This Prism Briefing sets out 12 topics which company secretaries, especially those in listed companies, will need to be planning for in 2016. Most of the new requirements we report on will come into effect during the first half of the year, so there is little room for procrastination! The different topics are set out broadly in the order in which they will come into effect.
1. UK Corporate Governance Code 2014: Viability Statements (Already in effect)
Most Main Market companies will already be aware of the changes to the UK Corporate Governance Code (the Code), which were originally published in September 2014 and took effect for reporting periods ending on or after 30 September 2015. These have primarily impacted the work that boards and audit/risk committees do in relation to risk, internal control and going concern assessments, with the new requirement for boards to publish an annual viability statement being the most significant new development within these changes. The Financial Reporting Council (FRC) has indicated that it will “seek evidence of the companies’ early experience of implementing risk management and viability reporting”. It is likely, therefore, that Main Market companies will need to continue to focus on, and possibly further develop, their internal board processes around long-term viability during the course of the year.
2. Transparency Directive (Home Member State Notification: Deadline 26 February 2016)
A number of changes driven by the EU Transparency Directive have come into force. The previous requirement under the Disclosure & Transparency Rules (DTR), that issuers should release interim management statements, was removed as far back as November 2014. On 26 November 2015 further requirements were introduced, including:
- An extension to the time limit for half yearly reports to be issued from two to three months after the end of the relevant half year;
- An extension to the time limit for listed companies to keep annual reports and half year reports on their websites from 5 to 10 years; and
- Certain minor changes to DTR 5 – the disclosure of interests regime – which has changed for the basis of reporting (via Form TR-1) for some major shareholders.
With effect from 26 November 2015 all Main Market issuers will be required (under DTR6) to notify their home member state to the Financial Conduct Authority (FCA) on the prescribed form by 26 February 2016. In respect of existing companies who have already disclosed their home member state there is no obligation to do so. However, the new form requires more detail than previously and the FCA is therefore requesting all existing issuers to update their notifications. The form, once completed, should be emailed to the FCA at tdhomestate@.fca.org.uk.
3. Board Diversity (Ongoing)
In October 2015, a five year summary report on progress with the implementation of the provisions of the Davies Report was published (Women on Boards Davies Review Five Year Summary). The Summary acknowledges that progress has been made over the past five years and makes the following five next step recommendations:
1. Continuation of a voluntary, business-led approach is continued for a further five year period.
2. Increasing the voluntary target for women’s representation on FTSE350 boards, to a minimum of 33% over the next five years, with particular emphasis on increasing the number of women appointed to the roles of Chair and Senior Independent Director and into Executive Director positions.
3. Focus on the executive layer of FTSE350 companies to improve the representation of women on the Executive Committee and senior-most leadership positions.
4. An independent steering body to be re-convened to support and sustain progress on this matter.
5. Steering body to review the recommendations 1-4 above and, in consultation with key stakeholders, publish more detailed comments as appropriate at the beginning of 2016.
It is clear, therefore, that boardroom diversity (and in particular gender diversity) continues to be an area of focus, despite general progress towards the 25% notional target for women on FTSE350 boards set out in the Davies review. It is likely that investor expectations will be for nominations committees to refer to the higher target of 33% in future. The Equality and Human Rights Commission is expected to publish updated guidance on Appointments to Boards and Equality Law in March 2016.
4. Reporting on Gender and Pay (Expected to take effect from 26 March 2016)
Companies with 250 or more employees will be required annually to publish information relating to the pay of employees, including bonus payments, for the purpose of showing whether, by reference to prescribed factors, there are differences in the pay of male and female employees. The type of information which relevant companies could be expected to report on will probably include the difference between male and female starting salaries, the difference between average basic pay and total average earnings of men and women (possibly broken down by grade and job type), as well as other components such as bonuses. It is anticipated that supporting commentary may be required to give the correct context for the information being reported. The format for reporting is being decided, but it is possible that companies will be required to publish such information on the corporate website as a standard online report.
