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EQ Bulletin January 2023

EQ Monthly Bulletin - 2023

Thursday, 9 February 2023

Keeping you up-to-date with industry changes and news impacting the world of share registration and employee share plans.

Welcome to our 2023 first edition of EQ Bulletin.

Thera Prins Thera Prins CEO - UK Shareholder Services

2023 looks like a year of major reform with a likely Audit Reform Bill which will establish the Audit, Reporting and Governance Authority (AGRA) as a replacement for the Financial Reporting Council, and which also includes proposals to bring the largest private companies within the definition of a public interest entity.

However, it is likely that the timescale for some of the reforms will take place over several years. A minimum standard for audit committees is likely to be introduced for FTSE 350 companies on a comply or explain basis initially before legislation is passed making the standard mandatory for such companies. The Economic Crime and Transparency Bill is expected to receive Royal Assent in the early part of 2023. It will have implications for all companies, including the proposed identity verification measures for all new and existing registered company directors, people with significant control and those delivering documents to Companies House.

Meanwhile, updated proxy voting guidelines have been published by Institutional Shareholder Services, while the Financial Reporting Council have issued several reports and guidelines, which are summarised below. Details are also provided of a consultation issued by the Financial Conduct Authority on the streamlining of rules relating to the publication of accounts in electronic format for those companies with transferable securities admitted to trading on a UK-regulated market.

As always, if you have any questions on the content of this month's Bulletin, please get in touch with your Client Relationship Lead.

Proxy Voting Guidelines

Institutional Shareholder Services (ISS) have published updates to its UK proxy voting guidelines for 2023. 

Read More: EMEA-Policy-Updates

In relation to directors’ remuneration, the updated policy notes that annual increases in salary are expected to be low and ideally lower proportionally than general increases across the broader workforce, as detailed in the consultation document issued in November 2022.

Further changes affecting UK companies include the following:

Gender diversity: A new guideline has been included for companies with financial years beginning on or after 1 April 2022. For standard and premium listed companies, ISS may consider recommending against the chair of the nomination committee (or other directors on a case-by-case basis) if the board has not met the targets of at least 40% women and at least one senior board position (chair, Chief Executive Officer, Senior Independent Director, or Chief Financial Officer) is a woman. For ISEQ 20 constituents and AIM-listed companies with a market capitalisation over £500 million, ISS will generally recommend against the nomination committee chair (or other directors, case-by-case) if there is not at least one woman on the board.

Ethnic diversity: new guidelines apply for companies with financial years beginning on or after 1 April 2022. For standard and premium listed companies, ISS may consider recommending against the nomination committee chair (or other directors, case-by-case) if there is not at least one member of the board from a minority ethnic background. Mitigating factors include compliance with the relevant board diversity standard at the preceding AGM and a firm commitment, publicly available, to comply within a year and other factors as applicable. For ISEQ 20 constituents and AIM-listed companies with a market capitalisation over £ 500 million, ISS will generally recommend against the nomination committee chair (or other directors, case-by-case) if they have not appointed at least one board member from an ethnic minority background by 2024.

Audit committees: a new policy has been inserted, specifying that for FTSE 350 companies, ISS will note where four or fewer audit committee meetings have been held during the reporting period. For FTSE All-Share companies, excluding investment companies, ISS will note where three or fewer meetings have been held.

Authorising issue of equity with and without pre-emptive rights: The policies have been updated to reflect changes to the Pre-Emption Group Principles following the issue of the revised principles in November 2022.

Additionally, the global change in policy contained in the consultation has also been adopted for those companies which are deemed to be high emitting companies – as identified by the Climate Action 100+ Focus Group (this includes a small number of UK registered companies). In cases where a company is not considered to be adequately disclosing climate risk disclosure information, such as according to the Task Force on Climate-related Financial Disclosures (TCFD), and does not have either medium-term GHG emission reductions targets or Net Zero-by-2050 GHG reduction targets for at least a company’s operations (Scope 1) and electricity use (Scope 2), ISS will generally recommend voting against what it considers to be the appropriate director(s) and/or other voting items available.

Emission reduction targets should also cover the vast majority (95%) of the company’s operational (Scope 1 & 2) emissions. For 2023, ISS will use the same analysis framework for all Climate Action 100+ Focus Group companies globally but with the differentiated implementation of any negative vote recommendations depending on relevant market and company factors (for example, voting item availability). Additional data and information will be included in the company information section of the ISS research reports for all Climate Action 100+ Focus Group companies to support this extended policy application.

Audit Quality Indicators And Mandatory Registration Of Public Interest Audit Firms

The Financial Reporting Council (FRC) has published its new firm-level Audit Quality Indictors (AQI). These are intended to provide stakeholders with comparable indicators of audit quality. 

