London Stock Exchange
(7 years, 2 months ago)
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Sir William Cash (Stone) (Con)
I beg to move,
That this House has considered the future of the London Stock Exchange.
It is a pleasure to serve under you, Mr Hollobone. I have brought this matter for debate because the proposed merger between Deutsche Börse and the London Stock Exchange raises issues of national interest and, in my opinion, it is a slam dunk that the merger is not in the national interest.
The London Stock Exchange Group owns several key market components in the United Kingdom, including the London Stock Exchange itself, a recognised investment exchange regulated by the Financial Conduct Authority and the London Clearing House, which is supervised by the Bank of England. A number of subsidiaries of the group are also regulated by the Financial Conduct Authority. The proposed merger requires regulatory approval by the Bank of England and the Financial Conduct Authority. The most significant approvals are those required, first, from the Bank of England in connection with the London Clearing House, which I understand to be 57% owned by the London Stock Exchange, and which conducts euro clearing, and, secondly, from the Financial Conduct Authority with respect to the London Stock Exchange, which is fundamental to the City of London’s capital markets.
The London Clearing House is one of the two main clearing houses in the UK and clears all major currencies, including the euro. As I understand it, both the German and French Governments have indicated a wish to strip euro clearing out of the City. All of that has significant political involvement because it would facilitate in due course a substantial movement of UK market infrastructure to the continent and would permit Germany and France, in the context of Brexit negotiations, to achieve German and French objectives that will undermine the UK’s political leverage during those negotiations.
Her Majesty’s Treasury has certain powers to direct or make recommendations to the Bank of England or the Financial Conduct Authority to take action or not. The Prime Minister is First Lord of the Treasury, and the Chancellor of the Exchequer of course has fundamental responsibilities. The Treasury has powers of direction over the Bank of England under section 4 of the Bank of England Act 1946. It may give directions to the Bank following consultation with the Governor
“as…they think necessary in the public interest.”
The Treasury may direct the Bank to exercise its powers not to approve the acquisition of what is described as a “qualifying holding” in the London Clearing House.
It is not known whether the Bank of England has already given its approval, although the Treasury could direct such a decision to be reversed on the grounds of public interest. The powers include determining that the proposed deal is not a normal commercial deal in the light of the Brexit negotiations and to take account of the involvement of the state of Hesse, which has shown a desire to boost Frankfurt as a hub at the expense of London, which is indicated in the report of Professor Dirk Schiereck, commissioned by Deutsche Börse in January 2017. In the past few days a Minister in Hesse indicated that the headquarters of the merged group should be in Germany:
“The reasons for the headquarters being in Frankfurt are crystal clear.”
The objective could not be clearer. It is inconceivable, in the UK national interest, that the London Stock Exchange should be regulated in and operated out of Germany as we leave, and having left, the European Union. There are also questions, as yet unresolved, surrounding the new chief executive officer, who is under investigation for potential insider dealing in connection with the London Stock Exchange deal, and the regulatory relationship between the United Kingdom and the EU which forms part of the Brexit negotiations. It would not be in the public interest for the combination of the two groups to be achieved immediately in advance of those negotiations, since that would give commercial parties operating at the behest of German political masters the ability to remove the rug from underneath the UK’s feet without regard to the negotiated outcome, or to threaten to do so during the negotiations unless the UK made certain concessions.
If the deal goes through, the combined group will be able to bulk up euro clearing and exchange and business clearing generally in Frankfurt at the expense of London. Given the declared political objective to promote Frankfurt, Paris and the eurozone, that is not an outcome in the UK’s national interest.
George Kerevan (East Lothian) (SNP)
The hon. Gentleman is, as ever, making a logical and compelling case, but is he suggesting to the House that the owners and management of the London Stock Exchange are willingly entering into a merger that will lead to the transfer of all of their business to another country?
Sir William Cash
There is severe detriment to our national interest in allowing a merger of that kind when the London Stock Exchange and its group are the jewel in the crown of the City of London. Any merger raises matters of national interest such as, first, financial stability and UK taxpayer liability. The merger would create a new financial market infrastructure group controlling, inter alia, about 90% of European-listed and over-the-counter derivatives transactions, but operated for the benefit of shareholders, not users, with an unprecedented complexity of risk profile and significant uncertainty as to whether the UK taxpayer would pick up the bill were part of the combined infrastructure to fail. The uncertainty created by the lack right now of a clear Brexit deal adds considerably to the stability and taxpayer risks.
Secondly, there is loss of control of a key UK asset post-Brexit. The London Stock Exchange is a major centre of global financial markets: more than 500 foreign companies are listed in London, which is 20% of global foreign listings; and it has the highest equity market capitalisation, 170%, in relation to the GDP of all the largest economies. Majority control of that vital business will pass to Deutsche Börse shareholders, who will own 54% of the new group post-merger. Passing control of the London Stock Exchange to Deutsche Börse in the context of Brexit is not in the national interest and might undermine our negotiations with the 27 member states as we leave the EU.
The issue is not where the headquarters of the new company is located technically. I am told that formally moving the HQ to Germany, as the state of Hesse has insisted, is not likely given the need for a significant shareholder vote, but that is beside the point. The real issue is who calls the shots and in whose interests critical decisions are made. It is no answer to say that the HQ will remain in the UK if the reality is that the people really in charge are flying in for the day from Germany. Decisions must be taken in the UK and in the interests of the UK.
