17 September 2006

FT: Sox is not to blame – London is just better as a market

In the past 18 months, the London Stock Exchange has attracted 152 international companies to its markets. Over the same period in America, the New York Stock Exchange and Nasdaq have attracted a combined total of 54 international companies. These figures are part of an important body of statistical data that confirms London’s lead over New York as a venue for international companies seeking to raise growth capital.

Confronted with these data, the response of some practitioners in the US market has been curious. Rather than consider what may be drawing companies to London, they have focused only on what may be repelling them from the US and, in so doing, they have singled out the Sarbanes-Oxley Act (Sox) for special mention.

At one level, it has been suggested that international companies listing outside America want to avoid submitting themselves to the highest standards of regulation. As the head of one US exchange put it: “By setting the bar so high in the US, Sox has had the unintended consequence of triggering a ‘race to the bottom’ by stock markets and companies.”

This line of argument may reflect a combination of sour grapes and a tendency to believe that bigger must mean better; that in creating the world’s heaviest rulebook the US has also created the most effective and trusted regulatory environment. However, this view does a disservice to both the international companies that are coming to London and the world-class standards of regulation to which they aspire.

Indeed, London’s principles-based regime, rather than a more prescriptive rules-based approach, continues to prove itself as a model that facilitates pro-competitive innovation in a tough but sensible regulatory environment. All the important independent corporate governance surveys confirm that the UK is number one for corporate governance standards.

At a more practical level, US market participants do recognise the strength of the negative sentiment towards Sox, in particular from smaller companies for whom the cost – in time, dollars and legal risk – represents a serious disincentive to growth via initial public offerings. These participants are hopeful that, with some minor modifications to the law, US markets will once again attract the lion’s share of international listings.

This hope underestimates the attractions of the City of London and its competitive pedigree. The truth is that Sox has become a convenient focal point for explaining away the success of London’s financial district. It is easy to forget that the City has a strong track record in competing for international listings. At the end of 2000, long before Sox, there were 532 international companies on the LSE compared with 488 on Nasdaq and 433 on the NYSE.

London’s competitive advantage is clear: it has the world’s deepest pool of international liquidity; it has a wide range of institutional emerging market investors; it has broad analyst coverage; it offers an unrivalled choice of markets on which to list; it is the gateway to a budding eurozone; and, critically, the City promotes world-class regulation and corporate governance standards. This is why the profile associated with an LSE listing provides real value. London offers a highly competitive product to companies who seek to join the global economy, enhancing growth prospects around the world, helping to build new economies and providing hope through prosperity.

London also has a significant cost advantage. As a recent report commissioned by the City of London governmental body and the LSE found, IPO underwriting fees in London are typically 3 to 4 per cent of funding proceeds, compared with 6.5 to 7 per cent in the US.

At the LSE, we work alongside our members and the Financial Services Authority, the City regulator, for continual improvement in the quality of our increasingly global market. This is reflected in our international marketing strategy, the current roll-out of completely new technology and the refinement of our product to accommodate demand for new types of markets such as the Professional Securities Market for issuers from countries that are unable to reconcile their local accounts with international financial reporting standards.

The British government also sees the City’s success as part of the country’s growth story in the global economy, with the Treasury increasingly engag-ed in promoting our distinctive financial centre. The lesson is clear. There is a great deal more to creating a thriving global market than changing the rules.
By Clara Furse

© Financial Times