Essential Corporate News – Week ending December 16, 2022

FCA: Primary Market Bulletin No 42

On December 12, 2022 the Financial Conduct Authority (FCA) published Primary Market Bulletin No 42 (PMB 42) which covers a variety of matters. These include a reminder of the FCA’s guidance and expectations in relation to climate-related financial disclosures, comments on the relationship between the UK Market Abuse Regulation (UK MAR), the Listing Rules and the National Security and Investment Act 2021 (NSI Act) and an article describing some general themes arising, and concerning behaviours identified, in enquiries that the FCA’s Primary Market Oversight department has carried out recently in respect of suspected unlawful disclosures.

Key areas covered in PMB 42 are as follows:

Climate – related financial disclosures

Given the impact of climate change on most listed companies, the FCA is using PMB 42 to remind companies of its rules, guidance and expectations, including by:

• Reiterating the importance of building capabilities now to make relevant disclosures (for example, by following the steps in the FCA’s July 2022 review of TCFD disclosures, particularly those in the section ‘Getting ready for TCFD-aligned climate-related disclosures’). This includes improving internal processes, deepening familiarity with the Taskforce on Climate-related Disclosures (TCFD) recommendations, and engaging with investors to understand their disclosure expectations.
• Reminding companies of the guidance and standards that they should consider to support their disclosure of transparent and decision-useful climate-related information, including by assessing their disclosures against the TCFD’s Guidance for All Sectors and, where relevant, Supplemental Guidance for the Financial Sector and for Non-Financial Groups.
• Identifying areas for improvement in listed companies’ disclosure of forward-looking information. The FCA notes that that some companies in the TCFD Non-Financial Groups (Energy; Transportation; Materials and Buildings; and Agriculture, Food, and Forest Products) had either: (i) not identified climate change to be an applicable or material risk to their business; or (ii) had identified climate change to be a principal risk but had not made disclosures under the Strategy or Metrics and Targets pillars of the TCFD framework that were consistent with the TCFD’s Supplemental Guidance for Non-Financial Groups. As a result, by way of example, the FCA sets out some areas in relation to those two pillars an oil company could consider.
• Encouraging better consideration of climate-related risks and opportunities in financial statements, and better connectivity between non-financial disclosures in the front half of the annual report and the financial statement disclosures.
• Encouraging listed companies, especially those making net zero commitments, to use the TCFD’s Guidance on Metrics, Targets and Transition Plans and, in addition, to consider the UK Transition Plan Taskforce (TPT) Disclosure Framework and Implementation Guidance, published for consultation in November 2022. This is important as the FCA notes that it has committed to drawing on the TPT’s outputs to strengthen disclosure requirements in this area for listed companies and regulated firms.

In terms of next steps in this area, the FCA plans to develop its regulatory approach to listed companies’ climate-related financial disclosures. As a result, it will continue to monitor listed companies’ climate-related financial disclosures under the Listing Rules, build on its TCFD-aligned disclosure rules in line with domestic and international developments to meet investors’ information needs, and consult on strengthening its disclosure expectations for transition plans, drawing on the outputs of the TPT, once finalised.

NSI Act and inside information under UK MAR

The FCA reminds issuers that they need to consider their obligations under UK MAR to disclose inside information when acquisitions are subject to review or assessment under the NSI Act or to interim or final orders. Among other things, the FCA encourages issuers to engage with it and with the Department for Business, Energy and Industrial Strategy (BEIS) at an early stage if they identify any potential issues complying with their disclosure obligations under UK MAR or the Listing Rules (e.g. where the issuer considers that any information in an interim or final order could constitute inside information under UK MAR and BEIS is considering imposing conditions requiring the non-disclosure of that inside information on national security grounds).

Unlawful disclosure of inside information

The FCA discusses a number of points in relation to unlawful disclosure including (amongst other things) looking at some general themes arising in connection with enquiries carried out by its Primary Markets Oversight department (PMO) in respect of recent suspected unlawful disclosures. In this context, the FCA notes that certain types of behaviours crop up repeatedly in PMO enquiries and present a particular risk of unlawful disclosure of inside information, including those summarised below.

