United Kingdom | Publication | November 2020
In 2018, the UK government consulted on proposed reforms to its powers for scrutinising investment for the purposes of protecting national security. The white paper set out the government’s proposed reforms for creating clear and focused powers within a predictable and transparent process. The government published its response on November 11, 2020, alongside a draft National Security and Investment Bill.
The National Security and Investment Bill will:
(BEIS, National Security and Investment Bill, 11.11.2020)
(BEIS, Documents relating to the National Security and Investment Bill 2020, 11.11.2020)
On November 11, 2020, alongside introduction of the National Security and Investment Bill, John Glen, Economic Secretary to the Treasury, announced that the Government intends to introduce a precautionary power to block listings on national security grounds.
This results from work undertaken by the Treasury pursuant to Action 19 of the Government’s July 2019 Economic Crime Plan. The work has concluded and indicates that there are possible scenarios in which a proposed listing may potentially give rise to national security concerns.
The Written Statement says that in designing this power, the Government will take full account of the fact that companies from all over the world come to the UK, as a world-leading financial centre, in order to raise capital. They are attracted by the depth, breadth and openness of the UK’s markets as well as London’s reputation for clean and transparent markets. The aim is that this power will reinforce that reputation and help maintain London’s status as a world-class listings destination.
The Treasury will publish a full consultation to inform the design of the power, which it expects to launch in early 2021. Further information will be set out in the consultation document.
On November 11, 2020 the Financial Conduct Authority (FCA) published Primary Market Bulletin No.31 (PMB 31). PMB 31 links to FCA reviews of corporate governance disclosures by listed issuers and delayed disclosure of inside information which are covered in separate summaries in this newsletter. It also covers a range of other topics, including those set out below.
European Single Electronic Format (ESEF)
As stated in PS20/14, PMB 31 includes an update concerning the delay in the implementation of the ESEF mandatory requirements. The FCA notes that it will go ahead with its proposal to delay the requirements to publish and file annual financial reports in machine-readable format and tag basic financial information in financial statements, such that these will only be mandatory for financial years starting on or after January 1, 2021 (rather than on or after January 1, 2020). However in response to feedback it has decided not to delay implementation of the requirement to tag notes to annual financial statements – this will remain unchanged, applying to financial years starting on or after January 1, 2022.
Coronavirus-related temporary policy measures on corporate reporting
Again, as stated in PS20/14, the FCA confirms that the current temporary relief for delayed publication of financial statements will, at a minimum, continue to be available to listed companies with financial periods ending before April 2021. The FCA also notes that, when it decides to bring any of these measures to an end, it will give companies notice so they have time to plan for the change.
European Securities and Markets Authority (ESMA) Guidelines on disclosure requirements under the Prospectus Regulation
PMB 31 notes that the new Guidelines contained in ESMA’s final report published in July 2020 will not become effective before the end of the Brexit implementation period. This means that, for prospectuses approved in the UK, issuers and their advisers should continue to have regard to the existing ESMA CESR recommendations after the end of the implementation period. The FCA notes that it will consult on its approach to the guidelines on prospectus disclosure based largely on the new ESMA Guidelines in due course.
Dealing with enquiries from the FCA
The FCA sets out when and how it may make contact with issuers in relation to compliance with continuing obligations and discusses its expectations of issuers and their advisers (including sponsors).
In Primary Market Bulletin No.31 published on November 11, 2020, the Financial Conduct Authority (FCA) linked to a review (Review) it has conducted of disclosures relating to corporate governance from a sample of issuers across different listing segments and categories. The FCA notes that it has found several areas where it felt that required disclosures could be improved.
The FCA encourages premium listed issuers to consider carefully whether, when stating how they have applied the Principles of the UK Corporate Governance Code, they have done so in a manner which enables shareholders to evaluate how the Principles have been applied rather than merely stating they have been applied. It also encourages such companies to consider including specific details of how they have applied the Principles in that accounting period, using examples and cross-references where appropriate.
The Review notes that for the premium listed population sampled in the review, the FCA felt that in certain cases disclosures appeared to be boilerplate as they did not change from year to year – it notes that such disclosures could be rendered less boilerplate by including examples and/or cross references to disclosures elsewhere in the annual report evidencing good corporate governance. It also notes that the quality of board diversity reporting could have been better.
The FCA notes as being of particular concern its observations that:
The Review makes the point that issuers should bear in mind not only that the quality of their disclosures will aid compliance with the relevant FCA rules, but also help to achieve the purpose of those rules which is that shareholders can effectively assess the quality of the company’s governance arrangements, and the board’s activities and contributions. The FCA fully supports and endorses comments of the Chief Executive of the Financial Reporting Council (FRC) about the risks of concentrating on achieving box-ticking compliance at the expense of effective governance and reporting.
