§ 3.29 p.m.
§ Lord Lamont of Lerwick
rose to call attention to the merging of the London and Frankfurt stock exchanges, and the consequences for companies and investors, including pension funds, if shares have to be denominated in euros; and to move for Papers.
The noble Lord said: My Lords, I am extremely grateful to have the opportunity to introduce the debate on this important subject although possibly not one with quite the same appeal as the Millennium Dome. I am pleased that the noble Lord, Lord Layard, who has a formidable reputation, is to make his maiden speech. I am sure that I speak for everyone in the House when I say that we look forward very much to hearing his contribution.
I declare an interest as a director of a number of financial companies, all of them listed in the Register of Members' Interests and a number of which are investors or potential investors through the London Stock Exchange. In introducing this subject I hope that I do not have to convince the House that my own interest in the matter is not commercial but relates to the economic and financial importance of the British financial services industry and the London Stock Exchange.
It may well be argued that the proposed merger between the London and Frankfurt stock exchanges is hardly a matter for Parliament because it is not in the hands of government. But if they have decided that they have a watching brief in the negotiations between BMW and Austin Rover, as they quite rightly have, they are then equally justified in keeping an eye on the future of the London Stock Exchange, an institution of enormous importance for our economy.
The proposed merger of the two stock exchanges could be immensely beneficial to London and to the whole of Europe. The vision is a bold one. My speech is intended to be in the nature of a probing one. I am not opposed to the merger; nor, however, am I wholly persuaded of its merits. Much of what I have read leads me to believe that it has been somewhat hastily cobbled together, partly in response to past failures of technology, and also pressures from competitors like NASDAQ. The merger seems to be the classic response of the traditional monopolist to embrace a competitor.
Many of the details are extremely hazy. It is rather ironic that the Stock Exchange should propose a merger without a prospectus and without giving the kinds of detail that it would itself require from a company proposing to list on the exchange. It is very far from being a completed deal. We are not so far down the autobahn that other deals, if they come, along, could not be considered. Mr Levitt, the 777 chairman of the United States Securities and Exchange Commission, who might be termed the Alan Greenspan of the securities business, is himself somewhat sceptical and has said:Having been an alumnus of six aborted (market) mergers in the USI wonder about how they are going to apply, and the likelihood of, a common listing and common governance structure".There are a number of worrying points about the terms of the merger. On the German side, iX will have one shareholder with a 50 per cent stake; on the UK side there will be 298 shareholders, each with a 0.17 per cent stake. Looking at those figures, no one would imagine that the London Stock Exchange had seven times the assets of its German counterpart or that there was twice the trading volume in London as in Frankfurt. On the face of it, it does not look like a merger of equals. One is puzzled by the concessions which have been made.
I appreciate that the Deutsche Borse has said that it is going to vote only in accordance with the votes passed by its members rather than using its entire shareholding. Nonetheless the structure sends a strange message. The proposed structure of the growth stocks market with NASDAQ also seems strange with six out of the 12 directorships going to the United States and the rest split between Germany and the United Kingdom.
I agree that the consolidation of stock exchanges throughout Europe may make good sense. It is not satisfactory to have 40 different exchanges serving a single market. When the LSE and the Deutsche Borse come together they could be a formidable force, accounting for 53 per cent of trading in equities in Europe. It is argued that that will reduce costs, spreads and increase liquidity. I shall come to those matters.
But how much do formal exchanges matter? Are they going to be relegated to the scrapheap of history, just like the idea that a building, a trading floor and a lot of shouting jobbers used to constitute an exchange? The real battle is between traditional exchanges, Internet dealing and ECNs, the electronically order-driven networks. Many of the questions that this merger is attempting to answer will be decided, not by officials of the markets, but by the markets themselves. They may well turn out to be very different from those wished on us by the officials of the two exchanges who, incidentally, stand to make huge sums of money out of these proposals.
I turn now to a number of questions of which I have given prior warning to the Minister and on which I hope he will be able to comment. Under the terms of the merger it is intended that the 300 to 500 English and German blue-chip larger companies will be quoted in London. Some people have speculated that this will mean the end of the FTSE 100 and all-share indices. There is nothing terrible about that, although it is important that there should be a credible replacement index because unless there are derivatives attached to those indices one will not get the liquidity in the market that is the whole point of the merger.
778 While the older, mature companies are to remain quoted in London, the exciting new growth stocks are to be in a new exchange to be set up jointly with NASDAQ in Frankfurt. No company wants to be described as a low growth company, but one wonders what is going to happen to the medium capital stocks, like Babcox. One wonders whether things really will work out precisely in this neat, clear-cut way or whether the markets themselves will decide which stock is quoted in which market.
If the division between Frankfurt and London turns out as planned by the two exchanges, what will that mean for London's initial public offering business? Will it continue in London? What guarantee can there be that when growth companies, the new electronics companies, become the blue-chip companies of tomorrow, they will mysteriously return to London? It is noteworthy that Microsoft in the United States has chosen to continue to remain quoted on NASDAQ. If the new, exciting UK companies of the future are all of necessity driven to Frankfurt, there is a very considerable risk that they will be followed by an exodus of professional firms, advisers and investment banks.
That leads on to the vital question of either the opportunity or the danger, according to one's point of view, of regulatory arbitrage. In the United Kingdom we have a more fully developed and efficient system of regulation than in Germany although it is fair to say that Germany is rapidly improving. Is Daimler Chrysler really going to want to be regulated by the FSA, which is now the London listing authority, and submit itself to all the requirements of the Hampel report on corporate governance and the role of non-executive directors and directors' remuneration? I hope so, but I have my doubts.
At the other extreme, will the new small technology companies be able to side-step UK standards of reporting and accounting by being quoted in Germany? The dangers to investors of the volatility of these so-called exciting companies have been vividly illustrated in the recent past. But if they are to have lower standards of regulation in future, they will lose much of their attraction to UK pension funds and institutions. It is a very great pity that the FSA cannot be the regulatory authority for both exchanges.
There is the question of the transparency of trading in the market. A modern market needs transparency and German trading rules are notoriously opaque. Huge block trades are carried out without reporting and in secret. It seems inevitable from the arrangements put forward that this anti-competitive practice will be extended.
The justification for this deal is economies of scale. But economies of scale do not come about just by putting together two organisations called exchanges. The real economies of scale could come in relation to clearing systems. Eighty per cent of transaction costs occur in back offices and efficiencies come from lower down the curve than from where the trade happens.
A low-cost pan-European equity trading market needs a common settlement system. Yet the proposed arrangements exclude Deutsche Borse's 50 per cent 779 stake in Clearstream and also leave in place the multiple expensive settlement arrangements such as Crest Cedel and Euroclear.
What had been planned in London and, according to newspapers, promoted by the Bank of England was a larger role for the London Clearing House whereby it would have been a central counter-party for all markets and allowed net trading. As the LCH already acts as a central counter-party to the international derivatives business, which flows through LIFFE with all its financial and commodity products, the International Petroleum Exchange and the London Metal Exchange, the City was on the verge of capturing even greater efficiencies. It is not clear whether that has been compromised or just ignored in the deal with Frankfurt. But what is worrying is that Euronext, the merged French, Belgian and Dutch exchange—a competitor to this proposal—has addressed the clearing matter.
Whatever else may be said about this deal, one point, which must be warmly welcomed, seems certain. It must mean the end of stamp duty on shares. If the merger goes ahead, the Chancellor will have no choice in that matter; otherwise share trading will move wholesale to Germany.
The issue of trading platforms is to be tackled, but for many people that will bring tears to their eyes rather than joy. The Sets system, installed only three years ago at such expense, is to be scrapped in favour of the German Xetra. No one, least of all the former Chancellor of the Exchequer, will easily forget the terrible problems that the London Stock Exchange has had in recent years with computerised trading systems.
Both Sets and Xetra were designed by the same firm, Andersen Consulting, so any bugs that are in the two systems are likely to be rather similar. It has been reported that Xetra has been out of action quite a lot in the recent past, including last week. Both systems are old, and faster and more advanced systems are becoming available. This time I hope that the right choice has, at last, been made but yet another change will be extremely expensive for the small brokers, even if it is petty change to the big investment banks. Small brokers are entitled to know how much this will cost and what they will be expected to pay.
One of the suspicions about the merger is that it is driven by the needs of the large investment banks with insufficient regard for retail investors and institutions. No one admires the American investment banks more than I do, but what is good for Goldman Sachs is not necessarily good for a free, open share market. Such concerns have been intensified by the somewhat insensitive handling of the matter of the euro by the stock market. Whatever Mr Cruickshank now says, certainly the Stock Exchange originally intended that all companies should be quoted in euros. Now, I am pleased to say, that the exchange seems to have retreated somewhat from that position.
To compel companies to be quoted in euros, even though Britain continues to stay out of the euro, would be to impose an extra cost, both on the retail investor and on the UK pension funds. The liabilities of the 780 latter are expressed in sterling and they are obliged by law to match their liabilities and assets. The 20 per cent fall in the euro has already translated into a significant fall in pension fund assets, which has to be made up either with the use of derivatives to hedge the risk or from other sources. Obliging companies to quote in euros would add to the risk and add to the cost.
There are strong views on this issue, but surely it is another matter that should be decided by the market. As long as Britain is outside the euro, companies, taking into account the views of investors, should decide in which currency they wish their company shares to be quoted. A modern trading platform should easily be capable of that.
In conclusion, there are many question marks against this merger. It is not clear that the proposals are in the interests of investors. It may be that the competition authorities in Brussels will be able to examine the matter and obtain some of the detailed information that has been missing from the debate. I would be grateful if the Minister would comment on the competence of the Brussels authorities to do that. In the meantime, unless the Stock Exchange stops giving the impression of making things up as it goes along, and until it provides answers to some of the questions asked, I fear that members of the Stock Exchange may well believe that they have ample justification, at least for the moment, for withholding consent from this proposed deal. I beg to move my Motion for Papers.
§ 3.45 p.m.
§ Lord Layard
My Lords, I am extremely grateful to the noble Lord for proposing this debate because our economic relations with the rest of Europe are so important to us. As an academic economist, I should declare an interest. I have always tried to do something else as well as economics, so for many years I spent time on the politics of unemployment, after which I spent some time on the politics of reforming Russia, which was not quite so successful; and recently I have spent time on the reform of education and employment in Britain. However, my main job is running a research unit studying the causes of national prosperity, which include two key factors underlying this debate: the issue of industrial structure and the issue of currencies.
On industrial structure and mergers in general, I would simply say this. When the information revolution was getting under way, many people thought that it would reduce the need for large companies and large banks, because it would so greatly reduce the cost of transactions between different separate companies. In fact, the reverse has happened because the cost of transactions has fallen, even more inside companies than it has between companies. So we now see mergers taking place in every industry and we are not necessarily reducing competition because the pace of globalisation is so rapid. The same general logic is behind the merger that we are debating today.