• Social media: In recent years the PMO has opened numerous enquiries into suspected disclosure of inside information via issuers’ social media offerings or in direct communications between issuers’ executives and investors through social media channels. It is noted that, when developing their communication and social media offerings, issuers should remember that inside information must disclosed via RIS and cannot be disclosed via social media alone. Issuers are also reminded that inside information cannot be disclosed in a manner which combines the information with marketing material.
• Mainstream media: The PMO has opened numerous enquiries in relation to (and referred to enforcement) instances of suspected unlawful disclosure where issuers, through their executives or communications departments, have leaked significant (and possibly inside) information to mainstream media outlets. Although the FCA recognises that issuers will want to develop proactive and successful media strategies and will need to pass information to high-profile media outlets for this purpose, this does not justify leaking inside information and, before any such communications, the issuer must consider very carefully whether the information to be disclosed is inside information. In the FCA’s view, such disclosures will very rarely (if ever) be made in the normal exercise of an employment, profession or duties for the purposes of Article 10 of UK MAR (unlawful disclosure of inside information). It is also noted that, where a press article containing the inside information is subsequently published, the FCA does not consider it a significant mitigant that it was published outside market hours. 
• Fundraisings: The PMO has opened numerous enquiries into potential leaks of inside information regarding fundraising activities (e.g. placings etc.). It is noted that these are often in respect of smaller issuers and reported on bulletin boards, smaller media outlets or blogspots. It is often not possible to identify the source of such leaks although in most instances it seems likely that it is not the issuer itself. The FCA reminds issuers that (bearing in mind DTR guidance that the wider the group of recipients of inside information, the greater the likelihood of a leak) they can protect themselves from such behaviours by putting in place tight systems and controls around fundraisings, restricting access to the information as far as possible, creating proper MAR-compliant insider lists and insisting their advisers do the same, and following the market soundings procedures set out in Article 11 of UK MAR.
• Analyst and media briefings: The PMO continues to open enquiries into suspected unlawful disclosure by issuers’ senior executives in analyst briefings, earnings calls or media events. It is noted that, typically, troublesome disclosures have arisen where executives are unsure about the detail of the results being presented, speak unscripted or are drawn off script in Q&A sessions. Issuers are reminded that analysts do not represent “the public” for the purposes of UK MAR and that executives must be thoroughly prepared for market and media events to avoid a selective disclosure of inside information to those attending.

The FCA also discusses issuers’ written policies and procedures for handling inside information and social media policies and notes that those provided to the PMO in the context of its enquiries vary in quality. Among other things, the FCA notes that it has not seen a written policy or procedure that puts the issuer’s (and its executives’/employees’) legal obligations in the context of its day-to-day activities and identifies practical situations/behaviours that create risk. Nor has it seen any social media policy that explicitly recognises the specific risk of unlawful disclosure of inside information through improper use of social media. Issuers should therefore consider whether their written policies and procedures are adequate to address the risks identified in PMB 42 and update and socialise them as necessary.

Cash shells and special purpose acquisition companies (SPACs) on reverse takeovers

The FCA reminds shell companies of its rules and guidance in relation to reverse takeovers. It notes that it has recently come to its attention that shell companies may not be properly applying the definition of a reverse takeover or may not have considered that a transaction the company is contemplating may potentially be a reverse takeover and, as a consequence, some shell companies may not have contacted the FCA to discuss whether a suspension was appropriate/applied to the FCA to be cancelled and re-admitted to listing following completion of the transaction. The FCA has therefore written to directors of shell companies on the Official List with the information set out in PMB 42 in order to remind them of their obligations. Amongst other things, the information includes reminders in relation to the following areas:

