We have recently seen a host of changes and developments.
Here is a full listing of the topics covered in this roundup:
- Updates on dematerialisation – BIS consultation process restarting
- CSD Regulation - Reconciliations
- Shareholder Rights Directive and the Shareholder Voting Working Group
- UK Individual Shareholders Society
- Brexit: thoughts on the implications of a possible UK exit from the EU
- Small Business, Enterprise and Employment Act 2015
- Modern Slavery Act 2015
- The final Davies Gender Report
- The Investment Association’s Principles of Remuneration
- Advice for smaller listed and AIM companies on improving annual reports from the Financial Reporting Council
- The Financial Reporting Council’s Discussion Paper on Succession Planning
CSD Regulation (CSDR) – Dematerialisation
You will recall that, in the summer, we advised that the Department for Business, Innovation and Skills (BIS) was planning a consultation on dematerialisation for December. The plans for a consultation followed ministerial approval for exploring ways of implementing such a change in the UK. However, shortly afterwards, the lead civil servant within BIS moved on to a new role and there has been no progress pending her replacement.
The replacement is now in post and John Heaton will be meeting her shortly to discuss next steps and likely timings, given that the original schedule is no longer feasible. We will advise you when we hear further information from BIS but our best view is that the consultation will take place towards the end of Q1 or early Q2 2016. We will also keep you updated on the composition and future meetings of the Dematerialisation Steering Group.
CSD Regulation – Reconciliations and other changes
One of the requirements of the CSDR is a change from quarterly to fortnightly full reconciliations between registrar and CSD, in our case Euroclear. The original proposal outlined weekly reconciliations, but some relief was negotiated by the ICSA Registrars Group and Euroclear with Brussels. The practical implications of this change and other technical requirements of the CSDR need to be discussed with Euroclear. A preliminary meeting has been scheduled for 10 December.
Shareholder Rights Directive (SRD) and the Shareholder Voting Working Group (SVWG)
Following submission of responses to the SVWG consultation document suggesting improvements to the proxy appointment and voting process, we are looking forward to the next meeting of the SVWG on 9 December. Proposals included changes to CREST messaging; greater use of CREST for lodging proxy appointments; separating the dividend record date from the proxy appointment deadline; and the introduction of an online gazette for centrally recording meeting details. The consultation document suggested increased visibility of voting data to issuers and, controversially, vote confirmation to investors.
The meeting in December should be looking at the results of the UN Principles for Responsible Investment Vote Confirmation pilot, undertaken by Broadridge and a small number of issuers and institutional investors. Critically, we hope that there will be an open discussion about the demand for changes and a rigorous cost benefit analysis to ensure that any proposals are fully costed and paid for by the parties who are requesting changes.
It would be premature at this stage to come up with any definitive proposals on this and other matters covered by the SRD, progress on which has stalled because of other priorities for the current EU Presidency. Work is likely to restart in the new year and we will be speaking to BIS beforehand about the results of the SVWG meeting and the remaining issues to be resolved in finalising the SRD.
UK Individual Shareholders Society (ShareSoc)
The UK Individual Shareholders Society (ShareSoc) published its suggestions for drastic changes to UK share ownership in October. The paper, ‘Reforming UK Share Ownership’, goes far beyond what is likely to be included in the SRD (and CSDR) by proposing that indirect investors’ details are held by the registrar so that they can enjoy communication and voting rights from the issuer, and have the ability to communicate with other shareholders and beneficial voters on the register. We will discuss with BIS whether they have any appetite for such far-reaching and costly proposals.
Brexit: thoughts on the implications of a possible UK exit from the EU
In the light of initial negotiations about concessions sought from the EU by the UK government which will be put to the electorate in a referendum, Equiniti has started looking at the implications for our industry, business and clients. There is no doubt that leaving the EU would be a hugely complicated and time-consuming move, but, in large areas of law, we doubt whether very much would change in the short to medium term because so much EU law is embedded in UK law.
All directives have to be by their nature and although Regulations do not, in practice that is what the UK Government has historically done because the wording tends to require transposition to UK law to make it clear. Our initial view is that, from a share registration perspective, nothing of substance will change because our infrastructure is quite different. From a financial services perspective, we suspect the UK would be very reluctant to make dramatic changes because of the implications for UK firms doing business in Europe. However, we will watch the situation closely as the negotiations proceed.
Small Business, Enterprise and Employment Act 2015 (SBEE 2015)
The second phase implementing provisions in SBEE 2015 took effect on 10 October 2015. The appointment forms for the appointment of both directors and company secretaries have changed. A statement has been added to the form that the person named therein has consented to act as director or company secretary as appropriate. The company, acting by an officer or authorised signatory, must sign this statement to confirm it. This replaces the previous process whereby the appointee had to sign the form to confirm their consent to act. The previous version of the form cannot be used for appointments made on or after 10 October 2015; unlike previous form changes there is no transitional period. Companies House will notify all appointees that their appointment has been noted on the public record and provide information on their rights and duties as a director or company secretary.
