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- I sympathise with at least part of the intention behind the amendment, which I think is to put on record our determination to resist extraterritorial encroachments on our ability to regulate UK markets in accordance with UK and EC law. In doing so, I acknowledge the expertise of the noble Lord, Lord Bridges, on the international scene, and I am sorry if I gave him a sleepless night on Thursday. Let me stress that the Government have no difficulty resisting extraterritorial encroachments. Indeed, I hope that that was made clear in my Second Reading opening speech and by my honourable friend the Economic Secretary to the Treasury in his Second Reading opening speech in the other place, in which he said that, “our interest in the ownership of the London Stock Exchange is that it should not affect the existing regulatory regime under which the exchange and its members and issuers operate. We are determined to act to protect our domestic regulatory environment, founded in both UK law and EC directives, that has made the City a magnet for international business. If a company operates in London, it should be regulated in London”.—[Official Report, Commons, 28/11/06; col. 990.] However, we would not wish to accept this amendment today for both handling and substantive reasons. On the substance, the amendment would detract from the clarity of the Bill and would introduce an element of protectionism. While it leaves the existing processes in the Bill untouched, it adds a requirement that, if it were to have any effect, would make it impossible for the operation of the markets operated in the UK by recognised investment exchanges to be moved to another country. That could be the state in which the new owner is established or indeed any other state. A UK-recognised body does not cease to be a UK-recognised body if control of it passes to a foreign person. Provided that it continues to carry on activities regulated under the Financial Services and Markets Act by way of business in the United Kingdom after the change of ownership, the exchange or clearing house concerned will still need to be either an authorised person under the Act or exempt from the need for that authorisation by being a recognised body. In both cases, it remains subject to the Act’s requirements and to the relevant provisions in EC law. It will still be supervised by the Financial Services Authority. There is no question of supervisory responsibility passing to a foreign regulator and there never has been. LIFFE, which is owned by the Dutch company Euronext NV, NYMEX Europe and ICE Futures, which are owned by US parents, and Virt-X, which is owned by a Swiss parent, are still supervised by the FSA and have to comply with the same FSMA requirements as the London Stock Exchange and the London Metal Exchange. If a UK-recognised body carries on activities in another country that are regulated in that country, it will have to comply with that country’s law. That would include, of course, complying with the conditions for a “passport” under the relevant EC directives if it wished to carry on such activities in another EU member state. There will be no more opportunity for the SEC or any other foreign regulator or authority to commence proceedings against a UK-recognised body after a change of ownership than there is now—or against a member firm of the recognised body, against an issuer whose securities are quoted on that body or against any other person, such as the directors or employees of recognised bodies, member firms or issuers. We cannot stop the authorities in any foreign country taking action against its own citizens or residents in its own courts; we have never been able to do that and will never be able to do so. But the Bill will give them the defence of being prevented by local, UK law, from carrying out the foreign regulator’s wishes. There is no need to legislate against any attempt by a US or other foreign regulatory authority to impose its provisions directly on a UK recognised body. The Protection of Trading Interests Act 1980 and the corresponding EC Council regulation are designed to protect Community interests by making it illegal for individuals and companies to comply with extraterritorial demands by US or other overseas authorities. Under that legislation, UK companies are obliged to inform the Government and the European Commission of any extraterritorial action taken against them in order that appropriate protective measures can be taken. Those measures make it unlawful for persons in the UK and the EU to comply with the requirements of the foreign legislation, regulator or court. None of this will happen on account of the Bill; it is simply a consequence of how the existing law works. The amendment is not therefore needed to make that point clear or to put it beyond doubt. The Bill is directed at a different problem. Its purpose is to prevent foreign-owned bodies from applying regulatory schemes from other states that would be excessive when considered against the existing UK and EC regulatory framework. It is possible that the foreign owners of a UK-recognised body might wish to do this for commercial reasons. It is more likely, however, that the regulatory authorities or Government in their home country would attempt to force the hand of the foreign owners by passing legislation or taking enforcement action under existing legislation in that home country. The Bill’s provisions will prevent such actions from resulting in unwelcome changes to the operation of UK-recognised bodies and the markets and systems that they run by giving the FSA a right to veto excessive regulatory provision proposed by UK-recognised bodies irrespective of their ownership or whether there has been a change of ownership. We also have concerns about how the amendment would work. The issue raised here is similar to issues that were raised in the other place when probing amendments were tabled. The Government believe that limiting the Bill’s provisions so that they took effect only after a change of control of a UK-recognised body or after a foreign takeover would be undesirable. Equally, the Government recognise that, if an owner of a recognised body wants to operate in a completely different way and seeks to move the domicile of the body to enable him to do so, then that is his right in a world of free markets. Attempting to prevent such steps would be unworkable, discriminatory and unfair. It is unlikely that any regime along these lines would be compatible with the UK’s obligations under the EC treaty or under the World Trade Organisation’s general agreement on trading services. Any new owner would also be taking an enormous business risk in seeking to move the centre of operations and the legal domicile of the exchange to another state, which is the only way in which overseas regulatory authorities would be able to take on any regulatory function in respect of any of the existing UK markets or the exchanges that operate them. In other words, the exchange would have to cease to be a UK exchange. Exchanges cannot force issuers or member firms to follow them if they migrate. Issuers and member firms are ultimately just users of the facilities that the exchange provides on a commercial basis. They are customers who can go elsewhere. The Government do not want to send out the message that the UK does not welcome foreign owners or foreign investment in the financial services sector. I am sure that few Members of the House would wish to send that message out either. My honourable friend the Economic Secretary said in another place: “Such intervention”— he meant protecting the London Stock Exchange from foreign ownership— “would fly in the face of the traditions that have underpinned the City’s success over the past 20 years. A policy of protecting ‘national champions’ would damage, not bolster, the interests of London and the UK”.—[Official Report, Commons, 28/11/06; col. 989.] As to the handling reasons to which I referred earlier, if we amend the Bill now it will have to go back to the other place and its passage would be delayed. NASDAQ’s bid for the London Stock Exchange is on the table. It is important, therefore, as I said in my Second Reading speech, that we move quickly. I do not accept the contention of the noble Lord that the Bill has been a long time in coming. Once it was identified as an issue to take forward, the Government moved swiftly. I am grateful for the support that we have had from the Opposition Benches. Correspondingly, I must oppose the amendment.
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- 15:15
Lord McKenzie of LutonLabour
Lord BridgesCrossbench
Lord Wedderburn of CharltonLabour