Ashurst Governance and Compliance Update - Issue 3

1.  Review of the Effectiveness of the Listing Regime – Changes proposed to the FCA rulebooks

The Financial Conduct Authority (FCA) has published Consultation Paper: Primary Markets Effectiveness Review. This contains a series of targeted proposals to remove barriers to listing and make the FCA's rulebooks more accessible together with a broader discussion on the structure of the listing regime so that the UK remains an attractive and dynamic listing venue.

The proposals build on the recommendations of both the Kalifa Review of UK FinTech and Lord Hill's UK Listings Review Report and include the following:

• allowing a targeted form of dual class share structures within the premium listing segment (such structures are currently only permitted in the standard listing segment);
• reducing the amount of shares an issuer is required to have in public hands (i.e. its free float) from 25 per cent to 10 per cent for both the premium and standard listing segments;
• increasing the minimum market capitalisation threshold for both the premium and standard listing segments for shares in companies (other than funds) from £700,000 to £50 million as the existing requirement is considered to be out of date (this would apply to new listings and not as a continuing obligation for companies currently listed); and
• making minor amendments to the Listing Rules, Disclosure Guidance and Transparency Rules (DTRs) and the Prospectus Regulation Rules (PRRs) to simplify the FCA's rulebooks and reflect changes in technology and market practice.

The FCA is not proposing to make changes to the track-record requirements for companies looking to list but is seeking views on whether changes are needed to attract more high-growth companies in line with Lord Hill's recommendations.

As part of the wider discussion, the Consultation Paper sets out four different models for how the UK listing regime could be structured in the future. These range from creating a single segment for UK listed companies with the minimum possible requirements for eligibility for listing, to maintaining two segments but allowing minimum standards for the "alternative" segment - a rebranded standard segment - to be set by market discipline.

In relation to the proposed minor amendments to the FCA's rulebooks, the FCA highlights that these are not intended to change market practice but are aimed at ensuring that the rules remain current, are reflective of modern technology and market practice, and are not duplicative. Proposed rule changes include:

• removing the need for two copies of documents such as circulars, notices, reports or other documents to which the Listing Rules apply to be submitted as this now tends to be done electronically;
• removing reference to the Document Viewing Facility given its replacement by the National Storage Mechanism (NSM);
• removing the need for certain documents to be available for physical inspection and instead requiring full terms to be made available electronically (for example, in relation to proposed constitutional amendments or the adoption of new or amended employee share schemes).;
• allowing circulars to include links to information already filed with the NSM;
• clarifying in Chapter 10 of the Listing Rules that:
  
  • a transaction for which shareholder approval has been obtained and which has subsequently completed does not need to be further aggregated; and
  • transactions that are aggregated with a class 2 transaction will still be subject to LR 10.4 notification requirements (until the class 1 threshold has been reached); and

• updating the requirements for class 1 circulars in relation to significant change statements and profit forecasts.

The consultation closes on 14 September 2021 and, subject to feedback received, the FCA aims to implement the relevant rules by late 2021. In respect of the discussion items, the FCA will provide feedback and, if appropriate, will issue a potential additional consultation on broader listing regime changes in future.

This Consultation Paper, in addition to the Wholesale Markets Review and the Prospectus Regime Review, both of which were published by HMT on 1 July 2021, are indicative of the governmental and regulatory will to reformulate the UK capital markets framework in order that the needs of the UK markets are better met and, more broadly, the UK can compete effectively on a global level in a post-Brexit landscape.

2.  Reporting on stakeholders, decisions and Section 172 – FR Lab publishes report

The Financial Reporting Lab (FR Lab) has published its latest report: "Reporting on stakeholders, decisions and Section 172". The report highlights that information on stakeholders and on decisions can help investors understand how a company is progressing in fulfilling its stated corporate purpose and achieving long-term success. The FR Lab believes that Section 172 statements can then be a helpful bridge between the two types of information.

