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Essential Corporate News – Week ending November 13, 2015

Publication November 13, 2015


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

The Investment Association: Principles of executive remuneration

On November 11, 2015 The Investment Association (IA) published its Principles of Remuneration (the Principles) for 2015 and an accompanying introductory letter which outlines the key changes to the Principles since the 2014 edition.

The IA acknowledges in the letter that it did not consider it appropriate to make significant amendments to the Principles, however they have been updated to make it clear that it is now members’ expectation that long term incentives have a performance and holding period of at least five years in total.

The IA has also amended the discussion of commercially sensitive performance targets in Appendix 1. It has removed the wording stating that the use of the provision allowing these targets not to be disclosed is an exception, but makes it clear that use of the provision still needs to be justified. The updated Appendix states that shareholders expect that any company which considers their targets to be commercially sensitive must explain to shareholders the circumstances that justify the use of this approach, and indicate when targets will be disclosed in the future.

In its introductory letter, the IA also re-emphasises its guidance on issues of concern to shareholders, specifically:

Salary increases

Investors are concerned by the level and frequency of salary increases and have a clear expectation that basic salary increases should be limited to inflation or the increase being given to the general workforce. However, the IA notes that there is an upward trend in the number of salary increases above inflation, which are leading to a significant rise in the overall levels of remuneration packages. The IA will continue to scrutinise all salary increases, and believes that all salary increases should be justified with clear and explicit rationale, particularly for any increases in excess of inflation or the increases provided to the general workforce.

Bonus disclosure

The retrospective disclosure of bonus targets is required so that shareholders can ensure that there is an appropriate link between pay and performance and so that the IA can justify supporting remuneration packages to its clients. The IA notes that there has been some improvement in retrospective disclosure of bonus targets in 2015, but that there are still a number of companies that provide no details on their bonus targets or consider them to be commercial sensitivity with insufficient justification.

The IA now expects that targets will either be disclosed retrospectively in full at the end of the year, or that there is a commitment to disclose such targets in full at a specified time in the future. If companies do not comply with this, the IA will ask IVIS to Red Top those companies. If relative achievement is disclosed, an Amber Top will be given.

This policy will take effect for companies with their year end on or after December 1, 2015.

Service contracts

The IA notes that there has been a lot of debate in 2015 on the length of service contracts and the majority of its members are still in favour of notice periods of up to 12 months. However, members also believe that new contracts should have equal notice periods for both the company and the director and that for new contracts, companies should introduce clauses to allow the withholding of pay in lieu of notice where there is any ongoing regulatory or internal disciplinary or misconduct investigation.


The IA is concerned with the large increase in pension amounts as well as complex pension arrangements for executive directors, which differ from arrangements that are in place for the rest of the employee population. The IA expects the pension arrangements of executive directors to be in line with those for the rest of the company.

Recruitment and leaving arrangements

Investors should continue to scrutinise recruitment arrangements and buyout awards. Any attempts to re-award or re-issue recruitment awards in the circumstances of a fall in company value are a particular concern for the IA, which believes that both the executive and the company take on risk during a recruitment situation and that it is inappropriate for the executive to be shielded from such risks.

The IA would like to reiterate that remuneration committees should take a firm approach when determining leaving arrangements and assessing whether an individual is a good or bad leaver and it expects full justification of the treatment of leavers, particularly where a leaver is deemed to be a good leaver.

(The Investment Association, Letter of Introduction to the Principles of Remuneration 2015, 11.11.15)

(The Investment Association, Principles of Remuneration 2015, 11.11.15)

FCA and HM Treasury: Policy statement on implementation of Transparency Directive Amending Directive and DTR changes

On November 6, 2015 the Financial Conduct Authority (FCA) and HM Treasury published a policy statement summarising feedback received on their joint consultation in March 2015 on proposals to implement the Transparency Directive Amending Directive (TDAD) in the UK, which included proposed amendments to the Financial Services and Markets Act 2000 and the Disclosure and Transparency Rules (DTRs).

