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Essential corporate news
– week ending April 5, 2019

Publication April 2019

ESMA: Final Report – ESMA guidelines on risk factors under the Prospectus Regulation

On March 29, 2019 the European Securities and Markets Authority (ESMA) published its final guidelines to assist competent authorities in their review of the specificity and materiality of risk factors and of the presentation of risk factors across categories when approving a prospectus following the full implementation of the Prospectus Regulation (Regulation (EU) 2017/1129) in July 2019.

ESMA published a consultation paper in July 2018 containing draft guidelines on risk factors and this Final Report provides an overview of the feedback received during the consultation as well as ESMA’s responses, with the final guidelines being presented in Annex II.

The primary purpose of including risk factors in a prospectus and/or a supplement is to ensure that investors can assess the relevant risks related to their investment and so make informed investment decisions in full knowledge of the facts.  As a result, risk factors should be limited to those risks which are material and specific to the issuer and/or its securities and which are corroborated by the content of the prospectus. The guidelines in the Final Report aim to encourage appropriate, focused and more streamlined disclosure of risk factors, in an easily analysable, concise and comprehensible form and the following guidelines are provided

  • Guidelines on specificity.
  • Guidelines on materiality.
  • Guidelines on corroboration of the materiality and specificity.
  • Guidelines on focused/concise risk factors.
  • Guidelines on risk factors in the summary.

The guidelines will become effective two months after their publication on ESMA’s website in all EU official languages.

(ESMA, Final Report – ESMA Guidelines on risk factors under the Prospectus Regulation 29.03.19)

ESMA: Final Report – Technical advice on minimum information content for prospectus exemption

On March 29, 2019 the European Securities and Markets Authority (ESMA) published its Final Report on the technical advice on the minimum information required in documents describing a merger, division or takeover necessary to apply an exemption from the obligation to publish an approved prospectus under the Prospectus Regulation (Regulation EU) 2017/1129).

Under the Prospectus Regulation, issuers may offer or admit securities in connection with takeovers, mergers or divisions without publishing a prospectus, provided that a document is made available to investors describing the transaction and its impact on the issuer. The technical advice sets out the minimum information content of this document in relation to the offer of securities to the public or the admission to trading of securities on a regulated market, and the description and impact that a takeover, merger or division may have on the issuer’s operational and financial activities.

ESMA consulted on draft technical advice in July 2018.  It notes that it only received five responses to the consultation and none of these represented the interests and views of investors. In light of this and the lack of specific evidence to ease ESMA’s concerns about investor protection, ESMA considers that it does not have a sufficient basis to significantly change the approach in its technical advice and so has only made limited changes to the draft technical advice. It will now need to be endorsed by the European Commission.

(ESMA, Final Report – Technical advice on minimum information content for prospectus exemption, 29.03.19)

FCA: Handbook Notice No 64 and final instruments and guidance for Brexit changes

On March, 29 2019 the Financial Conduct Authority (FCA) published Handbook Notice No. 64 describing changes to the FCA Handbook, Binding Technical Standards and other material made by the FCA in February and March 2019 to deal with the situation where the UK leaves the EU without a deal or an implementation period.

In relation to corporate aspects, instruments published include the following

These Instruments will commence on exit day, as defined in the European Union Withdrawal Act 2018, rather than at 11pm on March 29, 2019 as was specified in Policy Statement 19/5 published in February 2019.

The FCA has also published guidance on its approach to existing non-Handbook guidance where it relates to EU law or EU-derived law, such as technical notes, “Dear CEO” letters and the procedural and technical notes within the UK Listing Authority’s knowledge base. That non-Handbook guidance (guidance published outside of the FCA Handbook) will continue to be relevant in relation to matters that occur before exit day and will also be relevant, and should be taken into account, in relation to matters arising on or after exit day where the EU or EU-derived provisions to which it relates become or remain UK law.

In addition, the FCA has published guidance on its approach to non-legislative material produced by the EU, and in particular, the European Supervisory Authorities which include the European Securities and Markets Authority (ESMA).

The FCA notes that under the European Union Withdrawal Act 2018, the broad range of non-legislative material produced by bodies such as ESMA, or their predecessor bodies (for example CESR) has not been incorporated into UK law but the EU-derived law to which the non-legislative material relates has largely been retained. As a result, the FCA considers that the EU non-legislative material will remain relevant post-exit day to the FCA and market participants in their compliance with regulatory requirements, including provisions in the FCA’s Handbook. Accordingly, the FCA will expect firms and market participants to continue to apply ESMA’s guidelines and recommendations (and those of the other European Supervisory Authorities ) to the extent that they remain relevant, as they did before exit day, interpreting them in light of the UK’s withdrawal from the EU and the associated legislative changes that are being made to ensure the regulatory framework operates appropriately. In addition, the FCA will continue to apply such guidelines and recommendations in respect of its own functions in the same manner as before, interpreting them in light of the UK’s withdrawal from the EU and the associated legislative changes.

