HL Deb 10 February 1992 vol 535 cc530-46

8.18 p.m.

Lord Reay rose to move, That the draft regulations laid before the House on 19th December be approved [9th Report from the Joint Committee].

The noble Lord said: My Lords, the Uncertificated Securities Regulations will make it possible for the London Stock Exchange to introduce Taurus, its electronic system for the recording and transfer of shares and other securities. As the term "uncertificated." implies, companies which choose to issue securities in that form will not have to issue share certificates. Transfer of the ownership of such securities will not rely on stock transfer forms which at present have to be physically conveyed, with the relevant certificates, to companies through the Stock Exchange. Electronic messages will replace both share certificates and stock transfer forms. That change has been called "dematerialisation". The central purpose of the regulations is to give companies the right to rely upon such electronic messages to alter their registers, and so complete the transfer process.

This major change to the settlement system is considered by the securities industry to be necessary if London is to maintain its position as the leading financial centre in the European time zone and one of the three top centres in the world. Three years ago the so-called Group of 30, comprising representatives of all the leading international securities markets, made a number of recommendations to be adopted by the major markets with the aim of increasing efficiency and reducing risk. Taurus, on which the Stock Exchange has been working since well before the Group of 30 reported, will be the United Kingdom's response to the call to eliminate paper from movements through the exchange. There will not in future be any danger that a backlog of paperwork will leave transfers worth billions of pounds unsettled, as happened in 1987. The computerised system will also provide the platform for the introduction of rolling settlement with a short cycle and for the implementation of delivery versus payment. These developments will significantly reduce the risk of default during the interval between striking a bargain and settling it and when stock and money do not change hands together.

The Government welcomed the aims of the Group of 30 and we have long said we would provide the changes to legislation necessary to enable the Stock Exchange to implement its chosen system. That is why powers were inserted in the Companies Act 1989 enabling the Secretary of State to make regulations for the procedures for evidencing and transferring title to securities without a written instrument. Now that the exchange has settled the main features of its system, the way has been cleared for us to make the regulations. In framing the regulations the Government have aimed to provide a solid legal basis for the system which the Stock Exchange, after consulting market participants, has concluded best meets the full range of market needs. We have not sought to question that judgment but have used our own extensive process of consultation to make sure that the details are acceptable.

The regulations provide the necessary legal framework for the implementation of the system by the exchange and other participants and for companies to consider their preparations for joining it. It is now up to the exchange and to intending participants to complete their respective parts of the system, to test them fully and to make sure that everything that is reasonably practicable is done to minimise the opportunities for error, fraud or tampering with data. The exchange in its role as operator must also see that participants are not admitted unless they meet appropriate fitness and properness criteria. Only when these preparations are complete will the exchange be able to seek the Secretary of State's consent to admitting the first securities to the system.

The Secretary of State has commissioned the consultants Ernst & Young to carry out a pre-implementation review of the exchange's system. Stage 1 of this review was completed last autumn and was taken into account in the decision to lay the regulations before Parliament. It identified the Stock Exchange's design objectives for the system with particular respect to investor protection. A copy of Stage 1 of the report is in the Library. Stage 2 will monitor and report to the Secretary of State on the way in which the design objectives identified in Stage 1 have been implemented and tested. The Secretary of State will take into account the findings of the report when considering whether to consent to the admission of the first securities to the system.

The exchange currently predicts that testing should be satisfactorily completed by March 1993. This would enable it to seek the Secretary of State's consent to the admission of securities from April 1993.

The scope of the regulations is limited to making those changes to the law which are necessary to allow title to securities to be held and transferred without certificates and stock transfer forms. This must include defining the obligations of those who fulfil the new roles of operator, controllers and approved persons called for by the Taurus system and defining the new power of entitlement around which the legal structure is to be built.

The operator will be the Stock Exchange for so long as it performs its functions properly and does not give the Secretary of State cause to replace it or the exchange itself does not propose a replacement. The operator will run the central computer system and maintain the key records. It will also be responsible for admitting companies and their securities to the system and for admitting and supervising other participants.

Controllers will maintain the records of those investors on whose behalf they hold entitlements to securities. This is not the same as maintaining the company registers, which will continue to be carried out by companies and their registrars. There are two types of controllers: commercial controllers and company controllers.

