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FRC: Proposed revised UK Stewardship Code
On January 30, 2019 the Financial Reporting Council (FRC) published a consultation paper proposing changes to the UK Stewardship Code, together with a draft revised UK Stewardship Code in an Appendix to the consultation paper.
The revised Code sets out more rigorous requirements for reporting, focusing on how stewardship activities deliver outcomes against objectives. Reporting will be subject to increased oversight by the FRC to ensure the revised Code is effective in raising the quality of stewardship across the investor community.
The main proposed revisions to the Code include the following
- Revision of the :stewardship" definition – A new definition of ‘stewardship’ identifies the primary purpose of stewardship as looking after the assets of beneficiaries that have been entrusted to the care of others. At the same time, it broadens the scope of the revised Code to include investment decision-making and investment in assets other than listed equity.
- Purpose, values and culture – Signatories must report on an organisational purpose, strategy, values and culture that enable them to fulfil their stewardship objectives and enable them to fulfil their obligations to their clients or beneficiaries. This focus purposely aligns the revised Code with the 2018 UK Corporate Governance Code and ensures that effective stewardship behaviours are embedded across businesses.
- Integration of stewardship and investment approach – The revised Code sets higher standards for asset owners and managers regarding how they integrate their stewardship responsibilities into their investment processes, including investment decision-making, mandate design and other activities.
- Stewardship beyond listed equity – The revised Code now expects investors to exercise stewardship across a wider range of assets where they have influence and rights, in the UK and globally. Signatories should use the resources, rights and influence available to them to exercise stewardship, no matter how capital is invested.
- Recognising the importance of environmental, social and governance (ESG) issues – The revised Code reflects the significant developments that have taken place in sustainable finance, responsible investment and stewardship since 2012. It makes explicit reference to ESG factors and requires signatories to take into account material ESG factors, including climate change, when fulfilling their stewardship responsibilities.
- Restructuring to align with the UK Corporate Governance Code – The structure of the revised Code mirrors the 2018 UK Corporate Governance Code, with numbered Sections, Principles and Provisions accompanied by supporting Guidance.
- More rigorous reporting requirements – The revised Code sets out more rigorous requirements for reporting, focusing on how stewardship activities deliver outcomes against objectives. Reporting will be subject to increased oversight by the FRC to ensure the revised Code is effective in raising the quality of stewardship across the investor community.
The FRC ask for responses to the consultation on or before March 29, 2019. It is expected that a final version of the UK Stewardship Code will be published in Summer 2019.
(FRC: Proposed revised UK Stewardship Code, 30.01.19)
(FRC: Proposed Revision to the UK Stewardship Code consultation, 30.01.19)
(FRC: Summary of Changes from 2012 UK Stewardship Code, 30.01.19)
FRC and FCA: Building a regulatory framework for effective stewardship – Discussion paper
On January 30, 2019 the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) published a joint discussion paper seeking views on how stewardship can be improved within the existing structure of UK capital markets, acknowledging conventions such as the unitary board and shareholders’ voting rights. The discussion paper examines what effective stewardship should look like, what the minimum expectations should be for financial services firms that invest for clients and beneficiaries, the standards the UK should aspire to and how these could be achieved, as well as the potential public and private benefits of improved stewardship.
The discussion paper notes that at the same time the FRC has issued a consultation paper on a revised UK Stewardship Code and the FCA has published a consultation paper on the implementation of the amended Shareholder Rights Directive. In addition, in considering responses to the discussion paper, account will be taken of the recommendations in Sir John Kingman’s review of the FRC.
The discussion paper requests stakeholder input on certain matters, including
- The proposed stewardship definition – The discussion paper defines stewardship as the responsible allocation and management of capital across the institutional investment community, to create sustainable value for beneficiaries, the economy and society. Stewardship activities include monitoring assets and service providers, engaging issuers and holding them to account on material issues, and publicly reporting on the outcomes of these activities. The discussion paper asks whether stakeholders agree with the definition of stewardship set out , and if not, requests suggestions for alternative definitions.