In addition partial suppression of the date of birth information of directors has been adopted. In future, the date of birth information available to the public will only disclose the month and year of birth. The day is still required to be disclosed to Companies House on the appointment form but does not form part of the public record. Companies must still record the full date of birth information in their register of directors.
The process for striking off companies, whether at the request of the company or initiated by Companies House in the case of defunct companies, has changed. Previously, strike off could only take place following a waiting period of three months after publication of the proposal to strike off was published in the Gazette to allow for objections. This three month period has been reduced to two months.
The next implementation is currently expected in April 2016 and will include provisions to allow people to dispute their appointment as a director, change the registered office address of companies using an address without permission and the introduction of the People with Significant Control Register (PSC Register). Guidance and secondary legislation for the practical requirements for the PSC Register will be published prior to implementation.
Modern Slavery Act 2015 (MSA 2015)
On 28 October two statutory regulations were published: The Modern Slavery Act 2015 (Commencement No 3 and Transitional Provision) Regulations 2015 implements s.54 of the MSA 2015 which requires commercial organisations to prepare a slavery and human trafficking statement (Statement) for each financial year, ending on or after 31 March 2016, in which their total turnover is above the prescribed amount. The Modern Slavery Act 2015 (Transparency in Supply Chains) Regulations 2015 sets the prescribed amount at £36m and provides detail on how to determine total turnover.
The statement must be published on the companies' websites and clearly signposted from the home pages. For groups, all companies meeting the turnover criteria must make a Statement although, if apllicable, the same statement can be used for all companies.
Guidance on the Statement has been published by the Home Office. Although there is no prescribed period within which the Statement must be published, the Home Office is encouraging publication within six months of the end of the financial year.
Final Davies Gender Report
On 29 October 2015, Lord Davies published his final report on improving the gender balance on British boards. The report notes that since 2011 female representation has improved but that more progress is required.
At 1 October 2015, women held 26.1% of FTSE 100 board positions, compared to 12.5% in February 2011. There were no male-only boards. The FTSE 250 lags behind the FTSE 100, with women holding 19.6% of board positions and 15 male-only boards remaining.
The report makes five recommendations:
- That the voluntary approach to improving female board representation be extended for another five years.
- That the target for female board representation in the FTSE 350 be increased from 25% to 33% to be achieved in 2020 combined with encouraging the progression of women to the roles of chair, senior independent director and executive director.
- That FTSE 350 companies be encouraged to improve gender balance to their executive committees and senior leadership positions and asking all FTSE listed companies to address gender imbalance on their boards.
- That a new steering group be established, under a new chair; and
- That the new steering group should review the above recommendations and, after consultation, publish more detailed comments at the beginning of 2016.
Investment Association principles of remuneration 2015
The Investment Association has published its 2015 principles of remuneration.
There is only one change to the principles in Section C with the expectation from Investment Association members that long-term incentive plan awards should have a total performance and holding period of at least five years.
Although the remaining principles are unchanged, the Association highlighted certain aspects of the guidance in a covering letter, including:
- Basic salary increases for directors should not exceed inflation or increases for the general workforce.
- Bonus targets should either be fully disclosed at the end of the relevant financial year, or companies should commit to disclosing them in full at a specified future date.
- New directors' service contracts should have equal notice periods for both the company and the director and should allow for withholding of pay where the director is under regulatory, disciplinary or misconduct investigation.
- Directors' pension arrangements should be in line with those for the rest of the company.
- Remuneration committees should fully explain the reasons for treating a departing director as a good leaver.
FRC advice to smaller listed and AIM companies on how to improve annual reports
The Financial Reporting Council (FRC) has announced that it is writing to around 1,200 smaller listed and AIM-quoted companies with advice on ways that improvements could be made to annual reports in areas of particular interest to investors.
In particular, investors expect:
- The Strategic Report to be clear, concise, balanced and understandable;
- Accounting policies to be clear and specific, particularly in relation to revenue recognition and expenditure capitalisation; and
- Clear explanation of how the company generates cash flow.
The letter is a follow up to the FRC’s report ‘Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies’, which noted among other matters that investors often focus on the annual report when making investment decisions as there is a general lack of other sources of information for smaller listed and AIM companies.
FRC discussion paper on succession planning
Proper disclosure of succession planning is increasingly being sought by investors. The FRC has published a discussion paper – ‘UK Board Succession Planning’ – which seeks views on board succession for both executives and non-executives in order to support a suitably talented, diverse ‘pipeline’ of candidates.
Following a discussion process with a wide range of interested parties the FRC is seeking to promote a shared understanding of the key issues and good practice identified.
Issues explored in the paper include:
- Importance of effective board succession planning to business strategy and culture;
- The role of the nomination committee;
- Board evaluation and its contribution to board succession;
- Identifying the ‘pipeline’ for executive and non-executive directors, whether internal or external;
- The role of diversity goals in succession planning; and
- The role of institutional investors.