Financial Services Bill

This is the first debate initiated by the right hon. Member for Birkenhead (Mr. Field) in which I have participated. It has been an interesting discussion about what, I am sure, many people outside the Chamber regard as a rather esoteric but nevertheless important subject. If there are concerns about the role of the custodian, I am confused as to why the right hon. Gentleman did not table a new clause specifically to deal with that, because we might want to discuss a number of problems related to that and how that role fared throughout the recession. The proposals would make a fundamental change to the measures set out in the Bill, as they would move from a situation in which short selling is allowed unless it is banned to one in which it is banned unless it is allowed. When my hon. Friend the Member for Chichester (Mr. Tyrie) and I were in central and eastern Europe, introducing market economy and democracy to those areas back in the '90s, the distinction between a society in which something was allowed unless banned and one in which something was banned unless allowed was the principal distinction that underpinned the difference between the free markets of the west and the markets that we were trying to eradicate under the old communist system. When we used the word "eradicate", we meant "eradicate", not "reduce it to 10 per cent." When the Committee discussed the issue, there was a question about the basis on which we were working. There was considerable consensus that regulatory intervention was justified where there were identified market failures, and it was expected to deliver net benefits to the market. That was certainly the presumption in our significant debate about what those market failures might be. The obvious example of abuse was largely covered by the FSA's existing powers, but there was also the question of the disorderly markets that we have seen in the current crisis, as well as deficiencies in transparency. I recommend that the right hon. Gentleman read the discussion paper produced by the FSA on short selling, because it covers all those issues in considerable detail and concludes:""Short selling can generally be expected to increase market efficiency but can have negative impacts. In times of extreme market turbulence and for firms engaged in rights issues these risks are heightened. The fact that short positions are not normally disclosed to the market may also result in market transparency failure. Nevertheless, given that short selling has clear benefits, restrictions on it do appear to come at a cost"." That cost refers not just to liquidity and the cash cost but to reduced market efficiency. The extent to which there were problems was not clear, even to the FSA. On transparency, for example, it concluded:""It is not clear whether a lack of transparency about the level of short selling and the identity of short sellers gives rise to a material market failure."" Even after doing all that work, there was still a considerable amount of disagreement. My hon. Friend the Member for Fareham (Mr. Hoban) touched on some of the options that the FSA identified. There are six in all. One of them, which follows the right hon. Gentleman's line, was to prohibit the short selling of all stocks. Other options were to prohibit naked short selling, prohibit short selling of financial sector stocks, prohibit short selling of companies engaged in rights issues, prohibit short selling by underwriters of rights issues, and finally, prohibit short selling where there is urgent need. It is the last one that we have ended up with in the Bill, although it is the first one towards which the right hon. Gentleman's new clause is edging. As stated, there were a number of costs in terms of pricing efficiency, liquidity and forgone profits. One of the issues that needs to be explored further—I have no idea whether the right hon. Gentleman has thought through the implications—is the costs of the scheme. It concerned me in Committee that with the Government's preferred option, they were rather clutching at straws, given the wide ranges put forward in the impact assessment, which went from £106 million to £1,066 million, as the cost of the option that they eventually chose, which is now in the Bill. It would be interesting to see whether there was a quantification, how much wider that might be and what the top end of it might be, if one followed the right hon. Gentleman's view. The other issue which it is important to mention is the relationship with the international regime, which has not been touched on so far. There is an admission already by the Treasury that the UK currently has a wider definition of market abuse than many of our European counterparts. Even the FSA admits that market participants have encountered problems and significant costs in having to comply with the variety of different regimes introduced across a number of different jurisdictions. It should be recognised that we need to be seen to have a regime that is applied as widely as possible internationally. We struggled with the clause currently in the Bill, and how that fitted in with the international regime. One of the witnesses who spoke to us concluded— damning with faint praise—that it would probably work out all right because the wording is sufficiently wide that in all probability it will allow anything into it, which is hardly a glowing endorsement. I find it difficult to see how the new clause would fit in with the approach adopted by other countries. Germany has a ban on naked short selling, but only on specific financial institutions, not generally. In its approach, France has aimed at the short selling of financial sector securities as well. Finland has opted for considering more supervision, rather than any banning. The Czech Republic, being the Czech Republic, has opted for no action whatever on the matter. The only country that I could find, although there may be others, where there was any semblance of a relationship to what the right hon. Gentleman was hinting at was Belgium, where the whole approach to short selling was linked to good order, integrity and transparency. The rules there were to ensure that sales were covered, but with restrictions on the lending of shares. It is not a regime that has widespread attraction or merit. If we adopted the right hon. Gentleman's new clause, therefore, we would end up down an alley of regulation where none of our European competitors would want to go. That would leave the UK exposed.