Essential Corporate News – Week ending August 5, 2022

BEIS: Register of Overseas Entities – Commencement Order and Technical Guidance for Registration and Verification

On August 1, 2022 The Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No. 3) Regulations 2022 No. 876 were published. On the same day, the Department for Business, Energy and Industrial Strategy (BEIS) published non-statutory guidance (Guidance) to help overseas entities that own land in the UK, their beneficial owners and professional advisers. Among other things, the Guidance explains the circumstances in which overseas entities must register their details and those of their beneficial owners and (in some cases) managing officers in the UK Register of Overseas Entities to be maintained at Companies House. Companies House has also confirmed that the new Register is now live.

Commencement of provisions in Part 1 of The Economic Crime (Transparency and Enforcement) Act 2022 

On August 1, 2022 The Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No. 3) Regulations 2022 No. 876 were published. These Regulations, made on July 27, 2022, bring into force on August 1, 2022 most of the provisions of Part 1 of the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA) relating to the registration of overseas entities.

Sections 7 to 11 ECTEA, and some other provisions of Part 1 as far as they relate to those sections, are not yet being brought into force. Sections 7 to 11 relate to the updating duty and applications for removal from the Register of Overseas Entities.

The provisions relating to land ownership and transactions in sections 33 and 34 ECTEA, and the Schedules introduced by section 33, are being commenced on September 5, 2022. Section 33 introduces Schedules 3, 4 and 5, which amend land registration legislation for England and Wales, Scotland and Northern Ireland. Section 34 provides a power to require an overseas entity to register if it owns certain land.

BEIS Guidance for the registration of overseas entities on the UK Register of Overseas Entities - Technical Guidance for registration and verification

The Guidance (which is non-statutory), must be read in conjunction with the ECTEA and the Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022. It has been published to help overseas entities that own land in the UK, their beneficial owners and professional advisers. Part 1 of the ECTEA introduces a new register to capture information about beneficial ownership of overseas entities that own UK land. It requires an overseas entity that owns land in scope or wishes to own land in the UK to register with the Registrar of Companies. As part of the registration process, overseas entities are required to disclose information about their beneficial owner(s) (if any) and/ or managing officer(s) to Companies House. This information will be held on the Register of Overseas Entities and the overseas entity must update this information annually.

The Guidance includes sections on the following:

• Identifying beneficial owners and registrable beneficial owners, with an example where an overseas entity may have at least two registrable beneficial owners and an example where an overseas entity may have no registrable beneficial owners.
• Exemptions from registration, with an example where an individual is exempt from registering as a beneficial owner.
• Examples of “significant influence or control” over an overseas entity or its business and examples of “significant influence or control” over a trust that has ownership or control of an overseas entity. Examples of certain roles and relationships that would not, on their own, result in an individual or entity being considered to be exercising significant influence or control over an overseas entity (excepted roles) are also provided.
• Action required prior to an application to register an overseas entity in the Register of Overseas Entities. This includes identifying registrable beneficial owners, getting the information verified, registering the overseas entity online and obtaining an Overseas Entity ID number.
• Information about the transitional arrangements under section 41 ECTEA. These concern overseas entities that already own land in England and Wales from January 1, 1999 and Scotland from December 8, 2014. They will have six months from August 1, 2022 to register with Companies House, including to provide details of their beneficial owners and, where required, managing officers. Overseas entities that have made a relevant disposition of land since February 28, 2022 also have filing obligations. From August 1, 2022, new purchasers must register with and obtain an Overseas Entity ID number from Companies House. Although they will be able to register their title with the relevant land registry without an Overseas Entity ID number until September 5, 2022, they will need the number to sell the property. From September 5, 2022, new purchasers will not be able to apply to register their title with the relevant land registry without an Overseas Entity ID number.
• How to register ownership of an overseas entity, with summaries provided of the application process for overseas entities that already own land in the UK, and overseas entities that do not yet own land in the UK. This section also includes guidance on the information to be submitted for registration.
• Information on sanctions for non-compliance with the ECTEA.
• Information on public access to the Register of Overseas Entities, including guidance on the information that will not be publicly available.
• Guidance on making an application to protect information on the Register of Overseas Entities and when and how such an application can be made.
• Information about the verification requirements in relation to information supplied to the Registrar of Companies in connection with the Register of Overseas Entities. The Register of Overseas Entities (Verification and Provision of Information) Regulations 2022 (S.I. 2022/725) sets out the details of the verification system.
• Annex A to the Guidance is a table of examples of documents and information in either case obtained from a reliable source which is independent of the person whose identity is being verified.

