Monday, 26 July 2010

A regulatory turn, part 2

A couple of potentially related points that are worth a look, and once again hat-tip to Responsible Investor which has bundled the two things together. First up, the Treasury consultation document issued today contains the following:
5.21 The Government believes, however, that the functions of the UKLA could be merged with other regulatory functions relating to companies and corporate information, notably those of the Financial Reporting Council (FRC). This would have the benefit of bringing the UKLA’s regulation of primary market activity alongside FRC functions relating to company reporting audit and corporate governance. The Government is therefore considering whether the UKLA should be merged with the FRC under the Department for Business, Innovation and Skills (BIS), or whether it should remain within the CPMA markets division.

5.22 The Government believes that, within the proposed new regulatory architecture, there is a strong case for a powerful companies regulator established with responsibilities for regulating corporate governance, corporate information and its disclosure, and the stewardship of companies by institutional shareholders. This is a matter on which BIS will bring forward detailed proposals for consultation in due course, but the merger of the UKLA and FRC would be an important step towards such a reform.

5.23 The Government is also seeking views on whether there are other aspects of financial market regulation in which the links with companies law are sufficiently close to warrant consideration of transferring them to the potential new companies regulator.

On the face of it this makes sense, for the corp gov stuff. It would bring together relevant bits of the architecture - the listing requirements and the Code itself, for example. But it's interesting, isn't it, that the document talks of 'regulating corporate governance' (admittedly this is part of a longer phrase). I don't think anyone in the UK currently 'regulates' corporate governance, do they? I mean the comply or explain regulatory requirement is about disclosure, not governance itself (and notice disclosure is mentioned separately as part of the new regulator's role).

It's probably just a drafting issue. And yet... look again for references to shareholders, they are pretty thin on the ground. Shareholder engagement does not appear to be given anything like the same weight within the reform package that Myners would have given it. In addition, if we did have a companies regulator, would the temptation be to simply extend its remit a bit? If companies should split chair and chief executive, why not mandate it etc? I'm just saying that creating a companies 'regulator' must increase the likelihood that it will... errr... regulate.

Secondly it's also worth looking at the IMA's annual survey linked to in the Responsible Investor piece. There's a section on engagement in there which is very interesting, as it is based on asset managers' views. The IMA says that managers fall into three broad camps - a small group that see engagement as very important, the large majority who acknowledge its role but believe there are important limitations, and a third group - size unspecified - who doubt the benefits and aren't very interested. It also includes a run through of various arguments asset managers put forward for why engagement is difficult/has limits.

The thing that interests me about this rather honest picture, is that I am genuinely unsure which way the asset management industry will face on things like the EC Green Paper on governance. The public debate around such issues tends to be dominated by those who believe governance is important, but apparently that isn't necessarily where the industry as a whole is at. And if many managers aren't that bothered, will their trade bodies go into bat for the UK model? Maybe a more regulated approach to governance would enable them to shrug off all this 'ownership' stuff that clearly isn't to the liking of many. It might even save them the basis point (if that) they currently expend.

Notably one of the quotes from an asset manager used to illustrate the report makes the point that if things go wrong at a financial institution that neither the board or the regulator had spotted in advance, what chance would an outside investor have of doing any better? Similarly the argument is made that investors find it difficult to co-operate, for competitive reasons, because of different objectives, or because of fear of falling foul of concert party rules. All reasonable points, but might this not, then, point you down the road of seeking to strengthen regulatory rather than market oversight?

The more I think about it the more I think that the asset management industry is not necessarily going to worry too much about a drift away from the 'shareholder as owner' model. Interesting times and all that.

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