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Investment Exchanges and Clearing Houses Bill

My Lords, at Second Reading I always ask myself three questions about a Bill: first, are the aims of the Bill desirable; secondly, do you need a Bill to achieve those aims; and, thirdly, if so, does the Bill set about it in the appropriate way? In this Bill, the answer to the first question seems to me, unambiguously, yes. Its purpose is to prevent excessive regulation being imposed by a London Stock Exchange owned by NASDAQ via the introduction of Sarbanes-Oxley type rules. There are two reasons for wanting to prevent that, one practical and one principled. The practical reason is that, as noble Lords have said, London has made an outstanding success of operating with what I was going to describe as a light-touch regime—given the comments of my noble friend Lord Teverson, I had perhaps better say that it operates with a relatively light-touch regime. However, that relatively light-touch regime has been one of a number of contributory factors towards its success in recent years. Although there is a huge rule book, it is noticeable that when the FSA asks for suggestions on how the rule book might be significantly reduced, it finds very few practical suggestions forthcoming. Over a period when London has been growing, however, New York has been contracting in certain respects. It is absolutely clear that the excessive regulation, as we see it, of Sarbanes-Oxley—which is a classic case of the unintended consequences of a Bill that was designed to do what at the time were non-contentious things—has had a significant, negative effect on New York. That has been to our advantage. Therefore, it would be pretty foolish to encourage or allow anything that undermines the advantage that London has had in recent times. The principled objection to the kind of imposition of Sarbanes-Oxley rules relates to the issue of extraterritoriality. It is for this country, within, when appropriate, the overall context of EU legislation, to decide what level of regulation it believes appropriate. It is always difficult to get the balance right, but it is for us in the UK to decide how we set about doing that. As we have seen in the recent NatWest case on extradition, the USA is very quick to seek to apply its rules extraterritorially whenever it can. It is a logical extension of the military and economic power that the US has. It is a cast of mind that people get into, but it is pretty arrogant to believe that you can always call the shots even outside your own jurisdiction. It is therefore unacceptable and should be resisted. That is one of the consequences of this Bill. Is the Bill necessary? How likely is it that a NASDAQ-owned LSE would in practice introduce Sarbanes-Oxley type legislation? If it sought to do so, why wouldn’t the existing legislative framework be adequate to deal with it? On the likelihood of the Bill being necessary, the arguments are less clear-cut than seeing the aim established. One of the principal reasons for NASDAQ seeking to buy the LSE is to gain the benefits that, by driving business away from the US, Sarbanes-Oxley has brought to London. It would be perverse to introduce the very rules that would undermine the ongoing success of NASDAQ’s new purchase. Indeed, it has said that it welcomes the Bill. That attitude is underpinned by the growing and, by now, widespread acceptance in the US in financial and political circles that Sarbanes-Oxley, in the way it has been interpreted and implemented, has gone too far. There is a strong likelihood that some of the rules will be repealed or relaxed in the foreseeable future. In those circumstances, it is unlikely that there wouldbe pressure on NASDAQ and the SEC to try to introduce Sarbanes-Oxley to the UK. An argument was also made in the other place that if the LSE adopted new and onerous rules, market competition should and could deal with that—that new exchanges that did not make such onerous requirements would and should be established. As we have seen recently with the Turquoise consortium of international banks that proposes to establish a new, low-cost share trading platform, such developments are possible, although they are not guaranteed—certainly, not in the short term. If there is a belief that one may need to apply regulatory pressure against the imposition of Sarbanes-Oxley type rules, why is existing legislation not adequate? As my noble friend Lord Teverson said, the FSA has plenty of powers to regulate exchanges. The Economic Secretary stated in another place, as the noble Lord, Lord MacGregor, mentioned, that the Protection of Trading Interests Act 1980 and EU regulations could be effective if an overseas authority sought to impose its national requirements directly on a UK exchange or clearing house in respect of its UK activities. However, if a US owner were pressurised into operating in accordance with domestic US law, existing EU and UK legislation could not prevent lawful instructions being given by that US owner. The Bill would prevent such an outcome by allowing the FSA to act against excessive legislation from whatever source. The nub of the Bill is that it protects NASDAQ against SEC influence to impose rules that it would like imposed here, when NASDAQ, having just bought an asset to avoid those rules, would be very unlikely to impose them. In a sense, one can see why NASDAQ may support the Bill as a way of protecting itself against SEC pressure on it back in the US. In summary, there is a ““better safe than sorry”” argument in favour of having a Bill at all. The Bill may well be unnecessary, but it would be pretty foolish if we had not legislated for circumstances in which it might be necessary and, for some perverse reason, a NASDAQ-owned LSE introduced over-prescriptive rules. There are some vague echoes here of last week’s debate about Trident—we do not think that we will need to use it but we feel safer with it. At least this Bill is a cheaper option than Trident—and might be a safer one. My second argument is that it is important to lay down a matter of principle to the US that we will not simply accept extraterritoriality. This Bill sends such a signal, and that is useful in itself. If we accept, as I do, that a Bill is desirable, does this one do the trick? I think that probably, on balance, it does. It is very skilfully drafted by not mentioning a specific exchange or a specific potential owner. I agree with the Minister and the other noble Lords who spoke that this certainly is not a protectionist Bill, and we on these Benches share the view that we should be nationality-blind as to who owns institutions in the City. However, the question about the wide application of this Bill across all exchanges brings me to the first of two questions I have for the Minister. As the noble Lord, Lord MacGregor, said, the Economic Secretary in another place said that one advantage of the Bill was that it would keep deregulatory pressure on all existing exchanges operating in London. Do the Minister and the Government envisage that the FSA will use the new powers in the Bill against existing exchanges, or do they envisage that it really is clever drafting which actually has a narrower target? The second question—there was some discussion in anotherplace about EU legislation—is whether, in their wide consultation, the Government have consulted the European Commission and other member states. If so, as this is financial services legislation that is outwith the EU framework of capital markets regulation, have any concerns been expressed about any aspects of the Bill? With those questions, I reiterate that I believe this is an expedient Bill. As the Minister said at the beginning of the debate, the usual channels have agreed a timetable, which obviously I support. We look forward to having the Bill enacted by Christmas.