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Registration Services' Regulatory Roundup - June 2017

Tue 27 Jun 2017

We review the latest news, legislation and corporate practices governing UK businesses.

Joint Select Committee report on Human Rights and Business 2017 

Modern Slavery Act 2015 reporting: improvement is needed

Part of the Joint Select Committee report on Human Rights and Business 2017 considers reporting by companies under the Modern Slavery Act 2015 and concludes that improvement is needed.  

Many companies failed to meet the basic requirements such as the report being signed off by a director.  There was often identical wording and even the same KPIs used in several company reports with cautious and legalistic statements.  However, the report acknowledges that the Modern Slavery Act has raised the profile of this issue within companies and supply chains.  The select committee report supports the introduction of laws to make reporting on due diligence for all relevant human rights compulsory for large businesses and recommends legislation to impose the duty on all companies to prevent human rights abuses with the failure to do so an offence along the lines of similar provisions in the Bribery Act.  

The report is available here

Shareholder Rights Directive 

Amendment to encourage long-term shareholder engagement and enhance transparency

A Directive to amend the EU Shareholder Rights Directive was issued on 20 May 2017.  The amendments seek to encourage long-term shareholder engagement and enhance transparency.  The directive came into force on 9 June 2017 and must be implemented by member states by 10 June 2019.  Highlights of the directive include:

  • Greater regulation of proxy advisors, for example proxy advisors will have to adopt a code of conduct and report on ‘a comply’ or ‘explain’ basis against this code. 
  • Increased rights for shareholders holding shares through intermediaries who will have increased rights to participate in, and vote at, general meetings.
  • Increased provisions on directors’ remuneration many of which are in essence the same as those already in force in the UK.  For example companies will have to publish a report on directors’ remuneration and obtain shareholder approval for the report and for remuneration policy.  However, there are also some differences.  There is an explicit requirement, for example, that the remuneration policy should contribute to the strategy and long-term interests of the company.  
  • Related party transactions.  There is a requirement for material transactions between a listed company and a related party to be publicly disclosed and/or approved by independent shareholders.  The definition of a ‘related party’ in the directive is wider than under the Listing Rules as it has the meaning used in the International Accounting Standards Regulation.  

As the UK is due to leave in the EU in March 2019 it is likely that the directive’s requirements will only be necessary if transcribed into UK law.  The publication in the Official Journal of the EU is available here

The Investment Association (IA)

Publishes guidance on long-term reporting for companies

The guidance sets out expectations of IA members on various aspects of long term reporting.  It applies to companies who are Premium listed but the IA encourages Standard listed and AIM companies to adopt the guidance as best practice.  The guidance follows the IA’s Productivity Action Plan which highlighted concerns over how companies report on the long term drivers of value creation.  

The IA sets out its expectations and guidance on reporting in the following areas:

  • Business models and long term reporting
  • Productivity
  • Capital management 
  • Disclosure of material environmental and social risks 
  • Human capital and culture 

The guidance highlights areas for improvement such as:

  • Explanations are required about the extent to which companies are able to provide a return on invested capital as how well a company utilises its capital has a significant impact on long term profitability and success.  
  • Reporting on company performance needs to be clear, relevant, timely, related to needs of users and directed to sustainable value creation.  
  • Better disclosures regarding how a company is enhancing productivity of its workforce and steps taken by the Board to influence culture.
  • The IA would like to see the transition away from issuing quarterly reports and short term earnings to long term and thematic research.  

The IA states that it supports the current legislative framework governing reporting and that the guidance should be read in conjunction with the FRC’s Guidance on the Strategic Report (2014).  The Institutional Voting Information Service (IVIS) will be monitoring implementation of the guidance through analysis of Annual Reports reporting on year-ends on or after 30 September 2017.  

The Investment Association guidance is available here.

