HL Deb 14 December 1995 vol 567 cc1391-6

4.23 p.m.

Lord Chesham rose to move, That the draft regulations laid before the House on 16th November be approved [2nd Report from the Joint Committee].

The noble Lord said: My Lords, I beg to move that the Uncertificated Securities Regulations 1995 be approved. These regulations are necessary to allow computerised security settlement systems like CREST to operate.

The City of London is one of the three main financial centres of the world. It makes a substantial contribution to the UK economy and to exports. The equity market is an important part of the City, and the efficiency of the settlement system is an important part of the equity market.

The present paper-based system needs to be replaced to improve efficiency and reduce risk. The Stock Exchange sought to introduce a replacement system called Taurus which, as some noble Lords may remember, was abandoned in March 1993. The Bank of England then co-ordinated the responses of key City players in the setting up of the Securities Settlement Task Force, which decided on a new system called CREST. The CREST team has since been developing the system, and it is due to start testing in January and to start operating in July.

CREST will change the way in which title is transferred from one holder of securities to another. It will replace share certificates and stock transfer forms with authentic electronic instructions. However, CREST is a voluntary system. Only those who wish to use it need to give up their certificates. Detailed descriptions have been published by the CREST project team.

Both the central system itself and the networks which will carry the electronic instructions between participants and CREST will be very secure.

I turn next to the question of why the legislation needs to be altered. At present, under the Companies Act 1985 companies are obliged to issue share certificates to shareholders. They can only register the transfer of shares on receipt of a stock transfer form. It is therefore necessary to change the law to allow an electronic transfer system to work. Parliament foresaw that possibility when it passed Section 207 of the Companies Act 1989, which is an enabling provision. It allows such legislative changes to be introduced by regulations, which can thus take cognisance of advances in technology. That is the purpose of the regulations before us today.

Noble Lords will search in vain for a mention of the word CREST in the draft regulations. CREST is a good snappy name for the system under development. However, the Government believe that the legal structure must leave open the possibility of a competitor in the future. That is why the regulations use the rather dry formula of the Operator of a relevant system".

The operator must apply for approval under the regulations against the criteria set out under Schedule 1. It is fair to say that there is little likelihood at present of another system seeking the same approval under the regulations.

The Government intend to delegate to the Securities and Investments Board the task of considering whether CREST meets these approval criteria. SIB has already had a role in recognising CREST as a recognised clearing house under the FSA. In addition, the SIB's role is to approve CREST under the regulations.

Perhaps I may say a word about costs. In accordance with the Government's commitment to private finance, CREST will be paid for by those who use it. Sixty-eight city firms have committed capital to the project. Some noble Lords may have received complaints about the cost of CREST and in particular the costs imposed by those firms providing network links, Swift and Syntegra. The Government have explored those concerns with those who have expressed them and with the network providers themselves. As a result of those discussions the Government expect CREST, the networks and the industry between them to achieve an acceptable balance of costs between large and small users.

Another concern has been the position of the retail investor. Many of those with small shareholdings trade infrequently, if at all. For them it will probably be appropriate to remain with certificated holdings. That will remain a viable option. There will also be the possibility of sponsored membership—a CREST special— which will allow investors to keep their names on company registers and still benefit from the efficiencies of electronic settlement. I am pleased to tell the House that CREST borrowed the concept of sponsored membership from the Australian computerised system called CHESS, which I understand has been very successful.

It is now clear that CREST is expected to be introduced on time and to budget. That is a major achievement. The system will contribute to improving London's efficiency. The draft Uncertificated Securities Regulations make the minimum changes necessary to company law to allow electronic settlement. They have been the subject of extensive consultation, with positive and helpful results. All those busy with their own CREST preparations, including listed companies, will want to see what the final legislative framework looks like as soon as possible. The regulations have been the subject of an affirmative resolution in another place. I commend them to the House.

Moved, That the draft regulations laid before the House on 16th November be approved [2nd Report from the Joint Committee].—(Lord Chesham.)

