Essential Corporate News – Week ending April 29, 2016

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

On April 27, 2016 the Financial Reporting Council (FRC) published a final draft of the UK Corporate Governance Code (the Code), following its September 2015 consultation paper  on changes required to align the Code with the Statutory Audit Directive and the Statutory Audit  Regulation which will apply from June 17, 2016. The FRC also published an accompanying feedback statement and impact assessment.

The final draft is in largely the same form as the consultation draft proposed in September 2015, but includes the following changes from that draft:

• The proposed amendment to Code Provision C.3.1 to provide that the board should satisfy itself that at least one member of the audit committee has competence in accounting and/or auditing has not been made. However, to comply with Article 39 of the Statutory Audit Directive, a new requirement is that the audit committee as a whole has competence relevant to the sector in which the company operates.
• The reference in existing Code Provision C.3.7 to the audit committee having primary responsibility for making the recommendation on the appointment, reappointment and removal of the external auditors has not been deleted, as initially proposed.
• The proposed change to Code Provision C.3.8 to provide that the annual report should include advance notice of external auditor retendering plans has been made, but qualified with "any" to ensure that reporting is only undertaken when it is focused and relevant.

The FRC notes that the Competition and Markets Authority had recommended that the FRC require companies to propose an advisory vote on the audit committee report in the Code but since this is not supported by investors, this change has not been made.

The revised Code is effective for the audit of financial statements for periods beginning on or after June 17, 2016 but this will be confirmed once the legislative and regulatory processes connected with the UK’s implementation of the new EU requirements in relation to statutory audits are complete. The FRC has issued it now to enable companies and auditors to familiarise themselves with the new requirements.

(FRC, Final Draft - The UK Corporate Governance Code, 27.04.16)

On April 27, 2016 the Financial Reporting Council (FRC) published a final draft of its revised Guidance on Audit Committees (the Guidance), following its September 2015 consultation paper to take account of amendments to the UK Corporate Governance Code and regulatory framework in light of the Statutory Audit Regulation and Statutory Audit Directive and recommendations of the Competition and Markets Authority and the FRC’s Audit Quality Review and Corporate Reporting Review.

The final draft is in largely the same form as the consultation draft proposed in September 2015, but includes the following changes:

• The audit committee composition section has been rearranged to provide that a range of skills, experience, professional qualifications and knowledge are important in forming an audit committee and that the requirements for recent and relevant financial experience and sectoral competence flow from that broader requirement.
• Due to the change to Provision C.3.8 of the Code, the Guidance has been amended to note that the annual report should include advance notice of any external auditor retendering plans.
• The role of the audit committee in relation to the fair, balanced and understandable statement has been clarified and sections of the internal control and risk management and role of internal audit sections have been revised.
• The section on communication with investors has been amended to reflect the expectation that interactions with investors encompasses more than just the reporting included in the annual report and to provide flexibility in the placement of the audit committee's report.

Additionally, the consultation draft contained an Appendix with the intention to provide a list of relevant requirements for audit committees from other legislation and standards, which has now been removed.

The revised Guidance is expected to be effective for the audit of financial statements for periods beginning on or after June 17, 2016 but this will be confirmed once the legislative and regulatory processes connected with the UK’s implementation of the new EU requirements in relation to statutory audits are complete.

(FRC, Final Draft - Guidance on Audit Committees, 27.04.16)

On April 28, 2016 the Financial Conduct Authority (FCA) published Policy Statement 16/13 on the implementation of the Market Abuse Regulation (MAR). In this policy statement the FCA summarises the feedback received on the FCA’s consultation on policy proposals and Handbook changes related to the implementation of MAR in CP15/35, published in November 2015, and its consultation on provisions to delay disclosure of inside information within the Disclosure and Transparency Rules (DTRs) in CP15/38, published in November 2015. The FCA has incorporated this feedback into the changes to the FCA Handbook, which are set out in Appendix 1.

