The London and Frankfurt Stock Exchanges

Part of the debate – in the House of Lords at 5:08 pm on 24th May 2000.

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Photo of Lord Newby Lord Newby Liberal Democrat 5:08 pm, 24th May 2000

My Lords, like other noble Lords, I congratulate the noble Lord, Lord Lamont, on tabling this Motion--and also on his timing. Clearly, events have moved on significantly since the Motion first appeared on the Order Paper. I suspect that had this debate been scheduled even for yesterday afternoon, before we knew the outcome of the vote in Frankfurt, the tenet of our contributions might have been somewhat different. No doubt, if we were to hold a similar debate in 10 days' time, or even two months' time, they would be different again.

In many respects, the background to the situation in which we find ourselves is typical of Britain's relations with Europe. I believe that the London Stock Exchange and the City began this process with a fair degree of complacency. That was mentioned by the noble Lord, Lord Desai, and the noble Viscount, Lord Chandos. It was felt that we were pre-eminent in the field and that that pre-eminence was unlikely to be challenged by any continental upstart. However, a recognition has grown that something is going on and that it is something to which we need to respond if we are not to lose that pre-eminence; unless we get a move on, the consolidation will take place without us. Now, there is common consent that there was such a rush before the French alternative scheme carried all before it that we have something of a "cobbled together" scheme. That was the phrase used by the noble Lord, Lord Lamont, and I agree with his description.

Where do we go next? It is important for a number of reasons that, having reached this stage, the merger should now take place. The Deutsche Bo rse has approved it; therefore, there is a body of support for it on that side of the Channel which needs to be borne in mind. If London were to pull back, having come this far with German support, it would lead to a major question of credibility for the London Stock Exchange. As the noble Lord, Lord Lamont, and other speakers have said, there is now an increasing number of options in terms of new systems of stock market trading, which means that we cannot merely fall back on our past position. We must move forward. Having arrived at this point, surely this is the way in which the Stock Exchange should move forward.

That said, there are clearly a number of concerns and questions that need to be addressed both before the merger is consummated and after it has taken place. One question that spans both time-scales relates to the regulatory framework. There clearly is a different regulatory framework in Frankfurt. It has lower disclosure standards and, by common consent, a less consumer-friendly style than the London Stock Exchange. Although there is some movement in a London-ward direction in Frankfurt, clearly it will not lead, before any merger is completed, to a single regulatory framework. To put it no higher, it is slightly odd that within the single body of the merged exchange the listing requirements and virtually every aspect of the way in which a stock is treated will depend on exactly where it will be listed first. That seems unsustainable in the longer term.

There is also a question of taxation and stamp duty. When one discusses individual taxes rather than the generality of tax harmonisation, it is noticeable how many times we find arguments in favour of a common European tax level, and this is no exception.

The matter arises also of how to deal with smaller and medium-sized stocks--which is not wholly clear at present. Within the question of scale is a further question of consultation. It is clear that the very large players have been consulted up to now but the medium and small players in London have not. That does not seem a satisfactory way of proceeding. The noble Lord, Lord Northbrook, talked about consulting the private investor and about the large numbers of people who were taking up ISAs and similar financial products. I suspect that consulting them on some of these issues is impractical and is unlikely to lead to a clear view being expressed. The general principle of maximum consultation has been debated a great deal in relation the FSA. It has not been followed in this case to the extent that we would wish.

There is clearly a question about the cost of switching from the existing settlement system to the Xetra system and who bears the changeover costs. There is a lack of clarity regarding the possibility of, as it were, centralised funding from the exchange to help the smaller traders.

There is the issue of which shares will be quoted in euros, and whether having some quoted in euros and some in sterling will cause difficulties. I have a very simple answer, but I am not sure that the noble Lord, Lord Lamont, would find it acceptable. We shall see whether it proves in reality to be a problem--some speakers have suggested that it will and others that it will not.

There is also the question of whether the merger will lead to Frankfurt or London being pre-eminent. Considerable concern has been expressed in London that the longer-term effect of the merger will be that the bulk of business will go to Frankfurt, because that is where the new stocks will be traded, including the high-tech stocks. There have also been fears in Frankfurt that it is in a sense giving up the scope for growth: that companies will opt to list stocks in London when they have the option. That possibility was referred to by the noble Lord, Lord Barnett. Normally, when both sides express equally strongly held fears that the other side has the advantage, one has an instinctive sense that they have got it just about right. One can only hope that they have in this case, but it is difficult to know at this point.

A matter of considerable concern to individual consumers is the index that will be used. Given the growth of tracker funds in particular, if a new index is adopted there will at the very least be a big re-education job to be done.

All these issues are ones with which Don Cruickshank is now grappling. Anyone who has followed his career up to now would probably agree that he has the ability both to see the big picture and to grapple with the details, which suggests that he will do it very well.

Stepping back from the short term, there are one or two broader lessons or features of this episode that I should like to draw to your Lordships' attention. First, there is the generally accepted view that a consolidation of Europe's stock exchanges must make sense--that 40 is simply too many. The noble Lord, Lord Desai, and the noble Viscount, Lord Chandos, referred to the gains in terms of efficiency. In the single European market a consolidation of exchanges will make mergers and acquisitions across Europe easier, and it will be easier for individuals to hold shares. That makes a tremendous amount of sense.

A point that is relevant not just here but to a number of other developments within the EU is that the impetus for this European movement is not coming from an over-powerful Commission in Brussels or from the Council or the European Parliament. It is coming from American merchant banks. When discussing, as I am sure we shall in the months ahead, the future of the various aspects of the European economy, we shall need to give considerable weight to market pressure rather than merely the views of politicians. Politicians--and we all fall into this category--are coming very late to this issue. We were not debating it six months ago. In a sense, we are now following the market. In a number of economic issues that is a good principle.

If we accept that consolidation in Europe makes sense, and that it should be market driven, but if we see a broader consolidation than at present, it must make sense to have a single regulatory platform. Therefore, while I do not suggest that we move to that in the short term--this is particularly heartfelt for those of us who have just gone through the Financial Services Bill--there will come a time when it makes sense to be looking at a European framework document so that we do not have long arguments about exactly what is happening in Frankfurt, Paris or London. I can see that the noble Lord, Lord McIntosh, is already looking forward to that day.

This has been a useful debate. The exact shape of the exchanges in London and across Europe must be market-driven. But one of the roles of this House is to give voice to the concerns expressed by those who are affected by economic and social change. It is also the case that, where there is a regulatory role to play, we have spent a great deal of time thinking about how to achieve a fair and transparent system. I hope that in this debate we have achieved the first of those purposes. A detailed examination of the revised regulatory requirements is, I am glad to say, for another day.