HC Deb 07 June 2000 vol 351 cc100-7WH

1 pm

Mr. William Cash (Stone)

The proposed merger of the London stock exchange and the Deutsche Börse raises important concerns about the regulatory and competitive environment of the City of London as a whole, and of United Kingdom public companies in particular. These concerns are, or should be, vital to the Government both as a matter of national interest and, as I shall show, as a matter pertaining to the Government's obligations to the City under the terms of a memorandum of understanding signed in 1997.

The issue should have been debated in the House on a Government motion. However, the Government ran away until they were forced here today. These concerns, which it is my purpose to raise, arise in large measure from the vagaries of the merger terms on offer. First, the London exchange, Europe's premier financial centre, which until now has drawn inward investment from the foremost financial institutions in the world, is under the deal valued the same as an exchange which, in terms of assets managed, is seven times its junior.

Secondly, the loss of London's position as Europe's financial capital would have a negative effect on the City's competitiveness in general, sparking an outflow of financial institutions such as market analysts, investment banks and advisory firms. Thirdly, under the deal, the UK's blue-chip firms will in Frankfurt be subject to financial regulation that is gravely inferior to that which they Presently enjoy under the Financial Services Authority—regulation that in London is underwritten by the memorandum of understanding to which I have referred.

Fourthly, competition between the London and Frankfurt exchanges will be skewed by the presence, at 0.5 per cent., of stamp duty on share dealing in the former. Fifthly, the interests of the Frankfurt exchange are likely to supersede those of London given that its 50 per cent. shareholding in the new entity will be held en bloc, whereas London's 50 per cent. will be divided between its 298 shareholding companies into individual holdings of just 0.17 per cent. each.

These broad concerns are compounded by a host of questions left unanswered from the debate in the House of Lords on 24 May and under the merger terms, including the location and funding of a central counterparty for the new exchange. The matters raised in the House of Lords require answer, and they were not answered by the noble Lord who responded for the Government on that occasion. They must be answered; if they are not answered today, they must be answered soon.

I recognise that modern global companies require immense liquidity in the exchanges on which they list. Companies listing in New York already have access to such liquidity, and I see no reason why European companies should not be put on an equivalent footing. The fact that Europe's share market is overly fragmented does not speak to the question, on whose terms should it be consolidated. As I put it in my letter to The Daily Telegraph of 5 May—I pay tribute to that newspaper for its tenacious investigation of this matter—the question is, who is to call the shots? At first glance, the answer to the question is overwhelmingly self-evident—it should be London.

The London stock exchange manages 700 per cent. more assets than Frankfurt, its closest rival in Europe, and transacts 100 per cent. more by volume. There are more German banks headquartered in London than there are in Frankfurt and Berlin combined. The City's regulator, the Financial Services Authority, is world renowned for its probity, in contrast to its opaque equivalent in Frankfurt. Indeed, so attractive is the City that the American technology exchange, NASDAQ, chose recently to locate its European operations in London in preference to Frankfurt.

Despite all of these advantages, the London stock exchange is embarked upon a 50:50 merger with the Deutsche Börse in Frankfurt, causing the NASDAQ to reverse its decision to set up in London. Even this so-called merger of equals is far from equitable. It is nothing of the kind. It has all the hallmarks of a politically motivated reverse takeover. What Don Cruickshank, the merged entity's proposed chairman, describes as a 50:50 merger is in fact, owing to the distribution of shares, a 50:0.17 merger. Under the deal, the Deutsche Worse will hold its 50 per cent. of shares en bloc, but the London stock exchange holding will be split evenly between its 298 shareholding firms. It does not take a genius—I am sure that that includes the Minister—to work out that it will take only one London shareholder to vote with the Deutsche Börse, and Frankfurt will carry the day.

We are told by Gavin Casey that that is a temporary anomaly and that Frankfurt's holding will eventually be broken up. However, what assurances do we have? I urge the London stock exchange urgently to provide clarification on that point. A second and no less important defect of the proposed merger concerns shoddy financial oversight in Frankfurt. It is common knowledge that traders there conduct huge block trades in secret and that the company listing rules are complicated, to put it mildly. Even one of the supposed advantages of Frankfurt, its Xetra trading system, has broken down on more occasions than its London equivalent, SETS.

We are told that, under the merger, all high-tech or "new economy" stocks will be traded in Frankfurt, London being left with the blue-chip or "old economy" stock. Yet Mr. Cruickshank and his friends have so far failed even to address the thorny issue of how exactly a high-tech or blue-chip firm will be defined. Many companies defy or straddle such classifications. Where are their shares to be traded? There is also the danger that if blue-chip firms relocate to Frankfurt, many of the advisory and investment banking firms which depend upon them will go there too.

