Ashurst Governance and Compliance Update - Issue 36

1. FCA consults on proposed rule changes

The Financial Conduct Authority has published its long awaited consultation on changes to the Listing Regime. The proposals are contained in CP23/10 - Primary Markets Effectiveness Review: Feedback to DP22/2 and proposed equity listing rule reforms and build on the indications given by the FCA's Chief Executive, Nikhil Rathi which we covered in AGC Update, Issue 35. Central to the proposals is the replacement of the standard and premium listing categories with a single listing category for commercial company issuers of equity shares. We will issue a further, more detailed update in due course. Responses to the consultation should be submitted by 28 June 2023. As a follow-up to the preliminary proposals set out in the Consultation Paper, the FCA aims to issue a further consultation on the wider proposed changes to the Listing Regime in Autumn 2023.

By way of reminder, in May 2022, the FCA published DP 22/2: Primary Markets Effectiveness Review: Feedback to the discussion of the purpose of the listing regime and further discussion, in which the FCA sought views on an alternative single segment structure for the UK listing regime. More detail can be found in AGC Update, Issue 20.

DP 22/2 followed Lord Hill's UK Listing Regime Review (March 2021), which aimed to enhance London's attractiveness as a leading listing venue in a post-Brexit world and which forms part of a broader push for reform of UK capital markets.

2. The 'failure to prevent fraud' offence: what do companies need to know?

The government has announced a new 'failure to prevent fraud' offence, ten months after the Law Commission first proposed it in its June 2022 Options Paper on Corporate Criminal Liability.

The offence was tabled as an amendment to the Economic Crime and Corporate Transparency Bill which is currently progressing through the House of Lords, having been introduced first in September 2022.

The introduction of the offence marks the first notable expansion of UK corporate criminal liability since the introduction of 'failure to prevent' offences for bribery and the facilitation of tax evasion under the Bribery Act 2010 and Criminal Finances Act 2017 respectively.

However, while the introduction of the offence adds another important element to corporate compliance programmes, it remains to be seen if enforcement of it creates the deterrent to the behaviours which the government is targeting.

What is the scope of the offence?

Organisations will be criminally liable where an 'associated person' commits a specified fraud offence with the intention to benefit the organisation or any person who receives services from it. An organisation will not commit the offence if it is the target or victim of the intended fraud.

The maximum penalty on conviction will be an unlimited fine. Note that the government is not proposing to introduce personal liability for directors and senior managers.

As we reported in AGC Update, Issue 35, the government has published a factsheet which confirms that the offence will apply to conduct which takes place outside the UK where an overseas organisation or employee commits fraud under UK law or targets UK victims. The specific jurisdictional scope is yet to be determined but we note that the proposal scope is wider than the current extraterritorial nature of other existing 'failure to prevent' offences.

Will it apply to organisations of all sizes?

No. The 'failure to prevent fraud' offence differs from its predecessors in that it only applies to 'large organisations'. This is on the basis that the government does not want to put a further compliance burden on smaller businesses. To qualify as 'large', an organisation must have satisfied two or more of the following criteria in the financial year prior to the year in which the offence took place:

• more than £36 million in turnover;
• more than £18 million in total assets; and/or
• more than 250 employees.

These criteria are drawn from the medium-sized company threshold in the Companies Act 2006 and the £36 million turnover threshold mirrors that above which companies must produce a modern slavery statement under the Modern Slavery Act 2015.

While this will be welcome news for small businesses, the limitation to large organisations is a disappointing development. The prevalence of fraud is not dictated by organisation size – indeed large businesses will argue that their existing procedures are likely to be more sophisticated and effective at preventing fraud. Excluding smaller organisations from the offence may limit the utility of government guidance on effective risk mitigation and compliance measures. Indeed, a potentially difficult precedent is set if financial crime risk appears to apply to big business alone – and this places the new failure to prevent fraud offence at odds with the failure to prevent bribery and tax evasion facilitation offences, which are applicable to organisations of any size.

That said, it seems that this will not be a permanent point of difference: the government has recognised that the threshold at which organisations are excluded can be amended through secondary legislation.

