Much is still unclear about the proposed merger which could seriously damage UK financial markets after Brexit, writes Sir Bill Cash
The future of the London Stock Exchange, and the proposed merger between Deutsche Börse and the London Stock Exchange, raises serious issues of national interest as well as the future of London as a global financial capital.
Which is why, back in July of last year, one of the very first things that Theresa May was faced with on becoming prime minister was a call by a number of MPs - myself included - to block a German takeover of the London Stock Exchange.
This power-grab by Frankfurt-based Deutsche Börse would result in the 215-year-old British institution coming under foreign control. Of course both sides will use language like a 'merger of equals' but Deutsche shareholders will get a 54.4 per cent controlling stake, profits will be reported in euros and German boss Carsten Kengeter will take the helm at the new company.
Deutsche Börse’s intentions have become increasingly clear since Britain voted to leave the EU.
Yesterday, I secured a debate on the issue in Parliament with MPs now calling on May to stand up for UK finance. The reasons are simple. It is perfectly clear that such a soi disant 'merger' is not a merger at all and is not in the national interest or London's interest as a pre-eminent global financial capital.
The London Stock Exchange Group owns several key market components in the United Kingdom, including the London Stock Exchange itself, a recognised investment exchange regulated by the Financial Conduct Authority and the London Clearing House, which is supervised by the Bank of England. A number of subsidiaries of the group are also regulated by the Financial Conduct Authority.
The proposed merger requires regulatory approval by the Bank of England and the Financial Conduct Authority. The most significant approvals are those required, first, from the Bank of England in connection with the London Clearing House, which I understand to be 57% owned by the London Stock Exchange and which conducts euro clearing, and, secondly, from the Financial Conduct Authority with respect to the London Stock Exchange, which is fundamental to the City of London’s capital markets.
The London Clearing House is one of the two main clearing houses in the UK and clears all major currencies including the euro. Both the German and French Governments have indicated a wish to strip euro clearing out of the City. All of that has significant political involvement because it would facilitate in due course a substantial movement of UK market infrastructure to the continent and would permit Germany and France, in the context of Brexit negotiations, to achieve German and French objectives that will undermine the UK’s political leverage during those negotiations.
Her Majesty’s Treasury has certain powers to direct or make recommendations to the Bank of England or the Financial Conduct Authority to take action or not. The Prime Minister is First Lord of the Treasury, and the Chancellor of the Exchequer of course has fundamental responsibilities. The Treasury has powers of direction over the Bank of England under section 4 of the Bank of England Act 1946. It may give directions to the Bank following consultation with the Governor
The Treasury may direct the Bank to exercise its powers not to approve the acquisition of what is described as a “qualifying holding” in the London Clearing House. It is not known whether the Bank of England has already given its approval, although the Treasury could direct such a decision to be reversed on the grounds of public interest.
The powers include determining that the proposed deal is not a normal commercial deal in the light of the Brexit negotiations and to take account of the involvement of the state of Hesse, which has shown a desire to boost Frankfurt as a hub at the expense of London, which is indicated in the report of Professor Dirk Schiereck, commissioned by Deutsche Börse in January 2017.
In the past few days a Minister in Hesse indicated that the headquarters of the merged group should be in Germany: 'The reasons for the headquarters being in Frankfurt are crystal clear'.
The objective could not be clearer. It is inconceivable, in the UK national interest, that the London Stock Exchange should be regulated in and operated out of Germany as we leave, and having left, the European Union.
There are also questions, as yet unresolved, surrounding the new chief executive officer, who is under investigation for potential insider dealing in connection with the London Stock Exchange deal, and the regulatory relationship between the United Kingdom and the EU which forms part of the Brexit negotiations. It would not be in the public interest for the combination of the two groups to be achieved immediately in advance of those negotiations, since that would give commercial parties operating at the behest of German political masters the ability to remove the rug from underneath the UK’s feet without regard to the negotiated outcome, or to threaten to do so during the negotiations unless the UK made certain concessions.
If the deal goes through, the combined group will be able to bulk up euro clearing and exchange and business clearing generally in Frankfurt at the expense of London. Given the declared political objective to promote Frankfurt, Paris and the eurozone, that is not an outcome in the UK’s national interest.
I am pleased to see that this important issue of safeguarding the UK's financial interests is growing traction with fellow MPs. Tory Anne Marie Morris has written to the Prime Minister, urging her to block, or at least attempt to postpone, the deal. 'As we enter Brexit negotiations the end game is far from clear,' she wrote. 'This is not a time to risk uncertainty in our financial markets. Act and intervene using government powers and through these authorities to postpone the decision until April 2019'.
She also expressed fears that the exchange’s headquarters could, in time, be moved to Frankfurt and that regulation of the London Stock Exchange could remain in the EU.
Morris, who is chairing an all-party parliamentary group called Business Brexit, added: 'The London Stock Exchange locked in the EU does not bear thinking about'. I couldn't agree more.
Sir Bill Cash is a British Conservative politician and MP for Stone. He is the Chair of the House of Commons’ European Scrutiny Committee.