Of further concern is where the central counterparty for the new exchange will be located and how it will be funded. Until recently, the London stock exchange planned to create such a counterparty in collaboration with the London clearing house, yet we have heard nothing from Mr. Cruickshank on where the counterparty for the new exchange might be located. On this issue, too, we must have clarification.

In sum, while the merger is presented as one of equals, its terms are clearly quite advantageous to the smaller Frankfurt exchange. Heaven alone knows what it thinks it is playing at. Little wonder that last month Werner Seifert, the proposed chief executive of the new entity, wrote that whilst London is still centre stage, Frankfurt is waiting in the wings, ready to take a lead role. Yet there is still hope for those who are opposed to the terms of the merger, for there is an obligation for intervention by the Government despite denials to the contrary. A memorandum of understanding between the Bank of England, the Treasury and the FSA, which was agreed in 1997, made it crystal clear that the Treasury has departmental responsibility in relation to exchanges and in maintaining confidence in the UK financial system. The memorandum states that the Treasury is responsible for the overall institutional structure of regulation, and the legislation which governs it. There are a variety of circumstances where the FSA and the Bank will need to alert the Treasury about possible problems: for example, where a serious problem arises, which could cause wider economic disruption; where there is or could be a need for a support operation; where diplomatic or foreign relations problems might arise; where a problem suggests the need for a change in the law; or where a case is likely to lead to questions to Ministers in Parliament. This list is not exhaustive, and there will be other relevant situations. The proposed merger of the London and Frankfurt exchanges qualifies under almost all of the terms specified in the memorandum. For example, is not hitching our stock exchange, and so our country, to the crisis-prone euro a problem which could cause wider economic disruption …? Would not the merged exchange push for common European oversight and so suggest the need for a change in the law …? What about the situation that is likely to lead to questions to Ministers in Parliament …? In fact, it did.

I tabled a question, which was answered on 11 May by the Economic Secretary to the Treasury. My having tabled a question to the Chancellor of the Exchequer requesting him to indicate what representations had been received, and asking him to make a statement on the matter, in a manner that can be described only as contemptuous of Parliament and of the obligations set out in the memorandum of understanding, he declined to make a statement. He left it to a junior Minister to reply, and the response was as follows. I was told that there had been no representations. The answer continued: The terms of the proposed merger are a matter for the parties involved, subject to their securing the necessary approval of the relevant regulatory and competition authorities.—[Official Report, 11 May 2000; Vol. 349, c. 476W.] That answer is simply outrageous. It is absurd that there have been no representations on the proposed merger. Further, according to the 1997 memorandum of understanding, it is manifestly not just a matter "for the parties involved"; the memorandum makes that clear. The Minister simply cannot get out of it.

I point out merely that Europe's pre-eminent stock exchange can secure better terms than those currently on offer. Olof Stenhammar, chairman of the Swedish stock exchange, summed up the poor terms on offer to London when he expressed surprise that London was accepting a merger of equals. He went on to describe the deal, accurately, as having a top-down approach with bureaucratic and political undertones, favouring institutions at the expense of retail investors. The whole issue is a disgrace.

As if the criticisms identified by Mr. Stenhammar were not enough, the authorities in Frankfurt have made it clear that they will seek to extract even better terms for the Deutsche Börse, possibly preventing the new entity from being headquartered solely in London. Any such development, likely as it is, must be resisted at all costs. Indeed, the entire deal should be rejected.

I ask the Minister whether the Chancellor of the Exchequer or any other Cabinet Minister will make a statement on the whole matter to the House of Commons and thereby provide the proper, correct, constitutional and urgent clarification that is needed on the important points that I have raised. It is an outrage that he has not come to the House, or indeed to Westminster Hall today. I call on the City to see sense, to realise its own worth and to vote to reject the deal.

Mr. Deputy Speaker (Mr. Nicholas Winterton)

The hon. Member for Arundel and South Downs (Mr. Flight) has the permission of the initiator of the debate to participate and has notified both me and the Minister.

1.12 pm
Mr. Howard Flight (Arundel and South Downs)

I congratulate my hon. Friend the Member for Stone (Mr. Cash) on securing a debate on an important subject. Subject to the regulatory permissions and whatever Government involvement is required, the stock exchange is a private entity now. It is up to its members to do what they want, but it is becoming increasingly apparent that an unsatisfactory deal is being proposed, which will be voted down by the members in September, with opposition from large and small members.

The Opposition are not against the concept of a pan-European stock exchange, but against the terms of the proposed deal, which seem to smack of a lack of confidence and, indeed, of long-term strategy among the management of the London stock exchange. As my hon. Friend pointed out, London is overwhelmingly the biggest market in terms of companies quoted, turnover and value. It handled some 50 per cent. of international share trading, against the 5 per cent. handled in Germany.

What seems to have happened is that the strength of character of Mr. Seifert has dominated. When mergers occur, they inevitably lead to one party taking over. It is clear that a merger on those terms will lead to a market dominated by his leadership in Frankfurt.

