Essential Corporate News – Week ending 11 August 2023

FCA: Primary Market Bulletin No.45

On 10 August 2023, the Financial Conduct Authority (FCA) published Primary Market Bulletin No.45 (PMB 45) covering the following areas:

• Approach to implementation of International Sustainability Standards Board: IFRS S1 and S2 and what listed companies can do now to prepare.
• Audit of financial statements by third country audit firms.
• Application of the FCA’s transitional provisions in relation to minimum market capitalisation for shell companies.
• Multi-factor authentication for FCA systems.

These are summarised below.

International Sustainability Standards Board (ISSB): IFRS S1 and S2

The FCA welcomes the publication in June 2023 by the ISSB of the first two IFRS Sustainability Disclosure Standards (ISSB Standards) and:

• Sets out key features of its process for implementing the standards and plans for consultation.

• Explains how it will continue to supervise existing disclosures under the Task Force on Climate-related Financial Disclosures (TCFD) framework until any new requirements are implemented.

• Advises issuers on what they can do now to prepare for any future obligations relating to reporting on the ISSB Standards.

Implementation of ISSB Standards for listed companies: The FCA’s proposed approach

The FCA expects to consult in the first half of 2024 on proposals to implement disclosure rules referencing UK-endorsed IFRS S1 and IFRS S2¹ for listed companies. Assuming the Government’s endorsement process is completed in the timeframe envisaged, the FCA’s aim is to finalise its policy position by the end of 2024, with a view to bringing new requirements into force for accounting periods beginning on or after 1 January 2025 (the first reporting would begin from 2026). The FCA will also consult on an appropriate scope and design for the new regime (including in the context of the proposed reforms to the listing regime) and identify any transitional provisions that may be required to smooth implementation. In addition, the FCA expects to consult on moving from the current comply or explain compliance basis to mandatory disclosures for listed issuers.

At the same time as consulting on its policy approach in relation to the ISSB Standards, the FCA will consult on guidance setting out its expectations for listed companies’ transition plan disclosures. It intends to develop its guidance with reference to the final outputs from the Transition Plan Taskforce (TPT) and notes that the TPT Framework has been purposefully designed to interoperate with IFRS S2. The FCA considers that listed companies would benefit from additional clarity on what a good practice climate transition plan should cover and is of the view that the TPT Framework will provide that detail.

Alongside developing its approach to implementation of the ISSB Standards and the TPT Framework, the FCA will continue to monitor and engage with international developments relevant to the landscape for sustainability reporting. The FCA is also engaging with work on developing international standards for assurance and ethics.

The FCA’s supervisory approach

The FCA refers to its current supervisory approach and previous publications in this area, including its thematic review (published in July 2022 alongside a complementary review by the FRC) of TCFD aligned disclosures by premium listed commercial companies.

The FCA envisages continuing to use thematic reviews in 2023 and 2024 to consider TCFD-aligned disclosures made by all listed companies within scope of its existing TCFD-aligned disclosure rules, noting that standard listed companies are reporting for the first time.

The FCA recognises that its supervisory approach will need to evolve as it moves closer to the implementation of IFRS S1 and S2 and enhanced expectations on transition plan disclosures. It intends to provide more information on its supervisory approach as part of its consultation on these areas.

What listed companies can do now to prepare

Although the ISSB Standards and enhanced transition plan guidance will not replace the TCFD disclosure framework immediately, the FCA strongly encourages listed companies and their advisers to start considering the standards now and to build them into their plans for future reporting.

Actions that the FCA identifies listed companies can take to prepare for the potential future introduction of the standards include:

• Continuing to improve reporting in line with existing climate-related disclosure rules (as the ISSB Standards build from these).

• Engaging early with IFRS S1 and S2, the associated guidance, and the TPT Framework and guidance (once published) and considering reporting on a voluntary basis (this will help companies to identify data gaps and opportunities to improve internal processes).

• Engaging with the UK endorsement and implementation process for the ISSB Standards.

Audit of financial statements by third country audit firms

The FCA reminds third country issuers that are listed in the UK of their obligation under DTR4 to ensure that their auditor is on the FRC register. Where the FCA becomes aware that a published audit report has not been provided by an FRC registered third country auditor it proposes to take action by temporarily suspending the issuer’s listing until it complies with the DTR4 obligation. It encourages third country issuers that are at risk of breaching DTR4 to apply to the FCA for a suspension of listing before any breach occurs and reminds such issuers to also consider whether any breach may give rise to a disclosure obligation under the Market Abuse Regulation.

Application of transitional provisions in relation to minimum market capitalisation for shell companies

The FCA reminds shell companies (as defined in Listing Rule 5) of the transitional provisions in relation to market capitalisation that will apply where the shell company intends to undertake a reverse takeover that will result in the enlarged entity needing to apply for listing. If an issuer wants to rely on these transitional provisions, the deadline for complete submissions for an eligibility and prospectus review is 4pm on 1 December 2023. 

Multi-factor authentication for the FCA’s systems

The FCA has introduced multi-factor authentication (MFA) to strengthen how users log into its Electronic Submission System (ESS) and to further protect and control access to its data. It notes that the option to skip MFA registration when logging into the ESS will end soon so users should register as soon as possible to continue accessing the ESS.

(FCA, Primary Market Bulletin 45, 10.08.2023)

DBT: Register of overseas entities: Updated guidance on registration and verification

On 8 August 2023, the Department for Business and Trade (DBT) published an updated version of its technical guidance for registration and verification in connection with the Register of Overseas Entities (ROE). 

New sections have been inserted covering:

• Identifying foreign limited partnerships as beneficial owners.
• Rectification of the ROE.
• Registration of otherwise prohibited transactions.
• Imposition of financial penalties.
• Disclosure of protected information to public authorities. 

Amendments have also been made to the section covering applications to protect information relating to an individual that would normally be available for public inspection.

The updates to the guidance reflect legislative changes resulting from a number of recently made statutory instruments relating to these aspects of the ROE regime.

(DBT, Registration of overseas entities on the UK Register of Overseas Entities: Technical guidance for registration and verification, 08.08.2023)

(Webpage, Register of Overseas Entities: guidance on registration and verification, 08.08.2023)

FRC: Consultation on revisions to Ethical Standard for auditors

On 8 August 2023, the Financial Reporting Council (FRC) issued a consultation on revisions to its Ethical Standard to further enhance and clarify the principles of integrity, objectivity and independence that auditors must comply with. 

The changes include proposed amendments:

• Intended to enhance prohibitions where an audit firm’s independence could be threatened by economic over-reliance on fees from specific entities that are connected.
• Reflecting findings from audit inspections and enforcement cases. 
• Reflecting significant developments in the International Ethics Standards Board for Accountants (IESBA) Code since the Ethical Standard was last revised in 2019. 
• Intended to ensure breaches of ethical standards are reported to the FRC on a more timely basis.

The consultation closes on 31 October 2023.

(FRC, Invitation to comment and impact assessment - proposed Ethical Standard, 08.08.2023)

(FRC, Proposed Ethical Standard, 08.08.2023)

(FRC, Key changes to the Ethical Standard, 08.08.2023)

(FRC, Press release - Revisions to Ethical Standard, 08.08.2023)