First Standing Committee on Delegated Legislation



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The Committee consisted of the following Members:

Chairman: Mr. Patrick Thompson>

Aitken, Mr. Jonathan (South Thanet)

Carrington, Mr. Matthew (Fulham)

Couchman, Mr. James (Gillingham)

Duncan-Smith, Mr. Iain (Chingford)

Elletson, Mr. Harold (Blackpool, North)

Fox, Dr. Liam (Lord Commissioner to the Treasury)

Griffiths, Mr. Peter (Portsmouth, North)

Hamilton, Sir Archibald (Epsom and Ewell)

Janner, Mr. Greville (Leicester, West)

Knight, Mrs. Angela (Economic Secretary to the Treasury)

Prentice, Mr. Gordon (Pendle)

Primarolo, Ms Dawn (Bristol, South)

Purchase, Mr. Ken (Wolverhampton, North East)

Spring, Mr. Richard (Bury St. Edmunds)

Squire, Ms Rachel (Dunfermline, West)

Touhig, Mr. Don (Islwyn)

Walley, Ms Joan (Stoke-on-Trent)

Mr. M. Hennessy, Committee Clerk

3 First Standing Committee on Delegated Legislation Tuesday 12 December 1995


Draft Uncertificated Securities Regulations 1995

10.30 am

The Economic Secretary to the Treasury (Mrs. Angela Knight): I beg to move, That the Committee has considered the Draft Uncertificated Securities Regulations 1995. The regulations are necessary to allow a computerised securities settlement system to operate in the United Kingdom. Known as CREST, the electronic settlement system that is currently being built for the United Kingdom will match the best international standards. The City of London is one of three main financial centres in the world. It makes a substantial contribution to the economy and exports of this country. The equity market is an important part of the City, and the efficiency of the settlement system is an important part of the equity market. The present paper-based system needs replacing to improve efficiency and reduce risk. The stock exchange sought to introduce a replacement system called TAURUS—the transfer and automated registration of uncertificated stock—which was abandoned in March 1993. The Bank of England then coordinated the responses of the key City players, which led to the setting up of the securities settlement task force that decided on the new system, CREST. CREST will change the way in which title is transferred from one holder of securities to another. It will operate by receiving authenticated electronic instructions from members to transfer title to securities on a mutually agreed settlement day. It will check that the instructions from each counterparty match, that the seller has sufficient securities available and that the buyer has sufficient credit available within his credit limit. Settlement is currently five days after trading. On settlement day CREST will generate simultaneous instructions to the registrar to alter the register and to the settlement bank to make payment. There will be several different kinds of participants in CREST, some of whom will be CREST members who will hold uncertificated securities. That process is known as dematerialisation. CREST members will be the legal owners of their securities. They will include institutional shareholders, individual shareholders and nominees on behalf of investors, market makers and brokers. Some may link electronically directly to the system. Others may use the sponsored membership route—a CREST special—using an agent to communicate with CREST. 4 CREST—both the central system itself and the networks that will carry the electronic instructions between participants and CREST—will be very secure. There will be a complex arrangement of security hardware and passwords that should deflect hackers. For that to proceed, legislation needs amending. At present, under the Companies Act 1985, companies are obliged to issue certificates to shareholders. It is therefore necessary to change the law to allow an electronic transfer system to work. Parliament foresaw that possibility when it passed section 207 of the Companies Act 1989, which allows such legislative changes to be introduced by regulations. That is the purpose of the regulations that we shall be discussing this morning. The capital cost of CREST will be paid for by those who set it up; 68 City firms have committed capital to the project. The costs of transactions broadly fall into two categories: the charge levied by CREST itself and the costs imposed by the firms providing network links—SWIFT and Syntegra. My officials and I have explored those thoroughly with representatives of registrars and stockbrokers, and with the network providers. As a result of those discussions, I anticipate that CREST and the networks will achieve a balance of costs between large and small users. The Government have published their public policy objectives for CREST, and they deal with the role of the retail investor, investor protection, competition, company- shareholder relationships and London's standing as a financial centre. As for preserving the position of the retail investor, many with smaller holdings trade infrequently, if at all. For them it would probably be appropriate to remain with certificated holdings. That will remain a viable option. On investor protection, I have already described briefly the considerable effort that has been put into the security arrangements for CREST. CREST will allow for competition to encourage innovation, so that the services needed can be provided at the lowest possible cost. As part of the approval process, the Office of Fair Trading will consult publicly in January on the competition implications of CREST. With regard to company-shareholder relationships, CREST should not force investors to put their shares into nominee accounts. Keeping certificates is a viable alternative. Sponsored membership is another CREST option, which will allow investors to benefit from electronic settlements, while keeping their names on the company register with all the rights and benefits that that entails. Neither the Government nor CREST can achieve the objective of assuring London's standing as a financial centre, but it is now clear that CREST is expected to happen on time and to budget. That is a major achievement. The regulations make the minimum changes necessary to company law to allow electronic settlement. They have been the subject of extensive consultation, with many positive and helpful results. All those busy with their own CREST 5 preparations, including listed companies, will want to see what the final legislative framework looks like as soon as possible.