What is wrong with the deal? It does not cut costs. What is crucially needed is a United States-style net settlement system. At present, transaction costs are nearly 10 times as much here and in Frankfurt as they are in the United States. It will create six markets. In addition to blue chip in London, NASDAQ International in Frankfurt and AIM, or the alternative investment markets, there will be a Midcap-middle-sized capital stocks—in London, a Midcap in Frankfurt and German growth stocks on the Neuer market.

Two regulatory authorities will continue. Companies will be subject to the opaque German trading rules and, indeed, to a stock market that is controlled by two or three banks in an oligopolistic situation in Germany. A crucial point is that London has the machinery for multi-currency settlement in the CREST arrangements, which Frankfurt does not. That will be crucial for any pan-European stock exchange.

It is clearly unwise for London to surrender to Frankfurt the stocks of the future—the growth stocks. Excellent though the blue chips may be today, they are inevitably "old economy"—companies that will decline in future. Therefore, to do that is to sell out on the future.

There is no evidence that Xetra is any better than the combination of CREST and SETS. The change would cost UK brokers a fortune, raising the issue of who will pay for it. The Fund Managers Association has made it clear that it is a poor deal. It provides no cost reductions and worsens the regulatory situation. It is, if anything, less efficient than the present arrangements. A far better deal can be done It is time that the London stock exchange started to talk to NASDAQ directly. We thought that the Chancellor had arranged that for the exchange.

1.15 pm
The Economic Secretary to the Treasury (Miss Melanie Johnson)

I was pleased to hear that the hon. Member for Stone (Mr. Cash) has lost none of his knack of putting his view in a controversial manner. We have had a very good example of that today on an important subject. The proposed merger between the London stock exchange and the Deutsche Börse is clearly an important subject, which has understandably attracted considerable comment since it was announced on 3 May.

The London stock exchange is by any standards a major financial institution and one of the world's leading equity exchanges, as the hon. Gentleman remarked. However, the environment in which the LSE operates is undergoing a period of dramatic change. Technological developments such as electronic trading systems mean that it is—or soon will be—possible to have access to an exchange from virtually anywhere in the world. Allied to the general process of internationalisation of financial services, the result is the breaking down of barriers between national markets.

In Europe there are increasing customer-driven pressures for integration of financial markets. Institutional investors are increasingly looking at the European market in terms of industrial sectors rather than individual countries.

Against that background, it is hardly surprising that there is pressure from market users for consolidation of the exchanges within Europe, and the attractions of creating a single trading platform for European stocks are obvious. In response, the exchanges are coming forward with initiatives for mergers and alliances. The French, Dutch and Belgian exchanges are merging to form the Euronext exchange. Various Scandinavian exchanges are combining. Tradepoint, the UK electronic equities exchange, is in discussion with the Swiss stock exchange. Against that background, it is hardly surprising that the LSE should be pursuing its own merger initiative.

There are good reasons for mergers. Investors and companies both benefit from the creation of broader and deeper equity markets. Companies are able to offer their securities to a much greater number of potential investors. Investors have the opportunity to invest in a much wider range of equities. All sides should benefit from the lower trading costs that result.

I should make clear, however, that the terms of the deal to create iX—the international exchange—are a commercial matter for the parties involved, subject, of course, to their obtaining the necessary clearances from the relevant regulatory and competition authorities. The hon. Member for Arundel and South Downs (Mr. Flight) recognised that point. The Government were not a party to the negotiations.

Mr. Cash

Will the Minister concede—perhaps she is coming to it—that there is an important matter that she is leaving out, namely the memorandum of understanding. It lays down the ground rules and deals with exchanges—I have already made the point. I hope that she will refer to it because it is crucial to recognising the Government's obligations.

Miss Johnson

It is a matter of how the hon. Gentleman has interpreted the MOU. I understand that a merger is not a threat to financial stability. It would be in those terms that there might be some case for pursuing the provisions under the MOU. I make it plain that the Government were not a party to the negotiations.

On the competition aspects of the merger, the merger is below the asset and turnover thresholds that would make it a matter for the Commission. It therefore falls to the national authorities to consider. In the UK, if the proposals for the merger proceed, the Secretary of State for Trade and Industry will make his decision on whether to refer the case to the Competition Commission in the light of the advice of the Director General of Fair Trading. It is obviously not for me to comment on a particular case.

On the regulatory issues, which are of considerable interest to hon. Members, the Government made it clear in another place during consideration of amendments to the Financial Services and Markets Bill, which some of us find it difficult to leave behind us—the hon. Member for Arundel and South Downs laughs—we have no doubt that the provisions of the Bill relating to the recognition of exchanges are adequate to deal with structures such as the proposed iX. Although iX will have operations in both the UK and Germany, its component markets will need to be based in one or other of the countries for regulatory purposes. The markets based in London will fall to the Financial Services Authority to oversee, and those in Germany to the German authorities.