The Pre-emption Group 

Reports on company performance against its Statement of Principles and use of template resolutions

The Pre-Emption Group has published its monitoring report for 2017. The report looks at the implementation of the Group’s Statement of Principles and the use of the template resolutions for meetings held between 13 March 2016 and 1 February 2017.  It reviews market practice among FTSE 350, FTSE Small Cap, FTSE Fledgling Issuances in using the Statement of Principles and template resolutions and the level of support for disapplication authority resolutions.  

The report concludes that the template resolutions and Statement of Principles have generally been adhered to, but there are examples of possibly poor consultation and disclosure.  Companies which do not adhere to the Statement of Principles are less likely to receive ongoing shareholder support and should expect investors to question specific issuances that appear to be contrary to the Statement of Principles.

There is also an appendix in the report which sets out best practice guidance for engagement with investors and disclosure. 

The report is available here.

Criminal Finances Act 2017

The Government takes further steps to tackle money laundering and use of terrorist property in the Criminal Finances Act 2017

The Criminal Finances Act 2017, which amends the Proceeds of Crime Act 2002, received Royal Assent on 27 April 2017.

The Act is targeted to tackle money laundering and corruption, makes provision in connection with terrorist property and creates two new corporate offences of failure to prevent facilitation of tax evasion.  This is based on the offence in the Bribery Act 2010 of the failure to prevent bribery. 

A company or partnership may be prosecuted for failure to prevent the facilitation of tax evasion if a person evades tax and an associate of the company, such as an employee or agent, criminally facilitates the tax evasion while acting in their capacity as an associate of the company.  A defence would be that the company can show it had in place reasonable prevention procedures (or that it wasn’t reasonable for prevention procedures to be in place).  As yet there is no date as to when these provisions will come into force but companies should be reviewing current policies and procedures in readiness for its introduction. 

The Act is available here

BlackRock, the world’s largest asset manager

Publishes their engagement priorities for 2017-2018 

The priorities set out how BlackRock propose to engage with companies on key governance topics that they have prioritised.  

These are:

  • Governance: Board composition, effectiveness, diversity, and accountability remain a top priority.
  • Strategy: Board review of corporate strategy is key in light of shifting assumptions.
  • Executive pay: Executive pay policies should link closely to long-term strategy and goals.
  • Climate risk disclosure: Consistent disclosure of standards would enhance understanding of the impact of climate change on individual companies, sectors and investment strategies.
  • Human capital management: In a talent constrained environment, human capital management is a competitive advantage

BlackRock’s engagement priorities are available here.

Financial Reporting Council (FRC)

Discussion paper on the role of preliminary announcements and auditors is welcomed

The Financial Reporting Council’s (FRC) paper on the role of preliminary announcements and auditors is intended to stimulate discussion about ways to enhance the value of the preliminary announcement to users and provide assurance to investors.  

The FRC sets out four options for change which are:

  • Extending the scope of the current FRC auditor guidance to include voluntary engagements where companies outside the main UK listed market ask their auditors to agree the release of preliminary announcements.
  • Requiring audits to be complete and the auditor’s report to be signed before preliminary results can be released.
  • Including a bespoke auditor’s report with the preliminary announcement.
  • Requiring auditors to have completed their review of ‘other information’ in the annual report before agreeing to publication of the announcement.

The discussion paper is available here.

The Financial Reporting Lab 

Companies are encouraged to consider the use of new technologies in company reporting 

The Financial Reporting Lab has published its first report as part of its Digital Future Project. The report builds on past work which highlighted that the use of technology in corporate reporting is not meeting its full potential. 

The digital future project is designed to identify what benefits the new mediums and technologies should offer, consider which technologies might do this and how companies can make the most of the digital opportunity.

The Lab has asked preparers, investors, and others what they would like to see from a future digitally enabled system of corporate reporting. The responses have been used to construct a framework of production, distribution and consumption characteristics which are presented in the report.  The next step in the project is to consider how future technologies might be used to meet these needs. 

A copy of the report is available here.