4.30 p.m.

Lord Stewartby

My Lords, I thank the noble Lord for allowing me just to say a word. I am a member of the Securities and Investments Board. In that capacity I welcome the regulations. There has been close co-operation on the part of the parties involved in this process, including the Securities and Investments Board and my noble friend's department. I very much welcome the fact that the regulations are now before this House. I hope that they will be approved without difficulty.

I should like, however, to raise just one point with my noble friend. He referred to the role of the Securities and Investments Board, which has to approve CREST under the regulations, and continue to approve it. In public discussion of these issues it is sometimes difficult to differentiate between the responsibilities of the Government in the form of the Treasury, the Securities and Investments Board, and other regulatory bodies. I should find it helpful if the Minister could confirm that the Government's published public policy objectives remain the responsibility of the Government and not of the Securities and Investments Board. The Government have spelt out those public policy objectives as being the role of the retail investor; investor protection; competition; company and shareholder relationships; and London's standing as a financial centre.

I make only one other point, and in a personal capacity, not, as it were, wearing a SIB hat. There has been some anxiety expressed as to whether the CREST system will turn out to be a great blessing for the big institutions but cause problems for private and personal shareholders. I hope very much that, to the extent that it is able to do so, the Treasury will join in trying to persuade those who finalise the arrangements for costs that smaller shareholders and personal shareholders are not put at a cost disadvantage against the larger users.

Lord Graham of Edmonton

My Lords, I rise in the absence of my noble friend Lord Chandos, who is due to be here. I shall continue until he arrives, but I shall not take more than four to five minutes because I am conscious of a major social event that hangs upon the speedy conclusion of today's business in this Chamber.

I listened carefully to the Minister's remarks. This is one of those areas in which one needs to be a practitioner in the business of managing money and securities in order to understand the intricacies. The noble Lord, Lord Stewartby, is well conscious of matters of state, not least because of his present declared involvement as a member of the Securities and Investments Board, and also as a result of his eminent position in the other place and in the Government over many years. However, even he is able to raise one or two points of unease and uncertainty.

On this side of the House we always subscribe to the strengthening of what we call consumer protection, consumers in this context being not merely little men or little women but big men and big women—in other words, the industry. We are very conscious that anything that can be done to strengthen the integrity and reputation for probity of London as a financial centre should be done. I note that the Minister says that London is one of the top three in the world. I am surprised that we are not first. Certainly, we in this country look upon the City of London as a major, if not the major, financial centre.

It all sounds necessary. It all sounds as though it has been well thought out. However, the noble Lord, Lord Stewartby, referred to the Securities and Investments Board. I recall the Financial Services Bill and the creation of, among other bodies, the SIB. Frankly, there was a time when questions were raised as to whether Parliament had got matters right. The noble Lord is not the only Member of this House to have served on securities and investments boards.

Will the Minister assist the House by saying more about the steps that he and his colleagues believe they have in place, not necessarily to police the industry and not necessarily to interfere or intervene? I am quite certain that the best advice available has been given. But at the end of the day I believe the Minister will be frank and acknowledge that he, like myself, while we try to do our duty, is nowhere near competent to deal with people who may very well be sharp. One hears about fraud; one hears about mistakes; one hears about major catastrophes. I do not want the Minister to detail instances. But clearly what we are involved in here is putting in place the best possible improvement in technique and technology. That can be good, not only for this industry and this business, but for the reputation of this country.

I hope that one of these days when we think of CREST, we do not think that we are CREST-fallen! To be crestfallen in this respect may very well be dicing, not just with the money of "big people". I am well aware that most of the funds that are managed, invested and re-invested by big operators come ultimately or originally from the money put into pension funds and other small savings.

I am satisfied. The Minister sounded very confident that the Government had got it right. When we talk about the balance of costs between the big and the small investor, what the general public want is reassurance that to the very best of its ability Parliament is protecting their interests. We are not practitioners, but we have access to those who know the market, who can feel the situation and have a nose for it, who can smell it. We want the Minister, undoubtedly acting on advice, to reassure the House and the country in general to the best of his ability ("his" meaning the Government's) that this minimum change is good. He described it as such and I accept that it is, although I shall not go through the regulations to find out where there is reference to "minimum change". If it is a minimum change, that is to the good. If it will provide the maximum consumer protection, that is also to the good. I know that this is the beginning, if not of a new regime, then of a new system. There will be lots of people, not just in this country but throughout the world, who wish it well. To the extent that the Government have brought forward these changes, they certainly have the approval of this side of the House. I look forward to the Minister's replies to one or two queries that I have raised.

Lord Chesham

My Lords, I thank my noble friend and the noble Lord, Lord Graham, for generally approving the legislation. I shall try to deal with questions raised. I stated that the role of the SIB is to approve CREST under the regulations. The Government's public policy objectives remain the Government's responsibility. The Government are satisfied that the objectives for investor protection, competition, company-shareholder relationships and London's standing as a financial centre are met.

Turning to the role of the retail investor, discussions are still taking place to ensure that in particular small registrars and stockbrokers are not unfairly disadvantaged by network costs. Thus, retail shareholders who use small registrars and stockbrokers will not be unfairly disadvantaged.

In response to the question from the noble Lord, Lord Graham, on transaction charges, I understand that the network now plans that the differential between large and small users should be no greater than 2:1. In talking about costs for small investors, we are talking about pence rather than pounds.

The noble Lord, Lord Graham, also asked for some comfort with regard to the protection of shareholders. The Stock Exchange is responsible for ensuring that dealings on its markets are conducted in an orderly manner, affording proper protection to investors. That has not changed. The technology that is being used for CREST is the latest technology so far available. Considerable discussion has taken place with regard to experience overseas where it has been operating for some considerable period. I am delighted to say that Australia is one of the countries involved. I am confident that the Exchange will continue to take that responsibility very seriously. The Department of Trade and Industry has always had the responsibility for investigating and, if appropriate, prosecuting cases of alleged insider dealing. I hope that I have answered the noble Lord's question.

Lord Graham of Edmonton

My Lords, before the noble Lord sits down, let me say that he has reassured me that, to the best of their ability, the Government are satisfied that they have consulted as widely as they need. The noble Lord, Lord Stewartby, from the standpoint of his experience and position, saw the need to ask the perfectly appropriate question of whether signals—as one might call them—have been given about the areas of danger that need to be watched. The ordinary man who invests his money trusts people to know what they are doing. To what extent have the Government, after taking advice, flagged up possibly difficult areas? Although the Minister says that the latest techniques have been used and advice taken, he knows that there are people in the world who, as soon as a new procedure appears, look to see how it can be sidestepped or obviated. Sadly, there are crooks in the City of London, as in other places.

I am grateful to the Minister for his patience. I wish to raise just one final point. I do not want him to reveal the areas of worry—perhaps I may think of worry with a capitalW—but to satisfy me that the Government are not so complacent as to believe that they have a perfect system. There is no such thing as a perfect system where money and people are concerned.

Lord Chesham

My Lords, I thank the noble Lord. I shall do my best to amplify my remarks. The point made by my noble friend was not about the security angle; it was much more about whether the public policy objectives had been totally met. I believe that I answered him when I said that discussions are still taking place regarding small shareholders—not regarding the security of small shareholders. The question was about that rather than about security.

No system will ever be perfect. But I do not believe that this system will stand still. This is the start of a system which will greatly assist matters. Enormous concern about the possibility of computer hacking and so on has been taken into account. I believe that those questions have now been answered. It will be an ongoing process. It is not standing still. As the noble Lord knows, with computers one has to keep going. One cannot just stop at any point and say, "This is fine." One has to keep going. The process will be continued.

On Question, Motion agreed to.