City lawyers fear two-tier regulation will leave London out in the cold

Plans for the future of the UK Listings Authority are causing concern, says Gavriel Hollander

In the long and rich history of unpopular government proposals it might not be in the same league as the Poll Tax, but there is already a significant wave of opposition forming to plans for the future of the UK Listings Authority (UKLA); plans that may have an enduring influence on the strength of the London markets.

The proposals are part of the coalition Government’s wider move to breakdown the Financial Services Authority (FSA) into its constituent parts and redistribute them around the City’s quango-laden hinterland.

But what in some instances is likely to be little more than a rebranding exercise or the movement of a few chairs between offices, in others signals a potentially fundamental change in the regulatory landscape.

A Treasury recommendation to move the UKLA into the Financial Reporting Council (FRC) has been met with widespread opprobrium across the City. The London Stock Exchange (LSE), Institute of Directors (IoD) and Confederation of British Industry (CBI), among others, have already voiced public concerns about the plans.

The consultation period comes to an end next week (18 October), and the Treasury should be preparing itself for a sizeable ­mailbag.

The LSE, for one, argues that the function of the UKLA should be shifted to the Consumer Protection and Markets Authority (CPMA) instead of the FRC, given the former body’s role in acting as a regulator of the secondary markets. It is a view supported by many across the City.

The criticism of the proposals takes three distinct forms: that they would needlessly separate the regulation of the primary and secondary securities markets; that they would negatively impact on London’s primary market clout at the European Securities and Markets Authority (ESMA), given that the UK’s seat is occupied by CPMA; and that they would put the business of real-time market regulation into the hands of a body that has no experience of doing this.

For lawyers, both in-house and in private practice, the threat of a more complicated and, ultimately, costly, two-tier regulatory system is that it could make London a less attractive proposition for potential issuers at a time when the market needs all the help it can get.

LSE company secretary Lisa Condron says the impact will be felt far and wide unless the government listens to the naysayers.

“It could lead to a less efficient, more difficult process,” Condron explains. “If the process is more complicated it could be more expensive too, and if London is seen as less efficient then issuers could go to its competitors.”

While the disintegration of the FSA may have been inevitable following the demise of the Labour government that championed it, it is the way the functions of the City regulator will be sliced and diced that has caused such ­consternation.

“For primary markets to be regulated by one body and secondary markets by another doesn’t seem to make sense,” says Ashurst corporate partner John Parry, who spent 18 months on secondment at the UKLA earlier in his career. “This could easily result in conflicting rules. If this move resulted in inconsistent approaches then it could only be a negative thing for London.”

The GC100 group of general counsel, currently chaired by SAB Miller legal chief John Davidson, is preparing a response to the plans.

“The consequence for us is that as issuers we’ll have to deal with two rule books all the time,” says Davidson. “It’s just going to make it more complicated and we’re struggling to see why you’d want to do it.”

An extensive ring-around of capital markets lawyers in the City also fails to deliver any explanations of the rationale behind the proposals.

The suggestion from many is that the decision is the consequence of a turf war between competing factions within the Treasury.

“At the heart of this is an entirely political issue,” says one senior City source. “Nobody is in favour of it – it’s an example of politicians making decisions that have real consequences for companies and financial markets.”

And as the LSE is at pains to point out, the real impact will not be on the financial institutions that have become a target for Westminster crowd-pleasers, but the British companies that need support to help fuel the economy.
“Whatever synergies there are [between FRC and UKLA] are so small relative to the cost of split-market regulation to listed companies that it doesn’t even begin to stack up,” says Herbert Smith ­corporate head James Palmer. “You could say that the split would create more work for lawyers but that comes at a cost to effective regulation and to our clients.”

Freshfields Bruckhaus Deringer consultant Vanessa Knapp, a member of the European Commission’s advisory group on corporate governance, is another who sees the plans as counter-intuitive.

“At a time when life is hard enough anyway [for businesses], this makes it even harder,” she says. “Everyone’s been concentrating on the regulation of financial ­services and maybe people haven’t had as much time to think about this. We hope the government will listen to all the ­arguments.”

City regulators have come under consistent attack ever since the first waves of the financial crisis began to break three years ago. But Palmer is one of many who argue that the latest move is aimed at the wrong target.

“The irony here is that we have a really successful market regulator being divided in a way that’s going to make it less effective.”

With the consultation period almost at an end, the hope across much of the City is that the weight of opposition makes an impact with the Treasury powers-that-be.