What fraud must an organisation seek to prevent?

The offences within the scope of the 'failure to prevent' offence include existing common law and statutory fraud, in addition to offences related to false accounting, specifically:

• fraud by false representation (section 2, Fraud Act 2006);
• fraud by failing to disclose information (section 3, Fraud Act 2006);
• fraud by abuse of position (section 4, Fraud Act 2006);
• obtaining services dishonestly (section 11, Fraud Act 2006);
• participation in a fraudulent business (section 9, Fraud Act 2006);
• false statements by company directors (Section 19, Theft Act 1968);
• false accounting (section 17, Theft Act 1968);
• fraudulent trading (section 993, Companies Act 2006); and
• cheating the public revenue (common law).

Previous proposals also included money laundering in the scope of the 'failure to prevent' offence. However, the government's current view is that money laundering offences and compliance requirements are adequately addressed in the existing regulatory regime. Nevertheless, there remains ongoing scrutiny of the effectiveness of existing money laundering enforcement in the UK. You can read our article on the National Crime Agency's latest Annual Report here. In relation to firms in the regulated sector, the Financial Conduct Authority continues to take enforcement action ever more frequently against regulated firms for anti-money laundering systems and controls failures, even in the absence of evidence that money laundering has occurred. You can read our article on recent AML enforcement activity here.

How should organisations respond?

The breadth of criminal activity caught by the offence far outweighs the scope of existing 'failure to prevent' offences. This means that organisations will need to assess carefully the risk of, and their response to, each fraud offence, according to the specific profile and activities of their business. Leveraging existing procedures, and targeting specific areas to uplift, will be key to ensuring compliance, while minimising the overall burden imposed by the new offence.

Is there a defence available?

Adopting the language in the Criminal Finances Act 2017, it is a defence for an organisation to prove that it had reasonable prevention procedures in place at the time the fraud was committed or that it was reasonable to not have any such procedures.

Under the legislation, the government must publish guidance on the procedures that organisations can implement to prevent associated persons committing fraud offences. It is hoped that this guidance will make the practical implications of the offence clearer and help organisations to understand what reasonable prevention procedures they should put in place.

Item contributed by Ruby Hamid, Partner and Anthony Asindi, Associate in our Disputes, Investigations and Advisory Division.

3. Government updates insider dealing legislation

The draft Insider Dealing (Securities and Regulated Markets) Order 2023 has been published (together with an explanatory memorandum). The draft Order supplements the Criminal Justice Act 1993 and aligns the securities and markets on which the criminal offence of insider dealing can be committed under Part 5 of the CJA 1993 with those to which the UK Market Abuse Regulation applies. Currently, the list of securities and markets in scope of the CJA 1993 is narrower than UK MAR.

Specifically, the criminal regime will apply to securities trading on:

• a regulated market in the UK, EU or Gibraltar – e.g. the main market of the London Stock Exchange);
• a multilateral trading facility in the UK, EU or Gibraltar – e.g. the LSE's AIM market;
• an organised trading facility in UK, EU or Gibraltar; and
• any market established by NASDAQ, SIX Swiss Exchange (formerly the SWX Swiss Exchange) or the New York Stock Exchange.

The criminal regime will also apply to a wider range of securities including derivatives.

By way of reminder, the UK has both a criminal and civil regime for market abuse, of which insider dealing is one offence. The criminal regime for market abuse is founded on the Financial Services Act 2012 and the CJA 1993 and the civil regime is established by UK MAR. The Order deals only with the scope of offences under the CJA 1993 as the government considers the scope of offences under the FS Act 2012 to be appropriate and consistent with UK MAR.

Once the draft Order is finalised it will enter into force 21 days after the day on which it is made.

4. Wolfsberg Group publishes updated ABC guidance

The Wolfsberg Group has published updated Guidance: Anti-Bribery and Corruption Compliance Programme and an accompanying executive summary. By way of reminder, the Wolfsberg Group is an association of 13 global banks which aims to develop frameworks and guidance for the management of financial crime risks.

