What’s on the horizon as we enter 2017?
Guidelines on viability statements - Investment Association publication
Public position statement on quarterly reporting - Investment Association publication
The Financial Reporting Council – Grading of fund managers reporting under the Stewardship Code
The Hampton/Alexander Report - The drive for board diversity
Board Diversity Policy reporting and amendments to Disclosure Guidance and Transparency Rules - The drive for board diversity
Institutional Shareholder Services update Proxy Voting guidelines - The drive for board diversity
The Pensions and Lifetime Savings Association - Workforce reporting
Companies House – Publish guidance on Confirmation Statements
Hermes – Expectations for executive pay structures publication
Stamp Duty - Simplification review of residual paper duty on shares
Reporting on payment practices and performance
Financial Conduct Authority – Seeks early compliance with new regulated information rules
AIM Regulation – Disclosure obligations regarding social media
Quoted Companies Alliance – Governance Review 2016
Financial reporting Council – Response to the government green paper on corporate governance reform
Euroclear UK & Ireland (EUI) is currently in the process of applying to the Bank of England for authorisation to operate as the UK settlement system under CSDR. Although CSDR became law in September 2015 a number of key provisions are yet to come into effect:
Legal Entity Identifiers (LEIs) – All companies are required to obtain and maintain a Legal Entity Identifier. The LEIs will have to be provided to Equiniti as your registrar in order for us to onward deliver it to EUI, assigned to your CREST ISIN. Where we do not have access to these your relationship manager will be in touch to obtain them.
Segregated accounts – Article 38 requires custodians to offer all of their clients a segregated account. If a large number of retail clients take up this offer it may lead to an increase in numbers across share registers. Although a date has not yet been fixed this is expected to come into force in Q3 2017.
Dividends with options – EUI issued a consultation in August 2016 proposing changes to the way that dividends with options (alternatives to a local currency payment) are made to CREST participants, with proposed implementation in Q4 2017. The proposals sought feedback on the use of Electronic Election Entitlements (EEEs), enabling partial elections for all securities and having all election dates after record dates. Equiniti submitted a full response to the consultation seeking further clarification on a number of points. We currently await a response from EUI and will let you know how discussions progress.
Full dematerialisation of securities within the UK – After many years of protracted discussion the topic of de-mat has really picked up pace over the past 12 months. The government is currently targeting Q2 this year for the issue of a formal market consultation. The consultation will provide real opportunity to push for such things as increasing the registered shareholder details required (to simplify communication channels) and to accelerate on-line and self-serve mechanisms. We will ensure there is ample opportunity for discussion with our clients to inform our response.
The Markets in Financial Instruments Directive II (MiFID II) – Complying with the requirements stipulated under MiFID II will bring about many changes to the way in which market participants have to manage a number of their services. Corporate Sponsored Nominees, Dividend Reinvestment Plans and share dealing services will all be impacted and we will be communicating with you over the course of 2017 as to what these changes mean in practice.
The General Data Protection Regulation (GDPR) (Regulation (EU) 2016/679) – is a Regulation by which the European Commission intends to strengthen and unify data protection for individuals within the European Union (EU). As a regulation, enabling legislation will not be required to be passed by national governments. This will become EU law and is scheduled to come into force on 25 May 2018. Non-compliance may result in heavy fines.
It will apply to and place liability on all organisations that touch any personal data (Analog & Digital Assets) operating within the EU. All public authorities and companies processing more than 5000 data subjects within 12 months will have to appoint a dedicated Data Processing Officer who will be responsible to ensure that privacy is designed and implemented into systems and processes, new common data breach notifications (72 hours) are adhered to and to be prepared for their organisation to undertake new mandatory Privacy Impact Assessments (PIAs).
Despite an effective date of May 2018, GDPR compliance is already on the minds of most organisations. Throughout 2017 Equiniti will be issuing regular updates and hosting forums to assess and explain the requirements in more detail and to give you a chance to ask questions and discuss practical application.
Investment Association (IA)
The Financial Reporting Council made changes to the UK Corporate Governance Code in 2014 requiring companies to disclose their views on the longer term prospects of the company. Most companies reported on the new requirement in 2016 in respect of their 2015 annual report. With the benefit of the first year of disclosures the IA have produced their ‘Guidelines on Viability Statements’ which set out the expectations of institutional investors. In summary, the guidelines consider the following four areas:
- Period for viability assessment: The IA would like to see consideration of longer time periods than the 3 or 5 years that most companies have adopted and for companies to state clearly why that period has been chosen.
