Policy RoundUp - December 22 / January 23

Written By

Icole

Edinburgh Reforms – Market liberalisation via the Future Regulatory Framework

On 9^th December, Chancellor Jeremy Hunt announced a package of reforms to drive growth and competitiveness across the financial services sector. Together with the Financial Services and Markets Bill (FSM Bill, see below), they will set the UK regulatory agenda not only for 2023 but for many years to come. The FCA has created a new webpage on its approach to the future regulatory framework. The webpage links to a table which sets out the FCA's existing and future approach across different policy workstreams.HM Treasury also published a policy statement setting out its approach to the repeal of financial services retained EU law.

Of these measures, the most relevant include the following (more detail below):

the Wholesale Markets Review, which makes substantial amendments to various parts of the UK MiFID framework, many of which are implemented in the FSM Bill (eg research and inducements);
implementation of Lord Hill's UK Listing Review, and consequential repeal of the Prospectus Regulation and implementation of an entirely new regime for admission to trading and public offers;
the remaining elements of the Wholesale Markets Review, including the Short Selling Regulation: Call for Evidence - GOV.UK (www.gov.uk) which closes on 5^th March;
Deliver the outcomes of a review into secondary capital raisings
an independent review into investment research and its contribution to the effectiveness of UK capital markets
Review of the UK’s Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy/labelling (the FCA’s consultations closed last week, see November’s RoundUp); and

Consultation in Q1 2023 on bringing ESG ratings providers into the FCA’s regulatory perimeter. (HMT will also join the industry-led ESG Data and Ratings Code of Conduct Working Group as an observer – see November’s RoundUp). The Government will also issue an updated Green Finance Strategy in early 2023.

Government plan for “lift and shift” of financial services rules

In a policy statement, HM Treasury gave more detail on its programme for repealing all retained EU law relating to financial services. The programme will be a significant undertaking for firms, regulators and the government, and it is expected to take several years to complete. HMT intends to deliver the Edinburgh reforms by splitting the work into tranches, and expects to make significant progress on Tranches 1 and 2 by the end of 2023.

This timetable outlines three tranches of extensive regulatory changes to UK and EU law in 2023 and 2024 - summarising all areas of regulatory reform and timings (where given) (as of 17 January 2023). Read more in this briefing

Reform of the UK prospectus regime

The prospectus regime will be among the first tranche of rules to be reformed using the new powers in the Financial Services and Markets Bill 2022-23. HMT’s proposed new framework for the prospectus regime will enable a more flexible approach to the prospectus rules and introduce a new liability safe harbour for forward-looking statements in prospectuses. HMT published an illustrative statutory instrument on public offers and admissions to trading (Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023) to show how Government will make its proposed changes to the existing prospectus and public offers regime. The SI covers the majority of the changes previously announced by the government in March 2022 in response to its consultation on the UK prospectus regime. Key points to note are:

prospectuses will remain a key feature of an IPO in the UK;
the FCA will be given discretion to determine when a prospectus is required but, for a listed issuer, a public offer to its existing shareholders would not of itself require a prospectus;
the overarching requirement for a prospectus to contain ‘necessary information’ will be retained, but the FCA will be given power to make rules on the detailed disclosure requirements, opening the door to a more proportionate disclosure regime for secondary issues (if a prospectus is required at all); and
liability for forward-looking information in a prospectus will be aligned with liability for other listed company published information: liability will only be incurred when those involved are reckless.

HMT has stressed that the exact drafting, design and format of the SI is not final and will continue to develop before the final legislation is laid before Parliament once the Financial Services and Markets Bill 2022-23 has received Royal Assent (expected in spring 2023). Read more in this briefing

Financial Services and Markets Bill (FSM Bill)

The Financial Services and Markets Bill hands very broad powers to the government and the regulators to shape future regulatory policy and rework the rules the UK has inherited from the EU. This includes repealing EU-derived laws and replacing them with regulator-set rules. Read more in this briefing

Reform of the UK short selling regime

In a call for evidence, the government has begun the process for re-imagining the UK version of the Short Selling Regulation (SSR). The government says that short selling plays an important role in the efficient functioning of financial markets and asks whether the regulatory burden under the SSR is proportionate. Feedback is also invited on whether the public disclosure requirements are working as intended and whether processes around the market maker exemption could be streamlined. This call for evidence focuses on the short selling regime for shares (reform of other provisions of the SSR, eg the regime for short sales of UK sovereign debt, will follow at a later date. The call for evidence closes on 5 March 2023. Read more in this briefing

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FCA Primary Market Bulletin 42

The FCA's latest Primary Market Bulletin looks at Climate-related financial disclosures, UK MAR and its interaction with the Listing Rules and the UK's M&A approvals regime, recent 'unlawful disclosure' enforcement, SPACs and reverse takeovers, Structured digital reporting, and the UK Short Selling Regulation.