Commercial controllers will be drawn principally from the ranks of brokers, banks and institutional investors. They will provide services including holding the records of allocations of entitlements to securities and participating in transfers but they will do so under contract with the investor. Such services are likely to appeal to investors with large portfolios that are frequently changing, for whom it is worth paying to have the whole portfolio maintained by a single agent rather than to the small investor. Commercial controllers will be able to charge what the market will bear.

Each company that enters Taurus must appoint a company controller who will provide the basic services of holding the records of allocations of entitlements and participating in transfers at no charge to the investor. In many cases this company controller is likely to be the same person as the company's registrar with whom the shareholder is used to dealing. These arrangements are intended to meet all the requirements of most private investors.

The system does not allow the investor to give an instruction directly to a company controller to move the entitlements held for him to a commercial controller. Instead the investor's instructions must be given through a third party such as a broker or a commercial controller, and the company controller must act on them without questioning whether they are authorised by the investor. These third parties are known in the regulations as "approved persons". They must assume full liability for any losses caused by instructing transfers which were not authorised by the investor.

Any one person may wish to carry out more than one role in Taurus. For example, a broker may wish to be both an approved person and a commercial controller, and a company may wish to be its own company controller or a commercial controller holding entitlement to its own securities. The regulations explicitly permit one person to undertake more than one role.

The regulations also define the new statutory power of "entitlement" with respect to a share. This is the power, held only by controllers, to instruct the company whom to enter on its register as holder of the share. The controller must allocate the entitlement in his records to the investor for whom he holds it. The controller's duty is to give instructions to the company to register the names of the investors to whom he has allocated entitlements. Every controller must, at least once a year, send each investor a statement showing the entitlements held on his behalf. Company controllers must also send a statement after each change in the holding. When a market bargain, or an off-market transfer involving two controllers, is settled, the operator transfers the entitlements from the seller's controller to the buyer's controller in its records, and the two controllers make corresponding changes to their records of allocations. Such transfers of entitlement will be irrevocable, except in very rare cases, giving the market the assurance it requires that there is no risk that the transfer will be rejected some time after settlement by the company registrar.

Those companies that choose to enter Taurus will still maintain the registers of the holders of their securities but they will do so using data received in electronic messages rather than on stock transfer forms. Following registration, the company will no longer be required to send the shareholder a certificate. The investor will instead be receiving statements from his controller. All other communications from the company—dividends, annual reports, notices of meetings, rights offers and the like—will be sent by the company to its shareholders in the same way as today. The company will still be able to follow quickly changes in those having interests in its shares since investors will continue to be obliged to disclose any holding over 3 per cent. within two days and companies will continue to be able to serve Section 212 notices on anyone with an interest in shares.

Nothing in the regulations requires a company to join Taurus. It is a decision for each company to take by means of a special resolution and for the holders of each security to be converted to take by means of an extraordinary resolution. The exchange hopes that companies will feel able to put enabling resolutions to their members now that the regulations are settled and so pave the way for a managed take-on of securities from April 1993. The exchange would like all 2,500 listed companies to join within two years, but I stress that the Government see this as a decision for companies alone.

The Government have paid particular attention to the interests of smaller investors. We were especially concerned that there should be a viable alternative to using a commercial controller who would charge for his services. Less active private investors are likely to use the free services of company controllers. When they do transfer their securities, they will benefit from automatic statements showing the new holding. Should an investor seek additional reassurance as to the safety of his holding, he can instruct his company controller in writing not to transfer his entitlements until such time as he cancels this instruction, again in writing. The company controller may charge the investor with the administrative costs of applying such a lock. The private investor will also have available to him the compensation scheme in addition to the services of the Complaints Commissioner, about which I shall say more in a moment.

The system must be seen to be as secure as is reasonably practicable. The exchange's computer system will incorporate highly sophisticated security techniques, and all data passing between the systems of any participants will be encrypted. Human intervention will be restricted and closely monitored to see that data are not tampered with. Ensuring that data in the system are secure is not sufficient to see that an investor's securities are not transferred against his wishes. For that the instructions put into the system must be authorised by the investor. The regulations make it clear that any controller or approved person who instructs a transfer without the authority of the investor is liable for the loss, even if he acted in good faith on fraudulent instructions.