My third point is about competition concerns. The only substantial remedy offered by the parties to the EU Commission to allay concerns about significantly impeding effective competition is the sale of the central counterparty, Clearnet SA, based in Paris, and part of the LSEG. No disposals have been offered by Deutsche Börse, which owns trading platforms, central counterparties and settlement systems that have been integrated into a single vertical silo in Frankfurt. That is not sufficient, and I am concerned that the outcome of the European Commission’s review of the proposed merger will be determined by the EU’s political priority to ensure that Germany has control over London’s capital market infrastructure, instead of by genuine market concentration and anti-trust concerns.
Fourthly, there has been a lack of public scrutiny and industry comment; there has been little proactive support for, or indeed criticism of, the merger from the main UK financial institutions. That is not surprising, since the parties have given 12 major investment banks a role in the deal and they are destined to share about £353 million in fees if the deal succeeds. There has also been little comment by the UK Government so far on a deal concerning a major UK asset, although they still have a public interest role to play under the Enterprise Act 2002. We need to know why it was, and who decided not to refer the merger when it first came before the Secretary of State. Vast profits and sums of money are involved, and some stand to gain financially on a grand scale. All of that can be ascertained, but the national interest must prevail.
Precious little has been put into the public domain to suggest that the deal is remotely in the public interest. On what possible basis can it be argued, in particular post-23 June and the passage through the House of Commons of the European Union (Notification of Withdrawal) Bill, that the merger is in the national interest? Furthermore, under section 1JA of the Financial Services and Markets Act 2000, the Treasury
“may at any time by notice in writing to the FCA make recommendations to the FCA about aspects of the economic policy of…Government”,
including how to ensure compatibility with the FCA’s “strategic objective”, to ensure that the London Stock Exchange functions well, and how to advance the FCA’s objective to ensure the soundness, stability and resilience of the UK’s financial system, which is defined as including the London Stock Exchange and the London Clearing House.
James Duddridge (Rochford and Southend East) (Con)
Has my hon. Friend thought about what would happen, were the merger to go ahead, if the eurozone collapsed, given some of its fundamental difficulties? Having extricated ourselves from involvement in the euro and, on Brexit, from the European Union, would the merger not lock in some of the potential downsides to the UK equity and capital markets without gaining us any of the upsides?
Sir William Cash
As I have said, the withdrawal Bill is quite clear. We will leave. That means that we will be insulated from the catastrophe that could occur if the eurozone collapsed. I could enlarge that point, but I will not for the time being.
There is another statutory requirement to ensure the principle of the desirability of sustainable growth in the UK’s economy in the medium or long term. Those are all statutory functions, and I strongly suggest that Her Majesty’s Treasury should decide—in fact, I urge it to—that it is not in the UK’s interests to allow a deal where there is a clear intention to take action that would cause systemic risks in the UK and be detrimental to UK tax revenues.
I move to the powers of the Bank of England, which is under a judicially reviewable statutory duty in respect of the test of approval for any acquisition of the London Clearing House. Under the European market infrastructure regulation, the test for approval in general terms for the purpose of ensuring the sound and prudent management of the London Clearing House raises questions of the suitability of the proposed acquirer and the soundness of the proposed acquisition, including the person who will direct the business of the London Clearing House. It also includes questions relating to whether the Bank of England would be able effectively to supervise, and several other factors. All those are in question in this instance.
I turn to the powers of the Financial Conduct Authority, which is required to approve the acquisition of the London Stock Exchange because it involves the acquisition of the “control” over the LSE by the new holding company. In those circumstances, the FCA has to consider the suitability of the new group holding company and the financial soundness of the acquisition to ensure sound and prudent management, and have regard to the key influence that the new group holding company will have on the London Stock Exchange. There are grave concerns about all those matters that pose a threat to the sound and prudent management of the London Stock Exchange, including questions relating to moving euro clearing out of London. The removal of euro clearing to Germany would undermine UK economic growth, because it may lead to the movement of other currency clearing out of the UK and undermine the City’s success. Moving the new holding company to Frankfurt would also be against the UK national interest.
George Kerevan
I grant that there is an issue about the removal of all or a substantial amount of euro clearing to the European Union jurisdiction, but that may come anyway as a result of Brexit; it is not dependent on whether this merger takes place. Indeed, one could argue that the merger might act as a barrier to such a move.
Sir William Cash
I was against the merger before Brexit, and I have become even more so since. I emphatically repeat my view that it is against the national interest, and I will not in any way resile from that point.
This deal would operate against the UK’s national interest in several ways. For example, the driver behind the merger is to consolidate as much market activity across the whole value chain into as few liquidity pools as possible. The reason given for that is to allow customers—primarily the world’s largest banks—to manage their capital and collateralisation requirements as efficiently as possible, particularly in the illiquid and untransparent world of OTC interest rate swaps. The most efficient way of achieving that is to have one dominant silo. This merger would bring together the two pre-eminent trading and post-trade silos in Europe, the London Stock Exchange and Clearing House and Eurex, which is owned by Deutsche Börse. One of those silos would inevitably prosper disproportionately, at the strategic and economic expense of the other. Given that a German chief executive officer would immediately be in place—whether that is the presently proposed CEO or not—and more than 54% of the shares would be owned by Deutsche Börse shareholders, and given the strength of Eurex’s existing listed derivatives clearing house, there is a very meaningful risk that the London Stock Exchange and the London Clearing House, and therefore the City as a whole, would be at the thin end of the wedge.
