How will latest changes to Volcker Rule affect non-US banks?
Kathleen A. Scott discusses the final Volcker Rule, focusing on some of the issues raised by non-US banks in their comments.
There have been a number of corporate governance developments since the Spring of 2018, as well as developments in the narrative aspects of annual reports and accounts. This briefing summarises those developments and looks at some of the future developments in these areas that companies need to start preparing for.
In July 2018, the Financial Reporting Council (FRC) published its new 2018 UK Corporate Governance Code (2018 Code). This follows the FRC’s consultation on proposed amendments to the 2016 UK Corporate Governance Code published in December 2017 and the 2018 Code will apply to accounting periods beginning on or after January 1, 2019. With the 2018 Code, the FRC has also published updated Guidance on Board Effectiveness (Guidance).
In light of feedback received during the consultation process, the FRC has revised some of the Principles and Provisions in the 2018 Code from those consulted on. Key changes to note include the following:
In July 2018, the Financial Reporting Council (FRC) published its revised Guidance on Board Effectiveness (Guidance) together with the new 2018 UK Corporate Governance Code (2018 Code). The Guidance supplements the 2018 Code by suggesting good practice to assist companies in applying the 2018 Code’s Principles and reporting on that application.
The Guidance was consulted on in December 2017 and in light of feedback a number of changes have been made to the draft previously consulted on. These include the following:
In July 2018, the Financial Reporting Council (FRC) published its Feedback Statement following its December 2017 consultation on a revised UK Corporate Governance Code. The Feedback Statement has been published together with the revised 2018 UK Corporate Governance Code (2018 Code) and updated Guidance on Board Effectiveness.
The Feedback Statement summarises the main points raised in relation to the consultation questions and the resulting decisions taken by the FRC. It also includes a table showing how the 2018 Code differs from the 2016 version and in an annex, it tracks the changes from the version consulted on in December 2017 to the 2018 Code.
The FRC notes in the Feedback Statement that it will be monitoring how governance practices and reporting develop in response to the 2018 Code. This will include more in-depth reviews of annual reports to engage with companies on their reporting against the 2018 Code. It expects some companies to adopt the 2018 Code early and states that this will help the FRC determine whether additional guidance or support might be necessary.
The Feedback Statement also includes a summary of the responses to the high-level questions posed on stewardship and the UK Stewardship Code as part of the December 2017 consultation. The FRC is to consult on a revised UK Stewardship Code later in 2018.
In June 2018, the Financial Reporting Council (FRC) issued a draft of the Wates Corporate Governance Principles for Large Private Companies (the Principles), and supplementary guidance, for public consultation.
In its August 2017 response to its Green Paper on corporate governance reform, the Government stated that it believed that the corporate governance framework for the UK’s largest private companies should be strengthened and, in January 2018, Sir James Wates was appointed to chair a coalition group tasked with developing appropriate corporate governance principles for large private companies.
The Principles have now been published for consultation and are designed to assist companies which, for financial years beginning on or after January 1, 2019, will be required by the Companies (Miscellaneous Reporting) Regulations 2018 to provide a corporate governance statement for the first time. Such companies may adopt the Principles as a framework for the purposes of making the statement of corporate governance arrangements that will be prescribed by the Regulations, assuming they are adopted in their current form. It is further hoped that the Principles will act as guidance to companies of all sizes, not just those subject to the new legislative requirements, in understanding good practice in corporate governance and apply that good practice widely.
It is intended that the Principles be applied on an “apply and explain” basis. A company adopting them will be expected to apply them fully but can provide a supporting statement for each of the six Principles that gives an understanding of how the company’s corporate governance processes operate and achieve the desired outcomes. The Principles are supported by non-exhaustive guidance that helps companies apply them in practice but this is not to be seen as a checklist. Rather, companies adopting the Principles will be encouraged to demonstrate, through a written explanation in their directors’ report and on their website, how the application of the Principles has resulted in improved corporate governance outcomes.
The six Principles and accompanying guidance are as follows:
Responses to the consultation are to be received by September 7, 2018 to allow for the final Principles and guidance to be published in December 2018.
In April 2018, the Quoted Companies Alliance (QCA) published a revised QCA Corporate Governance Code (QCA Code) which replaces the previous version published in May 2013.
