Global | Publication | December 2021
On December 9, 2021 the Financial Conduct Authority published Primary Market Bulletin 37 (PMB 37). This concerns the implementation of the FCA’s postponed rules that require issuers to publish their annual financial reports (AFRs) in a structured format, explains the importance of adequate business continuity procedures for Primary Information Providers (PIPs) and suggests issuers may want to consider having more than one PIP account, and reviews sponsor requirements to identify and manage conflicts of interest.
The FCA reminds issuers that its rules requiring issuers with transferable securities admitted to trading on UK regulated markets to publish their AFRs in a structured XHTML web browser format come into force for financial years starting on or after January 1, 2021 for filing from January 1, 2022 (see DTR 4.1.14R). These AFRs must also be filed with the FCA’s National Storage Mechanism (NSM) and in-scope issuers who prepare annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) are also required to tag the financial information within their AFRs using a digital classification (taxonomy).
The FCA points out that, to meet the timetable for implementation, issuers will need to devote further and continuing management and operational resource to ensure that they will be able to submit annual financial reports in the required format. They will also need to review DTR 4.1 to check whether these requirements apply, and to what extent they apply.
The FCA also points out that while any change to the corporate reporting process can create challenges for issuers, especially when introducing new formats and technologies, it remains crucial that any output is of sufficient and appropriate quality. For guidance, it points to the Financial Reporting Council’s Lab October 2021 review of filings under the ESEF rules, including those elsewhere in Europe, where some jurisdictions have already mandated the requirements and to Information on the quality of tagging on the XBRL International website.
The FCA reminds issuers that they are responsible for all information drawn up and made public under the DTRs and so they will be expected to devote the same level of care and attention to their XHTML AFRs as they do to their AFRs in PDF or printed form.
Issuers must use a Primary Information Provider (PIP) (also referred to as a Regulatory Information Service or RIS) whenever they are required to disclose regulated information. Each PIP must have adequate arrangements in place to ensure that, in the event of a systems outage, it can continue to satisfy its obligations as a PIP with minimal disruption. In considering whether the PIP satisfies this requirement, the FCA will consider whether the PIP has arrangements in place for an alternative PIP to receive and disseminate regulated information on its behalf (DTR 8.4.10G).
As well as reminding PIPs of their obligations where they suffer a systems failure or outage and cannot redirect regulated information announcements to an alternative PIP, the FCA suggests that issuers may want to consider whether to set up and maintain a second PIP account themselves. This would mean that, when its usual PIP notifies of a breakdown in service, an issuer would be able to use this second PIP to ensure its regulated information is disseminated in a timely way, as required by Articles 17 – 19 of the Market Abuse Regulation (MAR), the Listing Rules, and the Disclosure Guidance and Transparency Rules (see DTR 8.4.3R). Although the FCA recognises there may be a cost for issuers in maintaining a second PIP account, there would be a corresponding benefit as issuers would be able to use the second PIP in the event of an outage at their usual PIP and so meet their disclosure obligations.
Sponsors are required to take all reasonable steps to identify and manage conflicts of interest that could adversely affect their ability to perform their functions under LR 8 properly. The FCA points out that in August 2017, it issued Technical Note 701.3 (TN 701.3) which provided updated guidance to sponsors on their conflict obligations. This included guidance on when sponsors should contact the FCA’s Primary Market Specialist Supervision (PMSS) team if they are in any doubt about whether they can effectively manage a conflict.
The FCA has recently reviewed the conflict queries it has received from sponsors since the publication of TN 701.3. The review focused on areas involving the volume and nature of conflict queries the FCA received from sponsors following the publication of the revised guidance in TN 701.3. For each area, it sets out in PMB 37 the change in behaviour the FCA expected to see as a result of the updated guidance and the results of its review. The FCA also highlights some cases where, following discussion with the FCA, sponsors took action to reduce the risk that there may be an actual or perceived conflict of interest, and the FCA sets out some observations following its review of sponsors’ submissions to the FCA about conflict queries.
The FCA encourages all sponsors to review the feedback in the review and refresh their understanding of the rules and guidance, including Technical Note 701.3. The FCA states that for sponsor firms that have not previously contacted the FCA to request guidance on a conflict case, the FCA anticipates it will be a useful exercise for the firm to reflect on why this has been the case and identify if there are specific areas not previously considered that may be relevant in the future.
Sponsors are reminded to contact the FCA at the earliest opportunity and ensure their submission precisely identifies the actual or potential conflict and, where applicable, includes an assessment under the reasonable market user test.
On December 9, 2021 the Financial Reporting Council (FRC) published a report which aims to promote good practice and positive working culture in companies, bringing together a wide range of views from board directors, leaders, senior individuals from across different functions and workforce representatives. It is a follow up on the FRC’s Corporate Culture and the Role of Boards report (2016 Report).
