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In this regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.

Nothing Standard About This New Category

A confusing name for decaffeinated regulation

So goodbye Cadbury, and now that we’ve all digested the threat of job cuts and the loss of independence of a great British brand, we can turn our attention to the real concern of Curly Wurly et al being renamed. Some of us of a certain age of course still rue the rebranding of Opal Fruits and fear that long-loved Cadbury brands will have their names changed to something that begs an exclamation mark after them like Starburst(!).

 To add to the naming confusion many chocolate bars have been shrinking in size. Only last June the Mars Company admitted that costs were a factor in reducing the size of a Mars bar from 62.5g to 58g. Being public spirited though, the Mars Company had previously launched a product called Mars Duo which, weighing in at 85g, was, despite its name, anything but twice the size of a regular Mars bar; before or after the reduction in size.

FMCG’s

Confused? Well that’s the idea. In the fast moving world of Fast Moving Consumer Goods (FMCG) this is all part of the game and in the absence of a “compare the market” type website for chocolate bars (which I suspect wouldn’t be financially viable for very long) the poor consumer has to fathom it all out alone. Companies, whether mobile phone providers, airlines or food companies, desperately try to make comparisons difficult for consumers, to ensure that clarity doesn’t prevail and lead to rational buying decisions and therefore price erosion. Obviously, this isn’t necessarily bad for shareholders as long as it is sustainable.

In coffee shops, I’m sure I’m not the only one who asks for a “Regular” latte and is puzzled at being handed a small bucket of the brown liquid. Why is everyone trying to confuse us with inappropriate names? Why when we ask for something “Regular” is it not what most people would consider to be “Regular”. Why is a “Grande” the size of a small urn? Still, that’s FMCG companies and retailers for you. It wouldn’t happen in a professional business-to-business environment, would it?

Would It?

Last September, the FSA issued a consultation document (CP09/24 for the more eager amongst you) which proposes that from April 2010 the current Primary and Secondary listing segments be renamed to Premium and Standard. Simple enough but like a “Regular” latte the name doesn’t reflect the product. Here are some implications of the proposed changes:

• At the moment, companies with Primary listings need a sponsor and a three year track record. This is expected to be the same for the new Premium listing
• Overseas companies which fall under the definition of Premium listed will need to have strong corporate governance and comply with the UK Combined Code. Something overseas companies can currently avoid with a Secondary listing.
• Under the present system, Secondary listings are only available to overseas companies which have their primary listing on another exchange. However, Standard listings will also be available to UK companies.
• Companies on the Standard list will not be required to have a sponsor (like Primary listing) or nominated adviser (like AIM companies). Also, Standard listing doesn’t require a three year trading record (unlike Primary listing, but the same as AIM).

The good news from all of this is that the Standard listing regime should make it easier for the Stock Exchange to compete with other European exchanges having less stringent listing requirements, with which this new category has been harmonised,  and thus keep London an attractive place for companies to list, but at what price?

On the face of it the new Standard category might appear to be a bridge between AIM and Primary listings, requiring as its name implies “standard” obligations from its companies.

Well not quite. It may be that some companies currently with a primary listing choose to downgrade to a Standard listing and relieve themselves of the governance burden. That will mean however that they are not included in any FTSE indices; a problem, as many institutions cannot invest in companies not included in an index.

Why is a 'Grande' the

size of a small urn?

Standard listings will

also be available to UK companies

Many Questions

But could AIM-quoted companies choose to move “up” to the main list but with a Standard listing? Or could companies coming to IPO choose Standard over AIM because of the lighter touch regulation. Might it also be that nomads of less scrupulous AIM-quoted companies seek to push them towards Standard listings so that the nomad removes the risk from themselves? What will this mean for AIM which hitherto has been the market of choice for fast growing smaller companies? Will less scrupulous advisers who can’t achieve nomad status focus solely on bringing poorer quality companies onto the Standard category? Will companies exploit the status of being on the “Main Market” despite it having a regulatory requirement lower than companies on AIM?

Lots of questions which, like the renaming of Cadbury’s chocolate bars, we will only know the answer to in time. However, if the average consumer doesn’t register that a Mars Duo is not the size of two Mars bars they are unlikely to ask, when their broker recommends a share, which market it is on and what the corporate governance standards are in the company.  

Private investors seem to be aware that as a general rule investing in AIM stocks is higher risk than investing in Main Market stocks, but this new Standard category will include blue-chip overseas companies as well as start-up UK businesses with no professional sponsor or adviser. How is a private investor supposed to distinguish the risk and what devious opportunities does this present for the sharper end of private client brokers? 

Over the last month or two I’ve spoken to many advisers, some of the best brains in the City, and a few infact with two brains. Most are still unclear as to what this all means for them and their clients and if they don’t know then we, private investors, probably ought to be worried.

Decaffeinated Regulation

To torture the coffee theme, whilst this change looks like regulation, smells a bit like regulation and may temporarily taste like regulation there is a danger that it is decaffeinated regulation and that as a result with this change, like with decaffeinated coffee, we won’t get the same kick and sharpness. Indeed the regulation may even turn out to be effective de-regulation – so not coffee at all.

We’re going through a period in which there is great concern over standards of governance following the corporate calamities of HBOS etc., and wariness amongst private investors and a general distrust of the City. My fear is that with the decaffeinated regulation of the Standard category the City will sleep through another phase of not just confusion but also future peril for investors, the stock exchange and the FSA, with investors not really knowing the risk of what they’re investing in.

Judging by what we’ve lived through over the last eighteen months many people might indeed consider that to be Standard. As for me, it’ll raise my stress levels and have me reaching for my Curly Wurly or whatever it’s called now.

Footnote: More mature Curly Wurly fans may like to be reminded of this advertisement from the 1970’s.

Ash Mehta                     

what devious

opportunities does

this present

we won't get the same

kick and sharpness

.

ash@orchardgrowth.com

Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.

 © Ash Mehta

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