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Will FCA listen to institutional concerns on listing rules?

Will FCA listen to institutional concerns on listing rules
Posted October 19, 2017

David Worsfold

Major financial institutions and investors are holding their breath as the Financial Conduct Authority ponders the angry response to its proposals to drastically water down the rules for listing sovereign-controlled companies on the London Stock Exchange.

The bitter row was sparked by the search by Saudi state-owned oil company Aramco for a listing on a major stock market. The FCA responded by putting forward plans in July – after meeting Aramco bosses and Saudi officials – for state-owned companies such as Aramco to qualify for a so-called premium listing on the London Stock Exchange, with less onerous disclosure and reporting rules and lowering the requirement for 25% of shares to be available to UK investors to just 5%.

World stock markets have been lining up to attract this lucrative slice of business. The Saudi government is aiming for a valuation of $2 trillion for the oil giant’s flotation, potentially making it the most valuable listed company in the world. It is widely understood that the choice is now between London and New York. But UK institutions are horrified at the way the regulator appears to be bending over backwards to secure the listing.

The International Corporate Governance Network (ICGN) has described the plans as “fundamentally flawed”, saying the UK should be pursuing a “race to the top” as it seeks to improve rather than relax regulation.

“We object to the watered down governance provisions which increase risk and the ‘premium’ labelling, which we believe is misleading”, ICGN said.

“The UK’s reputation for high-quality listing and governance standards is both a competitive advantage and a positive differentiator for the UK market in a global context. In the quest to grow and develop further, market integrity is something that must be preserved , and not diluted.”

Other industry groups, including the Institute of Directors and the Investment Association, also challenged the proposal, saying it would harm the UK’s world-leading reputation for institutional integrity, although the City of London Corporation came out in favour.

Politicians have joined the debate, especially after it was revealed that FCA chairman Andrew Bailey met Aramco in July. This followed a visit to Saudi Arabia in April by the Prime Minister Theresa May and Xavier Rolet, chief executive of the London Stock Exchange to meet Khalid al-Falih, Aramco’s chief executive and the kingdom’s energy minister.

The chairs of the key Treasury and the Business, Energy and Industrial Strategy select committees, Nicky Morgan and Rachel Reeves, wrote to Bailey demanding further information on the plans, including how far they have been influenced by Saudi officials and Aramco itself.

In her letter, Morgan warned that stock exchange listing rules for sovereign-controlled companies must not dilute the protection expected by investors.

“The UK has a world-class reputation for upholding strong corporate governance. The FCA must protect this reputation, especially as the City looks to remain competitive and thrive post-Brexit”, she said

Reeves added: “As we leave the European Union, it’s important the UK seizes new opportunities for business but it should not be at the expense of diminished corporate governance standards.”

As the consultation deadline closed last week, leading institutions took to the airwaves to press home their concerns

Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management told BBC Radio 4’s Today programme why they were opposed to changes:

“We agree that the UK must stay competitive and we understand there is a lot of competitive pressure from other listing authorities – like New York, like Hong Kong – but these rules have been put in place for a reason. There have been companies that have come to list here in the past under lower governance standards and frankly shareholders lost a lot of money because these protections weren’t in place”.

FCA chair Bailey has tried to play a straight bat in the face of these criticisms, pointing out that the FCA routinely has confidential meetings with companies considering a flotation.

“However, given the public discussion of these events, we can confirm that we held conversations with Saudi Aramco and their advisers in light of their interest in a possible UK listing in the early part of this year. We emphasised during those conversations that we were reviewing the listing regime”, said Bailey.

The fear among the institutional investors opposing the move is that far from the UK leading a “race to the top” with listings rules, it could be involved in a race to the bottom with New York, which is being urged by President Trump to lighten financial regulations.

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