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Investment Exchanges and Clearing Houses Bill

My Lords, this is getting rather boring. For these Benches, I add our support for the Bill, and I thank the Minister and his honourable friend the Economic Secretary for the courtesy of letting me see a draft of the Bill a few weeks ago. As the Minister is aware, in view of the importance of the subject matter of the Bill to the City of London—using that term as a proxy for our vibrant financial services industry, wherever it is located and certainly beyond the confines of the square mile—we have unusually agreed to the shortened time frame for getting this Bill through, both in your Lordships' House and in another place. The advantage is that we clearly lay down the basis for future regulatory changes as early as possible, so there can be no misunderstanding for anybody who might seek to acquire a controlling interest in any of our investment exchanges or clearing houses. These procedures have a down side, however, in that issues may not have been examined in the depth necessary; my noble friend Lord MacGregor referred to that. There is some danger of a technical deficiency going unnoticed, or the appearance of our old friend the unintended consequence. The mere fact that this Bill is not opposed by the Official Opposition Benches or the Liberal Democrat Benches—or, indeed, by any significant body of opinion outside Parliament—is not necessarily a guarantee that we will make good law. We have only to look at the proximate cause for this Bill—the Sarbanes-Oxley legislation—for an example of what went wrong. In the wake of the Enron and WorldCom scandals, that Bill went through the US legislature with no opposition from within the legislature or outside. But it is manifestly flawed legislation which has imposed massive costs on US-listed companies, and of course those UK companies that also have a US listing, in return for benefits which, I believe, are now widely acknowledged to be not commensurate with the costs imposed. As a result, as other noble Lords have said, there has been a commercial disadvantage for the US capital markets, of which London has taken advantage. I do not want to labour this point because we have agreed with the Government that this Bill can proceed quickly. However, we need to recognise that there is a risk, and I hope that the Minister will say something this evening about the nature and the robustness of the Government's engagement with those potentially affected by the Bill. This may be a case where it would have been appropriate for the Bill to contain a sunset clause or possibly—I shall no doubt get into trouble for suggesting this—a power for the Government to amend further the Financial Services and Markets Act if it is discovered that the amendments covered by the Bill either do not do the job that they are intended to do or that they end up doing the wrong job. The Minister might like to say what consideration the Government gave to those mechanisms when drafting the Bill. I make it plain that my party is entirely open to ownership issues relating to exchanges or clearing houses: we entirely agree with the Government on that. The history of our financial services market, especially since the brave reforms undertaken by my party in the 1980s, has shown that ownership is irrelevant. We owe the vibrancy of our financial markets to the fact that the City is a good place for financial services businesses to be, as the studies undertaken by the Corporation of London, referred to this evening, clearly show. We outshine Tokyo and everywhere in Europe, and we do better than New York on many counts. This country has always welcomed financial services businesses from abroad, whether they are setting up from scratch or buying into existing UK businesses. My party has no truck with economic nationalism, and there is a good degree of consensus on that this evening. One hallmark of my party is our dislike of regulation and our commitment to deregulation. Before we sign up to additional regulation, we need to be satisfied that it is absolutely necessary. It is undeniable that the Bill creates new regulatory burdens which will apply to investment exchanges and clearing houses, in that it creates for the first time the power for the FSA to interfere in the nature of regulatory processes applied by the exchanges. There is a nice argument that says that the Bill is about stopping more regulation coming in by the back door and so it is really a deregulatory Bill, but I do not quite buy that. The FSA is a regulator. The noble Lord, Lord Teverson, referred to the zeal with which it approaches its regulatory tasks, and the Bill is giving it more powers to regulate. Clause 1 introduces new Section 300A into the Financial Services and Markets Act, allowing the FSA to disallow regulatory provisions where it believes that the provisions would be excessive. The danger appears to me to lie not in the explicit words of the Bill, which seem to confine the FSA’s overt powers in an appropriate way, but in the fact that the exchanges and clearing houses will potentially have to negotiate with the FSA whenever they seek to make any change to their regulatory rule books. That gives the FSA an unparalleled opportunity to influence the rule books in the way that its current powers simply do not allow. To put that another way, the issue may not be the FSA saying ““yes”” or ““no”” to a regulatory change but, rather, that it has a position of power that it could use, perhaps not even consciously, to achieve objectives not directly related to the proposed regulatory change. For example, it could become known that the FSA favoured certain changes to consumer protection measures. Would an exchange or clearing house feel pressured to fall into line in order to get