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Investment Exchanges and Clearing Houses Bill

My Lords, I am grateful for the attention your Lordships have given the Bill today. I thank noble Lords for broad—and, in some instances, enthusiastic—support for this measure. Before responding to some of the detailed points about the Bill, I shall stress some of the most important, emphasising what has already been debated. First, we are legislating not to impose regulation but to avoid it. Of course, this sounds like a paradox—a point debated in the other place—but it goes to the heart of what we want to achieve. We want to safeguard our pragmatic and successful regime for market regulation. From today’s debate, that is something we all share. This country’s proportionate risk-based regulatory regime has made London a magnet for international business and an economic asset for the UK, for Europe and for countries throughout the world. As I said before, that is widely recognised in many other countries. The Bill will deliver that objective. It enables the Financial Services Authority—widely respected as one of the world’s leading financial regulators—to veto disproportionate regulatory changes proposed by exchanges and clearing houses for the markets which they provide and support. It also puts mechanisms in place which will enable the FSA to ensure that this will not impose any unnecessary or excessive burden on exchanges and clearing houses themselves. I also emphasise that the Government have not changed their attitude towards foreign investment in our financial services industry. It should therefore be clear that the Government do not have, and will not express, any views about the merits of the takeover bid for the London Stock Exchange made by the US NASDAQ stock market, as I indicated earlier. We will not intervene in the judgments of owners of those shares or in the judgments which the Financial Services Authority and competition authorities must make in their respective fields. The noble Baroness, Lady Noakes, mentioned the tension between the FSA’s different regulatory objectives and their interaction with the requirements of the Bill. I shall spend a little time on this. Some of it perhaps almost strays into Committee territory, but it would be good to get something on the record. I am grateful to the noble Baroness for giving me advance notice of her intention to raise this matter. The question may be summarised as querying whether the FSA regulatory objective for the protection of consumers must always trump other considerations, such as the need to maintain UK competitiveness, when the FSA is considering exercising its veto over potentially excessive regulatory provision. Put this way, the answer is ““No””, and I shall say why shortly. It is first worth exploring what would happen in practice and how the different legal provisions, which the noble Baroness rehearsed, might be engaged. The scenario will always have three elements: first, a UK recognised body wishes to bring in some new regulatory provision and notifies the FSA; secondly, the FSA calls in the proposal and, after fulfillingthe other procedural requirements in the Bill, decides that the proposal would be excessive and directs the recognised body not to make it under the newSection 300A(2); and, thirdly, the recognised body challenges the FSA’s decision to make the direction by judicial review. For such an action to succeed, the recognised body will have to demonstrate that the FSA’s decision was ultra vires, or that there were serious procedural inadequacies, or that the decision was unreasonable in the sense that it was a decision that an authority, when acting in accordance with its powers and having considered all relevant factors and discarded those which were irrelevant, could not rationally have reached. It is worth recalling that it will be for the FSA to review the proposed regulatory provision and judge whether it is excessive. Assuming that there is no question about the FSA’s powers or processes, it will be for the court to review the FSA’s decision and conclude whether that decision was unlawful or unreasonable in the sense described. To succeed, the recognised body would need to demonstrate to the court that no reasonable person in the FSA’s position could properly have taken the decision that it took. The court will not find for the applicant just because, if it had been taking the decision on the basis of all the factors that the FSA considered, it might have reached a different decision. We now have to consider the impact of the protection of consumers objective in such a case. In particular, a challenge might, as was suggested, seek to argue that if the FSA had given proper weight to that objective, it could never have concluded that the proposed regulatory provision was excessive. For instance, the argument might be that the FSA should have borne in mind that provisions of the same sort deliver consumer protection in another state. There are three points to note. First, the protection of consumers is only one of the four regulatory objectives that the FSA has under Section 2(2) of the Financial Services and Markets Act. The othersare market confidence, public awareness and the reduction of financial crime. I must stress that those objectives are not objectives of the FSA’s business