EQ Monthly Bulletin

Thera Prins CEO - UK Shareholder Services

“It will be a marathon and not a sprint” is one of the descriptions applied to the consultation on revisions to the UK Corporate Governance Code which has been announced by the Financial Reporting Council. However, this is not the only possible reform being considered which could have an impact on companies as the Financial Conduct Authority has issued a series of four engagement papers seeking views on a revised public offer and admission to the trading regime. In addition, two calls for evidence have been issued - one relating to a review of non-financial reporting and the other into tax-advantaged share schemes.

The Financial Reporting Council has also issued a minimum standard for audit committees which will apply to all companies with a premium listing of shares on the FTSE350. Initially, this will be voluntary but will become mandatory once the Audit, Reporting and Governance Authority has been established.

A new Insider Dealing Order has come into force with effect from 15 June 2023 and brief details of this are included in this Bulletin.

Finally, the Quoted Companies Alliance has produced a report looking at investors’ attitudes on Environmental, Social and Governance reporting in small and mid-cap companies.

In This Edition

UK Corporate Governance Code
Engagement Papers – UK Prospectus Regime
Call for evidence: Non-Financial Reporting Review
Call for evidence: Share Schemes
Minimum Standard for Audit Committees
Insider Dealing Order
QCA Report – Asking the Earth? Investor Attitudes To ESG

UK Corporate Governance Code

The Financial Reporting Council (FRC) has launched a consultation on revisions to the UK Corporate Governance Code (the Code).

The consultation closes on 13 September 2023. The revisions of the Code are described by the FRC as limited. It is intended that the revised version of the Code will apply to financial years commencing on or after 1 January 2025. The revisions to the Code will be supported by updated guidance with updated versions of the Guidance on Audit Committees and Guidance on Board Effectiveness being produced.

It should be emphasised that this is not a review of the entire Code. The overall structure remains the same with five sections, while changes have been made to each section the major changes are in section 4 relating to: Audit, Risk and Internal Control. This includes a new internal control reporting system, along with improved remuneration reporting on malus and clawback in Section 5 (Remuneration). The opportunity is also being taken to enhance the Code in those areas where the FRC has concerns over the standard of reporting. For instance, there will be a new principle dealing with reporting on actions and outcomes. The intention is also to improve the functioning of comply-or-explain, taking account of recently published FRC research and reports such as the latest Review of Corporate Governance Reporting:

Engagement Papers – UK Prospectus Regime

The Financial Conduct Authority {FCA} has issued four engagement papers inviting stakeholder feedback on the proposals for the revised public offers and admission to the trading regime:

Read More: Admission to trading on a regulated market – Engagement Paper 1 | FCA – all four papers are available via this link). The closing date for responses is 29 September 2023.

This continues the process started with Lord Hill’s report in March 2021, the UK Listing Review:

Read More: UK_Listing_Review_3_March.pdf (publishing.service.gov.uk) and HM Treasury’s consultation based on this report:

The UK government confirmed in April 2021 that it would take forward all the recommendations in Lord Hill’s report.

The areas covered in each paper are:

Admission to trading on a regulated market with views being sought on, amongst other things, when a prospectus is required for admission to regulated markets and when exemption should apply, the format of a prospectus, the responsibility for a prospectus and how it is approved.
Further issuances of equity on regulated markets with views being sought as to whether the FCA should reduce the requirement for a prospectus for further share issues and what document should be used in the event of a prospectus not being required.
Protected Forward-Looking Statements (PFLS) including how these should be defined and how such statements should be presented in a prospectus; and
Non-equity securities seek views on matters such as where the current UK prospectus regime could be improved in the context of wholesale, debt capital markets.

The FCA has made some starting assumptions:

They will continue to set the prospectus requirements.
It should align broadly with the existing UK Prospectus Regulation, but with changes where needed to remove unnecessary frictions or unintended consequences.
A prospectus will not be required for further issuances unless there is clear rationale.
The major change is not required for non-equity securities.

Worth noting: Consideration is given to removing the existing negligence liability standard and reverse burden of proof on issuers when producing projections (Protected Forward-Looking Statements), to be replaced with a recklessness/dishonesty standard with the burden of proof on investors (contained in Engagement Paper 3)

Timetable: As the consultation does not close until the end of September 2023, it is highly unlikely that the necessary changes in regulation and/or legislation will be drafted, reviewed, and approved for compliance from January 2024. It is more likely to be in early 2025, with feedback and associated draft regulation and legislation published in the first quarter of 2024. Given that the process began with Lord Hill’s review in March 2021, there may be an appetite for completion throughout 2024.

There is no time set aside for this in the parliamentary calendar yet, but we will continue to provide information on the outcome of the consultation and recommendations as and when available – this will be no earlier than October 2023.

Call for evidence: Non-Financial Reporting Review

The Department for Business and Trade (DBT) working in conjunction with the Financial Reporting Council (FRC) has issued a call for evidence as the first stage of a review of the non-financial reporting requirements; which UK companies need to comply with to produce their annual report and to meet broader requirements that sit outside of the Companies Act 2006 (e.g. modern slavery and gender pay gap reporting). The review will also consider the current thresholds for micro, small, medium and large companies which determine certain non-financial reporting requirements, and whether the preparation and filing of accounts with Companies House, remains fit for purpose. The call for evidence will close on 16 August 2023.

The government is asking companies and other stakeholders open questions about the costs and benefits of producing non-financial information, the value of the information provided and how such information could be improved in the future.