In the real world of markets, this works as follows. There will be no big announcements, no formal closures and no notice of intention to leave. Rather, liquidity will be shifted from one place to another through the creation of incentives and tipping points. Mirror contracts will be created that mimic what is on offer in London. Special arrangements for collateral and cross-margining in the favoured venue will be put in place. Without anyone particularly noticing, liquidity will shift away from London to the continent. Once that siphoning of liquidity begins, it will be unstoppable, and without liquidity there is no market.
Prior to Brexit, when this deal was first negotiated, that was a very attractive outcome for the LSE’s German partner. Post Brexit, control of the combined group and the shift of London’s business to Europe is an absolute necessity for Deutsche Börse and its national stakeholders. The importance of that is shown by the ever louder calls from German politicians and regulators for the combined group to be headquartered in Frankfurt. Controlling the LSE’s direction is key to Frankfurt successfully becoming the new financial centre of Europe—clearly at London’s expense. Even if the headquarters are maintained in the UK, there will be a German CEO, a majority of shares will be held by Deutsche Börse shareholders and there will be a massive political push from Frankfurt, which will lead to decisions being taken behind closed doors, against the UK’s interests.
The exchanges themselves have suggested that that loss of liquidity from London will not happen, and the solution is a so-called liquidity bridge. No market participant—apparently even the companies themselves—seems to understand what is meant by that or how it would be delivered. No reliance should be placed on it.
Finally, the acquisition of LCH.Clearnet SA by Euronext, which is largely French and Dutch-controlled and headquartered in Paris, is another political wildcard. That would enable France to exert much greater political force behind its push for euro clearing to relocate to Paris, again potentially creating systemic risk and dangerous uncertainty in the UK’s markets.
This transaction has the clear potential to strip a key activity out of the City of London. It should certainly not be nodded through in the midst of Brexit negotiations. Why weaken the City before we have even started the process of exiting the EU? I have mentioned the Enterprise Act 2002, which I understand can still be used in the public interest, including by reference to the criterion of UK financial stability.
In an important article published in the Financial Times on 13 February, Jonathan Ford makes it clear that the €29 billion merger was, as we know, conceived before the Brexit vote. The deal was supposed to take advantage of a converging EU rule book in the single market by drawing together Europe’s two most vibrant securities markets and their clearing activities, which are the financial plumbing of the system. The aim was to create
“a single…‘pool of liquidity’”
that captured scale economies, in competition with the Chicago Mercantile Exchange.
Jonathan Ford argues that to make their own common pool a reality, Deutsche Börse and the London Stock Exchange would have to be very ambitious. He doubts whether that is feasible. He indicates that there is a serious problem, namely, that
“clearing operations have a wider impact on the functioning of capital markets; not just the management of systemic risk but on the very competitiveness of financial centres.”
He states:
“Given the importance of finance to the post-Brexit economy,”
the United Kingdom has a “strong interest” in ensuring that the deal is not damaging to London as a financial centre. He argues that the Bank of England and the FCA still have vetoes, and the Government can
“determine the outcome in the wider public interest.”
He suggests that the Government would be wise to intervene to prevent the loss of future business, and indicates that it would be better to take account of the Brexit negotiations as they proceed.
The UK has long been in favour of foreign direct investment, which increases productive capacity through capital investment, transfers of technology, skills and better management. Deutsche Börse’s acquisition of LSE is not FDI. It is not cross-border investment in the UK by residents and businesses from another country with the aim of establishing a lasting investment in the UK. FDI does not cover the asset stripping and systemic risks associated with the proposed merger. Foreign investment in UK infrastructure, including in the LSE, is welcome—the LSE of course already has many foreign shareholders—but this merger must not be allowed to clamp down on competition, gut the UK’s financial infrastructure and cause significant and lasting damage to the UK. It is understood that the European Commission has already commenced proceedings and the London Stock Exchange and Deutsche Börse have received a limited statement of objections to the proposed deal.
In conclusion, I urge the Government, the Bank of England and the Financial Conduct Authority, and other regulatory authorities, including those in Germany and Brussels, to recognise that whatever the reasons may have been for the merger before 23 June 2016, the reasons since then for determining and resisting it are extremely strong and should be employed.
Several hon. Members rose—
Mr Philip Hollobone (in the Chair)
Order. The debate is due to finish at 5.30 pm. I need to call the Front-Bench Members no later than 5.07 pm. The recommended time limits for the Front-Bench speakers are: five minutes for the SNP; five minutes for Her Majesty’s official Opposition; and 10 minutes for the Minister. That allows two or three minutes for Sir William Cash to sum up at the end. Five Members wish to speak, so I am afraid there will have to be a three-minute limit. If there are too many interventions, somebody will not be able to speak.
Kirsty Blackman (Aberdeen North) (SNP)
It is a pleasure to serve under your chairmanship, Mr Hollobone. I thank the hon. Member for Stone (Sir William Cash) for bringing this debate before us. However, the context and tone in which it has been undertaken is a bit unfortunate. To me, it seems that this is not a political issue, but it is being made to feel like one.
