Policy developments must be conducive to small and mid-cap growth
21 February 2022

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Last summer the Department for Business, Energy and Industrial Strategy (BEIS) consulted on sweeping reforms to the audit and corporate governance landscape in the UK.

These proposals have been some of the most controversial we have seen and whilst we are still awaiting its outcome, we also continue to reflect and reiterate the necessity for proportionate regulation for financial markets in the UK. Particularly in light of the UK’s withdrawal from the EU, we now have a unique opportunity to ensure that our financial markets are fit for purpose and reflect the needs of those it intends to serve - that is both investors as well as quoted companies. 

Increasingly, we are noticing that regulatory reforms are triggered by systemic failures in larger companies, however, the QCA maintains that these failures do not represent the majority of quoted companies who often are impacted by overburdensome regulation that adopts a one-size-fits-all approach and is not designed to be reflective of the level of risk in smaller companies. 

The proposals within the BEIS audit reform consultation were a long time in the making. They amalgamated the recommendations from three separate reviews. First, the Kingman Review in 2018 (the Independent Review of the Financial Reporting Council (FRC)) which aimed to explore the ways in which the organisation could be reformed to maximise its effectiveness. The Competition and Markets Authority’s recommendations to address competition problems in the UK audit industry was next, published in 2019 and later that year, the Brydon Review which assessed the overall quality and effectiveness of audit and recommended reforms to regulation.

The final consultation contained nearly 100 questions on a range of proposals which were all aimed to improve the robustness of UK companies’ governance and audit processes. However, being such a broad consultation, it contained approaches that varied in likely effectiveness and potential drawbacks. 

Overall, the consultation was not well received by company directors. The QCA collaborated with YouGov to survey small and mid-cap directors and investors on the reforms and showed that 60% of them believed the reforms, if implemented as proposed, would have a negative impact on their company’s growth. Around the same proportion said they would be forced to reconsider the value of their company’s public listing. 

As the QCA’s membership is comprised of small and mid-sized quoted companies - which includes representation from the Main Market, AIM and AQSE - it was important that we were able to ensure the views and needs of our community were expressed in our response to the regulator. 

Not only are our members exponentially affected by regulation but they in turn have a vital role to play in the UK economy. It is therefore in the interests of the whole economic ecosystem that regulation addresses their needs too. The Government’s approach in proposing to implement sweeping reforms threatens the very nature of our financial markets and risks making markets less attractive which could potentially see companies seek funding elsewhere, eventually reducing the financial, social and even innovative benefits that our public markets generate.  

The QCA is most concerned about the impacts of the proposal regarding the broadening of the definition of a Public Interest Entity (PIE). PIEs are required to produce significantly higher standards of governance and disclosure. However, meeting those requirements often place significant administrative and resource burdens on the companies and therefore become an impediment for growth companies.

Additionally, conceptually, the foundation of the idea of “public interest” was not well established in the consultation. It is difficult to see how a company with few investors, employees, customers or suppliers, could be regarded as of public interest. The BEIS approach was to include all companies on the Main Market and those on AIM with a market capitalisation of €200m in the new PIE definition, adopting this threshold from European regulation. 

Instead, the QCA proposed a more patient and proportional approach. Focusing first on companies in the FTSE 350 and then assessing the effect and need for expansion. 

The vast majority of company directors (95%) and investors (83%) agreed that this would be a welcome approach. If an expansion was then deemed to be necessary, it is the view of small and mid-cap directors that the thresholds should be much higher than proposed, at £500m market cap.

Presenting the view of the smaller quoted companies was essential during this consultation. As is usually the case, the policies regarding public interest entities were designed with much larger companies in mind, but were targeted too broadly and would have caught and damaged much smaller companies in the process. We believe that UK financial markets are a cornerstone of the UK economy, but what truly upholds this are the small and mid-sized quoted companies that make up the majority of quoted companies on the market. These companies need to be heard in order to create a strong and prosperous ecosystem that protects both investors and supports companies. 

A significant milestone this year will be the publication of the outcome of BEIS’ consultation, and we await it with anticipation as it was such a stark contrast to other proposed reforms, such as those in relation to the Listing Review. It has been interesting, and perhaps even encouraging, to see reports in the media suggesting a potential watering down of the some of the proposals. We hope that our efforts, and those of our members, have had a positive influence in calling on the Government to reverse or amend the potentially damaging proposals.

The QCA, as ever, will be advocating for a measured approach to any reforms that ensures small and mid-sized quoted companies have the support needed to achieve their growth ambitions.