The FCA will proceed with amendments to the DTRs as set out in the joint consultation, but will implement the following changes, based on the responses received:

  • As well as requiring half-yearly financial reports to be made public no later than three months after the end of the reporting period (rather than two months as is currently required), Article 4 of the TDAD requires annual and half-yearly financial reports to remain publicly available for at least ten years. The FCA initially proposed applying the revised timeframe only to reports published on or after the date the new rules enter into force. However, in October 2015 ESMA published updated Questions and Answers on the Transparency Directive, which state that “for those reports that were made publicly available less than 5 years before the transposition date, the reports should remain publicly available for at least 10 years. This period of time will start counting from the date the reports were originally published and not the transposition date. For those reports that were made publicly available 5 years or more before the transposition date, the requirement of the TDAD will not apply”. The FCA has amended its position to align with that of ESMA as a result.
  • The FCA has revised DTR 5.3.1R to reflect the wording in Articles 13(1)(a) and (b) of the Transparency Directive. Additionally, all references to a "qualifying financial instrument" in DTR 5 have been removed and replaced with references to financial instruments within DTR 5.3.1R(1)(a), and paragraphs (1) and (2) have been deleted from DTR 5.3.2R.
  • The FCA has made an amendment to DTR 5.4.5R to reflect the change in the scope of Article 13 of the Transparency Directive.
  • A new DTR 5.7.1AR has been inserted to clarify the notification requirements where a person who has notified voting rights relating to financial instruments acquires the underlying shares. The new DTR reflects the text of Article 13a(2) of the Transparency Directive.
  • The FCA notes that stock-lending transactions are within scope of the Transparency Directive and the aggregation principles apply to those holdings in the same way as they apply to all holdings within scope of the Transparency Directive’s disclosure regime. As a result, the FCA does not believe a specific rule for stock-lending transactions is required as the existing DTR provisions apply and will not proceed with the proposal to introduce the new rule DTR 5.1.5R(1)(e), but will instead delete DTR 5.1.1R(5) and DTR 5.1.3R(6).

The FCA also published the Disclosure and Transparency Rules Sourcebook (Transparency Directive Amending Directive) Instrument 2015 (FCA 2015/54) with the policy statement, which implements the changes set out above, and which will come into force on November 26, 2015.

Finally, HM Treasury has requested that the FCA prescribe a reporting format for the annual reports on payments to governments required of companies active in the extractive or logging of primary forest industries under DTR 4.3A. The FCA is currently looking at the reporting format which will be used under the Accounting Directive 2013/34/EU in the UK and is assessing the practicalities of proposing the use of the same format for the Transparency Directive reporting requirements. The intention is to reduce the administrative burden on companies who have to report on payments to governments under both the Accounting Directive and the Transparency Directive. As a result, the FCA is working with the Treasury, the Department for Business, Innovation and Skills and Companies House to develop this.

(HM Treasury and FCA, Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule Changes including feedback on CP15/11 and final rules, 06.11.15)

FRC: Year-end letter of advice to preparers – smaller listed companies

On November 11, 2015 the Financial Reporting Council (FRC) published a letter of advice on preparing year-end reports for finance directors of smaller listed companies. The FRC notes that in June 2015 it reported on what investors value in the annual reports and accounts of smaller listed companies, and the letter outlines the feedback received from investors.

Investors stressed that good quality reporting by smaller companies was of considerable importance to them. In particular, investors noted that they largely rely on annual reports, as other sources of information about smaller companies are relatively scarce. Investors also value high quality reporting that is company-specific, communicating a clear picture of the business and enabling them to make investment decisions.

Investors expect clear information in the following areas:

Strategic Report

In preparing the Strategic Report the FRC recommends companies ensure:

  • it sets out a clear narrative, including a clear description of the company’s business model and strategy, the main trends and factors likely to affect the future development, performance or position of the business, and linkages between information presented within the strategic report and in the annual report more broadly;
  • it includes the principal risks and uncertainties that are material to the development, performance, position or future prospects of the company and that are regularly monitored by the board, rather than a long list of generic risks. It should also explain why they are material and how they are managed or mitigated;
  • the financial and non-financial key performance indicators are consistent with other financial information presented in the annual report; and
  • the analysis of the development and performance of the business in the Strategic Report is balanced and comprehensive.

Accounting policies, significant judgements and estimates

Since investors pay particular attention to policies that appear unusually aggressive or out of line with similar companies in the industry, in preparing its accounting policies, the FRC advises companies to consider the following questions:

  • Are accounting policies described for all significant transactions and revenue streams, including all those described in the Strategic Report, and those that are material to the financial statements?
  • Is it clear from the revenue recognition policy, the points at which revenue is recognised for each revenue stream?
  • Are the accounting policies specific and relevant to the company rather than merely copied from accounting standards or model accounts? Are insignificant policies excluded?
  • Are there clear policies for the capitalisation of assets and is it clear how the criteria for capitalisation are met?
  • Have all of the significant judgements or estimates been separately reported with a clear description of how management has made its judgement or estimate?

