HL Deb 21 June 2000 vol 614 cc338-41

7.55 p.m.

Lord McIntosh of Haringey

rose to move, That the draft regulations laid before the House on 12th May be approved [19th Report from the Joint Committee].

The noble Lord said: My Lords, the two instruments before us are part of a series of four that are necessary to enable the full merger between CREST, the computer system that settles transactions in equities and corporate bonds, and the Central Gilts Office (CGO), the computer system that settles transactions in gilts and other public sector securities. The merger was one of the key recommendations of the Bank of England's Securities Settlement Priorities Review and was widely endorsed by the financial markets because of the efficiency gains, the reduction in systemic risk and the improvement in the UK's competitive position which it is expected to bring.

In view of this widespread support and the highly technical nature of much of the legislation, I do not propose to detain the House with either a lengthy apologia for the merger or a detailed exposition of every bit of the regulations. However, there are a couple of points where the House may welcome a slightly fuller explanation.

The first of these relates to the new Regulation 36A of the Uncertificated Securities Regulation which is intended to clarify the meaning of "actual notice" for the purpose of the regulations as a whole. To understand the background to this regulation, it is necessary to understand that CREST operates what is known as an "assured payments" mechanism. This means that securities are transferred only if the requisite payment is guaranteed and, equally, payments are only made if the securities are transferred. A group of major banks—the settlement banks—plays a key part in this process by undertaking on behalf of their customers to make assured payments for security transfers. In other words, they will provide intra-day credit. To insure against risk, a settlement bank will normally take a floating charge over a customer's securities, supported by a power of attorney under which it is able to direct CREST to transfer the securities from the customer's account to its own account in certain closely defined circumstances.

The settlement banks have put it to the Government that they may be at a disadvantage using a power of attorney in CREST as compared with someone using a power of attorney outside CREST. They have suggested that the Uncertificated Securities Regulations would be interpreted as imposing more limitations on the actions of CRESTCo, which operates the CREST system.

The Government believe it unlikely that the courts would interpret the regulations in this restrictive way. However, it is important to clarify this as far as possible and this is done by the proposed amendment made by Regulation 36A. This says that if there is a dispute between a customer and a settlement bank as to whether the customer's obligation has been discharged, and hence as to whether the power of attorney is still in force, it will be up to the parties involved to resolve the matter and to submit notice to CRESTCo. CRESTCo itself will be under no obligation to make further investigations and will be entitled to rely on the settlement bank's instructions.

The second area where the House may welcome some explanation concerns the new Regulation 36B of the Uncertificated Securities Regulations. This provides that issuers of securities whose terms of issue specify that they may only be held in uncertificated form do not have to comply with the provisions in the regulations which relate to holdings in certificated form.

The main purpose of this regulation is to clarify the ability under the regulations to settle what are known as CREST depositary interests. These are English law securities issued by CRESTCo which represent interests in foreign securities held by it in overseas central securities depositories. They are in effect a mechanism which enables CRESTCo to settle foreign securities and for UK investors to buy and sell such securities through the CREST system.

Because CREST depositary interests are a rather specialised type of security, the Government believe that it is appropriate to exempt them from those provisions of the regulations which could require them to maintain a record of the units held in certificated form and to have procedures from converting from one form to another. That means that the investors will not need to fill in a stock transfer form in order to transfer them and will not have the option of receiving a share certificate.

That is not quite so much a departure from current practice as it may appear because complete dematerialisation is already a feature of the gilts market and will remain so in the future. As the House will have noted, the new regulation exempts certain specific public sector securities from the relevant provisions of the regulations as well. Because of that, and because of the need to ensure consistency of treatment, the Government consider it appropriate for any security whose terms of issue specify that it may be held only in dematerialised form to be similarly exempt. That will clarify the ability of corporate issuers to issue new securities in completely dematerialised form and thus to have the same freedom that hitherto only the Government have had.

Before I finish, perhaps I should say a brief word about the Local Authority (Stocks and Bonds) (Amendment) Regulations. These are entirely technical in nature and are intended to allow stocks issued under the Local Authority (Stocks and Bonds) Regulations 1974 to transfer through the CREST system after the merger. They are being dealt with under the affirmative resolution procedure because the power to amend them by the more usual negative resolution procedure was removed by statute in 1988.

I apologise for detaining the House but inevitably these are long and complicated issues. I hope that I have highlighted those which may be of general interest. I beg to move.

Moved, That the draft regulations laid before the House on 12th May be approved [19th Report front the Joint Committee].—(Lord McIntosh of Haringey.)

The Earl of Northesk

My Lords, I am grateful to the Minister for his explanation of these two regulations. In essence, we have no objection to them. However, by your Lordships' leave, I should like to ask one or two questions that flow quite naturally from them.

In common with my noble friend Lord Kingsland, with respect to issues on the face of the Utilities Bill, I find that our debates on the Financial Services and Markets Act are still fresh in my memory. That being so, does the Minister expect that further regulations will need to be tabled in the event that the proposed merger between the London and Frankfurt exchanges proceeds and Xetra is adopted as the settlement system? I hope that I gathered from his explanation that that may not be necessary. I also acknowledge that this is something of a "how long is a piece of string" question. None the less, it would perhaps be a little odd to make these regulations, only to have to make new ones to supersede them within the space of a few months.

One other point occurs to me. A knock-on benefit of the regulations should be to improve the competitiveness and efficiency of the City. Indeed, as I understand it, CREST has cut transaction charges by 5 per cent in advance of the implementation of these changes. I am sure that none of us will have any argument with that. However, I hope that the Treasury, and the Chancellor in particular, are well seized of how important levels of stamp duty are to the City's continuing competitiveness.

Thus, does the Minister accept that, although some savings and efficiencies in transaction costs will of course arise as a result of the implementation of the regulations, those will be relatively modest compared to what many perceive to be the more pressing need to reduce stamp duty? I concede that the point is perhaps a little tangential to the subject matter of the regulations. None the less, I look forward to the Minister's replies.

Lord Razzall

My Lords, I share the views of the noble Earl in welcoming the regulations. Obviously, it is important that the full merger between CREST and the Central Gilts Office takes place.

Effectively I should like to ask the Minister one question. He indicated, as, indeed, did another place, that the regulations and their form, which inevitably is complicated, were welcomed generally by the City. Is he aware of reservations expressed by anyone in the City with regard to the regulations?

Lord McIntosh of Haringey

My Lords, perhaps, first, I may answer the noble Lord, Lord Razzall. The only reservations of which I am aware are those of the settlement banks. I hope that through the introduction of Regulation 36A the Government have convinced them that their fears are no longer relevant. I believe that to be the case.

The noble Earl, Lord Northesk, asked me whether the proposed merger between the London Stock Exchange and the Deutsche Börse affects CREST. That matter is not entirely clear because the deal is not entirely clear. However, both the London Stock Exchange and Deutsche Börse have made it clear that their merger will not affect settlement systems initially and that subsequent changes will be undertaken only following member consultation.

The noble Earl asked me about Xetra. However, Xetra is a trading and not a settlement system, and therefore is not affected by the regulations.

Finally, I turn to stamp duty. I recognise that it is what he calls politely "tangential", and of course the merger has no direct implications for the levying of stamp duty. However, the Government keep the level of stamp duty under review at all times, as they do all comparable matters.

On Question, Motion agreed to.