some other, unrelated regulatory change past the FSA and past the powers that we are introducing in this Bill? Perhaps the Minster will say something about the constraints, if any, on the way that the FSA will, in practice, use its new regulatory powers. The Minister said that the FSA would not use the powers for routine regulatory changes, but Mr Tiner’s letter, to which the Minister referred, does not quite say that. I have concerns about that. Will the Minister say what will happen if the FSA starts to use these new powers more widely? Let us suppose that it is rather taken with its new regulatory power and seeks to use it not once but many times a year, and that it starts to impose significant costs on the exchanges and clearing houses within the Bill. What could the Government do about that? One possible constraint could be judicial review. As judicial review is process-focused rather than substance-focused, we cannot regard it as a first line of defence against the FSA’s incorrect use of its powers. I hope that some other constraints can be shown to exist. While I do not rate judicial review as a great protection against the powers of the state or its organs, I have one question for the Minister which arises from how judicial review would proceed. This point was made by my honourable friend David Gauke in another place. I have given the Minister notice that I intend to raise this issue. The meat of this Bill is in Clause 1, which adds new Section 300A to the Financial Services and Markets Act. The new power in Section 300A(2), to direct that a proposed provision must not be made, will have to be construed for judicial review purposes in the context of the four regulatory objectives set out in Section 2 of the Financial Services and Markets Act. Those are market confidence, public awareness, the protection of consumers and the reduction of financial crime. Noble Lords who took part in the deliberations on the Financial Services and Markets Bill—that does not include the noble Lord or myself, as we were not then in your Lordships’ House—will know that there was extensive debate on whether those four regulatory objectives should be extended to include a fifth, the competitiveness of the UK’s financial services industry. Due to the way in which the Financial Services and Markets Act is drafted, if there is any conflict or prioritisation between consumer protection and competitiveness, the FSA would have to award victory to consumer protection. Competitiveness is not a regulatory objective for the FSA and hence can come into play only if all other things are equal. If we assume that the London Stock Exchange is taken over by NASDAQ and further assume—although it may appear unlikely at the moment—that NASDAQ decides to add rules along the lines of Section 404 of the Sarbanes-Oxley Act, it is fairly sure to argue that that was necessary on consumer protection grounds. That is what Senator Sarbanes and Senator Oxleydid when they proposed their own legislation. Let us further assume that the FSA wants to use its power in Section 300A(2) to direct that this should not be added. NASDAQ would then seek a judicial review, which would look, first, at whether the FSA was acting within its own regulatory objectives. As the competitiveness of the UK's financial services is not a statutory objective, but consumer protection is, would the FSA not in practice be vulnerable in a judicial review? The Minister should note that I am not framingmy question by reference to the terms of newSection 300A and the elaboration of ““excessive”” found in subsections (3) and (4). Those come into play only if the FSA can indeed make a direction within subsection (2). Meeting the tests laid down in subsection (3) and taking into account the mattersin subsection (4) are not a substitute for the direction being within the FSA's statutory objectives. Put another way, Section 300A does not exist in isolation. It has to be seen in the context of the FSA's objectives as already laid down in Section 2, and those objectives contain nothing about the competitiveness of the UK’s financial services. This is a complex area. It was debated in another place, but it did not achieve the desired level of clarity, which I hope the Minister can achieve this evening. We might have preferred to see some aspects of the Bill expressed differently. The real rationale forthe Bill is the potential for regulatory burdens to be imposed following a change of ownership of the London Stock Exchange, but the Bill is not drafted in those terms. It gives a much broader power to the FSA. It may be that the FSA will use the powers with moderation and will not impose excessive burdens. It might even act as a deregulatory ratchet, although I am not holding my breath for that. We should be wary of conferring broader powers than necessary, in case future generations of FSA leadership are less scrupulous than the incumbents. Another aspect of the definition of ““excessive”” in subsection (3) of new Section 300A is that it is calibrated by reference to Community law, so if Community law is excessive we are stuck with it. That is doubtless a by-product of our treaty obligations. We know that most of the regulation we must apply in the UK, including for financial services, emanates from Europe. Now, for example, the financial services sector has to cope with MiFID—the markets in financial instruments directive—which will cost up to £1.1 billion to implement and over £100 million a year to operate. We really need a power in the Bill to strike down excessive regulatory burdens, full stop—including those coming from Europe. I accept that, for this Bill at least, that is a pipedream. I hope that the Minister can answer my questions today, so that we can clear the way for an easy and rapid passage through the remaining stages.