City watchdog delivers a blow to Deutsche Börse over LSE

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The Independent Online

Deutsche Börse's proposed bid for the London Stock Exchange has suffered a damaging setback after Callum McCarthy, the chairman of the Financial Services Authority, highlighted serious concerns about a foreign takeover of the LSE.

Mr McCarthy said users' fears over future regulation and investor protection would be allayed by the LSE having a parent company based in the UK and its primary listing on the London market. Such an arrangement, however, would be impossible under the proposed bid for the LSE outlined a week ago by Börse, the Frankfurt-based markets operator, although it is thought Euronext, the Amsterdam-based rival bidder, would be willing to relocate to London where it already employs more people than the LSE.

The fact that Mr McCarthy has chosen to speak publicly about the implications of a foreign takeover of the LSE will be seen as highly significant. Mr McCarthy's comments came in a statement designed to kick-start a public debate about how things might change in the City if the LSE fell into foreign ownership. His statement highlights a number of possible implications which Mr McCarthy said needed "careful consideration".

These include the LSE becoming a "passported" activity, with trading conducted in the UK but on a market operated from elsewhere. This would result in the UK listing rules and codes on corporate governance no longer applying. The LSE would be relegated to a more junior role and there would be changes to the role of the Takeover Panel.

Although he was careful to remain indifferent as to any potential future change of ownership of the LSE, he was at pains to point out what could result because "there has been little public discussion" of the possible long-term implications.

He said: "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."

Börse said it welcomed the FSA's comments, which emphasised the regulator's indifference to the nationality of the owners or the managers of the LSE. It said: "As outlined in our proposal, we are committed to ensuring the continued operation of the London equity market operated by the LSE in a manner consistent with past practice while delivering improvement and benefits to all stakeholders. In particular, our suggested corporate governance structure reassures stakeholders about the longer-term durability of the suggested arrangements."

Euronext underlined its own regulatory credentials, saying: "As a cross-border international company, Euronext has a proven track record of operating in a number of regulatory regimes. We understand fully the issues the FSA is raising. We have successfully integrated Liffe, a UK regulated investment exchange, into our business. Euronext has a working knowledge and understanding of the UK corporate governance and best practice in its markets."

Börse intends to keep the LSE's status as a recognised investment exchange in the UK, regulated by the FSA with its own management board separate from the Frankfurt-based head office. Mr McCarthy stressed the FSA's openness to foreign acquisitions of financial institutions, citing Santander's recent purchase of Abbey. "It is a policy in marked contrast to that adopted by at least some [EU] member states," he said.