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The SEC requires firms with more than 13 clients to register with it, but it has looked beyond simply the number of direct investors to the next layer down. For example, a UK-based hedge fund could have, say, 10 investorsbelow the SEC limitbut if they each had
10 investors, the SEC would say that the hedge fund had 100 investors and it would be drawn into the net. So there is a continuing push from the SEC to draw more activities based outside the US into its remit, with the consequence of imposing additional regulatory burdens on those funds. Although the Bill tackles an aspect of extraterritoriality, we should be under no illusion that it deals with the issue in its entirety.
Mr. Redwood: Does my hon. Friend agree that, if sensibly interpreted, the Bill is a bit of a first? It provides some kind of deregulatory ratchet, instead of a regulatory ratchet, which we have had so often in so many areas. It cannot just target one possible overseas buyer of the stock exchange and one possible overseas source of extra regulation. It has to target all of that. So as exchanges renew their regulations, there will be a gentle deregulatory pressure, which seems admirable.
Mr. Hoban: I am grateful to my right hon. Friend for making that point. There is a great deal in what he says, because there will be an inherent bias in the Bill to look at how exchanges reviewing their rule books might lead to the introduction of more onerous regulations, affecting the competitiveness of those exchanges. There is a benefit there. It is a slightly curious irony that the Bill makes a small extension of regulation in order to protect the light-touch regulation that we see at the moment and to entrench it still further.
Ed Balls: On that point, does the hon. Gentleman agree that, in order to make sure that we keep that deregulatory pressure on all exchanges, there is merit in the provision applying to all new rules and all existing exchanges regulated in London, and not simply to exchanges where there has been a change in governance?
Mr. Hoban: Indeed, although the Minister is in danger of trespassing on the detailed scrutiny of the Bill in Committee. I have tabled a probing amendment to that effect, to elicit from him his thought process. He makes an important point. There is an issue in that the current ownership regime of all exchanges has not created a problem to date. Some may believe that these changes should be triggered only on a change of control. It is important that, in Committee, we flesh that out still further.
Let me turn to the background to the Bill and the importance of the measure. The global nature of international capital markets means that businesses looking to raise money can choose where they go to raise it. Historically, international businesses have looked principally to New York to do so, but, following the introduction of the Sarbanes-Oxley legislation in the aftermath of the WorldCom and Enron scandals, international businesses have found the regulatory burden in the US too onerous and sought to raise capital in the UK. As a consequence, we have seen an increase in the number of initial public offerings in London and the amount of capital raised. It was announced earlier this month that £22.3 billion of funds has been raised on the London stock exchange so far this year, which exceeds the amount raised on other exchanges.
We have seen a significant benefit to the UK from Sarbanes-Oxley and the impact of that regulation, and not just in terms of fees for merchant banks and issuers. There are also the accountancy and legal services. A whole range of people have benefited from the fallout from excessive regulation in the US. A recent study indicated why firms were coming to raise money in the UK. It said that the cost of capital at both the initial public offering stage and afterwards is lower in London than in other major European or US financial centres. The report, commissioned by the City of London corporation and the London stock exchange, found that London markets are cheaper than both the New York stock exchange and NASDAQ with respect to both underwriting fees and other direct IPO costs. Other direct IPO costs, including legal and accounting costs, are lower in London than in the US largely due to the fact that in the US one needs to comply with Sarbanes-Oxley.
It is interesting that, despite the additional costs associated with US listing, the report found no evidence that Sarbanes-Oxley has delivered any significant regulatory benefits not already available under the UK corporate governance regime. That indicates an area where regulation has not improved the protection available to consumers. In the US, those involved are bearing the costs without seeing any great regulatory benefit.
The unpopularity of US markets and the increasing popularity of UK and European markets has led to US exchanges looking abroad to strengthen their business. It led to the New York stock exchange seeking to acquire Euronext and to the NASDAQ bid for the stock exchange. The commercial logic of that is that the US exchanges would like to benefit from the success of effectively regulated markets in the UK and Europe. Indeed, we should be clear in acknowledging that it is not in the economic interest of potential acquirers of UK and European exchanges for the Securities and Exchange Commission to be in a position to exert pressure to enable US regulations to be imported into the UK and Europe. If such regulations were brought in, there would be a risk that IPOs would move from Europe to Asia and other markets, with money thus flowing out of the UK and Europe. That explains why acquirers have an interest in the legislation going ahead in the UK.