Specifically, the report has three sections which cover:

• Reporting on key stakeholders: This section highlights that investors view information on a company’s key stakeholders as critical to understanding the company and its prospects. It outlines that investors want to see information on stakeholders’ relevance to the business model and strategy, the strength of stakeholder relationships, related risks and opportunities, and performance and metrics – i.e. what is measured and how it is assessed.
• Decisions and decision-making: This section highlights that investors want to know what the strategic decisions were during the period and how such decisions were made, including how stakeholders were considered in reaching them, the difficulties encountered, and the outcomes of these decisions.
• "Better" practice Section 172 statements. The final section highlights that such statements are not just about stakeholder engagement, but should reflect all aspects of the Section 172 duty to allow a better understanding of how a company is progressing in its pursuit of its purpose and long-term success.

Each section includes examples reflecting helpful ways of addressing some aspects of reporting highlighted by investors. The first two sections of the report also include detailed questions which companies should consider – a separate summary of the questions can be found here. The final section of the report builds on the tips on approaching Section 172 statements published by the FR Lab in October 2020.

A podcast is also available in which Freddie Woolfe, Global Sustainable Equities Analyst at Jupiter Asset Management and Helen Price, Stewardship Manager at Brunel Pension Partnership discuss the importance of linking information on stakeholders and decisions to strategy and the long-term success of the company.

Ashurst comment: Given that many companies have now reported twice against the 2018 version of the UK Corporate Governance Code and have produced their second Section 172 statement, there are some good examples of reporting for the FR Lab to draw on. Together with the Lab's 2020 "Tips" document, the report constitutes a vital planning tool for the 2022 reporting season and beyond, not least given the regulatory and investor scrutiny of such statements as a key part of their increasingly ESG-focused reviews.

3.  Chapter Zero: Businesses need to pick up the pace

According to Chapter Zero, the association of non-executive directors focused on addressing the challenges presented by climate change, the G7's Climate Change Committee's latest risk assessment shows that the risks of climate change to the UK have increased in the last five years (including extreme weather events and supply chain disruption). The UK will host the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow between 31 October and 12 November 2021. Prior to COP26, a detailed roadmap of how the UK plans to get to net zero is expected from the UK Government. Chapter Zero recommends that boards fully consider the implications of these changes and plan for them.

4.  FRC statement of intent on ESG challenges

The Financial Reporting Council (FRC) has published a statement of intent on ESG challenges. With information relating to ESG aspects of a company's sustainability becoming more significant, the underlying data systems, and the data that supports reporting, create an issue. While investors, governments, and wider stakeholders call for expanded disclosure, the FRC recognises that the systems that produce the information are significantly less sophisticated than those for financial information. The FRC believes that collaborative solutions are required if ESG information is to be useful to stakeholders and provide them with consistent and comparable information.

The FRC's paper builds on the FRC's previous work and dialogue with market participants, sets out areas in which such challenges must be addressed if the FRC is to ensure entities act and report in a way that meet the demands of stakeholders, includes some possible actions for addressing these demands, and notes the FRC’s planned activities in this area.

The FRC believes that there are six ESG-related challenges driving a need for better:

• Production of ESG information: to ensure that better internal information leads to better decisions and better insight for stakeholders.
• Audit and assurance: to ensure that reported information is robust and reliable.
• Distribution of ESG information: to ensure that it is made accessible to interested parties.
• Consumption of ESG-related information: to ensure that it leads to better decision-making by stakeholders.
• Supervision: to ensure that ESG information and activity is appropriately monitored and the relevant requirements are enforced.
• Regulation: so that ESG-related information is coordinated and coherent.

To achieve these goals, among other things, the FRC has stated that it intends to:

• Continue to consider the role of the UK Corporate Governance Code in ensuring boards are taking appropriate account of ESG issues in their consideration of the long-term success of the company.
• Develop guidance for UK GAAP reporters on the impact of climate-related issues on the company's financial statements and consider whether changes need to be made to accounting standards.
• Consider ESG-related amendments to auditing and assurance standards.
• Monitor investors' approaches to ESG within UK Stewardship Code reporting.

