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Investment Exchanges and Clearing Houses 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 the hon. Member for Twickenham (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.