EXEMPTION FOR RECOGNISED INVESTMENT EXCHANGES AND CLEARING HOUSES (Hansard, 9 February 2000)

§ Mr. Timms
I beg to move amendment No. 136, in page 132, line 36, leave out from beginning to "in", in line 37 and insert- in relation to which a recognition order is".

Mr. Deputy Speaker
With this it will be convenient to discuss the following: Government amendment No. 137.
Amendment No. 481, in clause 262, page 134, line 9, after "for", insert "access to and".
Amendment No. 482, in page 134, line 9, after "services", insert—
and the capacity of those services". Government amendment No. 139.

§ Mr. Timms
Amendment No. 139 makes a drafting change to correct the mistaken indirect reference in 326 clause 269(6) to directions made in subsection (2). Subsection (2) in fact contains no such power. The amendment makes a further consequential change.
Amendments Nos. 136 and 137 make minor changes to improve the drafting of clause 260. They do not change the substance of the provisions of this part.
Amendments Nos. 481 and 482, in the name of my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins), would make drafting changes to the provisions on the required particulars which applicants for recognition as recognised investment exchanges must send with their application. I shall be interested to hear what he has to say about this, but I suggest that the amendments are covered already by provisions in the Bill.
Clause 288(2)(b), for example, provides that references to rules of an investment exchange, which must be submitted with the application, are to rules made with respect to admission of persons to, or their exclusion from the use of, its facilities". That, I think, deals with amendment No. 481 and the important point about access.
Amendment No. 482 would add a reference to the capacity of those services". If there is an issue, I think that it can be dealt with by the FSA asking for additional information under clause 262(3)(e)—or, if need be, in the recognition requirements described in clause 261. I think that the points raised by my hon. Friend in his amendment are dealt with by provisions already in the Bill, but I shall be interested to hear what he has to say.

§ Mr. Cousins
I shall not detain the House for long, but we are dealing with an important aspect of developments in the markets that have taken place since the inception of the Bill. It is important because it concerns the capacity of the London market to continue to maintain its strength and significance: it must have the technological capacity to deal with modern market situations.
The United States has 160 on-line share brokers; 40 per cent. of all share trading there takes place on line rather than directly through the markets. The situation in this country is quite different. On the London stock exchange, although 2,000 shares are listed only 130 can be traded on line, and only a limited number of brokers have on-line trading capacity.
Since the explosion in asset values last autumn, the number of trades on the market has increased incredibly rapidly. The number of trades, particularly by small traders, is now three or four times greater than it was even six months ago. People are attempting to make the most of those trades by telephone, because of the lack of on-line trading capacity. In many cases, the telephone systems handled by brokers have broken down, causing delays and causing consumers attempting to buy and sell stock to doubt whether they have been fairly treated. I have been told by the FSA that in the early part of January as many as 2 billion shares a day were being traded on the markets, and that those included an increasing number of very small trades. In that respect, the London market compares very unfavourably with the market in Frankfurt, which has a completely electronic platform.
327 In November and December of last year, the position of small traders in the market led to a major outcry in the press and other media about the lack of ability to place deals when people wanted to execute them. At that time, the Securities and Futures Authority, which is currently responsible for this aspect of the work of the exchanges, produced some guidance for people in the market. That guidance effectively attempted to protect the position of clients who were already registered with brokers and who had nominee accounts. Plainly, they were to be given priority to the disadvantage of other traders who were not similarly placed. That cannot be satisfactory in consumer terms.
It is not clear that the FSA regards the capacity of the market to sustain the volume of trade as part of its duty. After I submitted a dossier of correspondence on the topic to Howard Davies of the FSA, he wrote:
You can be assured that where a firm does get into difficulties which pose a significant risk to customers—whether with its telephone or internet-based services—our supervision staff can and do get involved. Persistent poor service to customers, causing losses to them, could be grounds for disciplinary action … The longer-run development of dealing services is ultimately a commercial matter for the exchanges and their users. 7.45 pm
I confess to being rather dismayed by that last point. I am worried about the fact that the FSA does not consider the maintenance of the capacity to execute deals in the markets to be clearly one of its responsibilities. I accept that, as my hon. Friend the Minister has said, provisions in the Bill allow the FSA perhaps to include that in its remit, but the Bill does not seem to specify a duty, which is one of the purposes of the amendments.
Issuing the 9 December guidance that established priorities for those with nominee accounts, Lindsay Thomas, head of the Securities and Futures Authority's supervision department, said: It is important that firms put in place systems adequate to handle the new peak levels of business that they should now expect. That implies that Lindsay Thomas envisages some duty for the SFA to deliver in that regard. Howard Davies's later correspondence with me appears to water that down.
I am concerned about that. We are seeing the development of new markets; we are seeing the development of new traders in the market—consumers with small stocks of equities in which they wish to deal. It is, of course, possible that some of that may not be well advised. There is concern about people who are working on the margins, buying options rather than the shares themselves. However, the concern about whether consumers are well advised to engage in such trades provides no excuse for a lack of capacity in the market.
I urge Ministers to make it clear that the FSA will have a duty and responsibility to ensure that our British share markets can function in a modern, high-tech, e-commerce way, and will no longer be subjected to the delays experienced by small traders in the last months of 1999.

§ Mr. Flight
Let me ask the Minister a question about investment exchanges. Under the Bill, they become semi-regulative bodies themselves and gain a legal immunity that, in the main, was not enjoyed before. What arrangements, if any, will be organised to deal with complaints about investment exchanges in relation to those 328 using them, and for any potential recompense when exchanges have acted improperly to members or customers?

§ Mr. Timms
I listened with interest to what was said by my hon. Friend the Member for Newcastle upon Tyne, Central. I share his concern: it is important for adequate facilities to be available for as many people as wish to participate in trades.
There has been a remarkable increase in recent months. That is a welcome development. The more people who take part in such trading, the better. Of course they must take adequate advice and precautions, but we want more people to participate, and that is clearly happening.
My hon. Friend is right to draw attention to the growth of on-line share brokering. He has made the point that things have gone a good deal further in the United States than they have here. That is true, but I have no doubt that there will be rapid developments on that front in the UK as well; it is happening across the board in on-line services. That sector will be no exception.
It is clear from the letter that my hon. Friend read from Howard Davies that the FSA will take a general and close interest in what is happening to ensure that arrangements are working well and that provision is adequate, but if there is demand for a particular type of service, we will want the market to respond to that demand. I do not think that it is for the Bill or the FSA to require that the market should respond. I am not quite sure what mechanism it could adopt to require that.
Therefore, the arrangements in the Bill are the right ones. They allow for both my hon. Friend's points to be dealt with through the provisions that are already in place, but I am not sure that it will be possible for the FSA to take the rather more prescriptive role that he outlined, although it will take a close interest in how things develop. In that sector, notwithstanding the difficulties with capacity that have arisen in recent months, we can expect the market to move pretty quickly and ensure that there is adequate capacity for the attractive commercial opportunities that growth is presenting.
The hon. Member for Arundel and South Downs (Mr. Flight) asked about arrangements for complaints. The Bill requires the FSA to maintain arrangements for dealing with complaints against recognised bodies; it is in clause 275. The draft recognition requirements that were published for consultation last year also require the recognised bodies to maintain complaints arrangements. Those are the provisions that have been made. I hope that that covers his point.