Policy RoundUp – April 24
Dear Member,
The FCA is now consulting on reversing the MiFID II ‘bundling’ restrictions for investment research fees, which could help smaller active fund managers, and could also potentially boost small-cap company research. The FCA has also issued more detail on its proposed changes to the listing rules.
Meanwhile, proposed changes to the Takeover Code would ensure that private companies traded on the new ‘PISCES’ platform would not be caught, as this could otherwise have deterred growth companies from joining the new intermittent trading platform.
The ISSB has finally published its digital sustainability taxonomy, to help investors scrape and analyse sustainability disclosures, and confirmed it will press ahead with research projects looking at disclosure of nature and human capital risks and opportunities. Some practical guidance has been issued to help companies efficiently comply with both the ISSB Standards and the European Sustainability Reporting Standards (ESRS), aiming to help companies collect, govern and control decision-useful data only once. The landmark EU rules on sustainability due diligence have also now been finalised.
No RoundUp is complete without an update on AI, with the FCA confirming its approach to AI regulation, plus there is now a pilot AI and Digital Hub, which is a collaboration between regulators that enables innovators to get advice on issues that cross more than one regulators’ remit, and the UK and US have agreed to work together on AI safety.
Finally, last month I mentioned our ongoing ‘Bridging the Gap’ dialogue with the Investor Forum – which continues with our IR Breakfast Dialogue on 21st May and I hope to see some of you there!
Best wishes,
Liz Cole
Head of Policy and Communications
Linked in
www.irsociety.org.uk
MARKET REGULATION
More detail on Listing Rule proposals (PMB 48)
The FCA’s 48th edition of its Primary Market Bulletin consults on proposed changes to guidance in the Knowledge Base in relation to the listing regime, including rules for sponsors, in conjunction with Consultation Paper 23/31 (CP23/31).
The Bulletin also provides information on the timing of notification to issuers of their expected new listing category should the changes proposed in CP 23/31 go ahead, and includes a draft version of the Procedures, Systems and Controls Confirmation Form that the FCA proposes to introduce for issuers to submit to the FCA at admission as described in CP23/31.
Comments on the latest proposals are requested by 26 May 2024. For more information of the FCA’s listing rule changes, see our previous blogs here and here.
FCA to allow bundling of investment research fees
As announced last year, the FCA is now consulting on introducing more options to pay for investment research, including the ‘bundling’ of payments for third-party research and trade execution, to reverse the restrictions introduced under MiFID II in 2018.
Read more here.
FCA Anti-greenwashing guidance, and proposed SDR for portfolio managers
On 23 April 2024, the FCA published its much-anticipated anti-greenwashing guidance (FG24/3) that will apply to all FCA regulated firms from 31 May 2024, and issued a consultation (CP24/8) on extending the SDR and labelling regime to portfolio managers, closing on 14th June - read our blog here.
Proposed Narrowing of Scope for Takeover Code
On 24 April 2024, the Takeover Panel published a consultation paper, PCP 2024/1, which proposes a narrowing of the scope of the companies to which the Takeover Code applies.
The changes would have the effect of removing UK companies that do not have a UK listing from the Code’s jurisdiction, including companies whose securities are traded on alternative platforms such as the Government’s proposed Private Intermittent Securities and Capital Exchange System (PISCES). PISCES will allow securities in private companies to be traded, and there is a risk that growth phase companies might be deterred from having their shares traded on PISCES if this meant they fell within the Code’s jurisdiction.
The PCP proposes that the Code only apply to companies that have (or had in the previous three years, reduced from the current 10 year period) their securities admitted to trading on a:
- UK regulated market (e.g., the Main Market of the London Stock Exchange),
- UK multilateral trading facility (e.g., AIM), or
- stock exchange in the Channel Islands or the Isle of Man (e.g., The International Stock Exchange).
These are referred to for these purposes as being “UK-listed”. The PCP also proposes abolishing the ‘Residency Test’ so that companies listed overseas that have a registered office in the UK, Channel Islands or Isle of Man but do not have their place of central management and control in any of these jurisdictions, would no longer be subject to the Code (which will be helpful for foreign private issuers (FPIs) with the NYSE or NASDAQ as their primary listing), subject to the three year period mentioned above. The Code would continue not to apply to a company that has its registered office outside of the UK, the Channel Islands or the Isle of Man.
The consultation period for the PCP is open until 31 July 2024, and the Panel expects to publish a response statement in autumn 2024, with changes to the Code expected to be implemented one month later.
SUSTAINABILITY REPORTING UPDATE
Transition planning resources
In April, the Transition Plan Taskforce published its final set of resources, including sector-specific guidance, guidance on nature in transition planning, and how to undertake a transition planning cycle - read more here.