- What effective stewardship looks like – The discussion paper suggests that effective stewardship should reflect a clear understanding across the institutional investment community of clients’ and beneficiaries’ financial interests and their investment time horizon. The discussion paper suggests that key attributes of effective stewardship could be a clear purpose, constructive oversight, engagement and challenge, institutional culture and structures that support investment strategies and stewardship activities consistent with clients’ and beneficiaries’ financial interests over their investment time horizon, and disclosure and transparency. Views are sought on the attributes stakeholders consider most important. The discussion paper also asks whether there are any particular areas which stakeholders consider that investors’ effective stewardship should focus on to help improve outcomes for the benefit of beneficiaries, the economy and society.
- Key challenges to effective stewardship – The discussion paper identifies several challenges in achieving effective stewardship, including the complexity of the relationships in the institutional investment community. Views are sought on what stakeholders believe to be the most significant challenges in achieving effective stewardship, particularly on the investment required to embed effective stewardship in investment decision-making.
- The appropriate institutional, geographical and asset class scope of stewardship – The discussion paper requests feedback on how to deal with some specific issues in the design of the regulatory framework, including the institutional, asset-class and geographical scope of the framework. The discussion paper requests feedback on whether there is more that should be done to incentivise international investors and to ensure they recognise the benefits of exercising stewardship, including in respect of their assets in the UK and whether there is a case for regulatory rules to expand the reach of stewardship beyond equities.
- Developments to current and proposed regulations – The discussion paper seeks views on whether there are any areas in which additional regulatory rules, either to improve stewardship quality or prevent poor practice, should be considered rather than relying solely on promoting effective practices through the revised Stewardship Code. In addition, views are sought on whether stakeholders consider that regulatory actions are necessary to address any perceived harms. The discussion paper also asks whether, to support effective stewardship, amendments to other aspects of the regulatory framework that affect how investors and issuers interact, such as the Listing Rules, Prospectus Rules and Disclosure Guidance and Transparency Rules, should be considered.
Reponses to the discussion paper are requested by April 30, 2019. A feedback statement will be published later in the 2019/20 financial year.
(Building a framework for effective stewardship – joint discussion paper, 30.01.19)
(Building a framework for effective stewardship – joint discussion paper press release, 30.01.19)
FCA: Consultation on proposals to improve shareholder engagement - CP19/7
On January 30, 2019 the Financial Conduct Authority (FCA) launched a consultation on proposed changes to the FCA Handbook for the purposes of implementing parts of the Shareholder Rights Directive II (SRD II) in the UK, including provisions that impose transparency requirements on companies with shares admitted to trading on a regulated market in relation to related party transactions.
In the consultation, the FCA is planning for the scenario where an implementation period is in place after the UK’s departure from the EU. During an implementation period, EU law will continue to apply in the UK. This would require the UK to implement SRD II by June 10, 2019. If the UK were to leave the EU without an implementation period, the FCA would not proceed with the proposals addressed in the consultation, and would instead expect to return with revised proposals once the Government has decided how to proceed.
The transparency requirements in relation to related party transactions are set out in Article 9c of SRD II and they allow a number of choices to be made as part of SRD II’s implementation. The FCA is seeking to design a regime to implement SRD II’s minimum obligations in a proportionate manner for all companies within its scope, but, at the same time, impose minimum change on issuers that already comply with the existing premium listing requirements in Chapter 11 of the Listing Rules.
The consultation paper notes that one key difference between the premium listing regime and the SRD II regime is that SRD II uses the definition of related party for accounting purposes in IAS 24 which is wider than the premium listing regime, so there will be instances where existing premium listing requirements would not cover SRD II requirements.
The new rules will apply to all companies with their registered office in the UK who have shares admitted to trading on a regulated market in the UK or elsewhere in the EU. This includes both companies that are listed in the UK, and UK-incorporated issuers of non-listed shares admitted to a regulated market (such as the Specialist Fund Segment or the High Growth Segment in the UK, or a regulated market elsewhere in the EU). All these UK companies will therefore become subject to the new rules proposed by the FCA as part of its corporate governance rules in the Disclosure Guidance and Transparency Rules sourcebook (DTRs) and the new rules will be in DTR 1B and DTR 7.3. Companies with a registered office in an EU Member State outside the UK which have shares admitted to a regulated market will be subject to the rules that transpose SRD II in the Member State where their registered office is located. SRD II does not prescribe rules for non-EU incorporated issuers (including those which have shares admitted to a regulated market in the EU).
The amended DTRs will require companies to disclose and seek board, rather than shareholder, approval for material related party transactions, and the FCA proposes a relatively high threshold for materiality at 25 per cent of any one of profits, assets, market capitalisation or gross capital tests which are similar to the tests set out in Chapter 11 of the Listing Rules.