Primary Market Bulletin 42 deals with the following topics:

Climate-related financial disclosures – ongoing monitoring - reminder and clarification of the rules, guidance and expectations for TCFD-aligned climate reporting by UK listed companies;
Interaction between UK MAR, the Listing Rules and the UK's M&A approvals regime introduced at the beginning of this year (under the NSI Act);
Key issues relating to unlawful disclosure, including when dealing with shareholders, following enforcement against Sir Christopher Gent for Unlawful disclosure, who was fined £80k for unlawfully sharing inside information by speaking to key shareholders ahead of a market announcement. In times of market turmoil, it is more important than ever for listed companies to have robust procedures in place to identify and control inside information, and are ready to make trading updates as required. Recent FCA enforcement decisions have illustrated what the FCA expects companies and their directors to do to meet their announcement obligations;
Special purpose acquisition companies (SPACs) and cash shells on reverse takeovers;
Structured digital reporting: Improving quality and usability (see also below); and

UK Short Selling Regulation – the arrangements for updating the list of exempted shares.

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FCA: Streamlining our transparency rules on structured digital reporting of annual financial statements by companies

On January 12, 2023 the FCA published Consultation Paper CP23/2 (closing on 24^th February) which sets out proposals to simplify the FCA’s current rules for listed companies to prepare, publish and file with the FCA their annual financial report in an electronic format, and for the financial statement within it to be in a ‘structured digital format’. CP23/2 includes in Appendices the proposed amendments to the FCA’s DTRs and a new draft Technical Note to provide guidance for in-scope companies. Proposals include a new rule requiring in-scope companies to use a "generally accepted taxonomy" to tag IFRS consolidated annual financial statements - a "generally accepted" taxonomy is a taxonomy that is generally used in the UK for disclosures in regulated markets, that is based on taxonomy standards published by the IFRS Foundation and is up to date. The proposed new Technical Note will provide guidance indicating the current generally accepted taxonomies. The Technical Note sets out the FCA’s approach to the “generally accepted taxonomy” and includes tables of generally accepted ESEF and UKSEF taxonomies that will be kept up to date as new taxonomies emerge. Subject to feedback, the FCA propose to implement these proposals as soon as practicable in spring 2023, and the FCA is not proposing to introduce ‘transitional’ rules as it does not consider them necessary.

FCA’s Future Disclosure Framework for retail investments

The FCA is also consulting on retail disclosure for the future (DP22/6). The distribution of retail investments has changed in recent years, with a growing trend towards online investment and the digital distribution of disclosure. However, most disclosure regulations were designed for advised sales and paper-based disclosure and a review of retail disclosure is now needed to help financial services be fit for the future.

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Takeovers – ‘acting in concert’

Panel Statement 2022/21 amends the presumptions of the definition of ‘acting in concert’ and takes effect on 20 February 2023. The Panel also outlines the circumstances in which the Panel will presume parties to be acting in concert with each other (RS 2022/2). The main focus is the Panel’s approach to groups of companies and investment entities and will be particularly relevant for investment entities, fund managers, private equity portfolio companies and joint ventures. The impact of the changes in practice means that:

the threshold at which entities within a group are presumed to be acting in concert will be raised from 20% to 30%;
the Panel will look at both voting rights and equity interests; and
the rules will apply equally to limited partnerships, trusts, individuals and other legal or natural persons.

Investor Forum reveals interesting stats on UK equity ownership

This year's Investor Forum 'Annual Review' provides an assessment of the stewardship landscape in the UK, and argues that there is much work to be done to enhance relationships between companies and investors.

The Forum claims that companies, investors, regulators and policymakers need to recognise the UK’s diminished importance as an investment destination in order for reforms to yield benefits.

The Investor Forum have also written to FTSE chairs in wake of Tulchan’s 2022 “State of Stewardship” report, calling for a new group to be formed to ease stewardship concerns and to settle contentious topics such as executive pay and overboarding.

2023 Updated Proxy Voting Guidelines

Various of U.K. institutional investor bodies, including the Investment Association, ISS, LGIM and Glass Lewis have published updated guidance on remuneration practices for 2023. Investors continue to expect alignment of remuneration policies with long-term corporate strategy, linking of senior executive pay to the long-term success of the company and ensuring the executive experience remains commensurate with that of wider stakeholders (employees, customers, suppliers and shareholders) and reflective of the economic environment, with LGIM expecting environmental and social targets to be subject to third-party verification. For salary and pension contributions, companies are expected to show “additional restraint,” given current inflation disproportionately affects lower-paid workers, with executive increases “ideally lower proportionally” than general increases across the broader workforce.

