The final text of the SRD looks likely to be finalised shortly, with agreement to bring it into law during the term of the Dutch Presidency which ends 30 June 2016.
Discussion on this initiative within the EU has been lengthy for many reasons. A widely differing appetite for EU intervention amongst national governments was the initial problem – virtually no progress was made, for example, during the Luxembourg presidency which was not enthusiastic about many aspects e.g. greater corporate transparency. The difficulty of crafting legislation covering such widely different regimes was one problem which meant that agreeing what was and what was not in scope took a long time, and even now the precise application of certain aspects is uncertain. Defining a shareholder was the next hurdle, as in many EU countries that term includes what we in the UK would describe as the end investor. BIS are on record as stating that they did not want the definition to extend beyond the registered shareholder and this has been accepted, with the meaning defined by individual national law.
As if it were not complicated enough, late in the day, debate raged about so-called country by country tax reporting, aimed at the way international corporations manage their tax affairs, which held up progress for a good six months. This has now been resolved, and the disputed provisions will be omitted from the SRD but included in a revised EU Accounting Directive. It is expected that the final SRD text and timescales for introduction will be announced shortly. It is not expected to have a material impact on the UK but detailed analysis will be required, particularly around vote confirmation which is one of those areas of uncertain definition/application referred to above. If left to national governments, it will be an interesting test of BIS’ resolve, mentioned in the penultimate Round-Up, not to load additional cost onto UK businesses.
BIS are making good progress in preparing the consultation planned for September/October this year.
In that same Round-Up we reported on the last meeting of the Dematerialisation Steering Group and BIS’ decision about the consultation. BIS are hard at work data-gathering and reviewing issues, to which Equiniti is contributing. Among these are the collection of stamp duty/recording exemptions and how non-market transfers are processed, involving the Stamp Office and other HMRC officials, the mechanics of takeovers and other corporate actions, which has led to another meeting with the Panel for Takeovers and Mergers, and more discussion of legal implications.
A business analyst at the Department is looking at costs and benefits, without which no government initiative can proceed. The change is driven by EU legislation – the Central Securities Depositary Regulation (CSDR) – but the proposal is for the date to be brought forward, hence the impact analysis. All this is subject to the result of the EU Referendum. If Vote Leave succeeds, the official line is that it will not affect the issuing of the consultation because dematerialisation could have benefits in its own right, but government instability and resource reallocation to the resulting workloads may change that as well as potentially giving oxygen to those resistant to change.
Euroclear is expected to provide more information shortly about the process for collecting LEIs and other details from issuers which their registrars will facilitate.
Euroclear are working closely with all the UK registrars to identify what needs to be done to enable them to submit their application to be a CSD to the Bank of England by the end of 2016. The primary focus is on tightening up processes and procedures, changes to reporting, and the impact of, and planning necessary for the move to more frequent reconciliations in a shorter window because Extended Settlement means that work will be processed until 6pm from 20 June.
There is little to report that will affect issuers in the short term, but we have previously noted that, 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, and the registrar will be required to transmit this information to CREST. We know that this will need to be well in hand by the time that the Euroclear’s application is submitted but still do not have a definite timescale for the data collection to begin. However, we understand that Euroclear are giving careful thought to this at the moment, as well as the need to give guidance to participants and issuers about the process which will need to be followed. As soon as we hear anything we will pass the information on to clients.
A policy statement has been issued by the Financial Conduct Authority (FCA) on the implementation of the Market Abuse Regulation (MAR). The FCA has also published changes to its handbook.
The policy statement confirms that the FCA will proceed with most of the proposals set out in its consultations and its approach where it had discretion to choose a particular route under MAR. For example, where a company delays the disclosure of inside information, a written explanation for the delay need only be provided if requested by the FCA.
The general approach to the FCA Handbook is to provide signposts via hyperlinks directly to the provisions of MAR. This will mean that the Disclosure Rules, where most of the current requirements on market abuse sit, will become ‘Disclosure Guidance’.
The policy statement and Handbook changes are available from www.fca.org.uk.
The introduction of MAR will also affect AIM companies.
The London Stock Exchange has published an AIM Notice (44) setting out proposals for changes to AIM Rules and AIM Regulation as set out in an Inside AIM publication information which will help AIM companies and their advisers prepare for the introduction of MAR based on the assumption that the proposals set out in AIM Notice 44 will be implemented.
Changes to the EU Audit Directive and Regulation are due to come into force from 17 June 2016.
A recent FT article reported that many large UK companies are not prepared for the forthcoming changes which are due to come into effect in June this year (available from www.FT.com). The Financial Reporting Council (FRC) has been consulting on the requirements and has now published final drafts of changes to the UK Corporate Governance Code (the Code), Guidance on Audit Committees and changes to Auditing and Ethical Standards.
Whilst only minor changes have been made to the Code, the Guidance on Audit Committee has seen more extensive re-writing. Key items are:
- Changes to guidance on audit committee composition;
- Additional guidance on risk management and internal controls;
- Guidance on the role of the audit committee in relation to the fair, balanced and understandable statement;
- Additional guidance on reporting by the audit committee and interaction with shareholders.
Amendments to the Ethical Standards are in areas such as the fee cap for the provision of non-audit services, list of the EU prohibited non-audit services and rotation of the audit engagement partner. The FRC have also stated that as from 2017 they will publish names of companies or company audits that have been the subject of an FRC review.
The final documents and their effective date are to be confirmed by the FRC in due course. The drafts of the Code, Guidance on Audit Committees and Auditing and Ethical Standards may be found on the FRC website at: www.frc.org.uk.
