Publication
UK Carbon Border Adjustment Mechanism: how will it work?
In February, we reported on the Department of Energy Security and Net Zero’s confirmation that a UK Carbon Border Adjustment Mechanism (CBAM) would be bought into force by 2027
Global | Publication | October 21, 2016
Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.
In April 2016 the Financial Conduct Authority (FCA) published an interim report on its investment and corporate banking market study, which focused on primary market activities in the UK (equity capital market, debt capital market and merger and acquisition services). The FCA consulted on the interim findings and proposed remedies with a range of stakeholders including investment banks, clients, corporate finance advisers, innovators, buy-side investors and league table providers. Having considered the consultation feedback and carried out further work, the FCA has now confirmed its interim findings as final.
The final findings are that there is a wide range of banks and advisers active in primary market activities. While many clients, particularly large corporate clients, feel the universal banking model of cross-selling and cross-subsidisation from lending and corporate broking services to primary market services works well for them, there are some practices that could have a negative impact on competition, particularly for smaller clients.
The FCA has developed a targeted package of remedies to address these concerns and to ensure competition takes place on the merits:
(FCA, Market Study MS15/1.3: Investment and corporate banking market study – Final report, 18.10.16)
On October 18, 2016 the Financial Conduct Authority (FCA) published a consultation paper following its investment and corporate banking market study, which focused on primary market activities in the UK (equity capital market, debt capital market and merger and acquisition services). It published an interim report on this market study in April 2016. One of the practices that the FCA found could hinder competition, especially for smaller clients, is the use by banks of clauses in contracts, mandates or engagement letters that oblige clients to award or offer future services to that bank. The FCA found that these clauses can restrict a client’s choice in future transactions. It considered a range of interventions and proposed in its interim report that these restrictive contractual clauses should be prohibited.
The consultation paper proposes to introduce a restriction in the FCA’s Conduct of Business Sourcebook (COBS), which applies to corporate finance businesses, which will prohibit two types of contractual clauses that restrict competition without being clearly beneficial to clients:
The FCA has excluded from the prohibition future service restrictions in bridging loans. This type of loan is provided on the basis that the client will replace it with longer term financing, typically a bond issue, equity issue or term loan. The FCA notes that the bank would be unlikely to provide the bridging loan at all or on the same terms if it did not also know that it would be mandated on the subsequent longer term financing.
The FCA has requested comments on this consultation paper by December 16, 2016 and it is intended that the rules will be ready for firms to apply from early 2017.
On October 21, 2016 the Financial Reporting Council (FRC) published its annual review of corporate reporting for 2015/2016. This report provides the FRC’s assessment of corporate reporting in the UK based on broad outreach and evidence, including that obtained from the FRC’s own monitoring work, performed by its Corporate Reporting Review (CRR) team, on cases opened in the year to March 31, 2016, and from more recently performed thematic reviews.
The report includes:
Annual assessment of corporate reporting
The FRC concludes that although compliance with the accounting framework is generally good, particularly by larger public companies, certain areas of corporate reporting have, for several years, required general improvement. The profile of these issues has been raised through annual activity reports, discussions with audit firms and the use of generic press notices.
There have been improvements in some of these areas this year, for example in respect of the disclosure of principal risks and uncertainties (PRUs) and capital management policies. Fewer instances were in evidence this year of:
In addition, there were fewer issues relating to cash flow statements, in particular relating to misclassifications between operating, investing and financing activities.
The review sets out the more significant findings from this year’s monitoring activity relating to the financial statements and the strategic report.
Corporate reporting enforcement activity
This section provides an overview of the disciplinary cases which have been concluded under the FRC Accountancy Scheme in the year to 31 March 2016. In April 2016 the FRC introduced changes to its enforcement and disciplinary arrangements in preparation for the implementation of the EU Audit Regulation and Directive. With effect from June 17, 2016 the FRC implemented a new Audit Enforcement Procedure for new statutory audit cases.
Current and future developments
In this section, the FRC provides an overview of current and future developments in corporate reporting and the expected impacts, including:
(FRC, Annual Review of Corporate Reporting 2015/2016, 21.10.16)
On October 20, 2016 the Financial Reporting Council (FRC) published a discussion paper which presents ideas to improve the usefulness of the statement of cash flows. This is in the context of an IASB project on “Primary Financial Statements” which is examining the purpose, structure and content of the primary financial statements, including the statement of cash flows.