Other concerns include:

Climate accountability for boards or individual directors/chairs;
Overboarding;
board diversity and
cyber risk oversight
frequency of audit committees meetings

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Trends from the 2022 AGM Season

Regarding engagement with shareholders, in 2022 many companies were still facilitating questions in advance of the AGM, although slightly less than in 2021. The PLC What's Market 2022 insight and trends report showed that nearly 75 per cent of the companies surveyed (made up of 79 per cent FTSE 100 and 72 per cent FTSE 250) allowed questions in advance of the meeting (cf. 85 per cent in 2021).

The PLC What's Market 2022 insight and trends report also showed that, for hybrid meetings and those physical meetings where dial-in facilities were provided, live Q&A facilities were frequently offered to remote attendees (in 88 per cent of such meetings held by FTSE 100 companies and in 76 per cent of such meetings held by FTSE 250 companies).

In the GC 100 Poll of the 2022 AGM season, 19 companies reported shareholder activists attended their AGM with one third of them saying activists dominated the Q&A session. There were also press reports that several companies encountered issues or disruption at their AGMs in 2022. These include: Aviva (sexist comments); Lloyds of London, UK Oil & Gas, Shell, Standard Chartered and Barclays (climate protesters); and HSBC (climate and pensions related protests).

Ashurst reported 23 Say on Climate (SoC) resolutions being put at AGMs in 2022 (cf 13 in 2021). Of these 20 were put at FTSE 100 company meetings and three were at FTSE 250 company meetings. Most resolutions were board-proposed and, where that was the case, all passed. Three were shareholder proposed and all failed. As in 2021, most SoC resolutions were proposed at oil and gas, mining, utilities and financial services companies.

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FRC: ‘What makes a Good ARA’

The FRC published its ‘What makes a Good Annual Report and Accounts’, setting out the attributes for a high-quality Annual Report and Accounts (ARA).

The ARA, as the cornerstone of corporate reporting, should provide investors and other stakeholders with clear and relevant information on the company’s performance and prospects to help them make informed investment decisions and to promote effective stewardship. The FRC uses a principles-based framework which identifies corporate reporting principles and effective communication characteristics.

‘What makes a Good ARA’ illustrates these, providing a range of good practice examples which have been identified by the FRC as part of their ongoing supervision work.

This is the latest in the FRC’s ‘What Makes a Good…’ series and "clearly sets out the FRC’s view of the characteristics associated with a high-quality ARA in a clear and accessible way, which we believe preparers, including audit committee chairs and company secretaries will find helpful in producing decision-useful reports and accounts for stakeholders.”

Appendix 3 also contains some guidance from the FRC Lab on ‘What makes a good Annual Reporting process’.

View the full report

FRC’s expectations for the coming reporting season, and areas of supervisory focus for 2023/24

The FRC has also outlined its Key matters for 2022-2023, which sets out the FRC’s expectations for the coming reporting season and include:

Significant votes against project The FRC is currently undertaking an in-depth assessment of how companies have complied with the requirements of Provision 4 of the Code, considering the level of engagement with shareholders and the quality of reporting following a significant vote against a board-recommended resolution. In addition to the reporting found in annual reports, the review will cover announcements of voting results following general/annual meetings and update statements, as required by the Code. The aim of this research project is to determine the level of compliance with the provision, the extent of engagement with shareholders and the quality of reporting on such engagement. It will also support the broader aims of the work of the FRC’s CG&S team in encouraging good governance and best practice reporting.
Risk management and internal controls The Government intends to require companies to publish a statement on the effectiveness of their risk management and internal control systems. This year, the FRC’s CG&S team will continue to evaluate companies’ reporting on the Code’s risk management and internal controls requirements (Provision 29), to help the FRC formulate potential policy options to be included in the future consultation on the update to the Code (consultation expected in April).

The FRC also announced its areas of supervisory focus for 2023/24, including priority sectors for corporate reporting reviews and a number of thematic reviews to identify scope for improvement, as well as examples of better practice.

In selecting corporate reports for review, the FRC will prioritise the following sectors that are under particular pressure:

Travel, Hospitality and Leisure
Retail and Personal Goods
Construction and Materials
Industrial Transportation

These sectors are considered by the FRC to be higher risk for corporate reporting (and audit) by virtue of economic or other pressures.

