Quarterly reporting: risk-based approach cannot be too narrow

SINGAPORE'S market regulator said recently it would be unveiling a new approach to quarterly reporting (QR) for listed companies by the end of the year. It held back on the details, but the change is likely to involve removing such reporting requirements for a segment of the market.

For a start, it is encouraging that the regime appears to be considering a calibrated approach to QR, rather than a complete removal of it. Singapore Exchange Regulation (SGX RegCo) - which undertakes all frontline regulatory functions on behalf of its parent, the Singapore Exchange (SGX) - said it would be choosing to adopt a "risk-based" approach to QR.

It is also heartening that - concurrent with its plans to tweak the QR regime - are the regulator's plans to increase market surveillance and accountability in other respects at the same time (BT, Aug 8, 2019, "SGX RegCo: More oversight to boost market confidence").

Still, it needs to be said that the success of a risk-based approach will depend on how it is implemented, and that a significant roll-back of QR requirements is not something the regime can afford, in the current market conditions.

The most recent push to review Singapore's QR regime was formalised in a consultation paper issued by the SGX in January last year. It said then it was seeking feedback on whether to retain the practice, given that "concern about compliance costs has been repeatedly raised among market professionals and listed companies while investors prefer adjustments to QR to be tempered".

In a speech delivered at the Sustainability Reporting in Asean and Singapore Forum in November, SGX RegCo chief Tan Boon Gin said the regulator was looking to focus on more long-term reporting through the introduction of sustainability reporting and the review of QR.

Among its proposals then was a "complete removal of first- and third-quarter reporting, or its removal at the very least for companies of S$150 million market capitalisation or less".

Most recently, at a half-yearly regulatory briefing for the media last month, Mr Tan said that while the regulator had been intending to "focus on companies with higher market cap because they are the ones with the resources for QR ... the feedback that has since come back made us think that rather than just looking at market capitalisation of companies to determine what they should do about QR, we should instead consider a more risk-based approach and that is what we will be doing".

He added then that the framework is awaiting regulatory approval and would likely be announced by the end of the year.

These remarks have brought to the fore, once again, the long-running debate on the costs and benefits of QR.

Costs and benefits

Oft-cited by listed companies, as an argument not to have QR, is the compliance cost the practice entails. It is undisputed that QR adds a cost to companies, and one that can be especially burdensome to small entities; but the cost results in useful information for investors, particularly for retail investors who may not have the access to companies that institutional investors possess.

Such information is especially helpful in providing insight into the smaller companies that baulk at the cost; such insight benefits both the investors, as well as the companies themselves, for example, in terms of raising their profile.

QR would also help to raise the profile of the Singapore market as a whole, and work towards increasing its liquidity, which the SGX has much desired. Removing QR would put Singapore out of step with the world's most established markets, something the regime would scarce be able to afford at this point in time.

Another oft-cited criticism is that QR promotes short-termism, by encouraging investors to think along a shorter timeline, ie. every quarter, rather than along a longer one.

But it's also been successfully argued that providing more frequent information aids in a longer-term investment focus, while less information - and a lumpier information flow - forces investors to make more irrational and near-sighted decisions.

QR also helps to level the playing field, ensuring that all investors - and not just institutional players who tend to have greater access to companies and their management - are privy to market-sensitive information and data that is critical to decision-making.

Opponents of QR also frequently cite studies to support their views; but there has been just as much published research backing the benefits of QR.

At this juncture, I think it's important to acknowledge that Singapore's regulators have likely gone over such ground extensively, and have considered such arguments - as well as feedback from various segments of the market - in their deliberations.

Calibrated approach

And so, it is encouraging that, having considered such views, regulators here have seemingly chosen to retain QR, despite numerous calls to abolish it.

It is also encouraging that they seem to have chosen a calibrated approach - as opposed to a more blanket approach or one based on more arbitrary measures - by requiring continued QR from listed companies deemed to pose a greater investment risk.

Choosing a risk-based approach would make the practice of QR more meaningful for market participants. But, the success of such an approach would depend very much on how it is implemented and sustained.

For a start, I hope the reduction in QR requirements would not be significant; that the regime would choose to retain QR for the majority of the market, instead of adopting too narrow a focus in its risk assessment.

It should also ensure a transparent and consistent application of its risk assessment. Market players need to be fully aware of the basis on which QR is deemed to be required and when (and why) it is not required.

An undesirable approach would be to require just a handful of companies to maintain QR, based on a case-by-case assessment of their risks. Far more successful an approach would be to require QR across a range of risky sectors, such as the shipping industry, and market segments, such as Catalist companies, and for the rationale for these decisions to be made public.

It is also important that such a calibrated approach to QR, which could lead to slippages in accountability and a greater incidence of corporate malfeasance, takes place within an environment that has increased its regulatory surveillance in other areas.

It is therefore encouraging to note that the regulators have indeed said they will be taking steps to increase the level of regulatory oversight over the market, and it is hoped that they will bear the other aforementioned considerations in mind in their review and implementation of changes to the QR regime.