Thursday, September 14, 2006

The future of world capital markets (Part 2): MP Balls goes to Hong Kong

While the debate heats up in the United States over the Sarbanes-Oxley Act and regulation of U.S. capital markets (see here), it is also going strong in Great Britain. For the past four years, the UK—and particularly the London Stock Exchange and the UK Financial Services Authority—have been advertising London as a “Sarbanes-Oxley-free” zone. Whereas in the United States, regulators brag about their ferocity and willingness to go after evil-doers and crooks, the UK FSA boasts of its “light touch,” its “risk assessment” and, generally, its overall business-friendly financial environment. Just as an example, in 2004 when it was discovered that Royal Dutch Shell had vastly overstated in its financial statements the amount of proven oil reserves it controlled, the U.S. SEC fined the company $120 million, while the UK FSA levied only a $30 million fine. Granted, a total $150 million fine is very little for a company that makes nearly $20 billion a year in profits, but keep in mind that the $30 million FSA fine was the largest fine it had ever levied, by a factor of four! (See here, if you don’t believe me.)

Add in that the FSA brings only about a dozen or so enforcement cases each year, and one wonders if crime really does pay.Nonetheless, with U.S. businesses wailing and gnashing their teeth over Sarbanes-Oxley, the UK sounds a triumphant note every chance it gets. While the Commission on Capital Markets Regulation points out that 24 of the 25 largest IPOs this past year have not listed in New York, London boasts that a good number of those actually have gone to the London Stock Exchange.Still, one wonders sometimes if not all is happy over there. For one thing, we have this little bit of news from the Financial Times (“
Warnings weaken AIM’s ambitions” by David Blackwell) that notes that the London Stock Exchange’s small-cap market has been underperforming the broader market, calling into question whether AIM’s nominated advisors are able to “carry out sufficiently tough due-diligence processes on international companies.”

The second point is a speech by Ed Balls, UK Member of Parliament and Economic Secretary to the Treasury. This speech (see
here]) starts with the (by know) standard praise for London and how it is this wonderful financial center positively kicking the pants off the Americans. And then Balls says something amazing:

[O]ur interest in the ownership of the LSE is that it should not affect the existing light-touch, risk-based regulatory regime under which the exchange and its members and issuers operate.The FSA has also made clear that the way it operates the UK’s regulatory regime in respect of exchanges is neutral to the nationality of ownership.

However, in his statement of 12 June, Sir Callum McCarthy, chairman of the FSA, made clear that overseas ownership of the LSE exchanges raises uncertainties about the regulation of the exchange and its issuers going forward.It has been put to me that the right approach is Government intervention to protect the LSE from foreign ownership.

I reject this argument. This would fly in the face of the traditions that have underpinned the City's success. A policy of protecting “national champions” would damage, not bolster the interests of London and the UK. The Government’s interest in this area is specific and clear: to safeguard the light touch and proportionate regulatory regime that has made London a magnet for international business. That has made London an economic asset for the UK, for Europe, and for countries throughout the world.

I can therefore announce today that the UK Government will now legislate to protect our regulatory approach.This legislation will confer a new and specific power on the FSA to veto rule changes proposed by exchanges that would be disproportionate in their impact on the pivotal economic role that exchanges play in the UK and EU economies. It will outlaw the imposition of any rules that might endanger the light touch, risk based regulatory regime that underpins London's success.


Clearly, MP Balls doesn’t mean this to say that the FSA should have the power to oversee the LSE’s listing requirements, like pretty much every securities regulator has. I mean, it already has that, right? (Though, I guess, maybe it doesn’t.) What MP Balls really means is that they won’t let that nasty SEC export Sarbanes-Oxley to the UK, goddammit! We shall defend our Island, whatever the cost may be! We shall fight on the beaches, we shall fight on the landing grounds, we shall fight them all over Canary Wharf! We shall never surrender!

Hey, sounds like a winner to me. You keep on keeping on with your bad self! But do you really need an Act of Parliament to keep the SEC from imposing Sarbanes-Oxley on a stock exchange in the UK, particularly since it has no power to do so and has even
gone out of its way to say this?

Seriously, are you guys scared of your own shadows, or is this just fear-mongering, as a way to keep the NYSE and NASDAQ from buying up the London Stock Exchange?

Geez, the things people will say when faced with their imminent irrelevance.

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