The thematic reviews for 2023 include:

Large private companies: The proposed change to the definition of a Public Interest Entity (PIE) will bring an enhanced regulatory focus on the largest private companies. The Government’s intended threshold is entities that exceed £750 million annual revenue and 750 employees. The FRC will review a selection of private companies’ annual reports to identify whether and where there are areas of poor compliance with reporting requirements with a view to informing their monitoring activities going ahead.
TCFD metrics and targets: climate-related metrics and targets, including companies’ “net zero” plans, are seen as increasingly important by investors, and the TCFD’s recommendations in this area were updated in 2021. Following the FRC’s thematic review of TCFD disclosures in 2022 (in collaboration with the FCA) which highlighted room for improvement in many companies’ metrics and targets disclosures, the FRC will undertake a targeted follow-up in 2023, with a focus on the metrics and targets disclosures of companies from four relevant sectors. The FRC will also consider how adequately these companies’ net zero commitments have been addressed in their financial statements.

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FRC updates 2021 Statement of Intent on ESG

News I Financial Reporting Council (frc.org.uk)

The FRC’s updated statement of intent on ESG sets out areas where there remain ongoing challenges in ESG reporting, actions for preparers to produce decision relevant information, and the FRC’s plans to engage with the market to ensure that stakeholder needs are being met as demand for ESG information continues to evolve. This report reaffirms the FRC’s continued commitment to working internationally, supporting efforts towards a common international framework for sustainability disclosures, including key projects underway to develop international ethical, independence and assurance standards by the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA).

The report highlights the FRC’s key areas of focus regarding ESG reporting during 2023 which include projects and thematics on:

ESG Data - how and where to find it and use it effectively
Materiality disclosures – what should be considered when determining what are material issues?
Support for FRS102 Preparers
What are the ESG reporting requirements of the Corporate Governance Code?
The link between investors and ESG reporting

This update also outlines the vast amount of helpful material that the FRC has produced since 2021 including thematics, guidance and examples of best practice.

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UK net zero review

BEIS published the final report of the UK's Independent Review of Net Zero, commissioned in September 2022 to assess the UK Government’s approach to delivering its net zero target, with a focus on ensuring that it is pro-business and pro-growth.

The Review made 129 recommendations which fall under the following six pillars:

Securing net zero: A framework for a sustainable industrial strategy to deliver growth and jobs during the transition.
Powering net zero: The gear shift we need in delivery to achieve our targets and recommends specific actions to unblock the pipeline, including a re-think of our energy infrastructure. It proposes a solar revolution and onshore wind revolution.
Net zero and the economy: Going further to capture the economic opportunities across sectors, for businesses of all sizes.
Net zero and the community: How we unlock local action by reforming the relationship between local and central government, making sure the planning system supports net zero and turbocharging community energy and action.
Net zero and the individual: The role of individuals in the transition, how they can be supported to make green choices, and how government can ensure that net zero works for everyone.
The future of net zero: Seizing the global opportunities from new technology and R&D innovation now and out to 2050. It also looks at the UK’s carbon pricing regime and how the UK can maintain its international leadership on climate.

It then prioritises 25 key actions to be completed by 2025, including an HMT review of how policy incentivises investment in decarbonisation, updating the Green Finance Strategy to set out a 'clear, robust and ambitious approach to disclosure', and the establishment of a new forum for coordination across all regulators (including the FCA).

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EU developments in sustainability reporting

Supply chains and due diligence

The EU’s Corporate Sustainability Due Diligence Directive ("CSDDD") is aimed at tackling human rights and environmental impacts across a company's value chain by imposing a corporate duty of due diligence on in-scope large companies operating in the EU. These due diligence measures include a requirement to identify, prevent and mitigate human rights and environmental impacts connected with companies' own operations, as well as those of their subsidiaries and in their value chain. The general approach reached on 1 December 2022 completed the negotiating position agreed by the Council - the proposals still need to be negotiated with the European Parliament, which is expected to adopt its position in March 2023. Once adopted, Member States will have two years to transpose the directive into national law, meaning the earliest that the obligations under the CSDDD will apply is from 2025.

Deforestation

Companies will not be allowed to sell their products in the EU without a due diligence statement, following an EU agreement on a Regulation on deforestation-free products on 6 December 2022 (following a proposal by the Commission in November 2021). This Regulation aims at curbing deforestation and forest degradation driven by EU consumption and production by prohibiting the placing or making available on the EU market, or the export therefrom, of certain commodities unless they are: (i) deforestation-free; (ii) produced in accordance with the relevant legislation of the country of production; and (iii) covered by a due diligence statement.