To give some context, there have increasingly been mergers in stock exchanges. There were 18 stock exchanges internationally in 1999, but that had decreased to five by 2012—those numbers were given in a Library briefing paper.
James Duddridge
There are more stock exchanges than that in Africa, so that is wrong.
Kirsty Blackman
Those are the numbers that were given in a Library briefing paper, so I assumed they were correct.
There has been a move towards stock exchange mergers in recent years. Therefore, the merger is in the context of the London Stock Exchange Group looking to compete with bigger stock exchanges and needing to be a bigger stock exchange in order to do that.
I want to make it clear that the merger is not an anti-Britain move. As has been said, it was conceived a long time before the Brexit vote happened. It is not about trying to write Britain out, and the deal was not set up to try to move things to Frankfurt. In fact, as the hon. Member for Stone stated, the headquarters of the new organisation will be in London and—I do not think he mentioned this—the board will be 50:50 from the LSE and Deutsche Börse. There is therefore a lot of protection built in.
The London Stock Exchange Group has a good story to tell, and I want to talk about that briefly and about protections. The group has done a huge amount to support high-growth small and medium-sized enterprises through its ELITE and AIM programmes, both of which have been immensely successful. In fact, the group will come to Aberdeen next month to speak to companies about accessing finance.
I have asked the UK Government on a number of occasions for assistance for oil and gas companies in accessing finance and have felt like I was banging my head against a brick wall and not getting much of a response. However, the LSE Group has offered to come and talk to companies about ways in which they can access finance, which is hugely important. Those companies are not big enough to be involved in the stock exchange but the group is looking to grow them. It has also been successful in the horizontal model it uses for clearing. Again, protections are written in that will ensure that such things continue.
I have talked about the 50:50 board and the HQ in the UK. No one seriously thinks that Frankfurt will become the centre for European banking. That is just not the case. Anyone who has heard about the situation on the ground in Frankfurt knows that it does not have the infrastructure to support that. It is not going to happen. Companies will not move wholescale to Frankfurt. If I was a Frankfurt politician, I would want people to come and I would be making positive statements about that happening, but it is not going to happen. London will continue to be a big financial centre, and the link between the London Stock Exchange Group and Deutsche Börse will serve to bolster that rather than to weaken it.
Anne Marie Morris (Newton Abbot) (Con)
My hon. Friend the Member for Stone (Sir William Cash) put it incredibly well, so I will not trouble the House with the detail he put on paper so articulately. As he rightly said, the merger was conceived before the Brexit vote and circumstances have fundamentally changed. Our Prime Minister has said that we will be leaving the single market, and I suspect that we will leave the customs union. That very much puts into question whether in any event the deal remains commercially viable for the many of the reasons he identified. The pooling looks dubious to me, and the cost savings are certainly dubious. The biggest concern is that, post-Brexit, this is on the political agenda as opposed to the commercial agenda, which worries me.
I hear what the hon. Member for Aberdeen North (Kirsty Blackman) said about not being concerned about change of control. I do not agree with her sense of security. If the control of shareholders is with Deutsche Börse, they can change anything that is written into the agreement. I believe the chairman is to be a German, and he will have the casting vote.
The consequences are that we are putting at risk one of our most valuable assets. The headquarters of this wonderful institution could move to Frankfurt. The regulatory environment in which the stock exchange works could change. The eurozone could take on euro clearing. I do not agree with the hon. Lady that that is inevitable—it is still up for negotiation and I would like to clear euros here. Do we really want to take that risk where politics trumps economics, as in the EU project?
Whatever we think of the merger, this is not the right time. We will cause instability in the market if we carry on with it. My plea to the Minister, and indeed to the Prime Minister, to whom I have written, is that the decision should be delayed until 2019. We have the power to do that. As my hon. Friend indicated, the Bank of England can do it, the Chancellor of the Exchequer can do it, the FCA can do it and the Competition and Markets Authority can do it. The risks are huge. The competition authority in Europe has yet again moved the date for its decision, to 3 April. If it makes the decision, there will be unstoppable momentum behind the merger and we risk all the events that my hon. Friend identified becoming a reality. It will then be very difficult to stop.
I agree with my hon. Friend that FDI is a good thing, but this is not FDI. Why would we threaten our national economy? Why would we threaten our national security? The stock exchange, just like the NHS and BT, is one of our crown jewels. When we look at these commercial transactions, we must ensure that we make exceptions for things that are important to national wealth, national health and national infrastructure. The City supports that. I have now spoken to more than 50 individuals, and they will be named shortly.
Stephen Hammond (Wimbledon) (Con)
It is a pleasure to serve under your chairmanship, Mr Hollobone. I am glad: your stricture will cut down my 20 minutes of waffle to three minutes of pithiness. The London Stock Exchange is one of the world’s largest diversified international market infrastructure and capital markets businesses. However—my hon. Friend the Member for Stone (Sir William Cash) made this key point—it is no longer a social institution. It is a public company like any other. Its existence and ability to trade depends on its range and quality of products. It is not a members’ club or a public body.
Since its inception as a public company, it has changed dramatically, not only in the last 12 years but in the 40 years since we joined the European Union. As we leave the European Union, we need to recognise how much it has changed. It has sought opportunities to expand, and it has brought great success to the City of London, extending the range of products and activities. One therefore needs to see the merger with Deutsche Börse as the latest in a long list of opportunities and expansions that the London Stock Exchange has taken part in.
