Although there will be minimal impact on our clients, other than a request for information which Equiniti will pass on to Euroclear, the interaction between the registrars and the CREST system will change significantly and planning for this is well under way.
Euroclear has identified major changes that will be required to enable it to be fully compliant with the CSDR and apply to the regulator, the Bank of England, to be approved as the CSD in the UK. The planning and build of these changes will take place during 2016 and will need to be completed before it submits its application.
To achieve compliance, major IT changes will be required to meet settlement discipline and record keeping requirements, as well as changes to legal documents, rules, manuals etc. The Bank is taking an active role in monitoring these developments and has already started to ask for more frequent and more detailed reporting which will be formalised over the course of this year. Although not directly regulated by the Bank of England, registrars will be working closely with the Bank too, to ensure that their requirements for market stability are met.
One other significant change which will have a major impact on registrars as well, will be that full reconciliations on every security must take place fortnightly instead of quarterly as at present. This will involve considerable planning by both Euroclear and the registrars, and Equiniti has held a number of internal and external meetings on the subject and the work on the change is progressing to plan. We are mindful that, mid-way through this planning period, extended CREST (and CHAPS) settlement will be introduced on 20 June, and we are already beginning to factor in the demands of increased reconciliation activity in a shorter overnight window, a project that the Bank are also leading. The Equiniti project team is on track to deliver the changes required by the Extended Settlement Day. These should be invisible to issuers but more detail will be communicated in next month’s Round-Up
Other than the more frequent reconciliations mentioned previously, it is unclear yet what the full impact on registrars will be but, to enable the reporting to be carried out, all CREST participants, and issuers in CREST will need to have a Local Entity Identifier (LEI), as well as a code to record their countries of incorporation and, for all securities, a country code to identify the law under which they are constituted. If not already held, issuers will need to obtain a LEI in the autumn, and the registrar will be required to transmit this information to CREST. We will come back to you with more information and guidance in due course.
One of the other strands of the CSDR is dematerialisation and BIS have given more detail about their plans, including issuing a consultation in autumn 2016.
The CSDR requires dematerialisation in all markets across the EU by 2023 for new securities and 2025 for existing securities. One of the key questions for the market is the continued appetite for implementing a solution in the UK in advance of the statutory deadlines and – with regard to the EU Referendum – whether, if there was a vote to leave, such an initiative should still be pursued because of its intrinsic merits rather than just because the law required it.
BIS attended a meeting of the Dematerialisation Steering Group (DSG) on 24 February at which they mapped out their intentions in this area and intimated that they aimed to issue a consultation in autumn 2016 looking at the potential methods of achieving dematerialisation. More work will be done over the summer on costs and benefits, identifying risks and clarifying issues which need further work (many of which have already been identified in developing the Industry Model) and resolving these where possible to give more precision to the questions and greater certainty in the consultation proposals.
A number of issuers attended the meeting and put forward their views about additional ideas which might be incorporated into the eventual outcome. They and other clients will be invited to be part of the process of looking at the risks and issues, and the practical steps needed to move these forward, and the role of the DSG in the future, will now be discussed with BIS.
Rules for deregulatory action and targets are extended to regulators. It will be interesting to see the extent to which this features in the EU Referendum debate
The Small Business, Enterprise and Employment Act 2015 committed future Governments to publishing, and then reporting on, their performance against a deregulation target – the Business Impact Target (BIT). This is a target in respect of the economic impact to business of new regulation that comes into force or ceases to have effect over the course of the Parliament. At present the target only covers legislation and regulatory functions carried out by or on behalf of UK Ministers.
However, businesses (and the ICSA Registrars Group) have been vocal in telling the Government that the actions of regulators are as important as the content of legislation in determining their experience of regulation.
This further measure is specifically intended to:
- extend the Business Impact Target to include the actions of statutory regulators; and
- ensure regulators will have to carry out assessments of the economic impacts to business of any changes to their regulatory policies and practices.
More broadly the Government states that it should:
- provide a wider focus for the Government to reduce regulatory burdens on businesses, enabling them to free up resources and boost productivity;
- ensure that there is even greater transparency around the impact of regulation on business;
- enable regulators to contribute to the Government’s deregulation target of £10bn of regulatory savings during the current Parliament; and
- provide greater incentives for regulators to design and deliver policies that better meet the needs of business.
These aims may make certain senior company executives smile ruefully, especially those in the financial sector. Historically, the record of regulators in the UK and Europe in reducing the regulatory burden on businesses and contributing to regulatory savings has not been good. The amount of cost loaded on to businesses by MIFID2, FATCA and the OECD Common Reporting Standard already runs into billions of pounds and any realistic impact assessment will show, in the case of the last two, that the payback will be a fraction of what has been spent.
One of the key planks of David Cameron’s negotiations with the EU was protection for the City of London in order to free it from the imposition of regulatory burdens designed to apply to and benefit Eurozone countries. It will be interesting to see precisely what this means in practice (if that level of detail has been agreed), and also as the debate on Brexit unfolds, the extent (if at all) that this will be one of the key areas of discussion.
It will also be very interesting to understand whether this only covers action taken by the EU to stabilise the euro, or more widely, the imposition of ‘one size fits all’ regulation on financial services businesses across the EU which has a disproportionate impact on the City. The counter argument is that, in order to continue to do business across Europe, firms based in London will, in any case be forced to comply with such rules, regardless whether the UK is in or out. Now that Boris Johnson has shown his hand, he may well focus on this area, as it is one which he has spoken about in the past in his capacity as Mayor of London. We must also wait and see whether this affects the opinion of business leaders in this sector.