In meetings that my hon. Friends and I have had with institutions across the City, it has become clear that businesses are worried that the takeover of the London stock exchange could lead to the City losing its competitive advantage over US capital markets. We need to be clear that the Bill has nothing to do with economic nationalism or the protection of national institutions. It would be wrong for any country to use the Bill to defend its protectionist policies. We have thrived as an economy because we have open markets and enable foreign companies to buy UK assets. Indeed, that has been one of the factors behind the strength of the UK financial services market. The Bill is really answering the question of how we can best protect the regulatory advantage that we have at the moment.
In reply to an intervention made by the hon. Member for Edmonton (Mr. Love), I said that US
houses had been more vociferous than others about the risk of Sarbanes-Oxley being applied in the UK, but it is not just US houses making such comments. In March, Angela Knightshe was then at the Association of Private Client Investment Managers and Stockbrokers, but is now at the British Bankers Associationsaid:
What we need is a copper-bottomed guarantee that whatever framework is put into place we continue to trade and settle here, be governed by British law and be regulated by the FSA ... Otherwise, the SEC believes very strongly in extra-territorial activities, and because NASDAQ and the NYSE are American they will find it difficult to resist.
As the Minister said, the Bill gives the Financial Services Authority the power to veto changes to the rule book not just of the LSE, but of all UK recognised investment exchanges and clearing houses. Those powers are new. At the moment, exchanges in London have the freedom to set their own rules, subject to meeting certain recognition criteria. My hon. Friend the Member for Cities of London and Westminster (Mr. Field) asked the Minister whether there is a parallel with that elsewhere. I understand that many other regulators regulate the detail of rule books to a greater extent than the FSA has hitherto been able to do. Enabling the FSA to consider rule changes and the rule books of new exchanges is a significant change for London. Although the measure represents an extension of the FSAs regulatory power, it is an attempt to entrench our present advantage and, as my right hon. Friend the Member for Wokingham (Mr. Redwood) said, to introduce a deregulatory ratchet.
One of the concerns about the Bill that has been expressed by several people is the extent to which the FSA will seek to look at individual rules. The FSA will need to minimise the additional compliance burden on exchanges without creating the opportunity for exchanges to impose unchecked rules that make UK markets less competitive. I welcome the letter that the Economic Secretary received from John Tiner today about the FSAs recognition of that.
The Bills regulatory impact assessment reinforces the point about looking at relatively few changes to rules. It gives an upbeat assessment of the impact of the Bill, suggesting that of the estimated 1,000 rule changes a year, there would be only about 25 notifications, of which only one would be called in. On that basis, the RIA suggested that the measure would have a relatively low cost. I suggest that when the FSA considers regulations during the 12-month grace period before it must introduce detailed regulations, it should look at the type of rule changes made in the past, so that it understands what it would call in, because it is important for it to understand what is likely to happen in practice. We should continue to monitor the detailed regulations once they are applied to make sure that we are not calling in too many regulations, and imposing too many costs on exchanges and clearing houses in the UK.
The Bill sets out the framework within which the powers can be exercised. It is carefully worded, and it assumes that any rule required under EU or Community law is not excessivea point that some in the industry
might question, but I leave the matter at that. The Bill does not prevent the exchanges from ignoring excessive regulations that come from Brussels. It sets out the four criteria that should be considered in determining whether requirements are excessive. The first is the effect of existing legal and other requirements. The second is the global character of financial services and markets, and international mobility of activity. The third is the desirability of facilitating innovation, and the fourth is the impact of the proposed provision on market confidence.
