§
Lords amendment: No. 61, in page 31, leave out lines 41 to 44 and insert—
(i) as to the circumstances and manner in which and the time when or the period during which action may be taken for the purpose of stabilising the price of investments of any specified description; ".
§ Mr. HowardI beg to move, That this House doth agree with the Lords in the said amendment.
Mr. Deputy SpeakerIt will be convenient to consider the following Lords amendments: No. 63, in page 32, line 23, leave out subsection (6).
No. 64, in page 32, line 34, leave out from first "of' to end of line 37 and insert
section 44 above.(6A) Section 44(2) above shall not be regarded as contravened by anything done for the purpose of stabilising the price of investments if it is done in conformity with rules made under this section and—
- (a) in respect of investments which fall within any of paragraphs 1 to 5 of Schedule 1 to this Act and are specified by the rules; and
- (b) during such period before or after the issue of those investments as is specified by the rules.
(6B) The Secretary of State may by order amend subsection (6A) above—
- (a) by restricting or extending the kinds of investment to which it applies;
- (b) by restricting it so as to apply only in relation to the issue of investments in specified circumstances or by extending it, in respect of investments of any kind specified in the order, so as to apply to things done during a specified period before or after events other than the issue of those investments.
(6C) No order shall be made under subsection (6B) above unless a draft of it has been laid before and approved by a resolution of each House of Parliament.No. 186, in clause 96, page 76, line 13, at end insert—(bb) section 45 (6B);No 312, in clause 145 page 112, line 36, leave out from beginning to end of line 2 on page 113 and insert—
§
"Price stabilisation.
6. No provision of section 1, 2, 4 or 5 prohibits an individual from doing anything for the purpose of stabilising the price of securities if it is done in conformity with rules made under section 45 of the Financial Services Act 1986 and —
(2) Any order under subsection (6B) of section 45 of that Act shall apply also in relation to subsection (I) of this section.
No 440, in schedule 6 page 161, line 11, at end insert—
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7A. Rules made under section 45 of this Act regulating action for the purpose of stabilising the price of investments must make proper provision for ensuring that where action is or is to be taken in conformity with the rules adequate arrangements exist for making known that the price of the investments in respect of which the action is or is to be taken (and, where relevant, of any other investments) may be affected by that action and the period during which it may be affected; and where a transaction is or is to be entered into during a period when it is known that the price of the investment to which it relates may be affected by any such action the information referred to in paragraph 7 above includes information to that effect".
No. 475, in schedule 9 page 178, line 7, leave out from beginning to "in" in line 8 and insert
Section 46 of this Act shall apply in relation to rules under this paragraph as it applies".
No. 476, in page 178, line 10, leave out "references"and insert "reference". No. 477, in page 178, line 11, leave out "references" and insert "a reference". No. 478, in page 178, line 13, leave out "of section 46".
§ Mr. HowardThese amendments are the result of extensive discussions with a number of interested parties, including the International Securities Regulatory Organisation. It was argued in those discussions that the original exemption from the market manipulation offence for stabilisation, which was confined to action intended to stabilise the market price of international bonds in the period before or during an issue of such bonds, was too narrowly drawn. It was put to us that there is an increasing market in international equities and if stabilisation techniques accepted elsewhere in respect of such issues were not permitted in the United Kingdom, we would be put at a considerable competitive disadvantage.
At a late stage, a further argument was advanced in another place that stabilisation should be permitted in circumstances unconnected with new issues, for instance, the sale or dispersal of a large, existing shareholding. The Government have accepted the case for extending to the stabilisation of equities the exemption from the market manipulation offence currently shown in clause 45(7) provided it is in conformity with rules made under that clause. I stress that last qualification. As elsewhere in the Bill, it is the rules themselves which will set out the detailed requirements for protecting investors. In extending the provisions to equities, it has been necessary to look again at the protections available to ordinary investors. Given the increasingly international nature of the securities market, it does not seem practicable, once we include equities, to identify those securities which are distinctively international or likely to be traded on a "professional only" basis. Instead, we specifically provide that the rules to be made under clause 45 should provide that there is adequate disclosure to investors of the fact that the price of investments in which they may be dealing may be affected by stabilisation. Amendment No. 440 introduces a new principle into schedule 6 to make this point clear.