(The Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No. 3) Regulations 2022, 27.07.2022)

(BEIS, Guidance for the registration of overseas entities on the UK Register of Overseas Entities - Technical Guidance for registration and verification, 01.08.2022)

FRC: CRR Thematic Review of TCFD disclosures and climate in the financial statements

On July 29, 2022 the Financial Reporting Council (FRC) published a thematic report setting out the results of a review of both the Task Force on Climate-Related Financial Disclosures (TCFD) and of climate-related reporting in the financial statements of 25 premium listed companies. This follows the introduction by the Financial Conduct Authority (FCA) of specific TCFD climate-related disclosure requirements for listed companies, with the first reports issued by premium listed companies in relation to December 2021 year ends. At the same time, the FCA published a separate report setting out the results of its preliminary review of premium listed companies’ TCFD disclosures, which includes an analysis of companies’ TCFD disclosures by sector and company size.

The FRC found that the companies included in its review,  which was focussed on larger premium listed companies in sectors that are more exposed to climate change, have generally risen to the challenge around mandatory TCFD disclosures, and were broadly able to provide the TCFD disclosures that are ‘particularly expected’ by the FCA’s Listing Rules. 22 of the 25 companies reviewed also made reference to climate-related risks in their financial statements disclosures, and the FRC comments that this is a significant improvement since its 2020 thematic review.

The FRC provides examples of better practice disclosures throughout the report, and encourages companies, especially those at an earlier stage in preparing for their climate-related reporting, to use these as reference points when preparing their own disclosures. The report also sets out five main ways in which companies could significantly improve their TCFD disclosures and financial statements reporting in relation to climate change. The FRC encourages all entities preparing TCFD disclosures under the Listing Rules and/or TCFD-aligned disclosures under the new Companies Act regulations to refer to these broad themes, as well as the FRC’s more detailed expectations which are summarised in Appendix 2 to the report.

The five main ways suggested to improve TCFD disclosures and climate change reporting are as follows:

• Granularity and specificity – Rather than providing high-level, generic information, the FRC expects the specificity and granularity of companies’ climate-related disclosures to improve as their processes to manage climate-related risks and opportunities become more fully embedded into governance and management structures. The FRC also expects the link with financial planning to become clearer and more quantified.
• Balance - Companies should ensure that the discussion of climate-related risks and opportunities is balanced, and should consider linking the description of climate-related opportunities to any technological dependencies.
• Interlinkage with other narrative disclosures - Companies should consider the interlinkages of TCFD disclosures with other narrative disclosures in the annual report. For example, companies may need to consider the output of climate-related scenario analysis in discussion elsewhere in the strategic report about the company’s business model and strategy, or to explain how climate-related risks have been assessed and prioritised compared to other risks.
• Materiality - While the FRC does not want companies to take a ‘checklist’ approach to the TCFD guidance, companies should clearly articulate how they have considered materiality in the context of their TCFD disclosures when preparing the TCFD ‘statement of compliance’. The FRC may challenge companies that claim consistency with a recommended disclosure where it is not clear that all relevant and material elements of the recommended TCFD disclosures, including the all-sector guidance and, where appropriate, the supplemental guidance for the financial sector and for non-financial groups, have been addressed. They may also challenge companies if they do not provide disclosures consistent with the recommendations ‘particularly expected’ by the FCA, for example, in the areas of risk management and the elements of strategy not concerning scenario analysis, without a credible explanation.
• Connectivity between TCFD and financial statements disclosures – The FRC expects companies to consider the connectivity between TCFD disclosures and the financial statements, and to provide explanations where necessary, to address whether:
  • the degree of emphasis placed on climate change risks and uncertainties in the narrative reporting, including TCFD disclosures, is consistent with the extent of disclosure about how those uncertainties have been reflected in judgements and estimates applied in the financial statements;
  • the relationships between assumptions and sensitivities considered in TCFD scenarios, including any Paris-aligned scenarios, and those applied in the financial statements, require further elaboration;
  • emissions reduction commitments and strategies described in the narrative have been appropriately reflected in the financial statements;
  • the scale of growth of businesses and extent of progress against climate-related opportunities referred to in the narrative reporting is appropriately reflected in the segmental disclosures; and
  • discussion of matters which may have an adverse effect on asset values or useful lives in the narrative reporting is consistent with positions taken in the financial statements. 