10.36 am

Ms Dawn Primarolo (Bristol, South): I thank the Minister for that succinct and clear explanation of complicated matters. When I saw the heading containing the word "dematerialised", I initially thought of the Tardis in "Doctor Who".

Mrs. Knight: Beam me up, Scottie.

Ms Primarolo: Or "Beam me up, Scottie".—although I now realise that they are not connected. The Bank of England set up a team to develop CREST after the collapse of TAURUS, the stock exchange's ill-fated paperless share settlement project. An article in the Financial Times on 3 July said: "London Stock Exchange officials who were responsible for the development of TAURUS, the abandoned system … never really believed in the project, according to the exchange's former chief executive … Mr. Peter Rawlins." In a radio interview, Mr. Rawlins added: "it is by no means certain that the CREST system … being developed by the Bank of England will work either." He spoke about problems that had existed in the TAURUS system, not least its accountability and scrutiny. The explanatory document shows how CREST will operate, but further clarification is necessary. Will the Minister say to whom the operator is accountable? When will the system be fully operational, and when is it due to start? Can the Minister give a guarantee that CREST will be trouble free? Who will be responsible for the supervision of the system, especially during the initial stages, when teething problems can be expected? When TAURUS was in its initial stages, the Government said that stamp duty would be abolished when the system was fully operational. Does that promise hold good for the CREST scheme?

10.39 am

Mr. Peter Griffiths (Portsmouth, North): The Minister's explanation was very helpful to those of us who are not skilled in such matters, and who would not claim expertise. The crib sheet on CREST that we received is the best summary that I have seen. Newspaper references to the scheme are either so simplistic as to mean nothing, or so complex that they mean equally little to the non-expert. As I said to my hon. Friend the Minister before we began our proceedings, we received briefing through a company representing the Association of Private Client Investment Managers and Stockbrokers. That body and its constituent parts have been consulted throughout the development of the regulations, and the briefing is not a complaint or a criticism of the way in which consultation took place. It was carried out effectively and efficiently, but certain areas still require clarification. I am not asking the Minister to clarify those points this morning, because it would be a lengthy procedure and not the most valuable use of the Committee's time. 6 The draft regulations do not deal with the queries raised in that briefing, particularly questions about dual-registered securities, the recourse of a system member who feels that he has been disadvantaged by the new system, and stamp duty. Have those matters been considered, and have they been resolved to the satisfaction of those who will have to operate the system in years to come?