I turn now to the argument that stabilisation should be permitted in circumstances quite unrelated to the issue of investments. This argument was advanced at a very late stage. I have no wish to close the door on such arguments if they prove to be well-founded, but equally I believe we should be very careful before we rush to legislative conclusions in what has proved a very complex and technical area. I have thought it right, therefore, that we should meet this point by introducing the possibility of changing both the range of investments which may be 540 stabilised without falling foul of clause 44(2) and the circumstances in which such stabilisation may take place provided that it is in conformity with the rules. This is the effect of subsections (6B) and (6C) of amendment No. 64. The order-making power will be subject to the affirmative resolution procedure and will not be delegatable to a designated agency.
The remaining amendments are consequential. Amendment No. 312 to clause 145 reflects the fact that we have always intended that where stabilisation is permitted for the purpose of clause 44(2) it should also be exempt from the relevant provisions of the insider dealing legislation. Amendments Nos. 475 to 478 to schedule 9 stem from the fact that the defence against being found to have contravened clause 44(2) is available to anyone who acts in conformity with the rules made under clause 45 governing matters within the scope of the exemption in the new subsection 45(6A). The defence is not confined to authorised persons who are subject to clause 45 rules. This would include registered friendly societies. Separate provision in schedule 9 is therefore unnecessary and the amendments to that schedule reflect that.
§ Mr. GouldThe Minister will have some sympathy with me when I say that this is one of the most difficult areas in the Bill. It is made more difficult by the fact, as he conceded, that some of the pressure for change has come late in the day, certainly long since we last had the opportunity to consider this matter.
The problem as I see it — I speak as a layman as these matters are esoteric by most people's standards—is that the thrust and object of the Bill is to provide a substantial level of investor protection. One of the most important provisions to that effect is that which makes a criminal offence of market manipulation. It is one of the cardinal principles and planks of the Bill that there is a clearly defined criminal offence so that the ordinary person operating in the ordinary market who attempts to mislead other operators as to the true market price of an investment will commit an offence.
There are also, however, apparently powerful arguments in exactly the opposite direction. They state that in the Eurobond market — although we now see the argument being extended to international securities of all sorts, including equities, and from new issues to dealings in a secondary market of such equities—far from being a criminal offence, manipulation is to be authorised and welcomed as an essential feature of the proper operation of those markets. The fact that it is called market stabilisation in that context is mere labelling. It is most unsatisfactory that what is a criminal offence in one market should be authorised and welcomed in another. I am sure that the Minister must have wrestled long and hard with some of those problems over the past few weeks and months.
I had the benefit of a brief from ISRO on this matter and I understand that the case made is a very familiar one in so many regulatory matters. If the regulations are thought to be excessively rigid or inappropriate, then the threat is that the business being done will go elsewhere. We are essentially describing an offshore market in many respects. There is no particular reason, although I sometimes think that the reasons are stronger than people believe why the business should be done in London. Therefore, the argument is that if what is universally regarded in those markets as acceptable practice is 541 outlawed by the British regulatory regime, business will simply go elsewhere. That would be a pity. We derive benefit from having that market located in London. If the business is to be done, let it be done in London. If it is not done here we lose foreign exchange earnings, a certain amount of employment, and so on.
I understand the Minister's dilemma. However, the problem is that we are confronted with permissive provisions which cast the ultimate responsibility for resolving the dilemma upon the body which makes the rules. We have the benefit of having seen some draft rules on the question, and the Securities and Investments Board has done an admirable job in trying to establish what safeguards and criteria ought to apply in this difficult area.
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Nevertheless, it is still of considerable concern that the boundaries of the exemption are pretty unclear. We know that the distinction between an international market and a domestic market is not likely to remain fixed or concrete; it will change over time. The whole thrust of what is happening in the City of London right now is to break down that distinction substantially. For example, the merger between the SROs and the stock exchange shows that the old distinctions which used to be drawn between the domestic market and the international market in securities and equities is simply no longer likely to be either permanent or meaningful.
