Social Security Contributions (Share Options) Bill

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Mr. Flight:I beg to move, That the clause be read a Second time.

The clause raises the issue of market abuse. Again, on Second Reading, I did not communicate the point that I was making clearly enough.

The principle behind all the market abuse legislation—the Financial Services and Markets Act 2000 and the nightmarish regulations yet to come—is that the price of shares should not be capable of being distorted upwards or downwards by misleading information. The simple point here is that any company that does not avail itself of the option to pay the special NIC bill sends a clear signal to markets that people will take negatively. Whatever the underlying reasons, the company is clearly saying that it does do not think that the NIC bill that it may have in the future will be bigger than the current one. It is sending a clearly negative signal to markets about the prospects for the share price.

As we discussed on Second Reading, there may be different reasons for opting not to make the payment: management may want to change the employees substantially, so many options will lapse, or the company may not be able to afford to pay it, and so on. Although it is not clear precisely what will fall within market abuse and what will not until the regulations are available, it is certainly an abuse for companies to send a wrong signal to investors. If the company says that it will not exercise the option and you, Mr. Benton, have some shares and say, ``I don't like the look of that. I'll sell,'' and the subsequent results are wonderful, you will say that the company misled you.

Mr. Timms: I simply want to ensure that I have understood the hon. Gentleman's point. Is he saying that not taking up the option would send a signal that he is concerned about?

Mr. Flight: Absolutely. That is precisely the point: the option is a relieving measure. The Minister referred to the quid pro quo, the key to which here is the fact that the potentially large future employer NIC bills are capped at the much smaller amount as of 7 November. If a company does not take up the option, markets will interpret that as meaning that the management is not optimistic about future prospects. If I were a shareholder in a company and saw that it did not take up the option, I would think of selling the shares. That is how the market will react.

The reason for not taking up the option may have nothing to do with that and could be for one of two other main reasons. The signals sent to the market could be quite misleading.

Mr. Burnett: Does the hon. Gentleman think that the reverse case could also amount to market abuse? In other words, if a company takes up the option, it sends a signal to the market that it is extremely optimistic. The market might then rely on that.

Mr. Flight: The hon. Gentleman is correct in principle, although I, like the Minister, assume that most companies that qualify will take up the option, so it will be the majority rather than the minority. Logically, a company would take up the option only if it were reasonably optimistic about its prospects. If it was pessimistic and thought that profits would decline and that its NIC liability on options would be nothing because the company would not be worth anything, it would be mad to take up the option. The chance of misleading positive signals is much less than the chance of misleading negative signals.

Mr. Timms: I believe that the hon. Gentleman's fears are wholly unfounded. As he said himself, any number of considerations could underlie the decision whether to take the route that is offered by the Bill. He, or any other person, would be ill-advised to conclude that directors will take that decision for one specific reason over any one of the range that might apply. Because they can consider such a wide range of factors, there is no danger along the lines that the hon. Gentleman described. As the business community well knows, early settlement cannot in itself be seen as an indication of directors' expectations regarding the performance of the company's share price.

However—this is a little like our discussion about the Human Rights Act 1998—let us suppose that the hon. Gentleman is right and that the Bill allows for a breach of the market abuse rules. In such circumstances, the Financial Services Authority would rightly wish to take action. I would therefore argue against the opt-out in the new clause.

The new clause is unnecessary, and could damage the authority's ability to carry out its proper regulatory functions. I hope that the hon. Gentleman will withdraw the motion.

Mr. Flight: It strikes me that the Minister may not fully appreciate what the Government have done in relation to market abuse. Market abuse may be committed when a person takes an intended or unintended action that affects a share price in the wrong way. The Minister has got the point the wrong way round. For all kinds of good reasons, a company may decide not to take up the option. If that decision sends a signal that markets take to be negative, that is, in principle, an act of market abuse.

The new clause has raised the issue, and the FSA should perhaps opine on it. It was worth bringing to the Committee's attention our objection to the principle of having companies gamble by publicly taking a view and placing their slots on the board in terms of what might be in a future NIC bill. The Bill could lead companies unintentionally to send misleading share price signals.

I have made the point, and I shall be interested to hear what the FSA has to say about it. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

Bill, as amended, to be reported.

Committee rose at seventeen minutes to One o'clock.

The following Members attended the Committee:
Benton, Mr. (Chairman)
Allen, Mr.
Burnett, Mr.
Colman, Mr.
Etherington, Mr.
Flight, Mr.
Healey, Mr.
Hendrick, Mr.
Kilfoyle, Mr.
Luff, Mr.
Marshall, Mr. Jim
Rogers, Mr.
St. Aubyn, Mr.
Taylor, Mr. Matthew
Timms, Mr.
Williams, Mr. Alan W.

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