UK May Let Chinese Companies Use Own Audit Rules for London Listings

The UK is thinking about changing its rules for auditing. This could let Chinese companies use their own country's auditing rules when they want to list their shares in London. This is to help bring more companies and money to the UK.
By Newsroom | Business, Finance |

The United Kingdom is considering adjustments to its auditing regulations, a move intended to draw more Chinese companies to list on the London Stock Exchange. This proposal comes as part of a broader effort to enhance the city's standing as a global financial center and stimulate economic growth. The core of the change involves allowing auditors of Chinese-registered firms, participating in specific cross-border investment programs, to use Chinese auditing standards for listings in London. This initiative is currently undergoing a public consultation period to assess its implications for investor protection and audit quality.

Background and Context

The Financial Reporting Council (FRC), the UK's audit and accountancy regulator, has initiated a consultation on proposed amendments to its Third Country Auditor (TCA) policy. This policy governs how auditors from countries outside the UK are registered and supervised.

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  • The proposed change would temporarily permit auditors of Chinese-registered entities issuing Global Depositary Receipts (GDRs) in London to use Chinese Standards on Auditing (CSAs) for UK listing purposes.

  • This is seen as a response to a perceived barrier that might discourage Chinese companies from listing in London.

  • The move aligns with a wider UK government objective to boost economic growth and strengthen London's global market competitiveness.

  • The consultation period is a crucial step, allowing the FRC to gather feedback on whether the proposed approach adequately balances investor protection and audit quality with economic strategic goals.

  • The FRC acknowledges that Chinese auditing standards are not currently considered equivalent to UK standards, and the gap may be widening.

Drivers for the Proposed Change

The UK government has expressed a desire to reduce what it views as a "perceived barrier" for Chinese companies. This barrier is believed to stem from the complexities and potential differences in auditing practices and documentation access.

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  • Attracting Listings: The primary aim is to encourage eligible Chinese entities, particularly those participating in the Shanghai/Shenzhen Stock Connect program, to list their GDRs in London. This program facilitates investment between mainland China and Hong Kong, and the UK aims to integrate with this framework.

  • Economic Growth: The initiative is part of a broader government strategy to foster UK economic expansion and bolster London's competitive position in international finance.

  • Addressing Documentation Access: Past challenges have involved difficulties in accessing financial documentation from Chinese companies. Easing audit rule requirements is seen as a way to navigate these complexities.

Consultation and Investor Protection

While the proposal aims to attract listings, the FRC is explicitly seeking input on maintaining high standards of oversight.

  • The FRC is inquiring whether the proposed use of CSAs, on a temporary basis, appropriately balances investor protection with the objective of supporting economic growth.

  • Concerns regarding past accounting scandals involving Chinese companies have previously raised questions about investor risk. The current proposal is expected to be scrutinized for its ability to mitigate such risks.

  • The Financial Conduct Authority (FCA) and the China Securities Regulatory Commission have an existing agreement, the Shanghai/Shenzhen Stock Connect, which this proposal seeks to leverage.

Potential Implications

The proposed changes could signal a broader trend of Western markets adapting to accommodate varying financial practices.

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  • If implemented, it could lead to an increase in Chinese companies choosing London for their international listings.

  • The temporary nature of the proposed amendment suggests a phased approach, allowing regulators to evaluate its effectiveness and impact.

  • The FRC’s stance highlights the ongoing challenge for Western regulators in dealing with differing auditing standards and disclosure practices across global markets.

Expert Perspectives

"Allowing the use of CSAs on a temporary basis aims to encourage eligible Chinese registered entities to list on the London Stock Exchange through the Shanghai/Shenzhen Stock Connect agreement between the Financial Conduct Authority and the China Securities Regulatory Commission."— The FRC, in a statement.

"The proposed amendment is intended to support a shared wider Government objective of boosting UK economic growth and strengthening London’s global market competitiveness, while ensuring that appropriate safeguards remain in place."— The Financial Reporting Council (FRC) consultation document.

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The FRC’s consultation is a critical step in determining how the UK will proceed. Feedback from market participants, investors, and other stakeholders will be instrumental in shaping the final policy. The outcome will indicate the UK's approach to balancing regulatory oversight with strategic economic objectives in attracting international listings.

Conclusion

The UK's Financial Reporting Council is exploring a significant adjustment to its audit regulations by proposing to temporarily allow Chinese companies listing Global Depositary Receipts in London to use Chinese auditing standards. This initiative, driven by a government objective to boost economic growth and London's global financial standing, is now subject to a public consultation. The FRC is actively seeking input on how this proposal impacts investor protection and audit quality, particularly in light of historical concerns surrounding Chinese company audits. The temporary nature of the proposed amendment suggests a cautious approach, allowing for assessment of its efficacy and implications for the UK's capital markets.

Sources Used:

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Frequently Asked Questions

Q: What is the UK thinking about changing?
The UK is thinking about letting Chinese companies use their own country's audit rules when they list their shares in London. This is a temporary change.
Q: Why is the UK doing this?
The UK wants to make it easier for Chinese companies to list in London. This could help the UK economy and make London a more important financial center.
Q: Will this affect investors?
The UK's rule-makers are asking people if this change is safe for investors and if the quality of audits will still be good. They want to make sure investors are protected.
Q: How long will this change last?
The plan is to allow this change for a limited time. Regulators will watch to see how it works before making a final decision.