I do not have time to rehearse or go through my hon. Friend’s concerns. He was right to make a number of them—there clearly are some concerns—but he failed to talk about any of the significant advantages. First, the merger would create a European market infrastructure company to challenge other comparable companies in the world. It is simply not right to say that the efficiency savings or cost savings would be minimal. There would be considerable efficiency savings that would reduce the trading costs for market participants and, inevitably, for end users—the pension funds we are all in—and it would reduce the costs for capital raising.
One of the great advantages of this potential merger is that the UK’s high-growth businesses—they are the backbone of this country and, as we are now all Brexiteers, they want to go out into the world and compete—need to be able to get the capital that is so critical for growth and job creation in the United Kingdom. Highly innovative, high-growth companies in the UK need that access to non-bank finance and, in particular, equity. They also need the ability to access debt and debt instruments, which is one of the major opportunities that the merger will provide to both UK-based regional powerhouses and internationally-competing UK companies. We should not underestimate that benefit.
Mrs Anne Main (St Albans) (Con)
It is a pleasure to serve under your chairmanship, Mr Hollobone. I thank my hon. Friend the Member for Stone (Sir William Cash) for bringing the debate, which is very timely. As has been pointed out, the merger has been on the horizon for some time, but Brexit has suddenly crept over the horizon and, I am sure, will fundamentally impact on the decision-making process.
Half of St Albans’s economically active population work in London, with many working in financial services. I believe Brexit presents the opportunity to recalibrate our financial services, but the merger has the potential to take away from our negotiating strategy. It is in the best interests of the EU to give London a good deal in the Brexit negotiations, but not if the stock exchange is relocated to Frankfurt, which could happen as a result of the merger. To not look at this in detail would be foolish.
As has been pointed out, 17 of the largest currencies in the world are cleared in London, including the euro. Goldman Sachs and J.P. Morgan have hailed the City as
“one of the most attractive places in the world to do business”,
citing its “stable legal systems” and
“deep, liquid capital markets unmatched anywhere else in Europe”.
Doing anything that somehow puts a drag anchor on that liquidity is going to be a problem for the future. The merger should not proceed in such a febrile and shifting period as a result of our Brexit negotiations.
Does the Minister agree that it is in the best interests of the European Union’s internal market to maximise its access to City financial services? I believe it is totemic that the stock exchange that is at the heart of those financial services actually stays in London. I do not agree with the Scottish National party Member, the hon. Member for Aberdeen North (Kirsty Blackman), that stock exchanges emerge hither and thither and it does not really matter where, and that a headquarters in one place is enough. I actually think it is of concern. If any other major business was potentially being taken out of this country, such as a car manufacturing business or any other manufacturing business, there would be significant concern. The fact that this is to do with financial services and the stock exchange does not make it any less of a concern.
We should put a stay on the merger, which could be perverse and jeopardise the positive situation in the City of London. As my hon. Friend the Member for Stone said, decisions must be taken in the UK, by the UK. Taking back control was fundamental to the drive for Brexit; ceding control at this particular stage, if that is at all possible, would be at odds with the drive in this country to keep control within the United Kingdom.
Richard Fuller (Bedford) (Con)
It is a pleasure to serve under your chairmanship, Mr Hollobone. I am grateful to one of my constituents for drawing my attention to this issue. I want to hear what the Minister has to say because, if we look at all of the recent mergers and acquisitions activity, whether between ARM Holdings and SoftBank, PSA and Vauxhall, Unilever and Kraft, or even Liberty House and Tata Steel, the Government are saying something. The Government have a view, so I think, as many hon. Members have said, it is appropriate to hear the Government’s updated view.
It is clear from other aspects of Government policy that there was no planning for post-Brexit circumstances for our country, so it is appropriate that they should have a new and fresh look at this. We need to know if our rules and regulations for competitive markets and a national interest test are suitable and up to what is needed in this new period of uncertainty in our economy. We have inherited those rules from the past, but should we rely on them as if we were part of the European Union and say they are fine and fit for purpose now, or is it appropriate for us to look at them anew?
It is also important to hear from the Government, because their crucial role at this time is to reduce uncertainty in our economy, so that people, companies and banks start investing in our country. It is fair to say that there is not a conspiracy—I do not think there is a conspiracy in the City—but when there are mergers and acquisitions involving a vast number of advisers, their interest will be focused on the deal and not necessarily on the impartiality of their advice to the Government. Without a clear review from the Government, there is a risk that the City will just let the merger through on the nod because so many people have vested interests.
Echoing my hon. Friend the Member for Stone, I would like to know the Government’s role in reducing uncertainty on three specific issues. First, he mentioned a significantly increased systemic risk for the Bank of England from linking the two clearing houses, therefore exposing the UK to systematic breakdown of the euro. What assessment have the Government made of the extent of that? Secondly, as has been mentioned, on exposing the stock exchange to political risk from political groups outside the UK, what is the Government’s policy for managing that increased political risk if the merger goes through?
Thirdly, the harmonisation of business models has been mentioned by both sides during the debate. That is a way forward, but it is not the only way forward. Do the Government view the City of London harmonising with the EU as a priority, or should it better be looking to independently frame arrangements with the world?
Mr Philip Hollobone (in the Chair)
The five-minute guideline limit for speeches will be displayed on the clocks to help the opposition spokesmen to keep the debate on time.
