Reports that Singapore-based, Chinese-founded, fast fashion retailer SHEIN has filed for a Hong Kong IPO should not prompt the UK to weaken its standards on IPO risk disclosure.

SHEIN’s HKEX IPO filing was undertaken in part to try and persuade the UK’s Financial Conduct Authority (FCA) to alter its risk disclosure requirements and allow the company to list in the UK using a prospectus approved by the China Securities Regulatory Commission, according to a report in the Financial Times.

The FT report noted that a prospectus that had been approved by the FCA was rejected by the Chinese regulator, which has become stricter on how companies describe their business operations in China.

Differences in approach reportedly relate to disclosure around SHEIN’s supply chains and material from politically sensitive regions in China.

This news service saw this coming a year ago, reporting that SHEIN’s prospectus risk disclosures would be difficult given the challenges of maintaining full visibility over its supply chain, working with more than 5,000 independent manufacturers in China as of the end of 2023.

For its part, SHEIN’s human rights policy commits it to “rejecting forced labor, harassment, discrimination, and unsafe working conditions for our employees [and] protecting the human rights of our suppliers’ workers. We recognize that our responsibilities extend throughout our supply chains, and expect our suppliers to share our commitment to human rights.”

The policy further adds that suppliers working with the company “must sign and agree to abide by our Supplier Code of Conduct, which is informed by the UDHR [Universal Declaration of Human Rights] and the core conventions of the International Labour Organization (ILO), and strictly prohibits the use of forced labor and child labor.”

Material concerns

Under UK listing rules, sources at the time confirmed that if an investor suffers material loss based on a risk factor not laid out in a prospectus, then those responsible for the document are liable to pay compensation to the investors.

Investors speaking at the time pointed to Boohoo as an example of the kind of market losses that can occur over reports of labor exploitation, with the company’s share price falling precipitously in 2020 after a Sunday Times investigation into supply chain issues, which included allegations of modern slavery.

In January, following evidence given by SHEIN’s EMEA general counsel Yinan Zhu to the UK House of Commons’ Business and Trade Committee, its chair Liam Byrne wrote to the FCA expressing concern over a lack of transparency on the company’s business practices.

In the letter Byrne, quoted an FCA statement to the FT on the importance of companies disclosing legal risks around the world and asked the authority to lay out what checks it conducts to ensure adequate disclosure.

If the FCA altered its typical approach to allow SHEIN to list in London based off a prospectus it felt was inadequate on risk, it would consequently be sure to come under fire from UK legislators. Investors seeking damages from the FCA in such an eventuality would have a high bar to clear: the authority has legal immunity from liability to pay compensation, save where it is found to have acted in bad faith or breached a complainant’s human rights.

Less rules, more transparency

The UK has certainly been pursuing capital markets reform to remove listing friction for issuers seeking to conduct a London IPO. As part of this, the UK has stated that it is moving to a “disclosure-based” regime from a more prescriptive rules-based regime.

But a London Stock Exchange (LSE) FAQ released ahead of capital markets reforms coming into force on 29 July 2024 noted that while the moves would give more flexibility, they also mandated more investor information from companies.

“Ensuring transparency of corporate information that investors need, will provide companies with better access to capital, to support their growth ambitions,” noted the document. “The disclosure-based approach will keep the UK in alignment with other leading exchanges, increasing the appeal of the UK for even more companies.”

Transparency is the key here. If the FCA were to approve a prospectus that elided known concerns about SHEIN’s supply chain, that would be a very poor advert for renewed transparency for UK investors – and would significantly impact how many could, particularly under ESG criteria, make informed investment decisions.

SHEIN would be a big international name for London – and the fact that such a well-known brand is keen on an LSE listing is already a positive news story that should dispel much of the doom loop around London as a listing venue.

But the UK and its regulators should hold firm on ensuring transparency remains at the heart of the disclosure-based regime, even – and perhaps especially – where that meets opposition.

Principle is sometimes worth more than prestige.