Financial Services Bill

We have had a useful debate, and it is clear that there is substantial support for what the Government are trying to do through clause 13. Amendment 1 would delete proposed new part 8A of the Financial Services and Markets Act 2000, which aims to provide the FSA with a new power to prohibit, or require disclosure of, short selling. New clause 8 proposes an alternative prohibition. I listened carefully to the arguments put forward by my right hon. Friend the Member for Birkenhead (Mr. Field) who expressed general concerns about short selling, which I believe are shared by people who consider it to be a dangerous and speculative type of financial transaction. He referred to it as gambling, but I cannot agree with him. It is indisputable that, in certain circumstance, short selling can have adverse impacts, which can endanger financial stability. That is why the Government are committed to ensuring that the FSA has powers to intervene to prevent short selling and require its disclosure where necessary. But it is my view and that of the Government that, in general, short selling has clear beneficial effects for the market. Short selling is an important source of liquidity, it is a common risk management tool, and it improves pricing efficiency. That is why I believe the targeted approach and the proportionate way we are tackling the issue through clause 13 will allow the benefits of short selling to be claimed by those who use it responsibly, while preventing those who would seek to abuse it from doing so. That is preferable to the blanket prohibitions proposed. The hon. Member for Chichester (Mr. Tyrie) sought evidence of the efficacy of the recent ban on short selling. As he is aware, the ban was aimed at preventing the short selling of UK financial stocks, other than in permitted circumstances. The FSA monitored compliance with the ban and considers that it achieved its aim. In the future there will be academic studies examining short selling bans in great detail, but in those narrow terms the measures that the FSA introduced were effective in achieving its aims. As my right hon. Friend the Member for Birkenhead knows, his new clause would prohibit the majority of short selling in shares. First, naked short selling—that is, where the seller sells shares that he does not own, without having borrowed or otherwise set aside any shares to settle the transaction—would be permitted only if the share price at the time of the transaction was higher than the closing price the previous day. Such a prohibition, as we have heard, is known as an up-tick rule, and would allow unrestricted short selling in an advancing market, but would prevent short selling at successively lower prices. There is little evidence that this method does anything other than decelerate a share price decline. As we heard, the FSA looked at the introduction of an up-tick rule during its 2009 consultation and concluded that the costs that firms would incur to implement such a rule far outweighed the benefits. Respondents to the FSA consultation strongly opposed the introduction of an up-tick rule. The second prohibition proposed by the new clause would restrict covered short selling, where the short seller has borrowed shares, to circumstances in which the beneficial owners of the shares had given their permission at an AGM for the shares to be lent. I understand the purpose behind my right hon. Friend's proposal, but this may increase the costs of covered short selling by limiting the extent to which some entities are able to lend their stock and depriving them of low-risk income in the form of lending fees. However, in the Government's view, it would not act as an effective control over short selling. The prohibitions proposed by my right hon. Friend would be blunt and inflexible. I appreciate the probing nature of the new clause, and it is important that we have this debate. As they stand, however, the prohibitions would not allow the FSA to impose targeted controls on short selling, by banning short selling in particular financial instruments, or instruments issued by a particular company on a temporary basis. As a result, we consider that they would not adequately assist the FSA in protecting the stability of, and maintaining confidence in, the financial system. The new clause would require disclosure to the FSA of all short selling, regardless of how small the transaction is. The FSA would be given no discretion to adjust the contents of the declaration, to ensure that the obligations imposed under this provision were proportionate. The Government's view is that there is no evidence to suggest that requiring such extensive disclosure would produce any benefits to outweigh the extensive costs it would impose on companies. There is, as I am sure the House is aware, a global regulatory consensus that requiring disclosure of short positions will help to reduce the potential for abusive behaviour and disorderly markets, and I am sure we all agree with that. A great deal of work is taking place to try to secure international agreement on how that can be effectively implemented consistently. We are certainly working hard to ensure a pan-European approach to short selling, and the disclosure regime that is likely to be agreed in Europe is intended to include the disclosure of significant net short positions; a two-tier disclosure model, with private and public disclosure set at different thresholds; the incremental disclosure of changes of position above both thresholds; and an exemption for market makers. It is intended also to apply to positions in all shares, not just shares of financial stocks. I can therefore assure my right hon. Friend that a great deal of work is going on in that regard. My right hon. Friend also raised the issue that other hon. Members suggested was primarily one of corporate governance. His point was whether trustees of pension funds or, by analogy, directors of companies knew that their stock was being lent. The Financial Services Secretary, Lord Myners, has commissioned an informal review of stock lending, and any further safeguards that might need to be recommended to stock lenders, including pension funds, would be considered as part of that. My right hon. Friend highlighted the point, but other hon. Members responded by saying that boards and trustees are responsible for ensuring that they have corporate governance procedures in place adequately to control the funds and companies with which they deal. I am sure that that is absolutely correct, but in these circumstances the Government and the FSA may wish to issue advice on stock lending, and that is being looked at. My right hon. Friend mentioned that his proposed change was a probing new clause, and I hope that, having helpfully raised this issue, he will seek to ask leave to withdraw it.