781 A related logic is producing mergers between currencies. As capital flows have become ever easier between currencies, the cost of exchange rate uncertainty and exchange rate fluctuations have risen and the benefits from using a single currency have, therefore, increased. This is the second big issue behind the debate and the aspect on which I want to concentrate. It is a very controversial issue and this is a maiden speech. However, it is often said that if you laid all the economists in the world end to end, they would never reach a conclusion! That is not fair, but on this occasion I shall not come to a conclusion.
However, I shall set out some facts about a single currency, its impact and how it works, which may not be as well known as they should be, although I believe that most of the facts I shall quote are those with which the majority of economists would agree. The basic fact is that a single currency increases trade and capital flows within the area that it covers. Thus, it increases productivity and living standards. An obvious example is Canada. Canada has its own currency, but it shares a very long land border with the United States, so most parts of Canada are nearer to the United States than they are to the rest of Canada. Canada also speaks the same language as the United States and has a free trade area with the United States, but it has a different currency.
The result is that a typical Canadian province does 20 times more business with another Canadian province than it does with a US state which is equally distant and equally wealthy. Since trade in a large market increases competition and increases productivity and living standards, Canada's separate currency is an important reason why Canada is only four-fifths as rich as the United States. Therefore, free trade is not enough—not enough for a truly free flow of goods and not enough for a truly free flow of capital, and that doubtless lies behind some of the earlier remarks which were made by the London Stock Exchange.
If one looks at the movement of exchange rates between different currencies, it is not difficult to see why a common currency is so helpful. Ideally, of course, we would like, for example, the sterling exchange rate to move smoothly to offset differences in inflation rates between us and our competitors, so that we would have a stable level of competitiveness in world markets. But the story of the past 30 years has not been at all like that. The exchange rate has in fact been a major source of shocks and uncertainty, rather than a smooth mechanism of adjustment, and the main source of fluctuations in our national competitiveness, of which today's exchange rate is just one example.
Conversely, of course, there are other kinds of shocks, apart from exchange rate shocks, which can affect a country. The main argument against EMU, of course, is that we would lose our ability to vary our interest rates so as to offset those shocks which particularly affect Britain because of our particular economic structure. However, on inspection, it turns out that our industrial structure is, fortunately for us, very similar to the average of Europe as a whole. There 782 is much less difference between Britain and the rest of Europe than there is between a typical US region—for example, the Texas region—and the rest of the United States, yet all those regions of the United States happily share a common currency.
My final point concerns the question whether a single currency needs a large federal budget. It is true that if Texas has a bust, the US federal government in Washington helps it out with higher unemployment insurance and lower tax claims. People often argue that a single currency in Europe can work only if there is a large federal budget in Brussels. However, this overlooks the simple fact that US states are mostly forced by law to balance their budgets year by year, so they need that external support from Washington. The fact is that in Britain we already have more automatic stabilisation from within our own national budget than any US state receives from Washington. It is not true, therefore, that a single European currency would need a large federal budget in Brussels to enable it to work.
The basic situation is that the new technology is driving us towards a new world in which there are more large companies and more large currencies. In this context, the Stock Exchange and the nation as a whole have to make key decisions, and I hope that the facts which I have quoted are of some relevance.
In conclusion, I should like to say that in the past two weeks I have received a most wonderful welcome in this House, for which I thank your Lordships and the staff most warmly. I have also received a number of lessons on etiquette. In that connection, I have heard that in the debates in Parliament on the Irish potato famine the potato was always referred to as "that vegetable". The word "potato" was never used; nor have I used the word "euro"!
§ 3.55 p.m.
§ Lord Northbrook
My Lords, I am sure that the whole House would wish to join me in congratulating the noble Lord, Lord Layard, on his excellent maiden speech. The noble Lord is one of Britain's leading applied economists and has created, at the Centre for Economic Performance, one of the world's top economic research centres. Through his researches, he laid the intellectual foundations for welfare to work, and he promoted those ideas most effectively by founding the Employment Policy Institute. We look forward with interest to his useful, thoughtful contributions.
First, I declare an interest as a director of a fund management company based in London. Therefore, I speak with some experience of using the London Stock Exchange. In my short contribution, I wish to focus on the practicalities of the proposed merger between the London Stock Exchange and the Deutsche Borse. It is far too often claimed that the investment management and stockbroking firms which act for individual investors are always against change. Just like anyone else in finance, they recognise the need for these necessary changes and plan for them. Strategically, the alliance between the London Stock Exchange and the 783 Deutsche Borse is a good one. Companies which seek to offer their goods and services outside their own geographic borders often most successfully do so by acquisitions and mergers, especially as competition becomes fiercer. A combination of NASDAQ Europe, electronic crossing networks, to which my noble friend Lord Lamont referred, JIWAY and persistent rumours about tradepoint, means that the choice strategically for the London Stock Exchange appears to be either alliance or decline.
Five markets are effectively formed by iX. The first is the blue chip market, which will take Europe's top 300 to 500 companies and will trade in either sterling or euros, depending on the company and its primary trading currency. The second is a high growth market for technology companies, which will be formed on a 50:50 basis between NASDAQ Europe and iX. These stocks are expected to trade in euros. UK and German companies that do not qualify for either the blue chip or high growth markets will continue to trade on their own local exchanges. In addition, the AIM market will continue as before.
I deal now with my general areas of concern about the merger. I agree with the Shadow Chancellor that stamp duty disparities, regulatory problems and the aim of doing all trading in euros are major problems, especially for the private investor. I also wish to concentrate on a few specific problems of detail from a practitioner's viewpoint. First, there is the problem of the high technology area of iX. The high technology companies will come from the Frankfurt Neuer Markt, the London Stock Exchange's Techmark stocks, excluding the upper tier, blue chip ones, and from NASDAQ. These stocks are expected to trade in euros. We are faced with a situation where a quoted London technology stock outside the top 300 to 500 European top companies will find that it not only may see the currency of its share price change but also that it will be regulated by the German regulator. Such a change may discourage technology companies from coming to the market and will also create problems if they move from one level to another. UK investors may also be deterred from investing in them with a euro share price. Also, there may well be extra custody costs in holding the share.
Going on to more detailed concerns, there are two main administrative areas where major upheaval will occur as a result of the merger. The first area is trading platforms. The market for blue chip stocks will be regulated in the UK but will abandon the SETS system, to be replaced by its German cousin, Xetra. While the Stock Exchange system fails from time to time (the most notable occasion being 5th April this year for almost the whole day), Xetra fails too, and more often. Thus there will be one set of costs to change to Xetra from SETS then a second and much bigger cost to rebuild the whole entity to give, as the exchange press release said,a Common Market model and regulatory approach",offering trading in all UK equities. Some have estimated the cost of the first change to be at least £500,000 per firm and the second step—the major rebuild—to be many more times that.
784 The settlement situation for stocks is also undecided. Crest, the UK system, is a European leader in terms of the capability of its market systems and its multi-currency facility. Its lead is further emphasised by the need for the Deutsche Borse clearing system to be rationalised as it will be merging with Cedel to form Clearstream. If Clearstream were to be adopted as the settlement system, then the costs to all brokers and investment houses in the UK would be significantly greater than the costs associated with changing the trading platform.
My next area of concern is that of a central counterparty. Neither the Deutsche Borse nor the London Stock Exchange has one. However Eurex (the European Futures and Options Exchange) does, and it is part of the deal. Work is also underway with the London Clearing House to create a central counterparty for SETS. The proposition is that the UK will continue to build the central counterparty. It is then to be linked to Euronext (the French, Dutch and Belgian Exchanges proposed merger) followed by a third set of changes to create a central counterparty for the entire merger. The UK Stock Exchange, in its recent press release, states,It is intended that trading on the unified Pan-European market will ultimately feed one central counterparty".Who will pay for that? And is it to be in the UK or Germany? Those matters need to be clarified by the London Stock Exchange in its forthcoming information memorandum.
My next area of concern is the regulation of the merged markets. The "big five" brokers expressed the following concerns about the regulation of the merged stock markets. They believe that, while it is not practical to have a single unified market for all equity securities, given different liquidity characteristics, it is essential to have a single regulatory system which is transparent and flexible. They believe that this also needs one set of listing requirements and trading rules with fully transparent trading so professionals can see both what securities are changing hands and at what price. They believe, as my noble friend Lord Lamont stated, that German rules are notoriously opaque and less demanding than the FSA. Brokers can carry out huge block trades in secret. Frankfurt listing rules are also unnecessarily complicated. The brokers believe it is surprising that the FSA, which has taken over from the Stock Exchange as the UK listing authority, has not made that point where it is overwhelmingly best placed to be iX's regulator as well as the single listing authority.
Current shareholders in the Stock Exchange will ultimately decide its future at the forthcoming EGM. Well before that EGM is reached, more answers on how this alliance is going to work need to be given. To get that right, first, the exchange needs to publish details of the changes as soon as possible, including costs, outcomes and alternatives, and let the market users decide the most appropriate solution. It should be one which is relevant to all sectors and not preferentially weighted against any. Secondly, iX should take responsibility for at least some of the 785 changeover costs of the users. Thirdly, continuous consultation should take place which actively responds to concerns.
Not only the institutions should be consulted, but the private investor must not be excluded, especially at a time when the Government are urging people into ISAs, employee share schemes and stakeholder pensions. In the first three months of this year, more than 6 million bargains were traded for the private investor. That is not a small number and therefore the brokers and fund managers who look after them must be consulted too.
§ 4.5 p.m.
§ Lord Haskel
My Lords, I too congratulate my noble friend Lord Layard on his maiden speech. Not only is he one of our leading economists, he is also an inspirational teacher. I happen to know that because he taught my son and inspired him to become an academic economist too. I warmly welcome the noble Lord to the House.
I thank the noble Lord, Lord Lamont, for moving this Motion. Surprisingly, I share many of his concerns. But I wonder why we are debating the merger now. Despite yesterday's decision by the supervisory board in Frankfurt, as the noble Lord, Lord Lamont, said, the deal is not done and there are many important details to be settled.
Unlike my noble friend Lord Layard, I shall mention the euro because it is referred to in the Motion. Indeed, the wording of the Motion leads me to believe that perhaps the reason for moving it is that the noble Lord, Lord Lamont, sees this as yet more "euro creep"; yet another way that the euro is entering our lives, and perhaps he does not like it. But, like it or not, this is an inevitable part of being engaged in Europe. Mergers and consolidations are part of this engagement. They are part of being more competitive in the single market. As my noble friend Lord Layard said, economics is the driving force here, not politics.
The noble Lord, Lord Lamont, is concerned about companies denominating their shares in euros. There is no question of force. In fact, some companies already do this because it suits them. Indeed, our top 300 companies are quoted in both euros and sterling every day, as we can read in the Financial Times. Other companies have secondary listings in New York, again because it suits them. Currencies are a matter for the users of the market. Exchanges cannot force companies to take currency risks.
