Issue of the week: is London’s reputation for sale?

Saudi Aramco’s flotation would bring bumper fees, and it could be the first of many – but investors fear the cost is too high

Over the past 30 years, a reputation for having markets “governed by highquality, impartial regulation” has become a major selling point for the City, one that has encouraged other countries to do business here, knowing they won’t get ripped off, said Anthony Hilton in the London Evening Standard. So fund managers are understandably furious that the Financial Conduct Authority (FCA) is now planning “to throw principle out of the window in a craven attempt to persuade the government of Saudi Arabia to choose London as the place to list its oil business Saudi Aramco”. If it goes ahead, it would be the biggest listing ever seen, with a possible price tag of $2trn for the 5% of shares on offer, and create a “bonanza” in fees worth hundreds of millions to lawyers and other professionals. But the downside is that Saudi Aramco’s “standards of transparency and governance” fall far beneath those normally required to protect outside shareholders in major listed companies. Fawning to the Saudis “diminishes London”, said The Observer. Could it be that the regulator has been leaned on “by political masters who crave a post-brexit endorsement of the City’s pulling power”?

The FCA’S proposal is to allow state-owned companies to qualify for a coveted premium listing without having to satisfy all of the normal rules to protect investors, said The Daily Telegraph. Firms usually have to be selling at least 25% of their stock to qualify for a premium listing. It seems that, in addition, firms in the new subcategory would not have to disclose transactions with their sovereign owner; nor have to allow shareholders to vote for independent directors. If the FCA plan comes to pass, chances are it wouldn’t just attract Aramco to London, said Dasha Afanasieva on Reuters.com. Falling oil prices have “spurred privatisations” across the Middle East. London might also hope to attract state companies from Kazakhstan and Russia, and other places. “In the run-up to Brexit, London is appealing to the world outside of Europe.”

But how to square this with London’s reputation for high standards and low investor risk? The FCA is hoping that, by insisting companies in its new subcategory meet the other requirements of a premium listing, the integrity of the “premium” label will be retained, said the FT. It’s like when high-end fashion labels create cheap diffusion ranges to flog to the masses, so they can make more money without harming their core brand. The trouble is, if an exchange moves shoddy goods, “its legitimacy is endangered”. Reputations are like cake. You can’t have cake and eat it. London’s reputation cannot be “both had and sold”.