FSA Urges Examination Of Regulatory Implications Of LSE Takeover

by Robin Pilgrim, LawAndTax-News.com, London

08 February 2005

In a statement released on Friday, Callum McCarthy, Chairman of the UK Financial Services Authority, stressed the need for discussion of the potential longer term implications of any change of London Stock Exchange ownership.

“In discharging our regulatory responsibilities in respect of any offer for the London Stock Exchange (LSE), the FSA will adopt the same approach: that is, we will be indifferent to the nationality of the owners or the managers of any future combined operation, and will be concerned to ensure that the future operation meets our regulatory standards. If the LSE remains a UK exchange under a new parent it will continue to be subject to FSA regulation as a Recognised Investment Exchange (RIE)," he explained, continuing:

“This will require the FSA to be satisfied that, inter alia: the governance arrangements of the exchange are such that the exchange is a "fit and proper" person to perform its functions; the UK entity has sufficient financial resources to ensure that, in the event of the need arising, its business could be wound down in an orderly fashion; the exchange's systems, including satisfactory clearing and settlement arrangements, work and offer adequate protection to investors; and the exchange's risk management and internal and external audit procedures are robust."

However, he raised the possibility that in the event of a suitor such as Deutsche Boerse being successful in its bid for the LSE, the Exchange's new owners could choose to be regulated outside of the UK.

"The services of the LSE could be provided from another EU Member State as a "passported" activity - that is through the provision of trading screens in the UK and with securities admitted to trading on a market operated from elsewhere. Such a move, were it to occur, would potentially have significant implications for various aspects of the wider regulatory regime," he observed.

“The LSE, as a UK RIE, plays a key role as a focal point for the wider regulatory framework, including capital raising and corporate governance. The attractiveness of the UK financial markets, and ultimately the competitiveness of EU capital markets, depends, in part, on a system of corporate governance and of regulation which is of a high standard, but is proportionate and adaptable and attuned to the requirements of users," he continued, going on to add that:

“Until now, there has been little public discussion of the possible longer term implications of a take-over of the LSE, including potential changes to the present system. We wish to indicate some of the more significant of these changes, so that all involved can consider them."

Outlining the potential changes which could occur to the regime under which the LSE operates, Mr McCarthy concluded his statement by suggesting that:

"This is not a decision for regulators, but a decision for the exchange - taking into account the views of its stakeholders...It is therefore worth stakeholders raising the question of how any bidder will address these issues. There are a number of ways in which stakeholders may be reassured about the longer term durability of the arrangements including, as some have suggested, having the parent company or "topco" located in the UK with its primary listing on the LSE."

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