On 19 January 2022 the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (“CFD Regulations”) were published. They will come into force on 6 April 2022 and apply in respect of any financial year of a company which commences on or after that date.
The Financial Conduct Authority (“FCA”) published its Primary Market Bulletin 36 yesterday.
It introduces specific Task Force on Climate-related Financial Disclosures (TCFD) aligned climate-related disclosure requirements for listed companies and sets out the FCA’s disclosure expectations and supervisory strategy. Transparency remains key to the FCA’s ESG Strategy which was released at COP26.
The listing rule for premium listed commercial companies is set out in LR 9.8.6R(8) and came into force for financial years beginning on or after 1 January 2021. The first annual financial reports including disclosures subject to this rule will therefore be published from January 2022. As these disclosures are deemed to be an ‘accounting requirement’, the Financial Reporting Council (“FRC”) is responsible for keeping these disclosures under review. From 2022, the review of TCFD-aligned disclosures will be embedded into the FRC’s routine reviews of premium listed company annual financial reports.
The Financial Conduct Authority has published its final changes to the Listing Rules in order to encourage SPACs (special purpose acquisition companies) to list on the London Stock Exchange. The new rules will come into force on 10 August 2021.
The FCA consulted previously on the listing of SPACs, noting the need to balance investor protection with the desire to encourage SPACs to list on the Main Market.
A SPAC (or blank cheque company) is a shell company which raises cash through an initial public offering of its shares and lists, with the aim of using the funds raised to buy one or more companies later on. Prior to the new rules coming into force, there was a presumption that the FCA would suspend the listing of a SPAC when the SPAC identified a potential acquisition target. This was to protect investors from disorderly markets due to there being insufficient information available to the public at that stage. However, investors saw the suspension as detrimental as they could not then sell their shares, possibly for months.
The Financial Services Act 2021 has been published, making it the first financial services primary legislation passed by the UK Parliament since the UK left the European single market.
There are some important future changes that issuers need to be aware of.
- Issuers’ responsibility for notifying the market of transactions by PDMRs and persons closely associated with them
UK MAR requires persons discharging managerial responsibilities (PDMRs, being essentially senior managers) and those persons closely associated with them to notify both the issuer and the Financial Conduct Authority of their transactions in the issuer’s instruments. Currently, this notification must be made by the PDMR and their closely associated persons to the issuer within three business days of the transaction. The issuer must in turn notify the market within three business days of the transaction. This can be a difficult timeline to meet so the Act will require issuers to notify the market within two working days (“working days” will explicitly exclude England and Wales bank holidays) of receiving the notification from the PDMR and persons closely associated with them. This change is due to come into force on 29 June 2021.
Directors’ reporting and the statutory audit have taken a battering in light of recent corporate catastrophes such as Thomas Cook Group plc, Carillion plc and BHS. In response, the government commissioned three independent reviews in 2018: Sir John Kingman’s Independent Review of the Financial Reporting Council (FRC), the Competition and Market Authority (CMA)’s Statutory Audit Services Market Study and Sir Donald Brydon’s Independent Review of the Quality and Effectiveness of Audit.
- The FRC Review recommended that the current regulator, the FRC, be replaced.
- The Brydon Review concluded that statutory audit needs to become more informative and helpful to users.
- The CMA Market Study called for new measures to increase quality, competition and resilience in audits.
Many listed companies are now starting to prepare for the 2021 annual general meeting (“AGM”) season and plan their next annual report.
This note summarises what we think will be some of the key agenda items for 2021.
On 18 January 2021, the Investment Association (“IA”) published its shareholder priorities for listed companies in 2021. The publication:
- Assesses the progress made by listed companies on the four areas identified by investors as critical drivers of long-term value at the time of publication of the shareholder priorities for 2020;
- Sets outs IA member expectations for 2021; and
- Describes the approach which its corporate governance research service, the Institutional Voting Information Service (“IVIS”), will take to analyse these issues for companies with year-ends on or after 31 December 2020. This includes a summary of the IVIS questions and colour top approach for 2021.
The Department for Business, Energy and Industrial Strategy has opened a consultation on the Government’s proposed approach to restricting the use of corporate directors as part of its larger package to enhance corporate transparency, reform Companies House and fight economic crime in the UK.
On the one hand, corporate directors may be seen to weaken corporate governance by preventing individual accountability yet on the other, they may be a useful and legitimate option.
The law as it stands requires that only one director on a company’s board be a “natural” person and any number may be corporate directors. Provision to prohibit the use of corporate directors was made in the Small Business, Enterprise and Employment Act 2015 but this has yet to come into force. Accordingly, the consultation is looking at what exceptions to the prohibition on corporate directors should be introduced so as to achieve an effective balance between their legitimate and “smoke-screen” use.
- The Government intends to introduce regulations that create a “principles” based exception to the prohibition. The principle is essentially that a company can be appointed as a director if:
all of its directors are, in turn, natural persons; and
- those natural person directors are, prior to the corporate director appointment, subject to the Companies House identity verification process.
Responses are due by 03 February 2021.
The covering letter to chairs of remuneration committees of FTSE 350 companies highlights the main (minor) changes to the IA principles which essentially seek to clarify investor expectations on the following issues:
The use of non-financial performance measures, in particular environmental, social and governance (“ESG”) related measures – on trend with companies increasingly incorporating material ESG risks into their incentive plans, companies will need to ensure ESG performance conditions are clearly linked to the company’s strategy. However, the IA’s view remains that financial targets should comprise the majority of any annual bonus.
Deferral of bonuses – where a bonus opportunity is more than 100% of salary, a proportion should always be deferred into shares, not given as cash.
Post-employment shareholding requirements – companies should explain what mechanisms are in place to enforce shareholding policies once a director has left the company.
The FRC have published a discussion paper in which they question whether the traditional concept of the annual report remains fit for purpose. Arguably, annual reports are too long, impenetrable and fragmented. In looking at the future of corporate reporting, the challenge is how to balance the need for more concise reporting against demands for more transparency.