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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.