Essential Corporate News – Week ending February 8, 2019

Introduction

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

FCA: Primary Market Bulletin 20

On February 7, 2019 the Financial Conduct Authority (FCA) published Primary Market Bulletin 20. The Bulletin addresses several matters, including updates on the use of the name “UK Listing Authority”, guidance on how to apply the Listing Rules if an issuer has previously had insufficient distributable reserves to pay dividends and recent changes the FCA has made and is proposing to make, to the guidance in its Knowledge Base.

Introducing the FCA’s Primary Market functions – Retiring the UKLA name

The FCA plans to phase out the ‘UK Listing Authority’ or UKLA name entirely. It is gradually removing it from its website and other external communications and will refer to the FCA’s ‘primary market’ functions. Commentators and members of the public are confused about who (or what) the UKLA is, with some unsure if it is a separate body from the FCA. and so the change is being made to provide clarity.

Insufficient distributable reserves for paying dividends

The FCA comments that in the last few years it has seen resolutions put to shareholders in general meetings seeking to rectify situations where dividends have been paid in a manner that has infringed relevant company law. The FCA reminds premium listed issuers to consider how to apply LR 11 when this occurs. In most case, issuers have neglected to file their interim accounts for a certain period at Companies House so the distributable reserves shown in the last annual accounts have not been enough to allow for the amount of dividends paid.

Upon discovering the oversight, issuers have tried to put the company, its shareholders, directors and former directors in the position they would otherwise have been in had the accounts been filed. This has included seeking shareholder approval to release any liabilities that may attach to the shareholders and any directors or former directors. Given that significant shareholders, directors and, in some instances, former directors are classified as related parties under LR 11, the FCA points out that premium listed companies are required to consider the application of these rules when such an approach is proposed and should also refer to UKLA/TN/204.2 on this.

Reminder to issuers of their ongoing disclosure obligations under Article 17 of the Market Abuse Regulation (MAR) – Withdrawal from the European Union

The Bulletin notes that the withdrawal of the UK from the EU is likely to affect issuers differently, depending on their sector and specific business model and operations. Issuers are reminded that when considering the potential impact of the EU withdrawal they need to be aware of their ongoing disclosure obligations under Article 17 of MAR.

Payments to governments

Issuers trading on a regulated market who are active in the extractive or logging of primary forest industries, and whose home state is the UK, have to prepare a report annually on payments made to governments for each financial year. Such issuers must

• File the report on payments to governments with the FCA (in line with DTR 4.3A.10R(1)).
• File the report by uploading it to the national storage mechanism (in accordance with DTR 4.3A.10R(2)).
• Ensure the report is filed in XML (extensible markup language) format (in accordance with DTR 4.3A.10R(3)).

The FCA reminds issuers that these filing requirements are in addition to (and not instead of) the requirements for the disclosure, dissemination and filing of regulated information in DTR 6. As reports on payments to government are regulated information for the purposes of DTR 6, issuers must file the report in XML format and in human readable format. Issuers must also classify regulated information using the classes and sub-classes in DTR 6 Annex 1R (in this case, sub-class 1.3).

The FCA has also conducted a series of reviews of disclosures made under DTR4.3A to assess whether relevant issuers were complying with its requirements. The following are a number of common concerns that the FCA would like to bring to issuers’ attention

• Payments at government level - Some issuers did not appear to provide the required level of granularity regarding payments made to governments. In particular, some companies failed to provide the amount of payments made to each government entity (such as national, regional or local governments and governmental agencies). Some issuers appeared to have only provided the payments made by country which is not detailed enough to comply with Chapter 10 of the Accounting Directive. The policy intention is that stakeholders should be able to assess to which precise government entity a payment has been made.
• Format - Rather than uploading their reports in XML format, some issuers are using only HTML and/or PDF format. As required by DTR4.3A.10R, an issuer must also file its payments to governments report in XML (extensible mark-up language) format.
• Filing with the NSM - Some issuers are uploading their reports without the correct Headline Type (PGR – Report on Payments to Governments) or Classification (1.3 Payments to Governments).

Consultation feedback and changes to the Knowledge Base

Five new technical notes have been added to the FCA Knowledge Base, and five existing technical notes have been amended as a result of consultation in previous Primary Market Bulletins. These new and amended technical notes are as set out below.