George Kerevan (East Lothian) (SNP)
It is a pleasure to serve under your chairmanship, Mr Hollobone. This is an important debate, and we have discovered that an hour is not enough. I hope we can take it into the main Chamber at some point because a lot of issues need to be cleared up.
The hon. Member for Stone (Sir William Cash) is correct: this is a national issue and we have to take the national interest into consideration. The track record of takeovers and mergers in recent years has actually proven that, more often than not, the national interest has not been well served. There are a number of instances, particularly in financial services at this crucial moment in time, where dangers have to be brought into the light. The takeover by MasterCard of VocaLink, our main payments system in the UK, is systemically dangerous. It is also a technology raid, because we have the best payments technology in the world—that is another issue.
We have to judge mergers on a case-by-case basis. I say with due respect to everyone—I am not trying to make a silly debating point—that, if there has been a move to politicise this particular merger, I am afraid it has come from those who supported Brexit. They are in danger of finding problems where there are none to be found. Why would the owners of the London Stock Exchange Group walk into a merger like this if it was so disastrous for their business, and if it was so patently obvious that they were going to be out-regulated and that their business will be shifted away to another part of the world? If we look at it from that perspective, it ensures a bit of common sense in the debate.
George Kerevan
I would dearly love to give way, but given the little amount of time I have, I will not. As things move on, I hope we will have the chance for further discussion.
Hon. Members might be interested to know who actually owns the two parties in the proposed merger. In fact, the bulk of the London Stock Exchange Group’s ownership is not British. It is the Qatar Investment Authority, it is BlackRock, which is a major American private equity group, and it is Invesco, which is headquartered in Bermuda—we can all ask why that is. It is not actually the jewel in the crown of the UK, as was mentioned. It is already an internationalised organisation.
If we were to ask who owns Deutsche Börse, the answer is that the majority is owned by City of London institutions. That underlines the fact that, while there are hundreds of small exchanges all over the world, particularly in Asia and Africa, the big exchanges are owned by global institutions, and they are about mobilising global amounts of capital. In particular, they are no longer simply about narrow trading in equity. They are fundamentally about finding the capital for exchanges in derivatives and interest rate swaps, which makes the whole global capital market work. For that, the capital needs to be pooled. That is why for the past 15 to 20 years, right across the globe, there has been a constant move to merge and in some way consolidate the large exchanges. As we know, it has not been easy for political and national interest reasons, but that is the way the market is going. I put it to Members that it is either this merger or another merger—a stand-alone London Stock Exchange Group is no longer tenable.
That brings me to the final point worth making. Aspects of the structure of the merger have to be discussed, particularly post-Brexit. For instance, it seems strange that it is 54% to Deutsche Börse and 46% to the London Stock Exchange, rather than 50:50. That should be discussed, but in the end, this or some other merger will go ahead. Let us look at the specific technical issues, but let us not politicise this issue, because it is the nature of the way these global markets are working.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It is always a pleasure to see you in the Chair, Mr Hollobone. I begin by congratulating the hon. Member for Stone (Sir William Cash) on securing this extremely important debate at a critical time for the London Stock Exchange and for the many financial services companies in Europe and beyond that depend on its continued successful functioning. The hon. Gentleman could reasonably be regarded as the Archbishop of Brexit, so when he says that something might not be in the national interest as a result of the Brexit process, I for one certainly take heed of that.
The London Stock Exchange is a great British institution, with a history dating back to 1698. In the intervening centuries, the LSE has evolved far beyond a simple trading platform. Its services are now exported around the world and a variety of markets benefit from those services, which include clearing, indexing and technology. As policy makers, it must be our priority to provide an environment in which that can continue. However, the LSE sits at the convergence of a number of challenges as the UK seeks its departure from the European Union. We need to pay careful attention to how those challenges can be managed, not only for the future success of the LSE but to ensure that potential damage to the rest of the financial services sector is mitigated.
The first and most sensitive of those challenges is undoubtedly the proposed merger of the LSE and Deutsche Börse. Given the standing of the LSE, it is unsurprising that it has been courted by numerous merger partners over the years. Mergers were under discussion between these two particular organisations as long ago as 2000. The LSE last rejected an offer from Deutsche Börse in 2005. Today’s proposed merger has shareholder approval from both sides. The only barriers that remain are regulatory approval and the go-ahead from the relevant European and UK competition authorities.
There are good reasons why this deal could be in the best interests of industry more widely and the consumer, notwithstanding the outcome of in-depth scrutiny by anti-trust authorities. In the years following the 2008 financial crisis, regulators have made significant progress towards tackling a fragmented post-trade environment and mitigating systemic risk. It is arguable that the economies of scale provided by this merger may help those efforts, while creating a significant global player, as the hon. Member for Wimbledon (Stephen Hammond) outlined.
Consolidation has been a notable trend in recent years among trading venues, driven by a number of factors, but ultimately larger single entities have the potential to reduce costs for their stakeholders. This particular merger could also improve capital flows across the European Union, in the intended spirit of the capital markets union. I worry a little bit, listening to Conservative Members, about the degree of protectionism that seems to be slipping into centre-right parties around the world at the moment. Those advantages are perhaps being underestimated.
