Monday 11 June 2018 11:03 am

City watchdog Andrew Bailey defends controversial rules to clear way for Saudi Aramco London listing

The top financial watchdog has split the City with controversial changes to listing rules which could allow Saudi Aramco to list in London, but Financial Conduct Authority (FCA) boss Andrew Bailey insists the reforms will raise standards.

From July the regulator will create a new category with less strict requirements within its “premium” rules for firms which are majority-owned by a sovereign state, such as the giant oil producer Aramco, for which the Saudi state hopes to gain an ambitious $2 trillion valuation.

The FCA made some concessions to critics of the original plans – after a consultation process which lasted six months longer than initially planned – but Bailey told City A.M. that they will strengthen the City and actually boost standards at the firms in question.

Read more: FCA to bring in controversial new premium listing category in July

“We would want companies in the premium listing because the standards are higher,” Bailey said. “Companies want to be in it because it conveys a strong message, which is right.”

Firms will still be forced to show they are running an independent business, and must also give shareholders pre-emption rights, which allow first refusal on new share issues. Voting rights proportionate to equity held by investors must also be maintained, he added.

Yet some of the City’s most influential business groups remain unconvinced, arguing that some of the changes waterdown accountability to shareholders.

Chris Cummings, chief executive of the Investment Association, said the group, which represents the managers of trillions of pounds in investments, was disappointed by the free rein for companies to engage in related-party transactions – with, for instance, a sovereign shareholder – without prior consultation with other investors.

Read more: Former Royal Dutch Shell and GSK veteran joins Aramco board

He added that any firms in the new category should not be allowed into indices such as the FTSE 100 benchmark, which could force investment houses and pension funds to own Aramco shares. Index decisions will remain with the private providers, such as the London Stock Exchange Group’s FTSE Russell arm, the FCA says.

Stephen Martin, head of the Institute of Directors business lobby group, said the FCA had not laid out why a new listing category for sovereign-owned firms was necessary at all. He said: “If anything, we believe that listing rules should be strengthened for this category of issuer given its distinctive governance challenges and risks.”

Bailey acknowledged the “quite strong views on both sides”, but insisted that the changes the FCA made after consultation represent a “minimum, pragmatic number of changes” while also “preserving the important protections of independent voting rights”.

The regulator decided to back down on a proposal which would have allowed firms to escape independent votes on the election of independent directors, and added an obligation to report related-party transactions, albeit after the event.

Read more: That the Saudi Aramco IPO is in jeopardy should surprise no-one

The plans will apply to governments around the world looking to partially privatise their firms, but all eyes will be on the Saudi government, which has still not disclosed its preferred listing destination. The listing itself has reportedly been delayed to next year at the earliest, with New York, Hong Kong, and the Saudi Tadawul exchange thought to be among the rivals to London.

Lobbying for London has taken place at the highest levels of government, including on a visit to the Saudi capital, Riyadh, in April last year. Bailey denied that he has come under pressure from the government about the plans, which were first mooted in July last year. He has also met officials from Aramco.

“We’re an independent regulator so we’re not influenced by what the government think at all,” Bailey said, adding there was not “some sort of covert relation with the UK government on this”. Bailey said he has not spoken to ministers about the listing changes.

Neither has the decision been driven by specific trade policy, but rather a commitment to the openness of London’s markets. The government has been keen to promote the idea that the UK will remain a leading financial centre after Brexit.

“It’s not international trade policy, but it is about having a financial market in London which meets our integrity objectives,” he said. “Within that it’s open to competition.”

Read more: City watchdog seeks to reassure big investors on Saudi Aramco float