The revised QCA Code is constructed around 10 broad principles, accompanied by an explanation of what those principles entail, together with a set of disclosures. It sets out what the QCA considers to be appropriate arrangements for growing companies and asks companies to provide an explanation about how they are meeting the principles through the prescribed disclosures. The QCA Code operates on a “comply or explain” basis so where a company departs from the principles and their application, it will be expected to provide a well-reasoned explanation for doing so as part of its reporting on corporate governance.
The disclosures set out after each principle indicate the areas that companies need to address in their reporting on corporate governance and these should reflect how the company has applied the principles and be tailored to the company’s circumstances. In addition to these disclosures, the correct application of the QCA Code also requires that the chair provides a clear explanation of how the company applies the QCA Code in a corporate governance statement and it is recommended that this be included both in the annual report and on the company’s website.
The 10 principles are as follows:
The QCA Code also includes sections on good corporate governance and on the roles and responsibilities of the board, the chair, the senior independent director, the non-executive directors, the executive directors, the audit committee, the remuneration committee, the nomination committee, the company secretary and shareholders.
The QCA Corporate Governance Code can be purchased from the QCA here.
London Stock Exchange plc (LSE) published AIM Notice 50 in March 2018. It provides feedback on the consultation the LSE issued in December 2017 pursuant to AIM Notice 49 and confirms the resulting rule changes to the AIM Rules for Companies (AIM Rules).
In relation to the corporate governance requirements for AIM companies, respondents supported the new obligation for an AIM company to disclose on its website details of how it complies or explains against a recognised corporate governance code chosen by the board of directors. The LSE remains of the view that it should not prescribe a list of recognised codes as it believes it is preferable for AIM companies to have a range of options to suit their specific stage of development, sector and size. However, AIM Rule 26 has been amended in light of feedback to provide that an AIM company need only review its corporate governance disclosures on its website annually rather than on an ongoing basis.
While the revised AIM Rules came into effect on March 30, 2018, the implementation of the new corporate governance requirements in AIM Rule 26 will take effect from September 28, 2018 so that AIM companies have adequate time to prepare for the change. All new applicants to AIM from March 30, 2018 have to state which corporate governance code they intend to follow but otherwise will have until September 28, 2018 to fully comply with the new requirements in AIM Rule 26.
In its Feedback Statement, the LSE reminds AIM companies that good corporate governance is supported by a meaningful explanation of the company’s practices against the principles of the chosen code, rather than simply identifying areas of non-compliance.
In March 2018, the Department for Business, Energy and Industrial Strategy (BEIS) announced a consultation to improve the UK’s corporate governance framework and ensure the highest standards of behaviour in those who lead and control companies in, or approaching, insolvency.
Among other things, the consultation sought views on a number of proposed measures, including the following:
Following recent company failures, the consultation also sought views on certain aspects of the wider corporate governance framework that have been highlighted where existing processes and rules may need updating. These include the following:
The consultation sought views from directors of companies, institutional shareholders and the investment community as well as the wider public. Responses were accepted until June 11, 2018.
In March 2018, the House of Commons Business, Energy & Industrial Strategy Committee (BEIS Committee) announced the launch of an inquiry into executive pay and the gender pay gap in the private sector. The BEIS Committee is looking at these issues in light of concerns about the overall level of executive pay and bonuses and the April 2018 deadline for gender pay gap reporting.
The BEIS Committee has asked for written evidence on a number of specific questions relating to the gender pay gap and executive pay.
In June 2018, the Department for Business Energy and Industrial Strategy (BEIS) and the Government Equalities Office published a press release in relation to progress made to date by FTSE 350 companies in meeting the Hampton-Alexander Review target of having at least 33 per cent of board positions held by women by the end of 2020.
At the half-way point of the Hampton-Alexander Review, 29 per cent of FTSE 100 board positions were held by women (up from 12.5 per cent in 2011) so FTSE 100 companies are on track to meet the 33 per cent target by 2020 but FTSE 350 companies may fall short.
In relation to FTSE 350 companies, while the number of women on boards has increased to 25.5 per cent, around 40 per cent of all appointments will need to go to women over the next two years for the FTSE 350 to meet the 33 per cent target. There are also still 10 FTSE 350 companies with all-male boards.
The press release also announces that the new online portal for FTSE 350 companies to submit their 2018 gender leadership data (the number of men and women on the executive committee and direct reports to the executive committee) is now open and progress made on women in executive and leadership positions will be reported in November 2018 when the 2018 Hampton-Alexander Report will be published.
In April 2018, the Investment Association announced that it and the Hampton-Alexander Review had written to 35 FTSE 350 companies with low female representation at leadership level, calling for change.
