Ashurst Governance & Compliance Update – Issue 54

Audit and Corporate Governance Reform

1. King's Speech puts ARGA back on the agenda

As part of a very full King's Speech, the government has announced that an Audit and Corporate Governance Reform Bill will be brought forward. The Bill intends to deliver 'robust and rigorous scrutiny of large companies by auditors and greater transparency around their finances' as this is seen as 'essential to ensuring that investors, employees and consumers have an accurate picture of the health of [a] company'. The government believes that this transparency is central to delivering a secure economy, avoiding company failures and protecting jobs.

The Bill will replace the Financial Reporting Council with the long-awaited Audit, Reporting and Governance Authority or 'ARGA' which will be given powers to uphold standards and undertake independent scrutiny of company accounts. It will also seek to enable all company directors to be held to account for inaccurate financial statements and breach of their audit responsibilities; currently only directors who are members of an accountancy body can be sanctioned by the FRC. 

The Bill will also:

• extend Public Interest Entity (PIE) status to the 'largest private companies' in order to ensure that their audits are high quality and provide early warning of financial problems;
• remove 'unnecessary rules' on smaller PIEs to lift the regulatory burden on 'important smaller businesses' by removing requirements considered disproportionate; and
• include a regime to oversee the audit market, protect against conflicts of interest at audit firms, and build resilience in order that quality audit is available to all companies that need it.

Which private companies will be caught and which current PIEs will be subject to the lighter touch regulatory regime is not set out and likely to be subject to consultation. Nevertheless, given that the content of the Bill leverages many of the proposals in the previous administration's 2021 White Paper (for our overview of the response to the White Paper, see AGC Update, Issue 20), we may not have long to wait for the detail even if available Parliamentary time means Royal Assent is some way off.

From a governance and compliance perspective, other notable potential legislation is a Cyber Security and Resilience Bill which will update the current regulatory framework by:

• expanding the remit of regulation to protect more digital services and supply chains;
• giving more powers to regulators to ensure essential cyber safety measures are being implemented. This would include potential cost recovery mechanisms to provide resources to regulators and providing powers to investigate potential vulnerabilities; and
• mandating increased incident reporting to provide the government with better data on cyber incidents, including where a company has been held to ransom.

The Speech also included:

• an Employment Rights Bill which will seek to ban 'exploitative practices' and enhance rights of employees;
• a draft Equality (Race and Disability) Bill which will introduce mandatory ethnicity and disability pay reporting for employers with more than 250 employees, akin to the current Gender Pay Gap reporting requirements; and
• a Digital Information and Smart Data Bill which will enhance the powers and reform the governance of the ICO and make 'targeted reforms' to maintain standards of data protection in the context of new technology, presumably reflecting the latest developments in AI.

We will, of course, keep you up to date on all relevant legislation as it makes its way through the Parliamentary process.

Reform of the Listing Regime

2.  FCA publishes final rules in UK Listing Regime reform

The FCA has published its final rules for the new UK listing regime and Policy Statement 24/6 crystallising the most significant changes to the Listing Rules for 30 years. The new UK Listing Rules and accompanying transitional provisions will take effect from 29 July 2024. The rules follow an extensive consultation process, kickstarted by Lord Hill's UK Listing Review in 2021, which sought to enhance the attractiveness of UK capital markets.

In summary, there is a large degree of continuity flowing from the FCA's position set out in its December consultation - CP 23/31 - with some notable amendments. Importantly, the new rules retain the philosophy of a shift towards a more disclosure-based framework, whilst seeking to maintain robust levels of investor protection in key areas. 

We have set out below the principal updates from the draft UKLRs published in March in our briefing here and for our previous briefings, which contain an overview of all changes made to the regime subject to these final changes, click here and here.

3.  Admission and Disclosure Standards amended to reflect UK Listing Regime reform

The London Stock Exchange has published Market Notice N06/24 along with a marked-up version of the Admission and Disclosure Standards to reflect the reform of UK Listing Regime (principally the replacement of the premium and standard listing segments) and the closure of the High Growth Segment which is now redundant.

The amended Standards will take effect on 29 July 2024.

4.  FCA publishes Primary Market Bulletin No 50 

The FCA has published Primary Market Bulletin 50, which focuses on the impact of the UK Listing Regime reforms on the sponsor regime. This sets out how the FCA has responded to feedback received during its consultations on the Primary Markets Effectiveness Review in relation to areas such as:

• specialist due diligence;
• record keeping;
• issuer understanding of the sponsor's role and obligations; and
• FCA supervisory reviews of sponsor services.

As part of its response, the FCA has also published two new technical notes for consultation:

• Responsibilities of a sponsor: specialist due diligence (Primary Market/TN/722.1).
• FCA reviews of sponsor services (Primary Market/TN/723.1).

It is also consulting on amendments to the existing technical note, Sponsors: Record Keeping Requirements (UKLA/TN/717.1). Comments on the technical notes should be provided by 5 September 2024.

5.  UK Listing Regime reform: implications for FTSE UK Index Series 

FTSE Russell has published an article explaining the implications of the UK Listing Regime reform for the FTSE UK Index Series. Subject to ratification by the FTSE Russell Index Governance Board, Equity Shares (Commercial Companies) will become the eligible index 'universe' for the FTSE UK Index Series. This will replace the current premium segment. Due to the automatic mapping of premium-listed companies to the Equity Shares (Commercial Companies) category on 29 July 2024, there will be no immediate impact on the FTSE UK Index Series' composition.

Similarly, closed-ended investment funds with a premium listing will also map automatically to a new closed-ended investment fund category and retain index eligibility.