It is possible today for a dishonest person to pledge his securities more than once, particularly if the lenders are not sufficiently careful about taking the share certificate and signed stock transfer form as control of the collateral before advancing the loan. If the provisions for pledging in the regulations are followed, this will be much more difficult as not only the borrower and the lender are involved in the arrangement but also the controller holding the entitlements to the securities to be pledged. The lender's security will be threatened only if the borrower can successfully impersonate the lender in giving an instruction to the controller to release the entitlements from the pledge control. The position of the borrower remains as it is today. He will continue legally to own the pledged securities and receive all the company benefits of ownership, but he is at risk that the lender could have the securities transferred to itself without his consent.

Despite all the checks built into the system, mistakes may happen and an investor's stock may be transferred against his wishes. Should he find his stock is missing, any investor can ask the Complaints Commissioner to investigate, at no charge to himself. The Complaints Commissioner will investigate whether this is because some person has failed to perform his duties under the regulations, and will report his findings as quickly as he can to the complainant, to any person at fault, to the operator and to the Secretary of State. The report will give the Complaints Commissioner's opinion on the amount of loss, who caused it and the suitable remedy. If within four weeks of the report any private investor has not received payment as recommended by the Complaints Commissioner, he can apply to the compensation scheme. Cases where the report is disputed can be referred to the Financial Services Tribunal for a binding judgment. Again, if a private investor does not receive the payment determined by the tribunal within four weeks, he can apply to the compensation scheme.

The compensation scheme to be established by the operator will meet claims from private investors for losses caused by Taurus participants acting in breach of their Taurus duties. This does not include losses caused by companies or their controllers for which the companies and their controllers, if appropriate, will be liable.

Compensation will normally be paid to the full value of the loss, subject to a maximum of £250,000 payable to any one person in respect of claims arising from the failure of any one participant to carry out its Taurus functions properly. This figure should be sufficient to cover the holdings of 99 per cent. of private investors. There is an annual ceiling on payments by the scheme of £100 million. This figure is not meant to suggest that claims are likely to approach such a level but has been set to assist the exchange in arranging financing for the scheme.

In making the regulations, the Secretary of State must be satisfied that they contain appropriate safeguards for ensuring that competition is not restricted, distorted or prevented. Normal competition law will apply to participants. In addition, the regulations provide for the Director General of Fair Trading to keep the operator and the system under review and to report to the Secretary of State as and when necessary. The director general's staff have considered the exchange's proposals for Taurus as they have been developed, and will continue to do so, with a view to advising the Secretary of State, before he gives consent to the admission of the first securities into Taurus, of any features the director general would be likely to consider anti-competitive. This scrutiny is particularly important as the operator will not face direct competition in its role as operator. While these regulations do not provide for a competing operator, the Government would be prepared to consider any proposals for a competitor and, if required, to prepare further regulations.

The Uncertificated Securities Regulations 1992 set down the legal principles by which the system designed by the exchange shall be operated. Mechanical details will be contained in rules regulating the procedures and the participants. These rules will be made by the Secretary of State, or by the operator to the extent that the powers to do so are delegated to it and subject to the Secretary of State's approval. This rule-making power provides an essential element of flexibility to enable the operation of the system in a complex and changing environment.

By establishing principles rather than detail, it is intended that the regulations should give considerable scope for Taurus to develop further to meet market needs. Already various players in the securities industry are thinking beyond current implementation plans to improvements and new ways of supplying services to their customers. We welcome this as a sign that the industry recognises the opportunities for innovation that Taurus can offer. These regulations provide the essential legal and regulatory framework for Taurus. They are the product of extensive consultation. I commend them to the House. I beg to move.

Moved, That the draft regulations laid before the House on 19th December be approved [9th Report from the Joint Committee].—(Lord Reay.)

Lord Williams of Elvel

My Lords, the House will be grateful to the Minister for moving the Motion which concerns the regulations that are under consideration. We on these Benches welcome this development. We are rather sorry that it is behind schedule. We believe it could have been introduced rather earlier in this Parliament. Nevertheless I do not propose to divide the House against the Motion.

I have a number of points to make. As we on this side of the House do not wish to oppose the Motion, I have given notice to the Minister of the points I wish to raise. Why is the Stock Exchange to be accepted as the operator? The Stock Exchange is a recognised investment exchange under the terms of the Financial Services Act. It is not a self-regulatory organisation and it is not part of the Securities and Investments Board. It is an element by itself under that Act.

I understand that the regulations before us are made under the Companies Act. I am rather surprised they were not made under the Financial Services Act. In that sense I am rather surprised that the new Section 207 of the Companies Act 1989 was not an amendment to the Financial Services Act rather than being a new amendment to the Companies Act. This is really a matter of regulating markets. As such it should be part of financial services regulation rather than simply be part of the Companies Act and state that paper share certificates will henceforth be programmed into computers. I hope the Minister can comment on that.