Letters were sent to 14 FTSE 100 companies with all-male executive committees or combined executive committees and direct reports with low proportions of women. These companies were asked to explain their poor gender balance and what steps they are taking to move towards the target of a minimum of 33 per cent womens’ representation across their combined executive committee and direct reports to that committee by 2020, as recommended by the 2016 report of the Hampton-Alexander Review. Letters were also sent to the 11 FTSE 250 companies with an all-male board and the 10 FTSE 250 companies that failed to report their gender diversity data to the Hampton-Alexander Review in 2017.
The announcement notes that a number of key investors have told the Investment Association that they will vote against AGM resolutions at 2018 AGMs on the grounds of gender representation so the Investment Association urges the companies it has written to, to take urgent steps to outline their plans to increase diversity.
In March 2018, Pensions and Investment Research Consultants Ltd (PIRC) published the 25th edition of its UK Shareowner Voting Guidelines.
PIRC has made several key changes in the 2018 Guidelines from those published in 2017, including the following:
The PIRC UK Shareowner Voting Guidelines 2018 can be purchased from PIRC - click here.
The Institute of Chartered Secretaries and Administrators (ICSA) Governance Institute and Board Intelligence have produced three resources to help organisations with the preparation and presentation of their board reporting. This follows on from publication of a summary of their research into how board reporting (the preparation of reports and other papers discussed at board meetings) operates in organisations and this was published in December 2017.
While only available to ICSA members, the three resources produced are as follows:
In May 2018, the Financial Reporting Council (FRC) published a feedback statement summarising comments received on FRED 69 FRS 101 Reduced Disclosure Framework – 2017/18 cycle (FRED 69). The FRC issued FRED 69 in October 2017 as part of its annual review of FRS 101 and asked for comments to be submitted by February 2018.
FRED 69 comprised two questions:
In the feedback statement, the FRC confirms that no amendments are being made to FRS 101.
In March 2018, the European Commission published a consultation paper seeking views on whether the EU framework for public reporting by companies is fit for purpose. This follows on from the publication in February 2018 by the European Commission of an evaluation and fitness check Roadmap on public reporting by companies.
The first objective of the consultation was to assess whether the EU public reporting framework is overall still relevant for meeting its objectives, whether it adds value at the European level, and is effective, internally consistent, coherent with other EU policies, efficient and not unnecessarily burdensome.
The second objective of the consultation was to review specific aspects of the existing legislation as required by EU law, and thirdly it will assess whether the EU public reporting framework is fit for new challenges (such as sustainability and digitalisation).
The consultation will assess other ongoing developments in EU policies that may also have an impact on the public reporting framework (for instance, the Capital Markets Union, Common Corporate Tax Base and the digitalisation of companies’ lifecycle).
The fitness check is part of the actions announced in the Action Plan on sustainable finance published in March 2018. Responses to the consultation should be submitted through an online questionnaire by July 21, 2018. The responses will feed into a Staff Working Document on the fitness of the EU framework for public reporting by companies which is to be published in 2019.
In April 2018, the Board of the International Organization of Securities Commissions (IOSCO) published a consultation report which seeks input to a possible Good Practices Report on how audit committees of listed companies can support external audit quality.
The consultation report notes that the quality of a company’s financial report, supported by an independent external audit, is key to market confidence and informed investors and while the auditor has primary responsibility for audit quality, the audit committee can promote and support that audit quality. The Good Practices Report should help audit committees do this. The consultation report also notes that there is inconsistency in the way audit committees carry out their responsibilities and findings by audit regulators indicate a need to improve audit quality and the consistency of audit execution.
The consultation report considers the role of audit committees and audit quality and proposes good practices regarding the features in promoting and supporting audit quality. These features include the qualifications and experience that audit committee members should possess. The consultation report also proposes good practices that audit committees should consider when:
The consultation report seeks feedback on the proposed good practices and role of the audit committee in achieving sound audit quality. IOSCO requests that all comments are submitted by July 24, 2018.
In April 2018, the Department for Business, Energy, and Industrial Strategy (BEIS) invited Sir John Kingman, supported by an advisory group, to carry out an independent review of the Financial Reporting Council (FRC). The review will assess the FRC’s governance, transparency and independence, and ensure it is fit for the future. In June 2018, Sir John Kingham published a Call for evidence in relation to the review. The two objectives of Sir John Kingman’s review are (i) to ensure that the FRC’s structures, culture and processes, its oversight, accountability and powers, and its impact, resources and capacity are as good as they could be and are fit for the future, and (ii) to see the FRC standing as a beacon for the best in governance, transparency and independence. As a result, the review team is calling for evidence and information, including specific examples, on the effectiveness of the FRC.