In time, companies currently with a standard listing may join the FTSE UK Index Series if they decide to move to the new Equity Shares (Commercial Companies) category. Initially, however, companies with a standard listing will join a new 'transition category' once the reforms take effect and, as a result, will not be eligible for indexation. 

Directors' Duties

6.  IoD launches code of conduct for directors

The Institute of Directors has launched a consultation on a proposed code of conduct for directors. The Code is intended as a practical tool to help directors make better business decisions. It also provides leaders with a behavioural framework to help them build and maintain the trust of the wider public in their business activities. 

The Code represents a voluntary commitment and is structured around six key ‘Principles of Director Conduct’:

• Leading by example: Directors should demonstrate exemplary standards of behaviour in personal conduct and decision-making.
• Integrity: Directors should act with honesty, adhering to strong ethical values, and doing the right thing.
• Transparency: Directors should communicate, act and make decisions openly, honestly and clearly.
• Accountability: Directors should take personal responsibility for actions and their consequences.
• Fairness: Directors should treat people equitably, without discrimination or bias.
• Responsible business: Directors should integrate ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.

The Code is intended to apply equally to directors in the private, public and not-for-profit sectors, with the IoD hoping that directors will sign up to the final Code on a voluntary basis, signalling their willingness to apply high ethical and behavioural standards in their governance and leadership activities.

Responses to the consultation should be submitted by 16 August 2024.

The IoD will append guidance to the final version of the Code. This will provide examples of how the Code can be applied in practice.

Guidance on the Market Abuse Regulation 

7.  EU MAR: ESMA statement on good practice in relation to pre-close calls

The European Securities and Markets Authority (ESMA) has published a statement reminding issuers about the legislative framework applicable to 'pre-close calls'. By way of reminder, 'pre-close calls' are communications between an issuer and analysts usually taking place immediately before the periods preceding an interim or a year-end financial report during which issuers refrain from providing any additional information or updates.

In this context, ESMA has issued a reminder to issuers regarding the prohibition on unlawful disclosure of inside information and that public disclosure of inside information should take place in accordance with EU MAR. Pre-close calls should therefore only provide information which does not constitute inside information.

If a person receives inside information during such calls, whether inadvertently disclosed or not, they remain subject to the prohibitions on engaging in insider dealing, unlawful disclosure of inside information and recommending or inducing any person to engage in insider dealing. In such circumstances, ESMA recommends that the person reports the situation to their relevant national competent authority (NCA) without delay.

ESMA considers that the following good practices could reduce the risk of unlawful disclosure of inside information:

• Prior to a pre-close call, issuers should carry out an assessment of the information intended to be disclosed to ensure that it does not constitute inside information.
• Public disclosure of upcoming pre-close calls should be made with sufficient notice (for instance, on the issuer’s website), highlighting details, date, place, topics to be discussed and intended participants.
• Issuers should make the material and documents used during pre-close calls simultaneously available on the issuer’s website.
• Issuers should record pre-close calls in order to enable them to be made available to NCAs upon request.
• Issuers should keep records of the information disclosed during pre-close calls and publish those records on the issuer’s website.

Whilst this guidance does not apply directly to issuers with securities admitted to UK markets, we would suggest it constitutes a helpful reminder of the issues and precautions to consider in such circumstances. 

Sustainability 

8.  CSRD: Guidance on materiality assessments, value chain and datapoints published 

Following a consultation in December 2023, EFRAG has published the final versions of its implementation guidance on materiality assessments (IG 1), value chains (IG 2) and datapoints (IG 3) and an accompanying explanatory note to IG 3. 

This guidance is intended to help companies in-scope of the Corporate Sustainability Reporting Directive (CSRD) ((EU) 2022/2464) implement the sector-agnostic European Sustainability Reporting Standards (ESRS) adopted in 2023 (see First European Sustainability Reporting Standards (ESRS) apply from 1 January 2024 (ashurst.com).

IG 1 illustrates the materiality assessment process and explains the concept of impact and financial materiality including how these concepts interplay. IG 2 outlines the reporting requirements for the value chain and illustrates the reporting boundary of a group. IG 3 translates the ESRS Set 1 list of detailed requirements in each disclosure requirement and related application requirements into excel format and can be used by companies to conduct a gap analysis or data collection exercise.

The guidance is not binding, so if anything in it appears to contradict any requirement or explanation in the ESRS, the ESRS take precedence.

The guidance is especially relevant for the first tranche of undertakings in-scope of CSRD that must report in 2025 for financial years starting on or after 1 January 2024 (that is, large EU public interest entities, or parent entities of a large group, exceeding 500 employees that are already subject to the EU Non-Financial Reporting Directive 2014 (2014/95/EU) and large undertakings, or parent undertakings of a large group, with an EU listing and that exceed an average of 500 employees during the financial year). 

9.  Corporate Sustainability Due Diligence Directive published in Official Journal 

The Corporate Sustainability Due Diligence Directive (2024/1760) (CS3D) has been published in the Official Journal of the EU and will come into force on 25 July 2024. This is the final stage in the EU legislative process and it follows significant delays and renegotiation of the previously agreed text of the Directive by the EU Parliament and EU Council. Member States have until 26 July 2026 to transpose the Directive into national laws.

The CS3D establishes a corporate environmental and human rights due diligence duty for in-scope companies. It places obligations on EU and non-EU companies operating in the EU alike to identify, prevent, end or mitigate adverse environmental and human rights impacts from their operations or those of their subsidiaries and certain business partners in their chain of activities. For more information see EU adopts Corporate Sustainability Due Diligence Directive (CS3D) (ashurst.com). 

Transitional provisions provide for the CS3D to be phased-in based on the net turnover and number of employees of in-scope companies as follows: