HL Deb 04 June 1996 vol 572 cc1209-12

6.14 p.m.

Lord Mackay of Ardbrecknish rose to move, That the order laid before the House on 16th May 1996 be approved [21st Report from the Joint Committee].

The noble Lord said: My Lords, in moving that the above order be approved, I shall speak also to the draft Disclosure of Interests in Shares (Amendment) Regulations 1996.

I hope that the House will find it sensible to consider these instruments together, as they both relate to the introduction of CREST. That is why I am introducing the second of the instruments and not my noble and learned friend Lord Fraser of Carmyllie from the Department of Trade and Industry.

Perhaps I may, first, say a few words about CREST in case some noble Lords think that I have suddenly come before the House to advocate a brand of dairy product, toothpaste, or whatever.

CREST is the new computerised securities settlement system being built for the City by a project team on loan from the Bank of England. Some noble Lords will recall the debate on the main CREST regulations which took place last December, and which my noble friend Lord Chesham introduced on behalf of the Government. During that debate the importance of CREST to London's international competitive position was explained. I am pleased to say that CREST remains on target for inauguration on 15th July of this year.

Inevitably, with such a significant project, there are all sorts of bits of legislation which need amending for one reason or another. Having brought the main CREST regulations into effect last year, the Government have since been preparing the remaining pieces of secondary legislation for consideration by Parliament. The instruments that we are considering today are two such items.

The extension of scope order is an investor protection measure. The Government announced last October that people who input instructions to CREST on behalf of CREST members and sponsors will need to be authorised under the Financial Services Act. To ensure that this happens, the definition of "investment business" set out in Schedule 1 to the Act needs to be extended. That is what the order does.

It does it by inserting a new category of investment business into Schedule 1 to the Financial Services Act. The new category focuses on the acts of sending, or causing the sending of, CREST instructions on behalf of another person.

I turn now to the second instrument, the draft Disclosure of Interests in Shares (Amendment) Regulations. They will ensure that stocklenders are not subject to additional burdens of disclosure following the introduction of CREST next month.

Stocklending is a standard market practice under which stock is lent to a professional dealer to enable an order to buy stock to be met while demand for that stock temporarily exceeds supply. The stocklender, who is typically a large institutional shareholder, receives what I will term "collateral" for his loan. Stocklending plays an important part in maintaining the liquidity and efficiency of the London market.

Under CREST, a collection of different stocks of the necessary total market value will be used as collateral for stockloans. CREST will select the stock from the borrower's accounts which are at that time in surplus and provide for the stock to be returned at the start of the following day. As a result, the stocklender will not know in advance which types of stocks he will receive as collateral, and will only hold the stocks overnight.

The collateral may well include shares in public companies. Where that is the case, the shares, when added to those already held by the stocklender, could have the effect of taking the stocklender's shareholding through one of the disclosure thresholds specified in the Companies Act 1985. Where a threshold is passed, the Act requires the shareholder to disclose to the company his interests in its shares. That is to enable the company to know who is in a position to influence its affairs through the control of substantial shareholdings.

Clearly it would be very burdensome for stocklenders to be required to notify companies of the overnight shareholdings that they happen to acquire by accepting collateral for a stockloan. It is likely that by the time notification of receipt of the shares had reached the company, the shares would already have been returned to their previous owner. This, together with the fact that the stocklender is not seeking to use the shares to influence the company's activities, means that the disclosures would be of very little interest to the company. They are more likely to confuse than to inform.

The burden would not be limited to stocklenders. The companies and the Stock Exchange which received the notifications would need to record them. That would lead to additional expense which would not be balanced by any significant benefits from receiving the information.

The draft regulations would ensure that those unnecessary burdens are not imposed on stocklenders, companies or the Stock Exchange. The draft regulations amend the Companies Act 1985 to provide a specific exemption from the disclosure requirements where a person receives shares selected by CREST and those shares are returned the following day.

With that explanation, I commend both instruments to the House.

