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Fears for tiers

Regulation. Helen Pow finds widespread opposition to the FSA’s dual-listing plans but some believe it would be positive.

The FSA’s proposals for a two-tiered set of stock exchange listing rules have angered many people in the investment industry.

The plans would allow offshore companies to list under chapter 14 (equal to the European minimum directives) while onshore companies will still be subject to the more rigorous chapter 15.

Senior industry figures believe that the FSA’s attempt to enhance the competitiveness of the London Stock Exchange would be to the detriment of investor protection and could bring about another split-cap debacle.

Technically, there has been a two-tiered system of regulation in place since 2005, yet virtually no companies have listed under chapter 14 as yet.

Last March, the FSA issued a consultation paper on its proposals to liberalise chapter 15, to allow more alternative companies to list. But after suggesting it would scrap the two-tier system of regulation, the FSA made a U-turn, proposing in October to retain it.

Under chapter 14, companies do not have to maintain a spread of risk, have an independent board or report how they apply the combined code on corporate governance. Most worryingly, though, companies are allowed to build up substantial cross-holdings, which was the prime cause of the split-cap crisis in 2001/02. The consultation period for these proposals ended last week.

Industry bodies, including the Association of Investment Companies and the Financial Services Consumer Panel have been campaigning for the FSA to change its mind.

AIC director general Daniel Godfrey said last week: “Funds want to launch in London for the cachet and the liquidity. Both these benefits flow from the reputation of quality that London enjoys. Retaining chapter 14 would turn London into a commodity with lowest common denominator standards and pose unacceptable risks to investor wealth.”

Seven Investment director Justin Urquhart-Stewart says: “London is keen to increase its listings to expand the market but we need to keep up standards, otherwise the market will deteriorate.”

In the 1970s, the Vancouver Stock Exchange had a reputation for being a casino rather than a respected list of companies says Urquhart-Stewart, who fears the same could happen in London.

He says: “We can relax the restrictions but we must make sure we do not ruin our standards because markets are often judged by the lowest common denominator. If you lower the Thames barrier, you could end up with murky waters coming ashore.”

Royal London Asset Management chief investment officer Robert Talbut says: “There is a danger that we are looking at watering down standards and I think that would be a retrograde step.”

Bestinvest head of communications Justin Modray says: “The person who will lose out is the consumer. More overseas investment companies listing in London potentially means investors may invest in more high-risk investments or poorly regulated investments.”

He is very concerned that the relaxation of restrictions, particularly allowing cross-holdings, could result in a misselling crisis.

Modray says: “You would have to be a very experienced investor to understand the way that different companies are regulated. I think there is potentially a big risk of people buying inappropriate investments. If it were to blow up, it would be disastrous. We are still recovering after the split-cap crisis but if there was another one it would be a death knell for the investment industry.”

Godfrey comments: “The investment company industry has only recently recovered its historically good reputation and everyone involved in the sector should want to ensure that investors do not suffer a new scandal.”

There is also criticism of the FSA’s priorities. Should the regulator put consumer protection above the promotion of the London Stock Exchange?

Both objectives feature in the FSA’s mandate. The regulator also acts as the UK listing authority and can have conflicting responsibilities, which include providing appropriate protection for investors and maintaining the integrity and competitiveness of UK markets for listed securities.

Talbut says: “The FSA has both investor protection and accessing capital in its mandate but I think the pendulum has swung a little bit too far in one direction. The FSA has a lot of thinking to do about whether it is striking the right balance between the two.”

But Baring Asset Management chief investment officer Michael Hughes believes the pendulum is swinging the right way. He says: “The momentum is very positive at the moment so it is important that the regulation and tax regime does not dissuade from that momentum. I think London has taken over from New York as the major financial centre so regulation does have to be supportive. The advantages would far outweigh the disadvantages.”

Many people fear the inequality the two-tier system presents between onshore and offshore companies could bring problems. It is much easier to list and exist in the market under chapter 14 so UK companies are likely to feel disgruntled.

But the AIC says the FSA will be obliged to extend the use of chapter 14 to all investment companies because if it believes there are benefits for overseas companies, it will not be able to justify denying these benefits to UK companies.

Modray believes a single set of rules for all companies is the only approach. He says: “We need one tighter regulated system. London’s market may lose out but the risks are too great to risk another blow-up.”


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