The question facing the Minister is that, given that he accepts the case for stabilisation in one area while still regarding market manipulation in another area as a criminal offence, how will he prevent the one area leaking into the other? Where is his sticking point? He has apparently already gone a long way towards conceding that stabilisation should be permitted in the secondary market in international securities. If that is the case, we are perilously close—
§ Mr. HowardNo.
§ Mr. GouldThe hon. and learned Gentleman says no, but there is provision in the Bill which makes it possible for rules to provide for that. Where are we to stop? The ordinary investor will want to participate in such a secondary market in international equities and that is largely the purpose of providing such a market. The notion that one can always rely on the concept of the experienced or business investor being exclusively engaged in this market is misleading.
There are further, more technical problems which are equally difficult to resolve. For example, if the international syndicates which have underwritten a new issue, or even a secondary issue — a large volume of shares are dealt in the secondary market—stabilise the market in accordance with the rules but do so a little more enthusiastically than should really be permitted by the rules, in other words, if in addition to the permitted stabilisation there is in the same transaction or series of transactions, in the same mopping up by the underwriters of spare shares, a further element of what might in other terms be regarded as market manipulation, how will that distinction be made? Where will the limit be applied as to the degree of stabilisation permitted? How will it be identified in the course of the one series of transactions in respect of the same issue of securities?
542 These are immensely difficult problems. I confess that I do not have a solution to them, but then I am not the Minister. The Minister is obliged to offer some guidance to the House as to how these matters are to be resolved. At present, one of the most important principles underlying the Bill is in danger of substantial erosion. I want to be clear as to where the limits of that erosion will be.
§ Mr. Alan HowarthThe hon. Member for Dagenham (Mr. Gould) has raised legitimate issues of concern. The line between what would be legitimate stabilisation and what would be misleading the market is an extremely fine and difficult one to draw. I can well understand why my hon. and learned Friend the Under-Secretary of State has, I believe, only reluctantly been persuaded to accept that stabilisation should be legitimised in the way that he contemplates.
His opening remarks helped me to clarify what was in his mind. I had been a little concerned that the provision for extending the categories of transactions in which stabilisation would be legitimate by means of affirmative resolution of both Houses was an extraordinarily cumbersome one if it was to be applied in active market conditions. It clearly would not work. If I have interpreted him correctly, he is merely giving the Government time to consider further what categories of transactions should be so legitimised.
It will be impossible to avoid extending the categories to include secondary offerings. A signal case which is likely to arise before long will be the Government's offer of a further tranche of its holding of British Petroleum shares. As I understand it, under the Bill as amended stabilisation would not be permitted in the instance of such an offer. Yet I would have thought that that was typical of the sort of case of secondary offering where stabilisation would clearly be necessary to ensure orderly market conditions. We should not restrict ourselves to contemplating that only offerings of Government shareholdings would create such a situation. One can also imagine, perfectly respectably and properly, that a large private shareholding might be brought on to the market and that it would be in the interests of investor protection to have some stabilisation. Therefore, the class of categories covered will have to be extended.
This is quintessentially the sort of matter that ought to be determined by the Securities and Investments Board. I fully concur with the hon. Member for Dagenham in recognising how extremely difficult and technical it will be to make the judgments, and that it will be a problem to provide regulatory provisions to meet specific circumstances. However, it cannot be avoided, and surely the Bill's strategy is to ensure a flexible and highly competent regulatory authority which can adapt to altering market circumstances of the kind that my hon. and learned Friend the Under-Secretary of State has recognised.
§ Mr. BerminghamIn this series of amendments we have reached the heart of what is going on in the Bill. Whereas we had been going to pay lip service to investor protection, in fact we shall no longer do anything of the sort. When one starts to ask oneself certain questions about the proposals contained in these clauses, one begins to get a series of answers which are not very nice.