(FCA: Brexit: The FCA confirms final rules for firms, 29.03.19)

(FCA: Handbook Notice No. 64, 03.19)

ESMA: MAR Q&A updated

On March 29, 2019 the European Securities and Markets Authority (ESMA) updated its Questions and Answers (Q&A) document regarding the implementation of the Market Abuse Regulation (MAR).

The updated version of the Q&A document includes an update of the Q&A clarifying the scope of firms subject to the MAR provision to detect and report suspicious orders and transactions, together with new detailed answers in relation to emission allowances market participants (EAMPs). In this context there are new detailed answers on

  • The meaning of parent and related undertaking.
  • Disclosure of inside information concerning emission allowances referring to installations of other undertakings of the group of the EAMP.

(ESMA, Q&A on the Market Abuse Regulation, 29.03.19)

BEIS: Environmental reporting guidelines – Including streamlined energy and carbon reporting guidance

On March 29, 2019 the Department for Business, Energy and Industrial Strategy (BEIS) published an updated version of its guidance on environmental reporting. It now includes guidance to help companies comply with the Government’s new policy on streamlined energy and carbon reporting, including greenhouse gas reporting. The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (2018 Regulations) implement this policy and introduce new legal obligations from April 1, 2019.Under changes introduced by the 2018 Regulations, for financial years commencing on or after April 1, 2019, large unquoted companies and large limited liability partnerships are obliged to report their UK energy use and associated greenhouse gas emissions as a minimum relating to gas, electricity and transport fuel, as well as an intensity ratio and information relating to energy efficiency action, through statements in their directors’ report. Quoted companies of all sizes will continue to be required to report their global greenhouse gas emissions and an intensity ratio in their directors’ report, but they are now also required to report their total global energy use and information relating to energy efficiency action, alongside the methodology used to calculate the new and existing disclosure requirements.

The guidance is designed to help those companies and limited liability partnerships in scope of the new requirements. The updated guidance sets out steps to be taken when companies and limited liability partnerships are considering their environmental impacts and which key performance indicators to report on. It also provides guidance on the new streamlined energy and carbon reporting requirements and outlines additional voluntary information.

(BEIS, Environmental Reporting Guidelines, 29.03.19)

BEIS Committee: The future of audit - Report

On April 2, 2019 the Business, Energy and Industrial Strategy Committee of the House of Commons published a report on the future of audit, following an enquiry that it launched in November 2018. The object of the enquiry was to examine how the three separate reviews of different aspects of the audit market, namely the Kingman review of the Financial Reporting Council (FRC), the Competition and Markets Authority market study into the supply of statutory audit services and the independent Brydon review of the quality and effectiveness of audit, would complement each other.

The BEIS Committee makes a number of recommendations in its report, including the following

The audit project

  • The FRC should make graduated findings mandatory. These refer to the auditor expressing an opinion on key management estimates and judgements in the accounts, describing them on a range from cautious to optimistic.
  • As part of his review, Sir Donald Brydon should consider extending the scope of audit to cover the entire annual report, albeit with different levels of assurance and reporting. Auditors should be encouraged and empowered by the new regulator to speak their mind openly and clearly in audit reports and call out poor management when they see it.
  • There should be a requirement in the new UK Stewardship Code for investors and asset owners to consider audit matters.
  • Auditors should make a presentation at the AGM to show how they have challenged management and exercised professional scepticism to underpin their audit opinion, and to raise any major issues.
  • The FRC and its successor should consider requiring companies to publish the audit report at the same time as results are announced, instead of waiting for the full annual report to be published.

Capital maintenance

  • Compliance with the capital maintenance regime is patchy is best and not adequately audited. The FRC should urgently remind directors and auditors of their duties relating to the accounts and impose severe sanctions for breaches. Auditors should be prepared to challenge management on their accounting of realised profits and distributable reserves.
  • In light of concerns that one of the reasons compliance with the capital maintenance regime is poor could be due to the lack of clarity over how the rules governing the payment of dividends are to be interpreted, the Government and the FRC should work together to resolve these issues as soon as possible and produce some prudent guidance for companies and auditors to follow.
  • The Government and the FRC should urgently produce a clear, simple and prudent definition of what counts as realised profits for the purpose of distributions and the BEIS Committee supports defining realised profits as realised in cash or near cash.
  • The BEIS Committee supports the Government’s proposal to require companies and auditors to take a more critical look at the valuation of goodwill for the purpose of distributions and recommends that the Government urgently take steps to tighten the net asset test.
  • Companies should be required to disclose the balance of distributable reserves in the annual accounts and break down profits between realised and unrealised.
  • The Government should adopt a complementary solvency-based system in which directors must state that dividend payments will not make the company insolvent or create cash flow problems.