- Consider prospects and risks when assessing viability: Companies should not limit consideration of viability to medium or long-term risks but should consider the current state of affairs, address the sustainability of dividends, distinguish between risks that threaten performance from those that threaten operation and separate prospects from viability.
- Stress testing: investors would welcome more transparency on scenarios considered and likely outcomes, specific mitigating or remedial actions and any reverse stress testing.
- Qualifications and assumptions: qualifications and assumptions should be specific to the company and companies should distinguish between the two.
As part of its Productivity Action Plan launched earlier this year (designed to help increase productivity in the UK by long-term investment), the IA has published a position statement on their view of Interim Management Statements or quarterly reports. Although there is no longer a mandatory requirement for quarterly reporting, the majority of the FTSE 100 companies and a large number of FTSE 250 companies still report quarterly.
Not surprisingly the IA position statement calls for companies to cease quarterly reporting in order to focus on the longer term and strategic issues. The IA round table discussions will consider the benefits and challenges of ending quarterly reporting as well the improvements that could be made in reporting on longer term drivers.
Grading of fund managers reporting under the Stewardship Code (the Code)
There are nearly 300 signatories to the Financial Reporting Council’s (FRC) Stewardship Code. The FRC have tiered these signatories according to the quality of the reporting based on the seven principles of the Code and the supporting guidance. Asset managers have been assessed in three tiers and other signatories in two tiers with tier one being the best quality, and tier three needing significant improvements in their reporting. More than 120 companies are in tier one. The FRC have stated that asset managers who have not achieved at least a tier two after six months will be removed from the list of signatories.
The drive for board diversity continues
In November 2016 the Hampton/Alexander review on improving gender balance on FTSE boards, was published.
The key recommendations for FTSE 350 companies in the Review are that they should:
- aim for a minimum of 33% women's representation on their boards by 2020;
- target increasing the number of women being appointed to the roles of Chair, Senior Independent Director and Executive Director;
- take action to improve the under-representation of women on the Executive Committee and in the layer immediately below, i.e. the direct reports to the Executive Committee;
- aim for a minimum of 33% women's representation across their Executive Committee and in the direct reports to the Executive Committee by 2020; and
- voluntarily disclose, in the governance section of their annual report, or on their websites, the number of women on the Executive Committee and who directly report to the Executive Committee.
Recommendations under the review include appointing executive search firms to support the targets and investors to scrutinise company policies. The FRC has welcomed the review and said that they will revise the UK Corporate Governance Code once the Government consultation has been completed.
As part of the implementation of the EU Non-Financial Reporting Directive, the Financial Conduct Authority (FCA) has published changes to the Disclosure Guidance and Transparency Rules (DTR). A new rule DTR 7.2.8A requires listed companies to publish their board diversity policy with regard to aspects such as age, gender, educational or professional background, objectives of the policy and how it has been implemented and the results in the reporting period. If a company does not have a diversity policy it must explain why this is the case.
Institutional Shareholder Services (ISS) has updated its proxy voting guidelines. These come into effect for meetings on or after 1 February 2017. Key changes include:
The UK guidelines have been amended to take into account the recommendations of the Executive Remuneration Working Group, particularly the factors that ISS will consider when reviewing remuneration structures put forward by companies that are different to traditional Long-term Incentive Plans (LTIPs). The amended guidelines also state that where a serious breach of good practice is identified, the ISS may issue a negative voting recommendation against the chair of the remuneration committee.
The ISS will take into account the outcomes from the European Pay for Performance (P4P) model when considering voting on remuneration reports. The European P4P uses particular metrics to measure pay and performance over a period of time. ISS have previously said that the European P4P model will apply to all main market FTSE listed companies.
Smaller Board and committee composition
From September 2018, the ISS guidelines for Alternative Investment Market (AIM) companies on board and committee composition will also apply to listed companies which are not a member of the FTSE All Share or FTSE Fledgling indices. The changes amend the guidelines to mirror the Quoted Companies Alliance (QCA) Code requirements on audit, remuneration and nomination committees.Clarification of Overboarding Definition
The ISS will recommend a vote against directors who appear to hold an excessive number of board roles. The definition of overboarding has been clarified in the updated ISS guidelines.