Mr. Hoban: The hon. Gentleman raises a point about the context in which the Bill should be considered. Of course, the FSA has other powers relating to consumer protection, which is one of its regulatory objectives. The Bill deals with the regulations that apply to shares traded on exchanges, so I do not think that issues of shareholder protection come within its remit. There are measures in the UK listing rules that cover shareholder protection, too. The Bill is narrowly focused; it is more a rapier-like thrust than a clunking fist when it comes to tackling regulation, and we should keep it like that, rather than use it as a Christmas tree from which to dangle ever more baubles, although I may be in danger of mixing my metaphors.
Rob Marris: Perhaps I did not make clear what I sought to tease out from the hon. Gentleman. A body might wish to increase consumer protection or shareholder protection by tightening its rules, but that does not come within the framework of the Bill, so that tightening could well be seen as excessive under the definition in the Bill. That is the issue that I wished to raise.
Mr. Hoban: The hon. Gentleman is trying to make an important point. He is trying to find out whether there is any opportunity under the Bill for a Sarbanes-Oxley measure to be introduced, but I hope that it will not enable such a provision to be made. He should remember that although the conditions that I mentioned are in place the FSA seeks to ensure that regulation is proportionate and not excessive in its impactso there is not leeway, exactly, but a wider context for such considerations.
required under Community law or...law in the United Kingdom ,
is not justified as pursuing a reasonable regulatory objective.
One reasonable regulatory objective is the aim of protecting consumers, so I do not take the point made by the hon. Member for Wolverhampton, South-West (Rob Marris), as that aim can be pursued under that heading. As long as the requirement is not
disproportionate to the end to be achieved,
Mr. Hoban: Indeed. My hon. Friend has practised in that area of law, and he demonstrates his knowledge and understanding of the subject, and of the way in which the Bill will interact with the Financial Services and Markets Act 2000. The hon. Member for Wolverhampton, South-West (Rob Marris) is in danger of leading us up a blind alley.
Mr. Redwood: The suggestion made by the hon. Member for Wolverhampton, South-West (Rob Marris) is dangerous, because if too many of those provisions were added to the legislation, Sarbanes-Oxley would indeed be legal in Britain and it would be used as a reason for excessive regulation.
Mr. Hoban: My right hon. Friend is quite right. The narrow focus of the Bill and the way in which it has been drafted have received widespread support from the financial services sector and from trade bodies, because they seek to prevent that very thing from happening. If the wording were wider, more permissive and less restrictive, it would not necessarily command consensus, because it would not address the threat that UK financial services institutions attach to the imposition of extra-territorial jurisdiction in that area.
Mr. Love: Surely the important factor is that scandals such as those involving Enron and WorldCom have not taken place in the UK, presumably because of the proportionate regulatory environment. When Parliament passes the legislation, it must provide reassurance that sufficient protection is available to prevent similar scandals.
Mr. Hoban: The hon. Gentleman is right that those things did not happen in the UK. We did not suffer from the extensive financial scandals that afflicted US markets, partly because of the strength of UK regulation. A principles-based approach to regulation, with an emphasis on risk, puts in place the right framework to prevent the reoccurrence of those scandals. Too often, financial scandals arise because of a prescriptive, rules-based approach that requires people to tick boxes. We must therefore learn lessons from the American experience, and we must be careful not to repeat the mistakes that were made in the US in the past.
May I turn to the four conditions set out in proposed section 300A? People using the Bill must have a clear understanding of its import, and the purpose of the provision is to maintain the competitive advantage of the UK financial services sector relative to other global markets. We must look carefully in Committee at the language of proposed subsection (4)(b) to make sure that that message is clearly conveyed to people who are interested in regulation in the UK. The hon. Member for Wolverhampton, South-West asked the Minister about the lack of a backstop date in proposed section 300D. I am sure that, after consulting stakeholders, the Financial Services Authority will suggest an appropriate date. However, will the Minister or the Financial Secretary confirm that the FSA believes that the 30-day period in which it may deliberate on the changes is sufficient to consider fully the impact of any rule changes? Returning to the collapse of Enron and WorldCom, how long would it have taken people to discern the long-term damage that Sarbanes-Oxley would have inflicted if it had been introduced in UK
capital markets? It is therefore important that we make sure that there is sufficient time for the FSA to consider fully the impact of any rule changes.