• The definition of a reverse takeover is broad and refers to a “transaction” – as such it is not just an acquisition of a company’s share capital that would be caught but is likely to include any transaction of an acquisitive nature (for example, it could include the acquisition of assets such as the issuance of a loan, a purchase of a minority stake, or entrance into a joint venture arrangement). In addition, the FCA will generally consider that any form of transaction by a shell company will change the nature of its business and therefore result in a fundamental change in business. As a result, it is often the case that the first transaction a shell company enters into will constitute a reverse takeover.
• The rules on when suspension is required in connection with a reverse takeover (and exceptions to this requirement) – in this context it is also noted that issuers may wish to include in their systems and controls a plan for contacting the FCA in order to discuss whether suspension is appropriate (or to request a suspension) as part of any planning they may do when considering any potential transaction.
• The rules on cancellation and re-admission following a reverse takeover, including noting that a company applying for re-admission will need to comply with the FCA’s transitional provisions for shell companies in relation to market capitalisation.
• The importance of early engagement with the FCA on reverse takeovers.
• The steps the FCA may take where it suspects a breach of its rules has occurred.

Structured digital reporting: Improving quality and usability

The FCA draws the attention of listed companies to a report published by the Financial Reporting Council’s (FRC) Lab in September 2022, 'Structured Digital Reporting – Improving Quality and Usability'. The report identifies lessons learnt from the first year of mandatory structured digital reporting under the TD ESEF regulation and the FCA summarises its findings in PMB 42.

The FCA points out that issuers can find the latest information on structured digital reporting on its website, with a section recently added to the Filing of Structured Annual Financial Reports page regarding the 2022 European Single Electronic Format (ESEF) Reporting Manual.

The FCA plans to consult in early 2023 on updating its rules and guidance, which will reference the proposed addition of the ESEF 2022 taxonomy and the UKSEF 2023 approach. The FCA expects its system to be set up to process these in January 2023.

UK Short Selling Regulation – Arrangements for updating the list of exempted shares

Under Article 16 of the onshored version of Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (UK SSR), where the shares of a company are traded on a trading venue in the UK and a venue located in a third country, the FCA must determine, at least every two years, whether the principal venue for the trading of those shares is located in a third country. This is to avoid shares admitted to trading on UK trading venues being subject to some regulatory obligations under the UK SSR where they are principally traded on third country trading venues.

The FCA notes that it published its initial list of exempted shares on December 30, 2020. That list is currently under review and the updated list of exempted shares will be published on the FCA’s website on December 30, 2022. However, since that list will not include shares admitted to trading on UK trading venues in November and December 2022, the FCA will publish an updated exempt shares list in Q1 2023 which will include shares admitted to trading on UK trading venues in November and December 2022. This updated list will come into force on April 1, 2023 and firms are advised to use the exempt shares list published on December 30, 2022 until that date.

(FCA, Primary Market Bulletin No 42, 12.12.2022)

HM Treasury: “Edinburgh Reforms” of financial services

On December 9, 2022, the Chancellor of the Exchequer Jeremy Hunt MP unveiled at an industry roundtable in Edinburgh over 30 regulatory reforms. These “Edinburgh Reforms” follow on from the Chancellor’s Autumn Statement in which he highlighted financial services as one of the UK’s five key growth sectors.

The reforms build on the Government’s vision for financial services, as set out in the Chancellor’s speech at Mansion House in 2021. The Government is already taking forward work to deliver this vision through the Financial Services and Markets Bill (FSM Bill) which is currently making its way through Parliament. These latest reforms are the next step in the Government’s work.

Further information on the reforms generally can be found in this blog post from our Financial Services team. 

In conjunction with the publication of its policy statement on building a smarter financial services framework for the UK, HM Treasury (HMT) published an illustrative draft Statutory Instrument (SI) in relation to the UK’s public offers and admission to trading regime. This was accompanied by an associated illustrative Policy Note (PN) intended to explain how HMT may use powers introduced in the FSM Bill to move to a comprehensive FSMA model for the regulation of the UK prospectus regime. This is considered below.