The new technical notes are

• Quantified Financial Benefits Statements(FCA/TN/315.1)
• FRS 102 Cash Flow Statement Exemptions (FCA/TN/635.1)
• Sponsors’ duty regarding directors of listed companies (FCA/TN/718.1)
• Sponsors’ obligations on established procedures (FCA/TN/719.1)
• Sponsors’ obligations on no adverse impact (FCA/TN/720.1)

The amended technical notes are

• Share buy-backs with mix and match facilities (FCA/TN/202.2) - The FCA has clarified that not all buyback programmes fall within the exemption provided under Article 5 of MAR and so issuers should satisfy the criteria set out in MAR and in the Commission Delegated Regulation (EU) 2016/1052 to rely on the exemption when trading in own shares.
• Profit forecasts and estimates (FCA/TN/340.2) - The FCA reminds readers that the analysis of profit forecasts and estimates is fact intensive and that it will ultimately be considered on a case-by-case basis.
• Scope and application of vote holder and issuer notification rules (FCA/TN/541.2) - The FCA clarifies that, in the absence of a formal decision at EU level, it continues to be of the view that GDR issuers are not within the scope of DTR 5 unless the issuer’s shares are admitted to trading on a regulated market.
• Exemptions from the requirement to prepare a prospectus (FCA/TN/602.2) - The FCA is considering a request for further guidance about applying this technical note to the inclusion of a ‘mix and match’ in the scheme of arrangement context as a separate piece of guidance.
• Sponsors’ obligations on financial position and prospects procedures(FCA/TN/708.3) – The FCA has set out some factors a sponsor could consider when reviewing and challenging the work done by the applicant and its advisers.

The Bulletin also notes that the FCA is consulting on further proposed changes to the Knowledge Base.

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FCA: Brexit and how the FCA would use the temporary transitional power

On February 1, 2019 the Financial Conduct Authority (FCA) published a press release and a statement setting out how it would use the temporary transitional power given to it in draft legislation by HM Treasury enabling it to make transitional provisions if the UK leaves the EU without an agreement in place. The FCA notes that it intends to use this power to ensure that firms and other regulated entities do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit.

In the statement, the FCA also sets out the areas where it would not make transitional provision and so expects firms and other regulated persons to start preparing now to comply with their post-exit regulatory obligations. One area concerns EEA entities that have securities admitted to trading or traded on UK markets.  It points out that these will be required to submit information to the FCA and disclose certain information to the market from exit.

(FCA, Financial Conduct Authority outlines how it would use the temporary transitional power, 01.02.19)

(FCA, Brexit – What we expect firms and other regulated persons to do now, 01.02.19)

FCA: FCA agrees MoUs with ESMA and EU regulators to allow cooperation and exchange of information

On February 1, 2019 the Financial Conduct Authority (FCA) announced that it has agreed Memoranda of Understanding (MoUs) with the European Securities and Markets Authority (ESMA) and with EU regulators. These cover cooperation and exchange of information if the UK leaves the EU without a withdrawal agreement and implementation period.

The press release announces that the MoUs are

• A multilateral MoU with EU and EEA National Competent Authorities covering supervisory cooperation, enforcement and information exchange; and
• An MoU with ESMA covering supervision of Credit Rating Agencies and Trade Repositories.

(FCA, FCA agrees MoUs with ESMA and EU regulators to allow cooperation and exchange of information, 01.02.19)

FRC: Business Reporting of Intangibles - Realistic proposals discussion paper

On February 6, 2019 the Financial Reporting Council (FRC) published a discussion paper ‘Business Reporting of Intangibles: Realistic proposals’. The discussion paper aims to explore reasons why many intangibles are not fully reflected in financial statements and to develop practical proposals for improving business reporting of intangibles.

The discussion paper considers the case for radical change to the accounting for intangible assets and the likelihood of such change being made in the near future, and seeks stakeholder reviews on matters including:

• Intangibles as assets – The discussion paper suggests that an intangible should be recognised at cost only where the costs to be incurred on development of an intangible asset can be estimated at the time when a project to develop an intangible is undertaken, and the economic benefits to be derived from the intangible can be specified when the costs are first incurred. The discussion paper also suggests that for many intangibles the measurement uncertainty of fair value is so great as to call into question whether it could provide a representationally faithful depiction and proposes that requirements of existing accounting standards should be reviewed in light of these conclusions.
• Disclosure of expenditure on intangibles – The discussion paper proposes that there is a case for specific disclosure requirements of the amount and nature of investments in unrecognised intangibles that are treated as an expense in the period and that these should be clearly differentiated from expenses that unambiguously relate to the period.
• Narrative reporting and intangibles – The discussion paper further suggests that a company’s management should select the intangibles that are discussed in narrative reporting, by reference to those that are most relevant to the entity’s business model, and proposes that narrative reporting should include metrics relating to intangibles.

The discussion paper also suggests ways in which the business reporting process could improve the reporting of intangibles.

Responses to the discussion paper are requested by April 30, 2019.

(FRC: Business Reporting of Intangibles - Realistic proposals discussion paper, 06.02.19)