in the sense of business objectives, and still less are they meant to be objectives that the financial services industry or any individual exchange, clearing house or firm is meant to deliver. Rather, they operate more as constraints on how the FSA exercises its general functions. The extent of the obligation in Section 2(1) of the Financial Services and Markets Act is that the FSA is required to, "““so far as is reasonably possible act in a way … which is compatible with the regulatory objectives; and … which the Authority considers most appropriate for the purpose of meeting those objectives””." So while the authority is to meet those objectives, it is for it to decide how to go about doing so. It would be quite impossible for the FSA lawfully to concentrate on only one of its regulatory objectives to the exclusion of the others. It has to give due weight to all of them and if it did not—for example by giving too much weight to the protection of consumers—it might be vulnerable to a challenge. Secondly, in Clause 1 the Bill refers to ““a reasonable regulatory objective””. It does not refer to the FSA’s regulatory objectives that I have just discussed. In deciding whether a particular proposal pursues a reasonable regulatory objective, that question will have to be considered by reference to the particular proposal, the circumstances of the particular exchange or clearing house proposing the provision—not those of the FSA—and all other relevant circumstances. I am not saying that the protection of consumers could not be a reasonable regulatory objective—of course it could—but whether in the case of a particular proposal the objective being pursued was a reasonable regulatory objective would depend on all the circumstances. It seems to be being suggested that in these circumstances the only relevant objective would be the protection of consumers. That would not appear to be the case. These circumstances are necessarily dealing with financial markets and exchanges. I refer the noble Baroness to Section 3 of the FSMA which expands on the market confidence objective. Further, in exercising its functions, including that of taking decisions under the provisions of the Act, the FSA must have regard to the matters listed in Section 2(3). It is not the case, as has sometimes been implied, that the matters in Section 2(3), which include, "““the desirability of maintaining the competitive position of the United Kingdom””," are in some way subordinate to the regulatory objectives. These matters are really engaged in a slightly different way when the FSA makes its decisions and they must also be given the appropriate weight in the circumstances. Thirdly, even if the FSA protection of consumers’ objective was engaged, that objective is to secure the appropriate degree of protection for consumers. It is for the FSA to decide what the appropriate degree of protection of consumers is. Regulatory provision which went beyond that clearly could ““be disproportionate to the end to be achieved”” or, equally, it might be considered as not pursuing a reasonable regulatory objective. It would be for the FSA to decide whether that was the case, having regard to all the relevant circumstances in accordance with new Section 300A(4). Just because something is or purports to be for the protection of consumers, it does not follow that it either cannot be excessive or is the appropriate degree of protection. The final point raised in this context is whether the fact that the same regulatory provision is already in place in another country means that it must be appropriate or can never be excessive. The answer must clearly be no. I have dwelt at some length on that point to get it on the record. If, on reading Hansard, the noble Baroness or any other noble Lord wishes to raise further points on that before Committee, I would be very happy to seek to set up appropriate meetings. I will seek to deal with some of the other points raised. The noble Lord, Lord MacGregor of Pulham Market, made the point that this is not a protectionist measure. That is absolutely right; and it would be completely the wrong way to go. I was asked whether these rules would in practice keep deregulatory pressure on the exchanges. I believe that they will because of the processes that have been put in place. The need to notify the appropriate rules is a good mechanism to keep pressure on the exchanges. The issue was raised about parliamentary scrutiny. The impact assessment talks about post-implementation review. The effectiveness of the proposal will be demonstrated by the continued attractiveness of London as an international financial centre and the competitiveness of the UK financial services sector. In practice, these will be difficult to observe and measure, but the Treasury will be able to keep the effectiveness of the policy under review through its ongoing dialogue with stakeholders in the City and other parts of the UK financial services sector. Obviously, that is part of the review and scrutiny. There is another role for Parliament, as the noble Lord has indicated. The noble Lord also made the point about whether we might have assurances from NASDAQ that it will always abide by the current regulatory regime—I resist the terminology of the noble Lord, Lord Teverson—but that will not always necessarily be the case, which is why