The statement of cash flow tells investors where their company’s cash has come from and where it has gone, providing an insight into the quality of earnings. The discussion paper suggests several ideas for improving the transparency and consistency of the statement, while providing the company’s own perspective on the management of liquid resources. These include the following:
The FRC has requested responses to the consultation by February 28, 2017.
On October 18, 2016 the International Corporate Governance Network (ICGN) published an updated version of its Global Governance Principles (the Principles). There have been no significant changes from the previous version published in 2014.
The Principles describe the responsibilities of boards of directors and institutional investors respectively, and aim to enhance dialogue between the two parties. The Principles apply predominantly to publicly listed companies and set out expectations around corporate governance issues that are most likely to influence investment decision-making. They are also relevant to non-listed companies which aspire to adopt high standards of corporate governance practice. The Principles are relevant to all types of board structure, including one-tier and two-tier arrangements.
On October 18, 2016 the International Corporate Governance Network (ICGN) published Guidance on Diversity on Boards which builds upon the ICGN Guidance on Gender Diversity on Boards published in 2013. The original guidance identified the responsibilities of shareholders and companies alike to promote gender diversity on boards, ultimately to enhance corporate governance and the overall success of companies. The new Guidance recognises that a range of social and economic factors contribute to a fully diverse board, beyond gender diversity.
The Guidance identifies principles, policies and practices which promote board diversity in general, such as the adoption of robust board evaluation processes and shareholder engagement to promote good governance practices. As such, the Guidance aims to enhance dialogue on the subject between companies and investors. It also aims to provide a balanced view on the respective roles of companies and shareholders alike in promoting and supporting diversity on boards.
The ICGN encourages companies to develop and disclose board diversity objectives. Boards play a role in fostering diversity and inclusiveness within a company’s operations through overseeing recruitment and human capital management strategies. Boards should provide oversight on diversity measures and ensure that there is reporting across the organisation.
The ICGN also encourages shareholders to establish a dialogue with companies and, if necessary, hold the board accountable in instances of company non-compliance with market regulations or deficient disclosure with market protocols. Companies which do not meet such protocols should expect heightened shareholder interest. Shareholders may be able to facilitate greater board diversity by submitting their own nominees for consideration to the board. The ICGN notes that significant shareholders in some developed markets are increasingly able to nominate director candidates through equitable proxy access rules allowing them a voice in advocating for qualified, diverse nominees. Where proxy access is not assured, the ICGN notes that shareholders should consider petitioning their securities regulators for the right to have proxy access so as to facilitate boards that are more responsive to their shareholder base.
On October 18, 2016 the International Corporate Governance Network (ICGN) published an updated version of its Guidance on Executive Director Remuneration. The Guidance on Executive Director Remuneration replaces guidance published in 2012 and aims to provide a consistent and global perspective focused on major aspects of remuneration policy and practice that will assist companies in better understanding long-term shareholders’ views, as well as serve as a tool for investors when engaging with companies.
The updated Guidance discusses the remuneration committee, remuneration structure and contractual provisions and includes four main changes from the previous edition:
(ICGN, Guidance on Executive Director Remuneration, 18.10.16)
On October 18, 2016 the International Corporate Governance Network (ICGN) published an updated version of its Guidance on Non-executive Director Remuneration. The Guidance replaces a previous version published in 2013 and sets out the ICGN’s position regarding remuneration structures for non-executive directors (NEDs), including board chairs. The updated Guidance discusses structure, accountability and transparency in NED remuneration and contains two main changes, specifically:
(ICGN, Guidance on Non-executive Director Remuneration, 18.10.16)
Publication
In February, we reported on the Department of Energy Security and Net Zero’s confirmation that a UK Carbon Border Adjustment Mechanism (CBAM) would be bought into force by 2027
Publication
International financial markets have started to show significant interest in nature and biodiversity. Whilst climate change and greenhouse gas emissions have made the headlines in recent years, there has been much less focus on their equally important counterparts, nature and biodiversity. However, that has started to change.
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