For example, who will decide what is or is not a domestic or international share, bond or security? When 543 does the one change to the other? Who will make the decisions? Will there be someone standing at arm's length and looking in, or will it pass to the same old body which deals in those matters? Of course, as the Bill stands it will be done by people within the industry.
Who will decide what is manipulation and what is merely stabilisation? The hon. Member for Stratford-on-Avon (Mr. Howarth) made a good point with regard to the placing of a large shareholding, perhaps in a fairly small company, which is in the hands of a single person and if put in its entirety on the market at any given moment will automatically depress the price. That follows as night follows day. Who will decide such cases? Will it be someone at arm's length, or someone who is actually involved in making the markets? Again, the answer falls in the latter category, self-regulation becomes self-evaluation and protection is denied.
The Bill then begins to show many areas for grave worry. Even after all these amendments, the Government have not thought things through. For months, if not years, there has been pressure and comment from people within the City and elsewhere that there was much to learn from the Securities Exchange Commission across the Atlantic. But the Government would have none of that. They wanted self-regulation and they placed their offering upon the altar of that god.
The small investor will ultimately pay because many of these deals will take place in in-house arrangements, where both buyer and seller, or trader on behalf of buyer and seller, are within the same building and the same company. We talk as though investors will somehow be protected by the mythical Chinese walls, but we have had enough experience of what can go wrong in the City in the past few years. For instance, we all know that insider dealing goes on. It is disapproved of, rarely if ever investigated, and even less frequently prosecuted. Yet it it criminal and investors suffer—and it is never the big boys, always the little people.
What does the Minister intend to do about that? He has done nothing in the past. At least under the American system investigations are going on and lawyers and other persons involved are being prosecuted and the money recovered. What is happening in the City of London? The Minister knows as well as I do that the answer is nothing. No one is prosecuted and investors suffer. How great a charter is there for the crooks and the charlatans whom no one wants in the City because they are poison to the whole system'? The amendments do naught to tackle the cancer there.
I ask the Minister one last time: Will the Government ever listen to anyone? Will they not listen to the experts in America and elsewhere? Will they not look again at that aspect? At the end of the day it will be the small investor who pays the price for paper-thin walls that do not hold secrets, for manipulation that is classically called stabilisation, and for the creation of international markets when they are really domestic markets. It will be the small shareholder, the small investor, who will ultimately lose because the protection is not there.
§ Mr. NelsonThe amendments are a good example of where the Government have listened to people and where they have shown great ability to come to terms with an exceedingly complex problem. The amendments are welcome. They respond in exactly the right way and strike exactly the right balance between the need to protect 544 investors and the need to allow important business to be retained in the City of London and our economy. I pay tribute to my hon. and learned Friend the Minister and those others who have been involved in drafting the legislation.
We should emphasise the importance of this market to our economy and to financial services in particular. Whether hon. Members like it or not, the reality is that such is the nature of the international securities business that operators and market makers within that area will go elsewhere if they find the rules here inhibiting. The business will be done on behalf of investors in Britain and elsewhere outside Britain if rules and regulations impinge improperly and in a prejudicial way on the market.
Although it is difficult to define them, there are material differences between what might loosely be called the domestic and international securities markets which justify the differential treatment which the amendments seek to achieve. First, the lines of stock involved in the international securities market are considerably larger than those involved in the domestic market. Secondly, the number of market makers and dealers within that market is much smaller than is the case with the domestic securities market. There are far fewer participants even if the eventual beneficial ownership of lines of stock ends up in a multiciplicity of hands or, indeed, in institutional or mutual funds, unit trusts or whatever.
The nature of the market, in terms of financial size, large lines of stock and small numbers of dealers, undoubtedly means that some of the procedures, whether they are called, somewhat euphemistically, stabilisation procedures, or whether they are called, somewhat ingloriously, market manipulation, arguably act in the interests of investor protection. It is through stability in the market that one can, in certain instances, in international securities dealings, shift large lines of stock and acquire them. It is a mutual technique used by the participants in those markets which we should not seek to outlaw. It would be against the interests of both our economy and investors to do so.