(FRC: CRR Thematic Review of TCFD disclosures and climate in financial statements, 29.07.2022)

FCA: Review of TCFD-aligned disclosures by premium listed commercial companies

On July 29, 2022 the Financial Conduct Authority (FCA) published a report setting out the results of their preliminary review of 171 premium listed commercial companies’ Task Force on Climate-Related Financial Disclosures (TCFD), which includes an analysis of companies’ TCFD disclosures by sector and company size. This follows the introduction by the FCA of specific TCFD climate-related disclosure requirements for listed companies, with the first reports issued by premium listed companies in relation to December 2021 year ends. At the same time, the Financial Reporting Council (FRC) published a thematic report setting out the results of a review of both the TCFD and of climate-related reporting in the financial statements of 25 premium listed companies. 

Key findings from FCA’s review

The FCA’s key preliminary observations include the following:

• Over 90% of companies self-reported that they had made disclosures consistent with the TCFD’s Governance and Risk Management pillars, but this dropped to below 90% for the Strategy and Metrics and Targets pillars.
• 81% of companies indicated that they had made disclosures consistent with the seven recommended disclosures the FCA would ordinarily expect a company to comply with.
• There were some instances where companies indicated that they had made disclosures consistent with the recommended disclosures, but the disclosures themselves appeared to be very limited in content.
• Companies that had identified climate change as a principal or emerging risk in their annual financial report reported higher levels of consistency against each of the recommended disclosures. Companies that were primarily engaged in FCA-regulated activity also indicated higher levels of consistency for each of the recommended disclosures.

Actions for companies

While the FCA states that it is encouraged by the overall improvement in the completeness and consistency of disclosures with the TCFD framework following its regulatory intervention, in this review it reiterates its expectations of premium listed companies and standard listed issuers as they prepare climate-related disclosures in line with the FCA’s rules in future annual financial reports. Such companies should remind themselves of those expectations and consider the detailed results of the review, alongside the better practice examples highlighted in the FRC’s complementary review to help companies improve their disclosures.

Next steps

The FCA expects the UK Government to consult in due course on a mechanism to adopt the standards currently being developed by the International Sustainability Standards Board (ISSB) in the UK. The FCA will separately consult on adapting its existing TCFD-aligned climate-related disclosure rules for listed companies to reference the final IFRS Sustainability Disclosure Standards adopted according to the legal and institutional architecture that the Government creates following this consultation process. The FCA also considers this would also be an appropriate time to consult on moving from the current ‘comply or explain’ compliance basis to mandatory disclosure requirements for in-scope listed companies.

(FCA, Review of TCFD-aligned disclosures by premium listed commercial companies, 29.07.2022)

FRC: Digital Security Risk Disclosure – Lab Report

On August 3, 2022 the Financial Reporting Council Lab (FRC Lab) published a report on digital security risk disclosure to help companies improve the disclosure of digital security strategies, risks and governance. 

The report is designed to be of use to reporting teams and risk teams who are involved in reporting, and for audit committees who review the resultant disclosures. It focuses on disclosure relating to digital security (and strategy) risk that can be optimised to provide users with useful information. It does not cover what controls a company should have or what general requirements around risk disclosure should be, but it does refer to government guidance on actions that companies should take.

The FRC Lab note in the report that their discussions with participants identified information that could be of value to investors and other stakeholders. Based on these discussions, the report seeks to identify areas of digital security-related disclosure that investors value and the types of disclosure that may reflect both. Disclosure recommendations in relation to strategy, governance, risk and events are set out and these are supported by a separate detailed example bank providing a number of practical examples to help companies improve their disclosures in these areas. However, while of the view that more and better-focused disclosure would enhance reporting, the FRC Lab’s recommendations are not meant to serve as a disclosure checklist, it being acknowledged in the report that not all identified disclosures would be applicable to, or useful for, every company.  

The report also provides potential questions for boards and audit committees to consider when looking at disclosures around digital security risk.

(FRC Lab, Digital Risk Disclosure Report, 03.08.2022)

FRC: Consultation on funding the Audit, Reporting and Governance Authority

On July 29, 2022 the Financial Reporting Council (FRC) published a consultation paper setting out proposals for how the new Audit, Reporting and Governance Authority (ARGA), into which the FRC will transition, should be funded. 

In its Response to its consultation on Restoring Trust in Audit and Corporate Governance, the UK Government set out its intention to give ARGA statutory powers to raise a levy so that it has a sustainable and independent basis on which to carry out its regulatory activities. It has asked the FRC to consult on how these powers should be applied and the consultation seeks views on three issues: the overall approach to ARGA’s funding; the proposed funding model; and the groups that should fund each of ARGA’s` regulatory activities. The aim is to ensure that the right groups are levied in a proportionate manner. 

