As a new FCA chair steps up, we need a crack down on offshore firms’ lax rules
Hopefully, guided by a new chair, the FCA will make progress in holding offshore firms who don’t follow the rules to account, writes Sadiq Bhatti
Hong Kong’s longest-serving market regulator, Ashley Alder, is leaving his post to become chair of the UK’s Financial Conduct Authority (FCA). The appointment marks a fresh start for the FCA, which has faced backlash over its lack of accountability and slow response to a string of scandals. He will be essential for helping the FCA to grab the opportunity it now has to become a regulatory pioneer in a post-Brexit world.
Alder will take over from interim FCA chair Richard Lloyd this month, after leaving his post as chief executive officer of the Securities and Futures Commission (SFC) of Hong Kong as well as chair of the International Organisation of Securities Commissions. His successor in Hong Kong will inherit a robust and effective regulatory framework.
Of course, it remains to be seen whether Hong Kong’s status as a financial centre and the rights of shareholders will deteriorate as practices from mainland China seep into the city. Particularly concerning given we have seen Chinese state-owned companies delisting from the New York Stock Exchange in a bid to avoid scrutiny from regulators.
Thanks to Alder’s independent work, Hong Kong has introduced tougher rules for initial public offerings in Hong Kong; heavier fines on financial institutions for misconduct; increased scrutiny and penalties following the 2008 financial crisis; and an obligation that the SFC puts shareholder and consumer protections at the heart of its work. Most recently, Hong Kong’s Stock Exchange implemented new measures to enhance and streamline the listing regime for overseas issuers.
One major reform under the new approach is the introduction of one common set of core shareholder protection standards that will apply to all listed issuers, providing the same level of protection to all investors. Notably, one of the core standards that will be introduced will require issuers to approve their voluntary winding up by a super-majority vote of members in a general meeting. This prevents minority shareholders from being squeezed out by loopholes in overseas territories.
Indeed, there have been many outcries against the lack of investor protection for minority shareholders in UK listed issuers incorporated in offshore jurisdictions such as the Cayman Islands and Bermuda. Recent examples include a forceful takeover of a UK listed company controlling shareholders based in China at significant undervaluation. Although there is a judicial remedy called appraisal, through which the aggrieved minority shareholders can ask the Cayman and Bermuda courts to determine fair value of their shares, the process is expensive, lengthy and a court valuation is often significantly below what the market participants believe is “fair”.
The UK prides itself on maintaining globally-recognised governance standards for companies listed in London. Our regulators have extensive powers and resources to take action in the interest of shareholders. But we are falling behind key European markets, with the World Bank’s league table of shareholder governance ranking us behind France, Spain and the Netherlands. There are hundreds of companies listed on the London Stock Exchange which have links to overseas tax havens with lower corporate governance standards. Other jurisdictions, including Hong Kong, are already moving to take action to address this.
As the structure of our public markets changes, with the FCA set to introduce new rules to accommodate dual class share structures and a reduction of minimum free float requirements, there will be an imperative to ensure that shareholders are not exposed. UK regulators should be working directly with their counterparts in overseas territories to ensure all shareholders are properly protected, and to find an effective regulatory balance.
If businesses are listed in London, they must meet London’s standards. We need regulators with the teeth to maintain these standards at an international level, with meaningful oversight of overseas territories.
This is a crucial phase in the FCA’s history as it navigates the UK’s post-Brexit future, while helping to maintain London’s status as a global financial centre which supports innovation and competition. There will, and should be, pressure to deliver this mission with a relentless focus on consumers and shareholders, upholding its world-leading regulatory standards in an increasingly complex global financial system.