I will try to be relatively brief as there are some issues on clause 26 that we wish to speak about. I am not sure whether other hon. Members will want to speak on this. The clause deals with the exemption for recognised investment exchanges and clearing houses. It pertains to amendments to section 285 of FSMA, which defines recognised investment exchanges and recognised clearing houses. The FCA will supervise recognised investment exchanges but the Bank of England will be responsible for recognised clearing houses and other infrastructure such as payment systems.
This clause and section 285 of FSMA are fairly complex to understand in terms of who is being regulated by which regulator. According to the explanatory notes, subsection (2) provides that a
“recognised investment exchange need not be separately recognised as a recognised clearing house in order to provide clearing services.”
The notes then go on to say, that the general effect of subsection (2) and (3) is that
“a recognised investment exchange will need to apply for the status of, and be specified by the Bank of England as, a recognised clearing house in order to provide clearing services. However, recognised investment exchanges will continue to benefit from an exemption in relation to any regulated activities carried on for the purpose of facilitating the provision of clearing service by another person.”
As I understand it, and I may have misunderstood this, in plain speak that means that if the investment exchange provides third-party clearing services, it is exempt from any regulation for those services. Clearing houses will also benefit from this exemption. Paragraph 322 of the explanatory notes gives as an example of this the situation
“where clearing services are provided by a related company (which might be regulated outside the UK) and the UK recognised clearing house or recognised investment exchange routes trades not arranged using its facilities to a separate clearing house.”
Can the Minister explain who will be regulating an exchange that provides clearing services? If it is a dual-regulated recognised body, what will be done to ensure effective co-ordination of regulation and that there is not a duplication of effort, costs and resources in terms of regulation? We have been round this house a few times but again that is just for clarity. If the UK exchange or clearing house starts routing trades through these third parties to take advantage of regulatory arbitrage, but through less than savoury clearing houses—if I can put it in those careful terms—how can the Bank ensure that those services will be safely regulated and who will regulate those services if they are exempt from the regulation as proposed in the Bill?
There is an interface here between a clearing house and a recognised investment exchange. Recognised investment exchanges are regulated by the FCA. The hon. Member for Kilmarnock and Loudoun was right that a UK clearing house is regulated by the Bank of England because it is part of the financial infrastructure. Information has to be transferred from the recognised investment exchange to the clearing house. So there has to be a report of trades done. That transfer of information from the exchange to the clearing house helps facilitate clearing. It is described as a clearing service. It is not clearing itself: it is a clearing service. So providing information that helps to facilitate that clearing is not the same as clearing and so is regulated by the FCA as part of a recognised investment exchange’s activities. That is where that interconnection is regulated.
The hon. Lady referred to clearing houses outside the UK. The authorisation and regulation of clearing houses in the EU will be covered by the European market infrastructure regulation which ensures a consistent approach to authorisation across Europe. I hope that that clears up why we have this exemption in clause 26.