10.41 am

Mr. Ken Purchase (Wolverhampton, North-East): I listened with interest to the Minister saying that the changes were all foreseen in the Finance Act 1989 and that Parliament, with its usual vision, was able to pass that Act knowing that such a system would descend upon us in due course. The system failed. the infamous failure of TAURUS—the transfer and automated registration of uncertificated stock—was a City debacle of the first order. In the wake of recent matters concerning the Bank of England, and given the Government's position on the Barings fiasco, one wonders whether it is appropriate for the Bank to work on such an issue. It does not fill one with confidence, given recent history, to see the Bank of England involved in the CREST system. The Minister will be relieved that I shall not ask about materialisation—except to say that I have engaged in a little dematerialising; hon. Members may not have noticed, but I have shed two stone. The Minister said that the CREST system was running according to the timetable. However, she did not answer my hon. Friend the Member for Bristol, South (Ms Primarolo), who asked about the exact timetable and when it might be up and running? That is an important matter. It was foreseen by Parliament a long time ago that information technology would develop. Much has changed in the intervening years. That timetable is important, just in case we find this morning that it is not appropriate to nod the order through. What sort of companies will be listed on the new system? Will they only be listed companies? The unlisted securities market is set to continue for small and medium-sized enterprises until December 1996, so difficulties could arise if the timetable were such that the USM was still operating once the new CREST system had started. Would the USM be incorporated into the schedule? The replacement of the USM with the alternative investment market—AIM—is an important development for small and medium-sized enterprises. The Committee is aware of the difficulty of raising capital experienced by small and medium-sized enterprises and of how important it is that the replacement for the unlisted securities market takes off smoothly and is able to produce and generate the sort of capital funding that is necessary to ensure that the capital needs of our small and medium-sized enterprises are met. We should be told about the timetable in detail. What sort of share will be on CREST? Of course, the system was designed to cope with ordinary shares. The number of shares being transacted is almost 7 unimaginable, which is why such a system is required. We want to be sure that the right system is used and that it is reliable. What other sorts of share might be on CREST? Will preference shares or convertible loan stock be on that system? I mention preference shares because such shares take preference in company wind-ups during bankruptcy and for any other purpose under present law. If someone who had held preference shares for perhaps 10 years had tucked them away in an envelope in a cupboard and did not know that the company had gone bankrupt, what would happen in 20 or 30 years—when everyone had said that the CREST system was wonderful—if he had not staked a claim? If he or she was not on CREST, would that claim be more likely to be overlooked? We need to know what sort of protection there would be is such cases. My hon. Friend the Member for Bristol, South has mentioned regulation. Clearly, it is the Treasury's duty to issue and monitor licences. But I am unsure from a quick reading of the regulation what the Treasury's role will be. The Treasury will have a right to withdraw a licence from an operator. However, day-to-day matters are often more important and, if operators are licensed by the Treasury, will they be subjected to any of the other regulatory bodies, such as the Investment Management Regulatory Organisation or the self- regulatory organisations? There are many such bodies and the Treasury Select Committee has recently listed them. Can the Minister assure us that, as well as the Treasury's oversight of such matters, there will be an approved regulatory body to which operators will have to belong and which will give day-to-day guidance and monitor such work? The issues register will be interesting. If people want to investigate shareholdings in a company, they contact the company registrar or Companies house and, in due course, they will be sent a pile of information. In the paperless world that we are approaching, will such people be offered a disc or a CD-ROM; and if so, how can they be sure of its integrity? Will the supply of information in such forms without a hard-copy back up lead to problems? What are the arrangements for keeping hard copies? In court cases, records are often kept for five, six or seven years so that matters can be verified by sight of the paper. What arrangements will be made for the paperless settlement system so that there will be access to an unbugged, virus-free copy of registers? Such questions may already have been answered. I am sure that those who wrote the programme have thought of every conceivable way in which things can go wrong. I expect that they have developed ways to ensure that the programme's integrity will be guaranteed. However, we need to know more. There is the problem of shares held by nominees. For example, Barclays Bank has a nominees limited company which manages shares and assumes ownership in the name of shareholders. The company sends shareholders a short resume of unit price, and so 8 on. The Barclays system is paperless. In future, other banks might have such a system. Indeed, we might have to deal with the Banco Mexico, and who knows what it might do with such information and our shares? How can we be assured that the primary holders of shares will be recognised as such in an investigation or inquiry into business practice? I am sorry to burden the Minister with so many questions, but when considering the paperless world and the settlement arrangements that we are discussing, it is essential to ask questions. I do not believe that when the finance legislation was passed we were as aware of the position as we are now—although some of us are probably not very aware even now. I hope that the Minister will consider my questions seriously and that she can answer them satisfactorily.