HM Treasury: Illustrative statutory instrument and policy note relating to the UK prospectus regime

It is made clear that the SI is being published for illustrative purposes, should not be treated as final, and will continue to develop before the final legislation is laid before Parliament following Royal Assent of the FSM Bill. It uses square brackets to identify areas where the wording and effect of certain items is particularly likely to change and it is noted that certain important points of detail have intentionally been omitted, including transitional provisions and the regime of regulatory deference (the details of which continue to be considered by HMT) for offers into the UK of securities listed on overseas stock markets.

The contents of the SI and PN essentially reflect the policy approach outlined by HMT in the outcome of its review of the UK prospectus regime published in March 2022. As discussed in the PN:

• There will be a general prohibition on public offers of securities in the UK, subject to exemptions. The exemptions will largely be derived from those under the current regime but will (among other things) include new exemptions in respect of securities admitted, or to be admitted, to trading on UK regulated markets or “primary MTFs” (being multilateral trading facilities that meet certain criteria) and in respect of offers made via “public offer platforms” (see further below).
• The concept of a prospectus will be retained as an important part of the regulation of admission of securities to trading on UK regulated markets, with the FCA to be given enhanced rulemaking responsibilities including specifying when a prospectus is required in connection with admission (including in the context of secondary offers) and the detailed contents requirements.
• The FCA will be given rulemaking powers to ensure that, in appropriate circumstances, the rulebooks of primary MTFs require an admission document to be published and treated as a prospectus. MTF operators would remain responsible for the setting of detailed rules on the content, process for validation, and publication of such documents, subject to FCA oversight.
• A different liability threshold (based on fraud and recklessness) will be established for certain categories of forward-looking information in prospectuses. Aside from this change, the regime will retain the existing negligence-based threshold for false, misleading or omitted information.
• A route will be created under which offers of untraded securities can be made to the public via a “public offer platform”, with a new regulated activity being created to cover the operation of such platforms (the Government continues to consider its approach to creating this new regulated activity, which is not included in the SI). Companies will be required to use a public offer platform where an offer is not otherwise exempted from the prohibition on public offers and where its total value is above a certain threshold (yet to be determined).
• The public offer regime will be extended so that, as well as transferable securities, it will also cover offers of certain non-transferable securities including, but not limited, to minibonds. In this context, the PN notes that the Government is keen to ensure that business that does not affect retail investors or is already regulated elsewhere is not unintentionally brought within scope and that HMT expects to modify the definition of “relevant securities” in the current draft SI (in particular to allow existing business or market activity in areas such as the wholesale loan markets, building societies, credit unions and cooperative and mutual benefits societies to continue).

The PN notes that, overall, the effect of the SI will be to delegate a greater degree of responsibility to the FCA to put in place a regime that is designed and calibrated for UK markets and reflects the difference between public offers and admissions to trading. As such, the full suite of reforms will only take effect after the FCA has consulted on (and implemented) rules under its expanded responsibilities.

It is indicated that the FCA intends to start engaging with the market during 2023 (in parallel with the parliamentary process to enact the FSM Bill and the supporting SI) in order to start developing its policy and proposed rule changes at the earliest opportunity.

(HM Treasury, Building a smarter financial services framework for the UK – Policy Statement, 09.12.2022)

(HM Treasury, Draft Statutory Instrument – Admissions to Trading and Public Offers Regime, 09.12.2022)

(HM Treasury, Public Offers and Admissions to Trading Regime – Illustrative Statutory Instrument Policy Note, 09.12.2022)

(HM Treasury, Financial Services: the Edinburgh Reforms, 09.12.2022)

Takeover Panel: RS2022/2 – Presumptions on the definition of acting in concert

On December 14, 2022 the Takeover Panel (Panel) published Response Statement 2022/2 (RS) on presumptions of the definition of “acting in concert” and related matters. This follows on from Panel Consultation Paper 2022/2 (PCP) which was published in May 2022.

The Panel has adopted the amendments to the Takeover Code (Code) proposed in the PCP, subject to certain modifications (including, among other things, changes to the drafting of new presumption (2) and to the revised Note 6 on the definition of acting in concert).