Tagging for sustainability reporting
The ISSB has published its digital sustainability taxonomy, to help investors analyse sustainability disclosures more efficiently - read more here.
ISSB pressing ahead with nature and human capital reporting
The ISSB will commence projects to research disclosure about risks and opportunities associated with biodiversity, ecosystems and ecosystem services, and human capital.
Find out more about the ISSB’s latest decisions on its next two-year work plan here.
Interoperability guidance for ISSB and EU Standards
Guidance material has been published to illustrate the high level of alignment achieved between the ISSB Standards and the European Sustainability Reporting Standards (ESRS), and how a company can apply both sets of standards, including detailed analysis of the alignment in climate-related disclosures. This publication provides practical support that explains how companies can efficiently comply with both sets of standards.
Read more here.
Corporate Sustainability Due Diligence Directive (CS3D) now adopted
The European Parliament has finally approved the Corporate Sustainability Due Diligence Directive (CS3D), which will require companies operating in the EU to monitor their supply chains for the risk of human and/or environmental rights violations. The new rules will also deal with remediation of any such violations, require reporting on the due diligence findings and mandate Paris-aligned transition plans (but do not require them to be linked to remuneration).
See March RoundUp for more detail on this Directive and which companies are in scope.
Assessing the Materiality of UK Nature-Related Financial Risks
The Green Finance Institute (GFI) has issued a report assessing the materiality of nature-related financial risks for the UK economy, concluding that “damage to the natural environment is slowing the UK economy, and could lead to an estimated 12% reduction to GDP in the years ahead - larger than the hit to GDP from the global financial crisis or COVID-19.”
This first-of-its kind analysis quantifies the impact that nature degradation, both domestically and globally, could have on the UK’s economy and financial sector.
Read the report here: Assessing the Materiality of Nature-Related Financial Risks for the UK
AI UPDATE
AI Regulation
The FCA has set out its approach to artificial intelligence in a response to the Government’s response to its AI White Paper. The update includes the FCA's role and objectives, work to date, existing approach and plans for the next 12 months.
In the update, the FCA emphasises the importance of promoting the safe and responsible use of AI in UK financial markets and leveraging AI in a way that drives beneficial innovation. The FCA believes an evidence-based view, which balances both the benefits and risks of AI, will ensure a proportionate, effective and pro-innovation approach to the use of AI in financial services.
Pilot AI / digital hub
A pilot AI and Digital Hub has been launched by the Digital Regulation Cooperation Forum (DRCF), to allow innovators to obtain answers to complex queries which span the regulatory remits of DRCF member regulators (which are the Competition and Markets Authority (CMA), the Financial Conduct Authority (FCA), the Information Commissioner’s Office (ICO) and Ofcom).
The aim of the Hub is to increase innovators’ confidence in bringing new products, services and business models safely to market, by helping them understand and navigate regulatory requirements. This is a valuable opportunity for innovators to receive free and informal advice from four regulators all in one place.
The Hub provides a single source of informal advice to help unlock innovation and support UK economic growth.
If an innovator is developing a new fintech app, for example, they can ask for consolidated informal advice on how different sets of regulatory requirements may apply to their product, service or business model.
International AI safety research
The UK and US AI Safety Institutes signed an MoU on 1 April 2024 aiming to work together on AI safety research, which will see them work together to develop tests for the most advanced AI models, following through on commitments made at the AI Safety Summit last November. This will include developing tests for advanced AI models and working together to align approaches and evaluation suites for AI models, systems and agents.
On 11 April, the CMA published an update paper on AI foundation models as part of its review launched in May 2023. The update paper follows an initial report published in September 2023 which outlined proposed principles to guide the development and deployment of foundation models to achieve positive competition and consumer protection outcomes. The update paper looks at key changes since publication of the initial report and confirms the final guiding principles. It also sets out three key risks to competition posed by foundation model AI and looks at how the CMA's proposals will mitigate risk. The CMA proposes stepping up its use of merger control and taking account of developments in foundation model-related markets when deciding on its enforcement priorities for its incoming powers under the DMCC Bill to help mitigate and address risks. The CMA's update paper was accompanied by a technical report published on 16 April. The CMA plans to publish a further update in autumn 2024.
ICO consults again on Gen AI
The ICO published a third call for evidence on generative AI. This focuses on accuracy of training data and model outputs and closes on 10 May 2024. The consultation looks at the meaning of accuracy in a generative AI and data protection context and the impact of accuracy as well as the link between purpose and accuracy. It also looks at the impact of training data on accuracy of output.