The guidance addresses how the financial services industry should develop, implement, and maintain an effective ABC compliance programme.

5. Companies House issues further guidance on register of overseas entities

Companies House has published a blog: 'Using the advanced search function' in which it explains how to access and search within the new register of overseas entities.

6. ICGN publishes statement on post COVID-19 AGM practices and shareholder rights

The International Corporate Governance Network has published a statement on post COVID-19 AGM practices and shareholder rights in which it underscores its opposition to 'virtual only' AGMs now that the 'emergency' created by the pandemic is at an end. The ICGN believes that the hybrid format is the optimal approach for such meetings. The ICGN then takes the opportunity to reiterate its other principal expectations related to AGMs; these include:

• The date of the AGM should be coordinated with other company AGMs (to the extent possible) to facilitate a wider dispersion of meetings beyond a few days or weeks in a given year.
• AGM materials should be published at least one month ahead of the meeting, including the meeting format and procedures around registration, access, participant identification, shareholding verification and voting options and approach to questions.
• Reliable technology must be used to allow democratic, secure and efficient access for all participants.
• Robust procedures must be established to verify shareholder identification and level of shareholding and to ensure all participants can attend and vote.
• Shareholder questions should be permitted in advance or during the AGM and adequate time allowed for discussion and follow-up questions or statements.
• Shareholder proposals that have appeared on the ballot or been agreed in advance must be permitted and recognised on the AGM agenda, subject to reasonable thresholds.
• Vote execution deadlines must be clearly disclosed and the practice of 'share-blocking' or requirements for lengthy shareholding periods to gain voting rights should be discouraged.
• Voting results must be published promptly on the company's website after the meeting. If a board-endorsed resolution has been opposed by a significant proportion of votes (e.g. 20 per cent or more), the company should explain what actions were taken to understand and respond to shareholder concerns soon after the meeting.
• Meeting minutes, including all proposals, questions and answers, must be recorded and made available to shareholders.

7. Pre-Emption Group publishes its terms of reference

The Financial Reporting Council has published on behalf of the Pre-Emption Group (PEG) 'Pre-Emption Group - Terms of Reference'. The Terms of Reference respond directly to a recommendation in the UK Secondary Capital Raising Review (UKSCRR) that PEG's role in guiding best practice in relation to the pre-emption rights regime should be further centralised and formalised through revised terms of reference. This is in addition to, amongst other things, the creation of a dedicated and easily accessible website and a review of the PEG's membership to ensure that it is representative of UK capital markets as a whole.

By way of reminder, in November 2022, PEG issued a new Statement of Principles on the disapplication of pre-emption rights, together with template resolutions. These implemented the revised pre-emption regime set out in the UKSCRR (see AGC update, Issue 28).

For more detail on the content of the Terms of Reference and expectations as to the membership of PEG, read our update here.

8. FRC facilitates engagement between audit committees and investors

The Financial Reporting Council has published a webpage which sets out various 'conversation starters' for use by investors wishing to engage with audit committees and companies on assurance-related topics. The conversation starters are structured by topic and include an initial 'broad' question followed by more detailed follow-up questions. The FRC hopes that they will promote better engagement between investors and audit committees and, in so doing, improve understanding of companies and their approach to financial reporting and internal control.

The FRC developed the questions in consultation with investors, audit committees, and other interested parties. The FRC states that it will continue to work with these and other stakeholders to ensure that the questions remain relevant and useful.

9. Government publishes ethnicity pay reporting guidance

The government has published guidance for employers on how to measure, report on and address any ethnicity pay differences within their workforce.

The guidance includes advice on:

• collecting ethnicity pay data for employees;
• how to consider data issues such as confidentiality, aggregating ethnic groups and the location of employees;
• the recommended calculations and step by step instructions on how to do them;
• reporting the findings;
• further analysis that may be needed to understand the underlying causes of any disparities; and
• the importance of taking an evidence-based approach towards actions.

By way of reminder, unlike gender pay gap reporting for organisations with 250 or more employees, the measurement and reporting of ethnicity pay gap information is not compulsory.