The Motion is concerned about currency risk for our pension funds. But the merger changes very little. If investors want their investments to remain in sterling, the shares will continue to be quoted in sterling. The risk will remain the same as it always was for as long as we remain outside the euro and for as long as pension funds pay out their pensions to us in sterling. The real currency concern is that the merger is taking place when the euro and sterling are misaligned and do not represent economic fundamentals. The undervaluation of the euro and the 786 overvaluation of sterling could cause misleading measures of market capitalisation. That is the currency concern.
If we are to debate the iX Stock Exchange in Parliament, our concern must be how well it will serve the British economy and British business. Will iX be more efficient? Will it be a more efficient market with lower transaction costs and more liquidity? Will British business be disadvantaged, and I mean all British business and industry? Unlike the exchange rate, which only affects some parts of our economy, this will affect every part because every part of every sector of our economy is quoted on stock markets. The uncertainty will affect our businesses. While the deal is being negotiated, there will be uncertainty and financial markets do not like uncertainty. The uncertainty surrounding this merger may have an adverse effect on output and jobs in the real economy—and that is where it matters. The fact that the London Stock Exchange is now in play only adds to that uncertainty. Therefore, I hope that the terms of the merger will be finalised as soon as possible.
I agree with the noble Lord, Lord Lamont, that at first sight this merger would seem to benefit large companies and financial institutions. They should be able to benefit from greater exposure, lower transactions costs and greater liquidity. I am not so sure about small and medium-sized companies. Their recent experience of the London stock market has been decidedly mixed. For them, the market has been much more volatile, with huge fluctuations. Thanks to the gung-ho attitude towards dot.com businesses, many good companies have seen large declines in their share valuations, and declines in their valuations relative to their continental competitors.
For example, on the London Stock Exchange, the recent PE ratio for consumer durables has been about 8.9, whereas in Germany it has been 11, and in France it has been 14. That has caused some medium-sized companies to seek to withdraw from the London Stock Exchange by selling out to private equity funds. We are seeing quite a lot of activity in that area. Will this merger change any of that? Will it provide them with a better or larger PE ratio? Like other noble Lords, I am anxious to see.
Like the noble Lord, Lord Lamont, I too have concerns about the implications of this merger and its impact on our economy. Will it be a suitable market for the investment of our pension funds? If the iX is to be a privately owned, centrally organised monopoly market, it may offer our pension funds a poor deal. It must be an efficiently run, competitive market because those competitive markets make money for the participants. That is what I should like to see. Those matters of corporate governance and competition must be clarified and they must be got right.
Will there be access for the small investor and the small broker? There will have to be a common technology platform in the iX market, and the costs of changing over to the common system would be considerable. The noble Lord, Lord Northbrook, explained that.
787 Then, firms will have the cost of adapting to whatever settlement system the providers of settlement services decide on. That is where the main costs lie. Those costs may be prohibitive for the small investor and broker.
There are other matters to be agreed. Will there be common accounting? Accounting is different in the UK from in Germany. There was a report in the newspapers last Thursday that regulators had agreed a common set of accounts for listing on stock exchanges anywhere in the world. That may be good news, but I do not advise noble Lords to hold their breath because the committee charged with carrying out that work was set up in 1973.
That leads me on to regulation. There will obviously have to be some harmonisation. Regulatory rules in Britain and Germany are different, but they are converging. But the ethos is different too. There cannot be a dual system. I imagine that the FSA will continue to operate in much the same way, but on a larger canvas. There will have to be broad agreement, not only on the rules of market behaviour but also on the level of consumer protection, education and information. I assume and hope that the regulators are already talking to each other about that. I hope also that the lawyers are talking too because, as we have recently learned, there are differences in the takeover codes. For example, in Germany, the code demands that employees are informed about the likely effect on jobs in the event of a takeover. Here in Britain, the code hardly makes any reference to workers. How will that difference in attitude be reconciled without any reduction in standards of consumer protection and tolerance of market abuse?
The noble Lord, Lord Lamont, is right also about stamp duty. That will have to be addressed. Duty is payable on UK shares wherever they are traded. However the ADR loophole which enables British shares to be traded in New York has operated for some 10 years, I think. Will there be a similar loophole in Frankfurt or, as the noble Lord, Lord Lamont, said, will stamp duty have to be abolished? What index is used and how it is determined is also important. Not being in the main index has significant implications for investors and, more importantly, for companies, whether they are in or out of it.
I am not really sure of the value of debating this merger in Parliament. The noble Lord, Lord Lamont, said that few of these questions are matters for the Government. This is a merger—and merger matters are largely for the competition authorities, the regulators, the shareholders, the staff and directors of the companies themselves. That is where it needs to be discussed.
We want to see the information memorandum, normally prepared for the shareholders involved in a merger, because that memorandum should address and clarify the concerns which the noble Lords, Lord Lamont and Lord Northbrook, and I share. I look forward to reading it.
§ 4.15 p.m.
§ Lord Desai
My Lords, first, I thank the noble Lord, Lord Lamont, for introducing this debate. It timely. I believe that we should discuss this issue way before all the conditions have been settled so we can express the doubts and reservations that we have. That may help those concerned to do a better job.
Secondly, I must warmly welcome my long-time friend and colleague, the noble Lord, Lord Layard. Among his many achievements is that he survived a couple of lectures I gave him on price theory. It does not seem to have done him much harm and he has gone from strength to strength, so he is fairly robust.
I should declare a small interest. I am a non-executive director of a small City firm, Hythe Securities, which trades in Eurobonds. Do not ask me how, but I am a non-executive director of that firm.
In terms of economic theory, mergers are seldom economically efficient. Every time economists study mergers, they find that they give tremendous help to the managers but never help the shareholders and very seldom help the consumers. They are fashionable and all sorts of City firms make a lot of money out of mergers, acquisition business and so on. But seldom can we subscribe to a Darwinian notion that mergers take place for efficiency considerations or because the more efficient firms take over the less efficient ones. Normally, the cash-rich, less efficient firm takes over the rapidly growing, cash-strapped firm. That is very often the case.
In this case that is not a bad analogy because we have a large Stock Exchange—historically, the largest in Europe—merging with a fast-growing exchange. The growth rates of the German Stock Exchange are quite spectacular. Between 1995 and 1998, in terms of new funds raised on the market, the German market doubled every year. While London was nine times Germany in terms of funds raised in 1995, it was only five times by 1998. We can see the way that the growth rate is going.
So there is a great deal of complacency in London and we really must watch it. London tends to regard itself as absolutely the best because it is the largest. The largest markets have to watch and make quite sure that they are as competitive as the small markets coming through. Over the past five years especially there has been a rapid growth of small equity markets all over Europe. They are very innovative markets. Although at present they are small in relation to London, they need to be watched.
One consideration about this merger will be whether the London market can make itself more competitive; in other words, if the merger were to fail, could it actually improve its practices and learn from other markets? Can it survive at the top? Alternatively, if a merger is the solution, it will need the infusion of new blood, new techniques and new practices. It is possible that the establishment of a totally new exchange for iX will prove to be the solution.
Obviously these markets have a physical location only, as it were, by an old-fashioned definition. We can now trade on any market from anywhere. Therefore, 789 as Don Cruickshank said to today's Financial Times, we are talking about frameworks of governance when we talk about London or Frankfurt. These are not just geographical locations. The fact that stocks are being traded on the Frankfurt market does not reduce the number of jobs in London. That is not a relevant consideration. We must consider what kind of efficient combinations can emerge as a result of the merger.
There is also one very important point that we ought to bear in mind. Stock markets are agents only; they are intermediaries. The fact that they have to be efficient is in all our interests. The more efficient they are, the more our savings will come back to us in the form of pensions and so on. So it is in all our interests that markets are efficient and deal in low-cost transactions. I do not care where my pension fund puts its money as long as it gets me a large return. I do not care about the colour of the currency in which it trades or where it puts money: I want my pension fund to give me an income that will keep me happy as and when I retire. Therefore, to that extent, I consider the question of which currency markets trade in to be a purely technical one and of no significance.
We are talking about smart people; they should know how to hedge against exchange rate risks. If they do not, they should not be in the market. They are not ordinary consumers or workers; they are very smart people who trade very fast and who are supposed to know about all the instruments relevant for hedging exchange rate risks. As my noble friend Lord Haskel said, where companies choose to trade, what currencies they want to trade in or how many currencies they want to have are entirely matters for them. It is not of any concern to anyone else.
The one question to ask about this merger is: will it increase efficiency? Right now we do not know. There is insufficient information on hand to consider the question carefully. What we have had are news headlines about growth stocks over there and blue-chip stocks over here, which, when it comes down to it, are basically very cool classifications. One of the reasons behind the merger was the fact that NASDAQ was threatening to come to Europe. Indeed, one thing that such a merger will do is to stave off a separate NASDAQ/Europe and integrate NASDAQ into iX. Therefore, to that extent I believe that it will lead to a richer set of markets.
It is also premature to consider that question because this development may trigger other mergers. No doubt there is a Paris/Amsterdam merger, but there are also the Italian and Portuguese markets which might come on board with German and UK markets. Of course, as has already been said, it remains to be seen. However—this is independent of the merger—the stock exchanges have not proved themselves to be very efficient in the technology that they deploy. Basically, it is quite pathetic that they cannot get a proper computer system designed to do business; indeed, it is very costly to have inefficient machinery. I am surprised that the management concerned is not of sufficiently high quality to sort out 790 such matters. I do not believe that one could afford that kind of inefficiency through technology in any other sphere.
However, we know about trading on Wall Street in the United States. There is so much trade inside the US that 97 per cent of all trades are netted out. They do not really have separate settlements, but that is not yet the case in Europe. There are far too many different markets and one has to settle bilaterally with lots of different markets. The more that markets merge, the more we shall be able to net out. That will lead to a tremendous growth in efficiency. There is one factor that we do know: convergence and integration will lead to cost cutting. For the rest of it, I think that we have to hope that the institutional arrangements that are unveiled, and subsequently the management of the exchanges, are of better quality than what we have had thus far. We must also hope that iX will be able to stand up to the more efficient markets across the Atlantic.
In conclusion, I thank the noble Lord, Lord Lamont, for allowing us to discuss this most important question. It is one to which we shall no doubt return when we know more about the merger. In the meantime, I think we can say, "Well, the jury is out".
§ 4.25 p.m.