SRD II requires the public announcement of a material related party transaction but the FCA does not propose that the announcement should include a report prepared by a third party assessing whether, or not, the transaction is fair and reasonable.
The consultation proposes that firms should make disclosures no later than when the terms of the transaction are agreed, replicating the Listing Rules timing. In some instances, disclosures required under the Market Abuse Regulation (MAR) will need to be made at an earlier point in time and the requirements in SRD II are explicitly expressed to be without prejudice to the requirements on the disclosure of inside information in Article 17 of MAR.
The FCA proposes to provide exemptions from the announcement and approval requirements for some of the transaction types permitted by SRD II. This will replicate in substance the exemptions available under the existing premium listing regime so far as possible and will include transactions entered into in the ordinary course of business and on normal market terms.
Premium listing continuing obligations will be amended to extend the new DTR requirements to all premium listed issuers (other than open-ended investment companies) and issuers with a standard listing of equity shares but guidance will be included in the DTRs to reassure issuers that where they meet certain disclosure and other requirements in the premium listing regime, this will satisfy compliance with the disclosure and approval requirements in the new DTRs for the transactions in question.
Issuers within scope of the new DTR regime, and companies admitted to listing would be required to comply with the proposed changes from the start of the first financial year beginning on or after June 10, 2019.
Responses to the consultation are requested by March 27, 2019.
(FCA: Shareholder Rights Directive II and related party transactions - Consultation on proposed changes to the Handbook, 30.01.19)
FCA: Changes to align the FCA Handbook with the EU Prospectus Regulation – CP 19/6
On January 28, 2019 the Financial Conduct Authority (FCA) published Consultation Paper 19/6 on changes to align the FCA Handbook with the EU Prospectus Regulation which came into force on July 20, 2017.
While some of the provisions of the Prospectus Regulation already apply, most are due to apply from July 21, 2019 and on that date the existing Prospectus Directive and associated EU measures will be repealed. The purpose of CP19/6 is to update the FCA’s Prospectus Rules sourcebook so that it is consistent with the Prospectus Regulation. It will be known as the Prospectus Regulation Rules sourcebook.
CP 19/6 notes that the Prospectus Regulation will come into effect after the UK’s departure from the EU and the proposals in it cover the scenario where there is an implementation period following Brexit. If there is a “no deal” Brexit scenario, then the FCA will not proceed with the proposals in CP 19/6 and in that scenario, the FCA would produce revised proposals once the Government has decided whether to proceed with the reform of the UK prospectus regime.
The proposed new Prospectus Regulation Rules sourcebook will have a similar structure to the current Prospectus Rules sourcebook. However, it will contain fewer FCA rules as most of the provisions will sit within the Prospectus Regulation and the EU’s delegated acts and regulatory technical standards (RTS) made under the Prospectus Regulation which will apply directly at a European level. However, it will contain more of the text boxes which will replicate key provisions of the Prospectus Regulation and other relevant EU legislation and domestic law.
CP 19/6 notes that the main differences between the existing rules and the proposed new sourcebook are
- Persons responsible for a prospectus – this is currently set out in PR 5.5. Article 11 of the Prospectus Regulation is similar to the corresponding provision in the Prospectus Directive so the FCA proposes to mirror the existing provisions of PR 5.5 in the new rules.
- Use of language – Article 27 of the Prospectus Regulation is similar in content to the corresponding provision in the Prospectus Directive so the FCA proposes to mirror the existing provisions of PR 4.1 in the new rules. The provisions of Article 25.(5) of the Prospectus Regulation are slightly different from those in the Prospectus Directive for markets only accessible by qualified investors so this will be reflected in the new rules.
- Sending data to the FCA – issuers will be required to send information to the FCA in electronic format.
- Prospectus accuracy – the current rules in PR 3.1.2A and PR 3.1.2B reflect current market practice across Europe and existing regulatory expectations so the FCA proposes to retain them in the new sourcebook.
- National Storage Mechanism (NSM) – currently issuers have to file approved prospectuses with the FCA and this is done through the NSM in accordance with PR 3.2R. Article 21 of the Prospectus Regulation does not require issuers to file the approved prospectus with the FCA so issuers will no longer have to submit such documents to the NSM. However, Article 21(5) of the Prospectus Regulation requires the FCA to publish all prospectuses it has approved and it will do this by sending such prospectuses to the NSM.
