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Don’t just blame the regulator for London’s failed American dreams



When the UK suggested making board directors responsible for signing off internal controls over financial reporting, the reaction was furious. This was business unfriendly, City grandees thundered, it would deter good people from joining boards and bog down directors in bureaucracy.

The proposal was modelled on the US Sarbanes-Oxley rules, which function perfectly well in the land of the free. But the British government backed off from the idea.

The US is also the home of so-called quarterly capitalism, which is so burdensome and short-termist that it was scrapped as a UK requirement in 2014 in favour of less frequent reporting. The hamster wheel of US disclosure is overseen by renowned pushover the Securities and Exchange Commission, backed up by a nation of rampaging lawyers ready to drop a class-action lawsuit at every opportunity.

Yet companies such as chip designer Arm, cement group CRH and betting group Flutter are keen to enter this hostile environment, attracted by a bigger, more liquid pool of capital that currently tends to dish out higher valuations than the UK market. The wrong response would be to fixate on the individual gripe behind each migration, rather than looking at the bigger picture.

It is, incidentally, an open question whether interlopers to the US fare as well there as do homegrown companies. Unlike for the FTSE, there is a hefty dose of discretion concerning who makes the cut as one of the “leading companies” in the S&P 500 index: this also requires being deemed a US company, not merely US listed. The London Stock Exchange points out that (excluding special purpose acquisition companies) international IPOs on US markets raising more than $100mn since 2018 are down 37 per cent, versus domestic listings up 4 per cent.

But still they go. SoftBank’s decision against a dual-listing for Arm in favour of a US-only float is particularly galling. It was only worth SoftBank’s while to do a simultaneous London listing if it qualified for the index. Reportedly, it didn’t want to sign up to the rules for London’s “premium” market segment, a condition of FTSE 100 inclusion. In particular, it didn’t like the related party transaction rules.

It’s not obvious why these rules would be such a headache for SoftBank, according to some City advisers. The crux of the UK rules is that independent shareholders should vote on transactions with a related party that are over a certain size. (The US variant is to disclose and let everyone sue you if they don’t like it). But activities in the ordinary course of business are excluded. Unless Masayoshi Son has some particular dealmaking in mind, you wonder why this was such a stumbling block?

Either way, it seems churlish to point fingers at the regulator. The Financial Conduct Authority is reviewing the premium requirements already, as part of a process considering collapsing premium and standard into one segment. True, its original paper was quite confused; it has moved more slowly than some might like. But the regulator’s initial findings last year were that most respondents saw value in the related party safeguards and few cited them as a barrier to listings. It would seem hard to justify a SoftBank exemption for a market rule that garners widespread support.

London has been down this road before, embarrassingly tweaking rules to accommodate the listing of Saudi Aramco in an attempt to get one over on New York. It didn’t happen and the new sovereign category created within the premium listing rules has never been used. In any case, that fudge wouldn’t necessarily have secured index inclusion given that the decision on the latter rests with FTSE Russell.

The downsides of a US listing are sucked up as a cost of doing business there, which used to be the case for London. Updating the UK’s suite of listings and governance rules is part of addressing that. But so is long-term pensions reform, rebuilding a dwindling domestic investor base, and closing a valuation discount born in part out of Brexit and political dysfunction. What shouldn’t be is kowtowing to every big issuer’s particular niggles for fear they’ll go elsewhere.

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