Summary of feedback

In its summary of feedback received, the FCA notes the following:

• Most respondents supported the Treasury and the FCA’s proposals that issuers should provide a written explanation following notification of delayed disclosure of inside information only upon being requested to do so by the FCA. The FCA anticipates that the Statutory Instrument to be made by the Treasury will include this approach.
• Most respondents supported the proposal that the threshold above which dealings by persons discharging managerial responsibilities (PDMRs) and persons closely associated with them in financial instruments of the issuer should be notified should be €5000. This is the threshold the FCA will implement. However, the FCA notes that all transactions can be disclosed on a voluntary basis, regardless of the €5000 threshold if issuers wish. It also notes that requests were made for further guidance on how currency conversions from Euros to local currencies would work under the proposed threshold and states that ESMA is currently considering this issue.
• Regarding the delay in disclosing inside information in DTR 2 and the FCA’s proposed changes, the FCA notes the comments made by several respondents on the ESMA Guidelines under Article 17(11) EU MAR but because they have not yet been finalised, the FCA is maintaining the elements outlined in CP15/35. The FCA will reassess the status and continuance of DTR 2.5 in due course once it has more certainty on the content of the ESMA Guidelines. This also applies with respect to DTR 2.5.5G. In light of the requests for further guidance from respondents to CP15/38 and the probability that this provision will need to be amended once the ESMA Guidelines are available, for the time being, the FCA will maintain this provision in its current form, rather than deleting the final sentence as suggested in CP15/38.
• The FCA notes with regard to the proposed changes to Chapter 9 of the Listing Rules (LR) and Annex 1, that, as outlined in CP15/35, there is a clear overlap between the Model Code and MAR, making the Model Code’s retention in its current form incompatible with the UK’s European legal obligations. However, the FCA has concluded that going ahead with its proposal for replacement rules and guidance would be unnecessarily onerous on issuers and PDMRs alike and would not provide the legal certainty needed by stakeholders. As a consequence the FCA is deleting the Model Code (i.e. Annex 1 of LR 9) as proposed but will not introduce the proposed new rules (LR 6.1.29R and LR 9.2.8R) relating to the requirement for issuers to have effective systems and controls in place regarding the process for PDMRs to obtain clearance to deal, and the associated guidance. The FCA notes the suggestion of an industry-led development of codes or best practice in this area and would support such a development.

Other issues

In Chapter 4 of PS16/13, the FCA summarises other issues raised by respondents and identifies some of the areas raised in responses which were not part of the original proposals in its consultations, including questions in relation to DTRs 2, 2.8 and 3 (Articles 17, 18 and 19 MAR). The FCA is considering the appropriate approach for each of these areas. If the FCA considers it would be appropriate to address any of the matters with further guidance, it will endeavour to bring this forward, via either European level or domestic guidance. If the FCA decides that guidance is appropriate, it may consult on these issues in the future.

Next steps

The revised provisions and guidance to the Handbook set out in Appendix 1 to PS16/13 will come into force on July 3, 2016 at the same time as MAR. However, at the time of publication of the Policy Statement, it is still unclear when all the final Level 2 texts of MAR will be published in the Official Journal of the European Union. The European Commission has endorsed several of the technical standards but they still need to be notified by the EU Council and European Parliament before they can be published in the Official Journal and confirmed final. The FCA anticipates that it will add further sign posts in the Handbook to provisions of implementing measures made under MAR at a later stage. These cannot be added yet because the implementing measures have not yet been published in the Official Journal and therefore the FCA does not yet have the specific reference numbers and dates for complete and accurate cross-references. Furthermore, the three sets of ESMA has been mandated to draft under Articles 7(5), 11(11) and 17(11) of MAR have not yet been finalised. Therefore the FCA may have to reassess some of the provisions in the Handbook depending on the outcome of these Guidelines.