The key findings in the report include the following:
The FRC comments that the role of culture in companies and its importance appears to have significantly increased since the publication of the 2016 Report but the issues set out in the 2016 Report are still relevant. The work on company culture ranges from companies assessing their values and behaviours to meet their purpose to those who are engaging behavioural psychologists and external consultants. Many more annual reports now include purpose and values and talk about their culture-related initiatives in more detail. Companies also appear to better understand the relevance of culture to their business model, and the FRC is beginning to see some alignment with strategy and business models.
The 2016 Report urged directors not to wait for a crisis before they focus on culture and the FRC comments that it is interesting to see that both 2021 annual reports and the view of contributors to the research cite the pandemic as being instrumental in companies considering wider stakeholder and workforce matters, including employee wellbeing and mental health. They recognise that these issues will impact on both culture and the effectiveness of the company in delivering its strategy.
The report re-emphasises the importance of monitoring and assessing culture and the FRC has listed a number of approaches that are being used, stating that the reliance of many companies on staff surveys, site visits and other ad-hoc methods to gain insights into company culture remains a concern.
Based on findings contained in the report, the FRC will consider what further action to take, including any amendments to its 2018 Guidance on Board Effectiveness.
(FRC, Creating positive culture – Opportunities and challenges, 09.12.2021)
On December 3, 2021 the Financial Reporting Council (FRC) announced its areas of supervisory focus for 2022/23, including priority sectors, for corporate reporting reviews and audit quality inspections. These will be supplemented by six thematic reviews which will identify scope for improvement, as well as examples of better practice, in areas of key stakeholder interest.
The FRC’s Supervision Audit Quality Review team will pay particular attention in its reviews to areas including climate-related risks, fraud risks, and cash and cash flow statements and in selecting corporate reports and audits for review, the FRC will prioritise sectors that are under particular pressure namely Travel, Hospitality and Leisure, Retail, Construction and Materials, Gas, Water and Multi-utilities
The six thematic reviews to be conducted during the next year are as follows:
On December 2, 2021 Glass Lewis published an updated version of its approach to executive pay, last published in January 2021. The only change of substance is to remove specific references to fiscal years in order to clarify that the guidance outlined in the document will continue to apply throughout the course of the COVID-19 pandemic, particularly for companies and industries that continue to be affected by the pandemic.
On December 7, 2021 Institutional Shareholder Services (ISS) published a summary of the changes it is making to its UK Proxy Voting Guidelines that will apply to company meetings held on or after February 1, 2022. The full revised Proxy Voting Guidelines will be published in due course.
The key changes are as follows:
The ISS policy updates for 2022 introduce a board accountability policy for the assessment of and focus on the world’s highest greenhouse gas (GHG) emitting companies. ISS will recommend a vote against an incumbent director, usually the board chair in the UK, in cases where the company is not disclosing such as according to the Task Force on Climate-related Financial Disclosures (TCFD) and does not have quantitative GHG emission reduction targets covering at least a significant portion of the company’s direct emissions.
ISS already expects companies listed on the London Stock Exchange to be in line with leading market practice standards and to have at least 33 per cent female representation on the board (in the case of FTSE 350 constituents), and to have at least one female director on the board for smaller companies. ISS proposes to continue to exclude investment companies from the policy.
ISS is now introducing an ethnic diversity policy based on the recommendations of the Parker Review, such that ISS will expect FTSE 100 companies to already have at least one ethnically diverse director on the board (expected by the Parker Review by the end of 2021). If this is not the case, then ISS may recommend a vote against any director who is considered accountable for board composition. For FTSE 250 companies, ISS policy will look for at least one ethnically diverse director on the board by 2024.
The policy changes will also apply an approach based on the Parker Review recommendations when considering UK companies that are not constituents of the FTSE 100 or FTSE 250 (including the following indices: FTSE SmallCap, ISEQ 20, and large FTSE AIM companies, categorized as those with a market capitalisation of over GBP 500 million). While the Parker Review was silent on any expectations of these companies, ISS will expect companies in these indices, in addition to FTSE 250 constituents, to have at least one director of an ethnically diverse background on the board by 2024.
ISS also notes that under the requirements of the UK Corporate Governance Code (and for the FTSE SmallCap, the FCA’s Disclosure Guidance and Transparency Rule 7.2.8A6), companies have to describe their “diversity policy” or explain why they do not have one. Given these disclosure requirements, between now and 2024, ISS will closely observe diversity policies that companies outside the FTSE 100 adopt, with focus maintained on the potential of incorporating ethnic diversity on the board. In certain situations, ISS may recommend only qualified support for the nomination committee chair, if there is no disclosure on any plans to incorporate ethnically diverse directors into the board by 2024.
ISS confirm that ESG metrics can be included as performance measures utilised by a company's variable remuneration schemes, if the measures are clearly linked to the company’s long-term strategy, material to the business and are quantifiable.
ISS is removing share issuance proposals involving the issue of C shares from its general approach to resolutions seeking authority to issue equity proposed by investment companies.
(ISS: Policy changes to its UK Proxy Voting Guidelines for 2022,07.12.2021)
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