The hon. Member for Dagenham (Mr. Gould) asked who will scrutinise and monitor the situation. My understanding—I am open to correction—is that that will be the responsibility of the SROs and the SIB. We look to them, in their daily scrutiny of the markets and the operation of the stabilisation techniques, to ensure that the parameters of the legislation are not exceeded and that many of the detailed requirements of the amendments are complied with.
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For example, amendment No. 440 ensures that where action is to be taken in conformity with the rules adequate arrangements exist for making it known that the price of investments may be affected by that action and the period during which it may be affected. That is a material and proper piece of information made available which is a real attempt to overcome the difficulties which undoubtedly exist in defining the dichotomy between the domestic and international securities market. Communication, the provision of information and the clear setting out that there is less than a perfect market, and, necessarily, a situation where the client's interest will be dealt with at best is an important safeguard.
§ Mr. GouldI fully understand the importance of the safeguard provided by the disclosure provisions, but why 545 should not a similar safeguard provide a similar regime in any securities market? Why should there still be such a substantial difference between the domestic market and the international market when, as I think he concedes, that distinction will be increasingly difficult to draw?
§ Mr. NelsonIt is common ground that we should seek to achieve as perfect, as efficient and as accurate a market as possible — a market where deals are done at best, where the market price is established by the forces of demand and supply in the simplest terms and where the provision and disclosure of information in conducting those deals and in striking the prices is done on an honourable and fair basis, not on a basis which seeks to mislead people about the market price or what might be the direction of the market in a particular stock, be it up or down. It is undisputed that that is the objective and that is in the interests of investors. That is what rules elsewhere in the legislation have sought to enhance.
In this specific instance I have argued that the matter is different because of the size of the lines of stock, which are of such magnitude and dealt with in isolation by a small number of dealers, say in London, which form a significant part of the international securities markets operations. But the technical market operations are materially different and if one is seeking to protect, say, the interests of a client of a major investment bank who wishes to sell or to buy into a large line of stock, such mechanisms are an essential means of ensuring that he is able either to sell all that line of stock without driving down the price substantially, or acquire it without, conversely, driving it up.
It can be argued in purely theoretical terms that that can be against the interests of the other side to the bargain, but such has been the experience over a period that the movement of stock generally tends to reflect fundamentally in those international markets rather more than does the short-term effect of large amounts of demand or supply that take place in a domestic market. In simple terms, a large line of stock in a domestic market, being sold or acquired, can materially affect the price in the short term, whereas in the international market it need not necessarily do so. One reason for that is the stabilisation processes that have been established by dealers.
I readily accept that this matter is difficult to explain other than in the most technical way, but the House should recognise that it happens because dealers on all sides of the bargains in the international securities market want it to happen and perceive it to be in their interests in dealing on behalf of others in enabling them to acquire large amounts of stock or to dispose of them.
I welcome these amendments. My hon. and learned Friend and the Department have tried hard to respond to the legitimate anxieties of those concerned. The House would be well advised to accept the Minister's advice.
§ Mr. CashI shall speak briefly and with special reference to the remarks of the hon. Member for St. Helens, South (Mr. Bermingham). The international securities market will be traded in. We must be involved in that and ensure that it is done effectively. But is there sufficient control over how that will be carried out? That 546 takes one back immediately to the matter of the self-regulating organisations and how the market will be regulated through the control it exercises over those persons who are members of the SROs.
Some hon. Members may have had the opportunity to watch an extremely interesting programme, which lasted for about two and a half hours, called "Moneyspinners"—
§ Mr. Austin Mitchell (Great Grimsby)It was very boring.
§ Mr. CashThe programme was extremely interesting, despite the remark made by the hon. Member for Great Grimsby (Mr. Mitchell), in that it illustrated the expectation of predatory activities by some foreign-owned companies, especially Japanese companies. It seems clear that the sheer volume of money accumulated in their savings in Japan, if transferred to Britain, would, in the medium to long term, have a significant effect upon activities in the City of London. That is before we consider the activities of America and other overseas companies.