I understand from the regulations that the operator's report —the Minister has stated perfectly clearly that the operator will be the Stock Exchange —will not be put before Parliament and that it will be for the Secretary of State to decide what he does with any report which he may from time to time ask for. Why is that report not to be made available to Parliament? Further, on what grounds is the competence of the operator, as designated by the Secretary of State, to be judged? The Minister has quite rightly said that the regulations allow the Secretary of State to change the operator. We all know that changing the Securities and Investments Board from one day to another is simply not possible. The markets have to function and things have to go on. How can it be that the DTI retains responsibility for changing the operator when we all know that in practice the operator cannot be changed? It is absurd.

How far will the operator, as designated by the Secretary of State, rely on the mechanism of the Financial Services Act? In other words, how far will the operator rely on those self-regulatory organisations which have the statutory power to supervise their own members to police the system which the noble Lord described? In my view the operator will have to rely on them totally since the Stock Exchange has no means of checking who is doing what and where unless those people are registered with and licensed by SROs or directed by the SIB under the Financial Services Act. The Stock Exchange has no ability to check whether such people are fit and proper persons and whether they are doing the sensible thing. Therefore, why does the whole system not fall under the Financial Services Act?

If the system were under the Financial Services Act I could accept that the operator would have no civil liability. However, with it falling under the Companies Act, which allows for civil liability for damages when an offence is committed under the Act, I would argue that the operator should be under the Companies Act regime and be civilly liable for any damages which any aggrieved person who has lost his money as a result of the operation of the system could claim against the operator. After all, the operator is not a Crown servant. He is not licensed under the Financial Services Act. He has been picked out of the air by the Department of Trade and Industry and just happens to be the person who invented the system. I do not believe that that is a right and proper way to run what I consider to be a desirable system.

I now turn to the question of controllers. What is the difference between a company controller and a commercial controller? I understand what the Minister said and I have read the new regulations. However, I do not see why there should be any serious difference. The noble Lord said that the company controller was intended to help smaller shareholders who might not have access to commercial controllers. Where does the smaller shareholder stop? If company controllers are to offer their services more or less free of charge why on earth should not large investors join the club and go to company controllers rather than setting up commercial controllers of their own? What is to be the advantage?

The regulations lay down that there should be capital adequacy for commercial controllers but not in the case of company controllers. However, we have seen in the past, and very recently, that companies go into liquidation or fail to honour their obligations. Why should commercial controllers be subject to a capital adequacy provision which appears in the Financial Services Act and company controllers not have to meet the same capital adequacy requirements? The noble Lord said that difficulty might arise between the deal being struck and settlement. There might well be difficulty if a company suddenly goes into liquidation, the deal has been struck and the company controller has registered the deal yet is not able to meet the obligation.

I am sorry to detain your Lordships but these are interesting questions and I shall be grateful for the Minister's response. The next question is why the Government and the Stock Exchange chose this system, which does away with all paper securities of an equity nature, rather than the depository system as operated in New York and Tokyo. We need an explanation. I know that the system is operated in Paris, Stockholm and Oslo, but the London market is much larger than any of those. If New York and Tokyo have one system, why do we, who are rivals to New York and Tokyo, opt for another?

If we are to have another system, can that system handle bearer shares? As your Lordships will know, bearer shares are perfectly legal under legislation in this country. Under the Exchange Control Act 1947, which was intended to stop people moving paper out of the country, bearer shares were declared illegal for UK residents. However, the 1947 Act, although nominally still in force, has been negatived and many bearer shares are quoted on the London Stock Exchange. Almost all shares on the Paris Stock Exchange, for example, are bearer shares. Therefore, if the Minister is right in saying that London should be the central market for Europe, can Taurus handle shares which are not registered—bearer shares? If so, how and when?

As your Lordships will know, some 40 per cent., 50 per cent., or 60 per cent.—the figure varies—of the capitalisation of the London Stock Exchange is in gilt-edged securities, gilt-edged securities being securities issued by the British Government or with a British government guarantee. At present the transfer and settlement of gilts is handled through the Bank of England, except in the case of what are known as small gilts. Private individuals may have holdings of gilt-edged securities which they may wish to trade through their own broker and which are not big enough to be settled through the Bank of England. Why does Taurus not take over from the Talisman system the settlement of gilt-edged securities. Is that on the agenda? Is that to happen? Will the Bank of England be told that in two years' time, or whenever it may be, all transfers of gilt-edged securities will be handled by the Taurus system. If so, how will that happen?

