Essential Corporate News – Week ending 16 February 2024

Companies House: Improving the accuracy of the Companies House register

On 14 February 2024, Companies House published a blog post in relation to its new and enhanced powers under The Economic Crime and Transparency Act 2023 (ECTA) to query information and request supporting evidence. Companies House expects these powers to come into effect on 4 March 2024, dependent on parliamentary timetables (as the introduction of the relevant changes requires secondary legislation).

From 4 March 2024, Companies House intends to take a more robust approach to dealing with information provided to it for publication on the register (and will also be able to query information that was already on the register before the new measures came into effect). Queries may arise from its own investigations or because it has had information from elsewhere which raises questions about the accuracy of information. Examples given of when more questions could be asked include where a share capital figure seems too high, or the age of a director seems unusual.

Once Companies House has identified false, misleading or incorrect information it will be able to remove it more quickly than at the moment. It will also have more powers to share information with law enforcement agencies and other government departments.

Companies House intends to prioritise those cases that pose the biggest risk to the integrity of the register and will use its new objectives (introduced by ECTA) to help it do this.

The blog post notes that, where companies are asked for more information, it will be important for them to respond quickly so that Companies House can decide the next steps. Companies are also reminded that, if a case escalates to a formal query for information and they do not respond within the required timeframe, this will be a criminal offence and could have serious consequences including financial penalties and prosecution. Companies will have 14 days to respond to a formal query.

(Companies House, Improving the accuracy of the Companies House register, 14.02.2024)

PLSA: Stewardship and Voting Guidelines 2024

On 15 February 2024, the Pensions and Lifetime Savings Association (PLSA) published their updated Stewardship and Voting Guidelines (2024 Guidelines), together with a shorter Summary document which summarises the different voting recommendations in the 2024 Guidelines.

Key changes in the 2024 Guidelines include the following:

Section 4: Audit, Risk and Internal Control,

The 2024 Guidelines include more on cybersecurity and Artificial Intelligence (AI) in this section. In relation to cybersecurity, the 2024 Guidelines state that investors should encourage companies to explicitly disclose the governance and oversight structures in place to identify and manage cybersecurity risks, as well as provide timely reporting of any breaches and the measures taken in response. It also says that cybersecurity should also be an active consideration when selecting a supplier and suitable provisions should be included in contracts. Investors should agree what metrics to use to monitor their suppliers, at a depth and frequency proportionate to their risk.

So far as AI is concerned, while the 2024 Guidelines note its potential to create significant opportunities, they also note the risks that can be posed to businesses by AI. They state that investors should ensure that companies are accountable for their social impacts by aligning with evolving industry good practice. If AI and AI-enabled technologies are subject to new standards and requirements in the future in order to promote safety, security and equity, then investors will need to ensure that companies are adhering to these standards and requirements.

Examples of good company behaviour in relation to both cybersecurity and AI are included in the 2024 Guidelines, and it is stated that investors should consider voting against the re-election of a director (including re- election of the chair) if there is evidence of egregious conduct attributable to a particular director around the development and deployment of AI.

Section 6: Climate change and Sustainability

A new sub-section on biodiversity is included in the 2024 Guidelines, noting that the accelerating loss of global diversity has a direct impact on the financial markets, supply chains and corporate profitability. As a result, the 2024 Guidelines state that pension schemes will need to begin to treat biodiversity with the same prominence given to climate change and to consider voting to support resolutions that seek to encourage companies to address direct or underlying drivers of biodiversity loss. The PLSA suggests that pension schemes can also encourage investee companies in at-risk sectors to engage with the Taskforce on Nature-related Financial Disclosures (TNFD) on approaches to better integrate impact on nature into decision-making, as well as on approaches to identify and access biodiversity data.

Section 7: Social Factors and Workforce

This Section previously related to the workforce only but a section on social factors has now been included. Social factors include a wide range of topics from health and safety in supply chains, modern slavery, product quality and safety, customer privacy and data security, community engagement and impact on local businesses, and the 2024 Guidelines note that despite social factors being wide-ranging, they can manifest at the company level and can also represent systemic risks. A section on what good company behaviour looks like in relation to social factors is included, but the 2024 Guidelines state that due to the lack of a global framework of principles, data and metrics, and standards on social factors, voting against a company on this topic should be a decision taken only if all engagement avenues have been exhausted.