(FCA, Policy Statement PS16/13: Implementation of the Market Abuse Regulation (2014/596/EU), including feedback on CP15/35 and CP15/38, and related amendments to the Handbook, 28.04.16)

On April 29, 2016 the London Stock Exchange (LSE) published a new edition of Inside AIM in relation to the Market Abuse Regulation (MAR). This Inside AIM sets out information to support nominated advisers as they work with their clients to prepare them for the introduction of MAR and consequent changes to the AIM Rules. The content of this Inside AIM is based on the assumption that the proposals set out in AIM Notice 44 are implemented.

The LSE notes the following:

• AIM Rule 11 – The purpose of AIM Rule 11 is to maintain a fair and orderly market in securities and to ensure that all users of the market have simultaneous access to the same information in order to make investment decisions, and the disclosure obligation in respect of inside information under Article 17 of MAR protects investors from market abuse. Whilst there is overlap in respect of both sets of obligations, they should be considered separately. Compliance with MAR does not mean that an AIM company will have satisfied its obligations under the AIM Rules, just as compliance with the AIM Rules does not mean that an AIM company will have satisfied its obligations under MAR. An AIM company must comply with the AIM Rules and MAR at all times. An AIM company should continue to consider its AIM Rules disclosure obligations in conjunction with the advice and guidance of its nominated adviser pursuant to AIM Rule 31. It will not be a defence to a breach of the AIM Rules that the AIM company had received legal advice that it was MAR compliant. In this regard, the LSE does not expect a different approach by AIM companies and nominated advisers to compliance with AIM Rule 11 post MAR.
• Collaboration with the Financial Conduct Authority (FCA) – The FCA will have powers to intervene as competent authority and will be responsible for the investigation and enforcement of breaches of MAR. However, the LSE intends to work closely with the FCA to co-ordinate its approach to obtaining any necessary information from AIM companies to minimise duplication of activities. Where there is a query as to whether an AIM company should make a disclosure, the LSE will continue to liaise with the AIM company’s nominated adviser regarding its AIM Rules obligations and will provide the FCA with information about these discussions, where relevant to MAR, but it is open to the FCA to consider an AIM company’s compliance with MAR at any time. The LSE will not be able to opine on MAR obligations/compliance. Any guidance provided by AIM Regulation in respect of disclosure will only be in relation to an AIM company’s obligations under the AIM Rules.
• Person discharging managerial responsibilities (PDMR) dealings – Article 19 of MAR (PDMR transactions) contains notification requirements which will apply to issuers, PDMRs and persons closely associated with them. However, the LSE considers it is important for the integrity of the market that AIM companies have in place systems and controls to manage these obligations. Therefore, the LSE has proposed to amend AIM Rule 21 to require all AIM companies to have a dealing policy and to require nominated advisers to consider this as part of their responsibilities. The LSE expects AIM companies and nominated advisers to consider the design and implementation of the policy in a meaningful way, to ensure it is capable of working in practice, taking into account the nominated adviser’s knowledge of the company and its management. This obligation will be separate to an AIM company’s compliance with Article 19. Accordingly, an AIM company’s compliance with MAR will not mean it will have automatically satisfied its obligations under AIM Rule 21.
• Insider lists – The FCA, as competent authority for MAR in the UK will be responsible for enforcing compliance with the requirement in MAR that AIM companies maintain a list of all those working for them that have access to inside information. Accordingly, AIM companies will need to implement systems and controls to comply with these obligations. Although MAR includes provisions for issuers on SME Growth Markets to draw up a list only when requested by the regulator, the SME Growth Market regime will not into come into force until MiFID II is implemented in January 2018 and since AIM is not currently an SME Growth Market, AIM companies will need to comply with Article 18 MAR.

(LSE, Inside AIM: Preparation for Market Abuse Regulation, 29.04.16)

On April 25, 2016 the Financial Conduct Authority (FCA) published a consultation paper on proposed changes to the Decision Procedures and Penalties Manual (DEPP) and the Enforcement Guide (EG) as a result of the Market Abuse Regulation (MAR).