Particular areas in respect of which evidence is requested are as follows:
The Call for Evidence also asks questions about the FRC’s powers and sanctions, its legal status and its relationship with Government, as well as questions about governance and leadership, funding, resources and staffing. Responses are requested by August 6, 2018.
In June 2018, the draft Companies (Miscellaneous Reporting) Regulations 2018 (Draft Regulations) were published. Subject to Parliamentary approval, the Draft Regulations will amend the reporting requirements contained in Part 15 Companies Act 2006 (CA 2006), in the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 and in the Community Interest Companies Regulations 2005.
The Draft Regulations include the following new requirements:
Subject to Parliamentary approval, the new requirements will apply to company reporting on financial years starting on or after January 1, 2019 in line with the Financial Reporting Council’s plans for bringing a revised UK Corporate Governance Code into effect. The draft Companies (Miscellaneous Reporting) Regulations 2018 Q&A have also been published to help companies and other interested stakeholders understand how they will be affected by the new reporting requirements.
Following the publication of the draft Companies (Miscellaneous Reporting) Regulations 2018, (Regulations) the Department for Business, Energy and Industrial Strategy (BEIS) published draft “Companies (Miscellaneous Reporting) Regulations 2018 Q&A”. The purpose of the Q&A is to help companies and interested stakeholders understand how they will be affected by the Regulations. While the Regulations will not become law until approved by Parliament, BEIS recognises the importance of providing companies and stakeholders with as much time as possible to understand the proposed changes to the law.
Among other things, the Q&A:
In June 2018, the Financial Reporting Council (FRC) issued a Briefing from its Corporate Reporting Review team setting out current ‘hot topics’ of its Corporate Reporting Review function which will be particularly relevant to companies about to prepare their interim accounts and auditors engaged to review them.
The Briefing notes that most listed companies will adopt IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’, meaning 2018 interim reports will be the first prepared under these new standards. The FRC will be monitoring companies’ disclosure of their effects. It points out that companies should assess and explain the effects of the new standards and should provide responses which are clear, concise and company-specific, and focus on the areas of change. Directors are expected to disclose significant judgements made in applying the new standards and to quantify and explain sources of estimation uncertainty.
Other topical issues identified by the Briefing include:
The Briefing also highlights issues identified by CRR’s monitoring activities. These include determining materiality, classification issues, failure to comply with IAS 33 in relation to earnings per share and failure to file interim accounts in connection with a dividend payment.
In June 2018, the Financial Reporting Council’s Financial Reporting Lab (Lab) published a report on current developments in relation to blockchain, and on potential uses and impacts of blockchain on corporate reporting. This report forms part of the Lab’s wider project on the digital future.
The report notes that blockchain (also called a distributed ledger) is a type of shared database which creates a permanent record of transactions. Since it is distributed across a number of participants in a network and is not under the control of a single participant, it is robust. This, combined with the fact that any changes made to the data are clear to all participants, ensures both the data and the network are resilient. As a result, the report comments that blockchain is different from a traditional database because of the way it creates trust and resilience and it looks at whether blockchain could solve some of the existing corporate reporting challenges, which include:
The report concludes that while blockchain is not the only possible answer (or even the best), it does have the potential to solve some of the challenges in the stages of corporate reporting as follows:
As a result, the report suggests that blockchain merits consideration and experimentation by preparers, regulators and users of corporate reporting and it sets out specific actions for each of these different parties in order to take blockchain forward.
In June 2018, the Financial Reporting Council’s Financial Reporting Lab (Lab) published a report setting out the views of investors on the reporting of performance metrics. The reports includes a framework and set of questions for companies and boards to consider when deciding on how they report the company’s performance.
“Performance metrics”, for the purposes of the report, means all forms of metric a company might disclose to provide information about its performance, position and prospects, including financial metrics (GAAP and non-GAAP) and wider metrics (standardised and company specific). The report considers investors’ use of performance metrics and notes that investors want to see the following:
The next phase of this project, including examples of how companies have put the principles in the report into practice, will be published in Autumn 2018.
Kathleen A. Scott discusses the final Volcker Rule, focusing on some of the issues raised by non-US banks in their comments.
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.