5.  FCA, PRA and BoE seek views on improving diversity and inclusion in financial services

The Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and BoE have published a joint Discussion Paper (DP21/2) focusing on diversity and inclusion in the financial services industry. They have done so in order to prompt the firms they regulate to do more and do so more quickly, not least due to their assertion that research on the subject shows evidence of correlations between diversity and inclusion in risk management, good conduct, healthy working cultures, and innovation which, in turn, directly contribute to the stability, fairness and effectiveness of the firms, markets and infrastructure that together make up the financial sector.

The Discussion Paper asserts that diversity and inclusion are critical to the regulators' work on culture and governance, particularly for boards and senior management. For the FCA, it will also be based in existing work around the treatment of consumers. For the BoE and PRA, the key consideration is about the link between insufficient diversity and inclusion and groupthink, which they believe can present a serious risk to the safety and soundness of an institution.

The regulators' ultimate goal is to see increased diversity and inclusion in financial services translate into safer and sounder firms with better internal governance and risk management, a more innovative industry, and financial products and services that meet the diverse needs of consumers. To achieve this, a “one size fits all” approach to diversity and inclusion will not be prescribed; nevertheless, the regulators believe that policy has an essential part to play in driving change, hence the Discussion Paper seeks to understand the best approaches to take.

The Discussion Paper outlines different policy options for driving and supporting change, which generally build on existing requirements, as well as the regulators’ wider policy and supervisory frameworks. These include:

• using targets for representation at board and senior management levels;
• measures to make senior leaders directly accountable for diversity and inclusion in their firms;
• linking remuneration to progress on diversity and inclusion as part of non-financial performance assessment; and
• considering diversity and inclusion matters when assessing whether a person is 'fit and proper' to carry out their role under the FCA’s Senior Managers and Certification Regime.

The paper also focuses on the importance of data and disclosures to allow effective monitoring of progress.

A pilot data survey is planned for autumn 2021 to test how firms can provide data, with a view to introducing regular reporting in the future.

Feedback is requested by 30 September 2021. Detailed proposals will then be formulated with a joint consultation planned for early 2022.

6.  UK Bribery Act turns ten: Looking back at the past decade, and at the future of "ABC" enforcement

1 July 2021 marked ten years since the Bribery Act 2010 came into force, representing a landmark date in the UK's anti-bribery and corruption (ABC) history.

The Act came into force with much fanfare and expectation, and against a backdrop of strong public and political appetite to overhaul the UK's existing legislation by establishing a framework in which corporates could be held to account following various high profile corruption scandals.

This update by our contentious financial services team covers the key impacts that the Act has had over the years and where it might be headed. For more detail on the Act itself, please refer to our Quickguide which can be found here.

Item contributed by Ruby Hamid, Partner in our Disputes Resolution team.

7.  GC100 poll: the 2021 AGM season and beyond

GC100 has launched a poll on the 2021 AGM season and beyond, the purpose of which is to seek feedback on how companies have conducted their AGMs ( to date in this AGM season) and how they perceive the purpose and future of the AGM. It also seeks to ascertain how companies are approaching climate, sustainability and ESG issues, including views on seeking shareholder approval for a company's climate transition action plan and climate-related disclosures or disclosures under the Taskforce on Climate-related Financial Disclosure recommendations.

8.  COVID-19: Companies House updated guidance on buyback-related form filing

Companies House has published updated guidance on filing Form SH03 (Return of purchase of own shares) to reflect the fact that the temporary measures put in place during the COVID-19 pandemic for stamping Form SH03 have been made permanent.

In the event that a company purchases its own shares, an electronic version of Form SH03 should be emailed to HMRC. HMRC will then issue a letter confirming that the correct stamp duty has been paid. Companies House will accept and register Form SH03 where it is accompanied by such a letter, although the letter itself will not appear on the public register.