Changes to the DEPP and EG were not proposed in the FCA’s earlier consultations on implementing MAR (CP15/35 and CP15/38) because these changes depend on the details to be set out in a Treasury Statutory Instrument, which was still under discussion at the time they were published. The Treasury intends to lay the Statutory Instrument before Parliament in the coming weeks and so the FCA is now consulting on the proposed changes.

The proposals include:

• updating the list of ‘Warning notices and decision notices’ and ‘Supervisory notices’ in DEPP 2 Annex 1 and DEPP 2 Annex 2 to make reference to the FCA’s new powers;
• applying the FCA’s current penalty policy to all breaches of MAR by a firm and to individuals in non-market abuse and market abuse cases to all breaches of MAR other than in breaches of Articles 14 and 15 MAR;
• applying the FCA’s current policy on suspensions and restrictions to breaches of MAR, and extending it to include the new powers of disciplinary prohibition;
• applying the current settlement discount scheme for suspensions and restrictions to disciplinary prohibitions, with the exception that no settlement discount will be available for a permanent disciplinary prohibition;
• amending the definition of ‘breach’ in the Glossary to refer to behaviour that the FCA can impose sanctions for under Part VIII FSMA; and
• making other necessary consequential amendments to DEPP and EG, including to reflect the fact that market abuse is now governed by MAR.

The FCA has requested comments by May 22, 2016 and will publish its final rules and guidance in a Policy Statement in June 2016.

(FCA, Consultation Paper CP16/13: Changes to the Decision Procedure and Penalties Manual and the Enforcement Guide for the implementation of the Market Abuse Regulation (2014/596/EU), 25.04.16)

On April 22, 2016 the Financial Conduct Authority (FCA) published Handbook Notice No. 32, which outlines changes to the FCA Handbook made under various instruments.

The instruments include the following:

• Market Abuse Regulation Instrument 2016 – This instrument comes into force on July 3, 2016 and follows the FCA’s November 2015 consultation paper on the implementation of the Market Abuse Regulation (MAR). The FCA intends for this instrument to protect and enhance the integrity of the UK financial markets and to ensure that the domestic market abuse regime in the UK conforms with MAR and takes account of developments in the disclosure of inside information. This instrument will amend Listing Rules 1, 5, 7 to 10, 12, 14, 15, 17 to 20, and Appendices 1 and 2, and Disclosure and Transparency Rules 1, 1A, 2 and 3.
• Enforcement Guide (Transparency Regulations 2015) Instrument 2016 – This instrument comes into force immediately and amends the FCA's Enforcement Guide to provide a decision-making mechanism for the process of seeking a court order to suspend the voting rights of a shareholder who has breached certain requirements of the Transparency Directive. The instrument implements all of the changes to the Enforcement Guide that were recommended in the FCA’s eleventh quarterly consultation in December 2015.

(FCA, Handbook Notice No. 32, 22.04.16)

On April 21, 2016 the Cabinet Office and Foreign & Commonwealth Office published a collection of arrangements the UK has made with Overseas Territories and Crown Dependencies for the sharing of beneficial ownership information. Agreements have been signed by the governments of Anguilla, Bermuda, BVI, Cayman Islands, Gibraltar and the Turks and Caicos Islands (Overseas Territories) and Jersey, Guernsey and the Isle of Man (Crown Dependencies). All of these agreements (aside from that with Guernsey) include the requirement for the relevant  jurisdiction to maintain a central register (or equivalent system) containing accurate and current information on beneficial ownership for corporate and legal entities incorporated in their jurisdictions. They also set out the obligation for each party to share this information with the other party’s law enforcement and tax authorities.

The agreements were made in the context of a number of international initiatives to improve access to beneficial ownership information, as well as the UK’s people with significant control regime, which came into force on April 6, 2016.

(Cabinet Office and Foreign & Commonwealth Office, Beneficial ownership: UK Overseas Territories and Crown Dependencies, 21.04.16)

On April 22, 2016 HM Treasury and the Chancellor of the Exchequer published a joint statement issued by the UK, the majority of EU Member States, Gibraltar, Isle of Man, Anguilla and Montserrat on the initiative for automatic exchange of beneficial ownership information.