Referring to the remarks of the hon. Member for St. Helens, South, the real issue is whether the SROs will be able to control the activities of those companies which are operating from abroad as we would wish them to be controlled. The object of the Bill is to achieve sensible control over their activities. I have had, and continue to have, grave reservations about the conferring of legal immunity on the SROs, because, as I said on Report, there is no reason why it should be conferred. The right people must be appointed to the SROs.
In Committee I discussed this matter several times with the Minister. We have discussed the fit and proper person test many times and we have decided that it is possible to appoint the right people. I strongly request the Minister and the Securities and Investments Board to exert all the influence that they can to ensure that the right people are appointed to the SROs. That is the acid test.
I was delighted to hear—I should like the Minister to confirm this point — that, following an amendment which I tabled in Committee and further discussions on the matter, a significant number of independent persons will be appointed to the SROs. Ultimately, to avoid any suggestion of cosy clubs, it is essential that the people appointed to the SROs should be able to question the behaviour of their colleagues.
§ Mr. BerminghamI agree with many of the points made by the hon. Gentleman. Looking back over the history of Lloyd's underwriting, the self-regulation at Lloyd's and the messes that have occurred involving Ian Posgate, Peter Cameron-Webb and others, does the hon. Gentleman agree that that should be an object lesson to us in the sort of person whom we appoint to the SROs? Unless we have the strength and independence of character to do that, people can look within from without and the securities industry may be in the position that Lloyd's was in some years ago.
§ Mr. CashThe hon. Gentleman seizes upon a point with which I am familiar, in that some years ago I was asked to advise Lloyd's on self-regulation after Mr. Davison took over. In my memorandum, I drew attention to several matters which caused me some anxiety. However, the point to which I wish to draw attention is that Lloyd's has gone through the exercise required to sort 547 out its affairs. That exercise will have been noted by the people who will run the SROs and I am optimistic that they will be run properly.
If a large proportion of the members who effectively represent foreign-owned companies are in the business of monitoring and running the SROs, it is essential that we ensure that those people are themselves monitored by independent persons and that they work effectively. If one were to sum up the Bill in one sentence, it would be, "Will the SROs work effectively or not?"
§ Mr. HowardI thank my hon. Friends the Members for Chichester (Mr. Nelson) and for Stafford (Mr. Cash) for their support for these amendments, and express my appreciation of the sympathetic observations made by my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth) and the hon. Member for Dagenham (Mr. Gould) about the difficult decisions which had to be made on this matter. I agreed with much of what they said. The decisions were difficult and there was a dilemma. The issues are not clear-cut. It is of notable interest that there was considerable pressure in another place from hon. Members of all parties for the Government to make the changes which form the basis of these amendments. It is lair to say that the Opposition Front Bench in another place was in the van of those requests.
It is no secret that I pondered long and hard on the issue before acceding to the representations. One circumstance which weighed with me in eventually reaching the conclusion that there was a case for an extension was the need not to preclude or inhibit the ability of industry to raise finance. Stabilisation is an accepted and widely-used technique in the new issues of securities, and such issues would be substantially inhibited if that technique were not available. That is why the extension in these amendments is limited, broadly speaking, in that direction.
The securities to which these exemptions will apply are strictly defined in the legislation. Although we recognise the case for an extension for new issues of securities and we do not wish to close the door now against the possibility of there being other categories of securities to which the exemption should apply, and to which these techniques should be applied, we are not at the moment persuaded that that is so. That is why the order-making procedure is set out in the legislation.
That is the balanced way in which we sought to approach the matter. The categories of securities are identified in the legislation. The rules which will govern the application of the technique are provided by the Securities and Investments Board. The House will not have failed to observe the striking discrepancy in the tone in which these matters were observed by the hon. Member for Dagenham, leading for the Opposition in this matter, and the wildly inaccurate statements made by the hon. Member for St. Helens, South (Mr. Bermingham), which bore absolutely no relation to the text of the legislation. The inaccuracy of the hon. Gentleman's remarks is matched only by the lack of interest in this legislation which he displayed before this evening. I invite the House to treat his remarks with the utter contempt which they merit.
§ Question put and agreed to.