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EQ Bulletin – April 2021

01 April 2021

Welcome to our monthly bulletin of what’s happening within the regulatory environment that impacts the share registration and employee share plans space.

Paul Matthews (1) Paul Matthews CEO - EQ Boardroom

Here in the UK, spring is upon us and the first stages of easing lockdown restrictions are now in full swing, with the rule of six and reopening of schools. As vaccination numbers continue to increase, we remain optimistic about future milestones.

The spotlight on AGM planning, attendance and safety continues this month, and here at EQ we continue to support our clients in their preparations. We have lots of information and guidance available, which you can find here.

In this month’s bulletin, we look at the latest guidance from the Chartered Governance Institute (CGI) on holding AGMs during COVID-19, advice from the FRC on ‘comply or explain’ reporting and much more.

As always, if you have any questions on the content of this month's bulletin, please contact your Client Relationship Lead.

Kathy Cong 800X800 Kathy Cong Managing Director, Prism Cosec

An insight from Prism Cosec

It is interesting to read the Financial Reporting Council's (FRC) latest advice on improving the quality of 'comply or explain' reporting against the UK Corporate Governance Code (the Code).  The FRC has previously stated that "Full strict compliance has never been, nor has it reflected the spirit, of the Code due to the 'comply or explain' approach to the Provisions."  Unfortunately, some investors and investor relation bodies seem to ignore this fact and markdown companies whenever they depart from the Code, regardless of explanations provided.  However, equally, companies must provide complete, clear and reasoned explanations for any non-compliances to ensure investors have the information they need to base judgements about the quality of a company’s governance.  The FRC’s guidance should help companies to achieve this aim.”

Guidance on holding AGMs during the continuing COVID-19 crisis

The Chartered Governance Institute (CGI) and the City of London Law Society have published guidance on holding Annual General Meetings (AGMs) and the impact of COVID-19.  It is improbable that the Corporate Insolvency and Governance Act 2020 (CIGA), which introduced temporary relaxations of the law around holding AGMs, will be extended or other legislation introduced. Therefore companies will have to consider different options to hold their AGMs in line with COVID-19 restrictions on movement or gatherings at the time of their meeting. The four main issues highlighted by the guidance are:

  • Closed meetings will only be possible after 30 March 2021 if legislation and guidelines at the time preclude gatherings of only a limited number.
  • The AGM or general meeting arrangements will need to comply with restrictions and health and safety measures that apply when the notice is sent out, but companies should have contingency planning in place. Capacities to hold large meetings at venues are likely to be significantly reduced due to social distancing rules, and this needs to be taken into account.
  • Unless there is specific legislation in force at the time of the meeting, companies will not be able to preclude shareholder attendance either entirely or by limiting numbers permitted to attend. A company may, however, strongly recommend that shareholders do not attend due to the current circumstances.
  • Companies can legally hold hybrid meetings even if their articles do not expressly enable this, provided there is nothing in the articles that prevents this.

The guidance includes how the format and venue of a meeting can be changed if the situation changes before the meeting is held, requirements for holding hybrid meetings, conducting Q&As at these meetings, and ensuring meetings are COVID-19 secure.  There are good practice recommendations and sample wording for AGM notices for holding closed physical meetings.

CGI guidance

BEIS White Paper: Restoring Trust in Audit and Corporate Governance

On 18 March, the Department for Business, Energy & Industrial Strategy (BEIS) issued its much-anticipated White Paper setting out the Government’s proposals to recommendations arising from the Kingman, CMA and Brydon reviews covering all things Financial Reporting and Audit.

The paper, which is over 200 pages, sets out how the Government plans to address and include new measures in relation to directors, auditors and audit firms, shareholders and the audit regulator and drive meaningful and lasting change. It focuses on reforms that will instil public interest in audit and corporate reporting as well as the establishment of a new regulator to replace the FRC.

The review covers a lot of detail, so BEIS has set a sixteen-week consultation period, with a deadline for responses of 8 July 2021. This is being hailed as a once in a generation opportunity to shape the future of governance and reporting and whilst there is no need to respond to every element of the paper, BEIS is keen to gather as many views as possible. 

BEIS white paper

FRC issues advice on ‘comply or explain’ reporting

The Financial Reporting Council (FRC) has published advice on how to report successfully when a company chooses to explain rather than comply with a provision of the UK Corporate Governance Code (Code).  The advice is centred around:

  • Clarity – being specific about which Code provision is not complied with
  • Reporting departures from the Code – some companies were claiming compliance when this was not, in fact, the case
  • Providing clear and meaningful explanations for departures from the Code – of the 74 companies surveyed, only four explanations were considered adequate by the FRC.

The review also includes good and bad practice examples of reporting.

FRC advice

Recommendations for reform of the listing regime published

Lord Hill's review of the UK's listing regime was published on 3 March 2021.  The review makes 15 recommendations in total, including:

  • The Chancellor should present an annual report to Parliament on the State of the City
  • Reviewing the statutory objectives of the Financial Conduct Authority (FCA) to ensure it has sufficient scope to act to improve the attractiveness of the UK for business
  • Allowing dual-class structures to list on the premium listing segment with certain conditions
  • Rebranding and remarketing the standard listing segment, including a change of name
  • Lowering the free float requirement to 15% from 25% and allowing other measures of liquidity
  • Revising the Listing Rules in respect of the shares of special purpose acquisition companies
  • Carrying out a fundamental review of the prospectus regime, including tailoring of information requirements to meet investor needs
  • Increasing the use of technology to improve retail investor involvement in corporate actions
  • Considering how to improve the efficiency of capital raising

Some of the recommendations will require legislation, whilst others can be implemented by the FCA following consultation. The government now has to review the recommendations and set out the next steps.