§ Lord Lea of Crondall
My Lords, perhaps I may, first, welcome this debate. It is useful to have the opportunity to clarify some of the issues in what is undoubtedly a development of immense practical and symbolic significance. In that respect, I echo what the noble Lord, Lord Lamont, said. I also welcome the fact that we are holding this debate in a cool atmosphere—unlike the debate in another place, where last week Mr Michael Fallon said that the Stock Exchange had not only surrendered the towels round the pool to the Germans but also given up the hotel as well. Indeed, some members of the party opposite increasingly resemble a collection of anoraks festooned with badges saying, "Save this" or "Save that". First, we had "Save the Pound" and now we have "Save the Stock Exchange". Perhaps we shall soon see a badge saying "Save our Foreign Exchange dealers" on the grounds that some of them may need to be redeployed. I still own an anorak, and would be happy to lend it to the noble Lord, Lord Lamont, if he would like to borrow it sometime.
Perhaps I may also congratulate my noble friend Lord Layard on his excellent maiden speech. We were contemporaries at Cambridge, both guinea-pigs of C P Snow's "Two Cultures" experiment to turn us into scientists—with limited success, certainly in my case. So we became economists instead. I look forward to hearing many more contributions from my noble friend.
The wider significance of this debate is that it is bringing into focus—and will do so increasingly—a degree of objectivity in the analysis of our relationship with the rest of Europe. It will bring into focus such questions as the larger size of the German economy and the hugely greater size of the eurozone as a whole 791 than the sterling zone. There will also be the question of the difficulties caused by the volatility of sterling. Today is not the day to debate the crisis facing manufacturing industry, but sterling is now a relatively small currency pushed between the two tectonic plates of the euro and the dollar.
Our exposure to greater foreign exchange risk has been clear ever since the euro project got off the ground; indeed, I would say that it has got off the ground successfully. Of course, time will tell but that is my prediction.
The idea that we are in the "Last Chance Saloon" as regards the role of the London Stock Exchange may now be associated with some of the remarks attributed to various people during the past few days. However, I do not think that this has been said by the incoming chairman, Mr Don Cruickshank. I quote the words of a respected financial journalist, Mr Anthony Hilton, the City Editor of the Evening Standard. He wrote on 18th May,People fail to realise that the London Stock Exchange was negotiating with a pistol held to its head. Both it and the German Exchange are shedding their mutual status but the capitalisation of the German market was destined to be two to three times greater than that of the London Exchange—and it was also planning to raise a cash war chest. So in a few months' time the Germans could have mounted a hostile bid that London would have found impossible to resist.Faced with this option, Casey [the chief executive] has struck easily the best deal available for London—a much better deal than his hand would have suggested. Those who oppose it should stop and think what the alternative is. Casey deserves credit, not brickbats".I shall concentrate on two points in the substantive part of my remarks: the currency question and the importance, or lack of importance, of that; and the perspective of pension funds, in which, of course, the trade unions have a major interest. We need to be explicit about what will happen as regards the use of sterling or the euro. The structure of the merger gives this question greater significance than my noble friend Lord Desai has acknowledged. However, that debate will continue.
By the end of next year—I am trying to keep my exposition simple—all the continental-owned companies are likely to be quoted uniquely in euros. My expectation is that many British companies will also be quoted uniquely in euros. I say "uniquely" because, although a sterling facility will be available and will be used if a company is quoted in euros, the actual listing on the board will be in only one currency. There will no dual currency listings. Indeed it has been made explicit in the prospectus—if that is the appropriate word for the relevant document—that,dual pricing will not be allowed",because that could lead to imbalances and resultant wider spreads. That is the position. I quote from today's Financial Times where Deutsche Börse states,A company's shares will be traded in only one currency in order to concentrate the liquidity in one order book".There could be no clearer statement than that.
The fairest statement on the relationship between the merger and the euro must therefore be that, although the issue is not a major one at the present 792 time, it will become one if we stay out of the euro for a long time. One thing we are all clear about is that, whereas we could all foresee circumstances in which all trades were in euros, no one could foresee circumstances in which they would all be in pounds. I would be surprised if that contention were challenged today. I asserted that premise even before I read the article that I have just quoted. I go a stage further and assert that if someone wished to set up a new European fund in the next year, they would in all probability denominate it in euros. Could anyone doubt that?
The Financial Times has been cautious about the merger but its general assessment is worth reminding ourselves of as it is an interesting perspective. 1t states,at least it is a bold attempt to break the deadlocked self-interest that has bedevilled all attempts to create a much needed pan-European market".That takes us into a slightly broader field which I wish to touch on. If I were a betting man I would say—I would have said this yesterday, but my view is reinforced by today's news from Frankfurt—that the merger will go ahead for the following fundamental reason, which has not been made explicit so far today. We have in the world today three basic time zones: Asia, Europe and America. Given that 24-hour trading will not be followed to the letter with stockbrokers working through the night—that will be the day, or the night!—the relevant trading hours for the large internationally traded stocks will be eight hours in Tokyo, eight hours in this part of the world and eight hours in New York. That is the logic of the matter.
That logic relates to another logic; namely, the integration of European industry is a fact of life which no one, however Eurosceptic, would deny. Therefore there will be three big players around the world in the sense of three time-zone players. That is the typical kind of oligopoly that exists in many industries at the present time. Incidentally, it throws up the need for parallel regulation, which I do not feel that we have.
One does not need to be reminded that at the present time many industries that wish to have a spread of investments—I refer to the motor car industry in this connection—need to look to Europe, America and Japan, not to UK equities. That is the way that pension funds invest. One could give half a dozen examples of such industries. To say that this process incurs an extra cost for pension funds is an optical illusion. At least, it is an illusion to think that extra costs will result from what may become euro-denominated prices in Frankfurt. The exposure and the volatility are no different as regards a non-sterling company. At the present time there are foreign exchange transaction costs. Therefore, a myth has developed with regard to extra currency costs in this area. Pension fund managers will have to ask themselves the same questions, whatever the currency involved. We are told that at present pension funds' exposure to Europe is about 10 per cent. That is a figure of about £40 billion out of a total of £400 billion.
We cannot easily measure trends at the present time because the relevant financial statistics are not satisfactory. Will the Government provide the figure 793 for the European component of pension funds' investments overseas in the financial statistics? There is no such figure in the financial statistics at the present time. The stock of equities in this country in relation to GDP is much larger than that of the Germans. If the Germans go in the Anglo-Saxon direction, I believe that they will soon have a bigger equity stock.
I conclude by saying that I believe that the merger will be in the interests of pension fundholders in this country. I welcome it.
§ 4.37 p.m.
§ Lord Barnett
My Lords, I begin by congratulating my noble friend Lord Layard on his maiden speech. I declare an interest in that he has never lectured to me! He said that his speech was non-controversial. I look forward to hearing him when he is being controversial! I make it clear that I agree with what he said although I imagine that one or two people may have considered his speech controversial, not least the noble Lord, Lord Lamont, who was non-controversial today. I congratulate him on his speech. When I read it in the Financial Times earlier today I thought that we had moved into a new era of having our speeches printed in newspapers. I have the article here. I was glad to have a copy of the noble Lord's speech in advance! I enjoyed both the article and the noble Lord's speech. I agreed with much of what the noble Lord said, which surprised me considerably. I shall return to some of the points that he made. I willingly concede that on this occasion the noble Lord was non-extremist in his views. I know that I upset him once when I accused him of being extremist.
It was always inevitable, I suppose, that reference to the euro in the Motion—I do not know who drafted the rather badly worded Motion; I should be surprised if it was the noble Lord—would immediately provoke some people (both in this Chamber and outside) into expressing the usual reaction. I am glad that the noble Lord, Lord Lamont, did not express that reaction—although in the Financial Times he could not resist referring to the "insensitive handling" of the euro. I shall come to that in a moment.
The noble Lord, Lord Lamont, said, sensibly and rightly, that many questions need to be asked in regard to the proposed iX. I agree with the many questions that the noble Lord and others have put. Without the answers, I join him in being a "don't know". We need answers to many of the questions about the details of the merger proposals.
I fear that there will be a knee-jerk reaction from some politicians. Who is right: the politicians or the market? I am rather surprised that some Conservative politicians—of all people—have said that they should tell the markets how to handle the merger. I do not include the noble Lord, Lord Lamont, among them. He deliberately excused himself from that—although he did not refer to his right honourable friend the Shadow Chancellor of the Exchequer.
In The Times on Monday, the Shadow Chancellor, Mr Portillo, put forward three basic arguments for rejecting the merger—not for seeking details, but for 794 rejecting the merger. Perhaps I may refer to those arguments and comment on them briefly. All three arguments have been referred to, of course, by the noble Lord, Lord Lamont. He obviously does not take instructions on these matters but, nevertheless, he has read what his right honourable friend said.
Mr Portillo's first argument was that hi-tech stocks will move to Frankfurt and will involve a serious shift of business from London to Frankfurt. Secondly, he raised concerns about the German regulatory system, which I shall refer to in a moment. Thirdly, he thought that all equity trades would be in euros. I wish to deal with all those arguments, which, as I said, were also referred to by the noble Lord, Lord Lamont.
First, on the fear that hi-tech stocks will move to Frankfurt, we have not yet heard in detail how the merger will work, but I assume that, as it is a merger and not a takeover by one of the other, not surprisingly some parts of the merged exchanges will have some parts of the business. On the other hand, London is far and away the bigger financial centre; it is hugely bigger.
Perhaps many of the banks that the noble Lord has told us he represents will be based in both centres—I do not know—but I hope that he advises them from a professional point of view rather than from his views on the euro. That is an aside; I am sure that he does. I am sure that the pensions of my noble friend Lord Desai and myself would be in good hands if they were in the hands of the institutions the noble Lord advises.
Given that London is so much bigger than Frankfurt now—and is likely to be so in the future—and that it will be handling the major FTSE equities, the likelihood surely is that if there is to be any shift at all it will be from Frankfurt to London rather than the other way round. However, it is at least possible that there will be such shifts. Indeed, they are inevitable in a way because we are dealing with a different kind of market.
As to the worry about German regulations, there are serious differences between the regulation of our market and the regulation of the German market. We have the greatest living expert on our regulatory authority—the noble Lord, Lord Saatchi—who will reply to the debate for the Opposition. I hope that he will reply, not on the basis of advice that he has received from his right honourable friend Mr Portillo, but from his own considerable knowledge, having now sat through many long, tedious hours listening to, as well as taking part in, our debates.
As to the issue of the euro, the Motion states:if shares have to be denominated in euros".As the noble Lord, Lord Lamont, knows—as he willingly concedes—the market will decide these matters; shares will be denominated in the way that the market wishes them to be denominated. To table a Motion which refers to a fear of denomination in euros is clearly a nonsense; it is unlikely to happen.
I get confused between Mr Portillo and the noble Lord, Lord Lamont, but one of them said that even if we are outside the euro zone, denomination will be determined by market forces. I think that that must 795 have been said by the noble Lord; he is more sensible than his right honourable friend. Whether we are inside or outside—I hope that we will be inside soon; I know that that is contrary to the hopes of the noble Lord—the euro arguments and the euro fears are quite unnecessary and irrelevant.
