Quoted companies should shun the regulatory race to the bottom
There has been one set of rules for foreign firms wanting a London share listing and another for UK companies. It is right to level the playing field but it is wrong to choose the lowest common denominator by easing standards for British companies.
Regulators at the Financial Services Authority (FSA) have decided to extend to UK companies the secondary listing regime that has attracted so many foreign companies to London. It is an unnecessary application of light-touch regulation however when the financial crisis has emphasised the dangers of lax supervision.
UK companies have until now been able to seek an Aim quotation on the Alternative Investment Market or a full primary listing. Aim requirements are much less onerous and companies using that market (usually, though not necessarily, smaller firms) are treated with suspicion by investors who wonder why a lightly-policed market has been chosen. Many Aim companies aspire to moving to a full listing to benefit from the greater respect of companies using that market.
However, foreign companies have been able to apply for a secondary listing that entitles them to trade alongside UK firms with primary listings. These secondary listings do not require companies to meet the standards of other firms: they can ignore the corporate governance code, for instance, and issue shares without applying pre-emption rights to offer them to existing investors. Secondary listings also allow a lower level of disclosure.
For several years the London Stock Exchange courted these foreign companies who preferred to list their shares in the UK rather than their home countries. London became a listing of convenience in the same way Liberia or Panama are used by shipowners to register their fleets.
The FSA regulators are right to address the problem of lax standards for foreign companies but they are wrong to relax the rules for UK firms, effectively allowing them to use secondary listings too. It suggests that winning foreign business for the Square Mile is still more important than providing a market that can be trusted by all.
The hope must be that few UK companies will want to be associated with the Russian, Asian and other foreign companies that have shunned their home markets for a London listing and which can use different accounting standards, different currencies and hold shareholder meetings in far away lands. In practice however, some companies will think the damage to their ratings and reputation worth it for being less regulated.
Investors should ask what they have to hide and treat them accordingly. Good companies should continue to strive to apply the standards necessary for a full listing.