Read More: Feedback Statement

The FRC has decided that: 

  • The requirements should apply to all firms that audit more than 20 PIEs or at least one FTSE350 company.
  • The AQIs should include all audit engagements, but only some must be presented separately for PIE and non-PIE audits (those relating to quality monitoring and the extent of involvement in audits by partners and certain responsible individuals).
  • Firms may produce the data covering any 12-month period but should provide FRC with their data, specifying the period, by mid-June each year.
  • Firms may include narratives, with an indicative word count of 500 words in total, but not links to firms' own websites. The FRC plans to include guidance on what should be included in its forthcoming definitions note.
  • It will implement a phased approach. All firms in scope will participate in a pilot to collect AQI data for private reporting in summer 2024. The FRC will consider publishing some indicative overall ranges of AQI data without firm-specific numbers. It will also consider whether it will undertake some verification of the AQIs.  In summer 2025, firms will be asked to provide AQI data, segmented between all audits, PIE audits, and non-PIE audits, where possible. The FRC will publish the data segmented between all and PIE audits. The previous year’s data should also be published for each AQI. A senior partner should attest to the accuracy of the information.

All audit firms and responsible individuals (RIs) who undertake statutory audit work for Public Interest Entities (PIEs) must be registered by the FRC. By directly registering audit firms and individuals signing PIE audit reports, it is anticipated that the FRC will be able to act decisively when it identifies systemic issues that risk affecting audit quality. The registration regime is intended to enhance the FRC’s ability to drive improvements, ensure firms are growing sustainably, and more closely monitor the auditor’s work, as well as enabling the FRC to apply conditions or undertakings when concerns are identified. 

Read More: PIE Auditor Register

Corporate Reporting: What Makes A Good Annual Report And Accounts

The Financial Reporting Council (FRC) has published guidance on what makes a good annual report and accounts based on their perspective as a regulator.

Read More: What-Makes-a-Good-Annual-Report-and-Accounts

The report notes that an annual report and accounts (ARA) should be company-specific (avoiding the use of boilerplate disclosures), clear, concise, understandable (use straightforward language, defines specialist terms and acronyms), clutter-free (avoid duplication which obscures other relevant information as this can attract regulatory comment) and comparable.

The report also focuses on the following matters:

Materiality. Evidence of qualitative factors (that is, factors other than size) being used to increase quantitative materiality for certain transactions, events, or conditions is likely to prompt regulatory challenge.

Accuracy. Management should consider both the sufficiency and effectiveness of the controls over information prepared solely for the ARA as perceived material errors may attract regulatory enquiry.

Consistent and complete. Identify interdependencies between parts of the ARA at the planning stage, with teams preparing connected parts and communicating regularly. Read the ARA as a single document before publication. Incomplete descriptions of the nature of certain events and transactions or poor explanations of the accounting applied are likely to prompt regulatory challenges.

On-time and unbiased. In addition to complying with regulatory timing requirements, the ARA should not be biased. It may attract regulatory attention if its use as a marketing tool undermines the need for the ARA to be fair and balanced.

Navigable and transparent. Regulators may raise unnecessary questions if it is difficult to locate information in relation to a material transaction, event, or other condition, as well as raise enquiries where accounting policies lack clarity, are not company or transaction-specific or are inconsistent with other information in the ARA.

The report includes examples of what the FRC considers to be high-quality reporting.

Corporate Reporting: FCA Consultation

The Financial Conduct Authority (FCA) has published a consultation paper on streamlining and simplifying its rules requiring DTR 4.1 issuers to prepare, publish and file with the FCA their annual financial report in an electronic format and for the financial statement within it to be in a structured digital format. The consultation is open until 23 February 2023, and subject to feedback received and the obtaining of the necessary approvals, it is intended that the changes will be applied as soon as practicable in spring 2023.  

Read More:  Consultation Paper

The FCA is proposing to simplify the structure of the current rules by: 

  • Deleting the existing Technical Standard referred to in DTR 4.1.14R and relocating key provisions directly into DTR 4.1, including the obligations that all annual financial reports be prepared in the XHTML format and that consolidated IFRS annual financial statements be prepared and published in the tagged, structured digital format; the option for UK-incorporated preparers of solo-company IFRS financial statements to report in the tagged, structured digital format; and certain conditions on companies publishing other parts of the annual financial report in the tagged, structured digital format.
  • Introducing a new DTR rule requiring in-scope issuers to tag IFRS consolidated annual financial statements using a ‘generally accepted taxonomy’.
  • Providing guidance on generally accepted taxonomies in a Technical Note replacing provisions in the Technical Standard. A generally accepted taxonomy for this purpose means one which is generally used in the UK for disclosures in regulated markets, is based on taxonomy standards published by the IFRS Foundation and is up to date. The FCA will update the list of taxonomies currently within the Technical Standards to reflect new taxonomy updates published during 2022.
  • Including the European Single Electronic Format (ESEF) 2022 taxonomy as a generally accepted taxonomy.
  • Making minor changes relating to matters currently dealt with in the Technical Standard (including to specify that all companies (not just UK-incorporated issuers) who prepare solo-company IFRS annual financial statements may report them in the tagged structured digital format if they choose, provided they follow the rules and guidance applicable to issuers who prepare IFRS consolidated annual financial statements; and to clarify that structured digital reporting for non-IFRS financials is not currently permitted) and proposing a new rule and guidance clarifying that, where the National Storage Mechanism (NSM) has rejected a filing, the company should correct and resubmit it.

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