UK May Let Chinese Companies Use Their Own Audit Rules in London

The United Kingdom is looking at a temporary change to its audit rules. This could make it easier for Chinese companies to list their shares in London. The goal is to help London's financial market grow.
By Newsroom | Business, Finance |

The United Kingdom is proposing a temporary shift in its auditing rules, a move designed to encourage Chinese companies to list their shares in London. This initiative comes as London seeks to bolster its standing as a global financial center and counter a general decline in initial public offerings. The proposed change would allow auditors of Chinese-registered companies issuing Global Depositary Receipts (GDRs) in London to use Chinese auditing standards, a departure from current requirements. The Financial Reporting Council (FRC) is currently consulting on this matter, seeking feedback on how this approach balances investor protection with the goal of economic growth.

Context of the Proposed Changes

The United Kingdom's financial sector is undergoing adjustments to its listing regime. This is part of a broader effort to make London a more appealing venue for international companies, particularly those from China. The proposed changes are directly linked to an agreement between the UK's Financial Conduct Authority and China's Securities Regulatory Commission, facilitating listings through the Shanghai/Shenzhen Stock Connect.

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  • Timeline: The FRC announced its plan to consult on the proposed changes recently, with related discussions and reforms to the UK listing regime having been in progress throughout 2024.

  • Actors: Key bodies involved include the Financial Reporting Council (FRC), the Financial Conduct Authority (FCA), the China Securities Regulatory Commission (CSRC), and the London Stock Exchange (LSE). Chinese companies are the primary target audience.

  • Events: The FRC is currently in a consultation period regarding amendments to its Third Country Auditor (TCA) policy. This follows broader reforms to the UK listing regime.

Core of the Audit Rule Proposal

The central element of the UK's proposal is a temporary allowance for Chinese auditors.

UK proposes audit changes to attract Chinese listings - 1

  • Proposal: Auditors of Chinese-registered entities listing Global Depositary Receipts (GDRs) in London may be permitted to use Chinese Standards on Auditing (CSAs).

  • Rationale: This is intended to reduce a perceived barrier and encourage more Chinese firms to list in London.

  • Temporary Measure: The FRC emphasizes that this is a temporary amendment to its Third Country Auditor policy.

Balancing Investor Protection and Economic Growth

The FRC's consultation highlights a critical balancing act between safeguarding investors and fostering economic expansion.

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  • Economic Objective: The move is explicitly linked to supporting UK economic growth and enhancing London's global market competitiveness.

  • Investor Protection: The FRC is actively seeking views on whether the proposed changes adequately maintain investor protection and audit quality.

Attracting Chinese Companies to London

The reforms aim to make London a more attractive listing destination for Chinese businesses.

  • Listing Regime Flexibility: Reforms to the UK listing regime have introduced new categories and increased flexibility, potentially making it easier for companies with unique structures, such as dual-class share structures, to list.

  • GDRs Focus: The specific proposal concerning auditing standards directly addresses the listing of Global Depositary Receipts (GDRs) by Chinese companies.

  • Past Efforts: London has also worked to promote the internationalization of China's currency and deepen financial ties, indicating a sustained effort to engage with the Chinese market.

Impact on Different Listings

While the current focus is on GDRs, it's important to note that reforms to the listing regime have broader implications.

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UK proposes audit changes to attract Chinese listings - 2

  • Existing Listings: For entities that previously had premium listings, disclosure requirements for annual and interim reports under the listing rules remain unchanged.

  • AIM and SFS: There are no changes to the listing rules for entities listed on the Alternative Investment Market (AIM) or the Specialist Fund Segment (SFS) of the LSE.

  • Investment Funds: Specific rules for closed-ended investment funds have been adjusted, exempting transactions compliant with their investment policies from significant transaction and reverse takeover rules.

Expert Perspectives and Regulatory Consultations

The proposal is currently under scrutiny, with regulatory bodies seeking input.

"The FRC is seeking views on whether this approach appropriately balances the UK’s commitment to investor protection and audit quality with the strategic objective of supporting economic growth and strengthening London’s global market competitiveness." - Financial Reporting Council (FRC)

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The FRC's consultation is a key step in assessing the viability and implications of the proposed audit standard flexibility. The feedback received will inform the final decision on amending the TCA policy.

Conclusion and Next Steps

The UK's proposed temporary audit rule changes represent a strategic effort to attract Chinese listings and invigorate London's financial market. The FRC's consultation period is crucial for determining how these changes will be implemented, with a focus on maintaining high standards of investor protection while pursuing economic objectives. The ultimate success of this initiative will likely depend on the industry's response and the FRC's final policy adjustments.

  • Next Steps: The FRC will review feedback from its consultation on the proposed amendments to the Third Country Auditor policy. This will inform whether the temporary allowance for Chinese auditing standards proceeds.

Sources Used

  • Financial Times: Article provides an overview of the UK's proposed audit changes aimed at attracting Chinese listings.

  • Financial Reporting Council (FRC): Official consultation document detailing the proposed amendments to the FRC's Third Country Auditor policy and the rationale behind it.

  • Asian Legal Business: Explainer on the UK's new listing rules and their potential impact on Chinese companies.

  • Fortune: Article discusses London's efforts to attract more Chinese firms amidst an IPO drought.

  • Devdiscourse: Reports on the FRC's proposal for temporary audit standards for Chinese GDRs.

  • Sharecast: News report on the UK regulator considering changes to auditing rules to encourage London listings.

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Frequently Asked Questions

Q: Why is the UK changing audit rules?
The UK wants to make it easier for Chinese companies to list their shares in London. This could help London's financial market grow.
Q: What is the main change?
The UK might let auditors of Chinese companies use Chinese auditing rules for a short time. This is usually not allowed.
Q: Will this affect investors?
The UK's Financial Reporting Council is asking people if this change is safe for investors. They want to make sure investors are still protected.
Q: Is this change permanent?
No, the UK says this change would only be for a short time. They are testing if it helps attract more companies.