Comments are requested by March 28, 2019.
(FCA: Changes to align the FCA Handbook with the EU Prospectus Regulation – CP 19/6, 28.01.19)
PLSA: Corporate Governance Policy and Voting Guidelines 2019
On January 29, 2019 the Pensions and Lifetime Savings Association (PLSA) published an updated version of its Corporate Governance Policy and Voting Guidelines (2019 Guidelines). The new guidelines have been updated to mirror the 2018 UK Corporate Governance Code and highlight some of the key developments in UK corporate governance policy and practice.
On the whole, the 2019 Guidelines, which aim to assist pension schemes, asset managers and their proxy voting agents in the interpretation of the 2018 UK Corporate Governance Code and in forming judgements on AGM resolutions, remain unchanged. However, additional guidance has been added throughout and several revisions have been made to the UK Voting Guidelines section.
The revisions include the following
- Section 1: Board leadership and company purpose – Shareholders may want to undertake closer analysis of the narrative used in company statements to assess the company’s approach to workforce and stakeholders, including to assess whether there is evidence of a clear sense of corporate purpose, culture and values, and how those align with the company's strategy.
- Section 2: Division of responsibilities – A company's chief executive should not become chair of the company except in exceptional circumstances and there should be significant engagement with shareholders setting out the reasons for doing so, with clear timeframes indicated, in good time. In addition, shareholders are encouraged to have a clear sense of other demands on directors' time, and of any significant developments which have occurred since a director's appointment that may impact on their ability to commit appropriate time to the company.
Details of other current appointments, including any changes over the previous year, should be set out in the annual report and shareholders should ensure that they have a clear understanding of any existing (or pre-existing) relationship between the independent non-executives and the company that could compromise directors' ability to hold management to account.
- Section 4: Audit, risk and internal control – Shareholders are encouraged to pay close attention to the composition, skills and experience of the Audit Committee; Committee members should have recent and relevant financial experience related to audit, accountancy or investor practitioner expertise, and any Committee member's connections with the current or potential auditor should be clearly disclosed.
- Section 5: Remuneration – Investors should continue to express concerns about recent increases in the fixed pay of senior executives (compared to performance-related-pay) and should continue to press companies to clearly explain their rationale for such increases. Remuneration policies should not only be coherent and consistent throughout the organisation, but should be clearly linked to incentivising those behaviours which are consistent with the company's purpose and values.
In relation to the particular voting guidelines, the 2019 Guidelines suggest, in relation to sustainability and climate change, that shareholders may wish to consider supporting relevant climate-related or similar resolutions and key issues to doing so should be the proportionality and achievability of the resolution. The 2019 Guidelines also state that, in determining dividend policy, companies should take account of issues such as the level of Deficit Repair Contributions needed in considering the company’s financial position, and the need to pay such Contributions and payments to any defined benefit scheme should be considered in capital structure decisions.
(PLSA: Corporate Governance Policy and Voting Guidelines 2019, 29.01.19)
ESMA Prospectuses – Questions and answers
On January 31, 2019 the European Securities and Markets Authority (ESMA) published an updated version of its Q&A regarding the Prospectus Directive. ESMA has added two additional Q&As to clarify the application of certain provisions in the Prospectus Directive in case the UK withdraws from the European Union (EU) on March 29, 2019 with no withdrawal agreement in place (no-deal Brexit).
The Q&As provide the following clarifications in the event of a no-deal Brexit
- Third country issuers who currently have the UK as their home Member State for the purposes of prospectus approval should, when choosing a new home Member State due to the UK’s withdrawal from the EU, do so as if for the first time in accordance with Article 2(1)(m)(ii) of the Prospectus Directive. Issuers should choose between the EU27 Member States or the EEA EFTA States in which they have activities after the UK’s withdrawal (either offers/admissions made after the withdrawal or admissions made before the withdrawal which continue after the withdrawal). Such issuers should choose and disclose their new home Member State without delay after March 29, 2019.
- ESMA considers that prospectuses approved by the FCA in the UK while the UK was a Member State, can no longer be passported to the EU27/EEA EFTA. Prospectuses approved by the FCA and passported prior to the UK’s withdrawal can no longer be supplemented. As a consequence, such prospectuses can no longer be used to offer securities to the public or admit securities to trading on a regulated market within the EU27/EEA EFTA as this would entail a risk of a significant new factor, material mistake or inaccuracy arising without the issuer being able to inform investors, as required by the Prospectus Directive.