10.51 am

Mrs. Angela Knight: Many questions that are pertinent to CREST have already been asked. Perhaps if I had used the long version of my introductory speech, I would not now be answering them. I, too, find the word "dematerialisation" somewhat extraordinary and rather entertaining and I congratulate the hon. Member for Wolverhampton, North-East (Mr. Purchase) on his successful dematerialisation of two stones in weight. If he wishes to continue, I wish him all the best of luck. The hon. Member for Bristol, South expressed concern about the stock exchange, TAURUS and the contents that were made at the time about whether CREST would proceed on time and do what is intended. The operator referred to in the regulations is given that designation because, whereas CREST is a potential operator that should soon proceed, there could be other operators. That is why it is designated "the operator" in the regulations, rather than as CREST itself. It will start in July next year, the first securities going through in August on a phased basis with completion in April 1997. A useful leaflet will be made available to all shareholders. Last week, CREST gave a presentation in the House on its timetable and many of the procedures that are involved, including a useful diagram. I strongly advise those members of the Committee who were unable to attend that presentation to get hold of the documents that CREST provided because they turn a complicated matter into simple, useable English. CREST will be accountable to the Securities and Investments Board which is responsible for the day-today supervision. It must check that all CREST procedures are in accordance with its requirements, which are set out in schedule 1 of the regulations. CREST must also be classified as a recognised clearing house, so there will be proper security of its operation, financial stability and so on. CREST will be thoroughly tried and tested before it is up and running. I also have a natural scepticism for all things electronic and I, too, am pleased to know that there will be not just a proper trial period but a staged period in which CREST becomes fully operational. 9 The hon. Member for Bristol, South referred to stamp duty, which is a separate issue from CREST. We in the Government remain committed to abolishing stamp duty on shares, but the timing will depend on the overall Budget position. In the meantime, CREST will collect stamp duty and the detailed provisions to cope with that change are being published in the Finance Bill. My hon. Friend the Member for Portsmouth, North (Mr. Griffiths) raised some of the issues that APCIMS has been concerned about. I can assure him that we continue to have discussions with all the relevant players in the CREST programme. I hope that some of the points raised in the letter have been resolved. Foreign securities were mentioned. The vast majority of securities traded in London are United Kingdom securities. It will still be possible for overseas securities to be traded in London and to be settled through CREST under certain circumstances—first, if the law governing them is fully consistent with dematerialised settlements. That will be the case for Irish securities, which should be capable of being settled through CREST on day one. If that is not the case, and for those overseas securities where the law governing them is not fully consistent, foreign companies have alternative options. They can use the depositry receipt route, which is common in other countries, so that the rights to their securities are entered on a UK register and can be settled through CREST. CREST has a residual settlement system as well, as the stock exchange does now, for securities that, for one reason or another, cannot be settled through CREST. Consultation with the industry continues on several of those matters, particularly on the residual settlements system. The precise arrangements will be clarified in due course. The first priority, however, must be to improve London's settlement system, as the bulk of securities settled here are UK securities. The Government cannot legislate to change other countries' laws to make their securities compatible with our CREST system. Nevertheless, we anticipate that it will be a key player in the future of the London financial system. The hon. Member for Wolverhampton, North-East was, I think, confusing the Finance Bill and company law. The regulations change company law, as I outlined in my opening remarks. I mentioned the Companies Act 1989 because it contains provision to allow changes such as this by the regulation process, rather than through a full debate on the Floor of the House of Commons. A Committee such as this and the Deregulation Committee significantly assist our political process.