5. Modern Slavery Act Reporting (Required for financial reporting periods ending after 31 March 2016)
Companies, LLPs and partnerships with a turnover of £36 million, who carry on business in the UK and supply goods or services, will be required, for reporting periods ending after 31 March 2016, to produce an annual public statement providing details of steps taken to ensure the absence of human trafficking and slavery in any of its supply chains, and its own business. The concept of “total turnover” includes an organisation’s worldwide turnover, meaning that organisations with limited operations in the UK will still be subject to the reporting requirement if they meet the “carrying on business in the UK” test.
The statement must be approved by the Board, signed by a director (or equivalent), and published on the organisation’s website (and a link must be included to the statement in a prominent place on the homepage). Where relevant, it will be important to ensure that this matter is included on the Board agenda for formal approval. A parent company may produce one statement that subsidiaries can use to fulfil their obligations, provided that the statement fully covers the steps that each of the organisations required to produce a statement have taken in the relevant financial year. Therefore it may be possible for parent company boards to approve a statement that can be used by each group subsidiary covered by the new requirements. Although there is no statutory timescale within which the statement must be published, BIS have indicated that six months should be sufficient.
6. Dividend Disclosure and Payments (Applicable from 6 April 2016)
With effect from 6 April 2016, the UK basis for deducting tax on dividends will change with the principal changes being:
- The notional 10% tax credit on dividends will be abolished.
- A £5,000 tax free dividend allowance will be introduced.
- Dividends above this level will be taxed at escalating rates (7.5%, 32.5% and 38.1%)
- Although the tax credit has been abolished, companies are still required to issue a dividend confirmation statement.
For listed companies, company secretaries will need to ensure that their registrars make the relevant changes to the dividend stationery to reflect these changes in tax.
In a separate development, the FRC has published a report in November 2015: Disclosure of Dividends – policy and practice, setting out the results of its discussions with investors on what they want to know about dividends in the annual report. This report seeks to improve the level of communication to shareholders about dividend policy e.g. Why the company has selected its dividend policy? What does that policy mean in practice? How is the dividend funded? Listed companies may come under pressure from investors or investor groups to improve their disclosures around dividend policies and the financial justification for any proposed dividend payment.
7. The PSC Register (Takes effect on 6 April 2016)
During 2016 the steady flow of implementation of provisions in the Small Business, Enterprise and Employment Act 2015 (SBEE) is expected to continue, with the public disclosure of persons with a beneficial interest in more than 25% of the voting shares of any company or interests in LLPs. Under this requirement, companies must keep a public register of persons having significant control over them (PSC Register) with effect from 6 April 2016. This information will need to be filed with Companies House as part of the confirmation statement (see section 9 below) or on incorporation from 30 June 2016.
Companies already under an obligation to provide substantial information about their major shareholders (e.g. under DTR5) will be exempt from this obligation. However, it is important to note that all companies other than those that are exempt must maintain a PSC register even if the only entry is to confirm that the Company has no PSCs. Guidance is in the final stages of drafting and is expected to contain a comprehensive list of permitted statements setting out the status of any PSCs and the nature of the control. Subsidiary companies will be required to enter details of registrable relevant legal entities, and for large groups of companies there will be a need to consider how these requirements apply to joint venture and subsidiary companies with separate shareholders.
8. Supplier Payment Reporting (Expected in April 2016)
Large quoted companies will be required to produce half yearly reports covering numerous metrics relating to the payment of suppliers. It is proposed that the report includes standard payment terms and the proportion of invoices paid in 30 days or less, paid between 31-60 days and paid beyond 60 days.
9. Confirmation Statements to replace Annual Returns (Expected in June 2016)
New requirements introduced in the SBEE, designed to streamline the regime for filing annual returns with Companies House, are due to take effect in June 2016. A new annual confirmation statement will replace the annual return. Private companies will also be able to opt to keep certain registers at Companies House. Companies with multiple UK subsidiaries will need to ensure that their systems are adapted to cope with the mechanics and the timing of these changes. It should be noted, however, that where advantage is taken of keeping the statutory register on the central registry maintained by Companies House, full residential addresses and date of birth details for their directors will be available on the public record. For reasons of confidentiality and sensitivity this may discourage some companies from using this approach.