Probably the most serious matter in regard to the success of the London market is the question of stamp duty. Even the noble Lord, Lord Lamont, is in favour of harmonisation between ourselves and Frankfurt in this respect. At least he wants harmonisation between ourselves and Frankfurt. Perhaps my noble friend can indicate what the Chancellor has in mind in this regard. I am not asking him to tell us what will be in the next Budget, but it would be reassuring to know that the Chancellor and the Treasury are aware that there is a problem.
Decisions should be taken by those directly concerned—the markets—and not by politicians, whether in government or opposition. In my view, it is right that the merger should happen now, but it will happen soon anyway. As the noble Lord, Lord Lamont, said in the Financial Times, and similarly in his speech:A merger of the London and Frankfurt stock exchanges on the right terms could be immensely beneficial to all concerned. The vision of a market that covers half the equity trading in Europe is a bold one".I am sure that most people, on either side of the argument, would agree with that. I certainly hope they would. We are now living in a global market and it must be sensible to move in that direction.
I hope that the decision will be taken on the basic facts and not on any false political rhetoric, especially if it is based on irrelevant and—dare one say it?—anti-foreign prejudice. We know that that exists. I am not suggesting that any noble Lords opposite have such prejudice—and that includes the noble Lord, Lord Lamont, no matter how much I describe him as an "extremist" on this subject.
Certainly there is a Eurosceptic argument. I take the other side of that argument, but I believe that it would he not only sensible but right to move in that direction in the way suggested by the noble Lord, Lord Lamont. I hope that the merger will take place as soon as possible. In my view, it will inevitably take place in the not too distant future, even if it does not take place now.
§ 4.48 p.m.
§ Lord Blackwell
My Lords, I, too, thank my noble friend Lord Lamont for instigating the debate and for provoking what has so far been a remarkable outbreak of consensus. I shall try to be relatively brief in adding to that. consensus.
A common view among noble Lords who have spoken is that the outcome of a merger of this kind will be ultimately determined by the markets, and that the markets will prosper only if they provide an effective and efficient trading system that meets the needs of customers. There are plenty of competitors around who will displace the merged exchange if it does not achieve that position.
796 There has been widespread acceptance that the principle of global exchanges is now an important one; that there are benefits to be had from liquidity in depth; from the growth in size and scale of exchanges; and from the bringing together of trading that reflects the increasingly international trading portfolios of many investors.
But size of itself is not always the answer. The question is not so much whether the strategy is right but whether, as many noble Lords have said, it will be conducted in a way that is likely to succeed. While that is primarily up to the participants to determine, I would like to add a few observations in view of the importance of this to the wider economy.
I think the most critical question now, in ads ante of the merger, is whether the two parties can agree terms that will allow the optimum market outcome to emerge unconstrained by political compromises, fudges and woolliness that are likely to cause problems later. The noble Lord, Lord Desai, mentioned that many mergers fail to deliver benefits and I think that research would say that, where mergers fail to deliver, it is often because there are unresolved and unstated objectives and reservations between the two parties. During the courtship they may give different answers to different audiences, and thus fail to get clarity in advance on where they are actually taking the merged organisation. It is particularly important to understand and agree how power will be distributed once the two organisations have come together. The issues of power are often convenient to put aside, ignore or obfuscate, but if the issues of power and control are not understood by everyone, problems can emerge.
One critical area is obviously where the operation, control and wealth creation will lie between the two organisations as they come together. As the noble Lord, Lord Desai, and others have said, we have to remember here that we are not really talking about physical geographical locations in the merger because we are in an environment where electronic trading is leading to vast new developments. Physical location—what is going to be "in Germany" and what is going to be "in the UK"—is much less important in terms of the operation of the exchanges than where the traders, their screens, the users and the customers are located. As we know, that can be anywhere.
That is for the market to determine, but I think most people would expect that the focus of traders and screens will remain in London. There are a number of reasons for that; not least because that is where most of the major institutions are already located. Their resources, systems, infrastructure and their people are there and nothing in the merger itself would prevent that situation from continuing and indeed accelerating. However, for that to happen all the participants must be ready to accept that this will be the outcome should the merger take place. We should not try to build in any artificial barriers, constraints or political inhibitions that could stop the merger happening, because that would cause strains, contradictions and inefficiencies to re-emerge.
797 The noble Lord, Lord Northbrook, among others, mentioned the importance of the "back office", the settlement and clearing systems. There again, the physical location is much less important because the most critical thing is that the exchanges ultimately end up using the most efficient settlement system that can be put together, whether it is a utility across Europe or a number of local systems. Again, given the evolution of electronic processing—"global straight-through processing" I think is the new term—the physical location will become increasingly irrelevant in the development of the systems. There is nothing per se in the merger that would prevent that happening, so long as vested interests do not try to stop it happening in fixed locations in one place or another.
The other aspect of power that is important, as some other speakers have suggested, is that the power to set the rules lies outside the exchanges themselves. This is an area where we need greater clarity in order to understand what the future of the merger would be. As the noble Lord, Lord Lamont, and others have said, efficient markets clearly need the right balance between, on the one hand, transparency and, on the other hand, the avoidance of undue burdens being placed on the listing companies and the traders. I think it is also important, given the tradition that we have in the United Kingdom, that the markets continue to allow the effective operation of takeover rules and the corporate activity which is important to economic efficiency.
Given all that, I think that the market participants will want reassurance that the volume market, the large stocks, will continue to operate within the successful and open United Kingdom regulatory framework that has evolved and that this will not be distorted by compromises or harmonisations that introduce some of the distortions and the lack of transparency that has perhaps characterised some of the continental exchanges, or that places barriers in the way of takeover activity.
The regulations, as has been said, are equally important for the proposed smaller company exchange, where over-rigid listing rules could block the raising of new capital. If, as is suggested, that is to operate under German regulation initially, then in this country we need to be fully satisfied that such regulation will meet the needs of United Kingdom companies and United Kingdom investors in high-risk and high-tech shares.
We also need to understand, if we can, at this point rather than leaving it until later, what the ultimate objective is, in terms of separate regulation in these two markets: whether the intent would be to bring them together ultimately under some common regulatory framework to allow shares to move from one to the other, and to have some harmonisation. Would it ultimately be acceptable if it proves to be the FSA which provides that control? If the very clear intent is to keep them separate, then we need to understand that this implication is creating two 798 markets which ultimately may well be competitive rather than complementary. Those issues need to be explored rather than left under the carpet.
Finally, alongside regulation another critical power concerns tax policy. My noble friend mentioned that the United Kingdom risks being disadvantaged by stamp duty. One of the powers that may be lost here is the ability to sustain a policy on stamp duty in the United Kingdom which is different from the rest of the Continent. Again, we need to understand whether or not the Government are prepared to accept that implication. All these issues of how power will be exercised and what the implications are need to be addressed in advance of the merger taking place; otherwise, if pushed aside, these difficulties can come back later and unravel the process.
On the subject of currency, as other speakers have said, the Stock Exchange itself has now recognised that attempting to enforce a single currency trading in euros, if that ever was contemplated, is not a valid option. As with other aspects of exchange, it is the needs of customers that will prevail. It is true that many United States investors may prefer to have a single currency across Europe, because to them it is all foreign currency. However, as has also been said, as long as the United Kingdom is outside the euro, it will be important for United Kingdom investors to be able to invest in UK-denominated assets, and they will want to be able to do so. Therefore, at a minimum, it is important to offer choice as to which currency shares are traded in, according to whichever currency the listers choose. It may well be, if this merger goes ahead, that the exchange will have to offer dual currency trading in a number of shares. If it does not, investors will go elsewhere.
To sum up, it is vital to be clear about the execution issues in advance. That means facing the issues as to where power will lie both within the exchanges and in the setting of regulations around them.
§ 5 p.m.
My Lords, while thanking the noble Lord, Lord Lamont, for introducing this debate, I am struck by the coincidence that 18 years ago I made my maiden speech on the arcane subject of a European Commission directive on accounting by banks. Today, in my first speech since my recycled return to the House—but not a maiden speech, unlike that of my noble friend Lord Layard who gave us an excellent contribution, so I can expect no mercy from noble Lords—the noble Lord, Lord Lamont, has given me an opportunity to venture into similarly complex territory.
Although I am no longer the practising investment banker that I was originally, I still have interests to declare, both as the director of a number of companies quoted on the Official List of the London Stock Exchange or traded on the AIM market. I am also an adviser—in commercial rather than political terms—to a member of the London Stock Exchange specialising in "growth" companies.
799 I listened with interest to the speech of the noble Lord, Lord Lamont, and I welcome at least the open-minded position towards to the proposed merger from which he starts. However, I had the impression that the further information that the two stock exchanges have been able to release since the first announcement of the intended merger and since the noble Lord first tabled the Motion, in particular in relation to the use of the euro, perhaps led to some reshaping of his line of attack.
None the less, during his speech the noble Lord voiced his well-known concern about the euro and highlighted the alleged losses suffered by UK pension funds from holding securities currently traded for settlement in euros. It is with some trepidation that I suggest that a distinguished former Chancellor has fallen victim to an economic fallacy, even when the same argument has been advanced by the Sunday Telegraph, but I will have the temerity to do so.
The euro-denominated securities held by UK pension funds are predominantly equities and hence real assets rather than monetary ones. It is possible to assess the performance of such an equity portfolio only by considering the aggregate effect of the movement in the share price and the exchange rate. Since the launch of the euro, eurozone equities have generally performed well, not least because in many cases companies have benefited from the competitive exchange rate in which they trade. The denomination or principal currency of settlement for an equity security is essentially a veil. For that reason, I welcome the clarification from the London Stock Exchange and the Deutsche Börse that it will be their customers who determine in which currency or currencies shares will be traded.
As the noble Lord, Lord Lamont, and other noble Lords have already made clear, the London Stock Exchange is a commercial organisation with no monopoly or privileged status beyond the legacy from its earlier, more protected position. In commenting on the noble Lord's Motion, I shall try to bear in mind strictly the limitation on the roles of both the Government and Parliament in this matter, although, like other noble Lords, I believe that a significant national interest needs to be considered as a result of the proposed merger.
That national interest certainly includes the maintenance and, if possible, enhancement of London's position in the global financial markets, generating employment and other economic benefits. However, even more in the national interest is to see the most efficient and dynamic capital markets made available to UK companies of all kinds to finance their investment, expansion and growth.
When my noble friends and I were still speaking from the Benches opposite, I cited the work of the American economics writer, Professor Brock, who has argued convincingly for a causal connection between the superior record over the past 10 years of the US in net job creation and in the vibrancy of its capital markets, in particular NASDAQ and the venture capital community. Of paramount importance, 800 therefore, for the promotion of new companies and new jobs in the new economy is the closing of that gap between Europe's capital markets and those in America. We should not shrink from sacrificing, if it is necessary, 1,000 jobs in the City if, by so doing, some 5,000 lasting new jobs are created in emerging companies, financed by a strengthened stock market.
