Marcus Cake

Striking a balance between consumer protection, compliance costs and maintaining an effective market to raise capital for companies is very difficult. The following two articles suggest that the balance is skewed heavily toward consumer protection to the detriment of companies. Companies are simply moving to new markets where capital is easier to raise and costs are lower. If the balance is not right, the migration of companies will result in lost jobs and lost tax revenue to other financial centres.

It’s Location, Location, Location in the Sarbox Aftermath by Mallory Factor, Nationalreview.com, 4th August 2006

Extract:

• America used to boast the most hospitable business climate in the world. Recently, though, U.S. businesses have lost their edge, giving a slight advantage to foreign financial hubs.
• On July 11, the London Stock Exchange (LSE) affirmed that it drew 50 international initial public offerings (IPOs) from 15 different countries in the first half of 2006. Compare that to the combined 15 international IPOs offered on the Nasdaq and New York Stock Exchange in the similar period.
• At the root of this recent and startling shift is the 2002 Sarbanes-Oxley Act. Imposed after the fall of Enron and WorldCom, this law has hamstrung our public companies and forced them to buck their tradition of innovation by becoming too cautious and careful. … Congress acted without prudence or prescience. Its overreaching caused long-term negative economic consequences — at an estimated cost of $1 trillion, according to Dr. Ivy Zhang, now of the University of Minnesota — that are even greater than the initial damage. … Major companies in China, Russia, and even Saudi Arabia have all decided against offerings in the U.S. since the inception of Sarbox. The law also has caused mass de-listings from U.S. exchanges as businesses have opted for one-way tickets to markets in London, Belgium, Paris, and Hong Kong. In addition to the LSE’s declaration, a recent survey by European audit firm Mazars revealed that almost one-fifth of European companies currently listed on U.S. exchanges are looking for an exit strategy. There’s a clear winner here, and it’s not America. The blame falls squarely on the burdensome shoulders of Sarbox and the corresponding inaction of the Securities and Exchange Commission.
• This is not only Wall Street’s problem: When companies choose foreign markets for their IPOs, it’s bad news for all Americans. Though the U.S. still leads in global capital formation and investment, other economies, such as China and Britain, are gaining ground. This raises serious concerns about our global standing — in terms of keeping our money in our markets, listings on our shores, and jobs in our companies.

aPersonal view: Politicians need to act if the City is to remain world class, Michael Spencer, The Telegraph, 21st July 2006s

Extract:

• London currently handles $753bn in foreign currency every day, and trades more euros than all the other European capitals put together. The City is pivotal in a whole range of other financial markets. A fifth of all international bank lending is made here. Worldwide insurance premiums worth £153bn were written in London in 2004 while £2,000bn in metals contracts are traded annually. And London has taken a lead role in the newer financial sectors of hedge fund management, private equity and derivatives trading. …Every party needs to generate goodwill in the City, since many of the businesses that operate here could relocate anywhere in the world if they saw significant benefit. Already a notable proportion of London’s insurance market has slipped away to Bermuda in recent years because the disparity in taxation became too large. …bankers and brokers are a hard lot and will want actions, not words from their politicians. What do we all want to see? The first is better regulation.
• The City is becoming bogged down in expensive bureaucracy. The regulatory regime has too much box ticking, too little focus on basic principle and an inclination to “gold-plate” every new Brussels directive. Misconceived regulation can hurt financial markets: just look at what Sarbanes-Oxley has done for New York. Labour laws are becoming more “Europeanised” and being used opportunistically and sometimes cynically by disgruntled employees. All this complexity creates extra cost, which erodes competitive advantage. Compliance and legal costs are rising faster than any others in many firms. Taxation is another critical factor. Without tax competitiveness, the City will wither. Personal tax rates are broadly acceptable but NI and corporate taxes are too high and stamp duty on share trading should be abolished. Tax legislation is now absurdly complex.