The primary focus of the call for evidence is in respect of the non-financial information requirements contained in Part 15 of the Companies Act 2006 only, as well as equivalent requirements for Limited Liability Partnerships. Beyond requirements set out in the Companies Act 2006, respondents are invited to provide feedback on other reporting requirements that they need to comply with, as well as any other observations on the UK’s reporting requirements that they consider relevant. Once the call for evidence has closed, the information obtained will be used by the government to develop detailed proposals for public consultation in 2024. Subject to stakeholder views, the government will then look to legislate for any changes.

Call for evidence - Share Schemes

HM Treasury has issued a call for evidence relating to the operation of two of the tax-advantaged share option schemes, Save As You Earn (SAYE/Sharesave) and Share Incentive Plans (SIP) which closes on 25 August 2023.

Views are sought on, amongst other things, the effectiveness of the schemes, the level of take-up and the barriers to participation in schemes and consider what improvements could be made to simplify the schemes.

Views are sought on, amongst other things, the effectiveness of the schemes, the level of take-up, barriers to participation and what improvements could be made to simplify them.

We are currently working on our response to the call for evidence and should you wish to share your thoughts, please contact your All Employee Share Plan Manager.

Minimum Standard for Audit Committees

The Financial Reporting Council (FRC) has published the Audit Committees and External Audit: Minimum Standard (the Standard) which will apply across all companies with a premium listing on the FTSE350, initially on a voluntary basis before legislation makes compliance with the Standard mandatory, such legislation is dependent on the establishment of the Audit, Reporting and Governance Authority (ARGA).

The above should be read in conjunction with the UK Corporate Governance Code and the FRC Guidance on Audit Committees (the majority of the text in the Standard is taken from existing publications). The objective of the Standard is to enhance performance and ensure a consistent approach across audit committees within the FTSE350. By setting out clear expectations and guidelines, the FRC aims to support the delivery of high-quality audits and reinforce public trust in the financial reporting process.

The Standard has four main areas of focus:

Committee Responsibilities - for example, requiring that the company manages its non-audit relationships with audit firms to ensure that it has a fair choice of suitable external auditors at the next tender and in light of the need for greater market diversity and any market opening measures which may be introduced.

Tendering - The tendering process should be led by the Audit Committee and not by the entity’s executive management. The process should not exclude the participation of “challenger” audit firms without good reason and selection criteria should be transparent and non-discriminatory.

Oversight of auditors and audit - This includes working to create a culture which recognises the work of, and encourages challenge by, the auditor, reviewing whether the auditor has met the agreed audit plan and that the Audit Committee understands the reasons for any changes and obtaining feedback about the conduct of the audit from key people involved, for example, the finance director and the head of the internal audit, including consideration of the external auditor’s reliance on internal audit.

Reporting - The annual report should describe the work of the Audit Committee (e.g. an explanation of the application of the entity’s accounting policies, how the Audit Committee has assessed the independence and effectiveness of the external audit process and the approach taken to the appointment or reappointment of the external auditor). A report should also be included on the activities the Audit Committee has undertaken to meet the requirements of the Standard.

Insider Dealing Order

The Insider Dealing (Securities and Regulated Markets) Order 2023 (the Order) has been published. The Order was made on 25 May 2023 and comes into force on 15 June 2023.

Part 5 of the Criminal Justice Act 1993 (CJA 1993) established the criminal offence of insider dealing which applies to any security listed in Schedule 2 of the CJA 1993 or specified by the Treasury, where trading occurs on a regulated market as specified by the Treasury. The Order updates Schedule 2 of the CJA 1993, bringing the securities and markets on which an offence can be committed in the CJA 1993 broadly in line with the Market Abuse Regulation (MAR) and replaces the securities listed in that Schedule with the list of financial instruments found in Part 1 of Schedule 2 to the Financial Services and Markets 2000 (Regulated Activities) Order 2001.

It also replaces the list of named trading venues with references to the definitions for regulated markets, organised trading facilities and multilateral trading facilities as used in MAR and the Markets in Financial Instruments Regulation (MiFIR). This will result in an expansion of markets to approximately 130 markets, 230 multilateral trading facilities and 75 organised trading facilities. As companies should already be complying with MAR, this expansion should not impose any additional costs.

QCA Report – Asking the Earth? Investor Attitudes to ESG

With the increasing focus on Environmental, Social and Governance (ESG) matters the Quoted Companies Alliance (QCA) has published a report called Asking the Earth?

The report looks at ESG from the perspective of professional investors and also examines their expectations on ESG reporting in the small and mid-cap markets.

The findings of the report include the following:

Expectations around ESG disclosure and management within small and mid-caps continue to grow. Compared to three years ago, nine in ten investors believe there has been an increase in expectations.
Expectations are set to increase over the next few years, with three-quarters anticipating that ESG expectations of smaller companies will continue to grow.
Two in five investors believe that smaller companies are missing out on ESG-related investment, and a third say that the greater level of ESG-related reporting requirements means they are more likely to invest in Main Market companies over other small and mid-caps traded on AIM.
Over two-thirds of investors say that companies should look to provide a tailored sustainability strategy alongside their focus on each pillar of ESG.
The biggest challenge for investors in assessing the ESG credentials of small and mid-caps is the inability to compare data between companies and incomplete data.

The report also includes several key questions which companies should consider about ESG matters, with the following being a sample:

Do you engage with your investors to understand how they are integrating ESG into their investment decisions and what their preferences are? How could you help their decision-making?
Do you have the necessary organisational structure to ensure that your ESG communication is effective? Is the team or individual responsible for ESG reporting integrated with the company’s strategy development?
Have you identified your ESG-related risks and opportunities, and are these embedded into your strategy and value creation story?
Have you considered using third-party service providers to help you collect and manage your ESG data? Do you currently have gaps in expertise that are hindering your performance concerning ESG? Is it possible to secure additional expertise to help improve the quality of your disclosures and practices?

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EQ Monthly Bulletin - July 2023

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