I am sorry to bore your Lordships with these very technical points. But what will be the status of the rules which the operator will issue? During the passage of the Financial Services Bill we had long debates about the status of rules, regulations, orders and statutory instruments. I ask the noble Lord, what is the legal status of the rules which the operator will promulgate? Will it constitute a criminal offence if those rules are not observed? Will they merely be something to which people should pay attention, like the takeover code under which people who are censured may regard it merely as the way the market operates?

The Minister quite rightly raised the question of the compensation scheme. Will eligibility for the compensation scheme be the same as eligibility for the compensation scheme under the Financial Services Act? It would be absurd if we had two compensation schemes, allegedly running side by side, with different criteria. When the noble Lord replies will he comment on that issue?

I assume that there will be a transitional period in which Taurus—that great computer system—will operate alongside the existing system. The noble Lord rightly said that companies opt in and opt out, that it is voluntary, and so on. What happens if in five, 10 or 15 years' time we find that 2,500 major companies say, "We don't want this. We want to stay with our existing system because our shareholders say that they want pieces of paper to say they own a share in ICI" or whatever it may be. What happens if there is a marvellous computer system which works to the noble Lord's specifications, in which there are no defaults—in itself an optimistic hypothesis—and yet a great many companies simply opt to stay out of the system? What do the Government do then?

I have spent almost as much time asking questions of the Minister as the Minister did in introducing the regulations. I believe that they are important. After all, the regulations document is the size of a major Bill. I believe that it would be wrong of me to allow the House simply to pass the regulations on a Motion without scrutinising them and asking the Government a number of questions which I hope the noble Lord will be able to answer.

Having said that, I believe that the Taurus system will be for the benefit of this country. However, we need to get it right. If anything goes wrong in the system, we shall lose whatever pre-eminence we pretend to have in the financial markets of Europe.

Lord Terrington

My Lords, as I was responsible for taking the Talisman legislation through your Lordships' House 15 years ago, I thought it might be appropriate if I were to say a few general words about the Taurus system which will be allowed by these regulations.

The new system seems to me to be a logical successor to Talisman as it replaces an archaic system of paper registration which is both cumbersome and slow, a fact of which I am well aware having spent most of my working life in the securities industry.

I recognise the importance of this development to the UK as a financial centre. That has been touched upon by many today. I wish to confine my brief remarks to some of the implications as I see them for the private investor. I do so because for many years I have been actively involved on the private investor's behalf as a member of the executive committee of the Wider Share Ownership Council.

First, I particularly like the fact that the new system is designed to ensure that companies can continue to communicate directly with their shareholders by preserving a record of names on a company register. Secondly, the abolition of share certificates should certainly accelerate dealing operations for the private investor and should thereby provide him with greater flexibility than exists at present under the Talisman system.

Thirdly, there is the question of dealing costs, which are so important in particular to the small investor. I imagine that those are unlikely to be reduced initially owing to the need for capital expenditure to set up the new system. But that is a reasonable expectation in the medium to longer term. In addition I am glad to know that such matters as the pledging of shares as collateral for loans will continue for the private invester under the new system. In fact investors will operate much as they do today but without the process of moving paper between intermediaries within the market.

Finally, two other matters appeal to me on behalf of the private investor: the appointment of a complaints commissioner; and the existence of a compensation fund in the unlikely event of an investor suffering through the actions of a Taurus participant. I therefore conclude my brief remarks by welcoming the regulations. I hope that the new system will soon be brought into operation. I understand that that is now likely in the spring or early summer of next year after the necessary trial period which I believe will probably be required.

Viscount Bridgeman

My Lords, as a member of the Stock Exchange, perhaps I may add a few general points to those made by the noble Lord, Lord Terrington. The draft regulations before your Lordships' House may deal with the technicalities of company law but it is no academic exercise. Through these regulations the London Stock Exchange will be able to introduce and operate its Taurus system. It is difficult to exaggerate the importance of the system for the UK securities industry and its customers.

The UK is regarded as the leading centre for financial services in Europe. That view is not just held in the UK. All competitor centres recognise London's leading status. In particular the UK securities sector is acknowledged to be a leader both in the quality of its markets and those who operate in them. In only one respect does the UK lag behind. That is in the area of share registration and transfer.

