Clause 26 - Exemption for recognised investment exchanges and clearing houses

Part of Financial Services Bill – in a Public Bill Committee at 3:15 pm on 8th March 2012.

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Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 3:15 pm, 8th March 2012

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?