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Essential Corporate News – Week ending November 16, 2018

Publication November 16, 2018


Introduction

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

BEIS: Updated Companies (Miscellaneous Reporting) Regulations 2018 Q&A

On November 9, 2018 the Department for Business, Energy and Industrial Strategy (BEIS) published an updated version of the Companies (Miscellaneous Reporting) Regulations 2018 Q&A which was originally published in June 2018.

Changes in the updated Q&As include the following: 

  • If the directors of a company knowingly do not comply with any of the Companies (Miscellaneous Reporting) Regulations 2018 (2018 Regulations) requirements, or are reckless as to their compliance, they will be committing an offence.
  • The new requirements will apply to company reporting on financial years starting on or after January 1, 2019 so, with one exception, reporting on the new requirements will begin in 2020. The exception is that the requirement for companies to illustrate the impact of share price increases on executive pay outcomes applies to any new remuneration policies introduced by companies from January 1, 2019.
  • Depending on the circumstances, it may be acceptable for a subsidiary to provide less information in its own section 172(1) statement where policies are set by the parent company and applied throughout the group. However, judgement will be needed in deciding what is appropriate. For example, where reference can be made to accessible parent company statements, the subsidiary may be able to include less detail in its report.
  • The requirement to make the corporate governance statement available on a website can be discharged by publishing the complete annual report or the whole directors’ report (or strategic report if it is included there).
  • The Government hopes that the corporate governance principles for large private companies currently being developed by James Wates and a coalition group will be widely adopted, however, companies can choose the most appropriate code for them, or none. If a company does not apply a code, however, it must explain why that is the case and what corporate governance arrangements have been made.
  • Companies are able to choose a foreign corporate governance code but if they do so, they should ensure that an English language version of it is available and that this version is easily accessible online and free of charge.
  • The requirement to prepare a corporate governance statement applies to UK subsidiaries of listed overseas parents.
  • The employee threshold and the turnover and balance sheet thresholds should be calculated at an individual company level only. No consolidation across a group is required for these thresholds.
  • If a UK-incorporated and quoted company is a subsidiary of a non-UK incorporated parent, it must still report its pay ratio. However, in such a case the pay ratio reporting would relate to the pay and benefits of the CEO of the UK-incorporated and quoted subsidiary, rather than to the pay and benefits of the CEO of the non-UK incorporated parent and cover only UK employee pay and benefits at the UK incorporated and quoted subsidiary and any subsidiaries beneath it.
  • If an existing company has 250 or fewer UK employees in the financial year before the 2018 Regulations come into force, it will not have to report its pay ratios for the first financial year in which the rules apply, even if it has more than 250 UK employees in that year.

(Companies (Miscellaneous Reporting) Regulations 2018 updated Q&A, 09.11.18)

Hampton-Alexander Review – Improving gender balance in FTSE leadership

On November 13, 2018 the Hampton-Alexander Review published its third report assessing progress against the five key recommendations that it set in 2016, highlighting emerging best practice and current challenges.

The report notes the following:

Executive Committee and Direct Reports

The FTSE 100 has seen the number of women on the combined Executive Committee and Direct Reports increase to 27 per cent in 2018, up from 25.2 per cent in 2017. For the FTSE 250, the number of women on their combined Executive Committee and Direct Reports has increased marginally to 24.9 per cent in 2018, up from 24 per cent in 2017.

Women on boards

The number of women on FTSE 100 boards is now 30.2 per cent, up from 27.7 per cent in 2017. Women’s representation on FTSE 250 boards has increased from 22.8 per cent in 2017 to 24.9 per cent in 2018.

The number of all-male boards is now down to five, from 10 in 2017, but 75 companies in the FTSE 350 only have one woman on the board.

Outlook

The report notes that if progress continues at a similar rate, the FTSE 100 is on track to achieve the 33 per cent target for women on boards by 2020. However, a step change in pace is needed elsewhere with half of all available appointments in the next two years, both board appointments and combined Executive Committee and Director Reports, needing to go to women to achieve the 33 per cent target.

Throughout the report, there are examples of good practice as well as a summary of the barriers to women’s progression in the workplace. The report compares UK progress to that internationally and the role of executive search firms and the investor community is also considered.

(Hampton-Alexander Review, Improving gender balance in FTSE leadership, 13.11.18)

(Hampton-Alexander Review, Improving gender balance in FTSE leadership press release, 13.11.18)

ESMA: Updated Market Abuse Regulation Q&A

On November 12, 2018 the European Securities and Markets Authority (ESMA) published version 13 of their Market Abuse Regulation (MAR) Q&As. The revised Q&As include a new question and answer relating to the scope of the trading restrictions for persons discharging managerial responsibilities during a closed period under Article 19(11) of MAR.

The Q&As confirm that the prohibition in Article 19(11) applies to persons discharging managerial responsibilities (PDMRs) within an issuer, not to the issuer itself. Article 19(11) does not encompass transactions of the issuer relating to its own financial instruments even if it is the PDMRs who are taking the decision or bringing a previous decision into practice. The actions of a PDMR in its capacity as a director or employee of the issuer are not PDMR transactions for the account of a third party, rather transactions of the issuer itself, and so the Article 19(11) prohibition does not apply.

ESMA do however highlight that any transaction carried out by the issuer during a closed period should be treated carefully, as the issuer remains subject to the prohibition on insider dealing contained in Article 14 of MAR and so, where an issuer is in possession of inside information relating to its own financial instruments, it will not be able to trade on them unless it has established, implemented and maintained the internal arrangements and procedures set out in Article 9(1) of MAR.