Separating audit from non-audit

  • The CMA should, at the very least, implement its proposed operational split of audit and non-audit businesses to achieve the separate of economic interests.
  • The CMA should aim for full legal separation of audit and non-audit services. If the operational split is chosen instead, the CMA and the new regulator should conduct a review of the arrangements after three years to determine whether the split has ended cross-subsidies and improved culture, independence and transparency. If not, the CMA should then move to implement a full structural break-up of the Big Four into audit and non-audit businesses in the UK.


  • The FRC and its successor should require greater reporting on audit fees, potentially including the disclose of audit hours, staff mix, and rate per hour. Auditors should also report instances where they have performed additional procedures but have been unsuccessful at increasing their fee.
  • The FRC and its successor should be given more power over audit fees.

Ensuring independence, challenge and professional skepticism

  • The new regulator and the CMA should consider the potential independent appointment of auditors with a view to developing it as a viable remedy if other remedies and reforms fail.
  • The CMA should revisit increasing the frequency of audit rotations, which should be reduced to seven-year non-renewable terms that can only be terminated in exceptional circumstances.
  • The CMA should seriously consider the benefits of a cooling-off period of three years across which non-audit services could not be offered after an audit engagement had ended.
  • Joint audits should be piloted in the upper reaches of the FTSE 100 in conjunction with the BEIS Committee’s preferred option of a market cap for the rest of the FTSE 350. Such audits should include a Big Four and a challenger firm.
  • In light of their strategic importance, the Government should examine the auditing of banks to explore whether additional safeguards are required in this sector.
  • The CMA should draw up detailed proposals for the introduction of a segmented market cap offering challenger firms a chance to take up a proportion of audits across the FTSE 350. This should be done on the basis that each firm should have an individual cap to avoid one of the Big Four keeping all of its clients and remaining dominant. The CMA should develop this proposal together with a pilot of joint audits in the first instance to allow challenger firms to take on some of the more complex FTSE 100 audits.
  • The CMA should work with the regulator to draw up proposals to mitigate the consequences of an audit market failure, especially if it involved one of the Big Four. However, the CMA should prioritise remedies that enable more challenger firms to enter the FTSE 350 audit market and develop their ability to undertake the full range of audit.

Regulation of audit

  • The new regulator should ensure that it has effective procedures and policies in place to encourage whistle-blowers to come forward when they have serious concerns and investigate them fully.
  • The Government should introduce the necessary legislation in Parliament to ensure that there are wider powers to intervene to prevent a significant market failure or lessen its impact if it cannot be averted. When there has been a major accounting and/or audit failure, the new regulator should conduct and publish a swift but comprehensive review of what went wrong to share lessons with the wider audit market.
  • While the new regulator should be proportionate in relation to sanctions, in the worst cases it should not be shy of imposing tough sanctions, including large fines.

(BEIS Committee, The future of audit, 19th report of Session 2017/19, 02.04.19)

European Parliament: Resolution on proposed country-by-country income tax reporting

On March 27, 2019 the European Parliament resolved to adopt, with amendments, the European Commission’s 2016 proposal for a directive to amend the Accounting Directive (Directive 2013/34/EU) as regards disclosure of income tax information by certain undertakings and branches.

The changes to the European Commission’s 2016 proposal include the following

  • Ultimate parent undertakings with a consolidated turnover of or exceeding EUR 750 million will need to report income tax information annually.
  • The report will need to be published in a common template available free of charge in at least one of the official languages of the EU. It must be published on the undertaking’s website and it will also need to be filed in a public registry managed by the European Commission.
  • All subsidiaries (not just medium and large subsidiaries) controlled by an ultimate parent parent undertaking which has on its balance sheet a consolidated net turnover of or exceeding EUR 750 million will need to publish the report on income tax information of the ultimate parent undertaking.
  • Additional information to be contained in the report includes: the name of the ultimate parent undertaking and, where applicable, the list of all its subsidiaries and their respective geographical locations; fixed assets other than cash or cash equivalents; in reporting net turnover a distinction should be made between turnover with related parties and turnover with unrelated parties; stated capital; details of public subsidies received and political donations made;, whether undertakings, subsidiaries or branches benefit from preferential tax treatment (from a patent box or equivalent regimes).
  • Information should be presented separately for each tax jurisdiction.
  • Member States may allow specific items of commercially sensitive information to be temporarily omitted from a report but the omission must be indicated in the report and justified. Member States must notify the European Commission if they grant a temporary derogation and send to it the omitted information with an explanation of the derogation granted. Each year the European Commission will publish the notifications and explanations received on its website.
  • The European Commission will adopt guidelines to help Member States determine whether the publication of information could be considered seriously prejudicial to an undertaking’s commercial position.

(European Parliament, Resolution relating to disclosure of income tax information by certain undertakings and branches, P8-TA-PROV (2019)0309. 27.03.19)

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