A draft for comment on updated guidance on realised and distributable profits under the Companies Act 2006 has been published by the Institute of Chartered Accountants in England and Wales (ICAEW) and Institute of Chartered Accountants of Scotland.
The guidance helps to identify and apply the principles relating to the determination of realised profits and losses for the purposes of making a distribution. The ICAEW have stated that the guidance should be considered as having immediate effect regardless of the fact that they have asked for comments to be submitted by 9 June 2016. The guidance is available from the ICAEW website at www.icaew.com.
A recent Financial Conduct Authority (FCA) quarterly consultation paper looks for responses to minor changes in the Listing, Prospectus and Disclosure and Transparency Rules.
The changes include a prescribed format for reports by listed companies in the extractive or logging industries on payments to governments under DTR 4.3A. For financial years beginning on or after 1 August 2016 it is proposed to align the format of reports required by DTR 4.3A with reports required by UK regulations – they would therefore have to be prepared in XML format and filed with the FCA by being uploaded to the National Storage Mechanism. The reports would still have to be released to the market in a human readable format. The consultation paper is available at: www.frc.org.uk.
Companies are reminded that the first report under UK legislation is to be prepared for the financial year beginning on or after 1 Jan 2015 and delivered to Companies House within 11 months of the year end.
IOGP Industry Guidance on reports of payments to Governments
The International Association of Oil and Gas Producers (IOGP) has published amended guidance to companies in the extractive or logging industries to assist them with the requirement to report on payments to governments.
The guidance includes help on identifying which companies have to prepare a report, the types of payments to be reported on, and how and when reports be delivered. It also recommends to avoid over-reporting, duplication and use of notes to help users understand reports.
The IOGP guidance is available from www.iogp.org.
The stated aim of the recently proposed EU Accounting Directive is to fight against aggressive tax planning and tax avoidance at an EU and global level.
The Directive would apply to:
- Ultimate parent undertakings of EU headquartered multinational groups with a net turnover of at least EUR 750 million.
- Large and medium sized EU subsidiaries and branches of non-EU headquartered multinational groups with a net turnover of at least EUR750 million.
These companies will need to disclose their profit and tax accrued and paid in each EU member state and certain tax haven jurisdictions on a country by country basis.
The Investment Association has produced a Productivity Action Plan to encourage long-term investment with a view to addressing the UK’s productivity issues.
The Action Plan is made up of five objectives and twelve recommendations to deliver these objectives. The five principal objectives are:
- Enhance company reporting for efficient capital allocation – through investment and analytical expertise the industry will identify and finance those companies contributing productive growth in the economy
- Enhance investor stewardship and engagement – the investment industry will engage with companies to help them achieve sustainable value creation over the long term and support investments in improved productivity
- Simplify behavioural incentives and the investment chain – the industry will work to ensure that the agreed incentives and governance of the investment chain ensure a clear alignment with clients’ long term investment objectives
- Develop efficient and diverse capital markets – as key capital market participants, the investment industry has a key role in the development of asset classes and the efficient functioning of capital markets
- Overcome tax and regulatory impediments to the provision of long term finance – the investment industry should contribute to the debate on tax and regulatory impediments to investment so as to ensure the right long-term outcomes for clients.
The IA will carry out a six month progress review on the action plan which is available on the IA website: www.theinvestmentassociation.org.
The Equality and Human Rights Commission (EHRC) has carried out a detailed inquiry into board level recruitment and appointment practices in FTSE 350 companies.
60% of FTSE 350 companies still do not meet the 25% target set by Lord Davies – a state of affairs which is not helped by the approach of companies to Board level recruitment. Almost a third of companies rely on personal networks of current and recent board members to identify new candidates and there is virtually no open advertising of board roles. The position is even worse for executive roles with nearly three quarters of FTSE 100 companies and 90% of FTSE 250 companies having no female executive directors at all on their boards.
The EHRC has produced a six step good practice guide to improving board diversity. The six steps can be summarised as follows:
- Define the selection criteria for board members in terms of measurable skills, experience, knowledge and personal qualities.
- Reach the widest possible candidate pool by using a range of recruitment methods and positive action.
- Provide a clear brief, including diversity targets, to the executive search firm.
- Assess candidates against the role specification in a consistent way throughout the process.
- Establish clear board accountability for diversity.
- Widen diversity in the senior leadership talent pool to ensure future diversity in succession planning.
The report is available from the EHRC website – www.equalityhumanrights.com .
The first conviction was secured earlier this year by the Serious Fraud Office under s7 of the Bribery Act 2010. An AIM company has been fined £2.25 million for a conviction under the Bribery Act following an investigation into its activities in the United Arab Emirates and its operating subsidiary bribing a foreign public official. It is important for companies to remain vigilant and ensure proper supervision of their subsidiaries with internal monitoring and use of auditors.
The Investment Association (IA) Interim Report on executive pay
The IA has published an interim report as part of its stated aim to simplify and improve pay practices at UK listed companies. A series of proposals has been put forward for consultation.
- resetting the expectations both of listed companies and investment managers around pay structures and move away from the use of standard pay models to structures tailored to the individual business strategies and circumstances;
- challenging the dominance of Long-Term Investment Plans (LTIPs), which often result in a poor alignment of interests between executives and shareholders;
- consideration of using simple share award schemes;
- consistency of approach to other employees remuneration;
- review of relationships between Remuneration Committees, fund managers and shareholders;
- full retrospective disclosure of annual bonus targets.
The report is available from www.theinvestmentassociation.org.