The products covered by the legislation include palm oil, cattle, soy, coffee, cocoa, timber and rubber, as well as those products derived from these commodities, such as leather, chocolate and furniture. They have also included rubber, charcoal, printed paper products and a number of palm oil derivatives. A list of the products that fall within the scope can be found in Annex I. The earliest date for coming into force is in June 2024. The EU will need to formally adopt the new regulation before it can enter into force. Once in force, obligated entities will have 18 months to implement the new rules. Even though this regulation will not come into force for at least 18 months, businesses should start thinking about communicating with your supply chains to understand the source of your products that fall under the scope of this regulation.

The UK is also bringing in UK Deforestation due diligence proposals, with most respondents to Defra’s 2022 consultation calling for the government to act swiftly to help tackle illegal deforestation in UK supply chains, causing Defra to confirm that due diligence requirements will be introduced under the Environment Act 2021 (see Part 2 to Schedule 17) for forest-risk commodities ‘at the earliest opportunity’.

Carbon leakage

On 13 December 2022, the Council of the EU and the European Parliament reached a provisional agreement on a Regulation establishing a carbon border adjustment mechanism (CBAM), following a 2021 proposal by the Commission. The CBAM aims to address the problem of "carbon leakage" i.e. the situation whereby, due to costs related to the EU's climate policies, companies move their carbon-intensive production abroad to take advantage of laxer standards. The CBAM, which would become fully operational in January 2026, will require EU importers to buy "carbon certificates" reflecting the carbon price that would have been paid for the products under the EU's carbon pricing rules, i.e. the EU Emissions Trading System (ETS). Importantly, as the UK is not among the countries that are currently excluded from the CBAM, the introduction of this measure could significantly affect UK exports to the EU, with UK exports of iron and steel and aluminium being viewed as particularly vulnerable.

SASB Standards - what you need to know for 2023 disclosure

Updated SASB blog answers questions about how recent ISSB developments and decisions may affect your disclosure plans. Key takeaways include:

How you can continue to use the SASB Standards while laying the groundwork for adoption of the ISSB's Sustainability Disclosure Standards
ISSB decisions on the evolution of the SASB Standards
Tips for how best to prepare for the future application of the ISSB standards

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Sustainability reporting – ISSB Update

Following Emanuel Faber’s speech at COP15 (the UN Convention on Biodiversity), recent commentary from the International Sustainability Standards Board (ISSB) indicates that they consider a company’s ability to deliver value for its investors is inextricably linked to the stakeholders it works with and serves, the society it operates in, and the natural resources it draws on, and that the ISSB’s sustainability reporting standards will therefore be drafted in that context, to reflect the interrelationship between climate-related considerations, ‘nature’ and the human capital aspects of a ‘just transition’.

GRI – Major update of Biodiversity Standard

Ahead of COP 15 (the UN Convention on Biodiversity), the GRI issued a consultation on a ‘major update’ to the GRI Biodiversity Standard (GRI 304). Responding to demands from multiple stakeholders for companies to do more to assess, disclose and reduce their biodiversity impacts, the revised standard will reflect reporting throughout the supply chain, introduce requirements for biodiversity-related human rights impacts, and emphasize location-specific data, to ensure businesses are transparent about the sites where their biodiversity impacts take place.

The objective of the consultation is to test the clarity, feasibility, completeness and relevance of the draft Standard, and runs until 28 February 2023.

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GRI - corporate reporting as a driver to achieving the SDGs

What are the practical steps that businesses around the world can take to assess, measure, and report their contributions to the Sustainable Development Goals (SDGs), thereby demonstrating their commitment to driving change?

Exploring this issue was at the core of GRI’s Business Leadership Forum (BLF) on Corporate Reporting as a Driver to Achieving the SDGs. A two-year program, it brought together sustainability-focused companies, data users and key stakeholders to raise the quality and relevance of SDG data and facilitate peer learning through regular workshops and best practice masterclasses.

The two latest – and final – outcome papers are now available to the global community of sustainability practitioners:

Summary Paper 6 – Incorporating Sustainability Considerations into Supply Management to Drive the SDGs: Provides an overview of the impact measurement practices in supply chains, with insights on how to implement responsible procurement practices and increase transparency.
Summary Paper 7 – Global Agenda, Local Impacts – Contributing to the SDGs through Multi-stakeholder partnerships: Delves into the role of multi-stakeholder partnerships for the 2030 Agenda, presenting solutions for understanding, assessing, and communicating their impact and value creation for businesses.

All seven BLF publications are part of GRI’s published resources and tools on how to integrate the SDGs into sustainability reporting.

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