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Safeguarding the spirit of the London Stock Exchange

David Glass of London based Pritchard Englefield law firm reviews Investment Exchanges and Clearing Housing Act 2006 , which came into force on 20th December 2006.

    The innocuously named Investment Exchanges and Clearing Housing Act 2006 (“The Act”), which came into force on 20th December 2006, represents an attempt to preserve the independent spirit and flexibility of the London Stock Exchange (the “LSE”), even in circumstances where the LSE is taken over by an overseas Stock Exchange.

    The financial services industry is critical to the UK economy and the ability of the LSE to attract overseas companies to float on the LSE is at the heart of the City of London’s success in promoting the financial services industry. A full main board listing on the LSE is subject to wide-ranging European legislation (in matters such as the issue of prospectuses) but AIM, the Secondary Market of the LSE, is an Exchange regulated market rather than a European Union regulated market and promotes its “light touch” approach to self-regulation. The “light touch” is meant to be effective but simple and depends to a large extent on the ability of market practitioners (in this case so called NOMADS or Nominated Advisers) to vet and supervise companies applying and being admitted to AIM.

    Both the LSE and the UK Government have been worried that if the LSE were to be taken over, more heavy-handed rules would be imposed on AIM which might constitute a severe disincentive to companies seeking or wishing to retain a quotation.

    The Act gives the Financial Services Authority (the “FSA”) the power to “disallow excessive regulatory provision”. Rules are deemed to be excessive for this purpose if they are not required under EU or UK law and if they are “not justified as pursuing a reasonable regulatory objective” or they are “disproportionate to the end to be achieved”.

    In considering whether the rules are excessive, the FSA “must have regard to all the relevant circumstances, including –

a) The effective existing legal and other requirements,
b) the global character of financial services and markets and the international mobility of activity,
c) the desirability of facilitating innovation, and
d) the impact of the proposed provision on market confidence.”

    These broad-ranging words do appear to give the FSA considerable scope to intervene in the regulation of recognised UK investment exchanges or clearing houses.

    The Act includes provision for local stock exchanges to notify the FSA of proposed regulatory provisions so that the FSA can consider them in advance of coming into force. The FSA is also given power to refuse recognition of investment exchanges or clearing houses if their rules are deemed to be “excessive”.

    “Regulatory provisions” are defined to mean “any rule, guidance, arrangements, policy or practice” and the breadth of this definition does therefore give the FSA enormous power to strike down market practices whether formal or informal.

    There is concern that the FSA and indirectly the UK Government are given too much power by the Act and that the Act is a thinly-veiled attempt to protect national champions against international takeovers – a practice that in different contexts has attracted the interest of anti-trust authorities around the world. The stage is therefore set for some interesting challenges ahead.

© January 2007 David Glass
All Rights Reserved.