Friday, 14 July 2017

British Regulators Attempt to Attract Aramco to London: The Effects of Brexit

Today’s post looks at the news that the Financial Conduct Authority, the British regulator in charge of protecting the interests of the investing public (amongst other mandates), is considering reducing the standard required to list on the London Stock Exchange in order to attract the proposed public offering of 5% of Saudi Aramco’s shares – which will be the largest ever flotation. In just the second ever post here in Financial Regulation Matters, we discussed the potential of Britain succumbing to unscrupulous forces in the wake of Brexit, primarily due to desperation. More recently, we discussed how crucial corporate governance reforms have fallen by the wayside because of the decision to leave, and today’s news concerning Aramco is, unfortunately, a manifestation of the two posts – there is a real fear that the need to look attractive to big business is fundamentally setting the ‘smaller’ components of British society back considerably; this time, minority investors are in the firing line.

Saudi Aramco, or officially the Saudi Arabian Oil Company, is to all intents and purposes the largest company in the world, although the valuation of the company differs depending on where one reads, varying between $1.2 trillion, $2 trillion, and even as high as $8 trillion. Suffice to say, the proposed offering of just 5% of the firm’s shares has sent stock exchanges into overdrive with the multitude of fees that will be attached to such an offering and, apparently, the shortlist has been reduced down to just London and New York. In order to appear more attractive than New York, the British regulator - The Financial Conduct Authority (FCA) – has today proposed that the criteria for a new ‘premium listing’ be altered so that State-owned companies can qualify for premium-listed status without meeting two key criteria: The first relates to how the company and the controlling shareholder can conduct deals with each other; the second relates to allowing investors a vote on independent directors. However, financial professionals have been quick to condemn this proposal, as the dilution of the premium-listing category at once reduces the allure that it brings for investors, and also brings forward the very important concern that the listing would then ‘not provide the protections that investors expect’. The deduction that any interaction between the sovereign owners of the firm and the firm itself would not be subject to shareholder approval has forced the FCA to respond, with the assertion being that ‘sovereign owners are different from private sector individuals or companies – both in their motivations and in their nature’. Yet, this proclamation by the clearly-biased regulator did not assuage concerns that the move will ‘reverse the progress [London] has made in recent years to uphold strong governance and protect minority shareholders’. Minority investors will naturally be at risk in such an arrangement, which would usually never grace the prestigious premium-listed category, but this is no ordinary offering and these are certainly not ordinary times. Although pro-market campaigners argue that this dilution of standards is the ‘sort of flexibility which makes London such an attractive financial market… for this is indeed a financial market, a free one’, this incredibly short-sighted viewpoint misses a number of extremely important issues. What precedent does it set? What of the instability in the company’s region? What of the instability in the host exchange’s region?

We have discussed the post-2016 arena on many occasions here in Financial Regulation Matters and, in a post looking at lobbying in the United States, the phrase ‘selling to highest bidder’ was mentioned. However, in this case, it is not just the highest bidder that is of concern, but any input into the financial sector that is of real concern to the British politicians. When Prime Minister May visited Riyadh earlier this year alongside the head of the London Stock Exchange, the purpose of their visit was no secret. The motivation for this, rather obviously, is the threatened abscission from the City of London once the U.K.’s secession from the E.U. is confirmed – the extent to which Britain relies upon the City means, quite simply, the British Government must do anything it can to pump lifeblood into a City under siege. Yet, if we look at Aramco and its controllers, we the depths that the British Government is seemingly more than willing to stoop to. Saudi Arabia is currently involved in a particularly gruesome war with rebels in Yemen, and is in the midst of a crisis with Qatar over the emirate’s supposed financing of terrorism, which has raised more than an eyebrow considering the widely-held belief in Saudi-Arabia’s financing of terrorism, with a Republican Senator recently stating that the Saudi’s funding of terrorism ‘dwarfs what Qatar is doing’. In addition to these stories, the long-held understanding that the Country is one of the worst abusers of Human Rights in the world is seemingly not enough to stop the British Government and its regulators from reducing the scrutiny that the firm would be under, just to encourage it to list in London.

Ultimately, the fears after the decision to the leave the E.U. have not only been realised, but they have been surpassed. It is only a year after the decision was made, in the slightest of majorities, and the Government is already acting in earnest to reduce the level of regulation in order to garner investment – with investment being an overused term in this sense; the fees that would go to Financial Professionals is the driving factor here. The manner at which the Government is courting Aramco’s listing is akin to putting a plaster on a gaping wound – it is too late, and reducing the standards required makes the situation irrevocably worse. One commentator noted that the proposed reduction in standards is not of importance because in Britain ‘we’re ruled by Common Law’, and the ‘flexibility’ that is demonstrated by this reduction in standard ‘secures London’s pre-eminence’ – it is argued here that the reality is exactly the opposite; what this reveals to outsiders is that standards are not cherished in this country, they are for sale. With that in mind, any aim to be the ‘leading financial centre’ are ludicrous, because the foundations of trust and certainty are being eroded every time such a move is even proposed, never mind implemented. The FCA would do well to back down and protect the standards that London has been famed for, rather than cash-in on them so that the City does not fall on their watch.

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