As it is, from the information currently available, I believe that the proposed merged exchange—iX— offers the best prospects for enhancing the provision of capital to small, medium and large companies, while at the same time promoting the best of the established strengths of the City. The prospective efficiency gains which I understand could be achieved through massively increased netting of counter-party risks should, through reducing the capital needed by member firms to support their customer business, lower the cost of dealing for all investors; as importantly, any capital thereby freed up will then be available to support proprietary trading by member firms, the trading which in large part determines the market liquidity available to long-term investors.
The separation—in both the British and German markets—between stock exchanges, clearing houses and settlement systems means that a simultaneous resolution of all these detailed issues is impracticable I believe that, in the first instance, the merger of the two exchanges is the best possible way of achieving the desired efficiencies in settlement and risk management.
I shall touch only briefly on the issue of the growth company market, which I recognise is perhaps the most difficult area for many market participants and commentators. There is no doubt that the German Neuer Markt has been highly successful. Furthermore, while intuitively the ceding of the centre of the new growth market to Frankfurt feels threatening to UK technology and other high growth companies, I believe that the more rational sentiment should be that if the strengths of the Neuer Markt and NASDAQ can be brought to bear for the benefit of UK companies, then this will be for the national good.
Perhaps I may finish by urging the member firms of the London Stock Exchange, who will ultimately determine whether the merger will proceed, to look at the industrial, commercial and financial world around them. The very structures and institutions which may have served industry well 30 or 40 years ago are unlikely to be appropriate now, as companies both large and small trade in a hugely more open and international market.
I cannot forget the views expressed during the first debate in your Lordships' House in which I spoke. The leaders of some of the country's largest merchant banks urged a continuation of banks' ability to conceal their actual profitability through the use of hidden reserves. I recall an argument that took place at around the same time with a then banking colleague who vigorously asserted that it was in our employer's interest to continue as long as possible the archaic system of a Bank of England queue for new issues in the London stock market to protect the status quo and our banks' established positions.
801 I fear that, for all the traditional strengths of the City, it was attitudes such as those which contributed to the virtual disappearance of British-owned investment banks. I very much hope that all members of the London Stock Exchange will embrace the challenge and change involved in this proposed merger with an eye to the future and not to the past.
§ 5.8 p.m.
§ Lord Newby
My Lords, like other noble Lords, I congratulate the noble Lord, Lord Lamont, on tabling this Motion—and also on his timing. Clearly, events have moved on significantly since the Motion first appeared on the Order Paper. I suspect that had this debate been scheduled even for yesterday afternoon, before we knew the outcome of the vote in Frankfurt, the tenet of our contributions might have been somewhat different. No doubt, if we were to hold a similar debate in 10 days' time, or even two months' time, they would be different again.
In many respects, the background to the situation in which we find ourselves is typical of Britain's relations with Europe. I believe that the London Stock Exchange and the City began this process with a fair degree of complacency. That was mentioned by the noble Lord, Lord Desai, and the noble Viscount, Lord Chandos. It was felt that we were pre-eminent in the field and that that pre-eminence was unlikely to be challenged by any continental upstart. However, a recognition has grown that something is going on and that it is something to which we need to respond if we are not to lose that pre-eminence; unless we get a move on, the consolidation will take place without us. Now, there is common consent that there was such a rush before the French alternative scheme carried all before it that we have something of a "cobbled together" scheme. That was the phrase used by the noble Lord, Lord Lamont, and I agree with his description.
Where do we go next? It is important for a number of reasons that, having reached this stage, the merger should now take place. The Deutsche Börse has approved it; therefore, there is a body of support for it on that side of the Channel which needs to be borne in mind. If London were to pull back, having come this far with German support, it would lead to a major question of credibility for the London Stock Exchange. As the noble Lord, Lord Lamont, and other speakers have said, there is now an increasing number of options in terms of new systems of stock market trading, which means that we cannot merely fall back on our past position. We must move forward. Having arrived at this point, surely this is the way in which the Stock Exchange should move forward.
That said, there are clearly a number of concerns and questions that need to be addressed both before the merger is consummated and after it has taken place. One question that spans both time-scales relates to the regulatory framework. There clearly is a different regulatory framework in Frankfurt. It has lower disclosure standards and, by common consent, a less consumer-friendly style than the London Stock 802 Exchange. Although there is some movement in a London-ward direction in Frankfurt, clearly it will not lead, before any merger is completed, to a single regulatory framework. To put it no higher, it is slightly odd that within the single body of the merged exchange the listing requirements and virtually every aspect of the way in which a stock is treated will depend on exactly where it will be listed first. That seems unsustainable in the longer term.
There is also a question of taxation and stamp duty. When one discusses individual taxes rather than the generality of tax harmonisation, it is noticeable how many times we find arguments in favour of a common European tax level, and this is no exception.
The matter arises also of how to deal with smaller and medium-sized stocks—which is not wholly clear at present. Within the question of scale is a further question of consultation. It is clear that the very large players have been consulted up to now but the medium and small players in London have not. That does not seem a satisfactory way of proceeding. The noble Lord, Lord Northbrook, talked about consulting the private investor and about the large numbers of people who were taking up ISAs and similar financial products. I suspect that consulting them on some of these issues is impractical and is unlikely to lead to a clear view being expressed. The general principle of maximum consultation has been debated a great deal in relation the FSA. It has not been followed in this case to the extent that we would wish.
There is clearly a question about the cost of switching from the existing settlement system to the Xetra system and who bears the changeover costs. There is a lack of clarity regarding the possibility of, as it were, centralised funding from the exchange to help the smaller traders.
There is the issue of which shares will be quoted in euros, and whether having some quoted in euros and some in sterling will cause difficulties. I have a very simple answer, but I am not sure that the noble Lord, Lord Lamont, would find it acceptable. We shall see whether it proves in reality to be a problem—some speakers have suggested that it will and others that it will not.
There is also the question of whether the merger will lead to Frankfurt or London being pre-eminent. Considerable concern has been expressed in London that the longer-term effect of the merger will be that the bulk of business will go to Frankfurt, because that is where the new stocks will be traded, including the high-tech stocks. There have also been fears in Frankfurt that it is in a sense giving up the scope for growth: that companies will opt to list stocks in London when they have the option. That possibility was referred to by the noble Lord, Lord Barnett. Normally, when both sides express equally strongly held fears that the other side has the advantage, one has an instinctive sense that they have got it just about right. One can only hope that they have in this case, but it is difficult to know at this point.
803 A matter of considerable concern to individual consumers is the index that will be used. Given the growth of tracker funds in particular, if a new index is adopted there will at the very least be a big re-education job to be done.
All these issues are ones with which Don Cruickshank is now grappling. Anyone who has followed his career up to now would probably agree that he has the ability both to see the big picture and to grapple with the details, which suggests that he will do it very well.
Stepping back from the short term, there are one or two broader lessons or features of this episode that I should like to draw to your Lordships' attention. First, there is the generally accepted view that a consolidation of Europe's stock exchanges must make sense—that 40 is simply too many. The noble Lord, Lord Desai, and the noble Viscount, Lord Chandos, referred to the gains in terms of efficiency. In the single European market a consolidation of exchanges will make mergers and acquisitions across Europe easier, and it will be easier for individuals to hold shares. That makes a tremendous amount of sense.
A point that is relevant not just here but to a number of other developments within the EU is that the impetus for this European movement is not coming from an over-powerful Commission in Brussels or from the Council or the European Parliament. It is coming from American merchant banks. When discussing, as I am sure we shall in the months ahead, the future of the various aspects of the European economy, we shall need to give considerable weight to market pressure rather than merely the views of politicians. Politicians—and we all fall into this category—are coming very late to this issue. We were not debating it six months ago. In a sense, we are now following the market. In a number of economic issues that is a good principle.
If we accept that consolidation in Europe makes sense, and that it should be market driven, but if we see a broader consolidation than at present, it must make sense to have a single regulatory platform. Therefore, while I do not suggest that we move to that in the short term—this is particularly heartfelt for those of us who have just gone through the Financial Services Bill—there will come a time when it makes sense to be looking at a European framework document so that we do not have long arguments about exactly what is happening in Frankfurt, Paris or London. I can see that the noble Lord, Lord McIntosh, is already looking forward to that day.
This has been a useful debate. The exact shape of the exchanges in London and across Europe must be market-driven. But one of the roles of this House is to give voice to the concerns expressed by those who are affected by economic and social change. It is also the case that, where there is a regulatory role to play, we have spent a great deal of time thinking about how to achieve a fair and transparent system. I hope that in this debate we have achieved the first of those purposes. A detailed examination of the revised regulatory requirements is, I am glad to say, for another day.
§ 5.20 p.m.
§ Lord Saatchi
My Lords, I am most grateful to the noble Lord, Lord Lamont, for introducing this timely debate. Many noble Lords who had the good luck to take part in the proceedings on the Financial Services and Markets Bill will be aware that this subject emerged in the course of those debates.
§ Lord Saatchi
My Lords, many noble Lords have illuminated this subject with their contributions, perhaps none more so than the noble Lord, Lord Layard. I congratulate him on a marvellous maiden speech. The noble Lord is a great addition to your Lordships' House, and I hope that he will play a full part in its deliberations. The noble Lord exhibited great judgment in making one point very clear. As proof of that, it is precisely on that point that I wish to concentrate my remarks. The noble Lord spoke of the logic of globalisation which underlay the merger. He also spoke of the "related logic" of the merger of currencies. It is on the historic inevitability of the merger described by the noble Lord that I concentrate my observations. The same material determinism was reflected in the remarks of the noble Lord, Lord Haskel, who said that mergers and consolidations were inevitable.
What are those who have Britain's interests at heart, including all noble Lords present this afternoon, to make of this merger? Is it true, as the noble Lord, Lord Haskel, suggested, that this merger is nothing to do with Parliament or the Government; or is it true, as my noble friend Lord Blackwell said, that the merger has wider implications for the economy; or is it the case, as the noble Viscount, Lord Chandos, said, that there is a vital national interest at stake? Why has the merger struck such a chord in the minds of so many people? This is a dress rehearsal for what promises to be the most contentious debate of modern times about Britain's place in Europe and whether or not it should join the euro. When the time comes for that great national debate, the proponents of integration will put forward the very arguments that we hear in relation to this issue.
The noble Lord, Lord Layard, made the link explicit, for which I am grateful. This debate is a potent symbol of things to come. The financial services industry is a modern miracle. To my knowledge, it is the only UK industry in which Britain leads a global market. Yet the chairman of the London Stock Exchange, the jewel in the crown of British industry, tells us that Britain cannot make it on its own. He says that,the London Stock Exchange could not go it alone".In evidence to the Select Committee in another place, Mr Kidney asked Mr Cruickshank:Is it implicit in deciding to do the deal at all that you have come to the judgment that the British Stock Exchange on its own cannot compete in international markets?805 Mr Cruickshank replied:I think that is a fair conclusion to reach".I have no doubt that what the chairman of the Stock Exchange says is true. He explains to us that mergers of stock exchanges follow in the train of mergers of companies. Those mergers are a response to the dominant feature of our age—globalisation—to which the noble Lord, Lord Layard, referred.