Taurus aims to meet this competitive concern. It should remove the cumbersome and costly paper chase which the present paper-based system creates. It will enable the UK to meet international standards for the settlement of share transactions. For those reasons alone, I believe that your Lordships should be ready to give your approval to the regulations.

Perhaps I may draw to your Lordships' attention a couple of aspects of the way in which Taurus will operate. First, Taurus is not directly comparable to other registration systems. It has been constructed specifically to meet the needs of the United Kingdom environment, not least the needs of UK companies. UK companies wish to know the identity of their shareholders. Therefore, the Taurus system embodies the concept that a shareholder's name shall appear, as now, on a company register. Once operational, the system should ensure a more timely flow of information on to company registers by ensuring prompt registration of new owners of shares.

Overseas registration systems do not place the same emphasis on the company/shareholder relationship. If any noble Lords are moved to complain that either the regulations or the Taurus system itself are unduly complex, this point should be borne in mind. Other systems designed, for example, on a depository system would have been simpler, as the noble Lord, Lord Williams of Elvel, pointed out.

Lord Williams of Elvel

My Lords, I am sorry to interrupt. The noble Viscount recognises of course that on the Continent of Europe the bearer shares are the norm rather than registered shares.

Viscount Bridgeman

My Lords, I understand that point. It is the relationship between the company and its shareholders to which this system gives great emphasis. Taurus reflects the UK environment. The UK environment has not been reconstructed for Taurus.

Secondly, many will be concerned about the level of investor protection afforded by Taurus—a point that the noble Lord, Lord Terrington, made. It is especially important that individual investors should have full confidence in the regulatory arrangements. I believe that the arrangements outlined in the regulations will prove satisfactory. They will of course be supplemented by the detailed rule book.

I believe that the London Stock Exchange as operator of the Taurus system takes very seriously its responsibilities to ensure that investors are protected. It is putting in place stringent technical tests to ensure that all who have access to the system are highly competent in case they have to meet claims against them. The Exchange is paying for an independent complaints commissioner to investigate claims on behalf of investors as well as establishing a compensation fund. All those arrangements must be in place before the Secretary of State gives consent for the system to start operating. I suggest to your Lordships that those various layers of protection demonstrate a commitment to the secure operation of the system which noble Lords will welcome. It is also an important message which needs to be communicated to private investors. I welcome the Exchange's plans to assist companies to inform shareholders when they are asked to approve the transition of their company on to Taurus. In particular, it will need to be explained that investors who no longer receive a share certificate will still have records of their holdings in the form of statements from their appropriate Taurus participants.

Sometimes, when I am confronted by legislation of this length, I wonder whether the game is worth a candle. I am persuaded that in this case it certainly is. By approving these draft regulations your Lordships will facilitate an improvement in the competitiveness of the UK's securities industry at a time when it is vital that all its services perform with the utmost efficiency.

Lord Williams of Elvel

My Lords, before the noble Viscount sits down will he reply further to my question about bearer shares? I understand that he is a member of the Stock Exchange and we respect him as such. I fully accept that the Taurus system is designed to increase shareholder protection. How does the Taurus system, in his view, increase shareholder protection in those companies where there are bearer shares?

Viscount Bridgeman

My Lords, I do not feel able to answer that question specifically. If it is not covered by the Minister, perhaps it can be taken up later.

9 p.m.

Lord Reay

My Lords, I am grateful to the noble Lord, Lord Williams of Elvel, for having broadly welcomed the proposals. I am mightily relieved that he does not intend to divide the House. I understand that he wishes to give us the benefit of his considerable experience in these matters and he asked a number of detailed and technical questions. I am grateful for the notice that he gave me and I shall do my best to answer the questions. I am now in a better position to do so. However, I am also grateful for the expert support which the regulations received from the noble Lord, Lord Terrington, and my noble friend Lord Bridgeman. Both wished to give the regulations a fair wind.

The noble Lord, Lord Williams, asked why the Stock Exchange had been plucked out of the air, to use his phrase, to be the operator of the system. The Stock Exchange already has a central role, which is as a recognised exchange and a competent authority under the European Community listing directives. It has designed a system which builds on its role so that the interdependent functions which the Stock Exchange discharges of trade acceptance, confirmation and settlement can be offered to the market as a single package. The regulations deal only with one part of the package—that is, the transfer of securities, which is part of the settlement process—and we saw no need to require that to be brought under a separate control.

