courts by aggrieved US investors in LSE-quoted securities or, indeed, by high-profile district attorneys wishing to make a name for themselves. We have had a broad-ranging debate about the effect of Sarbanes-Oxley and it is now clear that, given the concerns evident in the US market, there has been a rowing back from it.
I hope that we can take the opportunity provided by the Bill to make the case once again for the pursuance of a minimum regulatory regime, especially in view of foreign membership as a fact of City life. We need to remember that innovation, flair and light-touch regulation have been the watchwords for many of the great successes in the overseas and outward-looking global financial markets in which London has played an important part over recent centuries. We should ensure that the UK authorities are able to regulate to the lightest possible degree and avoid the micro-management of the financial markets, to which other hon. Members have referred, irrespective of their ownership of the exchange in question.
I believe that that is the intention of this small but important piece of legislation. I welcome it as a positive step forward, which has certainly been welcomed by the City of London corporation in my constituency. It is wise to look carefully into all aspects of regulation and the way in which the FSA operates. We cannot be complacent. I detected from the Minister's earlier comments that with the additional powers given to the FSA in 1997, we had somehow been able to ward off all the problems that had arisen from Enron, WorldCom or the litany of previous scandals in this country that were outlined earlier by the hon. Member for Bristol, East. We should always remember that there will be crooks in any market and we should not be overly complacent that, in putting a new regulatory framework into place, we have somehow made ourselves immune from any such nefarious behaviour.
I welcome the Bill and hope that after rapid progress on Report and Third Reading it will be on the statute book before too long.
I am grateful for the opportunity during this short Third Reading debate—[Hon. Members: "Second!"] I am sorry, I mean Second Reading debate; time has flown so fast that it has evidently left part of my mind behind. On behalf of the official Opposition, I wish the Bill all good speed and I will reiterate briefly why it merits all-party support. I believe that it does, in the end, have all-party support. Dr. Cable provided the necessary grit, but said at the end of his speech that he was inclined to support the Bill. I have to say, though, that having listened to his entire contribution, I was not always sure that he was going to reach that conclusion.
We thank the Economic Secretary for sharing a draft of the Bill with us and for briefing us personally. After all the turmoil, drama and excitement of yesterday's Queen's Speech debate, we are glad to see that the clunking fist has been replaced by the outstretched hand of co-operation, but we know, of course, that we will be back to normal business soon—
No doubt tomorrow, and we all look forward to it.
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 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 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 Mr. Field, who knows a great deal about these matters—they are, so to speak, on his doorstep—made 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 ensure—Government Members as much as Opposition Members—that UK capital markets remain competitive. It has nothing to do with economic nationalism and everything to do with the national interest—two 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 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 FSA's 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 Brussels—that, of course, is not its function and those are matters for another day—but it will protect our capital markets from a danger, and that is why we believe that it deserves all-party support.
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 Opposition—probably 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 world's 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 world's 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 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.
My hon. Friend Mr. Love, who is a former member of the Treasury Committee—
I beg my hon. Friend's 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.
I hope that my hon. Friend remains a Member for a very long time, but if he looks for a change of career, I am sure that opportunities will open up to him, given his expertise.
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 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.
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.
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 exchanges—NASDAQ and the New York stock exchange—welcome the Bill and would not see it in any way as an obstacle to their proceeding with a takeover. Is that correct?
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.
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 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 questions—first, from the hon. Member for Fareham, and secondly, from my hon. Friend Rob Marris in an intervention—on 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."
The London stock exchange thinks that it is necessary. It states:
"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 City's ability to compete for global equity markets business."
The CBI thinks so. It says that it
"Seems clear that all this is highly advantageous".
The Association of British Insurers also thinks so. It tells us:
"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 question—as the hon. Gentleman did—of 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. Gentleman's 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 state's 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 support—I hope—from both sides of the House on Second Reading and in subsequent stages.
Question put and agreed to.
Bill read a Second time, and committed to a Committee of the whole House, pursuant to Order [this day].
Bill immediately considered in Committee.