London Stock Exchange

James Duddridge Excerpts

Tuesday 21st February 2017 Westminster Hall

[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.

--- Later in debate ---

[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.