It is undeniable that the UK’s decision to leave the European Union has significantly altered the terms of reference for the deal. In my view, it will be extremely challenging for the relevant regulatory and anti-trust bodies to deliver a final verdict on the proposals while the detail around the conditions of our exit from the European Union remain so vague. Notably, there seems to be some debate over whether the headquarters of the new entity would be in London, which was treated as a given prior to the vote on 23 June, or in Frankfurt, which has now entered the discussion given the UK’s signalled departure from the single market. Clearly there are strong arguments for both sides, but the conversation must take place in the context of ensuring a future for clearing activities in the City of London.
London is one of the world’s leading centres for clearing, providing essential market infrastructure to global financial services. The revenue and jobs that the industry supports must be recognised in the Brexit negotiations. LSE’s subsidiary, LCH.Clearnet, which is 57% owned by the LSE, cleared over 90% of the world’s over-the-counter derivatives last year, amounting to a figure in excess of $655 trillion. That is especially pertinent given the ongoing efforts by certain parties to relocate euro-denominated clearing to the continent. In 2015, LCH cleared €327 trillion across different euro-denominated products, according to evidence submitted to the Treasury Committee by the LSE earlier this year. The scale of that activity is so significant that it could support up to 232,000 jobs throughout the UK, which would be lost if euro-denominated clearing went as part of the Brexit process.
Although efforts have so far failed on the continent, given some strong practical arguments against re-domiciling those transactions, the relevant authorities must give careful consideration to potentially creating a bridge between Frankfurt and London that includes LCH.Clearnet, to mitigate the risk of that gaining traction.
The LSE is one of the vital cogs that has helped to build the UK’s successful financial services sector. It is critical that we ensure it can continue to function effectively post-Brexit. A full and in-depth assessment of the proposed merger must take place in that context.
Mr Philip Hollobone (in the Chair)
If the Minister would be kind enough to conclude his remarks no later than 5.27 pm, he would allow Sir William to sum up the debate.
The Economic Secretary to the Treasury (Simon Kirby)
Thank you, Mr Hollobone. It is a pleasure to serve under your chairmanship. I congratulate my hon. Friend the Member for Stone (Sir William Cash) on securing this important and topical debate. He has made many thoughtful and detailed points, and I will do my very best to answer them in the brief time I have. The hon. Member for Stalybridge and Hyde (Jonathan Reynolds) also raised some interesting points, which I will attempt to answer as I work my way through my speech; he should bear with me.
What is clear today is that we share the same interest: the continued success of an important, and some would say iconic, British company. The London Stock Exchange Group has a proud history that goes back more than 200 years. While the group is most famous today for its equities exchange, it is in fact a much wider business that includes, notably, one of the world’s major clearing houses.
I well recognise that the proposed merger with Deutsche Börse is a significant development. Let me start by recalling some of its key terms. The merged company will be controlled by a newly created parent company, headquartered here in London. At the outset, it will be owned 54.4% by shareholders of Deutsche Börse and 45.6% by LSE Group shareholders. The board of directors of the merged group—
Mr Philip Hollobone (in the Chair)
Order. I am sorry to interrupt the Minister, but a Division has been called in the House. If there is just one Division, we will return in 15 minutes. If there are two Divisions, we will resume in 25 minutes.
Mr Philip Hollobone (in the Chair)
We have 12 minutes left, of which the Minister can take up to nine.
Simon Kirby
It is a pleasure to be back under your chairmanship, Mr Hollobone. I was talking about the shareholding of the company. The board of directors of the merged group will be drawn from both sides of the group and chaired by the current LSE chair, Donald Brydon. The deal on the terms has now been approved by both sets of shareholders, but official scrutiny of the merger remains outstanding. Let me address that point in response to questions that my hon. Friend the Member for Stone asked about the roles of the FCA and the Bank of England.
The deal must be cleared by numerous regulators worldwide, including in Germany and the UK. In the UK, the Bank of England and the FCA have a statutory role in assessing and approving changes in the control of central counterparties and stock exchanges respectively. On CCPs, the Bank must be satisfied of the reputation and financial soundness of the acquirer, the reputation and experience of any person who will direct the CCP following acquisition, the CCP’s ongoing capacity to continue to comply with relevant regulations, and any money laundering or terrorist financing concerns. On exchanges, the FCA is empowered to intervene if it considers that the change of control would pose a threat to the sound and prudent management of the regulated market. Those assessments remain outstanding and the regulators are in ongoing discussions with the companies.
Of course, the merger is of such a size that it must face rigorous scrutiny from the European Commission on competition grounds. Its investigation is also ongoing and includes the engagement of the UK Competition and Markets Authority in a consultative capacity. It is due to reach its conclusion in early April. That is a complex and sensitive inquiry, which I will not attempt to prejudge.
My hon. Friend asked about the Government’s position. The Government do not have a formal role in scrutinising the merger, and it would not be appropriate for us to take a position either way on the deal, but we are following it closely and are in touch with the regulators.
Another area of concern that was raised pertains to the migration of businesses to Frankfurt if the merger goes ahead—particularly clearing businesses. The merger is subject to ongoing regulatory assessments. These are commercial matters, but for hon. Members’ benefit, let me read out what the LSE Group said on 16 January in relation to speculation about the merger. It stated that
“such action is not contemplated and any statements suggesting otherwise are inaccurate and misguided…LSEG and Deutsche Börse are committed to maintaining the strengths and capabilities of their respective operations in London and Frankfurt. Further, the existing regulatory framework of all regulated entities will remain unchanged and, in particular, there is no intention to move the locations of Eurex or Clearstream from Frankfurt, LCH from London and the US, Monte Titoli from Milan or CC&G from Rome following completion.”
