The London and Frankfurt Stock Exchanges

Part of the debate – in the House of Lords at 4:05 pm on 24th May 2000.

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Photo of Lord Haskel Lord Haskel Labour 4:05 pm, 24th May 2000

My Lords, I too congratulate my noble friend Lord Layard on his maiden speech. Not only is he one of our leading economists, he is also an inspirational teacher. I happen to know that because he taught my son and inspired him to become an academic economist too. I warmly welcome the noble Lord to the House.

I thank the noble Lord, Lord Lamont, for moving this Motion. Surprisingly, I share many of his concerns. But I wonder why we are debating the merger now. Despite yesterday's decision by the supervisory board in Frankfurt, as the noble Lord, Lord Lamont, said, the deal is not done and there are many important details to be settled.

Unlike my noble friend Lord Layard, I shall mention the euro because it is referred to in the Motion. Indeed, the wording of the Motion leads me to believe that perhaps the reason for moving it is that the noble Lord, Lord Lamont, sees this as yet more "euro creep"; yet another way that the euro is entering our lives, and perhaps he does not like it. But, like it or not, this is an inevitable part of being engaged in Europe. Mergers and consolidations are part of this engagement. They are part of being more competitive in the single market. As my noble friend Lord Layard said, economics is the driving force here, not politics.

The noble Lord, Lord Lamont, is concerned about companies denominating their shares in euros. There is no question of force. In fact, some companies already do this because it suits them. Indeed, our top 300 companies are quoted in both euros and sterling every day, as we can read in the Financial Times. Other companies have secondary listings in New York, again because it suits them. Currencies are a matter for the users of the market. Exchanges cannot force companies to take currency risks.

The Motion is concerned about currency risk for our pension funds. But the merger changes very little. If investors want their investments to remain in sterling, the shares will continue to be quoted in sterling. The risk will remain the same as it always was for as long as we remain outside the euro and for as long as pension funds pay out their pensions to us in sterling. The real currency concern is that the merger is taking place when the euro and sterling are misaligned and do not represent economic fundamentals. The undervaluation of the euro and the overvaluation of sterling could cause misleading measures of market capitalisation. That is the currency concern.

If we are to debate the iX Stock Exchange in Parliament, our concern must be how well it will serve the British economy and British business. Will iX be more efficient? Will it be a more efficient market with lower transaction costs and more liquidity? Will British business be disadvantaged, and I mean all British business and industry? Unlike the exchange rate, which only affects some parts of our economy, this will affect every part because every part of every sector of our economy is quoted on stock markets. The uncertainty will affect our businesses. While the deal is being negotiated, there will be uncertainty and financial markets do not like uncertainty. The uncertainty surrounding this merger may have an adverse effect on output and jobs in the real economy--and that is where it matters. The fact that the London Stock Exchange is now in play only adds to that uncertainty. Therefore, I hope that the terms of the merger will be finalised as soon as possible.

I agree with the noble Lord, Lord Lamont, that at first sight this merger would seem to benefit large companies and financial institutions. They should be able to benefit from greater exposure, lower transactions costs and greater liquidity. I am not so sure about small and medium-sized companies. Their recent experience of the London stock market has been decidedly mixed. For them, the market has been much more volatile, with huge fluctuations. Thanks to the gung-ho attitude towards businesses, many good companies have seen large declines in their share valuations, and declines in their valuations relative to their continental competitors.

For example, on the London Stock Exchange, the recent PE ratio for consumer durables has been about 8.9, whereas in Germany it has been 11, and in France it has been 14. That has caused some medium-sized companies to seek to withdraw from the London Stock Exchange by selling out to private equity funds. We are seeing quite a lot of activity in that area. Will this merger change any of that? Will it provide them with a better or larger PE ratio? Like other noble Lords, I am anxious to see.

Like the noble Lord, Lord Lamont, I too have concerns about the implications of this merger and its impact on our economy. Will it be a suitable market for the investment of our pension funds? If the iX is to be a privately owned, centrally organised monopoly market, it may offer our pension funds a poor deal. It must be an efficiently run, competitive market because those competitive markets make money for the participants. That is what I should like to see. Those matters of corporate governance and competition must be clarified and they must be got right.

Will there be access for the small investor and the small broker? There will have to be a common technology platform in the iX market, and the costs of changing over to the common system would be considerable. The noble Lord, Lord Northbrook, explained that.

Then, firms will have the cost of adapting to whatever settlement system the providers of settlement services decide on. That is where the main costs lie. Those costs may be prohibitive for the small investor and broker.

There are other matters to be agreed. Will there be common accounting? Accounting is different in the UK from in Germany. There was a report in the newspapers last Thursday that regulators had agreed a common set of accounts for listing on stock exchanges anywhere in the world. That may be good news, but I do not advise noble Lords to hold their breath because the committee charged with carrying out that work was set up in 1973.

That leads me on to regulation. There will obviously have to be some harmonisation. Regulatory rules in Britain and Germany are different, but they are converging. But the ethos is different too. There cannot be a dual system. I imagine that the FSA will continue to operate in much the same way, but on a larger canvas. There will have to be broad agreement, not only on the rules of market behaviour but also on the level of consumer protection, education and information. I assume and hope that the regulators are already talking to each other about that. I hope also that the lawyers are talking too because, as we have recently learned, there are differences in the takeover codes. For example, in Germany, the code demands that employees are informed about the likely effect on jobs in the event of a takeover. Here in Britain, the code hardly makes any reference to workers. How will that difference in attitude be reconciled without any reduction in standards of consumer protection and tolerance of market abuse?

The noble Lord, Lord Lamont, is right also about stamp duty. That will have to be addressed. Duty is payable on UK shares wherever they are traded. However the ADR loophole which enables British shares to be traded in New York has operated for some 10 years, I think. Will there be a similar loophole in Frankfurt or, as the noble Lord, Lord Lamont, said, will stamp duty have to be abolished? What index is used and how it is determined is also important. Not being in the main index has significant implications for investors and, more importantly, for companies, whether they are in or out of it.

I am not really sure of the value of debating this merger in Parliament. The noble Lord, Lord Lamont, said that few of these questions are matters for the Government. This is a merger--and merger matters are largely for the competition authorities, the regulators, the shareholders, the staff and directors of the companies themselves. That is where it needs to be discussed.

We want to see the information memorandum, normally prepared for the shareholders involved in a merger, because that memorandum should address and clarify the concerns which the noble Lords, Lord Lamont and Lord Northbrook, and I share. I look forward to reading it.