we need this legislation. The noble Lord recited what happened to IPOs. The report I referred to showed over a relative short period how the US market lost out big time. The noble Lord, Lord Teverson, raised the point about John Healey’s comments. As I understand the point about extraterritorial jurisdiction, the European Commission has competence for dealing with extraterritorial measures taken by third countries against EU member states. The EU regulation was ratified in the UK as an amendment to the UK Protection of Trading Interests Act. A direct attempt to impose obligations on a territory is a different issue; we are dealing with an attempt coming through an ownership and control structure. That is why we must have particular regard to that. The noble Lord, Lord Teverson, talked about how extensive the FSA’s handbook was. He may have studied it more assiduously than I have. We are dealing here with recognised markets. These are largely outside the detailed rule-making of the FSA, which is partly how the light-touch approach comes about. Much of the FSA’s rulebook is applied to others where it is the FSA’s job to make the detailed rules. The noble Lord asked about how AIM is protected. My advice is that AIM is a market of the London Stock Exchange, and part of the London Stock Exchange, not a subsidiary company. So both the LSE main market, which is a recognised market for the purposes of the prospective directive, and AIM, which is not, are regulated in the same way as parts of the recognised investment exchange. Therefore both are covered by the new legislation. The noble Lord also asked whether this is an open book for the FSA to over-regulate—a point also made by the noble Baroness, Lady Noakes. It should not be. The provisions are targeted and specific. At the end of the day, there is the process of judicial review if the FSA were to act in an overbearing way. The noble Baroness also asked whether undue pressure can be brought to bear. The legislation is about specific rights to veto proposed rule changes. Again, if the FSA sought to stray outside that authority to use it to apply pressure, it could be subject to review. The noble Lord, Lord Newby, asked whether the Bill is necessary. In reality, we will know in due course. It is a precautionary measure that will be useful to have because, if there were a takeover and if that brought a change to the regulatory environment, that would be a great pity. The noble Lord suggested that market competition would deal with overregulation. The problem with that mechanism is that it would take some time to accrue and costs would be involved in people moving off the exchanges. Why is not existing regulation effective? Presently, the FSA has powers not to recognise an exchange, but that would happen after the event and would be a fairly draconian application of the rules. That is why the Bill is necessary. The noble Lord asked about discussion and consultation in Europe. I will have to write to him on that because I do not have anything specific in my briefing. However— again making reference to the regulatory impact assessment—the Treasury has consulted with the FSA. This is a narrowly focused measured concerning a matter that is unlikely to be of wide general interest which the Government want to take forward with all reasonable speed. The Treasury therefore decided that it would not be appropriate to undertake a formal, public consultation on its proposal. The Treasury has shown the proposal informally to UKRIEs and RCHs, relevant trade associations and other key stakeholders, so there has been a degree of consultation, but I shall write specifically to the noble Lord on the issue of engagement with the Commission. The noble Baroness, Lady Noakes, reminded us that things are done in haste with a good deal of support do not always produce the right answer. Sarbanes Oxley is a classic case of that. It was suggested that there be a sunset clause and asked whether we are happy about the robustness of the legislation. One provision is limited to 12 months: the waiver provisions while the FSA gets its rule book up and running—work is being undertaken on that the moment—but it would not be appropriate to go beyond that. I repeat that this is fairly targeted legislation with a good deal of protection surrounding it. It was touched on whether the FSA would be able to use its power to force other changes. I do not believe that it would, as this is a narrow power to veto specific planned changes to the rule book. I hope that I have dealt with each of the points raised by noble Lords. If not, I am happy to read the record and follow up later. The Bill builds on the system that we already have and provides effective and flexible machinery to deliver an important policy objective: to ensure that market regulation here fits with the overall approach to financial regulation in the UK and in Europe. It fulfils the Government's commitment to safeguard the United Kingdom’s proportionate, risk-based approach to market regulation. It will ensure that London remains a magnet for international business and foreign investment and it will do so without imposing an unnecessary or excessive burden on the exchanges and clearing houses. I commend the Bill to the House. On Question, Bill read a second time, and committed to a Committee of the Whole House.