The FCA notes that it will use the results of the Review to inform its decisions about future surveillance and monitoring efforts in this area and encourages issuers to consider their compliance with the relevant rules and make improvements where appropriate.
(FCA: Review of corporate governance disclosures by listed issuers, 11.11.2020)
In Primary Market Bulletin No.31 published on November 11, 2020 the Financial Conduct Authority (FCA) linked to a review (Review) it has conducted of delayed disclosure of inside information (DDII) notifications it receives under Article 17.4 of the Market Abuse Regulation (MAR). It has assessed all of the DDII notifications it received during the period from July 4, 2016 to November 12, 2018 – over 1,300 notifications in total.
As a result of its review, the FCA has identified a number of areas where it will be increasing its oversight – these activities will be aimed primarily at raising awareness of the DDII notification requirements (and indeed MAR in general). The FCA also notes that issuers may wish to consider whether:
The FCA notes that it will continue to refine its algorithms and methodology for analysing announcements by issuers and intends to revisit, refine and replicate the Review in the future.
The main findings set out in the Review relate to the following areas.
Periodic financial information
The FCA notes that it received fewer DDII notifications relating to periodic financial information (i.e. scheduled financial reporting such as annual or interim financial information) than it had expected. As a result it is concerned that some issuers may not be adequately identifying (and notifying the FCA of) instances where periodic financial information is itself or otherwise contains inside information. The FCA acknowledges, however, that there may be an alternative explanation – that the small volume could arise from issuers having a very strict discipline of identifying inside information within their periodic financial information and expediting the disclosure of that information.
The FCA reminds issuers that, when preparing periodic financial information, they should begin from the assumption that information relating to financial results could constitute inside information.
Unscheduled financial information
The Review notes that DDII notifications relating to unscheduled financial information (i.e. trading updates, trading statements or other ad hoc announcements regarding the issuer’s financial performance) on average demonstrate a longer delay than those relating to periodic financial information. The FCA found this surprising as it had expected to see the opposite.
During the period under review over 3,000 trading statements were disseminated by UK issuers – out of those, DDII notifications were submitted in only 49 cases. The FCA notes that the disparity between the number of DDII notifications received and the number of trading statements issued may result from very timely dissemination of inside information across the market but it may also arise from issuers either failing to recognise the information as being inside early enough or failing to comply with the notification requirements of MAR where disclosure is delayed. As a result the FCA will be focusing its monitoring work on this to a greater extent in the future.
Director/board changes
Even though the average delay for disclosing director/board changes relative to the rest of the categories of regulatory information was rather small, the FCA was surprised by the number of notifications in this category given it is not a specified legitimate interest in the guidelines on delayed disclosure published by the European Securities and Markets Authority. As a result, this is also an area where the FCA will be focusing further monitoring efforts in future.
Overall volume of DDII notifications
Only a quarter of issuers submitted a DDII notification during the period under review. The FCA notes that, while the lack of a notification will not always equate to an inability to identify and disseminate inside information without delay and to delay its disclosure only where appropriate, it is concerned there may be a lack of awareness of the obligation to submit DDII notifications.
(FCA, Review of delayed disclosure of inside information, 11.11.2020)
On November 12, 2020, the Financial Reporting Council (FRC) published its annual year end letter to CEOs, CFOs and the chairs of audit committees of listed companies setting out its reporting expectations for preparers of reports and accounts in the 2020/21 reporting season.
The letter draws attention to the various reports and other publications produced in recent months by the FRC which provide detailed findings and good practice guidance and, in light of COVID-19 and Brexit, the FRC encourages companies to consider whether they should take advantage of the extended reporting deadlines put in place by the Financial Conduct Authority and lengthen reporting timetables for 2021.
In terms of the 2020 year-end reporting environment, the letter considers the impact of COVID-19 and the FRC’s expectations of reporting in this area, as well as the impact of the UK’s exit from the EU, with companies being expected to explain company-specific risks and uncertainties.
The FRC refers companies to the list of topics that gave rise to the highest number of queries in its monitoring work, as highlighted in this document, and says it has particular concerns about disclosures around working capital finance arrangements such as reverse factoring/supplier financing. It then provides insights and observations from its thematic reviews on climate change, IFRS 15, IFRS 16 and cash flow and liquidity.
The letter discusses section 172 statements and reporting on workforce engagement, and chair tenure under narrative reporting and corporate governance developments, before considering future developments.
