Financial Services Bill

There might be a suitable peg somewhere in the Bill for such a measure—I have not looked carefully enough to find one—but the new clause uses a machine gun to try to hit one very specific target. It is inappropriate and would cause a lot of collateral damage, as machine guns tend to do when trying to hit only one target. I shall take a brief look at the new clause—after all, that is what we are discussing. It begins by proposing to prohibit the short selling of shares. Why stop at shares? If one is trying to address the issue of pension fund assets, what about the bond market, what about corporate bonds and what about that range of financial instruments that runs all the way from poor-grade equity to top-tier sovereign risk? Once one has decided that short selling is a "Bad Thing", there is no logic to limiting this provision to shares. When I looked at the new clause a bit more carefully, I noticed that proposed new subsection (1)(a) bans short selling except under certain conditions—for example, in a rising market. That is a curious one-way ticket, and such an approach can only be distortive in any market—if one bans something in one direction and not in another, one will do a lot of damage to the process of trying to find a true price. Proposed new subsection (1)(b) is even more bizarre, because it says that the only circumstances in which short selling are permitted are where""the beneficial owners of the shares had given prior permission at an annual general meeting for the shares to be lent."" That is such a restrictive condition that it would suck all liquidity out of the forward markets, which would be the end of forward markets. Forward markets have been around a good while. There was an effective forward market in rice in ancient Japan, and it is said that there was one in China, so they have been with us for as long as there have been markets. When examining the clause, one must ask a more basic question: do we want derivatives markets or not? If we decide that we need them, it is logical to try to maximise their liquidity, as that will lead to higher levels of capital formation and more efficient risk allocation, to the benefit of us all. Short selling strengthens the long market; it provides strategic investors with an opportunity to hedge their positions and gives them confidence to take those long positions. An investor will be much more reluctant to buy if the would-be short sellers' views are not expressed in the market and are distorted by restrictions. The key question is always that of investor confidence. I took a look at a number of things on the web about what various people have had to say on this matter recently. Troy Paredes, a commissioner on the Securities and Exchange Commission, recently gave an interesting lecture to the Harvard law school forum on corporate governance in which he came to a pretty clear view. In line with what I have just implied, he said:""Short selling...is tied to investor confidence. Investor confidence depends on investors' faith in the integrity of markets. Investors expect that securities prices are meaningful in that they reflect the market's overall assessment of what a company is 'worth' by aggregating into a single number the different views of market participants…in promoting market efficiency, short selling can foster investor confidence, as investors can be confident that securities prices reflect both optimistic and contrarian views."" I could not have put it better—in fact, I could not have put it remotely as well. That is a clear expression of the need to retain short selling. The risks usually attributed to short selling—the right hon. Member for Birkenhead followed that approach—generally turn out to be something else. They turn out either to be the risk of share price manipulation, which he did not discuss very much, or to be fraud, which he discussed quite a bit, which is why I intervened on him to clarify what was going on in the Maxwell custodial case. Those are, quite rightly, already offences under existing law, and if the law needs tightening in that field—the right hon. Gentleman has suggested that it does—we should pay particular regard to that. We should look carefully to see what further steps should be taken to make share price manipulation and fraud more difficult. As this clause is about short selling, we are concentrating on practices that take place with respect to shorting the market. The long share market, however, is just as vulnerable to fraud and manipulation. One such practice, which good quality regulation seems substantially to have reduced, at least, was known as "ramping the stock"—talking it up while taking a holding and then selling up, leaving the poor souls who had taken the advice to take the fall in the market afterwards.