As the detail of the new requirements is published by Companies House, company secretarial departments might wish to consider their arrangements for managing subsidiary company records and filings.
10. The EU Audit Directive (Takes effect on 17 June 2016)
The governance of audit committee activity has been an important area for company secretaries, among others, over the past couple of years and this momentum shows no signs of abating with the EU Audit Directive being the latest regulation to require attention. The deadline for implementation is 17 June 2016 and key aspects include:
- Audit firms will have a maximum tenure of ten years, but member states may allow an extension (and the UK is proposing to do so): (i) by up to an additional ten years where a public tender is carried out after 10 years; or (ii) by an additional 14 years where more than one audit firm is appointed to carry out the audit.
- Audit firms, and their members, are prohibited from providing certain non-audit services to their Public Interest Entity (PIE) audit clients and where non-audit services are provided, these will be subject to a fees cap.
- A restriction in any contract limiting a company’s choice of auditor to particular lists or categories is prohibited.
The UK Government and the FRC have started the process of consulting on implementing the new regime in the UK, particularly in relation to non-audit services. This may impact on the current arrangements that issuers have in place for oversight of the services provided by the external auditor to the company. Consequently, company secretaries will need to consider whether revisions to the terms of reference of their audit committee, and/or the current procedures for the authorisation of the provision of non-audit services by the external audit firm, need to be revised in line with the new requirements as they are finalised.
11. The Market Abuse Regulation (Takes effect on 3 July 2016)
On 3 July 2016, a standardised EU-wide approach to the prevention of market abuse will take effect which will have some impact on UK listed companies. The key processes affected will be:
- Disclosure of information: Changes will be made to the definition and rules on disclosure of inside information. This will include a requirement to notify the FCA if the company delays disclosure, and to provide a written explanation of why the company believes the delay was permissible.
- Insider Lists: More detailed and extensive information will be required on insider lists which will need to be kept in a prescribed format.
- Dealings by Persons Discharging Managerial Responsibilities (PDMRs): A new regime for dealing by PDMRs which will catch a wider range of transactions (including gifts and donations). Time periods for announcement will be reduced to 3 business days from 4 business days. Transactions will only need to be reported once they exceed €5,000 in a calendar year. The FCA considers the Model Code to be partly incompatible with the Market Abuse Regulation, and so it is consulting on replacing it with guidance on the clearance procedures that issuers should put in place for dealings by PDMRs.
- Market soundings: The introduction of a new market soundings regime for the legitimate disclosure of inside information to potential investors, which will impose more prescriptive obligations on issuers including new written record keeping.
Therefore, the key action points for company secretaries to consider over the coming months are:
- Amendments to the relevant policies and procedures on share dealing and disclosure of price-sensitive information.
- Amending insider lists so they comply with new format.
- Training of directors and PDMRs.
12. Prohibition on Corporate Directors (Expected in October 2016)
Provisions in the SBEE prohibiting the use of corporate directors, except in certain limited situations, are expected to take effect in October 2016. This may be an issue for groups of companies which use corporate director companies, rather than individuals, as the directors of subsidiary companies within their groups.
…and to the future?
Looking further ahead, we anticipate that other areas will come to the fore later in 2016 and into 2017.
In the corporate governance arena, work by the FRC and others on the role of the board in succession planning and corporate culture may start to translate into specific requirements.
With many Main Market companies approaching the deadline for renewal of their directors’ remuneration policies in 2017, we anticipate that this will re-emerge as a topic for greater board discussion. This will no doubt be fuelled by a report, expected in spring 2016, from the Investment Association’s Executive Remuneration Working Group. This group is reviewing proposals for a radical simplification of executive pay, in reaction to investors’ concerns that pay structures are becoming too complex.
The EU has reached political agreement on the long-awaited harmonisation and extension of data protection law – the General Data Protection Regulation. This is expected to be adopted in early 2016, coming into force in 2018.
The anticipated dates are correct at the time of publication but may change during the course of 2016.
We would be pleased to receive any comments on the topics raised in this Briefing. And if assistance is needed in any of these areas we would be delighted to help.