The RS includes a number of illustrative diagrams (including in relation to a consortium offer) and addresses various requests from respondents for guidance on the application of the presumptions, including in relation to:

• The circumstances in which new presumptions (1) and (2) may be rebutted.
• Joint ventures.
• Portfolio companies of private equity firms.
• Government owned entities.
• The aggregation of direct and indirect interests for the purposes of new presumption (2).
• The application of new presumption (1) to “parallel funds”.
• The application of new presumption (10) to shareholders in a private company or members of a partnership who become shareholders in a company subject to the Code.

The amendments to the Code will take effect on Monday, February 20, 2023 (Implementation Date). The Code, as amended, will be applied from the Implementation Date to all companies and transactions to which it relates (including those on-going transactions which straddle the implementation date) except where to do so would give the amendments retroactive effect.

The RS notes that, where a party has any doubt as to the consequences of the amendments, in particular as to their impact on any transaction which is in existence/contemplation, it should consult the Panel prior to the Implementation Date to obtain a ruling or guidance. 

(Takeover Panel, RS2022/2 – Presumptions on the definition of acting in concert, 14.12.2022)

FRC: What makes a good Annual Report and Accounts

On December 13, 2022 the Financial Reporting Council (FRC) published a document setting out the FRC’s view on the attributes of a good Annual report and Accounts (ARA) from its perspective as an Improvement Regulator.

The FRC sees a good ARA as the cornerstone of corporate reporting and it should provide investors and other stakeholders with clear and relevant information on the company’s performance and prospects to help them make informed investment decisions and to promote effective stewardship. In setting out the attributes of a good ARA, the FRC identifies corporate reporting principles and effective communication characteristics generally associated with a high quality ARA. Where possible, in the document, the FRC provides published examples to bring the underlying principles to life.

The FRC notes that a high quality ARA complies with relevant accounting standards, laws and regulations, and codes and is responsive to the needs of stakeholders in an accessible way. It also demonstrates the corporate reporting principles and effective communication characteristics outlined in the document, with materiality having to be considered in applying both sets of principles, together with the size and complexity of the business, to ensure that the breadth and depth of the ARA is commensurate with the business. Detailed guidance and examples of good disclosures in relation to each of these principles is provided.

The corporate reporting principles are:

• Accurate - An ARA must be accurate, so free from material misstatement and error. The accuracy of the ARA depends, to a large extent, upon the quality of the company’s underlying data supporting both financial and non-financial information. The FRC points out that to be confident of its accuracy, management should consider both the sufficiency and effectiveness of the controls over information prepared solely for the ARA as perceived material errors may attract regulatory enquiry.
• Connected and consistent - A good ARA tells the story of the business using a package of reports. For this story to make sense, the reports should be connected and consistent. An ARA is connected when information on the same or related subject matter, either within the same section or in different parts of the ARA, is linked together so that users can understand how the elements interact. ARAs should be internally consistent and consistent with other public information produced by the company.
• Complete - A good quality ARA should be complete. Completeness reflects the breadth, rather than depth, of information included in the ARA and a complete ARA includes all the positive and negative material information needed by a user to understand the transactions the company has entered into and the company’s financial performance and position, development, liquidity status, and future prospects. Inadequate descriptions of the nature of certain events and transactions or poor explanation of the accounting applied are likely to prompt regulatory challenge.
• On-time - The FRC encourages preparers to ensure adequate time is available to prepare high quality ARAs and that these are then subject to a high quality audit.  For those companies required to file an ARA with the FCA in a structured digital format, where possible, the FRC urges them to consider reducing the time lag between results being announced and the structured report being published as this is likely to enhance the usefulness of the structured report to users.
• Unbiased - Information is unbiased if it is balanced and the FRC points out that the ARA may attract regulatory attention if its use as a marketing tool undermines the need for the ARA to be fair and balanced.
• Navigable - A good ARA must be accessible and easy to navigate. Companies that publish a copy of the ARA on their website should do so in a place where the document can be easily found and it should be available there for download in its entirety. The FRC notes that regulators may raise unnecessary questions if it is difficult to locate information in relation to a material transaction, event or other condition.
• Transparent - The ARA should faithfully represent the economic substance of the transactions that the company has entered into. The FRC points out that accounting policies that lack clarity, are not company or transaction specific, or are inconsistent with other information in the ARA, are likely to attract regulatory enquiry.