Moved, That the order laid before the House on 16th May 1996 be approved [21st Report from the Joint Committee].—(Lord Mackay of Ardbrecknish.)

Viscount Chandos

My Lords, again we wish to thank the Minister for introducing these two orders, and we acknowledge that the belated introduction of a paperless settlement system is central to the continued success of London as a financial centre. There has been a long history of abortive attempts to do this, and 10 years ago when exchanges such as Milan in Italy were seen as hugely inefficient the project in London started. Now we have a highly efficient, automated, paperless system in markets throughout Europe, including the previously reviled Italian markets.

The introduction of CREST and the efficient operation of participants in it is entirely welcomed by noble Lords on these Benches. At the same time we acknowledge that it is absolutely proper to ensure that any entity that is inputting instructions to CREST should be brought under the provisions of the Financial Services Act, and thereby add this activity to the list of investment businesses. We have noted after a long list of unhappy incidents—most recently the collapse of Barings—the paramount importance of efficient and properly run settlements and of protecting investors from any abuse of that. Will the Minister confirm that he believes that the exceptions to the definitions under Notes 1(a) and (b) of the order still leave investors adequately protected in the circumstances of both a takeover offer and a new issue?

As regards disclosure of interests in shares, we would agree absolutely that there would be no advantage in unnecessary information being provided as to the routine operation of CREST which may stop lenders being put over the 3 per cent. or any of the other normal limits for disclosure provided under the Companies Act. We would be concerned about a risk of inadvertently opening new loopholes whereby companies can build stakes in other companies without immediately disclosing the level of their shareholding. For instance, at the moment when a company offers a rights issue a predator can build a stake through buying the nil paid rights in the shares when they are separately traded and delay disclosing the effective interest that that entity has until after the rights issue is completed. There are exemptions for market makers and their requirement to disclose stakes above 3 per cent. I think the Minister confirmed that it is only through the automatic operation of CREST that this exemption can occur, but can he confirm that when a gap of one business day might quite possibly cover four or five calendar days over a holiday weekend there is not a way that this exemption can be used to enable an undisclosed stake to be built in a target company?

Lord Mackay of Ardbrecknish

My Lords, I am grateful to the noble Viscount for his support for the orders before us. Coming from the background he does, he knows a good deal more about these matters than I. He echoes what the Government feel strongly; namely, that a paperless system is essential to the success of London as a financial centre. He pointed to Italy, which has progressed from a market which I think he described as chaotic to one which is now a paperless system. That suggests that we have to keep looking to our laurels. I am pleased that the noble Viscount echoed the point I made in my introductory remarks that it is absolutely right to ensure that those people and companies inputting information into CREST via terminals are registered under the Financial Services Act.

As regards exceptions to the definitions, we do not believe this diminishes security in any way. We are confident about that.

On the point about an undisclosed stake, I believe I said at the end of my speech that this concerns only the electronic system, as the noble Viscount, rightly pointed out. I explained the reasons why we needed to bring forward this order as regards stock lending. The regulations will provide an exemption from the disclosure requirements which, as the noble Viscount rightly pointed out, are important where a person receives shares selected by CREST and those shares are returned the following day. The noble Viscount made an interesting point as regards the following day and the weekend.

Viscount Chandos

The following business day.

Lord Mackay of Ardbrecknish

My Lords, I was about to come to that. The noble Viscount asked how a holiday weekend would affect that. As regards a holiday weekend, a transaction could be carried out on Friday and the next business day would be Tuesday. He asked whether someone could therefore use the system in a way that we do not intend. I shall consider that matter and write to him, although I am confident that we have dealt with it. However, it is a point that I should consider.

I believe that we are in total agreement about the importance of the introduction of the CREST system to the City and about the various regulations and orders which will be needed to run it effectively and efficiently. As regards my assurance that I shall consider the point about holidays, I did not think that important money-men took holidays. However, I accept that they do. I shall consider that point and write to the noble Viscount.

On Question, Motion agreed to.