It was in 1982 that the term "globalisation" first appeared in the pages of the Harvard Business Review. There it was famously said that companies which adopted this new approach would "literally pave over" companies still trapped in the old national ways of doing things. At the time that was a controversial notion, but today it is a truism. Twenty years later this merger of exchanges is the result.
It has been said today by my noble friend Lord Lamont and the noble Lord, Lord Newby, and by many outside this House, that American companies may have been behind the merger. That may well be true. Consider the view of Europe from the 67th floor of a US corporate headquarters building in Manhattan, Cincinnati or Washington. I believe that it would be to the following effect, "In Europe there are different countries with people having different habits, practices and customs. How tedious. If only those people were more similar. Then, instead of having six factories in 10 countries, with four research and development facilities, producing 32 products in 62 package sizes, we could have two plants, one R&D facility, and produce three standardised products for the whole of Europe. Think of the cost savings". That demonstrates the economic power of globalisation to which the noble Lord, Lord Layard, referred. That is quintessentially the American perspective.
In addition to economic power, it has a strong philosophical underpinning which was perfectly, and elegantly, described by Professor Sir Isaiah Berlin:The American vision is larger and more generous; its thought transcends the barriers of nationality and race and differences of outlook in a big, sweeping single view … and, therefore, to it the differences and conflicts which divide Europeans in so violent a fashion must seem petty, irrational and sordid, not worthy of self-respecting, morally conscious individuals and nations; ready, in fact, to be swept away in favour of a simpler and grander view of the powers and tasks of modern man".That is the power of the economic and philosophical logic behind this merger which so many noble Lords today either welcome or regard as inevitable. However irresistible may be this logic, we can still ask certain basic questions of our Government before they give their blessing to this marriage. Such questions are especially appropriate in the light of the revelation in the evidence given to the Treasury Select Committee that the London Stock Exchange received "no representations" from the Treasury, the Bank of England or the FSA about the merger before it was announced. Mr Cruickshank was asked:Did the FSA or the Bank of England or the Treasury have any role in the negotiations before the deal was struck?He replied "No", but went on to say: 806For the avoidance of doubt, there were no representations to me from senior officials or Ministers, officials of the Bank or of the FSA, as regards the terms of this arrangement".A number of key issues emerge. The merger creates one exchange but leaves two regulators, two tax systems and two currencies. Taking each in turn, as to regulation the Minister conceded that the,appropriate regulatory arrangements for the merged body are not clear".Many noble Lords in this debate have referred to that. He went on:I can, however, reassure the noble Lord, Lord Haskel, that the regulators are talking because the FSA has issued a press release stating that it is working closely with our German supervisory colleagues to arrive at a sensible regulatory outcome for iX".However, the question is whether the resulting system will bear any resemblance to the regime under the Financial Services and Markets Bill over which Parliament has toiled for the past two years. The Government, extraordinarily in my view, say that the outcome of those talks between the regulators is "not a responsibility of the Government". But who will be responsible for ensuring a level playing field of regulation for all the participants in a merged exchanged? How can the FSA be the regulator for the exchanges of several countries and, at the same time, have the duty to look after the competitive position of the United Kingdom which is about to be given to it by Parliament under Clause 2(3)(e) of the Financial Services and Markets Bill? I hope that the Government will take a little more time, perhaps while the Bill is in the Commons, to think about the regulatory implications of these great proposed changes.
As to tax, my noble friends Lord Lamont and Lord Northbrook and the most distinguished former Chief Secretary to the Treasury, the noble Lord, Lord Barnett, have sought to deal with the anomaly that the UK imposes stamp duty on share transactions at the rate of 0.5 per cent whereas the German rate is nil. Is our tax regime to be harmonised? How can it not be?
I turn again to the evidence of the London Stock Exchange to the Select Committee. Mr Wheatley was asked about this point and said:Our position is that stamp duty will over time become something that is disadvantageous to United Kingdom companies raising capital".According to the Treasury's projections, stamp duty will this year contribute £3 billion to the Exchequer. If stamp duty is abolished to match the position in Germany, which it surely must be, what new tax will be raised to generate the missing billions? It is the question to which the noble Lord, Lord Barnett, wanted an answer.
I conclude on currency. I do not think that it is wise to go over this sensitive ground. It has been addressed by many noble Lords. However, perhaps I may say how nice it would be for all those who are deeply interested in this merger if the Minister would state from the Dispatch Box in a clear strong voice—I hope that his cold is now much better—in terms as unequivocal as those of the noble Lord, Lord Barnett, 807 the noble Lord, Lord Layard, and my right honourable friend the Leader of the Opposition, his plans for the future of our currency.
§ 5.30 p.m.
§ Lord McIntosh of Haringey
My Lords, I have to start with an apology. The Takeover Panel stole my vocal chords last week and it has not had the grace to give them back again. If I have difficulty in communicating, noble Lords must blame the Takeover Panel and not me.
It has been a remarkable debate. The noble Lord, Lord Blackwell, said that up to his speech we had achieved consensus. We achieved consensus virtually all the way through the debate and without being boring. That is quite an achievement. We did so without repeating ourselves and while providing an opportunity for my noble friend Lord Layard to make a quite outstanding speech which contributed not just to this debate but to my thinking about the basic economic issues lying behind the subject matter of this debate. We must all be grateful to the noble Lord, Lord Lamont, for making this possible.
First, I shall set out the Government's stance on the merger and then talk about some of the regulatory issues and matters related to trading in euros and pension funds. I shall give some thoughts about the blue-chip markets and growth markets. If I have time, I shall then respond to points raised in the debate.
As many noble Lords have said, this merger is clearly part of the consolidation process in European and global equity markets. The noble Lord, Lord Lamont, went so far as to say that that development may make good sense. It is no surprise that the London Stock Exchange, as one of the world's leading equity exchanges, is involved in this process. As the noble Lord, Lord Blackwell, said, if we are moving to global exchanges we are doing so because we have to reflect the creation of international trading portfolios. The exchanges are simply a reflection of the markets in which they operate.
If one has broader and deeper equity markets, one has advantages for companies and investors. Companies have a larger and deeper pool of investors to tap. Investors have a wider range of investment opportunities. All sides benefit from the lower trading costs which should result. Many noble Lords have said that this may not be the end of the game. It is highly likely that in five or ten years' time there will almost certainly have been moves in the direction of greater concentration in exchanges as well as markets.
The terms of the deal to create the iX are a commercial matter for the parties concerned, subject to their obtaining the clearances from the relevant regulatory authorities. Our interest as a nation, as a society—if I may be so bold as to agree again with the noble Lord, Lord Blackwell—is to look for an optimum market outcome rather than more temporary issues.
There has been reference to the terms of the merger. Much of it is still not known. Perhaps the Stock Exchange and the Deutsche Börse were slow 808 off the mark in making their intentions clear. There have been criticisms along those lines, with some justice. If they are going to go ahead, and if the London Stock Exchange membership is going to confirm the decision of the supervisory board of the Deutsche Börse, the London Stock Exchange will have to satisfy its members that it represents a good deal, as well as providing the necessary assurances to the regulatory authorities. It is difficult for me to comment on a deal which is still in progress and on which many of the details are still not known. Those questions are for the Stock Exchange rather than the Government. The noble Lord, Lord Desai, said that it would be premature for us to answer. It is more than simply premature. They are questions which it is in principle inappropriate for us to answer.
I was interested to hear the noble Lord, Lord Saatchi, in his interventionist mode suggesting that it was a responsibility of government to become involved in the process of the merger. I find it difficult to see how we should do so.
I turn to the regulatory issues. It has been made clear—the noble Lord, Lord Saatchi, did so when quoting from the FSA—that the regulatory authorities in Britain and Germany are working together. They are considering the practical implications. They will both have to be satisfied with the regulatory arrangements if the merger is to proceed. However, the broad outlines are already clear. The blue chip market will operate out of the United Kingdom; it will be subject to UK regulation. It will be a recognised investment exchange in the UK. The noble Lord, Lord Blackwell, wanted reassurance on that point. He can have it.
The noble Lords, Lord Northbrook and Lord Newby, raised this issue. It is not proposed that the FSA should perform a single regulator function for both the UK and Germany. There is some need for movement in the German regulatory regime. But it is clear that that is already happening. Werner Seifert is quoted in today's Wall Street Journal as saying that the Deutsche Börse is moving in that direction. He says that, beginning next year, German companies must report results quarterly rather than twice a year if they want to qualify for the Xetra tax index of 30 bluechip companies. I do not think that it needs heavy-handed intervention from the Government or the Treasury. The impetus towards harmonisation of regulatory regimes will happen on its own.
It is not that there is difficulty about operating as they are. I made it clear during debates on the Financial Services and Markets Bill that that already happens with the OM group, which owns the OM Stockholm exchange, under Swedish regulation and the OM London Exchange, which is a recognised investment exchange in the UK. It works perfectly well there. I repeat what I said when we considered amendments to the Financial Services and Markets Bill. We have no doubt that the provisions of the Bill relating to the recognition of exchanges are able to cope with structures such as the proposed international exchange.
809 The details of which companies will be listed have not yet been sorted out, but no companies will be forced to move their listing from one company to another. German companies listed in Germany will be traded in the same market as UK companies listed in the UK. People in the UK can already trade German shares. They are aware that the listing regime is slightly different. The fact that shares are traded on the same market does not necessarily mean that investors will automatically assume that the same listing regime applies.
I turn to the issue of trading in euros. To some extent, the fears that were expressed in the wording of the Motion when the noble Lord, Lord Lamont, first tabled it have been allayed by the clarity we now have from the London Stock Exchange that it will be for the market to lead. After all, the stock market is there to serve its customers. It will follow what its customers want to do in relation to the currency used for trading shares. Even if the majority of share trading moves to euros, the Exchange will continue to provide prices of UK stocks in sterling.
My noble friend Lord Lea of Crondall is sceptical about that. I can say only that on that issue we shall have to wait and see. While not in any way diminishing the authority with which my noble friend Lord Layard spoke, I do not believe that issues for the UK's entry into the euro arise from the merger. The position is unchanged. It is as set out by the Chancellor of the Exchequer in October 1997 and confirmed by the Prime Minister in February 1999.
I turn to pension funds, which were a proper concern of my noble friend Lord Lea. If the trading currency for a particular stock changed from sterling to euros, we would not expect that to impose a significantly greater amount of currency risk to most investment funds. Already 40 per cent of UK investment fund assets are in non-sterling securities. Approximately 10 to 15 per cent of those are in eurozone currencies. My noble friend Lord Lea made a good point about the need for a new series in financial statistics and I am sure that the Office for National Statistics will pay attention to what he said.