The FRC also sets out the “4Cs of effective communication”. These are expressed to be:

• Company specific;
• Clear, concise and understandable;
• Clutter free and relevant; and
• Comparable.

The document also includes a section on materiality, noting that whether a particular piece of information is material will vary between entities. It comments that information is material if omitting it or misstating it could influence the decisions and assessments of ARA users, materiality applies to all transactions, balances and disclosures, both numerical and textual, in the ARA, not just those transactions affecting the accounts, and what is material in any part of the ARA will be determined by quantitative and qualitative factors but also by their nature or context. The document looks at materiality in relation to each of these areas, as well as in relation to the strategic report, TCFD related disclosures and the UK Corporate Governance Code.

Appendix 2 to the document contains links to several FRC resources which provide suggestions on how to approach compliance with accounting standards, laws and regulations, and codes. Appendix 3 provides details of the process a company could follow to help deliver a high quality ARA.

The FRC has published the document in the hope that preparers, committee chairs and company secretaries will find it helpful when preparing their next ARA.

FCA: Market Watch 71 – Changes in advisory firms’ insider lists

On December 13, 2022 the Financial Conduct Authority (FCA) published the latest edition of its Market Watch newsletter, Market Watch 71, in which the FCA shares its observations about changes in advisory firms’ insider lists since the publication of Market Watch 60. The FCA also reminds firms of the requirement within UK Market Abuse Regulation (MAR) to include personal information in insider lists, and reiterates the importance of firms maintaining accurate insider lists and strictly limiting access to inside information to employees who require access to perform their role in order to prevent market abuse. 

Steps taken to reduce number of permanent insiders

The FCA notes that whilst there can be no single ‘correct’ number of permanent insiders, the typical number has reduced to between 250 and 450 and the FCA continues to observe a downward trend. Firms must continue to use insider lists to record when they have granted access to relevant inside information to staff who require that access, but they must also ensure that persons without a specific business need to access the inside information are prevented from doing so. 

The FCA points out that methods by which firms have reduced access include:

• Introducing registers of events and/or product specific ‘permanent insiders’. If persons only need access to specific inside information, they should be on the specific lists for that inside information rather than permanent insider lists.
• Top to bottom, periodic reviews of the roles of all permanent insiders, to ensure that each one requires access to systems containing inside information in order to perform their role.
• Comparing records of electronic access to files containing inside information with insider lists, and using these comparisons to determine whether those who did not access the information can have access withdrawn without detriment to the firm.
• Reviews of access to pipeline data, and whether those accessing data require access only to anonymised high-level information (like forecasting), rather than details of transactions which may include names of issuers and descriptions of transactions.
• Consideration of the necessity of non-deal team employees in particular functions, as well as multiple jurisdictions, having access to inside information. While functions such as the Control Room will need 24-hour global access, firms’ reviews have led to sizeable reductions in numbers of insiders in other functions such as presentation staff, or Debt Issuance staff where an equity M&A transaction does not require them to have access.

The FCA considers that the ongoing reduction in the numbers of people able to access inside information reduces the opportunities for unlawful disclosure of that information, and therefore enhances the integrity of UK markets, at the same time reducing the burden of insider lists.

Article 18 of UK MAR and personal information

The FCA reminds firms of the required format for insider lists and the information that should be included. This is in light of insider lists being presented to the FCA that only include the names of individuals and not required information such as personal telephone numbers, dates of birth, and national identification numbers (for UK nationals this is their national insurance number). The FCA uses insider lists to investigate possible market abuse and uses the personal information to eliminate people from its enquiries by cross referencing the information with MiFIR transaction reports, MAR suspicious transaction and order reports and other information sources.

