Smaller firms could question value of public listings if faced with ‘over-burdensome reforms,’ warns QCA

Feb 23, 2022
Regulatory reforms increasingly triggered by ‘systemic failures’ at larger companies

The Quoted Companies Alliance (QCA) has spoken out against the risk of creating ‘over-burdensome regulation’ by crafting new rules that come out of ‘systemic failures at larger companies’.

Having surveyed small and mid-cap firms, it warns that audit and corporate governance changes under consideration would negatively affect growth and could even force companies to reconsider their status as publicly listed companies.

The QCA is speaking out against a Department for Business, Energy and Industrial Strategy (BEIS) consultation on what it describes as ‘sweeping reforms’ to the audit and corporate governance landscape in the UK.

The consultation has not been well received by company directors, the QCA says. Its own research – conducted with YouGov – shows that around 60 percent of small and mid-cap directors and investors believe the reforms, if implemented as proposed, would have a negative impact on their company’s growth. Around the same proportion say they would be forced to reconsider the value of their company’s public listing.

‘These proposals have been some of the most controversial we have seen,’ it says, adding that although the outcome of the consultation has yet to be announced, the business body wanted to speak out on the ‘necessity for proportionate regulation for financial markets in the UK’, particularly following the UK’s departure from the EU.

The QCA says it sees the proposed rule changes as part of a trend where, increasingly, ‘regulatory reforms are triggered by systemic failures in larger companies’. Such failures do not represent the majority of quoted companies, it says, nor are reforms ‘designed to be reflective of the level of risk in smaller companies’.

Among its complaints are that the consultation is too broad, specifically that proposals within the BEIS audit reform consultation amalgamate the recommendations from multiple reviews: the Kingman Review in 2018, the Independent Review of the Financial Reporting Council, the Competition and Markets Authority’s recommendations to address competition problems in the UK audit industry in 2019 and later that year the Brydon Review.

It says the final consultation contains nearly 100 questions on a range of proposals, including approaches that vary in both potential effectiveness and potential drawbacks.

The QCA has also raised concerns about the BEIS’ approach to include all companies on the Main Market and those on AIM with a market capitalization of €200 mn ($226 mn) – a threshold adopted from EU regulation – as a public interest entity (Pie). Pies are required to produce significantly higher standards of governance and disclosure but ‘meeting those requirements often places significant administrative and resource burdens on companies and therefore becomes an impediment for growth,’ the body says.

The QCA says policies regarding Pies are often designed with much larger companies in mind, leaving much smaller companies ‘caught and damaged in the process’. It has put forward what it describes as a ‘more patient and proportional approach’, saying the new regulation – if it comes into force – should focus first on companies in the FTSE 350 before assessing the need for expansion.

This is supported by the vast majority of those surveyed: 95 percent of company directors and 83 percent of investors. These respondents also believe that if the regulation should be rolled out further, the thresholds should be much higher than proposed, at a market cap of £500 mn ($679 mn).

The result of the consultation is expected later this year.

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