(ESMA: Updated Market Abuse Regulation Q&A, 09.11.18)

FRC: 2019/20 Audit thematic reviews, priority sectors and audit areas of focus announced

On November 15, 2018 the Financial Reporting Council (FRC) announced plans to supplement its 2018/19 Audit Quality Review (AQR) monitoring programme with two thematic reviews. These thematic reviews complement other AQR work, all with the over-riding objective of driving improvements in audit quality.

Thematic reviews

The thematic reviews focus on aspects of audit practice across a number of firms to identify both scope for improvement and good practice. The thematic review topics are:

  • Audit Quality Indicators (AQIs) - An assessment of the development and use of AQIs by UK audit firms - This review commenced during the FRC’S 2018/19 inspection programme and will be delivered in 2019/20.
  • The use of technology in audits – The FRC reported on firms’ use of data analytics in January 2017 and plans to revisit the progress that the firms have made since, considering how the use of technology has widened beyond data analytics and the potential impact upon audit quality.

The FRC will publish its 2018/19 thematic review of ‘The Auditors Work on Other Information in the Annual Report’ later in 2018, and a report on ‘Audit Firm Transparency Reporting’ will follow in the first quarter of 2019.

Priority sectors

Priority sectors are those considered by the FRC to be particularly high risk in terms of corporate reporting and audit as a result of economic or other pressures. The corporate reports and audits selected for review by the FRC in 2019/20 will have regard to the following priority sectors:

  • Financial services, with emphasis on banks, other lenders and insurers;
  • Oil and gas;
  • General retailers; and retail property;
  • Business support services; and
  • Construction and materials

Areas of focus

Audit areas of focus are specific aspects of audit work or non-sector specific factors which the FRC expects to consider when reviewing an audit. As part of its audit monitoring programme for 2019/20,the FRC expects to pay particular attention to the auditor’s work on:

  • Going concern and the viability statement;
  • The other Information in the annual report
  • Long-term contracts; and
  • The impairment of non-financial assets.

In addition to this, the FRC will also consider the potential impact of Brexit, in both the selection of audits to review, and the individual areas of audit work to focus on.

(FRC: 2019/20 Audit thematic reviews, priority sectors and audit areas of focus announced, 15.11.18)

BEIS: Committee inquiry into the future of audit

On November 12, 2018 the Department for Business, Energy and Industrial Strategy Committee (BEIS Committee) launched an inquiry into the future of audit. The enquiry follows a similar study by the Competition and Markets Authority (CMA) on the statutory audit market and the Government’s independent review of the Financial Reporting Council (FRC) led by Sir John Kingman.

The inquiry will focus on the likely impact of the CMA market study and the review of the FRC in improving quality and competition in the audit market and reducing conflicts of interest. The BEIS Committee intends to feed into the CMA study and ensure audit reform is linked to coherent reform of the wider corporate governance agenda. As part of this inquiry, the BEIS Committee will consider the published submissions from the CMA’s market study of the audit sector.

Submissions are requested by January 11, 2019. The BEIS Committee intends to begin evidence hearings in January 2019, as soon as possible after the Kingman and initial CMA reports are published.

(BEIS Committee Inquiry: future of audit, 12.11.18)

(BEIS Committee Inquiry: future of audit press release, 12.11.18)

BEIS: Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018

On November 9, 2018 the Department for Business, Energy and Industrial Strategy (BEIS) published the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 and an accompanying explanatory memorandum.

The published Regulations remain unchanged from the draft Regulations published on July 18, 2018. They make changes to reporting requirements for quoted companies and introduce new reporting requirements for large unquoted companies and large limited liability partnerships (LLPs) to annually report on emissions, energy consumption and energy efficiency action as follows:

  • Quoted companies - will be required to disclose energy use from activities for which the company is responsible and from purchases of electricity, heat, steam or cooling for its own use. They must also describe the principal measures, if any, taken to increase their energy efficiency.
  • Large unquoted companies - will be required to disclose greenhouse gas emissions, energy use from activities for which the company is responsible and action taken to increase energy efficiency.
  • Large LLPs - will be required to prepare an energy and carbon report, equivalent to the directors' report for each financial year. The contents requirements of this report mirror the disclosure requirements that apply to large unquoted companies.

The Regulations will come into force on April 1, 2019 and will have effect on financial years beginning on or after this date.

(The Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018, 09.11.18)

(The Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 explanatory memorandum, 09.11.18)

HM Treasury: Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018 - Draft

On November 13, 2018 HM Treasury published the Draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018 (draft Regulations) together with an explanatory note.

The draft Regulations address deficiencies in each of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, the EU Funds Transfer Regulation and the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 that arise from the UK leaving the EU to ensure that this legislation continues to operate effectively.

Changes introduced by the draft Regulations include:

  • Removal of references to EU institutions, and an equalisation of the regulatory treatment of EEA member states and third countries.
  • Removal of references to European Supervisory Authorities (ESA) regulatory procedures.
  • Removal of the requirement for certain information (such as the UK’s National Risk Assessments of Money Laundering and Terrorist Financing) to be communicated to EU institutions, including the European Commission and the ESAs, as well as to other EEA member states.
  • A new requirement on UK credit and financial institutions to conduct enhanced due diligence on all relationships which they enter into.
  • An assurance that electronic transfers of funds between the UK and Gibraltar will be treated for the purposes of the EU Funds Transfer Regulation as being equivalent to transfers within the UK.

There are no substantive policy changes to the wider anti-money laundering (AML) regime, and the changes are only to ensure that the UK’s AML regime continues to operate effectively once the UK leaves the EU. The changes made would not take effect on exit day if the UK enters an implementation period.

(HM Treasury: Draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018, 13.11.2018)

(HM Treasury: Draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018 explanatory note, 13.11.2018)


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