HOUSE OF COMMONS
Third Standing Committee on Delegated Legislation
DRAFT DISCLOSURE OF INTERESTS IN SHARES (AMENDMENT) REGULATIONS 1996 FINANCIAL SERVICES ACT 1986 (UNCERTIFICATED AUTHORITIES) (EXTENSION OF SCOPE OF ACT) ORDER 1996 (S.I., 1996 No. 1322)
Thursday 6 June 1996
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The Committee consisted of the following Members:
Chairman: Mr. Robert Hicks
Bell, Mr. Stuart (Middlesbrough)
Bottomley, Mr. Peter (Eltham)
Brazier, Mr. Julian (Canterbury)
Carlisle, Sir Kenneth (Lincoln)
Church, Ms Judith (Dagenham)
Cohen, Mr. Harry (Leyton)
Darling, Mr. Alistair (Edinburgh, Central)
Fabricant, Mr. Michael (Mid Staffordshire)
Fox, Dr. Liam (Lords Commissioner to the Treasury)
Gardiner, Sir George (Reigate)
Gorman, Mrs. Teresa (Billericay)
Hall, Mr. Mike (Warrington, South)
Jones, Mr. Nigel (Cheltenham)
Knight, Mrs. Angela (Economic Secretary to the Treasury)
Leigh, Mr. Edward (Gainsborough and Horncastle)
Nicholls, Mr. Patrick (Teignbridge)
Pearson, Mr. Ian (Dudley, West)
Simpson, Mr. Alan (Nottingham, South)
Touhig, Mr. Don (Islwyn)
Ms J. A. Long, Committee Clerk2 3 Third Standing Committee on Delegated Legislation Thursday 6 June 1996
[MR. ROBERT HICKS in the Chair]
The Economic Secretary to the Treasury (Mrs. Angela Knight): I beg to move, That the Committee has considered the draft Disclosure of Interests in Shares (Amendment) Regulations 1996.
The Chairman: With this it will be convenient to consider the Financial Services Act 1986 (Uncertificated Authorities) (Extension of Scope of Act) Order 1996.
Mrs. Knight: The instruments relate to the introduction of CREST, which is why I, and not a Minister from the Department of Trade and Industry, am introducing the second of them. CREST is the new computerised securities settlement system that is being built for the City by a project team on loan from the Bank of England. CREST is important to London's international competitive position and is on target for inauguration on 15 July this year. The main CREST regulations were brought into effect last year, but inevitably with such a significant project several pieces of legislation need amending. First, I want to make a few points about the Financial Services Act 1986 (Uncertificated Authorities) (Extension of Scope of Act) Order 1996, which is an investor protection measure. The Committee will have heard the announcement last October that people who input instructions to CREST on behalf of CREST members and sponsors will need to be authorised under the FSA. To ensure that that happens, the order extends the definition of investment business that is set out in schedule 1 to the Act. The basic CREST design consists of a core settlement system, which will automatically process settlement instructions from participants, who will communicate with CREST through terminals or gateways. The CREST gateways will be connected to the central system by communications networks. The whole system, from the gateways, through the networks, to the central system, is highly secure and the Securities and Investments Board will check the security arrangements as part of its consideration of CREST's approval application. A Crest member with his own gateway for sending Crest instructions purely about settlement of his own securities will be expected to make his own security arrangements. There will, however, be situations in which persons have access to Crest to send settlement instructions on behalf of investors. First, there are the 4 Crest-sponsored membership arrangements, whereby a Crest participant with his own gateway sends Crest instructions on behalf of sponsored Crest members. Secondly, some companies might offer to run Crest members' gateways on their behalf, while others might operate or maintain systems that format messages from Crest members' own computer systems into instructions that are acceptable to the gateways. Much the same investor protection considerations apply in all those circumstances. The order is intended to bring the provision of such services within the regulatory framework. The FSA regulators propose to use their existing regulatory structure to implement the policy so that any additional work should be minimal. In most cases, existing regulatory resources should be sufficient, both in the affected firms and in the regulatory bodies. Most affected firms will already be subject to FSA regulation in respect of other categories of investment business. Even firms that will have to seek FSA authorisation for the first time do not expect regulatory costs to be high. That is reflected in the compliance cost assessment that was produced for the order, copies of which are in the House Library. The CCA estimates total industry costs at substantially less than £100,000 per year. The main provision of the order is subparagraph 2(1). The new category of investment business focuses on the acts of sending, or causing the sending of, Crest instructions on behalf of another person.
Mr. Alistair Darling (Edinburgh, Central): If it would help, Mr. Hicks, I should make it clear that I do not want to make a speech because we all agree that this is a good measure. I have one question, however. The Minister said that the order deals with dematerialised instructions. What is the difference between instructions and advice? The common understanding of them is different, but would dematerialised advice be covered in the order?
Mrs. Knight: The object of the order is to reproduce as closely as possible the situation that exists before CREST comes into use. At present, what is considered to be advice is subject to proper definitions. The order covers the circumstances in which people in charge of a gateway can send instructions. The order deems that to be an authorised event so as to give extra security to the investor. Without the order, the act of sending instructions, as described in the order, would not be covered.
Mr. Darling: For the avoidance of doubt, I take it that the answer to my question is no. Will the Minister confirm that the order only covers instructions, not advice, and that the question of dematerialised advice is elsewhere?
Mrs. Knight: The hon. Gentleman is correct. The order covers what I have described already. It deals with actions, not advice. There is one slight variation, but only in the sense that the order, as well as covering the sending of instructions, also covers an action that causes instructions to be sent. Such a circumstance might arise, for example, if a CREST sponsor 5 employed a computer bureau or a facilities manager actually to send instructions. I hope that that clarifies the matter. The rest of the order covers exclusions and clarifications, which mirror as far as possible the existing situation. The second instrument, the draft Disclosure of Interests in Shares regulations, makes a small and technical amendment to the Companies Act 1985. The draft regulations will ensure that stocklenders are not subject to additional disclosure requirements following the introduction of the CREST system: it preserves the existing position, to the benefit of all those who would otherwise be affected. CREST will result in a change in the procedure by which what I will refer to as collateral is provided for stocklending transactions. Stocklending is a standard market practice, as the Committee will know. Following the introduction of CREST, collateral will take the form of a collection of stocks. That collection of stocks may well include companies' shares that are covered by the disclosure requirements of the Companies Act 1985. Under the Act, investors must disclose significant shareholdings in public companies. In practice, that normally means shareholdings of more than 3 per cent. Such disclosure is unnecessary with stocklending for two main reasons. First, the stocklender does not know in advance which companies' shares will be included in the collection of stock provided as collateral by the dealer, as the selection of the stock is made by the CREST system. Secondly, the CREST system proovides for the collateral to be returned to the dealer the following day, in case the dealer needs the stock for another order. The stocklender is therefore only in possession of the shares overnight. The draft regulations would eliminate the burden of disclosure that would otherwise be placed on stocklenders. I commend both of those instruments to the Committee.
Mr. Stuart Bell (Middlesbrough): I am grateful to you, Mr. Hicks for calling me. It is nice to be in the Committee under your Chairmanship, a pleasure that I have not had before in my short and happy life in the House of Commons. I am pleased to see that the hon. Member for Mid-Staffordshire (Mr. Fabricant) is present. I shall try not to provoke him into a long speech. The Minister took us briefly through the second order before the Committee, which concerns the disclosure of interests in shares regulations. She made the point that the normal threshold is 3 per cent. of the relevant class of capital. She did not feel the need to refer to European Commission directive 88/627, which deals with major shareholdings and applies only to listed companies; nor did she mention the Department of Trade and Industry consultation document entitled "Proposals for Reform of Part IV of the Companies Act 1985", which was issued in April this year. That consultation document ranged wider than the order before us. We look forward with interest to seeing how consultation proceeds and to effecting some 6 modification to the Companies Act 1985 in the next parliamentary Session. The consultation document does not touch on matters before the Committee today. The Minister spoke of the need to modify legislation to implement the CREST system for paperless share transactions, which we welcome. My hon. Friend the Member for Edinburgh, Central (Mr. Darling) has referred to the City's and the stock exchange's move towards the paperless transactions system. The Securities and Exchange Commission in the United States is already on a paperless transaction system. It is all compterised—doubtless not an X-files but a Y-files system. We are nevertheless moving in the same direction. As the Minister stated concerning the DTI document, the regulations will exempt a specific type of share transfer from existing disclosure obligations and will require the insertion of a new subsection 9A into section 209 of the Companies Act 1985. The Minister has explained that shares that are used as collateral for stock loans will also be exempted. As a lawyer, I must say that we are only crossing the t's and dotting the i's here. When shares are pledged as collateral—either for overnight borrowing or leading—no ownership is transferred. There is therefore no need to change the law on this subject. I note that the stock exchange, not the DTI, was the promoter of the change which is intended to bring about certainty in the law. We have no objection to that but it is, as I say, unnecessary. We shall support the order today.
Mrs. Angela Knight: I am grateful to the hon. Member for Middlesbrough for his support. He is right that I did not refer to the consultation document. It will take time for people to read and respond to it and for us to consider the responses. We now face the fact that the CREST system is to start on 15 July, which is the reason for making the change. As the hon. Gentleman said, CREST will be good for London. However, I should like to follow up his point about the order being a legal exercise in dotting the i's and crossing the t's. If we had not introduced the order, he might be asking me in a few weeks' time why the Government had not changed the law, when some tricky lawyer who investigated the legalities found that stock lending could not take place through CREST as it had in the past. There are many tricky lawyers and none so tricky as those known to the hon. Member for Middlesbrough. It is better to provide security and ensure that stocklending can take place in future as it has in the past.
Mr. Bell: I am grateful to the Minister for referring to tricky lawyers. I was making a lawyer's point and did not wish to draw attention to my eldest son who has become a partner in Clifford Chance in the City. I appreciate the Minister's point. The case for changing the law may not be overwhelming and it may cover a 7 situation that does not exist; nevertheless, in the age in which we live, it is better to have certainy rather than uncertainty.
Question put and agreed to.
Resolved, That the Committee has considered the draft Disclosure of Interests in Shares (Amendment) Regulations 1996.8
Resolved, That the Committee has considered the Financial Services Act 1986 (Uncertificated Authorities) (Extension of Scope Act) Order 1996 (S.I. 1996, No. 1322).—[Mrs. Angela Knight]
Committee rose at fifteen minutes to Eleven o'clock.
THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:
Hicks, Mr. Robert(Chairman)
Bottomley, Mr. Peter
Carlisle, Sir Kenneth
Fox, Dr. Liam
Knight, Mrs. Angela