In conclusion, Sarbanes-Oxley has provided a great boost for the City, as US markets recognise, which is why, from Hank Paulson downwards, there has been pressure to water down the provision. It should be a warning to the Government and to Governments across Europe that while one piece of legislation can strengthen our competitive position, another can seriously damage it. We must pay great attention to the conditions that make the UK financial services sector a great success. It is not just about regulationit is about the people and businesses based here, the tax system, infrastructure and many other factors. If the UK is to thrive, we must look at what we can do ourselves to ensure that it remains globally competitive in the financial services sector, rather than relying on others to make mistakes from which we can benefit.
The Bill gives the FSA the power to protect the competitive position of our capital markets, but as the provisions indicate, it cannot protect exchanges and clearing houses from excessive regulations imposed here in Westminster or in Brussels. Although it protects UK capital markets from one aspect of extra-territoriality, it does not protect them from all aspects. We welcome the Bill and hope that it will be effective, but we do not see it as the end of the story when it comes to maintaining the competitiveness of the UK financial services sector.
Kerry McCarthy (Bristol, East) (Lab): I am pleased to have the opportunity to speak in the debate. I welcome my hon. Friend the Ministers opening remarks, which confirm that the Bill is intended not to impose additional regulatory burdens on the City, but to protect the light-touch system of regulation that has served the City so well since we set up the Financial Services Authority.
I also welcome my hon. Friends reaffirmation that the Government recognise that the Citys strength lies not just in its sensitive and light-touch approach to regulation, but in its internationalism and receptiveness to outside influences and outside investment. I am pleased to hear confirmation that the Bill is not intended to restrict foreign ownership of our recognised exchanges and clearing houses, that the Government are neutral on the matter and will remain neutral, and that the Bill is intended to safeguard the risk-based, principles-based approach that has made London such an attractive place for international financial institutions to do business, and its exchanges such a magnet for listings from around the world.
Far from imposing a new burden, the Bill will, by giving the FSA what I am sure will be a judiciously exercised power of veto, ensure that excessive, disproportionate or unnecessary regulation is not permitted. I am also pleased to hear the Minister confirm that the Bill is not about micro-managing the exchanges, and that safeguards will be built into it so that the FSA can allow exchanges to make minor changes to their rules without interference.
Many reasons have been advanced for the Citys position as one of the worlds two most successful financial centressome would say the most successful. Such factors include the English language, our geographical position between the US and Asian time frames, our skilled work force, and the attractions of London as a place in which to live and do business. But the Bill encapsulates the two main reasons for Londons success: its internationalism and its approach to regulation.
Britain has always been ahead of the pack as far as globalisation is concerned. Its financial sector has for 300 years or more been internationally focused and outward looking. Unlike other financial centres that developed primarily to serve their own domestic markets, the Citys phenomenal growth has been due to its role in financing world trade, rather than financing our indigenous industries. Indeed, as Professor Anthony Hopkins said, the industrial revolution happened independently of the City of London.
In the past three decades or more, since the collapse of Bretton Woods, London has prospered as a financial centre not just by capitalising on its traditional strengths, but by embracing liberalisation and exploiting the advantage offered it by protectionist or fiscally restrictive regimes in other financial centres. We have spoken a great deal today about Sarbanes-Oxley, but in the 1970s the London Eurobond market flourished because of decisions taken in the USA.
In 1979, the scrapping of exchange controls by the Thatcher Government freed up the flow of capital in and out of the country, removing a key obstacle to globalisation and cementing the Citys position as an international hub. Big bang, 20 years ago last month, changed the City for ever, by relaxing the rules preventing foreign ownership of British financial institutions and leading to an influx of overseas investment. Of course, there has always been a foreign element in the City. The names of what we would regard as some of the most traditional City institutions, such as Rothschilds, Warburgs, and Kleinwort Benson, make it clear that they were established by immigrants, and they have now been taken over by yet more foreigners coming in.
With big bang we saw what is commonly dubbed the Wimbledonisation of the Citythat is, its domination by foreign players. In particular, US banks, prohibited by Glass-Steagall from owning US securities houses, took the opportunity to move into London in force, and provided the City with capital for almost unlimited expansion.
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