Growing importance of workforce reporting
The Pensions and Lifetime Savings Association (PLSA) has written to the Chair of every FTSE350 company asking them to share fuller information with investors about the culture and working practices of their workforce. The letter includes a copy of the PLSA’s toolkit setting out the sort of information that companies are expected to include in their annual reports including the composition, stability, skill levels and engagement levels of their workers, and how their major employment models relate to the company’s underlying purpose and strategy. The PLSA also recognises the need for narrative reporting to be supported by data, for example on staff turnover, pay ratios, employee diversity, or investment in training and development.
Guidance on Confirmation Statements
Companies House has updated their guidance on confirmation statements indicating that a full statement of capital needs to be filed with the first confirmation statement that a company files. Once a full statement has been filed it is only necessary to file a statement of capital if there have been changes since the last statement of capital has been delivered.
Publish their expectations for executive pay structures
Hermes Investment Management have published a document entitled “Remuneration Principles: Clarifying Expectations” which is aimed at large public listed companies. The report starts by setting out some of the perceived problems with current structures of executive remuneration and then puts forward a number of proposals for companies to consider in their approach to executive pay. These include setting out the rationale for the Chief Executive’s pay package over the last year in an annual letter sent to employees. Hermes also favour simpler pay structures, use of higher fixed-pay such as cash and shares, and having a single incentive scheme.
Simplification review of residual paper duty on shares
The Office of Tax Simplification (OTS) has agreed with the Chancellor and the Financial Secretary to carry out a review of Stamp Duty. The aim of the review will be to develop recommendations about how to reform and simplify the Stamp Duty system from both a tax technical and administrative stand point.
This will include considering the possibility of transforming or replacing it so as to entirely remove the need for physical stamping.
The OTS aims to issue its report in Summer 2017. The terms of reference of the report are available here
The regulation on reporting on payment practices is expected to come into force on 6 April 2017. Several amendments have been made to the initial proposals following consultation. This includes the scope of the regulations which now only apply to large companies and LLPs. These are organisations which exceed two or more of the following categories: over £36m turnover, over £18m balance sheet total, over 250 employees. Each business in scope will be expected to publish its own individual report. The information required includes payment and dispute resolution policies, statistics on average time taken to pay invoices from date of receipt and the percentage of invoices paid within certain time parameters. Publication will be required twice yearly on a website provided by the government (which is under development).
The FCA is consulting on proposals necessary to comply with the European Electronic Access Point rules which are due to come into force in 2017. The new rules include requiring companies to classify information in accordance with those set out in the Appendix to the DTR when announcing regulated information and supplying a Legal Entity Identifier (LEI). The FCA is encouraging issuers to comply from 1 January 2017. However, the Regulated News Service (RNS) of the London Stock Exchange has asked companies to respond to the FCA consultation requesting a period of time before compliance is required in order to allow companies to prepare for the changes.
Disclosure obligations regarding social media
Alternative Investment Market (AIM) Regulation has published information on how social media should be treated in line with the disclosure obligations of the AIM Rules. Use of social media is subject to the same rules regarding disclosure of information and companies should take steps to ensure that use of social media is monitored to ensure compliance with the AIM Rules. AIM companies must continue to use traditional means of disclosing regulated information regardless of use of other information outlets.
The recent AIM Disciplinary Notice for breach of AIM Rule 31 should be noted by AIM companies with a review of their procedures as appropriate. AIM Rule 31 deals with the directors’ responsibility for compliance. In this instance the company failed to provide information to its Nominated Adviser (nomad) or to seek advice from their nomad about business development. Companies must liaise with their nomad to provide full and regular information in order that the nomad can carry out their duties.
Governance Review 2016
The QCA (which champions the interests of small to mid-size quoted companies) has published its fourth Corporate Governance Behaviour Review 2016. The review makes five governance reporting recommendations:
- Demonstrate clear links between strategy, performance and remuneration
- Keep your reporting concise and transparent - tell your story
- Demonstrate that you understand your shareholders’ and other stakeholders’ interests
- Publish the results of shareholder votes on your website
- Describe and explain how board performance is evaluated
Small and AIM companies should review their annual report disclosures in light of the QCA report.
Response to the government green paper on corporate governance reform
Amongst the responses to the government’s proposals on corporate governance set out in its recently published green paper, the Financial Reporting Council has set out its position. The FRC is seeking an extension of its powers to enable it to enforce governance rules. The FRC also suggests the development of a governance code for private companies, and a code of conduct for directors which would cover ethical duties.