(ESMA Prospectuses – Questions and answers, 31.01.19)
(ESMA Prospectuses – Questions and answers press release, 31.01.19)
ESMA Transparency Directive – Questions and answers
On January 31, 2019 the European Securities and Markets Authority (ESMA) published an updated version of its Q&A regarding the Transparency Directive. ESMA has added one additional Q&A to clarify the application of certain provisions in the Transparency Directive in case the UK withdraws from the European Union (EU) on March 29, 2019 with no withdrawal agreement in place (no-deal Brexit).
The Q&As provide the following clarification in the event of a no-deal Brexit
- For the purposes of the Transparency Directive, an issuer which currently has the UK as its home Member State and is admitted to trading on one or more regulated markets in the EU27/EEA EFTA must determine its new home Member State in accordance with Article 2(1)(i) of the Transparency Directive. To facilitate the timely transfer of supervisory tasks to the new home Member State, ESMA considers that it would be beneficial for an issuer to disclose its choice of a new Transparency Directive home Member State without delay after March 29, 2019.
(ESMA Transparency – Questions and answers, 31.01.19)
(ESMA Prospectuses – Questions and answers press release, 31.01.19)
EFRA and BEIS: Environmental Reporting Guidelines - Streamlined energy and carbon reporting guidance
On January 31, 2019 the Department for Environment, Food and Rural Affairs (EFRA) and the Department for Business, Energy & Industrial Strategy (BEIS) published revised Environmental Reporting Guidelines (Guidelines). The Guidelines are designed to help companies and limited liability partnerships in complying with the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 and the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (‘the 2018 Regulations’), and to help all organisations with voluntary reporting on a range of environmental matters, including voluntary energy and GHG emissions reporting, and through the use of key performance indicators (KPIs).
Most of the amendments to the Guidelines have been to incorporate guidance for companies to help them comply with their obligations under the new streamlined energy and carbon reporting regime (SECR regime) set out in the 2018 Regulations. The SECR regime applies to quoted companies, unquoted large companies incorporated in the UK, and large LLPs and comes into effect on April 1, 2019 for financial years beginning on or after that date.
The updated Guidelines provide guidance on the steps a company should to take when considering its environmental impacts and which KPIs companies need to report to comply with their legal obligations. It also outlines additional voluntary information that is likely to be useful to qualifying organisations and a wide range of stakeholders.
In addition, the Guidelines highlight the principles for accounting & reporting environmental impacts, including
- Relevance – Companies should ensure that the data collected and reported appropriately reflects the environmental impacts of an organisation and serves the decision-making needs of both internal and external users.
- Accuracy – The Guidelines note that a company should seek to reduce uncertainties in its reported figures where practical and seek to achieve sufficient accuracy to enable users to make decisions with reasonable confidence as to the integrity of the reported information.
- Completeness – Companies should quantify and report on all sources of environmental impact within the reporting boundary that they have defined, and disclose and justify any specific exclusions.
- Transparency – Companies should address all relevant issues in a factual and coherent manner, keeping a record of all assumptions, calculations, and methodologies used. In addition, a company should report on any relevant assumptions and make appropriate references to methodologies and data sources used as this is essential to producing a credible report.
(EFRA and BEIS: Environmental Reporting Guidelines - Streamlined energy and carbon reporting guidance, 31.01.19)
CMA: Consultation on draft guidance on the effects of the UK’s “no deal” exit from the EU on the functions of the CMA
On January 28, 2019, the Competition and Markets Authority (CMA) published for consultation a draft guidance document to explain how a “no deal” EU exit would affect its powers and processes for anti-trust and cartel enforcement, merger control and consumer law enforcement after exit. The guidance also explains the treatment of “live” cases in a no deal scenario, which are those cases that are being reviewed by the European Commission or the CMA on March 29, 2019.
The consultation document does not specifically cover some of the CMA’s functions which are less materially affected by a “no deal” EU exit, including regulatory appeals, market studies, market investigations and the criminal cartel offence.
Responses are requested by February 25, 2019.
(CMA: Consultation on draft guidance on the effects of the UK’s “no deal” exit from the EU on the functions of the CMA, 28.01.19)