The review of the minimum finding requirement will be wide-ranging and take into account several important developments since the original test was formulated. That will provide an opportunity for issues such as this to be addressed. Short-term volatility in the stock markets may be an issue. To the extent that the quoting of stocks in euros has any effect on this, it will be carefully considered.
I turn to the issues raised in the debate particularly by the noble Lord, Lord Lamont, who was kind enough to give me notice of the questions he raised. However, some of his points were also raised by other noble Lords. He asked, first, about medium cap stocks, which are not quoted on the London bluechip exchange or the Frankfurt high growth companies market. I understand that the iX will continue to run national markets in addition to the pan-European markets. Therefore, British companies which do not 810 fall into either the blue-chip or high growth categories will still be quoted and traded on the London exchange.
The noble Lord asked about the effect on London's IPO business. I believe that he answered his own question because I am sure he was right in saying that it will be market driven. There cannot be a guarantee that when growth companies become large companies they will return to London. However, the intention is to retain national markets as well as the pan-European markets. IPO's will continue to take place in London. While the pan-European growth company market will be operated in Frankfurt, it is not necessarily axiomatic that all such IOP business will be conducted out of Frankfurt rather than London.
I return to UK regulatory requirements and the Code of Corporate Governance, to which the noble Lord, Lord Lamont, referred. We do not yet know the details of the standards which will be applied in the various markets. However, the current position is that foreign companies with a listing on the London Stock Exchange are not required to comply with all the provisions of the UK listing rules. Therefore, there is not absolute uniformity and any changes which might take place may be a difference in degree rather than in kind. As I have said, the European blue-chip companies based in London will be a UK-recognised investment exchange under the Financial Services Authority.
The noble Lord asked whether small technology companies will be able to side-step UK standards of reporting and accounts by having their quotation in Germany. Again, that question answers itself. Clearly, UK registered companies must follow the requirements of UK company law, regardless of where they are quoted and traded. As he said, the customers of exchanges take the standards of regulation into account when deciding where to do business. Such companies will have to take account of what the market wants and whether by departing from accepted practice they lost their attraction to pension funds.
The noble Lord raised an important point about transparency. I agree that there are differences in transparency between regulatory requirements in Britain and Germany. I do not know—I do not believe that anyone yet knows—whether the proposed merger will lead to more block trades. However, the intention is for the London Stock Exchange to continue to follow the existing requirements whereby members doing bilateral trades off the order book would need to report the trade to the Exchange.
That brings me on to the important issue of clearing and settlement, where there are potentially huge advantages and savings if existing practices can be extended. The noble Lord, Lord Northbrook, properly referred to the need for a central counterpart. My noble friend Lord Barnett made a similar point. The proposed merger does not cover clearing and settlement, but the boards have said that they consider that settlement should be delivered ultimately on a consolidated pan-European basis. They will be consulting users for their views on the management, ownership and structure of potential settlement infrastructure. However, in the 811 expectation that there will be significant consolidation and rationalisation over the coming years, the merger is the first step on that road.
I was asked whether this meant the end of stamp duty. We always keep the position under review, but stamp duty is chargeable on trade in the shares of UK registered companies regardless of where those shares are traded, unless the season ticket charge has been paid. Therefore, one cannot avoid stamp duty simply by moving trading from London to Frankfurt. My noble friend Lord Haskel referred to the ADR loophole. That is supposed to be dealt with by the season ticket provision, so I do not believe that the noble Lords, Lord Barnett and Lord Saatchi, have reason to believe that stamp duty will somehow become unviable as a result of the merger.
We come now to the more technical issue of the trading platforms. I am not sufficiently expert to know whether Xetra is better or worse than SETS. The noble Lords, Lord Lamont and Lord Northbrook, asked who would pay the costs of any compulsory transfer from SETS to Xetra. I am sure that the Stock Exchange must tackle that issue if it is to convince small brokers that the merger is in their interest.
I have already referred to the issue of trading in euros, which has been resolved by the clearer position that the Stock Exchange has taken.
The noble Lord, Lord Lamont, asked whether there was a remit for competition authorities in Brussels. Strictly speaking and literally, the merger falls below both the asset and turnover thresholds for consideration by the Commission in competition terms. Therefore, there is no power for them to intervene. As regards whether the UK or German authorities will feel it necessary to intervene, that is another matter and it is one for them to determine.
Perhaps the central question for most outsiders—noble Lords were notably impartial in their comments today—is: what does this mean for the financial community in London? Are we selling our birthright for a mess of pottage by keeping the bluechip market and allowing the growth market to be located in Frankfurt? At the moment, of course, blue-chip shares form by far the bulk of the market. The FTSE 100 stocks and the top 40 stocks on the Deutsche Börse form approximately three-quarters of the combined market or capitalisation of the two exchanges. The Euro top 300 index of blue-chip companies represents a similar share of total European stock market capitalisation. Blue-chip shares also represent the great bulk of trading in equities. The share of the market of technology stocks is about 40 per cent, although it is difficult to find definitions which are precise in this area.
The noble Viscount, Lord Chandos, referred to the success over the years of the Neu Markt in growth stocks, against which must be set the losses that have been suffered recently with the decline both in Techmark and in the NASDAQ industries. Clearly, that has a knock-on effect on initial public offerings. However, even if the Frankfurt growth market is likely to see the bulk of IPOs, even though it is true that their 812 growth has been greater in recent years, it is not axiomatic that all that business will move to Frankfurt rather than continuing in London.
The debate this afternoon has been conducted notably with an absence of ideology and in a genuine spirit of inquiry and of genuine intention to contribute to the well-being of our financial markets and of our economy. The Government are grateful for that. I believe that the cautious welcome extended to the merger by noble Lords will be welcomed by those who are taking part in the negotiation. It is well known that the Government do not take a formal position on a merger between two private organisations. However, I am sure that both the Stock Exchange and the Deutsche Börse will be grateful for the views that have been expressed this afternoon.
§ 5.51 p.m.
§ Lord Lamont
My Lords, I do not intend to detain the House for long. However, I should like to thank noble Lords who have spoken in this debate, which I believe has been helpful.
I believe that I should accept the rebuke of the noble Lord, Lord Barnett, who said that there was a remarkable resemblance between an article that appeared in the Financial Times and the speech that I made in this debate. I had been feeling rather guilty about that and I had thought of apologising for it at the beginning of the debate. However, the truth is that I have become so used to bad behaviour on the part of the Government on matters such as this that my own standards have slipped and I have adopted those of the spin meisters who govern us these days.
I join with everyone who has congratulated the noble Lord, Lord Layard, on his remarkable maiden speech, which we all enjoyed. Unlike almost everyone who has spoken in this debate, I have not been a pupil of the noble Lord and have not heard arty lectures by him. However, almost as good, I have read a number of his works and, indeed, (dare I tell him) one of the measures in one of my Budgets was based closely on an idea about which he had written. I very much enjoyed what he said about Canada, although I believe that the logic of the argument about comparing the geography of different Canadian states to the neighbouring American states and comparing distances eventually would be limited by the theory of optimal currency areas. However, perhaps we could debate that further on another occasion. We look forward very much to hearing the noble Lord speak again in future.
I thank the Minister for his detailed replies, which am sure will be studied carefully, certainly by me and, I am sure, by others. I was very interested in the speech made by the noble Lord, Lord Desai, and in his scepticism about mergers in general and not only about this merger. On the whole, he believed that this merger might bring some benefits. It always surprises me that generally people are not more sceptical about mergers. Indeed, I believe that a great weakness is that we do not, post hoc, go back and examine mergers to find out what happened. That is a matter on which I have always intended to question the noble Lord, Lord Borrie, but have never had the opportunity to do so.
813 A number of speeches, such as those of my noble friends Lord Northbrook, Lord Blackwell and Lord Chandos, were based on their own detailed knowledge of the City, and we are much indebted to them. I particularly enjoyed what my noble friend Lord Chandos said with regard to the conservatism of the City of London and of the financial services industry in the past and about his memories of bankers who did not want to reveal their true reserves. Of course, he might have added that it was a Conservative government who introduced Big Bang. I believe that my noble friends Lady Thatcher and Lord Parkinson deserve enormous thanks for their far-sighted decision in taking on the very conservatism that my noble friend Lord Chandos rightly criticised.
My noble friend Lord Blackwell said that there had been a great and surprising outbreak of unanimity in this debate, and the noble Lord, Lord McIntosh, referred to the absence of ideology—which made me feel profoundly uncomfortable. None the less, I was delighted to find myself in agreement with much that was said by the noble Lords, Lord Lea, Lord Haskel and Lord Newby. My very good friend, the noble Lord, Lord Barnett, as always made an extremist speech at the centre of extreme moderation. As ever, he could not resist lashing out about xenophobia and Euro-scepticism, although for once I was exempted from that. If he is looking for xenophobia and Euro-scepticism, perhaps he should read the joint letter of Giscard D'Estaing and Helmut Schmidt, published a few days ago. What it said about Turkey and the United States vis-à-vis Europe is almost unrepeatable and would deeply shock your Lordships.
The noble Lord, Lord Barnett, and, I believe, the noble Lord, Lord Newby, tried to suggest that some principle was being betrayed by the fact that a number of noble Lords on this side of the House favoured the abolition of stamp duty on shares in order that it should be brought in line with Germany, were we not supporting harmonisation. We believe in harmonisation by the market. We believe that it is good that taxes should converge in response to competitive pressures. However, we are against political decisions taken at the centre to bring about an unnecessary bureaucratic harmonisation.
I should like to reply to one point made by the noble Lord, Lord Barnett. He said that he was rather puzzled by the wording of the Motion. We are saying that everyone is agreed that it is a matter for the markets to decide whether shares are quoted in euros. Of course it is, and we all agree about that. However, it seemed to have escaped the noble Lord's notice that at the beginning it appeared very definitely that it was being proposed that all shares would be quoted in euros. As a number of newspapers pointed out, that was stated quite explicitly and it caused much anxiety. However, the London Stock Exchange and Mr Seifert have withdrawn very clearly from that position.
I also very much enjoyed the description by my noble friend Lord Saatchi of a conversation on the 167th floor of an American corporation. I believed that he was going to say that it was Saatchi & Saatchi, 814 perhaps waiting to take over a clearing bank! When I travelled back on the train from Brussels today, I heard a speech that was absolutely identical to the fictitious one that he thought was being invented. It came from Americans, who were complaining about the national susceptibilities in Europe of dividing up the single market. However, as my noble friend said, the issue of the single currency continues to produce a big divide in British politics. The debate will continue. But I am pleased that on this subject today we have achieved much consensus. Therefore, I beg leave to withdraw the Motion standing in my name.
Motion for Papers, by leave, withdrawn.