Essential corporate news – Week ending March 15, 2019

BEIS: Independent review of the Financial Reporting Council – Initial consultation on recommendations

On March 11, 2019, the Department for Business, Energy and Industrial Strategy published a consultation paper seeking views on certain of the recommendations made by the independent review led by Sir John Kingman of the Financial Reporting Council (FRC). Sir John Kingham published his final report, setting out 83 recommendations, in December 2018.

The Government plans to take forward a number of the other recommendations made and it includes a table in the consultation paper setting out its proposed approach to the different recommendations. In some cases, the FRC will move without delay to adopt the improved practices recommended. Some recommendations involve choices in how they should be implemented and these are identified in the consultation paper for discussion and consultation. Other recommendations involve weighty, wider issues and inter-connections which need to be considered, particularly in light of the ongoing study into the statutory audit market being conducted by the Competition and Markets Authority and the review being led by Sir Donald Brydon on audit quality and effectiveness.

The Government’s approach to the Kingman recommendations includes the following

The new regulator

The Kingman review recommended that the FRC be replaced with an independent statutory regulator, to be called the Audit, Reporting and Governance Authority, accountable to Parliament with a new mandate, new clarity of mission, new leadership and new powers. While this will require primary legislation, the Government intends to establish such a new regulator as soon as Parliamentary time allows. It is taking steps to appoint new leadership at the FRC, which will transition into the Audit, Reporting and Governance Authority once established by legislation. While primary legislation will be needed to give the recommended objective, duties and functions to the new regulator, the FRC has agreed that in the interim it will adopt the new objective, duties and functions as quickly as possible. However, before it does that, comments are requested on the proposed objective which is to protect the users of financial information rather than the providers of that information and on the recommended duties and functions.

Audit expectations and public interest

The Government will consult on proposals to review the UK’s definition of a public interest entity (PIE) later this year.

Corporate reporting reviews

The Kingman review recommended that the new regulator should be given a power to direct changes to accounts rather than having to go to court. The Government intends to bring forward a legislative power to achieve this as soon as Parliamentary time allows.

Wider role on corporate reporting

The Kingman review recommended that the corporate reporting review process should be extended to the entire annual report. The Government supports this and the FRC will take this forward immediately. The Government will also take forward discussions with the Financial Conduct Authority (FCA) and the FRC to consider the case for strengthening qualitative regulation around a wider range of investor information than is covered by the FRC’s existing corporate reporting work. The Government will consult on any proposals which emerge from those discussions in due course.

Enforcement

The Kingman review recommended enhancements to the sanctions regime for audit and for directors. The Government notes that such changes will require primary legislation and will require careful consideration of how any new policies interact with the existing enforcement framework. It will bring forward proposals for consultation on this in due course.

Corporate failure

The Kingman review recommended the introduction of a robust market intelligence function to be developed by the new regulator and this is to be taken forward by the FRC immediately. The Kingman review also recommended that the Government introduce a duty of alert for auditors to report viability or other serious concerns. This is to be considered further as the Government wants to ensure that it can act as a meaningful warning and market intelligence tool, rather than a tick-box exercise.

The Kingman review also recommended that the new regulator should be able to commission a skilled person review, paid for by the company, where there are concerns about the corporate governance or corporate reporting at a company. It also recommended that the new regulator should be able to require rapid explanations from companies in serious cases. The Government agrees with this, but points out that this will require primary legislation to implement. In relation to “skilled person reviews”, it will think further about the framework to ensure that it is fit for purpose and fully considers any wider market consequences, while respecting company independence and lessons learned from the similar framework run by the FCA. There will be a further consultation on this framework in due course.

The FRC is to take forward immediately the recommendation that viability statements be reviewed and reformed with a view to making them substantially more effective. Responses to the consultation are requested by June 11, 2019.

(BEIS: Independent review of the Financial Reporting Council – Initial consultation on recommendations, 11.03.19)

FRC: Financial Reporting Lab Survey 2019

On March 14, 2019 the Financial Reporting Council’s Reporting Lab (the Lab) launched a survey to obtain views on the reporting topics that it should select for its projects over the next few years. The Lab’s survey seeks to find innovative ways to improve the effectiveness of corporate reporting by working with companies and investors to find practical solutions. The survey also provides the Lab with the opportunity to seek opinions on the effectiveness of projects that have already been completed and the effectiveness of its communications to stakeholders.

The survey will remain open until April 12, 2019.

European Commission: Final draft delegated regulation on the format, content, scrutiny and approval of prospectuses

On March 14, 2019 the European Commission published the final draft text of its delegated regulation supplementing the new Prospectus Regulation (2017/1129), following an earlier draft published in November 2018. This is the final draft subject to objections from the European Parliament or the European Council.

The draft regulation will repeal and replace the Prospectus Regulation (809/2004) and it includes sections on the following

• The minimum information to be included in the registration documents, in the securities note and the additional information to be included in the prospectus in certain circumstances.
• The format of a prospectus, the format of a base prospectus, categories of information to be included in the base prospectus and the final terms, and the use of a prospectus summary.
• The content of the specific summary for the EU Growth prospectus, the content of the EU Growth equity registration document, the content of the EU Growth non-equity registration document, the content of the EU Growth equity securities note and non-equity securities note, and the format of the EU Growth prospectus.
• Criteria for the scrutiny of the completeness of the information contained in the prospectus, criteria for the scrutiny of the comprehensibility of that information, criteria for the scrutiny of the consistency of that information, the proportionate approach in the scrutiny of draft prospectuses and review of the universal registration document, approval of the prospectus, approval and filing of the universal registration document, and changes to a draft prospectus during the approval procedure.

The content of the final draft regulation is substantially the same as that published in November 2018 although there have been some drafting amendments and some of the articles have been re-ordered.

The regulation will enter into force on the 20th day following its publication in the Official Journal and will apply from July 21, 2019.

(European Commission: Final draft delegated regulation on the format, content, scrutiny and approval of prospectuses, 14.03.19)

(European Commission: Annexes to the final draft delegated regulation on the format, content, scrutiny and approval of prospectuses, 14.03.19)

European Commission: Draft Commission delegated regulation on regulatory technical standards for Prospectus Regulation

On March 14, 2019 the European Commission published a draft text of its delegated regulation supplementing the new Prospectus Regulation with regard to the regulatory technical standards (RTS) specifying the implementation of certain provisions in the Prospectus Regulation which entered into force in July 2017 and will be fully applicable by July 21, 2019. The content is substantially the same as that in the draft submitted to the European Commission in July 2018 by the European Securities and Markets Authority (ESMA) in its final report.

The draft RTS cover requirements in relation to the following areas of the Prospectus Regulation

• key financial information to be disclosed by issuers for the prospectus summary
• data for classification of prospectuses and practical arrangements to ensure that such data is machine readable
• advertisements disseminated to retail investors
• requirements to publish supplements to a prospectus
• publication of a prospectus
• arrangements for the notification portal used for passporting prospectuses.

(European Commission: Draft Commission delegated regulation on regulatory technical standards for Prospectus Regulation, 14.03.19)

(European Commission: Annex to draft Commission delegated regulation on regulatory technical standards for Prospectus Regulation, 14.03.19)