Lord Hill’s review

The FCA has commented on the proposals in the review and has committed to act quickly to implement the recommendations where appropriate with the aim of publishing a consultation paper by the summer and making relevant rule changes by late 2021.

FCA comments

The proposals also received support from the Investment Association, which sees the reforms as important to attract companies to list in the UK, providing jobs and boost the economy.  In particular, the rebranding of the standard listing segment and review of the prospectus regime is supported.

Investment Association comments

The PLSA publishes its 2021 Stewardship and Voting Guidelines

The Pensions and Lifetime Savings Association (PLSA) has published its 2021 Stewardship and Voting Guidelines. Relatively few changes have been made to the 2020 guidelines; however, they have been updated to take account of the impact of COVID-19, including AGMs, the growing importance of climate risk and reporting against the Task Force for Climate-related Financial Disclosures recommendations. Key items to note are:

  • Companies need to respond appropriately to the challenges COVID-19 has placed on their workforce by taking measures such as ensuring employees can work from home
  • Investors should consider voting against Nomination Committee Chairs where there is failure to move towards the Davis Report or Parker report targets for gender and ethnic diversity on boards
  • Executive Remuneration should reflect the impact of COVID-19 and whether the company has benefited from government support
  • The PLSA supports the temporary provisions in place to allow virtual AGMs but doesn’t support changes that would make virtual AGMs permanent
  • Investors should consider voting against large companies if they are not making progress towards reporting in line with TCFD recommendations

PLSA guidelines

Operational separation of the ‘Big 4’ audit firms progresses

The Financial Reporting Council (FRC) has reviewed the 'Big 4' audit firms' plans to achieve operational separation of audit practices. The firms can now move to the next stage of implementation. The FRC has updated its principles of operational separation following engagement with audit practices. It also sets out the desired outcomes of operational separation:

  • Audit practice governance to prioritise audit quality and protect auditors from influences from the rest of the firm that could divert their focus away from audit quality;
  • The total amount of profits distributed to the partners in the audit practice should not persistently exceed the contribution to profits of the audit practice;
  • The culture of the audit practice should prioritise high-quality audit by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism/judgement; and
  • Auditors should act in the public interest and work to benefit shareholders of audited entities and wider society.

FRC information

The final Hampton-Alexander review is published

The fifth and final report of the Hampton-Alexander Review has been published, which records the progress of gender diversity on boards since the review was established in 2016.  A summary of the latest findings include:

Women on Boards

  • The FTSE 100 met the 33% target for women on boards at the start of 2020, and women's representation is now 36.2%, up from 27.7% in 2017. The number of Executive Director roles held by women, however, remains low.
  • The FTSE 250 met the 33% target at the end of 2020, and women's representation now stands at 33.2%, up from 22.8% in 2017. Executive Director positions held by women is also low. The number of 'one and done' boards has reduced to 16 from 74 at the end of 2018.

Executive Committee & Direct Reports

  • The FTSE 100 has made good progress – the number of women in combined Executive Committee and Direct Reports category increased to 30.6%, up from 28.6%in 2019. This is the most significant increase in four years.
  • Progress in the FTSE 250 has been slower, remaining broadly flat. The number of women in combined Executive Committee and Direct Reports category increasing marginally from 28.5%, up from 27.9% in 2019.

The report acknowledges the progress made, but there is still much to do. 

Hampton-Alexander review

Gender pay gap reporting deadlines are relaxed

The Equality and Human Rights Commission (EHRC) has announced that enforcement against companies for failing to report their 2020/21 gender pay gap will be postponed until 5 October 2021 due to the COVID-19 pandemic. This gives companies an additional six months in which to report their data.  Enforcement for 2019/20 reporting was suspended in March 2020.

EHRC announcement

Office for Tax Simplification – Call for Evidence on third party data provision

The Office for Tax Simplification (“OTS”) is considering how to improve tax submissions for individuals by making smarter use of personal tax data (including the possibility of getting more data from third-parties such as banks, building societies, insurance companies, investment managers, wealth managers, pension providers etc.) reported directly to HMRC and reflected in an individual’s personal tax accounts. They are seeking feedback through a call for evidence.

Income sources being considered:

  • Bank and building society interest (building on the information already available)
  • Dividends of UK companies and distributions from authorised unit trusts
  • Distributions from UK and overseas open-ended investment companies
  • Pension contributions
  • Gift aid payments to charities
  • Data from investment and wealth managers, including information about chargeable gains, excess reportable income, interest, dividends and equalisation payments
  • Insurance bond chargeable events
  • Royalties

EQ has spoken with the OTS to express our concerns with the inclusion of dividend payments. Our view is that the inclusion of dividend payments could potentially create an issuer obligation to file information not currently maintained on share registers and for which there is no current legal basis for collecting. Changes to company law and retrospective data collection exercises would be required as a result.

The deadline for responses to the call for evidence is 12 April and we encourage Issuers to respond to ensure your feedback is heard.

Call for evidence

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