That is what the company said, but let me emphasise that we are not complacent about the position of UK financial services companies, and we will continue to ensure that we support and enable their ongoing success.
On the implications of Brexit, we are in regular contact with not just the LSE but many financial services firms to understand the implications of Brexit for their varied areas of business and their priorities for the new trading relationship as we negotiate with the EU. Our aim is clear: to ensure the continued success of British financial services and the millions of jobs that they bring to people across the UK.
Moving on to specific points raised during the debate, I welcome the thoughtful contributions made by the hon. Member for Aberdeen North (Kirsty Blackman), my hon. Friend the Member for Wimbledon (Stephen Hammond) and the hon. Members for East Lothian (George Kerevan) and for Stalybridge and Hyde. I want particularly to answer my hon. Friend the Member for Newton Abbot (Anne Marie Morris), who asked whether the deal could be postponed. In the long term, this business, like so many others, will need to meet the challenges and opportunities of Brexit. I assure Members that the Government take our role seriously. We will continue to engage with the LSE and other firms across the financial services sector to ensure that we understand their plans and what they consider they need from the arrangements that we are negotiating with the EU.
My hon. Friend the Member for St Albans (Mrs Main) asked what was to stop TopCo moving to Germany. The deal has been voted on by shareholders in its current terms with the London headquarters. It is clearly part of a balanced structure designed to secure the approval of both sets of shareholders. Ultimately, the long-term location of the headquarters is a matter for the board and shareholders, in common with other companies, but importantly, it is worth noting that in this case, the articles of association of the combined company will contain a safeguard that the location of the company cannot change without the approval of 75% of the directors. Also, of course, under the Companies Act 2006, the removal of that safeguard from the articles of association could take place only with the agreement of 75% of the combined group’s shareholders. That is a significant point.
My hon. Friend the Member for Bedford (Richard Fuller) asked whether the companies would merge their central counterparties and whether that would create a systemic risk. The European market infrastructure regulation establishes a strict supervisory framework for CCPs, and in the UK they are regulated by the Bank of England. He was also keen to know more about the Government’s view on takeovers. I have said and will repeat that there is a formal and regular scrutiny system for takeovers of exchanges and CCPs, operated by the Bank and the Financial Conduct Authority. There is also a competition scrutiny process.
My hon. Friend the Member for Stone asked about TopCo moving to Germany. I reiterate my previous comments: the deal has been voted on by shareholders in its current terms with the London headquarters. There will be 50% of directors from each side, and the shareholders’ agreement provides additional and clear reassurance. He asked about the Treasury’s power to direct the Bank of England. It is true that the Bank of England Act 1946 includes that power, but the factors that the Bank can take into account are set at European level in EMIR, and the Bank would still be subject to those constraints in a scenario where the Treasury sought to exercise its power of direction. We can direct it only if we act lawfully, and we cannot direct it to act beyond the scope of its regulatory powers as set out in EMIR.
The Government take a close interest in the developments on the proposed merger and the assessments of the various regulatory bodies involved. Financial services represent an immensely important industry for the UK, and we have been clear that we will pursue a bold and ambitious free trade agreement involving the freest possible trade in goods and services, including in that sector. That is in not only our interests but those of member states across the EU. I thank hon. Members from throughout the House for being here today and sharing the commitment that we all have to the future success of the London Stock Exchange and the sector more broadly.
Sir William Cash
I am glad that the Government will consider the matter carefully, and that it is clear from this debate that everyone accepts the need to examine the issue rigorously, as so many have urged on me since I introduced the proposals. We look forward to that further examination, which may well be on the Floor of the House.
I do not have time to go into all the details of the essential questions now; I set them out in my speech. On the question of who calls the shots and the location of the headquarters, as I said, formally moving the headquarters to Germany would not be likely given the need for a significant shareholder vote, but that is beside the point. The real issue is who calls the shots and in whose interests critical decisions are made. It is no answer to say that the HQ will remain in the UK if the people who are really in charge just fly in from Germany for the day. Decisions must be taken in the UK, in the interests of the UK. I hope that the Government will take a proactive position on all of this.
I do not agree with the Minister’s assessment of the impact of the articles of association. I have been a lawyer for a long time, and I know that such things have an extraordinary capacity to disappear into the wind. I am not impressed by the 75% argument, whether it involves directors or the combined group. The key question is who calls the shots. The idea of 50% of the directors coming from each side is interesting, but basically it all comes down to the national interest.
With regard to the powers of the Treasury under section 4 of the 1946 Act, the European market infrastructure regulation is a European regulation. I inform the Minister, just in case he had not noticed, that we are leaving the European Union, which means that the European Court of Justice will no longer have a role in relation to the regulation. I do not say this cynically, but I strongly suggest that he goes back to his lawyers and assesses that point. The European Court of Justice will not have any jurisdiction over EMIR once the matter has been dealt with by our exiting the European Union, the repeal Bill and other measures. I thank you, Mr Hollobone, for your chairmanship of this debate.
Question put and agreed to.
Resolved,
That this House has considered the future of the London Stock Exchange.