Both the FSA and its German counterparts will need to be satisfied about the regulatory arrangements if the merger is to proceed. They are already working together and considering the practical implications of the proposed merger. Indeed, Howard Davies visited the BA We last week for discussions with his German opposite number.

Much of the detail of the proposed merger is still to be worked out by the exchanges, and therefore the regulatory authorities cannot at this stage say precisely what the regulatory arrangements will be. However, it is worth noting that the merger is not without precedent in terms of its implications for regulation. For example, there is already an instance of two separate exchanges with a single owner operating in two countries. The OM Group owns the OM Stockholm exchange, which is regulated by the Swedish regulator. Another subsidiary is OM London exchange, a UK recognised investment exchange regulated by the FSA.

Mr. Cash

Does the Minister recognise that legislation was required with respect to Lloyd's of London, for example? That was a highly contentious matter and has been referred to in subsequent public legislation. The reasons are those that I gave in relation to the memorandum of understanding. These are issues of seminal importance to the future of the City of London. Lloyd's of London was a good example. I ought to declare an interest, as I was involved in advising on the matter as a lawyer, before I entered Parliament. When one is dealing with the centre of gravity in stock exchanges, that must be dealt with properly, not through private deals, as is the case at present.

Miss Johnson

I do not accept the hon. Gentleman's suggestion.

The FSA and its Swedish counterpart have their separate roles in the case that I was describing, and the arrangements work satisfactorily. There is a clear parallel between that and the present case.

As regards iX, the pan-European blue-chip market is expected to be run as part of a recognised investment exchange in the UK, and will therefore be regulated by the FSA. The FSA will also continue to supervise the London market for UK smaller and medium-sized companies and AIM. The derivatives market and the pan-European market for growth companies will be run from Germany and will be regulated by the German financial services authorities.

Details of the listing and admission to trading standards for the iX markets have not yet been announced. However, the stock exchange has made it clear that companies will not be required to give up their home market listings in order to be admitted to trading on the new iX pan-European markets. German companies listed in Germany will be traded on iX's pan-European markets, along with UK listed companies. This will not be a unique situation. Tradepoint intends to introduce pan-European trading in the near future and a similar situation will pertain there. To date, Tradepoint's plans have not given rise to any insurmountable problems for the FSA.

The fact that the shares of UK and German companies will be traded on the same market does not necessarily mean that investors will automatically assume that the same listing regime applies. It is already the case that foreign companies that are traded on the London stock exchange are not required to comply with all the provisions of the UK listing rules.

The iX will consider what standards it wishes to impose on companies trading on its markets—for example, in terms of disclosure requirements—in addition to those required by the company's domestic listing authority. iX will be a commercial operation and will obviously have to take into account the wishes of its users, and the companies quoted on the exchange will need to consider the standards that investors expect.

The arrangements for companies transferring between the various components of iX have yet to be settled, but I understand that the intention is that to be included in the new blue-chip index, a company would need to be traded on the London blue-chip exchange.

With regard to company law requirements, UK-registered companies must follow the requirements of UK company law, regardless of where they are quoted and traded. Again, it is worth noting that the customers of exchanges take the standards of regulation into account when deciding where to do business. Companies will therefore have to take account of what the market wants, as well as the legal requirements to which they are subject. That has been one of the attractions of being based in London, as the hon. Member for Stone accepted.

The merger has raised other issues, including the issue of trading in different currencies, as we heard. The stock exchange has clarified its position on that in evidence to the Select Committee on the Treasury on 17 May, and elsewhere. The stock exchange's press release on the same day stated: The new exchange will need to offer trading in a company's shares in the currency which best meets the needs of investors and other users of the market. In the event that the primary currency of trading was not sterling for a UK company, the Exchange would ensure that sterling prices were still available for private investors, newspapers, indices etc. As for the implications for the UK's entry into the euro, the Government's position is unchanged. It remains as set out by the Chancellor of the Exchequer in October 1997—a statement with which I am sure the hon. Member for Stone is familiar. The determining factor underpinning any Government decision on economic and monetary union is whether the economic case for the UK to join is clear and unambiguous.

In conclusion, a number of questions raised by the merger proposals cannot be answered definitively at this stage. The London stock exchange will issue its information memorandum in July, which will set out in detail the terms of the merger. As the hon. Member for Arundel and South Downs commented, it will then be for members of the exchanges to judge the merits of the proposed merger, and for the regulatory authorities to satisfy themselves about the arrangements for the merger.

Mr. Cash

May I make a brief reply?

Mr. Deputy Speaker

Unfortunately, the hon. Gentleman has had his say and made his interventions, the Minister has replied, and the debate comes to an end. We move on to the next subject a few minutes early.