Mr. Purchase: I am grateful for that "deconfusing" message from the Minister, but it does not alter the fact that 1989 is a long way from where we are today. There have been significant changes in information technology, and the concerns expressed in 1989 may not be the same as those felt today.


Mrs. Knight: One thing that we can be sure of is that the technology in five years' time will be substantially different from current technology. Those who will be up to the minute with it will be the teenagers of five years' time, rather than people of the age of the hon. Gentleman and me. I take his point. The hon. Gentleman expressed concern about the Bank of England, especially after Barings. I have full confidence in the Bank of England on this project, because it has already built three separate electronic settlement systems. It therefore has experience of such matters and we can say with confidence that we are not in the first stages of a learning curve; rather, we are adding to existing settlement systems. The hon. Gentleman was worried about who would be able to use CREST, and the position of the unlisted securities market and the alternative investment market. CREST is a settlement system, not a trading system. It can settle trades that have taken place on any market, whether it is the USM, AIM or any future markets—none of us knows what those might be. The principle of CREST is that it can settle all types of securities, provided that they are subject to UK law and to the terms of issues. They include stocks and shares, debentures, debenture stocks, loan stock, preference shares, which the hon. Gentleman mentioned, bonds and units of collective investment schemes, including OEICs—open-ended investment companies—which we shall no doubt discuss on another occasion. OEICs is as good a term as dematerilisation.

Mr. Purchase: There is no need for such insulting language. [Laughter .]

Mrs. Knight: The hon. Gentleman raised the interesting question of what happens to someone who has held a share for a considerable period. By that, I took it that that person then finds that the shares have been dematerialised and that he or she is in a different scheme from that which was originally intended. I refer to that as the "Aunt Aggie question" because Aunt Aggie may have kept shares behind her clock for many years and then decided to sell. Indeed, she may have even passed away. We suspect that many private investors will retain their paper certificates. They trade infrequently, so it makes sense for them to keep the certificates. However, if Aunt Aggie had traded and had been dematerialised, how would she know what had happened and what record would she have? The answer is that she would still have a piece of paper that would tell her what had taken place. Aunt Aggie could also ensure that she remained in certificates and, therefore, could be rematerialised. I assure the hon. Gentleman that the Aunt Aggie question, in all its forms, has been fully covered. The hon. Gentleman then mentioned security matters and the saving of information. I assure him that CREST will keep the records for a considerable time. The regulations require it to do that. Records will be kept for seven years in a machine-readable format. I am glad to say, however, that hard copies can be produced for court cases or for other reasons. An 11 appropriate variety of records will be kept. The Financial Services Act 1986 was a pertinent player in that subject. As the hon. Gentleman said, it covers all those who have access through a variety of membership to CREST. It gives the extra security required. The hon. Gentleman's final point was on nominees. The relationship between a nominee and the beneficial owner will not change as a result of CREST. The beneficial owner will have an alternative option if he so wishes in future. Many people are nominees because it is convenient for them to be so. However, someone who trades more frequently than Aunt Aggie will now 12 have the option of sponsored membership. He or she will be able to use CREST in a more personal way and not through a nominee. We anticipate that the option of sponsored membership will be very attractive to those who use trading facilities more frequently. It will provide an additional facility that is not available at present. I hope that I have answered all the points that have been raised and clarified the various issues.

Question put and agreed to.


That the Committee has considered the Draft Uncertificated Securities Regulations 1995.

Committee rose at four minutes past Eleven o 'clock.


Thompson, Mr. Patrick (Chairman)

Carrington, Mr.

Couchman, Mr.

Duncan Smith, Mr.

Elletson, Mr.

Fox Dr. Liam

Griffiths, Mr. Peter

Knight, Mrs. Angela

Primarolo, Ms

Purchase, Mr.

Spring, Mr.