Section 8: Capital Allocation and Structure

The 2024 Guidelines are concerned about the growth in the prevalence of dual-class share structures and the potential loosening of regulatory requirements around the use of dual-class shares. They state that this raises important questions for investors concerned about the integrity and operation of capital markets. Good company behaviour involves companies adopting single-class share structures at IPO or as soon as possible thereafter. For any dual-class share structures where sunset clauses are not adopted, it is stated that companies should adopt provisions that require periodic approval, at least every seven years, from a majority of each share class voting separately, for the dual-class share structure to continue, and adopt supplemental safeguards for pivotal proposals. Investors should consider voting against the Governance Committee Chair (or equivalent) if the company has a dual class share structure without a sunset clause of seven years or less from the date of the IPO.

(PLSA, Stewardship and Voting Guidelines 2024, 15.02.2024)

(PLSA, Stewardship and Voting Guidelines 2024 -Summary, 15.02.2024)

FCA: Market Watch 77

On 14 February 2024, the Financial Conduct Authority (FCA) published Market Watch 77. In this edition of Market Watch, the FCA shares its observations on trade by organised crime groups (OCGs) and how firms can mitigate the risks of being used to facilitate their trade.

For more information see our Regulation Tomorrow blog post.

DWP: New funding and investment regulations for defined benefit schemes published

On January 29, 2024, the Department for Work and Pensions (DWP) published the final version of the long-awaited Occupational Pension Scheme (Funding and Investment Strategy and Amendment) Regulations 2024.

Funding levels in defined benefit (DB) schemes have generally improved over the past 18 months, despite the LDI crisis. With the Government’s plans to encourage pension schemes to invest more heavily in “productive finance” under the Mansion House proposals, the new Regulations aim to offer more investment flexibility, while balancing employer affordability and benefit security for members. The new Regulations clarify a more flexible investment regime for DB schemes, so long as it is supported by the employer covenant. Any funding deficits should be recovered as soon as the employer can “reasonably afford” but a recovery plan should take account of its impact on “the sustainable growth of the employer’s business”.

What does this mean for employers?

• Where the new regime may have the effect of accelerating the scheme’s existing funding strategy (and any recovery plan), employers will need to consider affordability. They should engage early with the scheme’s trustees.

• The headline statement of strategy needs to be agreed between the employer and the trustees, with certain supplementary details needing only consultation between them.

• The new Regulations put covenant assessment on a formal legal footing for the first time, so this will be an area of increased focus for the trustees. They may well seek more detailed information from the employer regarding its business and the general outlook for the related industry. The Pensions Regulator has promised updated covenant guidance, which will set out its expectations of employers and trustees. Costs for trustees, funded by employers, will inevitably increase.

• The employer and trustees should discuss the timescale for preparing their first funding and investment strategy and the related statement of strategy.

• With shorter recovery periods, there is a real possibility of generating a trapped scheme surplus. Easier access to surplus funds for the sponsoring employer is seen as a priority for future legislative changes if the Government is to encourage schemes to support its productive finance agenda. The first step has been taken in the reduction of the tax payable on DB surpluses from 35 to 25 per cent with effect from 6 April 2024. However, further change may depend on the outcome of the election.

We are expecting the final version of the revised DB Funding Code probably in Q2 2024, and this will flesh out the detail on how the Pensions Regulator will expect employers and trustees to approach scheme funding. The DWP has also confirmed that the Pensions Regulator will reconsider its fast track guidance and has promised updated covenant guidance.

The new Regulations are due to come into force on 6 April 2024, following parliamentary approval. They are expected to apply to scheme valuations dated on and from 22 September 2024.

(DWP, Occupational Pension Scheme (Funding and Investment Strategy and Amendment) Regulations 2024, 29.01.2024)