The noble Lord, Lord Williams, also asked why Taurus was not regulated directly under the Financial Services Act. The key features of Taurus relate to company law rather than to investor protection. Therefore, we did not believe that the FSA was an appropriate basis for regulation. The business of being a controller, including that of being a company controller, is not investment business. It is therefore inappropriate that it should be subject to the FSA. Furthermore, there must be provision for foreign participants operating wholly outside the United Kingdom and they are not subject to the FSA—

Lord Williams of Elvel

My Lords, I am grateful to the Minister for giving way. Recognised investment exchange under the FSA may be foreign or UK. The Secretary of State, who after all is the fount of all legislation under this regulation as well as under the FSA, is perfectly capable of deciding whether it is a matter of company legislation or regulating markets. In my view—and I must make that plain to the noble Lord—it is not a question of whether one substitutes one piece of paper, or two pieces of paper in the case of a stock transfer form, for a computer entry. It is a question of regulating markets. If the system goes wrong, then the markets go wrong. I am sorry to go on a little about the matter, but I believe strongly that the Government have approached the problem from the wrong angle; as though it were a question of company law stating simply, "If you are a shareholder you get a certificate and if you want to transfer your share you get a stock transfer form." That is the wrong way of approaching the matter. The approach should be how to make the London Stock Exchange or the stock market generally a proper financial centre of Europe. The difference between me and the Minister on that matter is acute.

Lord Reay

My Lords, the noble Lord has made his point. The business of being a controller is not investment business as such and, therefore, in our view it should not be subject to the FSA. If investment business is carried out by a controller who is for that reason regulated by the FSA, that will not apply to his actions as a controller.

The noble Lord asked about the competence of the operator and on what grounds his competence is decided. The Stock Exchange had a good track record in running Talisman, which has not failed at times of high load even in the 1987 October crash. The design and implementation of Taurus is independently scrutinised by Ernst & Young. Its expert reports will he carefully considered by my right honourable friend the Secretary of State before consent is given to the admission of the first securities to the system. He will look to be satisfied that as regards each of the points listed in the Ernst & Young report the protection of the investors and the effectiveness of the system have been assured—

Lord Williams of Elvel

My Lords, I apologise for intervening but I warned the Minister that I would do so from time to time. The fact that Ernst & Young, which is after all an accountancy firm, states that at the moment the Stock Exchange is fit to be the operator of the system is neither here nor there. What happens if and when—and it is an if and not a when the system breaks down? Does the Secretary of State appoint Ernst & Young to be the new operator? What will happen?

Lord Reay

My Lords, it is not possible to foresee all the circumstances in which the substitution of an operator will be required. That is a possibility. However, we consider it most unlikely that such a step will be necessary.

Lord Harmar-Nicholls

My Lords, is not the answer to the noble Lord that, if something has been set up which, with the best will in the world, it is hoped will work and then it does not work, it must be repaired? Parliament will have all the power in the world to repair shortcomings which may occur at any stage.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord, Lord Harmar-Nicholls. After this order has been passed, Parliament will have no such power to make repairs. That must be for the Secretary of State. He must decide whether or not the Stock Exchange, Ernst & Young or any other reputable firm is the proper operator of the system. After we have passed this Motion, Parliament will no longer be involved in the system.

Lord Reay

My Lords, the Secretary of State, as well as the operator, has duties which are laid upon him by Parliament. He will be responsible to Parliament for discharging those duties.

The noble Lord went on to ask about the reliance which the operator would place on SROs. The regulations allow the operator to rely on statements on any matter made by other regulators if the operator is satisfied with the nature and scope of that regulator's supervision in regard to the matter in question. I emphasise that it is for the operator to decide what use to make of that provision.

The noble Lord asked me why the operator has no civil liability. The operator's immunity in the discharge of its regulatory functions corresponds to the immunity given to self-regulatory organisations under the Financial Services Act. Two factors in particular make it an essential strengthening of the regulator's role. First, if the regulation is to be effective, an operator needs to be able to act swiftly and decisively, sometimes on less than convincing evidence if it seems necessary to do so in the interests of investors. Secondly, the operator's financial resources may well be less than those of participants or others affected by its actions. There is a real risk that the prospect of a number of large claims for damages would deter an operator from taking the actions which it believes necessary. We do not believe that that would be in the interests of investors.