The statement commits each country to the new pilot initiative for automatic exchange of information on beneficial ownership launched by the UK, France, Germany, Italy and Spain, which will provide tax and other relevant authorities with vast amounts of information to help track the complex offshore trails used by criminals. Each country will establish registers of beneficial ownership or other mechanisms identifying the beneficial owners of companies, trusts, foundations, shell companies and other relevant entities and arrangements to enable the sharing of such information between tax and law enforcement authorities as soon as possible.

The scheme is intended to mirror the steps taken under the Common Reporting Standard and aims to develop a global information system of fully searchable interlinked registries with common international standards.

(Chancellor of the Exchequer and HM Treasury, Statement on the initiative for exchange of beneficial ownership information, 22.04.16)

On April 27, 2016 the Financial Conduct Authority (FCA) published its fourteenth Primary Market Bulletin, in which it is, among other things,  consulting on changes to the Technical Note Related Party Transactions – Modified requirements for smaller related party transactions.

The Technical Note refers to Listing Rule 11.1.10R(2)(b), which states that a premium listed company must obtain written confirmation from a sponsor when undertaking a smaller related party transaction. The current version of the Technical Note provides that discussions will need to be had about the substance of the transaction contemplated as well as the correct classification before the final letter from the sponsor is submitted. The proposed changes provide that the FCA will still need to have discussions, where necessary, if a sponsor questions the correct classification under the class tests before the transaction is entered into and that sponsors should approach the FCA for guidance in such cases.

The FCA is requesting comments on this Technical Note by June 8, 2016.

(FCA, UKLA Technical Note UKLA / TN / 308.3: Related party transactions – Modified requirements for smaller related party transactions, 27.04.16)

Following its September 2015 consultation paper, the Financial Reporting Council (FRC) published on April 27, 2016 the final draft of its revised Ethical Standard, which includes proposed changes to incorporate provisions of the Statutory Audit Regulation and the Statutory Audit Directive.

Changes to the consultation draft of Ethical Standard include:

• Incorporating guidance for non-listed public interest entities (PIEs), which explains those circumstances where an audit committee might be requested to approve the extension of the appointment of an engagement partner or key audit partner from five years up to a period not exceeding seven years.
• Clarifying that when the 70% fee-cap for non-audit services to an audit firm's network is applied, the requirement applies to the audited entity, its controlled undertakings and the consolidated accounts of that group. It does not apply to the parent undertaking of the entity.
• Simplifying the language in relation to the standard concerning the provision of non-audit services before appointment as an auditor.
• Increasing the threshold under which smaller listed and quoted entities can benefit from relief from certain of the restrictions on non-audit services from a market capitalisation of EUR 100 million or less to a market capitalisation of EUR 200 million or less.
• Revising the text in relation to the prohibitions over providing advocacy for an audited entity in relation to tax to clarify that the prohibition does not apply to advice provided to an audit client that does not constitute advocacy.
• Addressing concerns that the proposal to prohibit contingent fees for tax services would significantly increase costs for smaller audited entities (as they would need to procure a separate provider).

The FRC has also published the final drafts of the revised auditing standards which include proposed changes to incorporate the Statutory Audit Regulation and Directive and new and revised standards issued by the International Auditing and Assurance Standards Board arising from projects covering auditor reporting, other information and the audit of disclosures in financial statements. These incorporate most of the proposals from the FRC’s September 2015 consultation.

The revised standards are expected to be effective for the audit of financial statements for periods beginning on or after June 17, 2016 but this will be confirmed once the legislative and regulatory processes connected with the UK’s implementation of the new EU requirements in relation to statutory audits are complete.

(FRC, Final Draft - Revised Ethical Standard 2016, 27.04.16)

(FRC, Final Drafts - Revised Auditing Standards 2016, 27.04.16)