Insider lists and contractors

The FCA reminds issuers that Article 18(1) of UK MAR sets the requirement to maintain insider lists for 'Issuers and any person acting on their behalf or on their account'. As a result, it expects issuers to have arrangements in place to ensure that firms contracting to them provide personal data in response to regulatory requests. Advisory firms should have in place similar arrangements with external parties with which they contract and to which they provide access to inside information. If a person does not agree to provide personal details, firms should consider whether that person should be given access to files containing inside information.

Data protection

Since UK MAR does not provide an exemption for the provision of personal data in relation to the location of people identified on insider lists and data protection laws in those locations, the FCA points out that firms must consider what arrangements they can put in place to meet their obligations under UK MAR, as well as the appropriateness of providing access to inside information to persons who cannot provide the personal data required to enable the firm to meet UK MAR obligations. The FCA states that it has e been informed by a small number of firms that where a person overseas has refused to provide the personal data required by UK MAR, those firms have withdrawn access to inside information.

Burden of work

To reduce the burden of work and to mitigate possible risks to data protection, the FCA states that firms can store insider lists and personal data separately, and add the personal data to the template when insider lists are requested by the FCA. However, the FCA expects issuers and persons acting on their behalf or account to respond to its requests for insider lists promptly, for example, within two days.

(FCA, Market Watch 71, 13.12.2022)

FRC: Areas of supervisory focus for 2023/24 announced

On December 16, 2022 the Financial Reporting Council (FRC) announced its areas of supervisory focus for 2023/24, including priority sectors, for corporate reporting reviews and audit quality inspections.

Thematic reviews of corporate reporting for 2023/24

The FRC’s Corporate Reporting Review team will conduct four thematic reviews during the next year:

• Insurance contracts (IFRS 17): The new standard on insurance contracts will have a significant effect on corporate reporting in the insurance sector so the FRC will review a selection of insurers’ 2023 interim accounts to identify compliance with IFRS 17 and examples of good disclosures.
• Large private companies: The proposed change to the definition of a Public Interest Entity or PIE will bring an enhanced regulatory focus on the largest private companies. The Government’s intended threshold is entities that exceed £750 million annual revenue and 750 employees. The FRC will review a selection of private companies’ annual reports to identify whether and where there are areas of poor compliance with reporting requirements with a view to informing its monitoring activities going ahead.
• Task Force on Climate-related financial Disclosures (TCFD) – metrics and targets: Climate-related metrics and targets, including companies’ “net zero” plans, are seen as increasingly important by investors, and the TCFD’s recommendations in this area were updated in 2021. Following the FRC’s thematic review of TCFD disclosures in 2022 (carried out in collaboration with the FCA) which highlighted room for improvement in many companies’ metrics and targets disclosures, the FRC will undertake a targeted follow-up in 2023, with a focus on the metrics and targets disclosures of companies from four relevant sectors. The FRC will also consider how adequately these companies’ net zero commitments have been addressed in their financial statements.
• Fair value measurement (IFRS 13): The FRC’s review will focus on companies in the non-financial sector, and will provide an overview of the disclosure requirements of the standard, highlighting examples of better disclosure and common pitfalls.

Thematic reviews of audit

The FRC has selected the following topics to be covered in this inspection cycle:

• Sampling;
• Hot reviews;
• Network resources and service providers; and
• Root cause analysis.

Areas of focus for audit quality inspections

The FRC’s programme of audit quality inspections will pay particular attention to the auditor’s work in the following areas:

• Going concern;
• Fraud risks;
• Climate-related risks, including the linkage between the audited financial statements and climate-related disclosures elsewhere in the Annual Report; and   
• The application of the revised Auditing Standard on risk identification and assessment (ISA (UK) 315).

Priority sectors

In selecting both corporate reports and audits for review, the FRC will give priority to the following sectors which the FRC considers to be higher risk, for corporate reporting and audit, by virtue of economic or other pressures:

• Travel, Hospitality and Leisure;
• Retail and Personal Goods;
• Construction and Materials; and
• Industrial Transportation.

(FRC, FRC announces areas of supervisory focus for 2023/24, 16.12.2022)