(FRC, Summary of key developments for 2020/21 annual reports – Year end letter, 12.11.2020)
On November 11, 2020 the TCFD Taskforce, established in 2019 and made up of regulators and government departments to explore the most effective approach for implementing the 2017 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), published an interim report. The UK government intends to introduce fully mandated climate-related financial disclosure requirements across the UK economy by 2025, with a significant proportion of mandatory requirements in place by 2023. The interim report sets out the pathway to meeting that commitment.
The interim report covers the following:
With the interim report is the Roadmap which sets out a strategy for each category, being listed commercial companies, UK-registered companies, banks and building societies, insurance companies, asset managers, life insurers and FCA-regulated pension schemes, and occupational pension schemes.
So far as listed companies are concerned, the Financial Conduct Authority has already consulted on a change to the Listing Rules to require commercial companies with a UK premium listing to comply or explain against the TCFD recommendations, and the aim is to implement the change from January 1, 2021. There will be a further consultation to consider widening the scope of issuers who should meet this obligation.
As far as UK-registered companies are concerned, there will be a consultation in 2021 on changes to the Companies Act 2006 to include new obligations for certain companies, including very large private companies, to make TCFD-aligned disclosures in their annual report and accounts. The aim is for regulations to be laid and, subject to Parliamentary time, made in mid-2021 to effect this.
(HM Treasury, Interim report of the UK’s Joint Government Regulator TCFD Taskforce, 11.11.2020)
On November 9, 2020 the Financial Reporting Council’s (FRC) Financial Reporting Lab (Lab) published the results of a thematic review undertaken in 2020 of climate-related considerations by boards, companies, auditors, professional bodies and investors. The Lab has summarised its findings in one report and then published the detailed findings on governance, corporate reporting, audit, professional oversight and investor reporting in separate reports.
The FRC comments that, to move forward, a reporting framework is needed. The FRC supports the introduction of global standards on non-financial reporting and will engage with organisations working to achieve that goal. In the meantime, the FRC encourages UK public interest entities to report against the Task Force on Climate-related Financial Disclosures’ (TCFD) 11 recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board (SASB) metrics.
The FRC notes that the review’s key outcomes are that:
As mentioned above, alongside the summary report the FRC has also published a suite of reports containing the more detailed findings. These can be found at the following links:
Investor reporting and TCFD disclosure
(FRC, Financial Reporting Lab, Climate Thematic – Summary Report, 09.11.2020)
On November 9, 2020, the European Securities and Markets Authority (ESMA) published updated Questions and Answers (Q&As) concerning the Prospectus Regulation and the Transparency Directive in the context of the Brexit transition period. The prospectus Q&As have also been updated as part of an ongoing Q&A revision exercise.
In relation to Brexit, the prospectus Q&A include a new question on the choice of Prospectus Regulation home member state at the end of the UK’s transition period for leaving the EU, as well as a new question on the use of UK approved prospectuses after the end of that transition period.
In the transparency Q&A, the question relating to the choice of Transparency Directive home member state has been modified to cover the position from the end of the UK’s transition period for leaving the EU.
(ESMA, Questions and Answers on the Prospectus Regulation, 9.11.2020)
(ESMA, Questions and Answers on the Transparency Directive, 9.11.2020)
On November 12, 2020 the Financial Reporting Council (FRC) published a report, following its monitoring of audit reports in the 2019/2020 inspection cycle. The report looks at certain questions and focuses on how the FRC is working to drive improvements. A key concern is inconsistent audit quality which needs to be remedied, particularly in light of the economic turbulence created by the COVID-19 pandemic.
The report considers the following questions:
In terms of the first question, the most common areas needing improvement are sufficiency of challenge of management, audit of going concern, group audit oversight and quality control over the audit. Audit fees, audit market share and auditor changes and rotation are market indicators that reflect concerns about the market and the report considers each of these. The FRC also sets out its new supervisory approach.
On November 12, 2020 the Takeover Panel announced minor amendments to the Takeover Code to take effect at 11pm on December 31, 2020. These are set out in Instruments 2020/1 and 2020/2.
Instrument 2020/1
The Document Charges Section of the Takeover Code has been amended to reflect the long-standing practice that, where a waiver of an obligation to make a general offer under Rule 9 which was previously obtained under Rule 37 is renewed at the same time as a company renews an authority for the purchase of its own shares, a fixed document charge of £2,500 is payable.
Instrument 2020/2
The Note on the definition of “reverse takeover” in the Definitions Section of the Takeover Code has been deleted on the basis that it will cease to be relevant following the United Kingdom’s withdrawal from the European Union.
(Takeover Panel, Minor amendments to the Takeover Code – PS2020/11, 12.11.2020)
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