The FRC proposes that the following groups of market participants should contribute the major share of ARGA’s funding: 

• The auditors of Public Interest Entities (PIEs) should fund audit regulation, including standard setting, supervision and enforcement. Audit firms in scope should pay an annual levy based on their fee income from PIE audits.
• The recognised supervisory bodies (RSBs) should also contribute to costs of setting auditing standards, and, with the recognised qualifying bodies (RQBs), should meet the costs of overseeing their regulatory functions. The professional bodies should pay an annual levy based on the size of their membership.
• The accountancy professional bodies should meet the costs of overseeing the performance of their regulatory roles through an annual levy.
• Listed companies, large private companies and other entities falling within the definition of PIEs should fund the costs of regulating corporate reporting, including reporting and audit standard setting, monitoring, and enforcement against directors. Listed companies should fund ARGA’s work in relation to corporate governance and audit committees. Contributions from listed companies should be through an annual preparers levy based on their market capitalisation; other PIEs should pay an annual preparers levy based on turnover or equivalent measures of size.
• Institutional investors interested in ARGA’s work on investor stewardship should meet the costs of that work. Investment managers and insurance companies authorised and regulated by the Financial Conduct Authority (FCA) should pay an annual levy aligned with the FCA fee methodology and structure. Pension schemes should contribute through a separate levy.
• Actuarial regulation undertaken by ARGA should be funded by the actuarial professional body or bodies and the main intended beneficiaries of actuarial regulation - insurers, large pension schemes and large funeral plans.

Views on the proposals are requested by October 22, 2022. Following the consultation, the FRC will issue a feedback statement responding to stakeholders’ views and noting those issues on which there will be further consultation. 

(FRC: Consultation on funding the Audit, Reporting and Governance Authority, 29.07.2022)

FRC: Annual Enforcement Review

On July 28, 2022 the Financial Reporting Council (FRC) published its fourth Annual Enforcement Review which reveals a record number of cases were resolved in the last year and record financial sanctions of £46.5m were imposed. The number and scope of non-financial sanctions have also grown. These sanctions are targeted at the failures identified and are directed at identifying the causes of the failures, imposing measures to prevent recurrence, and monitoring progress and effectiveness of the required steps through ongoing reporting to the FRC.

The Review sets out themes from completed audit investigations (in most cases the auditors failed to obtain sufficient appropriate audit evidence, performed parts of the audits without sufficient professional scepticism and failed to document their workings properly). It also provides information about the FRC’s Enforcement Division and its processes, and about fines and sanctions issued. The FRC notes that it  continues to encourage and incentivise full and frank cooperation. While progress in this area has been slower than hoped, the FRC is seeing positive changes, including through self-reporting, proactive steps taken to address issues self-identified and comprehensive admissions.

(FRC, Annual Enforcement Review, 28.07.2022)

FRC: Thematic review – Judgements and Estimates (Update)

On July 26, 2022 the Financial Reporting Council (FRC) published an updated thematic review on disclosures about significant accounting judgements and sources of estimation uncertainty. An earlier  review on this topic was published in November 2017 and, while the FRC has identified some improvement in the overall quality of judgement and estimate disclosures since the 2017 report, issues on this topic continue to arise which is why the FRC decided to produce this follow-up report. 

Summary of key observations 

The FRC’s review identified many good examples of detailed, granular disclosure explaining management’s judgements and the nature of the uncertainties relating to significant estimates and companies had generally made an effort to tailor their disclosures. Significant estimates were supported by quantification, such as information about assumptions made and the specific amount at risk of material adjustment. Almost all of the FRC’s general selection of companies provided some degree of sensitivity disclosure, including sensitivities which complemented the disclosure requirements of other IFRS standards. There were many instances of effective linkage and the use of cross-referencing to achieve well-integrated estimate disclosures. 

However, the FRC has identified the following as areas where there is generally room for further improvement:

• Companies should explicitly state whether estimates have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
• Sensitivity disclosures should be provided more frequently and in the way that is most meaningful to readers.
• Sources of estimation uncertainty may vary from year to year. Companies should reassess whether disclosures made in a previous year need to be revised.
• Where additional estimate disclosures are provided, such as those carrying lower risk, having smaller impact or crystallising over a longer timeframe, they should be clearly distinguished from those with a significant short-term effect. 