The noble Lord asked me about the distinction between commercial and company controllers. I attempted to cover that matter in my speech. In particular the noble Lord asked why it could not be open to larger investors to make use of company controllers. In fact, all investors, irrespective of size, will be entitled to make use of company controllers. That is a commercial decision which needs to be taken by the investors involved. Large investors will need to decide whether it is worth while paying a commercial controller's charges for the services which are offered. We have assumed that the smaller investor will probably not take such an option.

The noble Lord asked why there is a capital adequacy test for commercial controllers and not for company controllers. A company which appoints a company controller is jointly and severally liable with it for its actions. There is no need for a capital adequacy test for the controller when it has the full financial backing of the company behind it. On the other hand, commercial controllers must meet capital adequacy criteria. They are liable for all losses which they cause by failing to perform Taurus functions. Before they are admitted to participation by the operator and for so long as they continue to be controllers, they must have sufficient financial resources to meet any obligations which they may reasonably be expected to incur.

Lord Williams of Elvel

My Lords, is it not the case that commercial controllers will be those who are operating as investors or conducting investment business under the Financial Services Act? They therefore have capital adequacy requirements under the Act. In order to avoid the mass of legislation that comes before your Lordships, it may perhaps be more sensible to say that the Financial Services Act capital criteria will be sufficient for commercial controllers under this regulation.

Lord Reay

My Lords, I do not see why that should be the case. As I explained, commercial controllers are liable for losses that they may incur for failing to perform their obligations and functions as set out under Taurus.

Lord Williams of Elvel

My Lords, if they are licensed under the Financial Services Act, then they are responsible for their losses under that Act. Under the capital adequacy criteria they must satisfy their SRO and, if necessary, the SIB.

Lord Reay

My Lords, the noble Lord does not persuade me. The Stock Exchange intends to rely mainly on the existing FSA requirements for capital in the case of FSA-regulated funds. But commercial controllers are liable for all losses that they cause by failing properly to perform their Taurus functions.

The noble Lord asks why the Stock Exchange chose this system rather than a depository system as in New York or Tokyo. Other major financial centres do not have our tradition of registration, which gives companies a direct relationship with their shareholders, but it is the Stock Exchange which chose full dematerialisation rather than a depository. We always intended to provide the legislation within the constraints of the principles of our law to enable the Stock Exchange to implement whatever system it chose and not to tell it what system it should have.

By definition, bearer shares rely on the conveyance of a document of title from one person to another and therefore cannot be dematerialised. However, they can be deposited in a depository and the interest thereby created can he transferred to Taurus.

Lord Williams of Elvel

My Lords, again I beg leave to intervene. The noble Lord is quite right. Bearer shares are title to a share and can be deposited in a depository. The depository can issue registered instruments with a name on them or not as the case may be. If Taurus cannot handle bearer shares—as I said before, the vast majority of French and German and no doubt Polish, Russian and everybody else's shares are bearer shares—then what is the point of the system? The point is that we should be the financial centre of Europe and not try to imitate New York, which has registered shares.

Lord Reay

My Lords, bearer shares can be handled by Taurus provided they are held by a depository. In those cases the interest in the shares can be treated as a Taurus security under Regulation 93. An arrangement of that kind must apply in centres such as Paris.

The noble Lord asked about the future of gilts and their relation to the Taurus system. Gilts are already dematerialised through the central gilts office run by the Bank of England. Therefore Taurus will not settle gilts because the Bank of England does so.

With regard to the legal status of the rules, they will be statutory rules, conformity with which will be a statutory duty. They will be made under statute and a breach will be actionable as a breach of a statutory duty. The noble Lord asked what would be the criteria for a compensation scheme and referred to the need to dovetail it with the provisions in the investors' compensation scheme under the Financial Services Act. The Department of Trade and Industry, the SIB and the Stock Exchange will work together to frame the rules of both schemes of compensation, aiming to avoid gaps or overlap between them.

The noble Lord asked about the transitional system. The certificated system will remain in place. Companies will be free to choose whether or not to join Taurus and we have no plans to make it compulsory. I believe that I dealt with the questions about opting in and they are covered in Part IX of the regulations, which gives the detailed provisions for companies wishing to join Taurus.

I believe I have answered all the questions raised by the noble Lord. In conclusion perhaps I may say that the regulations provide the necessary legal framework for introducing the Taurus system chosen by the Stock Exchange. I commend the regulations to the House.

On Question, Motion agreed to.