Cash flow statements

The FRC has established that investors seek to understand how a company converts its profits into cash and its liquidity. Therefore, companies should ensure they have given adequate time to considering whether the classification of operating, investing and financing cash flows is consistent with the business model described in the Strategic Report, whether attention has been paid to the classification under accounting standards of unusual or non-recurring cash flows which may nonetheless meet the definition of operating cash flows, and whether late adjustments have been reflected in the cash flow statement.

To aid financial directors in preparing this information, the FRC directs them to its Guidance on the Strategic Report, its Lab Project Report on accounting policies and integration of related financial information, and its Corporate Reporting Review – Annual Report 2015, which provides further detail on these areas as well as highlighting other common areas of enquiries from the FRC’s reviews of annual reports.

(FRC, Year-end letter to preparers – smaller listed companies, 11.11.15)

EBA: Updates on remuneration practices and the use of allowances across the EU

On November 12, 2015 the European Banking Authority (EBA) published a follow up report and accompanying press release on the actions taken following the publication of its “Opinion of the European Banking Authority on the application of Directive 2013/36/EU (Capital Requirements Directive) regarding the principles on remuneration policies of credit institutions and investment firms and the use of allowances”, in October 2014 (the Opinion), which suggested new criteria to properly implement the remuneration requirements set out in the CRD IV Directive.

The CRD IV Directive introduced a limit on the ratio between variable and fixed components of remuneration of 100 per cent (200 per cent with shareholder approval), which Member States needed to comply with for the performance year 2014 and onwards. As a result, some institutions introduced role-based allowances, which were treated as fixed remuneration, and thereby widened the scope for awarding variable remuneration.

In the Opinion, the EBA determined that role-based allowances that are not predetermined, are not transparent to staff, are not permanent, that provide incentives to take risks or, without prejudice to national law, are revocable, should be classified as variable remuneration in line with the CRD IV Directive.

Having come to that conclusion, the EBA asked competent authorities to use all necessary supervisory measures to ensure that by December 31, 2014 those institutions using role-based allowances adjusted their policies in line with the criteria set out in the Opinion.

The follow-up report concludes that competent authorities have taken measures in this respect and, where necessary, asked institutions to implement the necessary changes. However, such measures will, in most cases, only be effective for the remuneration awarded for the performance year 2015, while only in a few cases were changes to institutions' remuneration policies and practices already made for the performance year 2014. In particular, all competent authorities clarified that the review of institutions' remuneration policies and practices under their respective jurisdictions was part of their on-going supervision. Some competent authorities also indicated that they had taken further supervisory measures following the publication of the Opinion to ensure that institutions met the criteria listed in it.

The follow-up report also highlights that none of the Member States or competent authorities have, so far, adopted specific legal or regulatory instruments following the publication of the Opinion. This is mainly because the adoption of the final EBA Guidelines on sound remuneration policies is awaited. These Guidelines, which are expected to be finalised by the end of 2015, will contain further criteria to identify both fixed and variable components of remuneration. The follow-up report notes that the UK will change its supervisory instrument for 2015 to verify that institutions apply the criteria in the Opinion and will take appropriate measures, where necessary, to change their remuneration policies and practices.

(EBA, EBA Follow-up Report: On the actions taken by competent authorities following the publication of the Opinion of the European Banking Authority on the application of Directive 2013/36/EU regarding the principles on remuneration policies for credit institutions and investment firms and the use of allowances, 12.11.15)

ESMA: Updated Q&A on common operation of Market Abuse Directive

On November 9, 2015 the European Securities and Markets Authority (ESMA) published an updated version of its questions and answers on the common operation of the Market Abuse Directive (MAD).

The revised questions and answers include a question on the disclosure of inside information relating to Pillar II requirements under the CRD IV Directive, specifically, whether credit institutions are required under MAD to publish the results of the Pillar II assessment systematically.

ESMA provides that whenever a credit institution subject to the market abuse regime is made aware of information, notably the results of an exercise under the supervisory review and evaluation process, it is expected to evaluate whether that information meets the criteria of inside information. If these criteria are met, the MAD provisions, as transposed into the national law of the Member States, apply with respect to the relevant disclosure requirements. Such a credit institution would have then to publicly disclose the inside information unless it has delayed such a disclosure after having assessed that all the conditions for delaying apply.

(ESMA, Questions and Answers: On the common operation of the Market Abuse Directive, 09.11.15)

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