Observations relating to the impact of climate change 

Many companies mentioned climate change within their estimate disclosures. Several explained that the impact was factored into significant estimates. The FRC notes that better disclosure clearly articulated the timing of any impact, providing specific clarification that climate change either had a risk of a material adjustment to carrying values of assets and liabilities in the next year or did not, but could have medium or longer-term impacts.

Good practice examples

To encourage improvement in the general quality of company disclosures, the review includes examples of good practice, including quantified assumptions and amounts at risk of material adjustment, detailed explanations of management’s judgements and the nature of the uncertainties relating to significant estimates, and discussion of the effects of climate change on estimates. 

(FRC, Thematic review – Judgements and Estimates (Update), 26.07.2022)

Law Commission: Digital Assets – Consultation Paper

On July 28, 2022 the Law Commission of England and Wales published a Consultation Paper setting out draft proposals to reform the law relating to digital assets, including crypto-tokens (or cryptocurrencies), non-fungible tokens (NFTs), databases, software, digital records and domain names.  This follows a request to the Law Commission from the UK  Government to review the law on digital assets, to ensure that it can accommodate them as they continue to evolve and expand.

The emerging technologies are used for an increasing variety of purposes, including being valuable in themselves, used as a form of payment, or used to represent or be linked to objects or rights, such as equity or debt securities. The Law Commission’s proposals aim to deliver wider recognition and legal protections for digital assets, allowing a more diverse range of people, groups and companies to interact online and benefit from them.

Key provisional proposals and conclusions are as follows:  

• The explicit recognition of a “third” category of personal property, “data objects”, distinct from things in possession and things in action, is proposed. This would allow for a more nuanced consideration of new, emergent, and idiosyncratic objects of property rights. Two options for the development and implementation of this provisional law reform proposal are described — iterative, common law reform or (limited) statutory intervention. The potential benefits and drawbacks for each are outlined and consultees are asked for their views.
• Certain criteria that a thing must exhibit if it is to fall within this proposed third category of personal property are proposed. 
• The factual concept of control (as opposed to the concept of possession) best describes the relationship between data objects and persons. 
• Cypto-tokens satisfy the proposed criteria of data objects and are appropriate objects of property rights. The rules of derivative transfer of title can be applied to such transfers, including in the context of the unauthorised disposition of a crypto-token.  
• An explicit clarification that the special defence of good faith purchaser for value without notice should apply to crypto-token transactions. 
• There should be statutory law reform clarifying the scope and application of section 53(1)(c) of the Law of Property Act 1925 in connection with certain dealings in specified forms of equitable crypto-token entitlements. 
• Law reform clarifying and simplifying the apportionment of shortfall losses arising out of commingled crypto-token holdings held on trust by an insolvent custodian would be beneficial. 
• It could be desirable to develop bespoke statutory provisions designed specifically for collateral arrangements in respect of crypto-tokens, but the Law Commission does not make law reform proposals at this stage. 
• In relation to the tort of conversion, there are arguments in favour of extending conversion (or a conversion-type cause of action) to data objects. However, the Law Commission acknowledges that this would be a step change for the law, and one which would need further consideration, so does not make law reform proposals at this stage.
• There is an arguable case for law reform to provide courts with the discretion to award a remedy (where traditionally denominated in money) denominated in certain crypto-tokens in appropriate cases. However, the Law Commission does not make law reform proposals at this stage. 
• The Law Commission asks consultees for their views on the reasoning for its provisional proposals, on the proposals themselves and, in certain cases, on the most appropriate method for implementing such proposals

• The Law Commission is seeking responses to its consultation by November 4, 2022.

(Law Commission, Digital Assets – Consultation Paper, 28.07.2022)
(Law Commission, Digital Assets – Summary of Consultation Paper, 28.07.2022)

FCA: Strengthening financial promotion rules for high-risk investments and firms approving financial promotions – PS22/10

On August 1, 2022, the Financial Conduct Authority (FCA) published Policy Statement 22/10 ‘Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions’ (PS22/10).

In PS22/10 the FCA sets out its final policy and Handbook rules for high-risk investments subject to its financial promotion rules and for firms communicating and approving financial promotions. The FCA also summarises the feedback it received to Consultation Paper 22/2 ‘Strengthening our financial promotion rules for high risk investments, including cryptoassets’ (CP22/2).

For further information on this, please see our Regulation Tomorrow blog post here.

FCA Strengthening financial promotion rules for high risk investments and approving financial promotions