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The Economic Secretary to the Treasury, Ed Balls, announced today that the Government is to legislate to enhance the FSA's powers in relation to recognised exchanges. The FSA will be given the power to veto rule changes proposed by recognised exchanges that would be disproportionate.
Talking about the planned legislation in a speech to the Hong Kong General Chamber of Commerce and the British Chamber of Commerce, in Hong Kong, Ed Balls said:
"The Government's interest in this area is specific and clear: to safeguard the light touch and proportionate regulatory regime that has made London a magnet for international business. That has made London an economic asset for the UK, for Europe, and for countries throughout the world. I can therefore announce today that the UK Government will now legislate to protect our regulatory approach.
This legislation will confer a new and specific power on the FSA to
veto rule changes proposed by exchanges that would be
disproportionate in their impact on the pivotal economic role that
exchanges play in the UK and EU economies.
It will outlaw the imposition of any rules that might endanger the light touch, risk based regulatory regime that underpins London's success.
Nothing in this legislation has any consequence for the nationality of the ownership of UK exchanges. It will neither make overseas ownership easier or more difficult. We remain open to overseas investment that will continue to be able to benefit from our regulatory regime."
Background
1. A copy of the written Ministerial statement is attached below.
2. Copies of Ed Balls' speech in Hong Kong are available from the Treasury's website at www.hm-treasury.gov.uk
WRITTEN MINISTERIAL STATEMENT
FINANCIAL SERVICES REGULATION
The Economic Secretary (Mr Ed Balls): Concerns have been expressed to the Government about the effects of a possible takeover of the LSE by a company based outside the UK on the LSE's rules, in particular the rules applying to those companies whose securities are traded on the LSE's markets. This is a concern that the Government shares. In this statement I set out our approach.
The Government is neutral as to the nationality of the owners of Recognised Bodies (RBs)1. Of the current RBs, five are subsidiaries of overseas based companies. Openness to overseas investment has been an important part of the success of the City in recent years and will continue to be in the future.
The Government would also not seek to intervene in the independent judgements of the Financial Services Authority (FSA) and the competition authorities in respect of any changes of ownership of RBs. The FSA and the competition authorities have specific tasks to perform on an independent basis within clear legislative frameworks set out by Parliament. Independence and indifference to nationality are key elements of the UK's regulatory regime.
Investors, issuers of securities, and members of RBs all have an interest in RBs having rules which strike a balance appropriate to that body between the benefits of the restrictions, particularly in terms of investor protection and the impacts on issuers, members and other stakeholders. Such a balance is vital to ensuring exchanges play their role in creating deep and liquid capital markets which promote economic growth. In this respect, the Government believes it is essential that changes of ownership of RBs should not put at risk the achievement of such a balance by RBs.
Our current regulatory regime for RBs is based on high-level legislative principles supplemented by FSA guidance. Within this framework, RBs have the freedom to develop their own rule books in consultation with their members.
I have discussed these issues widely in recent months and made clear that I would expect any potential new owners of the LSE to want to provide certainty and reassurance to the exchange's stakeholders. I welcome the statement which the US's Securities and Exchange Commission issued on 16 June. This provided a helpful clarification of how the SEC sees the current position in respect of the scope of US securities laws.
However, as the FSA pointed out in its statement of 12 June, there is a degree of uncertainty about how overseas ownership of the LSE would affect its regulatory regime. It depends on exactly how any owner would attempt to integrate the LSE with its existing business and the legal framework in other countries - both of which can be subject to change
It is important that there is certainty that the rules of RBs in the UK will continue to be proportionate, balancing the benefits of restrictions with the impacts on stakeholders.
The Government will now legislate to enhance the FSA's powers in this area. This will confer power on the FSA to veto changes to the rules of an RBs in defined circumstances. The aim would be to enable the FSA to stop RBs making rule changes whose effects on issuers and others were likely to be disproportionate to the public benefits. The Government will provide further details in due course.
The purpose of such a change to legislation is not to involve the FSA in the day-today commercial judgements of the RBs. The power will be a right of veto and not a right of approval of rule changes. It will provide a back stop to ensure that the RBs stakeholders can be certain about the proportionality of the rules of the RBs going forward.
This new provision will ensure that UK RBs remain open to overseas ownership. It makes the permissible outer limits of the RB's rules blind to the nationality of their ownership by entrenching better regulation principles in respect of those rules.
It should also be clear that we will not allow this legislation to be evaded through abuse of our Recognised Overseas Investment Exchange and Clearing House regimes.
HM Treasury
13 September 2006
1 Under Section 18 of the Financial Services and Markets Act 2000 there are seven recognised investment exchanges (the London Stock Exchange, London International Financial Futures Exchange, EDX London, Virt-X, ICE Futures, the London Metal Exchange and NYMEX Europe) and two recognised clearing houses (CREST, and LCH.Clearnet Ltd).