The first statements under the Modern Slavery Act will be required for companies with 31 March year-ends. Section 54 of the Modern Slavery Act 2015 require all commercial enterprises with a turnover of more than £36 million that conduct business in the UK to publish on the company’s website a slavery and human trafficking statement each financial year. The new reporting provision applies first to companies with a 31 March 2016 year-end. The Government published guidance on the new legislation in October 2015 which is available here.
On 12 February 2016 the response to the government consultation on gender pay reporting was published together with the draft regulations. The regulations take effect in October 2016 and employers must make the first tranche of information required in April 2017. This must be published by April 2018 with an annual report being made thereafter. Preparations should start now particularly as data is required for the 12 months ending 30 April 2017 for the comparison of bonus payments and therefore information gathering is required from this April. A second government consultation which closes on 11 March 2016 is being carried out on the draft regulations but no major changes are now expected.
Companies are required from 6 April 2016 to keep a register of people with ‘significant control’ over a company (the PSC Register). Companies must send the information on the PSC Register from 30 June 2016 to Companies House. The PSC Register requirements do not apply to companies who have voting shares admitted to trading on certain markets including on the London Stock Exchange as these companies are subject to similar disclosure requirements such as under DTR5. However, UK subsidiaries of listed companies will need to comply. BIS has now published its final guidance for companies on these requirements. This is available from here.
A review of FTSE 350 companies' environmental reporting and greenhouse gas emission disclosures in annual reports has been recently published by the Climate Disclosure Standards Board and is available on their website: http://www.cdsb.net/.
Regulations were brought into force on 1 January 2016 under the Small Business, Enterprise and Employment Act 2015, allowing the Secretary of State to introduce regulations requiring certain prescribed organisations to produce annual reports detailing whistleblowing disclosures they have received.
Following the admission by a retail plc to an accounting error which affected dividend payments companies should pay extra attention to the technicalities of dividend funding. Under UK law companies must have sufficient reserves to make dividend payments and to be able to support this position. This means that if new reserves have accumulated from which dividends are to be paid accounts must be filed at Companies House outside of the normal annual cycle. The company in question held a general meeting in February 2016 in order for shareholders to rectify the issue.
Companies are also reminded that the FRC Lab published a report in November 2015 looking at the information investors would like to see in respect of dividend reporting.
The FRC published a report ‘Clear and Concise Developments in Narrative Reporting’ in December 2015. The report includes practical tools to help companies achieve clear and concise reporting and provides an overview of developments in narrative reporting. It also includes a study reviewing the influence of the FRC’s Guidance on the Strategic Report since its publication in 2014, which found that annual reports have become more cohesive, with better linkage between related information and more focus on clear and concise reporting.This is available here.
In January 2016 the FRC published its report Developments in Corporate Governance and Stewardship in 2015. In this report the FRC Chairman stated that the FRC does not intend to make substantial revisions to the UK Corporate Governance Code for the next three years. Minor revisions are expected as a result of implementing the EU Audit Regulation and Directive. The report may be found here.
The one main change was to emphasise that for long term incentive awards the total performance period and holding period combined should be at least five years. A letter sent to Remuneration Committee chairs highlighted items which are of concern to its members including above inflation salary increases and inadequate disclosure of bonus targets. Copies of the Principles of Remuneration and letter to Remuneration Chairs may be found on the IA website here.
In December 2015 the GC100 confirmed that the current guidance on executive remuneration is effective. A full review of the guidance will be carried out in 2016.
The European Banking Authority published in December 2015 its final guidelines on remuneration policies.
The implementation date for these guidelines is 1 January 2017 and the FCA has confirmed that the rules will apply to the 2017 performance year. The FCA will consult on any necessary changes to domestic rules. The guidelines contain requirements for remuneration policies, associated corporate governance arrangements and processes to apply when remuneration policies are implemented. They can be found here.
The details behind the Market Abuse Regulation continue to be finalised with various consultations underway. For example ESMA published at the end of January 2016 a consultation on the guidelines under MAR which deal with instances of legitimate delay in disclosing inside information. The consultation closes on 31 March 2016 and can be found here.
The ISS 2016 UK & Ireland Proxy Voting Guidelines were published in December 2015 and can be found here.
The Supreme Court ruled in favour of Eclairs Group Ltd in December 2015 against JKX Oil & Gas plc’s use of its Articles to suspend Eclairs right to vote at general meetings and to restrict its rights of transfer. This ruling has reaffirmed the role of the Proper Purpose rule in law. Directors must not only act within their powers but must identify the proper purpose of the exercise of their powers before they do so.
BIS has published a consultation paper on ways to implement the requirements of the EU Directive on non-financial reporting including whether the UK should adopt an option to require non-financial statements to be independently verified. The consultation also asks for opinions on wider reforms of narrative reporting such as whether to allow companies to provide separate non-financial statements on their websites and if there are other narrative reporting requirements that can be repeated. The consultation closes on 15 April 2016. The EU consultation containing the proposals which BIS is seeking views on so that they can better respond and negotiate, also closes on the same date. These can be found here and here respectively.